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Cash and Tax free acquisition of Equity ?

Cash and Tax free acquisition of Equity ?

Can anyone advise on any tax implications?  All companies and people described here are UK based.

Company A owns 100% shares in Company B.  Company A wants to sell a large % of shares in Company B to Company C which is owned by several employees of Company B.  As Company C and its shareholders cannot pay for the value of shares, Company A will grant Company C an interest bearing loan on the value of shares for a period of several years.  Say a year later, Company B pays dividends to Company A and Company C.  The dividend income comes with the tax credit so corporation tax free.  Now Company C has money to repay part of the loan and interest to Company A.  The system will continues until the loan with interest is fully repaid.  Effectively, Company C would have acquired shares in Company B without paying for it.  Would this system be caught by any tax legislations on Company C and its shareholders, ie. employees of Company B?

Many thanks for your opinion and advice.

EE

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21st Jun 2010 13:05

Holding Company

Hello Sunshine,

Company C would be a holding company as well.

EE

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23rd Jun 2010 10:14

I am not with it

Hi Sunshine,

Many thanks for the tip and info.

I must be dumb but I cannot see the resemblance here.  The value of the shares is the full market value and no beneficial incentives, and to be sold to Company C.  Also, the loan relationship between Company A and C is real.  If Company B did not pay dividends, Company C still has to repay Company A the loan and interest as per contract.  It would be unfair if they have to pay tax on the value of shares.  Please comment.

Okay, if the scenario become, say, the several employees of Company B resign and form Company C and start trading on their own.  Company A worries about the competition and offers to sell a large % of shares in Company B to C, then appoint the directors of Company C as directors of Company B as well.  The loan relationship between Company A and C remains the same at arms length.  Any comment in this scenario.

Many thanks.

EE

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