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Portfolio Companies Face Tax Issues From Post Acquisition
Taxand USA considers the potential tax implications of a deal for portfolio companies in the post-acquisition period.
Typically, in line with private equity investment strategy, following the initial post-acquisition period, we see aggressive growth plans for the portfolio companies. This can be accomplished either through organic growth or strategic acquisitions. In either case, such growth presents tax issues ranging from the structuring of such acquisitions to the implications of such acquisitions on the company's tax footprint.
As the company's tax footprint grows close attention should be paid to potentially triggering taxable presence in new jurisdictions, for both state and foreign tax jurisdictional purposes, and to new state or foreign tax filing requirements. In addition strategic tax planning should be considered to maximise the tax efficiency of the company's growing business operations, for everything from tax structuring and identifying local jurisdiction tax incentives or holidays, to ensuring that appropriate transfer pricing arrangements are established.
A portfolio company's post-acquisition period can be one of growth and expansion. However in some cases, particularly given the anemic economic growth over the last few years, financial difficulties are sometime encountered. As a result, portfolio companies may be forced to renegotiate the terms of their debt. Although such "restructurings" or "modifications" may appear routine, they can have significant and unintended tax consequences that should be analysed. The basic rule is that if a debt modification is found to be significant it is treated as a deemed exchange and is therefore a taxable event for both the issuer/debtor and holder/lender. In other words, the debt is treated as if it has been cancelled in exchange for the new restructured debt.
Discover more: Potential post-acquisition tax issues for portfolio companies
For private equity portfolio companies the immediate post-acquisition period can be dynamic and challenging not only from a business perspective but also from a tax perspective. With many business changes occurring during this period, whether during times of economic growth and expansion or times of struggle, there are many tax-related obstacles and opportunities to be considered. Therefore it is important to ensure that appropriate attention is given to tax-related items. In the end, they can have a meaningful impact on a portfolio company's EBITDA and corresponding valuation multiple upon exit.