Four weeks ago, the German-headquartered software supplier SUSE was listed on the Frankfurt stock exchange, giving it a €5 billion valuation. The IPO was seen as mildly disappointing for the Swedish private equity firm EQT, which had purchased the business specialised in building complex enterprise computer systems based on the Linux platform for just $2.5 billion in March 2019.

Coincidentally, details of the transaction that saw EQT acquire the business from the Micro Chip multinational tech conglomerate two years ago have just appeared in accounts filed here by three of its Irish-registered subsidiaries, Novell Cayman Software Unltd and its parents Novell Software International Ltd and Novell Cayman International Unltd.

If the Novell name rings a bell, it is because it was once synonymous with computer networking. If you logged into a work or college network in the 1990s, the name probably popped up somewhere on your screen, until it was eventually superseded by other technologies.

In its efforts to remain relevant, Novell acquired SUSE, but it was eventually swallowed by the Attachmate Group, which in turn was bought by Micro Focus. This is why the name Novell still appears in multiple Irish subsidiaries of the group including those listed here.

Despite acquiring multiple US companies such as Attachmate and later merging with the enterprise division of Hewlett Packard, Micro Focus was and remains a UK-headquartered PLC.

From the get-go in 2014, Micro Focus decided to run SUSE as a standalone business. A sale was always an option. It was agreed in 2018, and concluded on March 15, 2019. EQT paid $2.5 billion in cash for SUSE, generating a $1.8 billion profit on disposal before tax for Micro Focus.

The deal was conducted by Micro Focus Midco Holdings Ltd, a British subsidiary of the group’s ultimate parent, which reported consolidating various SUSE assets under a US-registered special-purpose vehicle called Marcel Holdings LLC and collecting proceeds after the transaction concluded.

It has now emerged that a large portion of this transaction was routed through the group’s Irish-registered subsidiary Novell Cayman Software. “On 15 March 2019, pursuant to the completion of the disposal of the SUSE group by its ultimate parent undertaking, the Company disposed of its 100% interest in SUSE Linux GmbH (registered in Germany) and its subsidiary SUSE Linux S.r.o (registered in the Czech Republic) for $1,036.7 million resulting in a gain on disposal of investment of $999.9 million being credited to the profit and loss account,” a new filing reports. 

The Irish-registered company received payment for its SUSE assets under the form of a $1.3 billion loan note issued by Micro Focus Midco Holdings. As its name suggests, Novell Cayman Software is tax resident in the Cayman Islands (one of its directors, Gregory James Link, is a Cayman-based lawyer). As it is not subject to corporation tax in that jurisdiction, the company posted a $1.2 billion profit in 2019 but paid no tax.

Novell Cayman Software did not hold on to the loan notes received in payment for the SUSE deal. The following month, it distributed the full $1.3 billion intercompany debt package to its parent Novell Software International Ltd, again resulting in a $1.2 billion profit.

“Novell Software International Limited is a public company limited by shares and incorporated, domiciled and registered in Ireland,” its accounts state. However, “the company is tax resident in the Cayman Islands and under the rules of the Cayman Islands is not subject to corporation tax on its income,” the filing adds. Again, Link is a director. And again, no tax was paid.

The journey of the $1.3 billion does not end there. Within days, Novell Software International contributed the loan notes in exchange for a £1 share in its British subsidiary Micro Focus Software Holdings Ltd.

“As a result of our work, we found the complex tax accounting judgements relating to the SUSE disposal to be acceptable.”

Micro Focus annual report 2019

One month on from the sale of SUSE by a British group entity, another British group entity had received half of the proceeds and the vast bulk of the recognised profit from the deal under the form of intercompany debt held against the original seller. In the meantime, corresponding profits had been booked in the zero-tax Cayman jurisdiction by companies registered in Ireland.

Overall, Micro Focus reported paying $264.6 million in tax on the $1.8 billion profit generated by the disposal of SUSE. This equates to an effective rate of 14.7 per cent, lower than the 19 per cent applicable in the UK in 2019 or the much higher rates applicable in the US and Germany where other parts of the transaction took place.

Micro Focus’s 2019 annual report assessed the risk of material misstatement in the “complex tax judgements” associated with the deal as follows:

“The Group has undertaken significant structuring activities in relation to the disposal of SUSE; some of these structuring activities have complex tax implications. The effect of these complex structuring activities is that, as part of our risk assessment, we determined that the applicability of relevant tax legislation is an area of judgement, which could have a material impact on the tax obligations recognised. The key judgements were in respect of whether these complex structuring activities attract a certain application of tax legislation, which could impact the tax charge for taxes incurred as a result of the disposal.”

After auditing the risk and getting third-party tax advice, however, the group concluded: “As a result of our work, we found the complex tax accounting judgements relating to the SUSE disposal to be acceptable.”