Date: February 2013 Presenter: Cole Wilkinson US flip up: overview & tax issues
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Date: February 2013Presenter: Cole Wilkinson
US flip up: overview & tax issues
US flip up: overview & tax issues
Tax issues
Tax concessions
• Issues with transferring IP?• Market value of IP?• Tax consequences pre concessions.
• Scrip for scrip roll-over• Residency issues
Other matters
• Ongoing IP management• Transfer pricing• Questions?
• Common early stage venture structure• Why flip up?• What is a flip up?
Overview
US flip up: overview & tax issues
Tax issues
Tax concessions
Other matters
• Common early stage venture structure• Why flip up?• What is a flip up?
Overview
Overview: common structure
Aust Co
FoundersEmployee stock options? Angel investors?
Why flip up?
Aust Co
Australia US
US Venture Capital firm
US Holding Co
Requirement for investment
A requirement of the terms sheet set out by the Venture Firm is to enforce the interposition of a new US parent company (US Holding Co) such that the US venture capital firm will hold shares in a US company.
Founders
Employee stock options? Angel
investors?
What is a flip up?
Aust Co
Founders
Employee stock options? Angel
investors?
Australia US
US Holding Co
All ownership in Aust Co is to be ‘flipped up’ and transferred to the US Holding Co. As a result, the US Holding Co will own 100% of Aust Co. All intellectual property will remain with Aust Co.
Aust Co owners establish US Holding Co
What is a flip up?
Aust Co
FoundersEmployee stock options?
Angel investors?
Australia USUS Venture Capital firm
US Holding Co
Ownership of US Holding Co must be exactly the same proportions as the ownership of Aust Co (pre VC investment). Share and option holders receive shares in US Holding Co in exchange for shares in Aust Co.
100% ownership
Investment
US flip up: overview & tax issues
Tax issues
Tax concessions
• Issues with transferring IP?• Market value of IP?• Tax consequences pre concessions.
Other matters
Overview
Tax Issues with transferring IP
Australia USUS Venture Capital firm
US Holding Co
IP deemed to be sold for market value by the Aust Co. Easily valued by the ATO based on term sheet issued by VC (pending transaction) eg. $200K VC investment into Aust Co for 20% stake will effectively value the company (and the IP) at $1m.
Founders
Employee stock options?
Angel investors?
100% ownership
Intellectual Property Transfer
@ MV= $1mTax = $300k
Aust Co
Tax consequences pre concessions
Disposal of Shares @ MV = $1m Capital
Gain= $230K tax to shareholders
US
US Holding Co
Australia
The disposal of shares in Aust Co and the acquisition of new shares in US holding Co will give rise to a capital gain event. This will result in a $230k tax liability in the hands of the shareholders.
Aust Co
Founders
Employee stock options? Angel
investors?
US flip up: overview & tax issues
Tax issues
Tax concessions
• Scrip for scrip roll-over• Residency issues
Other matters
Overview
Scrip for scrip roll-over relief - Shares
CGT Roll-over relief under Sub Div 124G
US Holding CoAust Co
Shareholders
Aust Co shares transferred to US Co – must be 100% and ordinary sharesShareholders must own US Co shares in same proportions and same terms as Aust Co holdingsCost base of shareholders interests carried over - i.e. deferred capital gain
100% Aust Co shares transferred to US Co
Shareholders interests in Aust Co replaced by shares in US co – same % & terms
Scrip for scrip roll-over relief - Options
CGT Roll-over relief under Sub Div 124M
US Holding CoAust Co
Option holders
Existing option or rights holders Aust Co options cancelled in exchange for options in US CoAll share/option holders must be able to participate in the exchangeUS Co must acquire more than 80% of Aust CoSpecial rules apply (under Sub Div 83A) for employee options that have not had a tax event
US Co must acquire at least 80% of Aust Co
Existing options or rights cancelled in exchange for new options in US Co
Residency Issues
• In the case that the US Holding Co is initially in Australia and subsequently moves to the US at a later time, a capital gain event will be triggered.
• This is why the residency status of the company is critical in determining the outcome of whether a capital gain will occur or not.
• Section 104-160 of the 1997 Act deems there to be a disposal of US Holding Co’s assets (being shares in Aust Co) at market value at the date of the change for Australian CGT purposes.
Residency Issues
• According to s 6-1 of the 1936 Act, a company is an Australian tax resident if:• It carries on business in Australia; and• Has either its central place of management and control or voting
control in Australia.
• To ensure that US Holding Co is not an Australian tax resident, it is suggested the following measures be taken:• That the board meets in the US (Australian directors can join by
telephone); and• If there is a CEO appointed it be someone who lives in the US
US flip up: overview & tax issues
Tax issues
Tax concessions
Other matters
• Ongoing IP management• Transfer pricing• Questions?
Overview
Ongoing IP Management
Aust Co
FoundersEmployee stock
options?Angel investors?
US
US Venture Capital firm
US Holding CoLicence Agreement
Royalties
• Arm’s length royalties paid• Likely to be 5% withholding tax on royalties• Ensure some profits in Aust Co to utilise withholding tax credits
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