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Are there any loopholes or specific deal structuring methods that can benefit international clients?

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

More articles by this firm.

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

US - Massachusetts - FJB In 2017 the US reduced the tax rate for corporations from 35 per cent down to 21 per cent, making investments for US companies in the US, much more attractive than in the past. It has not stopped investments outside of the US from taking place, but has brought some investment back to the US.

For overseas investments, the new tax rate moves to tax foreign profits for US companies that used the previous law to leave profits untaxed overseas. Today, foreign profits might be taxed at an even lower rate, based on tangible depreciable assets. If the profits realised overseas are reinvested in a tangible US asset, a company could avoid paying taxes on its above normal foreign profits.

Germany - UB Because of anti-avoidance rules in German tax law, we almost never recommend offshore corporations for use in deals. Under the BEPS (Base Erosion and Profit Shifting) regulations of the OECD, it seems that offshore companies and vehicles are becoming more and more unattractive worldwide. Most of the time we advise our clients to take a German company as a vehicle. It´s easy, safe and straightforward.

Sometimes we may use a Dutch company as a vehicle, but only if there is a presence in The Netherlands. I would like to have more offshore companies, in order to travel to all those nice countries, but in Germany we don’t use them much.

Sometimes it makes sense to transfer the statute seat of a company to other countries to utilise their jurisdiction. We have done this quite a lot recently for Brexit, translating English companies over to Europe.

This is something you should always think about when structuring a deal, and we do quite a lot of restructuring within the companies to get more of a tax advantage. We sometimes merge the daughter company with the mother company, or vice versa, to get more tax benefits.

India - JB Historically, from the mid-90s to the mid-2000s, Mauritius was used extensively for offshore structures, but over the last 10 to 15 years, a lot of the new structures have come through Singapore.

The secret sauce to running a deal in India, is to choose your offshore jurisdiction carefully. This is the last mile before you make the investment in India, so you should choose a jurisdiction which has a robust and substantive double taxation treaty with India, and is known for being very compliant.

This is possibly why Singapore has taken over from almost all other jurisdictions with regard to India. When we are looking to structure transactions, more often than not, we recommend clients to look at a Singapore special purpose vehicle (SPV) to hold their investment.

We also recommend avoiding intermediation once you're into India, so don't set up an Indian holding company, which will then hold the actual investment downstream. It is much better to do a direct holding of the company in which you want to invest, because that just makes it easier to run and more tax efficient.

We don't really have the capacity to avail of tax benefits or other sort of benefits by changing the seat or otherwise.

Some of our private equity clients do prefer routing money through the British Virgin Islands (BVI) sometimes, but as a rule, we are increasingly seeing structures move into Singapore.

Historical investors who've been here in India for 10 or 15 years, do have Mauritius structures in place, and they are still operating them, but even for them, when it's time to set up a new fund, Singapore looks very attractive.

Netherlands - SK I'll start with just a few general comments and get a bit more technical.

I would say that offshore incorporation is dying, because most clients don't like it and the tax authorities like it even less.

As for special purpose vehicles, The Netherlands is used as a holding country for tax purposes. There is a big industry of so-called trust companies, that are providing corporate and other services for these kinds of holding companies. These trust companies are still good and doing a lot of work for many jurisdictions, but for countries like Germany or the US, they are much more sensitive. They can be used to assist, but you need substance.

If a Dutch structure is being used, there need to be more substance on the ground, so they get an office and employees and people doing real activities.

When it comes to the specifics of investment in The Netherlands, we see more and more usage of specially designed vehicles like the Dutch CV, which is comparable to the limited partnership. It is a mechanism that is used a lot to invest into the Netherlands - basically to create a transparent entity for tax purposes that gives investors a good amount of protection from liability.

This is similar to the limited liability LLC in the US, or The Limited Partnerships which you have in the common law. Other special vehicles and entities that we use, include foundations, which are similar to trusts, although trusts are not recognised per se. We use entities like foundations which are called STAKs and are transparent for tax purposes, while, at the same time, allowing a certain protection from liability for investors.

These are all very specific entities that have to be tailored very carefully. We do that together with the tax advisors and the notaries, who are involved in setting up those entities.

Belgium - SDS We are seeing fewer and fewer offshore companies involved in Belgian transactions, because of very severe anti-money laundering regulations.

It's very difficult to open bank accounts, and we must complete a lot of know your customer (KYC) checks. The general perception towards offshore companies has worsened over the years.

As far as special purpose vehicles are concerned, they are often necessary for tax reasons. A Belgian who owns more than 25 per cent of a company, cannot sell to a non-EU buyer, without losing their exemption from capital gains. It usually states in the purchase agreement (SPA) that the shares have to be purchased by an EU company, and that the purchaser has to covenant that they will not sell the shares to a non-EU company for a period of 12 months.

We do see a lot of special purpose vehicles in private equity investments. They establish a New Company to purchase the target company, and the financing is done via the New Company. That's the structure we see quite often in Belgium. The owners will reinvest 49 per cent of the proceeds in the new holding company and the deal is leveraged when they buy the target company.

We have a new company code that enters into effect on the first of May and as from then we will apply statutory seat theory to be more in line with neighbouring countries. Until now, Belgian law would apply only if a company had its real activities in Belgium. The new code also makes Belgian law much more flexible and attractive to foreign businesses.

Netherlands - SK KYC has become a big issue. I think it's worldwide, but definitely in The Netherlands. We are spending more time on each transaction, proving all sorts of things that once we never needed to prove. This includes source funds, identifying people and businesses and also the history of clients.

It goes along with banking and the opening bank accounts in Continental Europe. I don't know how it is in Belgium or Germany, but definitely in The Netherlands, banks are becoming a big headache and it takes a big part of the energy that is involved in any new transaction to arrange a new bank account.

Italy - LB In cross border M&A transactions carried out in Italy by non-EU foreign clients, a point of concern is whether there is reciprocity, in terms of investment protection, between Italy and the non-EU jurisdiction of the foreign investor.

This may, sometimes, require the non-EU foreign investor to invest in Italy through a corporate vehicle rather than as an individual.

If neither the individual nor the corporate vehicle of a certain non-EU jurisdiction is allowed to operate or to purchase businesses in Italy, then the foreign investor may decide to establish a Special Purpose Vehicle (SPV) in (i) a non-EU country having reciprocity with Italy or in (ii) an EU country, other than Italy, having reciprocity with the non-EU jurisdiction of the foreign investor. In the latter case, the SPV established in the EU country will be allowed to carry out business in Italy without any restriction.

An additional point of concern may arise during the post-acquisition or consolidation stage, when the foreign investor needs to appoint, within the board of the acquired Italian company, directors or managers having the same nationality of the foreign investor.

There is a specific Italian entry visa that entitles foreign nationals to be appointed as director of an Italian company, which is the entry visa for self-employment. However, Italian visas are subject to numerical restrictions, provided by annual entry quotas, when they need to be granted to certain applicants having non-EU nationalities.

Careful planning is required while structuring of the deal, in order to ensure that the managers of the foreign investors are smoothly deployed to Italy to supervise the post-acquisition activities related to the acquired Italian company.

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