Monday, July 25, 2011


This article examines the tax aspects of preparations for the conduct of an IPO (initial public offering) on a foreign stock exchange.

In the course of IPO preparations, the tax lawyer’s job is mainly narrowed down to the following: (1) identification and minimization of the issuer’s tax risks, (2) creation of a tax-efficient corporate structure of the issuer, and (3) development of a scheme for distributing and using IPO proceeds.

1. Identification and Minimization of Tax Risks

During a due diligence review of the issuer, relevant tax risks are identified (to be further outlined in the offering prospectus) and recommendations are given as to their minimization. Obviously, the existence of any significant tax risks can greatly reduce the attractiveness of the issuer’s shares for potential investors.

The tax lawyer’s task is to minimize such risks. There can be different ways to do that: from the execution of additional documents revealing the nature or the economic implications of certain business transactions to the removal of the company plagued by serious tax risks from the structure of the holding participating in an IPO.

2. Creation of a Tax-Efficient Corporate Structure of the Issuer

Nowadays, issuers usually consist of not one but several legal entities, both Ukrainian and foreign. A successful IPO is impossible without an efficient corporate structure of the issuer. Tax lawyers play a very important role in the creation of such a corporate structure. Apart from being transparent and easily understandable for potential investors, the issuer’s corporate structure must be non-burdensome from a tax standpoint.

In view of the flaws in the applicable securities laws (the impossibility of issuing foreign currency-denominated shares, the need to obtain a permit from the Securities and Stock Market State Commission to float a Ukrainian issuer’s shares abroad, etc.), issuers usually prefer to conduct an IPO through their foreign companies.

Thus, tax lawyers are also charged with the task of choosing the most tax-efficient jurisdictions for setting up the holding’s foreign companies. Other criteria for the choice of a jurisdiction include the taxation of dividends, interest, royalties and gains from the sale of shares or other corporate rights and the favorability of the terms and conditions of the applicable double taxation treaties.

A rather popular practice is to incorporate the parent company, which will directly float shares on a foreign stock exchange, in the Netherlands. Cyprus-based companies are often used as the holding’s intermediate companies.

3. Development of a Scheme for Distributing and Using IPO Proceeds

Depending on how the issuer intends to use its IPO proceeds (either for investing in operating companies, or for buying a new business, or otherwise), tax lawyers need to come out with a mechanism for distributing such proceeds between the holding’s companies with least costs. Possible solutions are increases in the share capitals of the holding’s member companies, the provision of loans by one of the holding’s member companies to another, etc. The result of such tax planning largely depends on how tax-efficient the issuer’s corporate structure is.

In Place of an Epilogue

Summing up the above, it can be concluded that the success of an IPO depends chiefly on the involvement of qualified tax lawyers.

No comments:

Post a Comment