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

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

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