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Is a UK company entering into 'sell to open' option

Resolved Question:

Is a UK company entering into 'sell to open' option transaction of a portion of the company's IP liable to corporation tax on the option premium?
Submitted: 5 months ago.
Category: Tax
Expert:  bigduckontax replied 5 months ago.

Hello, I am Keith, one of the experts on Just Answer, and pleased to be able to help you with your question.

Only when the option is closed or runs off then the net amount gained is exposed to Corporation Tax CT).

I do hope that you have found my reply of assistance.

bigduckontax, Accountant
Category: Tax
Satisfied Customers: 3369
Experience: FCCA FCMA CGMA ACIS
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Customer: replied 5 months ago.
Hi Keith,Thank you for your prompt and clear response.Upon reflection, the matter has some complexities that might have affected your response had you been aware of them.Dies any of the circumstances below affect your view as to the taxable treatment of the option premium?The UK company ( Company A) is contemplating selling an option to a US company (Company B) for B to acquire 30% of A's IP (actually Trade Secrets). The option premium is $100,000 and the option can be exercised at any time at a strike price of $2,000,000.An independent valuation of 30% of the Trade Secrets would probably value them at less than the strike price.The option premium is being used by A to fund litigation against a third company (C) for the misappropriation of A's Trade Secrets, the premium cannot be put to any other use.The option is subject to a Call Right and a Put Right.The Call Right can be exercised by A upon a resolution of the litigation and any subsequent award of damages to A, it would repurchase the option according to a pre-agree formula for a sum between $1 and $200,000 according to the the quantum of a damages award.If A does not exercise its Call Right following resolution of the litigation then B has the right to put the option back to A for a price 10% higher than would have been payable had A exercised its Call Right.If neither A nor B exercise these rights then B has the right to exercise the Option itself.If the outcome of the litigation is unsatisfactory and no damages are awarded then A has right to repurchase the Option for $1.RegardsPeter
Expert:  bigduckontax replied 5 months ago.

Thank you for your support and most interesting telephone call.

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