Tax benefits can be a critical, motivating factor for entering into an alliance rather than an alternative structure. Tax attributes available with an alliance formation can create advantages over traditional M&A transactions. For example, how an alliance is formed will impact the available tax benefits and associated tax costs for the alliance and its participants. In the U.S., passthrough entities and other alliance tax structures can generally defer current tax costs, prevent double taxation, and allow for a more efficient use of existing tax attributes of the participants.
An alliance allows for certain tax advantages. Alliances started from the ground up allow participants to decide on a form of alliance that considers the needs of all participants. For example, an alliance may be formed as a legal entity that is taxed as a partnership or through contracts without a new legal entity formation. The terms of the alliance will determine whether it is taxed as a partnership or as another arrangement. This flexibility is one of the advantages of the alliance structure.
Understanding the tax motivations that are specific to each participant is important. Often, the main tax objective of an alliance is to limit tax costs throughout the alliance lifecycle, and should be understood prior to settling on the structure of the alliance. Participants should also consider balancing the tax efficiency of the flow of earnings while the alliance is operating and any tax implications of the expected exit event upfront.
Additionally, the tax analysis should contemplate potential changes to relevant provisions in the tax code. As tax laws are enacted, they should be monitored for their impacts to the alliance.
The achievement of these objectives is linked to three distinct stages of the alliance lifecycle which are: formation, ongoing, and exit.
Financial Services Deals Leader, PwC US