Altaba Inc. gave up on a years-long effort to rid itself of a massive stake in Alibaba tax-free—but Altaba’s foreign shareholders still won out under the company’s liquidation plan.
Altaba, formed in 2017 from the remains of Yahoo! Inc. after Yahoo sold its web business to Verizon Communications Inc., announced earlier in April that it will fully liquidate, exchanging cash and other property for its shareholders’ stakes.
When it liquidates, foreign shareholders won’t owe any tax, according to tax professionals. Some of its largest foreign shareholders include UBS AG, Barclays Plc, and HSBC Holdings Plc.
The small perk comes after several years of attempts by Yahoo and Altaba to get rid of a massive stake in Chinese e-commerce giant Alibaba Group Holding Ltd. in a low-tax or no-tax way. The Alibaba holdings, purchased in 2005 for just $1 billion, now equal more than $50 billion.
“This is sort of a consolation prize,” said Robert Willens, a New York-based tax consultant, regarding the lack of a withholding tax on foreign shareholders. “This is the next-best thing.”
The company declined a request to comment.
How It Works
Corporate distributions to shareholders that would otherwise be treated as dividends—which can be taxed at ordinary income tax rates—get more favorable sale treatment when the company fully liquidates under tax code Section 331.
Additionally, distributions in a full liquidation aren’t subject to restrictions under tax code Section 301, which are intended to limit a company’s ability to disguise dividends as payments that would receive that more favorable sale treatment.
Due to uncertainty about when the Section 301 restrictions apply, withholding agents tend to withhold tax on the money going out to foreign shareholders at a rate that varies based on international tax treaties. That doesn’t happen in the case of a full liquidation because there is no uncertainty about whether Section 301 applies.
‘No Tax Magic Bullet’
Altaba President and CEO Thomas McInerney acknowledged on an April 3 conference call that a low-tax way out was “no simple, easy, straightforward thing.”
“The reality is there’s no tax magic bullet, if you will,” he said, telling investors and analysts that the company, its advisers, and “the brightest tax minds in the world” had spent “literally years looking at this.”
Yahoo sought to rid itself of part of its then-$40 billion stake in Alibaba in a tax-free spinoff in 2015. After Altaba offered in June of last year to buy back 195 million of its own shares in exchange for shares of Alibaba and sell additional Alibaba shares to cover the resulting tax liability, it announced that only 156,676 had been tendered nearly a month later.
Altaba’s liquidation will trigger a 21 percent tax rate to be applied to the company on its gains, according to tax professionals—a softer blow to the bottom line under the 2017 tax law, which reduced the corporate rate from 35 percent, McInerney noted on the call.
For Altaba’s foreign shareholders, however, the grass is a bit greener, tax-wise. The largest non-U.S. shareholders as of the end of 2018 were Canada’s Public Sector Pension Investment Board, with 2.73 percent; the Swiss bank UBS Group AG, with 1.47 percent; the Jersey-incorporated hedge fund BlueCrest Capital Management Ltd, with 1.33 percent; London-based Barclays PLC, with 1.28 percent; and HSBC Holdings PLC, another London juggernaut, with 0.99 percent.
The withholding rates would have been relatively small for the countries in which those investors are based, but the tax liability still could have been substantial for the largest shareholders, considering the sheer sizes of their stakes, said Stefan Gottschalk, a senior director at RSM US LLP in Washington.
“I’m sure that for the largest shareholders even a low rate is a significant dollar amount, and really undesirable,” he said.