Private Equity Backed Tech Deals Face Cross-Border Tax Challenge

The global anti-base erosion, or GloBE, framework is the latest challenge for private equity sponsors acquiring multinational enterprises, as the Organization for Economic Cooperation and Development and the G7 continue to scrutinize international tax arbitrage.

This in turn is beginning to reshape how private equity firms think about structuring their acquisitions—and nowhere is the shift more evident than in the technology sector.

The G7’s last minute “side-by-side” compromise to exclude US-parented groups from the GloBE rules may have slowed the impact of the 15% global minimum tax, but Pillar Two legislation is nevertheless coming into force across multiple EU jurisdictions (and is already implemented in the UK).

At the same time, private equity investment in tech continues to grow year on year with platforms in SaaS, fintech, crypto, and AI attracting high valuations and competitive processes across the sector.

Yet tech targets are often structurally “tax-awkward,” generating losses in early years, holding valuable but ill-defined intellectual property, and operating across multiple jurisdictions via an agile workforce.

These characteristics are inherent in the value proposition attracting private equity to the sector, but they can create or amplify tax risks, meaning private equity houses and their advisers may need to rethink their longstanding tax structuring strategies.

Shift in Strategy

Historically, the solution for an efficiently structured (sector agnostic) acquisition and holding period typically involved a platform holding structure in a well-known European jurisdiction such as Luxembourg or the Netherlands, aiming to house IP in a jurisdiction with an attractive regime, and introducing financing to maximize interest deductibility where possible.

The aim was to increase revenue efficiencies over the life of the investment, ultimately reducing the overall effective tax rate and helping to increase investor returns. Exit proceeds could be returned tax-efficiently to investors, with the added benefit of flexible legal regimes based on English law principles.

But these well-trodden structures need to be pressure-tested for tech acquisitions that don’t behave like traditional targets. Many are pre-profit, not yet scaled for efficiency, and decentralized. Their tax profiles are volatile, and their operating models don’t map neatly onto national tax systems.

Even in a pre-profit scenario, accounting-based deferred tax assets and timing differences can distort effective tax rate calculations. Jurisdictions offering generous tax incentives may fall foul of the new GloBE rules, leading to top-up taxes in other jurisdictions, even when the group overall is barely breaking even.

Clearly Pillar Two wasn’t drafted with a tech business’ sector-specific nuances in mind. It may create mismatches between economic reality and notional tax liability, especially where IP amortization or research and development reliefs distort GloBE income.

This can penalize legitimate tech scale-ups and by extension, the private equity funds that invest in them.

Rethinking Tech Structuring

Some clear trends are emerging in private equity-led tech deals, aimed at tackling the potentially distortive effects of GloBE and taking account of the increasingly risk-sensitive market:

Onshoring of IP and HoldCos. Some private equity firms are abandoning traditional offshore holding platforms in favor of onshore jurisdictions with stronger substance and more transparent tax regimes, such as the UK, Ireland, or the US. While this may slightly increase headline tax costs, it reduces exposure to Pillar Two top-up taxes and improves reputational risk profiles.

Revised tax covenants in share purchase agreements. Share purchase agreements now routinely include tax warranties and indemnities tailored to Pillar Two exposures, including deferred tax mismatches and potential GloBE top-ups. Warranty and indemnity insurers are also revising their approach to tech-heavy targets.

Pre-acquisition modeling of GloBE exposure. Buyers are undertaking effective tax rate modeling during due diligence, particularly for IP-intensive targets operating across low-tax jurisdictions. This includes forecasting GloBE outcomes post integration, something few were doing even 18 months ago.

Conservative use of IP planning. Private equity firms are reassessing the value of aggressive R&D credit claims, cost-sharing arrangements, or IP migrations, particularly where local substance or governance is weak. The emphasis continues to shift toward defensibility and audit resilience.

UK Context

The UK’s favorable environment for management incentives, R&D, and early-stage IP development mean it will continue to be a leading jurisdiction for tech entrepreneurs and their investors.

In addition, the UK offers a stable legal regime and strong regulatory and reputational certainty to private equity houses looking to move away from offshore holding companies for their tech investments.

But the UK’s fast implementation of the Pillar Two rules has made it a proving ground for how private equity M&A adapts to the new landscape.

Looking Ahead

As Pillar Two and GloBE implementation gathers pace, the absence of a unified position from the US has injected even more uncertainty into an already unstable area of law.

Many governments, including in the UK, are still calibrating and refining their domestic Pillar Two rules, and interpretive guidance is generally fragmented and incomplete.

We’re now in an environment where substance and defensibility are more important than ever and macroeconomic tax policy determines outcomes as much as commercial planning. Private equity sponsors looking at tech targets will need to ensure their legal, tax and commercial advisers are closely aligned, both in the deal phase and during the life of the investment.

Tax efficiency in cross-border tech deals needs to focus on robust corporate structures that offer certainty, adaptability, and defensibility—particularly now that tax authorities have access to data via international exchange of information arrangements.

The ability to extract value from global tech businesses increasingly depends on how robustly they are governed, reported and aligned with the evolving tax landscape.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Dulcie Daly is a partner at global law firm Goodwin, focusing on UK and international tax, and providing advice on complex cross-border M&A transactions in the private equity, technology and life sciences space.

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