Tax Considerations for Cross-Border SPACs | International Wealth Tax Advisors

SPACs, or special acquisition corporations, were all the rage in 2020 and 2021, including investors such as sports icons and media moguls. Also referred to as “blank-check companies,” SPACs offer an alternative way for private firms to go public and saw a resurgence of popularity during the deal-crazed early days of the pandemic.

Initially established in the 1990s, SPACs serve as a way for private companies to quickly buy and take a company public. In many cases, investors invest in the SPAC before the acquisition target is identified. While a SPAC vehicle can help to avoid the lengthy and expensive process of a traditional initial public offering, the drawbacks include a compressed timeline.

From Boom to Bust

SPAC, IPO and deal activity have exploded in recent years. The value of SPAC IPOs rose from just $14 billion in 2019 to $83 billion in 2020. The following year saw that figure almost double, jumping to $162 billion, according to SPAC Research.

But 2022 was different. Markets experienced a severe downturn amid decades-high inflation and aggressive hiking of official rates by central banks — sending borrowing costs skyrocketing and dealmaking plummeting. The value of SPAC IPOs in 2022 was just $13 billion through December 27.

Not only were there fewer deals, many SPACs liquidated due to their time-constrained process, leading to approximately $45 billion in liquidations in 2022.

Tax Implications

The Inflation Reduction Act of 2022 included a 1% excise tax on corporate buybacks that was scheduled to begin in 2023. Why would this tax affect SPACs? The life of a SPAC has several phases:

Formation and IPO

Target search

Merger or de-SPAC

Before the SPAC goes public, original investors are able to redeem their shares through a company repurchase, or stock buyback, triggering the tax implication. This process is referred to as a de-SPAC and happens when the SPAC merges with a privately held company to become a public company. If the SPAC does not merge or de-SPAC within two years, the SPAC must be dissolved and all funds returned to the original investors.

On top of dismal economic conditions and a gloomy IPO market, the 1% excise tax threat was a tipping point that led many SPACs to dissolve in the latter half of 2022. After all, their days were numbered anyway with the looming 24-month limit affecting the many SPACs created in December 2020.

Too Late for Relief?

However, at the very end of 2022, the U.S. Treasury and the Internal Revenue Service issued new guidance regarding excise tax and corporate stock repurchases, announcing that SPAC liquidations wouldn’t be taxed under the new federal buyback levy. While this was no relief to the many companies that liquidated prior to the announcement, guidance from the tax agency gives companies lead time to begin complying with the law prior to the IRS’ release of formal regulations. Additionally, according to the notice, investor withdrawals before SPAC deals are completed might avoid the buyback tax depending on the timing of the merger and other conditions.

Special Considerations for International Investors

Complexities around SPACs abound — and are exacerbated when U.S. companies are considering foreign acquisitions or vice versa. Additional tax issues may arise both during the forming of a SPAC and during the merger process if borders are crossed.

Tax residency of a SPAC is determined by its place of incorporation, making it more beneficial for U.S. SPACs to acquire U.S. targets and for foreign SPACs to acquire foreign targets. Foreign operations of a U.S. SPAC will require that the SPAC file reports with the IRS. And the opposite holds true, as foreign SPACs acquiring a foreign target need to consider the breadth of their U.S. operations. Inadvertent residency could create a multicountry tax event.

Tax Implications

Passive foreign investment company issues (PFIC) are possible for U.S. shareholders in a foreign corporation if at least 75% of a company’s gross income is passive, or if 50% of assets produce passive income using a quarterly averaging test.

Global intangible low-taxed income rules (GILTI), apply to U.S. SPACs that acquire foreign targets. These anti-deferral rules also apply when a U.S. SPAC acquires a U.S. target corporation that controls and operates controlled foreign corporations.

Given the evolving regulatory environment as well as the myriad of considerations for cross-border SPAC transactions, it is best to consult with a tax adviser who is knowledgeable about U.S. and international tax laws and compliance.

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