The UK public M&A markets have been vibrant in the last year with an increasing focus on extremely large private equity-funded acquisitions and also on de-mergers or post-acquisition break-ups.

Private equity is coming under scrutiny in a number of jurisdictions. An enormous amount of money is available to these funds and investments have to be found to provide a home for it. Life being as it is, any company that goes into private equity ownership is unlikely to stay there for long, so a trade sale or a public flotation is likely to follow.

In response to some political and trade union pressure, private equity investors have been defending their ground against a charge that they fund their investments with excessive debt and thereby reduce the UK tax take from their target.

Rightly, the industry has said that it is subject to the same rules as everyone else. It has to show that its UK funding passes the independent lender/arm's-length borrower test. It could, therefore, be said with some justification that any private equity-funded target has no more than the appropriate amount of debt for its capital structure and the type of business that it is carrying on. However, of course, that is only part of the story because the fact that a business is being reinvigorated by private equity investment will usually mean that lenders have a greater willingness to lend against the expectation that things will happen in the short term. In any event, that argument will no doubt continue over time as the government-led investigation into what is called "shareholder debt" comes to a conclusion.

Any private equity investor looking to make a significant investment in a public company will no doubt have an eye to a possible break-up of the target if there are mature or poorly performing businesses that the private equity is not particularly interested in alongside the business that the private equity investor really wants to buy. Fortunately, this is an area where tax life has got easier in the UK rather than worse.

At the other end of the tax spectrum, there are increasing signs that the UK corporate world is feeling the squeeze. The corporate tax rate has not been raised and the corporate base has not been broadened but it is undoubtedly the case that, despite a publicly expressed desire to be friendly to business and encourage inward investment, some parts of the Revenue are aggressively pursuing tax yield. Nowhere has this been more evident than in the application and extension of the CFC (controlled foreign corporation) rules to counteract multinational tax planning. Rather oddly, this comes at a time when other regimes, most notably the US, are adopting a more relaxed attitude in this area.

So, there is a greater appetite than there was for considering emigration or expatriation of existing UK-based businesses to achieve a better overall tax rate for a public group and hence a better valuation for public investors.

The legality of exit charges imposed on emigration from one EU jurisdiction to another is still under review by the European Court of Justice. On the one hand, it could be said that an exit charge is an impediment to relocation and investment in another EU jurisdiction. On the other hand, an emigration which means that gains accrued in one jurisdiction drop out of charge to tax completely (because the new jurisdiction does not tax the same gains) clearly raises some difficult issues in EU law terms, especially given the current focus of the ECJ on trying to balance the potentially conflicting requirements of the fundamental freedoms and the drive against tax avoidance. For the moment, however, let's assume that no-one wanting to restructure would rely on the ability to emigrate tax free but would need to work within the existing legislative framework.

Acquisition and on-sale of part of the business

Where the acquirer is either a foreign company or an overseas private equity fund, life should be relatively straightforward (at least if you can sell shares rather than assets).

If a new UK holding company is used to make the acquisition, then it will have a fair market value basis in target. Subsidiaries or businesses that are intended to be kept can then be transferred up from the target to the new UK holding company tax-free within the UK group and, subject to corporate law formalities, the proceeds can be extracted tax free, thereby leaving the target with its high basis and the assets that are to be sold to third parties. A sale of slimmed-down target will complete the process and achieve the commercial objective.

If there is more than one third-party potential buyer and gains might be crystallised at different levels, a cascade of holding companies can be introduced and used to achieve a similar result.

If business and assets to be sold are located outside the UK, then the non-UK position on realisation will have to be considered.

If there is no underlying taxable gain or any gain that would be covered by the substantial shareholding exemption (SSE), then life is even easier. Direct sales can then be made.

The SSE was introduced in 2002 to enable UK-based companies and groups to restructure flexibly and rapidly in response to emerging global opportunities without facing the prospect of a large tax charge. The exemption is intended to apply to most disposals by trading companies of shareholdings of 10% or more in other trading companies.

Realisation and return of funds to shareholders

A public company reconstructing itself may well be able to use the SSE to achieve a tax-free profit on sale and then return funds to shareholders through capital reduction so that the gain is only taxed at the shareholder level.

Alternatively, it may be possible to introduce a new holding company and use effectively the same technique that a foreign buyer or overseas private equity fund could have used.

Spins

Spins come in two forms in the UK: a dividend demerger, which has various ongoing conditions attached to it that may make life difficult where a change of control of either party is contemplated or cash is to be returned to shareholders at some point, and a corporate reconstruction, where the shareholder carry-over rules have been considerably liberalised in recent years.

A spin could be effected to partition a company but continue ownership by existing shareholders or to allow a third-party bidder to acquire one part of the previously unified corporate structure subsequently (in which case, the change of control restrictions on dividend demergers will mean that a corporate reconstruction route will have to be used). In corporate law terms, dividend de-mergers are very straightforward but corporate reconstructions will usually require the superimposition of a new holding company to facilitate the split or it may be necessary to go to court to get a reduction of capital approved.

Stamp duty will always be an issue that needs to be managed in any such transaction.

In tax terms, however, the shareholder-level tax issues are relatively straightforward. It will usually be possible to structure a dividend demerger or corporate reconstruction on a tax-free basis. If, subsequently, there is a realisation, then gain will usually only have to be recognised on the portion of a demerged or spun company that is sold.

At the corporate level, formerly all relevant parties had to be in the UK. This is still the case on the dividend demerger where any companies being spun must be UK tax resident. The introduction of the SSE, however, has meant that corporate-level gain may be sheltered by that exemption and so a business can be spun to a foreign holding company without UK tax if that is the more appropriate vehicle for the future (for example, because the business being spun is largely being conducted in the US or elsewhere outside the UK so that a UK holding company would largely be inappropriate).

Partial public bid

If someone is interested in bidding for part but not all of a company, then it may have a joint bidder who wants the remaining part of that company or it may wish to leave that part of the company in existing hands or it may want to realise it for cash.

The techniques described above can be used to achieve a corporate reconstruction and a realisation free of tax (again assuming that no overseas tax implications arise). Shareholder-level gain can usually be managed too so as to be realised only on any cash consideration.

Expatriation

The superimposition of a foreign holding company over a UK holding company should be relatively straightforward and achieve a tax-free carry-over for shareholders.

If the group concerned is then merging with a largely overseas business, that should be facilitated by the superimposition of the new holding company.

If, however, the group concerned is simply looking at re-domiciling itself, then the SSE may enable non-UK assets to be extracted from the old UK target with no UK tax charge on the basis described above.

Future dividend flows for UK shareholders will often be a focus in any such transaction as they were, for example, in the Royal Dutch Shell reconstruction. The UK is, fortunately, a benign regime as regards income access shares so that, as part of any capital reorganisation, shareholders can be left with shares that will give them a UK income flow and the division treatment they desire.

There are thus many permutations which will enable either a private equity investor or a corporate financier looking to achieve financial alchemy within an existing structure to get to where they want to without significant shareholder or corporate-level taxes.

Looking down the other end of the telescope, there is no reason why someone wanting to use the UK as a base for a listed vehicle or as a holding company for EU operations should be put off because others are looking to leave (but not taking significant action yet).

It is simply a question of assessing relevant advantages and disadvantages.

The UK can certainly offer an attractive package still with no withholding taxes on outbound dividends; the benefit of a good treaty network and withholding tax exemption within Europe under the Parent/Subsidiary Directive regime; no interest allocation rules on funding outbound investment and a fairly generous foreign tax credit regime (again, something that is being reviewed before the ECJ). Stamp duty on share dealings plus perhaps a slightly less generous CFC regime than in other jurisdictions are the only blots on that particular horizon.