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Excess cash in a Belgian M&A context

Jérôme Terfve and Guillaume Charlier report on the treatment of excess cash in M&A transactions by the Belgian authorities

They say ‘you can have too much of a good thing’ and while cash is king, in a Belgian M&A context, this old saying turns out to be true.

In the context of M&A transactions involving one or more individual sellers who are tax residents in Belgium, ‘excess cash’ has become a hot topic. This results from the Belgian tax system under which, while private individuals may benefit from a full tax exemption on the capital gains they realise on shares (except under particular circumstances), a 30% Belgian withholding tax is levied on any dividends received.

In this framework, Belgian private individual sellers tend to leave amounts of cash that exceed the target companies’ operating needs (so called ‘excess cash’) on their balance sheets, hoping that the buyer will agree to take this cash into account when determining the acquisition price. This is bearing in mind that a buyer which benefits from the participation exemption in acquiring 100% of the target’s shares can – immediately or shortly after the transaction – upstream (free of tax) these funds to, eg, reimburse the acquisition debt(s).

Although these operations had been under the scrutiny of the Belgian tax authorities for several years, unless in (very) specific circumstances, it was only in 2012 with the introduction of the new general anti-abuse rule (GAAR) in the Belgian Income Tax Code that the tax administration found a legal basis for contestation.

Synthetically, the Belgian GAAR renders a legal act, or a set of acts thereof linked by a joint intent, that is constitutive of tax abuse as unenforceable against the tax administration. In such a case, the tax administration can impose the operations conducted as if the abuse had not taken place.

The application of the GAAR by the Belgian tax authorities led to the groundbreaking decision issued on 6 September 2022 by the Court of Appeal of Antwerp. In short, in this rather complex case:

  • A private individual seller had transferred a part of its shares in the target group to a third-party buyer for c€14.35m while leaving ‘excess cash’ of c€6.34m on the balance sheets. The net cash position of the target group was factored in the acquisition price.
  • The buyer largely financed the acquisition with bank debts that were repaid with the cash left in the target group, upstreamed inter alia through a loan (this was agreed upon between the parties before the closing).
  • The individual seller was assisted in this transaction by an external adviser who considered but dismissed a distribution of the excess cash prior to the closing because of the tax costs it entailed. From the different documents reviewed by the Court of Appeal of Antwerp, including the external adviser’s report, it was clear that the financing structure was put in place to avoid the 30% withholding tax due on the distribution of the target’s cash to the individual seller prior to the closing.
  • The Court of Appeal of Antwerp confirmed the joint intent between (i) the share deal, (ii) the payment of the acquisition price and (iii) the upstream of the cash and considered that these operations, taken as a whole, were constitutive of tax abuse at the level of the individual seller, even though the latter was not involved in each operation taken individually.
  • As a result, based on the Belgian GAAR, the Court of Appeal of Antwerp reclassified the capital gain realised by the individual sellers as a taxable dividend received up to the amount of the target company’s cash it considered excessive.

The Belgian Supreme Court confirmed this decision in a ruling issued on 11 January 2024. In its ruling, the Supreme Court approved the Court of Appeal of Antwerp’s findings and reasoning and confirmed that for a joint intent between different operations to exist, it is not required that the taxpayer be formally part to all of them.

Now, relying on the precedents set by the Court of Appeal of Antwerp and the Belgian Supreme Court, the Belgian tax authorities are on the hunt for potentially abusive transfers of cash-rich entities by Belgian taxpayers and although it has always been a topic of discussion between sellers and buyers, excess cash is now more relevant than ever in a Belgian M&A context.

Indeed, although the seller is primarily responsible for the taxes to be paid on (deemed) dividend they receive, under the standard Belgian tax statutes of limitation the tax administration can only go back three years to claim evaded taxes from the seller, while it has a five-year window to act against the company if it considers the company should have withheld the tax due on the (deemed) dividend distributed. One cannot therefore exclude that the Belgian tax authorities try to recover the withholding tax from the company rather than from the individual seller in a scenario like the one presented to the Court of Appeal of Antwerp.

However, it is important to note that, in this case, it was obvious that the target company had excess cash and the tax authorities could prove that it was intended to be allocated to the reimbursement of the acquisition loans immediately or closely after the closing. Of course, it would be more challenging for the Belgian tax authorities to prove the existence of an excess cash issue and a court may refuse to apply the Belgian GAAR even to a sale of a cash-rich company if the debts incurred for the acquisition were serviced through the future profits of the target company’s activities and the cash was invested by the company itself (after the sale).

Finally, although the decisions summed up above do not shed much light on the concept of excess cash, which can be difficult to apprehend in practice, one can find guidance in the past Belgian Ruling Office’s decision on the so called ‘plus-values internes’/ ‘interne meerwaarden’ cases and the criteria developed and used by the Ruling Office from 2012-17 to assess the existence of excess cash.

About Tetra Law

Established in 2012, Tetra Law is a business law firm with offices located in Brussels which has rapidly emerged as a significant presence in all fields related to corporate and personal taxes, tax litigation and white-collar crime, corporate law, M&A and labour law. Tetra Law is grounded on three core principles: passion, synergy and enterprise. Passion for the firm’s unwavering dedication and commitment to clients and delivering excellence in the legal practice, synergy for its belief in maximising collaboration between different areas of expertise that mutually reinforce each other and enterprise for the firm’s dedication to providing pragmatic advice that brings added value to clients and their business endeavours. These core principles have led the firm to its current success.

About the authors

Jérôme Terfve is a highly regarded lawyer in the field of corporate and tax law and a partner at Tetra Law. Jérôme focuses on the economic activity of businesses. He advises them on tax, accounting and corporate law issues. He assists in the planning and implementation of structuring and restructuring strategies, in developing M&A operations and in setting up remuneration and planning policies intended for executives and managers. He also assists clients with obtaining advance rulings and in litigation. Jérôme is the author of various publications and a lecturer, and is frequently invited to speak at conferences.

Guillaume Charlier is a lawyer and associate at Tetra Law. He advises businesses in the fields of corporate law and corporate taxation, dealing with M&A operations, due diligence, national and cross-border corporate and tax matters, restructuring and reorganisation, tax structuring and advance rulings. Guillaume has authored several publications in his areas of expertise and is a lecturer at the Belgian Chamber of Accountants in Brussels where he teaches corporate taxation.