Hi - This is related to an earlier post with significant more clarification and detail - hopefully someone out there can shed some light and common sense on this
Recently an american company General Growth Properties (GGP) merged and shareholders were paid out in cash (or a combination of cash and shares in new company - but I dont want to complicate matters). This cash payout was to be treated as a dividend and subject to a 15% withholding tax for UK share holders. Take the following scenario - a UK investor buys £100,000 worth of GGP shares within the last 2 months and lets assume that after the merger the investor gets back roughly the same as they invested - so £100,000. Now the investors profit is £0 and there should be no tax due. However since this is now considered to be a dividend (and not a capital gain) then the amount the investor actually gets back is £85,000 and there is no clear way to recoup this loss. Also since this is income the investor must now report this on his tax return and pay a significant amount of income tax.
Hopefully everyone would agree that this seems like an absurd outcome - however this is what has happened to me recently (the numbers and timings are different but I used the example above to make the point). I am in a dispute with my broker who is insisting on handling the investment as described above. I have since been in touch with representatives of GGP who have sent me their definition of how the dividend should be treated from a tax standpoint - however It is worded in a little too much legal speak for my understanding. Could anyone re-interpret what is being said in layman's terms?
The pre-closing dividend is expected to be treated as a dividend for U.S. federal income tax purposes to the extent it is paid out of GGP’s earnings and profits, which is expected to include a substantial amount of capital gain that is expected to be recognized as a result of the pre-closing transactions entered into after the charter amendments closing. To the extent the pre-closing dividend exceeds GGP’s earnings and profits, it is expected to be treated as a non-taxable return of capital which will reduce the unaffiliated GGP common stockholder’s tax basis in its GGP common stock to the extent thereof, and to the extent it exceeds the unaffiliated GGP common stockholder’s adjusted tax basis, it is expected to result in gain being recognized by the unaffiliated GGP common stockholder. The conversion of shares of GGP common stock held by unaffiliated GGP common stockholders into the right to receive the merger consideration in the merger, and the exchange of class A stock for BPY units at the election of an unaffiliated GGP common stockholder, are each expected to result in gain or loss being recognized by the unaffiliated GGP common stockholder.