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By Euan Rocha and Solarina Ho
TORONTO Aug 29 Burger King's proposed
$11.5 billion acquisition of Canada's Tim Hortons may
offer big tax benefits to the U.S. fast food chain but the real
tax winner is likely to be its controlling shareholder, 3G
The New York investment firm is not only deferring a capital
gains tax hit in the U.S. because of the deal structure, but is
also poised to reap a multitude of dividend tax and other
benefits by moving Burger King's domicile to Canada, tax experts
on both sides of the border said.
Burger King plans to buy the Canadian coffee and doughnut
chain in a C$12.64 billion (C$11.5 billion) cash-and-stock deal
that would create the world's third-largest fast food restaurant
group. 3G will own 51 percent of the new firm.
"3G clearly wants to get both the dividends and the capital
gains," said lawyer Charles Kolstad at Venable LLP in Los
Angeles. "Someone, who clearly knows what he or she is doing
spent a lot of time thinking about this. And it's quite clever."
In the deal, 3G has opted for partnership units instead of
common shares in the new entity. That move defers the capital
gains tax hit it would have faced in the United States had it
More significantly, if 3G controls its equity via a holding
company in a country that has a tax treaty with Canada, as most
tax experts say is likely to be the case, the investment firm
will save millions in dividend withholding taxes each year.
A spokesman for 3G declined to comment on Friday.
A combined Burker King/Tim Hortons will have a much larger
float of outstanding shares. That will make it easier for 3G
Capital to trim its majority position over time, giving it an
exit strategy. The structure also lets the firm escape any
Canadian capital gains taxes on share price appreciation, making
the potential tie-up one whopper of a deal for the investment
Shares of Burger King and Tim Hortons have soared since word
of the deal leaked last Sunday. Burger King stock is up 17.6
percent since the Friday before.
DIVIDEND WITHHOLDING TAX BREAK
Canada does not have a tax treaty with the Cayman Islands,
where 3G Capital is incorporated. Tax experts said it is a
simple matter for 3G to hold its units via a firm in a country
with a Canadian tax treaty, cutting its withholding taxes on
dividends paid by Burger King to as low as 5 percent.
Withholding taxes on non-resident shareholders in a Canadian
firm can run as high as 25 percent, while similar dividend taxes
for non-resident investors in U.S. companies can hit 30 percent.
The differential in the dividend withholding tax rate
clearly was a factor in the deal structure, said Charles Kolstad
a lawyer with Venable LLP in Los Angeles.
"The ability to be able to re-route things through a treaty
jurisdiction and cut your withholding tax rate from 30 percent
down to 5 or 10 percent is huge," said Kolstad in L.A.
U.S. politicians have criticized the deal as a tax dodge by
It is clear though that dividends will be a factor. The two
firms made dividend payouts of nearly $230 million in 2013.
"Both companies have had pretty balanced capital structures
and capital return policies in the past. And we're going to
continue to have that," Burger King Chief Executive Officer
Daniel Schwartz said this week, though he declined to give
details on size.
(Editing by Bernard Orr)