On February 25, 2021, Venable partner Friedemann Thomma was quoted in Bloomberg Law on tax traps that await early SPAC investors.
According to the article, investments in SPACs—also known as blank-check companies—are speculative, meaning investors don’t know for months or even years what the vehicle will acquire. That could spell trouble for investors who are unaware of the complex tax hurdles U.S. shareholders face when they own stock in certain foreign companies.
When a SPAC deal crosses borders, it could trigger passive foreign investment company (PFIC) tax rules aimed at closing a loophole that lets U.S. taxpayers use offshore hedge funds or other investment vehicles to shelter money. Those rules also can be triggered when an offshore SPAC places capital it raises from U.S. investors into an interest-bearing trust account.
To avoid that tax hit, a SPAC deal has to be executed within a very narrow window of time, or have a perfect mix of assets to qualify for exceptions carved out in the tax code.
“There’s so much money chasing deals, and there’s impatience from private equity and investors to be able to monetize their investments,” said Thomma.
Click here to access the article.