Special Purpose Acquisition Company (SPAC) – Is this tax vehicle a blank check?

Is it a bird? Is it a plane? Why is a SPAC considered a ‘high flying’ concept and what tax issues need to be considered to reap the benefits and avoid the pitfalls of a SPAC transaction?  In this article, we provide a brief overview of SPACs, the particular tax issues relevant to the US (the major market for such vehicles), and also mention how the use of these vehicles is being developed in Europe and the UK. 

A more detailed version of this article can be found here.

A SPAC is a Special Purpose Acquisition Company, also known in the vernacular as a ”Blank Check Company”.  It is an entity concept that has come in and out of fashion since the 1990’s, depending on a variety of factors including market liquidity and appetite for risk for new technologies. SPACs are formed solely for the purpose of creating opportunities to raise capital via an initial public offering (IPO) for an acquisition or a combination of entities (“de-SPAC” transactions).  Once the initial case is raised SPACs typically have between 12 and 24 months to identify a target company or companies to include in the SPAC and close the deal.

SPACs have generally been a US market innovation. Over the past five years, more than 500 SPACs went public, raising over $300Bn, mostly in the US. In Europe, there have only been 10 SPACs created with a total value of $1.8Bn over the past two years; and only three in 2020, with a total raised of only $425M.  There are a number of reasons why SPACs are not so common in Europe, such as maturity of tech investments before they list publicly and the way the listing rules work in Europe.  However there is increasing evidence that the European market is beginning to develop its interest in SPACs.

SPACs are gaining momentum in the UK.  Over the past five years, the UK has had 50 listed SPACs with over $2Bn raised. There are limitations applicable to SPACS under the UK listing rules however, in April 2021 the UK Financial Conduct Authority proposed changes to the listing rules to bring the UK rules relating to SPACS closer to those operating in the US .

There can be a range of tax issues associated with a SPAC.  For founders and sponsors with stock options and awards there will be a need to consider whether the benefits provided generate an immediate tax charge, or can be deferred to later realization, and whether the tax is charged using capital or income treatment.

With respect to the corporate tax issues we focus on the US tax implications in this article, as this is currently the main market for SPACs.  Significant US tax costs can arise where there is a cross border element to the SPAC, for example a US SPAC with a foreign target, or a foreign SPAC acquiring a US target.  These centre on:

  • Whether the acquisition structure creates US tax obligations as a result of the US controlled foreign corporation (CFC) provisions.  These will include consideration of the new group’s exposure to GILTI and BEAT adjustments to its US taxable income;
  • How the US anti-inversion and tax-free reorganisation provisions apply.

It is possible to limit the exposure of the new group to these adverse tax implications where appropriate consideration is given at the time of acquisition, to the post acquisition structure.  It may be possible to minimize the impact of the US CFC provisions by structuring the transaction such that the SPAC becomes a subsidiary of the foreign target, or by using a foreign holding company to acquire the target and the SPAC.  It may be possible top avoid the application of the anti-inversion provisions for the acquisition of a US target by a foreign SPAC by making the foreign SPAC US tax resident.  There are complex tax issues to address, which are covered in more detail in the full article [link to full article].

SPACs have become a growing vehicle for companies to go public in the United States. UK’s and Europe’s appetite for these creative structures seems to be increasing. Understanding the key tax issues and receiving the proper tax advice is paramount to success. Failure to properly structure the transaction can trigger significant tax implications for Founders, Sponsors, Target and its shareholders, and the SPAC and its shareholders.

For further information please get in touch with your usual Mazars contact.