Foreword by Andrew Chilvers
For ambitious companies eager to expand into overseas markets, often the conventional route of organic business development is simply not fast enough. The other option to invest in or buy a business outright is far quicker but often fraught with unforeseen dangers. And even the biggest, most experienced players can get it badly wrong if they go into an M&A with their eyes wide shut.
If you search for good and bad M&As online the Daimler-Benz merger/acquisition with Chrysler back in 1998 is generally at the top of most search engines on how NOT to undertake a big international merger. Despite carrying out all the necessary financial and legal measures to ensure a relatively smooth deal, the merger quickly unravelled because of cultural and organisational differences. Something that neither side had foreseen when both parties had first sat down at the negotiating table.
These days the failed merger of the two car manufacturers is held up as a classic example of the failure of two distinctly different corporate cultures. Daimler-Benz was typically German; reliably conservative, efficient, and safe, while Chrysler was typically American; known to be daring, diverse and creative. Daimler-Benz was hierarchical and authoritarian with a distinct chain of command, while Chrysler was egalitarian and advocated a dynamic team approach. One company put its value in tradition and quality, while the other with innovative designs and competitive pricing.
Stefan Geluyckens discussed The Art of Deal Making: Using External Expertise Effectively as part of the Tax chapter.
Describe a typically tax-efficient deal structure in your jurisdiction? Any examples.
Belgium implemented several European directives that foresee tax neutrality if certain conditions are met. In such a qualifying reorganisation (merger, (partial) demerger and contribution of a universality of goods or a line of business), assets, liabilities and all related rights and obligations are in principle transferred from the transferring company to the receiver. If the transaction qualifies for the tax-neutral regime, the transferor doesn’t suffer any capital gains tax, while the receiving company gets no step-up in tax basis.
No tax-neutral treatment is available where a main objective of the transaction is tax evasion or avoidance. If there’s any doubt, a preliminary ruling can be requested. If such a restructuring is successfully challenged by the tax administration, the restructuring that was deemed tax free becomes taxable, with capital gains tax for the transferor and a step-up tax basis for the receiver.
Share deal or asset deal?
For a purchaser, an asset deal may be interesting, because they can recover a significant part of the acquisition cost through depreciation of certain assets acquired at a relatively high corporate tax rate.
In an asset deal, the seller should request a certificate stating that the selling entity has no outstanding tax liabilities vis-à-vis the Belgian corporate income tax, VAT and social security tax authorities. The purchaser must notify the authorities of the asset transfer agreement. These are necessary for the asset deal to be recognised by the Belgian tax authorities and to avoid the joint liability of the purchaser for unpaid taxes/social security of the seller.
From a Belgian seller’s perspective, a shares sale is usually preferred because capital gains realised on shares are generally tax-free or low-taxed for Belgian individuals and companies. However, neither the purchase price nor any goodwill included in the purchase price can be depreciated for tax purposes.
What elements of a structure or deal could prevent a client from implementing your recommendations? For example, holding companies, trusts, exemptions, withholding tax.
- Interest deduction limitations regarding a Belgium-based acquisition vehicle.
In several cases we would recommend a Belgian holding company as an acquisition vehicle. When using a Belgian company as an acquisition vehicle, one must consider the thin capitalisation rules. With the introduction of a 5:1 debt-to-equity ratio for intragroup financing, the deductibility of interest expenses is restricted although it still leaves a broad margin for debt financing. As of this year, the earnings-stripping rule imposed by the European ATA Directive will enter into force, limiting the deductibility of interest expenses to the higher of EUR3 million or 30% of EBITDA.
- Using a branch instead of setting up an acquisition vehicle.
As an alternative to the direct acquisition of the target’s shares through a Belgian holding company, a foreign purchaser may structure the acquisition through a Belgian branch. A branch is not subject to additional tax duties and is taxed at the stand- ard corporate tax rate of 25%. No withholding tax applies on profit repatriations from the branch to the foreign head office. If the client believes the Belgian operation is expected to make losses initially, a branch may be advantageous since, subject to the tax treatment applicable in the head office’s country, a timing benefit could arise from the ability to consolidate losses with the profits of the head office.
How would you minimise the tax risks on a deal, including historic tax liabilities and ongoing tax optimisation?
The tax risks on the deal itself and ongoing tax optimisation can be excluded on beforehand by obtaining a ruling. The Office for Advance Tax Rulings gives to every person liable to tax the possibility to obtain an preliminary ruling from the FPS Finance as regards the tax consequences of a transaction or a situation, which has not yet had consequences for tax purposes.
A request for a preliminary ruling must be made under conditions specified by law – in writing, with a full description of the situation or transaction and the legal and regulatory provisions concerned. Tax rulings are a very powerful risk management instrument, and, from our experience, the Belgian rulings sys- tem can proactively support businesses. Tax advisers worldwide can benefit from the transparency of the Belgian rulings practice as a source of inspiration.
With historic tax liabilities, this will only be an issue in case of a share deal and not of an asset deal. We recommend undertaking a thorough due diligence investigation before the share deal is concluded. To the extent possible, the outcome of the due diligence investigation should be reflected in the SPA-contract under the tax representations, warranties and indemnities. In a Belgian context, indemnifications are structured as a reduction of the share-purchase price so that they are not taxable to the recipient.
Top Tips – Tax Traps To Be Avoided In Your Jurisdiction
• A special assessment of 100% is applicable to so-called ‘secret commissions’, which are any expense of which the beneficiary is not identified properly by means of proper forms timely filed with the Belgian tax authorities. Filing of the required documents is a must!
• Except when Belgium signed an addendum to the DTA (Luxemburg, the Netherlands, Germany) with the country concerned, there could be a tax trap looming for cross-border commuters and the companies that depend on them, if working from home becomes permanent following the pandemic. People who live in one country and work in another, and their employers, could face difficulties regarding the “right to tax”.
• Belgian resident taxpayers have an obligation to report their foreign bank account in their annual Belgian income tax return. A taxpayer that does not know this will be considered as acting in a fraudulent way.