9 - Tax on private equity transactions

Summary

Introduction

In this chapter, we will consider the tax issues for the private equity investor, Newco and the managers of the investee company in respect of a UK private equity transaction, and how such tax issues impact upon the structure of a private equity transaction including the form of debt finance. The tax issues of the different parties are dealt with in turn; however, in reality, many of the issues are overlapping. For example, if Newco is unable to obtain a tax deduction in respect of the coupon upon the investor debt, this will have an impact for both the investor and the managers, as it will result in a higher tax charge within Newco which will impact upon the value of their investment in Newco.

In chapter 3, there is a detailed analysis of transaction structures, including diagrams to demonstrate those structures most often encountered. This taxation chapter assumes a transaction structured in such typical fashion. As outlined in that chapter, it is increasingly common for a double (or more) Newco structure to be used, one reason for such a structure being the desire that the investor's equity funding should be provided to a different company than that to which the investor's debt funding is provided for the tax reasons outlined in section 3.2 below. Generally, where there is more than a double Newco structure, this is driven by the non-tax reasons (such as the desire to achieve structural subordination) discussed in chapter 3.