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How do different deal structures affect tax liabilities in your jurisdiction?

June 2019 - Corporate & Commercial. Legal Developments by IR Global.

More articles by this firm.

The following article discusses session two in the IR Global Virtual Series on 'Steamlined Structures - A best practice approach to international deal structuring'

India - JB In India, asset deals are subject to an effective punitive tax, because a pure asset deal is subject to the highest rate of capital gains tax.

Because of this, pure assets deals don’t work from a tax efficiency point of view, however, the Indian direct access code recognises something called a slump sale, which is the sale of a business as a going concern. So it’s not shares you buy, but the entirety of the business, including assets and or liabilities attributable to that business. In that case, you get beneficial tax treatment to the extent that you are charged on the aggregate tax block, not on the gain accrued to each asset.

For share transactions, we do have a slightly beneficial rate of tax, which is applicable if you have held the shares for more than two years. You get taxed at long-term capital gains, which is an effective rate of 10 per cent on the gain. If you have invested through a jurisdiction, which has an effective double taxation treaty (DTT), you can actually avoid Indian capital gains, which makes a lot of sense.

The big thing to bear in mind, from the Indian tax point of view, is that we now have the general anti-avoidance rules being brought onto our statute, and they have the potential to be fairly draconian. If and when we structure transactions, we try and make sure that there is, in every sense of the word, nothing which could fall foul of that part of the tax act, because it can cause a lot of problems.

We do have withholding taxes, so if there is capital gains payable, the buyer of the shares, or of the asset, needs to withhold about 10 to 20 per cent of the consideration and pay that to the Indian government upfront. There is the capacity to claim a refund on that, but it’s a separate process.

Netherlands - SK Most transactions are structured through The Netherlands to hold assets and mostly to hold other companies throughout the world. The Netherlands has a little more than 85 treaties worldwide for double taxation, designed to reduce taxation. There is also the so-called rule of participation exemption, where shares, held in other jurisdictions, can be sold free of capital gains tax.

Many transactions are done through The Netherlands using Dutch companies, even if there are no Dutch assets involved. When you are doing transactions within The Netherlands, people prefer to do share deals rather than asset deals, with the exception again of real estate transactions.

If you are doing share deals in real estate transactions, there are some punitive damages that add to the cost of the transaction. As a result, real estate transactions are usually done by buying assets.

Double taxation treaties are very favourable and, in most cases, withholding taxes on dividends are reduced from 15 per cent to 5 per cent, so that very advantageous. Rolling over losses can also be done after an acquisition.

One more issue to consider is VAT, which has not been mentioned until now.

Italy - LB The sale of a business as a going concern implies taxation of capital gains derived by the seller from the sale of the going concern itself. Capital gain is determined as the difference between the sale price (market value) of the going concern and its original net asset value.

In an asset deal, capital gain derived by an individual will be subject to Individual Income Tax (IRPEF), applied with progressive rates from to 23 per cent to 43 per cent.

Capital gain derived by a company will be subject to Corporate Income Tax (IRES) at a rate of 24 per cent.

The transfer of a going concern is also subject to Registration Tax at different tax rates, ranging from 0.50 per cent to 15 per cent, depending on the nature of the assets transferred. The buyer is not taxable in connection with the purchase of a going concern.

The sale of shares also implies the application of capital gain tax. Capital gain is determined as the difference between the sale price of the shares and the cost incurred by the seller when it first purchased said shares.

If the seller is an individual, the capital gain tax is subject to a 26 per cent tax rate.

To reduce or minimise the amount of capital gain derived by the individual shareholder and the amount of related capital gain tax, the selling individual may opt to step up the tax value of the shares to be transferred, and align the same to the corresponding market value. The step up process requires the application of a substitute Italian tax at a rate of 11 per cent.

If the seller is a company, then the Participation Exemption Rule (PEX) usually applies. PEX implies that capital gains are taxable on their 5 per cent amount maximum. The buyer is not taxable in connection with the purchase of shares or quotas.

Belgium - SDS In the case of a Belgian share acquisition, the acquiring company is not entitled to depreciate the assets of the target company, nor the acquired shares in the target company, which leads them to prefer an asset deal.

But, as I already said, in most cases the seller will prefer to carry out transactions by means of a sale of stock, because the capital gains on shares are, in principle, one hundred per cent tax exempt.

In the case of an acquisition of business assets, the acquiring company is, in principle, authorised to depreciate acquired assets and goodwill or clientele, on the basis of the acquisition value. That means that the acquiring company will benefit from a fiscal step up, that reflects the difference between the sale price of the transfer of assets or liabilities, and the fiscal value of these liabilities prior to the sale. Under these circumstances, the seller will, in principle, be taxed on all capital gains realised on this purchase of assets. The capital gain is not taxed immediately, but on a future pro-rata basis.

The corporate tax rate of 33.99 per cent will be lowered to 29 per cent in 2018 and 25 per cent as from 2020. SMEs get a decrease in the rate to 20 per cent, from 2018, for the first tranche of EUR100,000. These rates are to be increased with the crisis tax, which will also be lowered for 2018 and abolished in 2020.

The 95 per cent dividends-received deduction (DRD) is increased to 100 per cent, resulting in a full participation exemption. The separate 0.412 per cent capital gains tax for multinational enterprises on qualifying shares is abolished, while the conditions to benefit from the capital gains exemption are brought in line with the DRD. This implies the application of a minimum participation threshold of at least 10 per cent, or an acquisition value of at least EUR 2.5 million in the capital of the distributing company.

As from 2020, capital gains on shares are taxed at the standard rate (25 per cent) if one condition is not met, but exempted when all the conditions are met.

The last thing to mention is that quite a lot of interesting measures for technology companies have been implemented since 2017. We have a new innovation income deduction tax, and all kinds of social measures that benefit research and development. It makes Belgium quite an interesting country to invest in when you want to do R&D.

US - Massachusetts - FJB The type of deal structure is impacted, tax wise, by the type of corporation you are dealing with and how it is structured between the shareholders and the assets.

There are different types of corporation in the United States, including LLC (limited liability companies) C-Corps, S-Corps, partnerships and trusts. Each of these types has a different tax liability. A business acquisition of any size carries tax implications for the buyer, ranging from employment taxes to state sales tax liabilities.

Usually a buyer doesn't have to pay federal tax on his purchase (please note that there are exceptions to the rule). However, the buyer will have to pay local and state taxes. Taxation rates vary from state to state. It is important for a foreign buyer to hire a local tax professional to help understand the impact of the transaction.

Finally, there is a difference in tax liabilities if you purchase straight assets versus making a stock/share play.

Germany - UB Investing in Germany isn't as bad as a lot of people think, from a tax perspective. It’s not the tax which is so terribly high, but the social security payments. However, Germany is a very stable market and therefore – with Brexit imminent – maybe a kind of safe harbour in Europe.

Analysing whether you want to do an asset or a share deal is important. The share deal is advantageous for the seller, because the purchase price is taxed much less. If it's sold privately, it's taxed at 60 per cent, but if held in a limited liability company, you don't pay any tax on the purchase price at a company level, although you pay out a bit more tax later on.

Asset deals are much more beneficial for the buyer, because there are amortisation possibilities.

We recently had to deal with a Dutch company which was selling two German companies and some IP rights. The British buyer bought via a German company. The buyer wanted to buy the IP rights in an asset deal and not in a share deal. This was a big tax disadvantage for the seller, so in the end, the buyer had to pay the tax disadvantage on top of the purchase price because the seller didn't agree to pay a higher tax.

We quite often use Dutch companies as holding companies, however, under German law, we have anti-avoidance regulation to consider.

If you use a holding company outside of Germany and the holding company has no other business in the country of origin than as a holding company, the German financial authorities are allowed to take a source tax for any payment of dividends to this holding company. If you own a holding company in The Netherlands, Hong Kong, Dubai, or another tax beneficial country, you have to have your own business within that country. If you have a Dutch BV as a holding company for the shares in a German company, and this is just a holding company, it will be taxed in Germany, even if it's based in The Netherlands.

The European Court of Justice has said this is not against European law. Since this year, even the profits of the sale of real estate of holdings outside of Germany will be taxed in Germany, when more than 50 per cent of domestic immovable assets at any time during the 365 days prior to the sale.

A trust from somewhere like Dubai, or the Cayman Islands won't be accepted as a vehicle by the German tax authorities and therefore holding structures should be reviewed by local counsel.

Contributors

Justin Bharucha (JB) Bharucha Singh Mundkur (B&P) – India www.irglobal.com/advisor/justin-bharucha

Florence Joffroy-Black (FJB) MedWorld Advisors – U.S – Massachusetts www.irglobal.com/advisor/florence-black

Shai Kuttner (SK) Synergy Business Lawyers – Netherlands www.irglobal.com/advisor/shai-kuttner

Lorenzo Bacciardi (LB) Bacciardi and Partners – Italy www.irglobal.com/advisor/lorenzo-bacciardi

Urs Breitsprecher (UB) AQUAN Rechtsanwälte – Germany www.irglobal.com/advisor/urs-breitsprecher-new

Steven De Schrijver (SDS) Astrea – Belgium www.irglobal.com/advisor/steven-de-schrijver