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Streetwise Burger King owner doesn’t expect huge tax bill from deal

Observers are scratching their heads over whether the Burger King-Tim Hortons tie-up will require that shareholders fork a chunk of the proceeds over to the U.S. Internal Revenue Service in the form of capital gains taxes. Though the deal creates a combined parent company, another entity is also being created, one whose tax implications for Burger King's shareholders are unclear.

According to the deal announcement, the new parent company will trade on the New York Stock Exchange as well as the Toronto Stock Exchange. Tim Hortons Inc.'s shareholders can elect to receive cash, stock in the new parent, or a combination of the two. Burger King Worldwide Inc. shareholders, however, can choose among options that involve ownership in a new TSX-listed limited partnership – into which 3G Capital, the private equity firm that owns 70 per cent of Burger King's stock, has already said it will convert all of its holdings.

It's difficult to ascertain what impact this will have on Burger King shareholders' tax bills. The announcement says "the transaction is expected to be taxable, for U.S. federal income tax purposes, other than with respect to the partnership units received by them in the transaction." That suggests that, unlike tax inversions which are normally subject to capital gains taxes following a Treasury Department regulatory change that took effect in 1997, one that was intended to reduce the appeal of such inversions, the companies expect the conversion of the Burger King shares into partnership units not to be taxed.

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"This is not what I have seen as the typical way that one does a cross-border merger transaction, generally," said Martin T. Hamilton, a tax partner at Proskauer Rose LLP in New York. "Normally it's two corporations; the idea that you would have an intermediate partnership step, that's not something I've seen before."

Burger King shareholders can either choose to exchange their shares and receive 0.99 of a share in the new parent company and 0.01 of a share in the partnership, or to receive one partnership unit per Burger King share – "subject to a limit on the maximum number of partnership units that can be issued," the announcement states. The partnership shares can be converted into common shares in the new parent, but only after one year; however, holders of the partnership units can participate in the parent company's shareholder votes.

The company appears poised to reap a tax-inversion windfall, without shareholders such as 3G feeling the sting of capital gains taxes. But the deal is still subject to regulatory approval. Also, the corporate-tax windfall to a combined BK-Tims could be more like a trickle, depending on where the combined company's revenue is actually generated.

"If the real effect of any transaction in which you change the jurisdiction of the parent company from one jurisdiction to another, you have to look at the effective tax rate on the combined revenues in both jurisdictions," Mr. Hamilton observes.

"To take an extreme example, if you had a U.S company that derived all of its income from the United States, and you changed its jurisdiction to a jurisdiction with virtually no corporate tax, they would still be subject to tax in the United States, so you wouldn't have achieved an effective tax rate result. You'd have moved your parent but you wouldn't actually have achieved an effective reduction in the amount of taxes you actually pay."

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