On April 9, 2021, Friedemann Thomma was quoted in Bloomberg Law on tax inversions in the cannabis space. According to the article, founders of some cannabis companies want to go public so that they can raise capital that would help them consolidate, expand their business to different verticals in the cannabis space, and take advantage of historically high valuations of public cannabis companies.
Tapping into the U.S. stock market for cash isn’t straightforward for cannabis companies that engage in the “leaf production” aspect of the business, driving the founders of those companies to enter into lucrative deals with Canadian SPACs that give them an opportunity to legally list on alternative U.S. exchanges. But rushing to get acquired by a parent company based in Canada, which legalized recreational marijuana use in 2018, may trigger an Obama-era tax hit on some companies that move offshore to avoid U.S. taxes.
“This is where the inversion rules come into play because many times, the target shareholders will own substantial shares of the parent company in Canada, and that could lead to scenarios where the foreign SPAC is treated as a domestic corporation for tax purposes,” said Thomma.
When a Canadian SPAC acquires more than 80% of a U.S. company, the anti-inversion rules treat any profits that flow up to the Canadian company as U.S. income. And that triggers different tax consequences for U.S. shareholders and foreign shareholders of the cannabis company. “There is no fix to this once you invert a company,” said Thomma. “And it’s not like companies aren’t disclosing this. It’s just that as an investor you need to be aware that you might have a funky tax result that you didn’t expect.”
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