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

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

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