The group of investors who control Burger King Worldwide Inc. (BKW) are using an unusual strategy to avoid the tax penalty that normally applies to shareholders of companies that shift their legal address out of the U.S.
The plan was disclosed today as part of Miami-based Burger King’s $11 billion stock-and-cash deal to buy Tim Hortons Inc. (THI) and adopt that coffee chain’s Canadian headquarters. The transaction is the first “inversion” announced since President Barack Obama called the strategy an “unpatriotic tax loophole” in late July and ordered regulatory changes to curb them.
Rather than take shares in the new combined Canadian company, 3G Capital, an investment fund with offices in New York and Rio de Janeiro, will swap its majority stake in Burger King for interests in a related Canadian partnership that can be converted into stock, the companies said in a statement today.
“Having the partnership units will defer taxes until an ultimate sale,” Burger King Chief Executive Officer Daniel Schwartz said on a conference call with analysts today.
The move enables the group of investors to avoid the so-called Helen of Troy regulations, a 1996 rule crafted by the U.S. Treasury Department to discourage inversions, a strategy that can help American companies avoid corporate-level taxes by reincorporating abroad. The rule imposes a tax on the shareholders of inverting companies, requiring them to recognize a gain on the value of the stock when it’s converted to a share of the new foreign company.
Other Burger King investors will also have the option of swapping their shares for partnership units, although the total amount is limited. Those who receive shares in the Canadian corporation will have to pay tax on any gain.
Burger King executives said the acquisition, which creates the world’s third-largest fast-food company, isn’t motivated by taxes, and that they expect their effective tax rate to remain about the same following the acquisition. Still, one U.S. senator, Senator Sherrod Brown, an Ohio Democrat, has already recommended avoiding Burger King restaurants.
3G was co-founded by a group of Brazilian investors including the billionaire Jorge Paulo Lemann. William Ackman, the New York hedge-fund manager, disclosed a personal stake in 3G in 2012. 3G’s managing partner is Alexandre Behring, the executive chairman of Burger King who will continue in that role for the merged company.
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