I don’t understand this Vodafone tax thing

Chief executive Vittorio Colao is closing in on a sale of Vodafone’s 45pc stake in Verizon Wireless, the US’s biggest mobile operator, to majority owner Verizon Communications.

The company expects tax exemptions to allow it to keep the vast majority of the income which will be positive news for investors, including UK pension funds, which are expecting a major payout following the deal.

People (including some very savvy investors) keep talking about the tax that will be due on this.

But there’s no tax payable on selling such a stake in a subsidiary. Substantial shareholding exemption or SSE. From the UK point of view there’s just not anything to pay at all.

The Americans might want a slice but that should be simple enough to deal with.

I just don’t get it. What tax is it that everyone’s worrying about?

Note that this piece in the Telegraph does talk about this. But what’s confusing me is why anyone ever thought it was going to be different?

6 thoughts on “I don’t understand this Vodafone tax thing”

  1. I don’t think SSE is applicable because the US operation is being sold out of a Lux Holdco. So it will be the interaction of the Lux participation exemption, Lux/US treaty, UK CFC and UK dividend exemption that needs to be sorted. They should get to an exempt result overall but it’s a much more complex analysis than SSE.

  2. Robin, good analysis. However, and as you yourself point out, the end result is exemption.

    To be fair, and Timmy was indeed fair, the article was more about Vodafone business strategy and it’s need to balance its various invested interests. So I found it interesting, nothing more really.

  3. The actual law is more complicated, as TP said.

    But Tim’s point was that the principle is clear – profit on the sale of subsidiaries isn’t taxable and isn’t meant to be taxable.

    So those who say that we should follow the principle rather than the letter of the law should be happy if in this case it does indeed turn out to be non-taxable.

  4. Vodafone has wanted to sell the Verizon stake for a very long time – something like ten years. This tax issue has always been brought up whenever this desire was mentioned for that entire period. What has changed now? If the tax issue could always be avoided by structuring it right, surely people have known that all along?

  5. Richard/Michael – one thing you have to bear in mind here is that Vodafone bought into Verizon in 1999 and that was before the UK had SSE so at the acquisition date the sale of a sub by a UK holdco would have been taxable. That will be one of the reasons that they hold the investment via the Netherlands, which had an existing participation regime. So even without SSE they would have been able to avoid CGT. However, until 2009 they would have suffered tax at the point they paid a dividend up to the UK and the final piece that allows them to get the cash up to the UK and then out to shareholders is the divi exemption in CTA2009. What Vodafone is doing now is to use a suite of advantageous tax provisions that the UK introduced (mainly under the last government but as part of an ongoing process) to make it a desirable holding company location.

    This is more steps than SSE and there are things they could get wrong in implementation but, although it’s not particularly complicated but it’s not the sort of thing that journalists (or bloggers) would typically take the time to explain.

    The discussion of SSE is a red herring in that it is not available to Vodafone for Verizon (it might be if they sold the whole Dutch Holdco). It is only useful now as an analogy because had Vodafone held Verizon in a UK company then SSE would have been available (subject to satisfying all the requirements in Sch 7AC – and I haven’t seen anyone confirm that they all would be satisfied),

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