The private equity market has been a source of long-term growth for companies and investors alike. Private equity funds have made America one of the most competitive economic climates globally, helping entrepreneurs build great things by giving them access to capital that would otherwise be out of reach.
In 2015 alone, U.S.-based PE firms invested $826 billion across 1,854 deals. As the economy recovers, 2021 is expected to be a record year in PE activity, with a projected $900 billion going into U.S.-based funds and a record number of buyout transactions increasing liquidity for investors and companies alike.
While value-added tax (VAT) applies to many commercial transactions, it does not apply to all transactions. In the United States, VAT applies to payments for services rendered in connection with the sale of tangible property, unless an exception applies. One such exception is where the service involves investment advice provided by a financial intermediary (such as a bank) regarding buying or selling securities or other financial assets or providing investment advice involving securities or other financial assets.
In this context, a private equity representation would typically involve an investment in securities, and therefore financial advice rendered to a company by a PE firm is exempt from VAT. Consequently, companies need to engage with their PE adviser early on to prove to the private equity firm that their advice is exempt from VAT to save the company money.
The price of not paying attention and getting it wrong can be costly. For instance, in a recent case in the U.K., Marks & Spencer Capital Holdings Ltd was fined £50,000 by HM Revenue and Customs for failing to charge VAT on fees paid to an external adviser for private equity services.
Avoid Paying More Taxes
VAT is not the only area that companies should be cautious about; income tax, local country tax, and personnel issues to consider. And since many private equity firms do business in multiple countries, companies must engage with their PE firm early on to help their U.S.-based clients account for the complicated tax issues that often arise in cross-border transactions.
It is clear that both the private equity industry and its clients will have a lot to deal with in 2021, but by engaging early with their advisers, companies can stay ahead of the curve.
In conclusion, the only way to find out if private equity is suitable for you and your company is by getting in touch with a consultant. At the very least, they can help you avoid making any costly mistakes when handling investors. Get started today!