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I'm based in the UK and own eBay shares. Will the PayPal spin

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I'm based in the UK and own eBay shares. Will the PayPal spin off create a taxable event in HMRCs view? If so, how will it be calculated?
Submitted: 1 year ago.
Category: Tax
Expert:  TonyTax replied 1 year ago.
Hi.

Let me take a look at this and I'll get back to you. It will take a while to draft my answer.
Expert:  TonyTax replied 1 year ago.

Hi again.

My understanding is that the terms of the demerger or spin off have yet to be announced so it's really not possible to go into too much detail other than to give you a few basics as to how they work for CGT purposes.

In a very simple situation, if you take some shares in Paypal so you end up with shareholdings in both companies and there is no cash involved, the cost of the two new shareholdings will be split in proportion to their stock market value.

Whenever cash is involved, there will be almost always be a capital gains tax event to report to HMRC. Whether you would have CGT to pay or not would depend on the amount of cash received, whether you took any shares in Paypal and how much of the cost of the Ebay shares is attributed to that cash and new Paypal shares.

As a shareholder in Ebay, you will be offered shares in Paypal and or cash because of the perceived dilution of the value of the Ebay shares. In effect, as a shareholder, you won't be giving Paypal away without being compensated.

When Verizon demerged from Vodafone in February 2014, there were several options open to shareholders including taking cash payments as a return of capital or as a special dividend to suit both US and UK shareholders.

See page 5 and Example 5 here for more information on the basic mechanics. See page 7 for a note on demergers and pages 8 and 9 for some examples as to how the base cost of the original shareholding is split between new shareholdings and cash.

I hope this helps but let me know if you have any further questions.

Customer: replied 1 year ago.

Here's some info from the SEC:

On September 30, 2014, eBay announced its intent to separate its Payments business and its Marketplaces business into two independent, publicly traded companies—PayPal and eBay. The separation will occur by means of a pro rata distribution to the eBay stockholders of 100% of the shares of common stock of PayPal, which was formed to own and operate eBay’s Payments business.

So no cash involved. My understanding is that eBay stockholders after the split will own eBay and PayPal stock. Is getting PayPal stock considered a taxable dividend or similar?

Expert:  TonyTax replied 1 year ago.

There will be large institutional shareholders in the US and in the UK and they will need to be kept happy. It used to be the case that if new shares in a demerging company were issued, they were not normally treated as a dividend. Now, with big companies operating in several countries, they have to cater for different tax jurisdictions in how they structure demergers or spin offs.

Because there are two tax jurisdictions for the major shareholders, its possible that even a share distribution with no cash involved will be treated as a dividend as opposed to as a capital payment which is unusual. As I said in my previous post, in the Verizon demerger, Vodafone shareholders were given options to take cash and/or shares as capital or as a dividend. It all depends on how the deal is structured and what clearances are needed from the IRS in the US and HMRC in the UK.

So the Paypal shares could be treated as a dividend or as a capital payment. Nobody will know until a formal document is published. Then it will become clear. Take a look at the notes on the Verizon case here for an idea as to what went on.

Customer: replied 1 year ago.
Hi - final follow up. Given that eBay is US based (unlike the Vodaphone example) is there any chance the PayPal shares issues could be viewed by HMRC as a dividend that will incur a tax?
Expert:  TonyTax replied 1 year ago.
That is possible but as I said in my previous post until the document is released, nobody will know. As the UK and the US have a double tax treaty, any dividend will be given a tax credit for UK tax purposes which will cover any liability to UK tax of a basic rate taxpayer.
TonyTax, Tax Consultant
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Satisfied Customers: 15753
Experience: Inc Tax, CGT, Corp Tax, IHT, VAT.
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