Liberty Media, the new owner of motor racing’s premier series, has set up a tax-efficient structure that takes profits by way of the Cayman Islands and Delaware



When Liberty Media finalized the takeover of Formula One auto racing’s parent company Delta Topco last week, it should have been music to the ears of America’s taxman.

F1 is the world’s most popular motor sport, famous for the high-speed races it holds at glitzy locations from Malaysia to Monaco. Close to half a billion people watched the last season. And under its shiny hood beats a powerful business engine.

According to its latest financial statements, Delta Topco generated earnings before interest, tax, depreciation and amortization (Ebitda) of $463.6m on $1.7bn of revenue in 2015. Delta Topco has been owned by the private equity firm CVC since 2006 and over that time it has made more than $5bn of Ebitda. Yet it paid just $122.9m of tax thanks to a clever avoidance scheme. According to senior advisers working with Liberty it is planning to repeat that scheme in the United States.

Delta Topco’s revenue comes from four main sources – fees from race organizers, broadcasters and sponsors as well as the sale of corporate hospitality tickets. The vast majority of this is received by the company’s subsidiaries in Britain where corporation tax comes to 20%.

However, filings show that F1’s tax rate was actually equivalent to just 3.3% over the past decade and it only paid $6.5m in 2015. It is driven by a clever, but perfectly legal, trick under F1’s hood.

Delta Topco’s British subsidiaries receive huge loans from their offshore parent companies and pay hundreds of millions of dollars in interest on them every year. In 2015 alone the British companies paid $395.4m in interest. As this is a cost to them it pushes them into a loss on paper so they pay little tax. The loss is only on paper as both the British companies and their parents are owned by the same shareholders so the money is simply being moved from one hand to the other.

The profit of the British companies is essentially wiped out by the interest payments to their parents and this ultimately ends up in Delta Topco where it is paid to shareholders. As Delta Topco is based in the tax haven of Jersey no tax is deducted there. In order for this avoidance scheme to work Britain’s tax authority has to agree to the interest being tax deductible and this is exactly what it does with F1.

Facebook Twitter Pinterest Fast cars and clever accounting have made Formula One a very lucrative business for its owners. Photograph: Dunbar/LAT/Rex/Shutterstock

“It’s a great structure. It’s a great tax arrangement,” Liberty’s chairman, John Malone, said at the company’s annual investor day presentation in November. Liberty’s chief executive, Greg Maffei, described the tax structure as “attractive” and there is good reason for this.



Analysis of more than 100 sets of company accounts shows that F1 would have had to pay at least $500m more in UK corporation tax over the past decade if it had been charged at the standard rate.

Unlike Delta Topco, Liberty is registered in the US state of Delaware so F1’s profits should now be racing in that direction. It would be logical to assume that the company will therefore have a turbocharged tax bill to pay, but not according to Liberty.

“We have managed to do the transaction in a way that will permit an efficient repatriation of money back to the US without incremental tax for many, many years,” said Liberty’s chief corporate development officer, Albert Rosenthaler, in a call with analysts. “We will be able to repatriate cash to the US in the future to the extent that seems to make sense with no additional taxes.”

Although it is not known how Liberty plans to avoid paying tax in the US on F1’s profits a possible clue comes from Rosenthaler’s comment that “we do not believe there is any incremental tax on the repatriation of earnings back to the US. We’ve been able to replicate their structure.”

Liberty is in a position to introduce a similar structure in the US to the arrangement overseas with the consequence that profits it receives from F1 wouldn’t have tax deducted. Shareholders in Delta Topco currently receive money when it declares a dividend and if Liberty directly owned the company it would be paid the dividend which would be taxed. However, in contrast, there is no corporation tax on interest in Delaware and this appears to be crucial to its plan.

Company documents show that Liberty Media itself is not directly acquiring Delta Topco. Instead it is being bought by Liberty’s indirect wholly owned subsidiary Liberty GR Cayman Acquisition Company, which is based in the tax haven of the Cayman Islands. It will need funding to complete the purchase and if this comes in the form of a loan from Liberty the interest on it will need to be paid to Liberty.

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When Delta Topco declares a dividend it will be paid to Liberty GR Cayman and in turn that company would pay the loan interest to its ultimate parent Liberty in Delaware where it would not be taxed. The profit from the dividend received by the Cayman company would be wiped out by the interest payment to Liberty in Delaware where it would not be taxed. And voilà, F1’s profits end up in Delaware without any tax deducted just as Rosenthaler said.

That doesn’t mean Liberty has a smooth road ahead of it.

Tax agreements between corporations and governments raced into the spotlight in August last year when Apple was fined a record $14.5bn by European lawmakers, the European Commission. Apple channelled all of its sales in Europe through a company in Ireland where the government allowed it to allocate the vast majority of its profits to a head office which the commission claims existed “only on paper”. As a result, its tax rate hovered between 0.005% and 1% and the European Commission alleges this was a case of the government benefiting Apple in particular which breaks European state aid rules.

The Irish government and Apple are appealing against the ruling and, with cash reserves of more than $200bn, the technology titan has been able to put the $14.5bn in an escrow account pending the outcome. F1 would not be in as fortunate a position because, according to its latest financial statements, it has $452.4m of cash which is less than the amount it saved from its agreement with Britain’s tax authority.

The European Commission has refused to rule out a tax investigation into F1. Asked whether it was a possibility a spokesperson said: “We cannot speculate on any possible future investigations on tax state aid cases.”

This may not be the only hurdle in Liberty’s way. F1 company documents reveal that its agreement with Britain’s tax authority expires at the end of this year. This coincides with changes in British tax law which are being introduced in April. They will cap the amount of interest on intra-group loans which can be used to offset tax. The limit will be equivalent to 30% of Ebitda which is far lower than the level of between 73% and 127% which F1 has enjoyed over the past decade. It should mean F1 pays more in tax in the UK and in turn it will reduce the amount of F1’s profit which is ultimately received in the US.

This was acknowledged by Rosenthaler as he said: “F1 has done a wonderful job in terms of creating a structure that is extremely tax efficient. We will be stepping into that structure. There are some changes on the horizon, broader changes from the UK perspective that will have a modest increase in the amount of taxes going forward once those become law. But we think the structure is going to remain extremely efficient.”

F1 company documents paint a far bleaker picture and state that “the new rules could reduce significantly the amount of Formula 1’s interest expense that qualifies as tax deductible. These changes could adversely affect Formula 1’s financial results and position.”

Capping the amount of deductible interest at an equivalent of 30% of Ebitda will reduce the amount F1 can offset against its tax bill from $395.4m to around $139.1m. In turn this will increase the amount of profit on which its tax bill is calculated.

The net result is that if this new formula had been applied in 2015 F1’s tax bill would have accelerated around ten-fold from $6.5 million to $64.9m. F1 could have an even more high-octane tax bill if the British authorities refuse to allow its deductible interest to hit the 30% limit. Time will tell.

