At year-end, unexpected US and state income tax impacts may arise for SPACs — even those formed in offshore locations, Bloomberg reports. Nearly 700 SPACs were established during 2021 and 2022, raising more than $175 billion.
Many of these companies were formed in locations such as the British Virgin Islands or the Cayman Islands, which are without US tax treaties. While these locations have historically enjoyed a low- or no-tax reputation, the reality has caught some accounting and management teams off guard. As a result, many professionals have been surprised to learn that tax liabilities may now exist in relation to their SPAC.
Even when formed outside of the US, each SPAC entity could create a nexus (a taxable presence) in a US jurisdiction. Various factors can trigger both US and state filing requirements. First, nexus might exist due to the location of company property—including bank accounts. SPACs raise capital through an IPO, and the capital raised by these entities is usually held in trust interest-bearing accounts in the US. Read more.
