Special Purpose Acquisition Company (SPAC) – Is this tax vehicle a BLANK CHECK?

Special Purpose Acquisition Company (SPAC) – Is this tax vehicle a BLANK CHECK?

Mon 07 Jun 2021

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.


SPAC, a Special Purpose Acquisition Company, also known in the vernacular as a ”Blank Check Company”, 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 for acquisition or combination of entities (“de-SPAC” transactions). The industry standards permit the “Founders” and “Sponsors” between 12 and 24 months to identify a target company or companies to include in the SPAC and close the deal. At that time, the SPAC essentially becomes the target operating company. The benefits of this investment vehicle are numerous; significant sums can be raised to take private companies or combinations of entities public, while enjoying substantial increases in stock prices on the back end.

SPACs are formed by individuals or hedge funds (“Sponsors”) and aim to go public by raising equity through an Initial Public Offering (IPO). The IPO in these cases consists of the sale to the public of investment units of Class A common stock, along with a fraction of a warrant option to buy additional shares. Typically, a unit sells for $10 and the warrant’s strike price is $11.50. The cash raised will be held in a trust account to be used only if the acquisition/combination occurs. In addition, it is not uncommon for institutional investors to make private investment in a public entity SPAC (known as a “PIPE”) once a deal is announced.

The Founders/ Sponsors will buy Class B, “Founders Shares” and warrants in the SPAC at a nominal price per share. These shares and warrants can be converted into a 20% ownership interest in Class A shares after the acquisition/combination has occurred. The Founders/ Sponsors hold all voting rights until the de-SPAC vote occurs, once the proposed deal has been announced. The Public has redemption rights once the de-SPAC deal is out for a vote. The Class A shareholder has the right to vote “no” on the deal and be redeemed before the deal is completed. If the de-SPAC is not completed within the prescribed time, the entire SPAC is liquidated and all cash in the trust is distributed to investors.

Tax Issues for the Founders: Investors or Employees?

A well-reported vehicle for raising considerable equity, structuring a SPAC has potential financial repercussions for the founding individuals. As stated above, the Founders/Sponsors receive Class B shares and warrants in the SPAC for a nominal price, prior to the issuance of Class A shares to the Public (or Institutional Investors). These shares are convertible to ownership of 20% of the combined company after the de-SPAC transaction. This raises what is commonly known as the “Cheap Stock” issue. The key tax question is whether the Founders acquire their shares as investors or as employees of the entity they created?  This in turn will determine how and when their gains are taxed.

While the final resolution relies on individual facts and circumstances, there are a few key principles to mitigate the compensation risk, and ameliorate personal tax consequences. Two main US tax principles established in court cases at the Supreme Court and lesser court levels (eg.

Berckmans v. Commissioner TC Memo 1961-100), is whether the stock purchase was at a bargain price and if so, whether the bargain was intended as compensation. To receive investor status for the purchase of the stock, establishing that there was no bargain element goes a long way.  To support this fact, the recipient should be prepared to show that at the time of the purchase, the SPAC had little net worth, no investor subscriptions in hand, no agreements with underwriters, no agreements with Targets, or that any agreements in place were subject to significant contingencies. In these cases, the Founder is significantly more likely to be deemed an investor. Such status would allow him or her to defer taxation until a sale of the shares.

Other jurisdictions will have other tax rules which will need to be considered.  For example, the UK has what is known as ‘employment related securities’ rules.  It may be possible for the company and the investing employee shareholders to elect to treat restricted shares as subject to income tax on acquisition, so that subsequent increases in value are taxed more favorably (at the time of writing) as capital rather than income.

Tax issues for the SPAC, the Target and the US and Target shareholders:

SPAC founders face a critical binary choice, whether to organize as a US or Foreign Entity. This decision is most commonly based on the jurisdiction of the Target(s), which may well not be known at the time of the SPAC’s formation. There are many possible combinations for the jurisdiction of the SPAC and the Target. For example, the SPAC can be organized as a foreign corporation, usually a Cayman Islands entity while the Target is a US entity; the SPAC can be a US entity and the Target a foreign corporation; the SPAC can be a US corporation and the Target be a US corporation or both foreign entities. The last two cases with consistent governance are relatively straightforward. The first two raise considerable tax issues.

US SPAC acquiring Foreign Target Corporation:

A typical case arises when a US SPAC has been formed and subsequently identifies a foreign entity as a Target.

In such a case, when the US SPAC acquires the foreign target corporation this would result in the Target being treated as a “controlled foreign corporation” (CFC) for US tax purposes. A foreign corporation is a CFC if more than 50% of the vote or value of the entity is controlled by “U.S. Shareholders”. A “U.S. Shareholder” is any U.S. person who directly or indirectly, owns 10% or more of the vote or value of the foreign corporation’s stock.  Once a foreign corporation is categorized as a CFC, there are specific rules that determine what foreign income is taxed in the US to the US SPAC. Generally there are two types of income subject to US tax: (i) “subpart F income” (passive income, for example interest and dividends), and (ii) “Global Intangible Low-Taxed Income” (GILTI).

Conceptually, GILTI is designed to capture foreign intangible income or business income in excess of a 10% return on qualified business assets investment (“QBAI”). The calculation of GILTI is complex. In general, “positive tested income” (the excess of gross income, not considering dividends and Subpart F income among others) is aggregated at the shareholder level, and the total amount is netted against “negative tested losses”. Interest expenses for foreign entities reduce the amount of the QBAI exclusion. There is a 50 percent deduction against net GILTI that reduces the tax rate from 21% to 10.5% prior to foreign tax credits, which are themselves subject to an 80% limitation.

In addition, the US SPAC may be subject to a minimum US tax under “base erosion anti-abuse tax (BEAT), which under certain conditions disallows tax relief for payments from the US SPAC to the foreign target corporation. Furthermore, the foreign target’s individual shareholders will be subject to 30% US withholding tax on dividends paid from US and foreign includible earnings of the Target, unless a lower treaty rate applies.  

One way to avoid this suboptimal tax situation is for the US SPAC and the Foreign Target Corporation to structure the de-SPAC transaction as a reverse triangular merger under section 368. The Target will form a subsidiary with Target parent stock, which will merge into the US SPAC. The US SPAC shareholders will receive the Target stock in exchange for stock in the US SPAC. The result is the US SPAC will become a subsidiary of the Target. This raises the issue of whether the Target will be treated as a US corporation for tax purposes under Section 7874 and whether the US shareholders will be subject to tax under Section 367.

Under Section 7874, a corporation organized outside the US may be treated as a US corporation for all US tax purposes if (i) the shareholders of the US SPAC receive 80% or more (by vote or value) of the foreign corporation by virtue of the de-SPAC combination and (ii) the foreign corporation fails the “substantial business activities” test. Accordingly, the foreign parent corporation will not be treated as a US corporation if it (and its affiliated group) meets the “substantial business activities” test – 25% or more of its revenues, tangible assets and employees take place in the parent’s country of incorporation and it is a tax resident of such country. If the US shareholders own more than 60% but less than 80% of the parent foreign corporation, US affiliates will be subject to the “base erosion anti-abuse tax “(BEAT) without a Cost of Goods Sold deduction and dividends paid to US shareholders will not be treated as “qualified dividends“. The calculation of the Section 7874 percentage is complex since it contains “anti- stuffing” and “skinnying down” rules including both certain pre-acquisition and 36-month post-acquisition capital events including redemptions and stock issuances.

For the US shareholders to receive tax free treatment for the exchange of their shares in a US corporation for shares in a foreign corporation, the transaction must meet both requirements of Section 368 and Section 367. Under Section 368, one of the requirements is that the foreign parent continue the historic business of the acquired corporation, the US SPAC. It is not clear whether a US SPAC, which has only portfolio assets, can meet this test and therefore qualify for tax free treatment.

Furthermore, even assuming that the Section 368 requirements are met, Section 368 does not apply to the exchange of US stock for foreign stock, unless the requirements of Section 367 apply. To satisfy Section 367 the following requirements must be met; (i) US shareholders must receive in the transaction less than 50% of the foreign stock by vote or value; (ii) less than 50% of the foreign corporation by vote or value is owned after the transaction by either officers or directors of the US SPAC or its 5% shareholders; (iii) 5% US SPAC shareholders enter into a Gain Recognition Agreement, and (iv) the target corporation has engaged in an active trade or business for the 36 months prior to the transaction.

Assuming the reorganization meets the requirements listed above, the Sponsors warrants received in the foreign target will not be taxable and the foreign holding company would not be subject to US taxation on group profits, but rather would be subject to tax in its jurisdiction of tax residence. In addition, the shareholders of the foreign holding company will not be subject to US tax.

Another way to avoid CFC status for the foreign target corporation is to engage in a “double dummy corporate transaction” so that the Target is owned by a foreign parent. This transaction is used when the tax-free reorganization requirements cannot be met. In this structure, the Sponsors form a foreign holding company in a Section 351 transaction. This involves the acquisition of the stock of both the foreign Target and the US SPAC by the newly-created foreign holding company through a series of mergers of foreign holding company’s subsidiaries into the US SPAC and the foreign target, respectively. The end result would allow the US SPAC and the foreign Target to become subsidiaries of the new foreign parent. The transaction would still be required to run the gauntlet of Sections 367 and 7874 to be tax free, as previously discussed.

However, unlike the reorganization structure, the Sponsors’ warrants received in the transaction may be taxable. The foreign holding company would not be subject to US tax on group profits, but would be subject to the tax of its jurisdiction of tax residence.

Foreign SPAC acquiring a US Target Corporation:

A typical case might be a Cayman entity identifying a US corporation as the Target to be acquired in a tax-free stock transaction. As the US corporation’s shareholders will generally control the combined entity, this raises the risk that the transaction will trigger both the anti-inversion rules of Section 7874 and Section 367, as previously discussed.

To avoid this result, the Cayman Islands SPAC will typically domesticate by merging into a

Delaware corporation prior to closing the transaction. That merger can generally qualify as a tax free “F” Reorganization under Section 368 so thereafter the foreign SPAC will be treated as a US Corporation and therefore able to complete the transaction on a tax- free basis. Section 367 (b) applies to US shareholders in the inbound “F” Reorganization. 10% or greater US shareholders (by vote) include into income their share of the Foreign SPAC’s accumulated earnings and profits. This amount is generally de minimis as the SPAC’s only asset prior to the final deal is cash, which will accrue little or no income. Less than 10% US shareholders need to make a “QEF’ election to avoid gain. The foreign shareholders would be subject to US withholding tax on dividends, as previously discussed.

The tax treatment regarding the Sponsor’s warrants is uncertain if the Foreign SPAC is treated as a “Passive Foreign investment Company” (PFIC). A Foreign corporation is a PFIC for a tax year if it meets either the Gross Income Test (75% or more of its income is passive) or The Asset Test (50% or more of its assets are passive including cash).

SPAC activity in the US, UK and Europe:

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 $425M.

  • European SPACs

One reason for the lack of SPACs in Europe is the relative maturity of European technology prior to going public. The European market has substantial history of operating profits and healthy financials, and therein an easier route to an IPO and little need to bear the extra cost of a SPAC as compared to US counterparts. Another difference is the restrictive listing rules in Europe. As previously stated, the US stock exchanges allow the investors to reclaim their investment if the SPAC does not make an acquisition within the stated timeframe; major European stock exchanges do not. Conversely, US stock exchanges have tighter regulations for IPOs than their European counterparts. Finally, there is a smaller pool of venture capitalists operating in Europe.

Despite the above, it appears that things are beginning to change in Europe. Ex- Credit Suisse CEO Tidjane Thiam raised $300M in 2021 for a SPAC, French investor Xavier Niel launched a 300M Euros deal in December 2020 and Tikehau Capital, a global alternative asset management group, just raised 500M Euros for a SPAC, trading on the Euronext Amsterdam exchange.

  • United Kingdom (UK) SPACs

Over the past five years, the UK has had 50 listed SPACs with over $2Bn raised. One reason for the lack of London stock market listings is that SPACS are ineligible for listing on the Premium segment of the official market List and may only be listed on the Standard offering. The UK shareholders of a SPAC, unlike their US counterparts, do not currently have the redemption rights. In addition, unlike the US stock exchanges, the London stock market suspends the trading in a SPAC once it identifies a potential acquisition. It should be noted that in April 2021, the UK Financial Conduct Authority, proposed changes to the listing rules. If adopted, these would bring UK listing rules closer to the US stock market rules by eliminating listing suspension if the SPAC gives the shareholders redemption rights and the right to vote on acquisitions.


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, the Target and its shareholders and the SPAC and its shareholders.

For further information please get in touch with your usual Mazars contact or one of the following:

Craig Stern: Managing Director – Real Estate, Mazars USA LLP; Craig.Stern@mazarsusa.com

Mark Hubbard: Partner – Financial Services Tax, Mazars UK LLP; Mark.Hubbard@mazars.co.uk