Guardian Media Group, the parent company of the Guardian newspaper, has used an offshore structure to complete its acquisition of Emap's trade magazine and events interests, in partnership with the private equity firm Apax partners. The deal, completed March 20, 2008, involved GMG incorporating a new company in the tax haven of the Cayman Islands and integrating it with an existing network of Cayman companies set up at the same time by the private equity firm.
The structure is complex and the financial information made publicly available about the new companies remains limited.
However we have been told it will eventually involve a holding company in the low tax jurisdiction of Luxembourg that will own a group, which includes a number of Cayman Islands' companies. One of those companies is Eden Bidco, which was incorporated in the Caymans on December 17 2007 as the vehicle to orchestrate the £1bn bid by GMG and Apax for Emap. Another is GMG Hazel Acquisition 1 Limited, a GMG-owned company, which was incorporated in the Caymans on the same, date and will be transferred into the existing Apax structure.
The Apax Caymans structure at the time of the deal involved a complex network: Apax Nominees WW Ltd owned Eden Acquisition1 Ltd which owned Eden Acquisition 2 Ltd which in turn wholly owned Eden Bidco. The rate of corporation tax in the Caymans Island is zero.
While UK tax law does not require corporation tax to be paid by the buyer on acquisition of assets, stamp duty is generally payable at a rate of 0.5% on the acquisition of shares in a UK incorporated company. Stamp duty of nearly £2m was paid by GMG and Apax partners on the nearly 42 million Emap shares they bought ahead of the bid. However the takeover bid itself was structured as a Scheme of Arrangement under UK company law. These schemes are accepted by HM Revenue and Customs, as a common method of implementing an offer for a public company and means no stamp duty is payable on the acquisition. Stamp duty is a different tax to Stamp Duty Land Tax. SDLT is levied at 4% on UK land transactions, normally payable by the purchaser and was not due at any point in this deal.
In response to questions GMG disclosed the avoidance of stamp duty by GMG on a separate transaction within the structure. Stamp duty of approximately £600,000 would have been payable on the transfer of GMG Hazel into the Apax-owned companies if GMG Hazel had been incorporated in the UK rather than the Caymans.
Apax would not comment on the structure of the network saying it does not discuss the details of its deals. However a GMG spokesman said the corporate structure had been created offshore at the private equity company's request. Referring to the stamp duty saving he said:
"It is important that GMG does not lose out financially because of the offshore structure of the deal," he added. "Had GMG Hazel been incorporated in the UK, stamp duty would be payable on the transfer into the offshore structure. Had the entire acquisition been structured in the UK, this transfer would not have been necessary, so, in effect, the UK Exchequer has not lost out."
The main implications for corporation tax as opposed to stamp duty only arise in the event of shares in Emap being sold at a later date. It still remains unclear how the offshore structure would affect any tax liability arising on a subsequent disposal of Emap by GMG, Apax or both companies.
The level of taxation payable on any capital gains made from selling shares could have a significant impact on the financial performance of the investment in Emap.
Should the Emap asset be sold in the future, a potential purchaser may also avoid stamp duty on any acquisition thanks to the offshore structure, which could have the effect of enabling Apax and GMG to achieve a higher price on any disposal.
GMG told us it believes that Cayman incorporation has unspecified benefits for Apax investors, but that if GMG were to sell any of its holding, any gains it made would be subject to UK tax legislation. The complexity of the network and the inherent uncertainty about its final structure make it difficult to asses what benefits, if any, and of what magnitude would accrue to either Apax or GMG.
Emap plc itself will remain a UK-based company headquartered in the UK and as such its operating profits will be taxed in the UK.
A spokesman for GMG said: "This structure will not save GMG any UK corporation tax when compared with an onshore structure. Operating profits and any gains by GMG on disposal will be subject to the UK tax regime.
"The purchase of Emap plc has been structured as a UK Scheme of Arrangement which, as has long been accepted by HM Revenue and Customs, does not attract stamp duty on acquisitions. This would be the case even if the acquisition was structured in the UK rather than offshore."