Our client, an Andorran resident and high net worth individual, was a 50% shareholder in a UK technology business with US operations. He wanted to purchase the remaining 50% of shares from the other shareholder to gain full control over the company. He sought advice on tax implications of cross-border share sale and the transfer pricing implications of the transaction.

Background to the need for an option

Our client was a UK expat and entrepreneur, currently living in Andorra. His objective was to subsume the UK business under an Andorran holding company, and minimise his tax exposure. The UK business held the intellectual property rights used by the UK and US businesses. Our client wanted to move these businesses offshore. The brains of the business provided their services via personal service companies, one of which was resident and controlled from the UK.

Tax residency

First we established our client’s tax residency. He had lived in multiple countries and was unsure whether he was still UK resident for tax purposes. His tax residency would determine whether he purchased  UK shares in his personal capacity or incorporated a new company to complete the share purchase.

Share acquisition tax warranties & indemnity

We reviewed the seller’s share purchase documentation. We successfully negotiated a some tax warranties and a tax indemnity.  These protected our client if any tax liabilities emerged after completion for which the UK business would be liable. We also drafted a sophisticated indemnity which protected our client if HMRC reassessed the company’s profits after completion, and also if HMRC raised IR35 issues.

This indemnity covered:

  • Potential transfer pricing adjustments: arising on the transfer of intellectual property;
  • IR35 issues: Personal service companies are at risk under the IR35 legislation. We explained the areas in which HMRC are becoming increasingly vigilant.  HMRC may seek tax from the trading company on the grounds that fees paid to the personal service company were deemed “salary” subject to income tax and national insurance under PAYE.

We advised our client on the stamp duty implications of a foreign company buying UK shares under an option agreement. We also transferred our client’s  existing 50% shareholding to Andorra in the most tax-efficient way.

Transfer pricing of licence agreement

After the transaction was completed we put in place a licence agreement for the intellectual property between UK and Andorran company so that the Andorran company received income from licence fees. This required careful consideration of transfer pricing rules which apply when a UK company makes a royalty payment to a low tax country. We ensured the licence fees complied with transfer pricing rules whilst client’s company enjoyed competitive tax rates.

International legal team

Throughout the transaction we worked closely with our client’s Andorran lawyers. Together we ensured the transaction worked in both jurisdictions. We continue to support our client’s UK business, resolving commercial issues, and infringements to his  intellectual property.

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