U.K. Is the Place to Be
The best domicile for this turns out again to be the U.K. For example, assume investors put in $50 million and obtain a $100 million exit via asset sale:
- If 50% of $50m is spent on R&D, U.K. R&D tax credits will be $6.25m.
- The ACC will have $25m of non-R&D related U.K. tax losses
- Corporate income tax liability realized will be $100m–$25m @ 10% = $7.5m
- The remaining $92.5m can be distributed to Investors without withholding tax
- The ACC only suffers net $1.25m of tax over its lifetime.
The U.K. tax system has always worked on the simple principle that dividends are paid out of profits after tax and should not be taxed further. It is not necessary to read a bilateral tax treaty or work out if a complex exemption system applies, as there is simply no rule in the U.K. tax system that imposes tax on dividends, so there is no need to worry about where a myriad of investors are located—the dividend can be paid and there is no tax to be accounted for.
No country is a panacea of course, the U.K. included. The U.K. tax system for investors and management teams who are U.K. residents still hasn’t caught up with developments for companies. Milestone deals can still be taxed up front based on the total potential proceeds, with relief if milestones fail to arrive.
Given the attrition in drug programs and uncertainty over those milestones, this is unfair. Proceeds should be taxed as they are received, not before.
Flexibility on an exit would be further enhanced if the current complex demerger and reorganization provisions were simplified to allow one-step transactions that move assets from one company to another, provided both are under common ownership. These seem pretty logical to us, and the motivation for updating the rules is that the U.K. would become the jurisdiction of choice for the best assets and the best people, regardless of where they originate from.
We are often asked, “Where’s the next Genentech coming from?” It certainly isn’t going to spring into existence just because that’s seen as a good outcome. It is, however, much more likely to happen if one country in particular becomes the aggregator of seasoned product developers and the best assets the planet has to offer.
Overall, though, we were surprised to arrive at the conclusion that the U.K. is currently the best country in which to locate an ACC. We have an international perspective and are genuinely indifferent to where these companies are located.
Another surprise was the deteriorating attractiveness of the U.S. as a place for a startup. This is inexorably tied to the macro trend from company purchase deals to asset purchase deals. Unless the exit is a share sale, for American firms the transaction losses to tax in an asset sale deal are considerable.
In a world of increasingly choosy buyers of assets, and the increasing internationalization of deals, the need to return cash to investors in multiple jurisdictions without burdensome tax levies has increased. The U.S. has always slapped a 30% withholding tax on investment returns as they leave the U.S., but this steep hit is being incurred more frequently, thus lowering the attractiveness of the U.S. market for ACCs overall.
Of course, an advocate of starting an ACC biotech in the U.S. could stand his/her ground and insist that the deal is actually just a share purchase, but this could result in there being no deal at all.
Our view is that we’d like as much flexibility as possible to make a deal work. We feel that, absent a serious shift in U.S. tax policy, these trends will continue and the U.S. will fall further behind the U.K. on the attractiveness scale for ACCs.