tax management international forum - bratschi€¦ · embolex advokater, copenhagen 38 france...

Acquiring a Host Country Business

In this issue of the International Forum, leading experts from 19 countries provide their perspectives on the tax issues

that can arise when a foreign buyer acquires a business from a host country seller. The papers discuss the tax differences

between an acquisition of shares in a company and an acquisition of business assets and assumption of liabilities. Other

issues addressed include the relative advantages and disadvantages of different kinds of financing arrangements, the

ability of the buyer to make use of preaquisition losses, and the advisability of employing an acquisition vehicle in the

host country to carry out the sale.

Volume 38, Issue 3

SEPTEMBER 2017

www.bna.com

Tax ManagementInternational ForumComparative Tax Law for the International Practitioner

Contents

THE FORUM

4 TOPIC and QUESTIONS

5 ARGENTINAMaximiliano A. BatistaPerez Alati, Grondona, Benites, Arntsen & Martınez de Hoz(h), Buenos Aires

9 AUSTRALIAElissa Romanin, Sarah Sapuppo, and Amanda KarafilisMinterEllison, Melbourne

15 BELGIUMHoward M. Liebman and Valerie Oyen1

Jones Day, Brussels

18 BRAZILHenrique de Freitas Munia e Erbolato and Pedro Andrade Costa deCarvalhoBaptista Luz Advogados, Sao Paulo

24 CANADARobert McCulloghDeloitte Canada, Montreal

29 PEOPLE’S REPUBLIC OF CHINAPeng TaoDLA Piper, Hong Kong

32 DENMARKChristian EmmeluthEMBOLEX Advokater, Copenhagen

38 FRANCEStephane Gelin & Claire AylwardCMS Bureau Francis Lefebvre, Neuilly-sur-Seine

42 GERMANYPia DorfmuellerP+P Pollath + Partners Rechtsanwalte und Steuerberater mbB, Frankfurt

47 INDIARavi S. RaghavanMajmudar & Partners, International Lawyers, Mumbai

52 IRELANDLouise Kelly and Marian KennedyDeloitte, Dublin

59 ITALYCarlo GalliClifford Chance, Milan

64 JAPANEiichiro Nakatani and Akira TanakaAnderson Mori & Tomotsune, Tokyo

2 09/17 Copyright � 2017 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941

THE TAX MANAGEMENTINTERNATIONAL FORUM is

designed to present a comparativestudy of typical international tax lawproblems by FORUM members whoare distinguished practitioners inmajor industrial countries. Theirscholarly discussions focus on theoperational questions posed by a factpattern under the statutory anddecisional laws of their respectiveFORUM country, with practicalrecommendations wheneverappropriate.

THE TAX MANAGEMENTINTERNATIONAL FORUM ispublished quarterly by BloombergBNA, 38 Threadneedle Street,London, EC2R 8AY, England.Telephone: (+44) (0)20 7847 5801;Fax (+44) (0)20 7847 5858; Email:[email protected]

� Copyright 2016 Tax ManagementInternational, a division ofBloomberg BNA, Arlington, VA.22204 USA.

Reproduction of this publicationby any means, including facsimiletransmission, without the expresspermission of Bloomberg BNA isprohibited except as follows: 1)Subscribers may reproduce, for localinternal distribution only, thehighlights, topical summary andtable of contents pages unless thosepages are sold separately; 2)Subscribers who have registered withthe Copyright Clearance Center andwho pay the $1.00 per page per copyfee may reproduce portions of thispublication, but not entire issues. TheCopyright Clearance Center is locatedat 222 Rosewood Drive, Danvers,Massachusetts (USA) 01923; tel:(508) 750-8400. Permission toreproduce Bloomberg BNA materialmay be requested by calling +44 (0)207847 5821; fax +44 (0)20 7847 5858 ore-mail: [email protected].

www.bna.com

Board of Editors

Managing DirectorAndrea NaylorBloomberg BNALondon

Technical EditorNick WebbBloomberg BNALondon

Acquisitions Manager − TaxDolores GregoryBloomberg BNAArlington, VA

68 MEXICOJose Carlos Silva and Juan Manuel Lopez DuranChevez, Ruiz, Zamarripa y Cıa., S.C., Mexico City

72 THE NETHERLANDSMartijn JudduLoyens & Loeff N.V., Amsterdam

82 SPAINEduardo Martınez-Matosas and Luis CuestaGomez-Acebo & Pombo Abogados SLP, Barcelona

86 SWITZERLANDWalter H. Boss and Stefanie Maria MongeBratschi Wiederkehr & Buob AG, Zurich

91 UNITED KINGDOMJames RossMcDermott Will & Emery LLP, London

97 UNITED STATESPeter A. GlicklichDavies, Ward, Phillips & Vineberg LLP, New York

101 FORUM MEMBERS and CONTRIBUTORS

09/17 Tax Management International Forum Bloomberg BNA ISSN 0143-7941 3

Acquiring a HostCountry Business

Questions

1. When a Foreign Country buyer (FCB) acquires a

Host Country (HC) business from HC sellers, what are

the tax differences between an acquisition of shares in

a company, and an acquisition of business assets and

assumption of liabilities? Please consider:

s Gain or loss for sellers of shares or for sellers ofassets and liabilities (amount to be recognized,nature, and in the case of loss, any restrictions onuse of loss).

s Advantages or disadvantages (either to the foreignbuyer or the HC seller) in shares being issued ratherthan cash being used to pay the acquisition price.

s Possible issues for sellers, if shares are used, if theydispose of the shares they receive shortly after thetransaction.

s Ability to use or restrictions on use of debt to fi-nance the acquisition.

s Ability of FCB to step up the tax cost (‘‘basis’’) in theHC target’s business assets.

s Depreciation of goodwill and other intangibles fortax purposes if the assets or shares of a companyowning the assets are acquired; in the case of anasset acquisition or deemed asset acquisition,whether there rules for allocating purchase priceamong assets to determine goodwill.

s Ability of the buyer to utilize preacquisition(current-year or prior-year) business losses of theHC target business.

s Whether an acquisition vehicle is advisable or nec-essary, and whether there are advantages to using anHC vehicle rather than a foreign one.

2. If, rather than HC sellers, the sellers are foreign,

how do these factors change?

s Gain or loss in the case of shares or assets and li-abilities being sold (amount to be recognized,nature, and in the case of loss, any restrictions onuse of loss.)

s Advantages or disadvantages (either to the foreignbuyer or the foreign seller) in shares being issuedrather than cash being used to pay the acquisitionprice.

s Differences in consequences to sellers disposing ofshares received for the acquisition shortly after thetransaction.

s Ability to use or restrictions on use of debt to fi-nance the acquisition.

s Differences (if any) in ability of FCB to step up thetax cost (‘‘basis’’) in the HC target’s business assets.

s Differences (if any) in depreciation of goodwill andother intangibles for tax purposes if the assets orshares of a company owning the assets are acquiredor a deemed asset acquisition occurs; differences (ifany) in allocation of purchase price against assets todetermine goodwill.

s Whether this changes the ability of the buyer to uti-lize preacquisition (current-year or prior-year) busi-ness losses of the HC target business.

s Whether this changes the considerations in usingan acquisition vehicle, and whether this creates ad-vantages to using an HC vehicle or a foreign one.

3. Do you see any notable changes in the answers

that you have given to these questions that might

come from the significant international tax changes

from the OECD-driven BEPS actions or the exit of the

United Kingdom from the European Union? What

would those changes be, if so?

4. Are there particularly important non-tax factors

that FCB should take account of? For example:

s Would common agreements provide for tax repre-sentations, warranties, or indemnities that mightsurvive through a statute of limitations (e.g., as a‘‘fundamental representation’’)?

s Whose law would normally apply to the acquisitioncontract (e.g., it may be common to use U.S. or U.K.law in international M&A; might that be true here)?


ARGENTINAMaximiliano A. BatistaPerez Alati, Grondona, Benites, Arntsen & Martınez de Hoz(h), Buenos Aires

I. Acquisition by Foreign Country Buyer ofArgentine Business From Argentine Sellers

When a foreign country (FC) buyer acquires an Argen-tine business from Argentine sellers, there is a signifi-cant difference in the treatment of the resulting gainor loss depending on whether the buyer acquires theshares in the company concerned or instead acquiresthe company’s assets.

A. Acquisition of Shares

Argentine sellers selling shares of an Argentine com-pany will be taxed on any resulting capital gain. Thecapital gain will be calculated as the difference be-tween the sale price of the shares and their acquisitioncost. The acquisition cost comprises the sum of the ac-quisition price of the shares (the subscription price, ifthe shares were issued directly by the Argentine com-pany) and any later capital contributions made to thecompany.

The tax rate on the capital gain is 15% for sellerswho are Argentine resident individuals and 35% forsellers that are Argentine companies. Where the saleof shares in an Argentine company gives rise to a capi-tal loss, the loss may be used only to offset capitalgains arising from the sale of shares in another Argen-tine company (it cannot, for example, be used to offseta gain arising from the sale of shares in a nonresidentcompany).

B. Acquisition of Business Assets

If, instead of selling the shares, the Argentine sellerssell the assets and liabilities of an Argentine business,they will again be taxed on any capital gain arisingfrom the sale, but in this case the tax rate on the gainwill be 35%, whether the sellers are individuals orcompanies.

The sale price is allocated to each of the assetstransferred, according to their fair market value andany excess of the sale price over the total fair marketvalue of the assets is treated as goodwill.

Once a sale price has been allocated to a particularasset, the type of asset will determine the tax treat-ment, as follows:s Capital gains from the transfer of real estate are

subject to income tax, the gain being calculated asthe sale price less the acquisition cost or (if appli-

cable) the construction cost, after deducting depre-ciation already taken by the seller.

s Capital gains from the transfer of movable assets(other than inventory) are subject to income tax, thegain being calculated as the sale price less the acqui-sition cost or (if applicable) the construction cost,after deducting depreciation already taken by theseller.

s Gains from the transfer of inventory are subject toincome tax, the gain being the difference betweenthe sale price and the cost of the goods sold.

s Gains from the transfer of some types of reproduc-tive cattle are considered to be gains from the trans-fer of fixed assets and are therefore taxed in thesame way as capital gains from the transfer of de-preciable movable assets.

s Capital gains from the transfer of intangibles aresubject to income tax, the gain being calculated asthe difference between the sale price and the acqui-sition cost. In the case of the following, the allow-able depreciation computed in previous years mustbe deducted from the acquisition cost: (1) patentsand concession rights; and (2) research and develop-ment (R&D) expenses where the taxpayer elected toadd the R&D expenses to the value of the asset towhich they relate and depreciate them over a five-year period (instead of deducting the expenses in theyear in which they were incurred).

s Proceeds from the transfer of self-generated good-will are subject to income tax on their full amount.

Where a loss arises from the transfer of any of thebusiness’s depreciable assets, the loss is considered tobe an ordinary loss and may be used to offset ordinaryincome. Losses may be carried forward for five fiscalyears. There is no loss carryback.

C. Effect of Inflation

In all cases, for purposes of calculating a capital gainor loss, the acquisition price, capital contributions (inthe case of shares), construction and improvements(in the case of depreciable assets), or R&D expenses(in the case of intangibles—unless the expenses werededucted in the year in which they were incurred) arecalculated in Argentine pesos at their historic value,with no adjustment for inflation. Given Argentina’shigh inflation, an inflationary component will be em-bedded in the tax basis. The inflationary component

09/17 Tax Management International Forum Bloomberg BNA ISSN 0143-7941 509/17 Tax Management International Forum Bloomberg BNA ISSN 0143-7941 5

may potentially be significant enough for a transac-tion to give rise to a capital gain for tax purposes,where there would be a capital loss in real economicterms (i.e., if the basis were adjusted for inflation).

D. Share-for-Share Exchange Versus Cash Acquisition

If the FC buyer issues its own shares to the Argentinesellers in exchange for: (1) shares in the Argentinecompany; or (2) the going concern, the tax treatmentwill be as set out in I.A. and B., above, respectively.The shares of the FC buyer will be valued at the fairmarket value of the shares or assets given in exchange.A seller who is an Argentine-resident individual mayprefer to receive cash rather than shares, because he/she may be able to use the cash to obtain exemptincome. On the other hand, shares in an FC buyer re-ceived by an Argentine-resident individual will giverise to taxation in the individual’s hands in two ways:(1) dividends received with respect to the shares willbe subject to income tax at progressive tax rates(maximum 35%); and (2) capital gains arising on asubsequent sale of the FC buyer shares will be subjectto income tax at a 15% rate. For a seller that is an Ar-gentine company, there will be no significant advan-tage or disadvantage to receiving cash rather thanshares. From the perspective of the buyer, it will prob-ably be preferable for the buyer to issue its own sharesrather than have to obtain the necessary cash to payfor the shares in the Argentine company, but there willbe no Argentine tax benefit to doing so.

E. Disposal of Shares Shortly After Transaction

Argentina has no provisions affecting the tax treat-ment of capital gains from the sale of shares thatdepend on the period for which the shares are held.The fact that a seller may dispose of shares receivedshortly after the transaction will have no impact onthe seller’s tax liability.

F. Ability to Use or Restrictions on Use of Debt

An FC buyer may use debt to finance the acquisition ofshares or assets. Where shares are acquired, the FCbuyer itself will have to borrow the funds (see below)and the repayment of the debt will have no Argentineimplications. Where assets are acquired, two alterna-tives are available: (1) the FC buyer itself borrows thefunds and makes a capital contribution; or (2) an Ar-gentine SPV that will purchase the going concern bor-rows the funds (likely with its parent company’sguarantee).

The restrictions on the use of debt apply only wherethe borrower is a local buyer (i.e., here, the ArgentineSPV) and are as follows: (1) thin capitalization rules,which apply with respect to debt owed to nonresidentrelated parties; and (2) the non-deductibility of inter-est paid on debt taken out to buy shares in an Argen-tine company.

Having the Argentine company assume the debttaken by the buyer of its shares would have the follow-ing tax consequence: The assumption would be con-sidered a loan to the original debtor that is not in theArgentine company’s benefit and would, therefore, bedeemed to yield interest at a rate equal to the discountinterest rate for commercial loans of the Banco de la

Nacion Argentina (if the presumed debt is located inArgentina). There is another deemed interest rate inthe Income Tax Law for some transactions with for-eign parties, but case law nonetheless supports theuse of the standard interest rate of the Banco de laNacion Argentina.

G. Step-up in Tax Cost

An FC buyer cannot step up the tax cost in an Argen-tine target’s business assets.

H. Depreciation of Goodwill and Other Intangibles;Allocation of Purchase Price Among Assets to DetermineGoodwill

Different types of intangibles are subject to differenttax treatment. Argentina’s tax laws contain provisionsconcerning the tax depreciation of only four types ofintangibles: goodwill, patents, trademarks and con-cession rights. Patents and concession rights may bedepreciated over their lifetime. Goodwill and trade-marks may not be depreciated at all for tax purposes.Other intangibles may or may not be depreciated, de-pending on whether they have a determinable lifes-pan.

The sale of its shares does not impact the value ofthe intangibles of an Argentine target.

In the case of a sale of assets, as noted in I.B., above,the price paid for the assets as a whole must be allo-cated to each of the assets separately, according totheir fair market value.1 Goodwill is the amount of thesale price that is in excess of the sum of the fairmarket value of all the assets transferred. Beyondthat, there are no more specific rules that apply in thiscontext. As noted above, goodwill cannot be depreci-ated.

I. Use of Preacquisition Business Losses

Where a buyer acquires shares of an Argentine target,the target may continue to use its preacquisition busi-ness losses, because the target remains the same tax-payer as it was before the acquisition.

Only one restriction applies in this context: If theArgentine target merges with or absorbs another com-pany, the target’s accumulated losses will not survivethe merger unless its shareholders held at least 80% ofthe amount of the target’s capital for at least two yearsprior to the merger. This rule is designed to preventthe merger of recently acquired companies with accu-mulated tax losses with profitable companies with aview to utilizing such losses. Where the two-year hold-ing period requirement is met, the benefit of the accu-mulated losses is reduced by two elements: (1) thelosses may be carried forward for only five fiscal years;and (2) the accumulated losses are not adjusted for in-flation.

The calculation for determining whether the 80%requirement is met may be made at either the direct orthe indirect level, i.e., if the requirement is not met atthe level of the direct shareholders, it may still be metat the upper tiers of the corporate structure with theresult that the benefit of the losses is preserved.

If the buyer acquires the target’s assets and liabili-ties rather than its shares, the transfer of accumulatedbusiness losses is not allowed, unless the transfer is


within the same economic group (which does notappear to be the case on a true sale of a business).

J. Use of an Acquisition Vehicle

In the case of a purchase of shares, it is advisable touse a foreign acquisition vehicle, because, if the FCbuyer wishes to sell its stake in the Argentine com-pany at some future date, it may simply sell the sharesof the acquisition vehicle. Such sale would not be sub-ject to Argentine income tax, because only direct salesof shares issued by Argentine companies are taxable.It is, therefore, preferable to use a foreign rather thanan Argentine acquisition vehicle.

Where assets and liabilities are acquired, it is neces-sary to set up either an Argentine branch or an Argen-tine vehicle to receive the assets. This branch orvehicle will be the Argentine registered taxpayer car-rying on the acquired business. If a branch structureis chosen, it is advisable for the branch to be a branchof a foreign acquisition vehicle, so that in the futurethe FC buyer may sell the shares of such vehicle with-out paying any income tax on any capital gain arisingon the sale, because, as noted above, only direct salesof shares issued by Argentine companies are taxable.

II. Acquisition From Foreign Sellers

When an FC buyer acquires an Argentine businessfrom foreign sellers, the tax treatment of any resultinggain or loss is rather different from the correspondingtreatment where the acquisition is from Argentinesellers as set out in I., above.

Foreign sellers that sell shares in an Argentine busi-ness will be taxed on the resulting capital gain. Thelaw provides for a presumed capital gain of 90% of thesale price, but the seller may opt out of this presump-tion and instead pay tax on the effective capital gain.The income tax rate is 15% for all nonresident sellers.

The tax treatment may change where one of Argen-tina’s tax treaties applies: residents of Italy are exemptfrom tax on such capital gains, while residents of Den-mark, the Netherlands, Spain, Sweden, Switzerlandand the United Kingdom are subject to tax on suchgains but, where the seller controls at least 25% of thevoting power of the Argentine target immediatelybefore the sale, the income tax rate on the gains is lim-ited to a maximum of 10%.

The Income Tax Law, as amended in 2013 witheffect from September 23, 2013, provides that whenboth the buyer and the seller of shares in an Argentinetarget are nonresidents, it is the buyer that is liable forthe Argentine tax on the relevant capital gain. Al-though a regulation was issued in late 2013, it did notaddressed this rule and it was not until almost fouryears later that the Federal Tax Administration issueda resolution2 providing a procedure for the paymentof the tax by a nonresident buyer. Under Resolution4094, a nonresident buyer is required to make a wiretransfer to the Federal Tax Administration within fivebusiness days of making the payment of the purchaseprice to the nonresident seller. Resolution 4094 pro-vides that payments of taxes owed with respect totransactions entered into between September 23,2013, and July 18, 2017 have to be made (without in-

terest or penalties) before the last business day of thesecond month following that in which the resolutionenters into force.

As a result of widespread protests regarding certainobligations of stockbrokers when the seller of theshares is a nonresident but the buyer is a resident, theFederal Tax Administration suspended Resolution4094 for 180 days, two days after it was published (i.e.,on July 20, 2017). There is still much uncertaintyabout the future of this procedure, but it seems fairlyclear that the Federal Tax Administration intends tocollect the tax in arrears, albeit without any interest orpenalties. Taking into account the suspension, thedeadline for paying the tax with respect to transac-tions that have already taken place would be March30, 2018.

If the seller makes a loss, the loss may not be usedto offset other gains.

If foreign sellers sell a business with its assets andliabilities, this must take the form of a sale of a branchof a foreign entity in Argentina. An Argentine branchof a foreign entity is subject to the same Argentine taxtreatment as a local company. In these circumstances,the branch would, therefore, be deemed to sell all itsassets and liabilities and would be subject to incometax on the resulting gains in the same way as an Argen-tine company. The price received by the branch maythen be distributed to its headquarters abroad as prof-its; such distribution would be equated with a divi-dend and would not be subject to income tax inArgentina.

A. Shares Rather Than Cash Used to Pay AcquisitionPrice

If the FC buyer issues its own shares to the foreignsellers in exchange for either shares in the Argentinecompany or the transfer of the going concern, the taxtreatment will be the same as set out in I.A. and I.B.above, respectively. The shares of the FC buyer will bevalued at the fair market value of the shares or assetsreceived in exchange. There is no Argentine tax advan-tage or disadvantage for either the foreign sellers orthe FC buyer in either cash or shares being used—thisapplies whether the sale is a sale of shares or the saleof a going concern.

B. Disposal of Shares Shortly After Transaction

As is the case where the sellers are Argentine resi-dents, there are no provisions affecting the tax treat-ment of capital gains from the sale of shares derivedby foreign sellers that depend on the period for whichthe shares are held. Thus, the Argentine tax liability offoreign sellers disposing of shares in an Argentinetarget would not be affected by the fact that the dis-posal took place shortly after the transaction in whichthey acquired the shares.

C. Ability to Use or Restrictions on Use of Debt

The same considerations apply as those that applywhere the sellers are Argentine sellers (see I.F., above).


D. Step-up in Tax Cost

The FC buyer cannot step up the tax cost in the Argen-tine target’s business assets.

E. Depreciation of Goodwill and Other Intangibles;Allocation of Purchase Price Among Assets to DetermineGoodwill

The fact that the seller is a foreign seller does notaffect the treatment of goodwill and other intangibles:the treatment is the same as when the sellers are Argen-tine residents (see I.H., above).

F. Use of Preacquisition Business Losses

The position regarding the ability to use preacquisi-tion business losses of an Argentine target’s businessare the same regardless of whether the seller is a resi-dent or a nonresident (see I.I., above).

G. Use of an Acquisition Vehicle

As discussed in I.J., above, it is advisable for an FCbuyer to using a foreign acquisition vehicle, in orderto avoid any future capital gains tax liability. Thisholds true regardless of the residence of the seller.

III. BEPS

There is no expectation that there will be any changesto the tax treatment discussed above as a consequenceof the OECD-driven BEPS initiatives.

IV. Non-Tax Factors

Common agreements provide for tax representations,warranties, or indemnities. Due to the frequent sus-pension by law of the running of the statute of limita-tions for one year (this happened in 2007 and 2013),parties will prefer not to mention a specific periodover which the tax representation, warranty, or in-demnity applies. Besides, in the case of transactionsoccurring on or after September 23, 2013, there wasalso uncertainty about when the statute of limitationswould begin to run, because there was no deadline forpaying the tax due.

In transactions involving foreign parties, it iscommon to choose New York law as the applicablelaw.

An FC buyer must register as a foreign shareholderwith the Public Registry of Commerce of the provincein which the Argentine target is incorporated underthe General Corporations Law. The buyer will not beable to exercise its political rights with respect to thetarget until the registration is complete.

Under the new regime created on July 18, 2017 (butnow suspended), an Argentine company will not reg-ister a new shareholder in its books and records untilit receives certified evidence that the capital gains taxon the transfer of the shares has been paid.

NOTES1 This allocation is also important for purposes of deter-mining which other taxes apply (value-added tax (VAT),gross turnover tax, and stamp tax). The same allocationmust be made for purposes of each of these taxes.2 Resolution 4094, published on July 18, 2017.


AUSTRALIAElissa Romanin, Sarah Sapuppo, and Amanda KarafilisMinterEllison, Melbourne

I. Acquisition by Foreign Country Buyer ofAustralian Business From Australian Sellers

The following response sets out at a high level some ofthe key Australian tax considerations for a foreignpurchaser (‘‘FC buyer’’) of the shares in an Australianresident company or the assets of an Australian busi-ness owned by an Australian resident company. Inparticular, the main differences between a share saleand an asset sale are highlighted in the context of eachof these key considerations.

A. Classification of Assets and Purchase Price Allocation

1. Classification of Assets

The tax treatment of the disposal of assets by the Aus-tralian resident sellers (whether in the context of ashare or an asset sale) will depend on the type of assetand whether the asset was held by an Australian resi-dent seller on:s capital account, ors revenue account.

Broadly, an asset forms part of the capital of a busi-ness if it is an integral part of the business structure.Alternatively, an asset is held on revenue account ifthe business deals with the asset primarily in thecourse of conducting its profit-generating activities.1

Assets disposed of on capital account are generallysubject to Australia’s capital gains tax (CGT) rules andmay be eligible for CGT concessions (describedbelow). Accordingly, unless an Australian residentseller was in the business of share trading, the dis-posal of the shares in the Australian resident companyis likely to be subject to the CGT rules for the Austra-lian resident company vendors.

In an asset sale, the assets sold may include tangibleassets (land and buildings), depreciating assets (plantand equipment), trading stock and intangible assets,such as goodwill and intellectual property. Impor-tantly, there can be different rules that apply in thecontext of the sale of different types of assets.

A ‘‘depreciating asset’’ is an asset that has a limitedeffective life and can reasonably be expected to de-cline in value over the time it is used (such as copy-right); however it expressly excludes land, tradingstock and certain other intangible assets, includinggoodwill and trademarks.2

Where the Australian resident sellers sell a depreci-ating asset, special balancing adjustment rules applyto reconcile the deductions that have been claimed forthe asset’s decline in value with the sale proceeds.Where the Australian resident sellers receive anamount of consideration for an asset that is greaterthan the written down value of the asset, the Austra-lian resident sellers will be assessable on the differ-ence.3 Alternatively, the Australian resident sellers willbe entitled to a deduction to the extent of the differ-ence, where the amount received for the asset is lessthan the asset’s written-down value.4

Goodwill is considered to be a capital asset subjectto the CGT rules, rather than being depreciable.5

Trading stock is anything produced, manufacturedor acquired that is held for purposes of manufacture,sale or exchange in the ordinary course of business.Trading stock is a revenue asset and transactions in-volving trading stock give rise to either ‘‘ordinaryincome’’ or ‘‘general deductions.’’

Accordingly, the gain or loss for sellers of shares orfor sellers of assets can be quite different dependingon what is being sold and its characterization for Aus-tralian tax purposes.

2. Purchase Price Allocation

From a corporate income tax perspective, there is nospecific requirement to allocate purchase price amongassets to determine goodwill.

There can however be a mismatch between the in-terests of the FC buyer and Australian resident sellersin the case of an asset sale and the allocation of pur-chase price.

For example, Australian resident sellers may preferto allocate less of the purchase price to the sale of de-preciating assets, to limit the impact of any necessarybalancing adjustments. For the FC buyer, in the caseof an asset acquisition, the CGT cost base, or tax cost,of those assets will be the amount that the FC buyerpays for those assets. Accordingly, the FC buyer mayhave an interest in allocating a greater amount of thepurchase price to depreciating assets, in order tomaximize depreciation deductions claimed in thefuture.

In a share acquisition, the FC buyer instead inheritsthe Australian resident company’s tax cost in the com-pany’s assets, including the written down value of anydepreciating assets. The FC buyer may be able to ‘‘step


up’’ the tax cost of those assets, however, if the Austra-lian resident company joins a new or existing consoli-dated group after the acquisition. This is discussed infurther detail in I.H., below.

B. Capital Gains Tax Concessions

As noted in I.A., above, the sale of a capital asset, suchas the shares in a company, may be eligible for CGTdiscounts or concessions, including:s In most circumstances, gains or losses made on the

sale of a CGT asset that was acquired prior to Sep-tember 20, 1985, are generally disregarded;6

s A capital gain made on the disposal of an asset thathas been held for at least 12 months (subject to cer-tain exclusions) can be discounted by 50% if theseller is an individual or a trust, or by 33.33% if theseller is a complying superannuation fund (referredto as the ‘‘general CGT discount’’);7 and

s While there is no general CGT discount if the selleris a company, certain other CGT concessions mayapply to particular assets that are held or used in thecarrying on of business by a ‘‘small business entity.’’8

It should be noted that the small business CGT con-cessions may also be available for sellers that are in-dividuals or trusts.

C. Utilization of Losses

If an Australian resident seller has carryforward taxlosses, subject to applicable carryforward loss rules,these may be able to be applied to reduce any assess-able capital or revenue gain made on a disposal of theAustralian resident company shares or the underlyingAustralian resident company assets. However, if anAustralian resident seller has carryforward capitallosses (again, subject to applicable carryforward lossrules), such capital losses can only be applied toreduce capital gains (and not revenue gains).

D. Goods and Services Tax

Australia imposes a consumption-based tax, thegoods and services tax (GST), on the supply of certaingoods and services at a rate of 10%. In the case of anasset acquisition, the sale of the assets of the Austra-lian business will be a taxable supply and subject toGST, unless an exemption or concession applies. Forexample, the sale of the assets may qualify as:

A GST-free supply of a going concern and not besubject to GST, if the FC buyer is registered for Austra-lian GST and certain other requirements are met.These requirements broadly include that: the Austra-lian resident sellers must supply to the FC buyer allthings necessary for the continued operation of theenterprise; the Australian resident sellers must carryon the enterprise until the day of supply (that is, thetime of completion of the sale); and the sale documen-tation must clearly state that the parties agree to treatthe sale of the Australian business as the GST-freesupply of a going concern for GST purposes.

A GST-free export or supply, if certain requirementsare met. This will depend on the nature of the particu-lar assets purchased, whether the assets include goodsthat are exported out of Australia, and whether theassets are sold to the FC buyer, who is not in Australiaat the time the assets are supplied, for use or con-

sumption outside Australia, the FC buyer not beingregistered or required to be registered for GST.

Also, if any of the assets are in the nature of, for ex-ample, ‘‘residential premises’’ or a ‘‘financial supply,’’then they are likely to be input taxed and not subjectto GST.

Otherwise, if the sale of the assets is taxable, the FCbuyer will be require to pay a GST amount to the Aus-tralian resident seller based on the purchase price andthe value of any liabilities assumed. This GST amount(and any other GST incurred on transaction costs)will be a net cost to the FC buyer, unless it is registeredfor Australian GST and meets the requirements forclaiming/is entitled to claim back this GST (either inpart or in full) as an input tax credit. The FC buyer willneed to consider whether it is required to register forAustralian GST.

Alternatively, where the FC buyer purchases theshares in the Australian resident company, the supplyof the shares by the Australian resident sellers shouldnot be subject to GST and no GST will be payable bythe FC buyer. If the FC buyer is registered for Austra-lian GST, it may be able to recover GST incurred onany transaction costs associated with purchasing theshares, subject to meeting certain requirements.

E. Stamp Duty

Australia imposes a State-/Territory-based tax called‘‘stamp duty.’’ Each State/Territory has its own set ofrules, and a liability for duty will generally depend onthe nature, value and location of the relevant assets/land interests.

In the case of an asset acquisition:s The FC buyer may be liable to pay ‘‘transfer duty’’ in

certain Australian States/Territories on the purchase(and agreement to purchase) the assets of the Aus-tralian business (both tangible and intangible) thatare located, or deemed to be located (for stamp dutypurposes), in the State/Territory concerned.

s Transfer duty is assessed (at rates of up to 5.75%) onthe higher of the GST-inclusive consideration paid/given (including liabilities assumed) for the dutiableassets and the market value of the dutiable assets onthe date they are agreed to be transferred.

In the case of a share acquisition:s The FC buyer may be liable to pay ‘‘landholder

duty’’ if the Australian resident company directly orindirectly holds land interests (i.e., freehold land,leasehold land, fixtures) in any Australian State/Territory, the value of which exceeds the applicablemarket value threshold.

s The FC buyer may be liable to pay ‘‘landholderduty’’ if the Australian resident company directly orindirectly holds land interests (i.e., freehold land,leasehold land, fixtures) in any Australian State/Territory, the value of which exceeds the applicablemarket value threshold.

Landholder duty is assessed (at rates of up to5.75%) based on the total market value of the land in-terests, and in some States/Territories this also in-cludes the value of any dutiable chattels/goods.

The FC buyer may also be liable to pay a stamp dutysurcharge in New South Wales, Queensland and Vic-toria on the asset or share acquisition, as the FC buyer


is a foreign entity. This will mainly be relevant if anyof the assets/landholdings of the Australian residentcompany are ‘‘residential’’ in nature.

An FC buyer that has a transfer duty/landholderduty liability will be required to lodge certain docu-mentation with, and pay the duty liability to, the rel-evant State/Territory Revenue Office within aspecified time frame (which differs in each State/Territory).

F. Scrip-for-Scrip Transactions

Where the Australian resident sellers receive shares(‘‘new shares’’) in exchange for the transfer of sharesin the Australian resident company, the Australianresident sellers may be entitled to CGT roll-over relief(where they hold the Australian resident companyshares on capital account). Where CGT roll-over reliefis available, any capital gain made on the sale of theAustralian resident company shares can be deferreduntil the subsequent sale of the new shares.9

For the Australian resident sellers to be entitled toCGT roll-over relief (and therefore tax deferral), anumber of conditions must be fulfilled. In particular,the FC buyer must acquire at least 80% of the votingshares in the Australian resident company and allshareholders of the Australian resident company of aparticular class must be entitled to participate in thearrangement on substantially the same terms.10 TheAustralian resident sellers must elect to apply the CGTroll-over and may only do so if they would otherwisemake a capital gain on the disposal of the shares(rather than a capital loss).11

In a transaction between unrelated parties, no roll-over relief is available if shares are provided as consid-eration for the transfer of the underlying assets of theAustralian resident company’s business (as comparedto the share sale alternative). In this situation, themarket value of the new shares is broadly treated asthe consideration for the transaction. Accordingly, inthe absence of any other cash consideration, the sellermay have a tax liability without any cash proceedswith which to fund it.

There is a risk that, if the relevant Australian resi-dent seller sells the newly acquired shares shortlyafter acquiring them, the gain on that disposal wouldbe revenue in nature (and the CGT discount would notbe available) on the basis that the relevant seller ac-quired the shares with the intention of disposing ofthem at a profit.

G. Debt Financing

When funding for the acquisition of the Australianbusiness (asset or share acquisition) is sourced off-shore, the mix of equity and debt funding will be par-ticularly relevant. It should be noted that, forAustralian tax law purposes, debt and equity have spe-cific meanings, and the definition of tax law debt andtax law equity do not always align with the commer-cial or legal characterization of debt and equity.12

Interest on tax law debt instruments is likely to bedeductible where the debt is used with a purpose ofproducing assessable income or the interest has beenincurred to acquire an asset from which the taxpayerwill derive assessable income. However, interest paidto a nonresident entity is subject to interest withhold-

ing tax (IWHT),13 generally at a rate of 10%, althoughthe rate of IWHT may be reduced under the terms ofan applicable tax treaty.

Significantly, a deduction with respect to interestpayments is only available once any applicable IWHTliability has been withheld and remitted to the Austra-lian Taxation Office (ATO) by the taxpayer.14

Additionally, the ability to obtain deductions withrespect to interest payments is subject to Australia’sthin capitalization and transfer pricing rules. Verybroadly, under Australia’s transfer pricing rules, theATO can make tax adjustments to a cross-bordertransaction that is not on arm’s-length terms, wherethe actual conditions of the transaction result in alower taxable income, increased losses, greater taxoffsets and/or a lower withholding tax liability of theentity, compared to if the transaction had been atarm’s length.

Under the thin capitalization rules, where the Aus-tralian business is foreign controlled (that is, theentity is controlled, in the relevant sense, by a foreigninvestor or investors together with associated enti-ties), tax deductions for interest and associated bor-rowing costs are proportionately denied where thelevel of debt giving rise to those tax deductions ex-ceeds the maximum allowable debt. While there areother tests, the safe harbor debt amount is equal to60% of the Australian entity’s net Australian assets.

H. Tax Consolidation

Australia has an income tax consolidation regime thatallows a group of wholly owned Australian entities tobe treated as a single entity for purposes of determin-ing its Australian income tax liability.

Broadly, in an income tax consolidated group, theassets of each member of the group are automaticallytreated as assets of the group’s head company andlosses of one entity in the group can be set off againstincome earned by another entity (subject to certain in-tegrity rules). Additionally, transactions betweenmembers of the group are ignored for income tax pur-poses and one single tax return is lodged for the groupcollectively.15

Where the Australian resident company (or Austra-lian acquisition vehicle) joins an income tax consoli-dated group (or an income tax consolidated group isformed following the acquisition of the Australianresident company), the tax cost of the underlyingassets of the subsidiary member must be reset in ac-cordance with a cost-setting calculation. The cost-setting calculation is complex, but is broadly based onthe cost of the shares in the Australian resident com-pany, together with the Australian resident company’sliabilities. This process can result in the tax values ofthe Australian resident company’s assets being reset ata higher value than prior to consolidation (though itcan also result in a reduction in the tax values). Con-sequently, where the tax values are ‘‘stepped up,’’ theincome tax consolidated group would have access toincreased depreciation deductions, or increased CGTcost bases relevant to any future disposals of thoseassets. This tax cost-setting calculation is not under-taken where there is a direct asset acquisition.


I. Carryforward Losses

Where the FC buyer purchases the shares in the Aus-tralian resident company, the FC buyer may be able toutilize the losses (from the current or prior years) inthe company, provided the Australian resident com-pany satisfies either the continuity of ownership testor the same business test.

The continuity of ownership test will be failed in thecase of an FC buyer acquiring all the Australian resi-dent company shares from the Australian residentsellers, as the test broadly requires 50% of the Austra-lian resident company’s shares to be beneficiallyowned by the same persons at all times in the periodbetween the year in which the loss was incurred andthe year in which it is utilized.16 An FC buyer is there-fore likely to be relying on the same business test to beable to utilize the Australian resident company’s taxlosses.

The same business test is very strict, and broadly re-quires that the Australian resident company, from thetime immediately before the continuity of ownershiptest is failed to the time that the tax losses are utilized,carries on the same business and neither conductsany new kinds of business nor enters into any newkinds of transactions than it had, prior to its acquisi-tion by the FC buyer.17 Accordingly, from a commer-cial perspective, the tax losses in an Australianresident company acquired by an FC buyer will onlybe of value to the FC buyer where it is expected thatthe Australian resident company will continue tocarry on materially the same business as it had beenconducting prior to its acquisition.

It should be noted that, at the time of writing, thesame business test looks likely to be replaced by asomewhat less strict ‘‘similar business test.’’ However,this test is not yet in force.18

J. Use of an Acquisition Vehicle

The use of an acquisition vehicle by the FC buyer willbe of particular relevance in the case of an asset sale,where:

s If the FC buyer were to operate the business in Aus-tralia directly, this could result in the FC buyer beingdeemed to have a permanent establishment (PE) inAustralia. Subject to an applicable tax treaty be-tween Australia and the country of residence of theFC buyer, once the FC buyer has a PE in Australia,the FC buyer should be assessable in Australia withrespect to the profits attributable to that business.Both an Australian PE and an Australian subsidiarycompany would be considered to be standalone en-tities of the FC buyer for tax purposes, and would besubject to similar tax treatment in Australia. How-ever, the FC buyer may find that it is administra-tively easier to isolate the operation of theAustralian business from the operations of the FCbuyer generally through the use of a special purposevehicle (whether an Australian or foreign entity).

s If the FC buyer has one or more existing whollyowned Australian entities, the use of an Australianacquisition vehicle would allow the FC buyer to in-clude the Australian business in a newly created orexisting income tax consolidated group.


A. Exemption from CGT on Disposal

Where the sellers are foreign residents for tax pur-poses, one of the key differences will be whether suchsellers are subject to CGT on the sale of the businessor the sale of the shares in the Australian residentcompany. Where a foreign tax resident disposes of aCGT asset on capital account, it is possible that thesale of the asset will not attract CGT, provided certainconditions are fulfilled.

Where the foreign resident seller disposes of a CGTasset (whether this is shares in the Australian residentcompany or a business asset held on capital account),the seller will only be subject to CGT in Australia onthe disposal of ‘‘taxable Australian property’’ (TAP).TAP is defined to include:19

s ‘‘Taxable Australia real property’’ (TARP), which in-cludes:/ Real property situated in Australia (including a

lease of land that is situated in Australia); and/ A mining, quarrying or prospecting right (to the

extent the right is not real property), where theminerals, petroleum or quarry materials aresituated in Australia;

s A CGT asset that is an ‘‘indirect Australian realproperty interest,’’ which is broadly where:/ The nonresident seller (together with its associ-

ates) owns 10% or more of the shares in the rel-evant Australian entity at the time the sharesare sold or has held 10% or more of the sharesfor at least 12 of the 24 months preceding thesale; and

/ More than 50% of the market value of the assetsof the relevant entity is attributable to Austra-lian real property at the time it is sold (notingthat interests in other companies held by therelevant Australian entity must be subject to adetailed tracing exercise); and

s A CGT asset that is used in carrying on a businessthrough a PE in Australia.

Consequently, where the foreign resident sellers areselling shares in the Australian resident company, aforeign resident seller will not be subject to CGT onthe sale of the shares where:s The foreign resident seller (together with its associ-

ates) holds less than 10% of the shares in the Austra-lian resident company at the time of the sale of theshares, and has not held 10% or more of the sharesfor more than 12 months at any time in the preced-ing two years; or

s Less than 50% of the market value of the Australianresident company’s assets (including through trac-ing any interests held by the Australian residentcompany in other entities) is attributable to Austra-lian real property at the time of the sale.

B. Foreign Resident Capital Gains Withholding

Under the foreign resident capital gains withholding(FRCGW) rules,20 a disposal of TAP by a foreign resi-dent is subject to a 12.5% non-final withholding tax.21

The FRCGW rules are subject to a number of exemp-tions, including in particular that a withholding re-


quirement does not apply to sales of shares takingplace on an approved stock exchange or to the sale ofTARP with a market value of less than A$750,000.22

The FRCGW rules will therefore be of particular rel-evance for off-market share sales where the Australianresident company meets the indirect Australian realproperty interest test and potentially in asset saleswhere significant TARP assets, such as Australianland, are being purchased.

Importantly, the purchaser of the asset (in this case,the FC buyer) is required to withhold 12.5% of thepurchaser’s cost base (this will broadly be the consid-eration paid to acquire the asset) and remit thatamount to the ATO, unless the seller can provide suf-ficient proof that either:s The asset is not TAP; ors The seller is not a foreign resident.23

In most cases, the purchaser/FC buyer will be en-titled to rely on a declaration from the seller that theasset is not TAP, or the seller is an Australian tax resi-dent and is not subject to the FRCGW requirement(unless the purchaser knows the declaration to befalse).24

Where the FC buyer must withhold from the sale ofthe asset, the FC buyer must pay the relevant amountto the ATO on or before the day the FC buyer becomesthe owner of the asset (this will usually be at settle-ment).25 The FC buyer is entitled, under the FRCGWrules, to deduct this amount from the total purchaseprice payable to the foreign resident seller.26

III. BEPS and Brexit

It is not currently anticipated that any particularchanges to the answers above would be required as aconsequence of the United Kingdom’s exit from theEuropean Union.

With respect to the OECD BEPS work, the mostlikely source of change to the laws outlined in thispaper may be in relation to the recognition of PEs inAustralia. To the extent the definition of a PE contin-ues to move towards recognizing an entity’s economicsubstance over its form, it is likely that more busi-nesses undertaken in Australia will result in a PEbeing recognized.

It should be noted, however, that work undertakenin this area recently has not had a significant impacton Australian tax laws or resulted in changes to Aus-tralia’s double taxation agreements. It should be notedin particular that on signing the Multilateral Conven-tion to Implement Tax Treaty Related Measures toPrevent Base Erosion and Profit Shifting in June thisyear, Australia declined to adopt optional Article 12regarding the artificial avoidance of PE status throughcommissionaire arrangements and similar strategies,although it did adopt Articles 13, 14 and 15 (to someextent), which are also relevant to the definition of aPE.

IV. Non-Tax Factors

In the authors’ experience, share sale transactionsgenerally involve a full suite of tax representations,warranties and indemnities. This is less the case in anasset sale. However, tax representations, warrantiesand indemnities provided by an Australian resident

seller are often capped at a maximum of five yearsfrom completion, and so are generally unlikely to sur-vive Australian statutes of limitations.

Often, when one of the parties to an acquisition isbased in the United Kingdom or the United States, theapplicable law chosen will be U.K. law or the law of aU.S. state, respectively. Of course, commonly the ju-risdiction that is nominated will depend on the rela-tive bargaining power of the parties.

A final point to note is the increasing prevalence anduse by parties of warranty and indemnity insurance(‘‘W&I insurance’’). W&I insurance can be utilized byparties to a transaction to protect against losses aris-ing in relation to claims for breach of warranties orunder indemnities given in the transaction docu-ments. In the case of a seller, the insurance protectsand reimburses the seller for any losses from warrantyand indemnity claims by the purchaser, which allowsthe seller to complete the transaction without ongoingrisk. In the case of a purchaser, W&I insurance allowsthe purchaser to recover losses from breaches of thewarranties or under indemnities in the sale contract,without having to pursue recovery from the seller.This can be particularly valuable where the parties tothe sale will have an ongoing working relationshipthat would otherwise be strained by claims under thewarranties and indemnities.

W&I insurance has been increasing in popularity(at least in Australia) in recent years and could be es-pecially relevant to share sales as opposed to assetsales, where the purchaser of the Australian residentcompany will be inheriting any existing (and poten-tially hidden) liabilities of the company, in addition tothe company’s assets.

NOTES1 Sun Newspapers Ltd. & Associated Newspapers Ltd. v. FCof T (1938) 61 CLR 337 at 359-360.2 Income Tax Assessment Act 1997 (Cth) (ITAA97), sec. 40–30.3 ITAA97, sec. 40-285(1).4 ITAA97, sec. 40-285(2).5 ITAA97, sec. 100-25(2). For the taxation treatment ofgoodwill, see e.g., Australian Taxation Office, TR 1999/16:Income tax: capital gains: goodwill of a business (Novem-ber 28, 2001), http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR199916/NAT/ATO/00001.6 Two important exceptions to this rule include wherethere is a sale of an asset that would otherwise be a pre-CGT asset (i.e., an asset created or acquired prior to Sep-tember 20, 1985), but:s The majority underlying interests in the asset have changed by more

than 50% since Sept. 20, 1985 (where the ultimate owners of the

asset must be traced through all interposed entities holding the

asset); or

s In the case of a sale of shares in a company (or units in a trust)

where, broadly, at least 75% of the company or trust’s net asset value

come from post-CGT assets (excluding trading stock), whether

owned by the company directly, or indirectly through interposed, or

subsidiary companies or trusts.

See ITAA97, Division 149.7 ITAA97, sec. 115-100.8 ITAA97, Division 152.9 ITAA97, Subdivision 124-M.10 ITAA97, sec. 124-780(2).


11 ITAA97, sec. 124-780(3).12 The law with regard to the classification of debt andequity for Australian tax purposes is set out in ITAA97,Division 974. For further detail regarding the distinction,see: Australian Taxation Office, Guide to the debt andequity tests (January 18, 2017) https://www.ato.gov.au/Business/Debt-and-equity-tests/.13 Taxation Administration Act 1953 (Cth) (TAA), Sch. 1,sec. 12-245.14 ITAA97, sec. 26-25.15 The income tax consolidation regime is expansive, andis set out in Part 3-90 of the ITAA97.16 ITAA97, sec. 165-12.17 Ibid, sec. 165-210.18 The change from the same business test to the similarbusiness test is proposed to be introduced by the TreasuryLaws Amendment (2017 Enterprise Incentives No. 1) Bill2017, which at the time of writing this paper had passedAustralia’s federal House of Representatives, and wasawaiting approval from the Senate. The progress of this

Bill can be followed at http://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r5850. The ATO has recently releaseddraft guidance regarding how this test would be applied,see: Australian Taxation Office, LCG 2017/D6: The busi-ness continuity test – carrying on a similar business (July21, 2017) https://www.ato.gov.au/law/view/view.htm?docid=%22COG%2FLCG20176%2FNAT%2FATO%2F00001%22.19 Id., Subdivision 855-A, in particular sec. 855-15–855-30.20 The foreign resident capital gain withholding rules areset out in TAA, Subdivision 14-D.21 TAA, sec. 14-200(3).22 TAA, sec. 14-215(1).23 TAA, sec. 14-210.24 TAA, sec. 14-210(3).25 TAA, sec. 14-205(3).26 TAA, sec. 16-20.


BELGIUMHoward M. Liebman and Valerie Oyen1

Jones Day, Brussels

I. Acquisition by Foreign Country Buyer of BelgianBusiness From Belgian Sellers

A business can be acquired in two key ways. A buyercan acquire the shares of a company (share deal) or itsassets (asset deal). The tax treatment of a share versusan asset sale/purchase will clearly influence the typeof transaction that is eventually preferred. This paperwill first describe the direct (income) tax regime appli-cable to a share versus an asset deal, distinguishingbetween a Belgian individual seller and a Belgiancompany selling the shares or assets. The indirect taxregime will then be discussed. Finally, the use of a Bel-gian acquisition vehicle and the basic tax impact of fi-nancing the transaction via debt will be covered aswell.

A. Direct Taxation

1. Share Deals

Currently, Belgian individuals selling shares belong-ing to their private estate or ‘‘patrimony’’ are not sub-ject to tax on capital gains. There are, however, twoexceptions to this rule. First, when the sale of theshareholding is realized outside the scope of thenormal management of the individual’s private estate(‘‘speculative income’’). The second exception con-cerns the sale of a substantial shareholding (i.e., aseller owning alone or with his/her spouse or certainclose relatives more than 25 % in the Belgian targetcompany at any time during the five years prior to thesale) that is sold to an entity established outside theEuropean Economic Area (EEA).2

In addition, and as might be expected, a Belgianresident individual who holds shares for professionalpurposes (for example, a trader) is taxable at the ordi-nary progressive personal income tax rates of between25% and 50% (plus local surcharges) on any capitalgains realized upon the disposal of shares, except forshares held for more than five years, which are taxableat a separate rate of 16.5% (plus local surcharges).

When the seller is a Belgian company, capital gainson shares are taxed at a nominal rate of 0.412%, pro-vided two conditions are met and the seller is not itselfa small or medium-sized enterprise (SME). First, theshares must have been issued between companiessubject to the normal tax regime (the ‘‘taxation condi-

tion’’). Second, the shares must have been held in fullownership during an uninterrupted period of at leastone year (the ‘‘holding condition’’). If any dividendsthat are or would be paid on the shares being sold donot qualify under the taxation condition (regardless ofthe holding condition), the capital gain is taxed at theregular corporate income tax rate (including the crisissurtax) of 33.99%. If the one-year minimum holdingperiod condition is not fulfilled, the capital gain issubject to a 25.75% tax.3

Capital losses on shares are not, in principle, tax-deductible for a Belgian seller of shares (whether anindividual or a company).

2. Asset Deals

Where the seller is an individual, capital gains realizedon tangible or financial fixed assets are taxable at arate of 16.5%, as long as the seller has used the assetsfor more than five years as part of his or her profes-sional activity. For capital gains realized on the sameassets used for less than five years in a professional ac-tivity, the ordinary progressive rates of personalincome tax will be applicable. Capital gains on the saleof assets other than tangible or financial fixed assetsare also taxable at ordinary progressive rates if used aspart of a professional activity. Capital gains on tan-gible and intangible fixed assets can, however, benefitfrom what is known as a ‘‘spread taxation’’ regime (ba-sically a form of deferred taxation, as discussedbelow).4

Capital gains realized by a Belgian company on asale of assets will, in principle, be taxable at the regu-lar corporate income tax rate of 33.99%, including thecrisis surtax. Nevertheless, Article 47 of the BelgianIncome Tax Code (ITC) provides for an optional de-ferred taxation regime for capital gains realized ontangible or intangible fixed assets held for more thanfive years in the company’s business. Under thatregime, the capital gain will be taxed on a deferredbasis if reinvested in depreciable tangible assets or in-tangible fixed assets within three (or five, in the case ofbuilding, ships or aircraft) years from the first day ofthe taxable year in which the capital gain is realized.In that case, the capital gain is only brought back intotaxable income in proportion to the annual deprecia-tion allowed on the reinvested asset. Several othertechnical conditions also apply.


Capital losses on assets are in principle tax-deductible for a Belgian seller of assets (whether anindividual or a company).

3. Share Deal Versus Asset Deal5

Whereas a share deal is primarily attractive to a sellerbecause capital gains on shares will, in principle, betax-exempt, the flip side is that there will be an impor-tant disadvantage for the buyer. Specifically, the buyercannot depreciate the purchase price it has paid for itsshares. By contrast, an asset deal is generally more at-tractive for a buyer because Belgian law allows the ac-quiring company to depreciate all acquired assets inaccordance with their stepped-up acquisition value,including the value attributable to goodwill. However,a buyer can indirectly benefit from a share deal aswell. For example, carried-forward tax losses of thetarget company may remain available for set-offagainst future profits, without any time limitation, inthe case of a transfer of shares, provided the change ofcontrol can be justified as having a legitimate businessreason (which, given the expected fact pattern, isprobably likely).

In addition, since the gain on a transfer of assets isnormally subject to tax in the hands of the seller, onecan expect that, as compared to a share deal, the priceeventually agreed upon on in an asset deal will behigher (as the seller will likely want to be at least par-tially compensated for its expected income tax liabil-ity in exchange for handing the buyer a stepped-up taxbasis in the assets being sold). Still, even with that dis-advantage, buyers are often obliged to structure theiracquisitions as a share purchase in order to present acompetitive bid.6

B. Indirect Taxation

1. Registration Duties

No registration duties apply to a transfer of shares,whereas real estate transferred in an asset deal(whether as part of the business acquired or sepa-rately) is subject to a 10% (in Flanders) or 12.5% (in‘‘Wallonia’’ or the Brussels-Capital Region) registra-tion duty on the agreed transfer price or on the fairmarket value if the latter is higher (provided that suchtransfer is not otherwise subject to value-added tax(VAT)).

2. Value-Added Tax

No VAT is due on a sale of shares, except in relation toany costs relating to the acquisition or sale of shares(for example, advisory fees). VAT at a rate of 21% is, inprinciple, due on the sale of assets (excluding the partof the sale price relating to the acquisition of realestate situated in Belgium, to the extent real estatetransfer taxes apply, as described in I.B.1., above). Thetransfer of certain assets (for example, receivables)and the transfer of liabilities are nevertheless VAT-exempt. A VAT exemption is also available if the assetsacquired constitute a ‘‘universality of goods’’ or‘‘branch of activity’’ (i.e., a ‘‘transfer of a going con-cern’’).7 In brief, this requires that the transferred

items constitute an ensemble of elements allowing thebuyer to carry on an independent economic activity.

C. Belgian Acquisition Vehicle—Restrictions onFinancing

The purchase of shares or assets by a foreign buyer ofa Belgian target company is often effected via a Bel-gian acquisition vehicle. The latter usually borrowsfunds in order to finance the acquisition of the busi-ness of the target company.

Financing an acquisition with debt has the tradi-tional advantage that the interest cost and other ex-penses (for example, bank fees and other transactioncosts) are fully deductible for tax purposes in thehands of a Belgian corporate purchaser, irrespectiveof whether the transaction is structured as an asset ora share acquisition. Although financing an acquisitionwith debt has the advantage that the interest cost andother expenses are fully deductible, some restrictionsare nevertheless applicable.

First, interest payments are generally not tax-deductible where they exceed the market, or ‘‘arm’s-length,’’ interest rate. Interest paid by a Belgianborrower to a tax-haven resident is also not tax-deductible unless the Belgian borrower can prove thatthe transaction concerned corresponds to a real andauthentic transaction and that the interest rate doesnot exceed an arm’s-length interest rate.8 Also, the ITCcurrently contains a ‘‘thin cap’’ rule (5:1 debt/equityratio).9 This rule applies when interest is paid to a re-cipient that is either not subject to income tax or issubject to a tax regime that is significantly more ad-vantageous than that applying in Belgium. Interestpaid to group companies can also be caught by the‘‘thin cap’’ rule. Furthermore, as a general rule, a 30%withholding tax applies to any interest paid to a non-resident. The rate of withholding tax can be reduced,or an exemption from withholding tax provided,under domestic law as well as under various tax trea-ties entered into by Belgium.


The scenario of nonresidents (whether individualsand companies) selling a Belgian business via a shareor asset deal will now be briefly described.

A. Direct Taxation

A sale of shares (not held in connection with a busi-ness conducted in Belgium through a Belgian perma-nent establishment (PE)) by nonresident individualsor companies is exempt from Belgian capital gainstaxation. Indeed, under the various tax treaties en-tered into by Belgium, the right to levy tax on capitalgains realized on shares in a Belgian company by anon-Belgian individual or corporate shareholder is, inprinciple, allocated to the selling shareholder’s state ofresidence.10 Hence, Belgium does not have any au-thority to levy tax where such a treaty applies. Capitallosses are generally not tax deductible.

The right to levy tax on capital gains realized onassets of a Belgian business is also mostly allocated tothe seller’s country of residence. However, if gains arerealized by a foreign corporate seller on a disposal ofassets forming part of a Belgian PE, then taxation in


Belgium at the normal corporate income tax rate of33.99% is possible. Two particulars should be noted:11

First, if the Belgian PE is selling all of its assets andliabilities to a third party, it will, de facto, be impos-sible for it to apply for the deferred taxation regime(described in I.A.2., above). Second, if Belgian realestate is being sold (irrespective of whether it formspart of a Belgian PE), withholding tax (at the rate of33.99%) will also need to be withheld by the Civil LawNotary enacting the transfer of ownership. This with-holding tax can be offset against the final corporateincome tax due (and possibly even result in a refund),but often entails a pre-financing disadvantage for theforeign seller.

B. Indirect Taxation

Irrespective of the country of residence of the seller,registration duties can apply on the transfer of realestate located in Belgium.

III. BEPS Actions and Brexit

The European Commission has recently agreed on anAnti-Tax Avoidance Directive (ATAD). The ATAD indi-rectly implements certain BEPS Actions. The ATADwill, for example, result in BEPS Action 4 (on the limi-tation of interest deductions) being implemented inBelgium. Thus, interest expenses will only be deduct-ible up to 30% of a taxpayer’s earnings before interest,tax, depreciation, and amortization (EBITDA). TheATAD must be implemented in Belgian domestic lawas of January 1, 2019.12 These changes are of courserelevant for the analysis under I.C., above.

As for the exit of the United Kingdom from the Eu-ropean Union, it is speculative to report on changes orreal impact as yet. At the very least, however, shouldthe EU Parent-Subsidiary Directive and the EU Inter-est and Royalty Withholding Tax Directive no longerapply in relation to dividends, interest and royaltiespaid by Belgian taxpayers to U.K. residents, theBelgium-United Kingdom tax treaty will become evenmore important as a tool for reducing or eliminatingwithholding tax.

It is noted for the sake of completeness that over thesummer (July 2017), the Belgian Government reacheda political agreement on a significant Belgian taxreform and has announced the introduction of taxmeasures that, depending on the eventual texts of thelaw to be voted by Parliament, may impact the tax re-gimes described above. This of course may take sometime to implement, but the authors understand thatthe Government would like to pass at least some of theproposed measures before the end of the 2017 fiscalyear.

IV. Non-Tax Factors

A. Representation and Warranties or Indemnities

Representations and warranties and indemnities playan important role in a share deal because the buyer

takes over all the tax liabilities of the target company.The latter will therefore generally require more exten-sive indemnities from a seller in a share deal than inan asset deal. For that reason, the buyer will usuallyinitiate a due diligence exercise, which will include areview of the target’s tax affairs. To the extent possible,the findings of any such due diligence investigationshould be appropriately reflected in tax representa-tions and warranties and/or tax indemnities in theeventual share purchase agreement. Typically, in aBelgian context, indemnifications are structured as areduction in the share purchase price so that they willbe tax-neutral for the beneficiary.

Asset deals, on the other hand, will usually only in-clude an indemnity for pre-closing taxes that relate tothe purchased business.

B. Applicable Law

Sellers and buyers of a Belgian business can choosethe law to be applied to the underlying sale and pur-chase agreement. Most often, the parties will agree onthe law of the jurisdiction of the seller as constitutingthe law applicable to the sale/purchase agreement. Ex-ceptions are possible, however. The authors have seenU.S. or English law, or even Dutch law, used as alter-native choices of law in multi-jurisdictional asset orshare acquisitions, even where the acquisition has aBelgian component.

NOTES1 The authors would like to express their appreciation toMr. Andreas Wuylens for his invaluable assistance in thepreparation of this article.2 Belgian Income Tax Code (ITC), Art. 90.3 ITC, Art. 192.4 Another regime applies to capital gains realized uponthe total and definitive termination of the seller’s busi-ness.5 For further discussion on this point, see H. Liebman &E. Bojilova, ‘‘Setting the Scene: Steps to a SuccessfulTransaction—Mergers & Acquisitions,’’ Topical AnalysesIBFD (2017).6 T. Blockerye, ‘‘Tax treatment of international acquisi-tions of businesses—Belgium,’’ 90b Cahiers de Droit fiscalinternational de l’IFA, 146 (2005)7 Belgian VAT Code, Arts. 11 and 18.8 ITC, Arts. 54 and 55.9 ITC, Art. 198, 11° (which will be amended as a result ofBEPS).10 OECD Model Tax Convention, Art. 13. Most of the taxtreaties to which Belgium is a party are based on thisModel.11 T. Blockerye, see note 5, at 156.12 See the Belgian contributions to the August 2016 andDecember 2016 issues in Volume 37 of the Tax Manage-ment International Forum, for more information on theimplementation of the BEPS Actions in Belgium.


BRAZILHenrique de Freitas Munia e Erbolato and Pedro Andrade Costa de CarvalhoTax lawyers, Sao Paulo

I. Introduction

One of the most important factors that has to be takeninto account in dealing with cross-border M&A trans-actions is their tax consequences. This is particularlythe case where the target company is a Braziliancompany—Brazil’s tax system is highly regulated andcomplex, so that special attention is required in orderto identify opportunities and mitigate potentially ad-verse consequences when structuring such transac-tions.

By way of an initial remark, it should be noted thatstock (shares or quotas) deals in Brazil are more usualthan asset deals, whether the Foreign Country buyer(FC buyer) concerned makes a direct investment in aBrazilian target company or uses an investment ve-hicle to make the investment.

An FC buyer will rarely make a direct asset acquisi-tion in Brazil, since an FC buyer that does so willlikely face operational problems for a number of rea-sons, among which the authors would draw particularattention to the fact that such a buyer will not be reg-istered with the Corporate Taxpayers ID (the CadastroNacional de Pessoas Jurıdicas or CNPJ) as a Brazilianresident and, therefore, its ability to conduct its busi-ness in Brazil will be compromised.

II. Asset Deal Versus Share Deal

One of the first tax-related decisions to be made withrespect to a cross-border M&A transaction is whetherto buy stock (shares or quotas) or assets of the targetcompany.

Depending on the particular transaction, an acqui-sition of assets may not achieve the expected out-come, as the FC buyer (or locally incorporatedcompany, as the case may be) may become liable forpotential past tax contingencies of the seller in accor-dance with Brazilian law, since the asset deal per sedoes not isolate the FC buyer from the past liabilitiesof the company whose assets it acquires. That beingsaid, as noted in I., above, in practical terms, it wouldbe difficult for an FC buyer to conclude an asset dealin Brazil without incorporating a local entity.

The Brazilian tax legislation provides that a legalentity that acquires goodwill or a commercial, an in-dustrial or a professional establishment from a thirdparty and continues to operate its core business willbe: (1) fully liable, if the seller ceases to carry on the

same business; or (2) secondarily liable, if the sellercontinues to carry on the same business, or consti-tutes a new company to carry on the same line of busi-ness within six months from the conclusion of theacquisition transaction.

It is also important to note that some taxes in Brazilare associated with actual assets, such as the tax onreal estate (Imposto Predial e Territorial Urbano orIPTU). Where this is the case, potential tax debts asso-ciated with an asset will be automatically transferredto the buyer of the asset, even where the conditions re-ferred to in the previous paragraph are fulfilled (i.e.,the purchase of real estate from a company will auto-matically make the buyer liable for IPTU, even wherethe real estate is purchased as part of the acquisitionof a business unit).

The capital gain for the seller in the case of an assetdeal will correspond to any positive difference be-tween the value of the sale and the respective account-ing cost of the assets, and will be subject to acombined rate of 34% (i.e., to corporate income tax orCIT (comprising Imposto de Renda das Pessoas Jurıdi-cas or IRPJ and Contribuicao Social sobre o LucroLıquido or CSLL) if the seller is a legal entity. Exceptwhere a fixed asset is being sold, in addition to CIT, thesocial contributions on revenues (Programa de Integ-racao Social/Contribuicao Social sobre o Lucro Lıquidoor PIS/COFINS) will be levied at a combined rate of3.65% (under the cumulative regime in which no cred-its are allowed) or 9.25% (under the non-cumulativeregime in which credits are allowed for PIS/COFINSpaid on some items of depreciation or amortization,leases, freight, and, most importantly, inputs used inthe production and sale of goods and/or services), de-pending on the method used to calculate the taxpay-er’s CIT liability.

It should be noted that an asset deal may also trig-ger indirect taxes (Imposto sobre a Circulacao de Mer-cadorias e Servicos or ICMS and/or Imposto sobreProdutos Industrializados or IPI (excise tax)), depend-ing on the nature of the assets sold and the State(s) inwhich the seller and the buyer are located.

If the seller is an individual domiciled in Brazil, thecapital gain will be calculated based on the differencebetween the cost of acquisition of the assets recordedin a special file included in the individual income taxreturn where all individual taxpayers must list theirassets (such as shares, real property, bank accounts,


etc.) and the sale price. Progressive rates ranging from15% to 22.5% will apply, depending on the amount ofthe capital gain. It is important to mention that in theevent of subsequent sales of the same share or quotas(same asset or right), if the following transactionsoccur until the end of the calendar year following thatof the first transaction, the capital gain accrued mustbe added to the capital gain of the first sale in order todetermine the applicable rate, but the amount previ-ously paid can be offset.

Usually, ICMS is not levied in the case of sale of anasset by an individual, unless the individual is re-garded as a taxpayer who frequently carries out com-mercial transactions or transactions the volume ofwhich indicates a commercial intention.

Share deals, however, are more common in Brazil,since they do not trigger value-added tax (VAT) andthey are also easier to implement. In addition, the pasttax liabilities of the seller are fully transferred to thebuyer. Where the target company is a subsidiary orcontrolled company of the seller resident in Brazil, theBrazilian tax legislation provides that a share deal willgive rise to a taxable capital gain, calculated as the dif-ference between the price paid for the shares and theirbook value. It should be noted that Brazil uses the‘‘equity pick-up’’ method to measure investments insubsidiaries, affiliates and jointly-controlled subsid-iaries, so the value of the shares at the time of sale willbe the original cost of the investment adjusted accord-ingly (gain or loss). It is important to note that theamount resulting from the use of the equity pick-upmethod will not be included in the CIT calculation.

As in the case of an asset sale, if the seller is an indi-vidual resident in Brazil, the capital gain will be calcu-lated based on the difference between the cost ofacquisition of the shares recorded in a special file in-cluded in the individual income tax return where allindividual taxpayers must list their assets (such asshares, real property, bank accounts, etc.) and the costof acquisition. As previously noted, the applicable taxrate will depend on the amount of the capital gain. Onthe other hand, if the seller is a nonresident, Norma-tive Instruction 1,662/2016 provides that, for purposesof calculating the capital gain on a sale of shares, it isno longer acceptable to prove the acquisition cost ofthe shares based on the capital registered in the Cen-tral Bank of Brazil linked to the purchased shares. Theseller must instead prove the cost of acquisition basedon documentation such as contracts, bank vouchers,terms of discharge, receipts, foreign exchange con-tracts and other documents that have evidentiarystatus under civil law.

Finally, Normative Instruction no. 1732 (‘‘IN/1732’’)has been published on August 29, 2017, changing andequating the applicable rates for capital gain in thecase where the seller is a legal entity domiciled abroad(non-resident). Now, instead of applying a flat 15%rate, progressive rates ranging from 15% to 22.5% willalso be applicable, depending on the amount of thecapital gain accrued. Specific tax treaty provisionsmust be observed depending on the country where thelegal entity is located. According to IN1732, progres-sive rates apply as of January 1, 2017. Controversiesarise in relation to the application of the new rates asfrom January, and reinforces other one in relation tothe fact that progressive rates must apply to capital

gains earned by non-residents, regardless of whetherthey are individuals or legal entities as from the enact-ment of Law no. 13.259/16 that introduced the pro-gressive rates, since in view of Article 18 of Law 9249/95, capital gain rules for resident individuals in Brazilshould be the ones applicable for non-residents aswell. There are exceptions for sellers resident in low-tax jurisdictions, to which a 25% rate applies, or inJapan, to which a reduced rate of 12.5% applies underthe Brazil-Japan tax treaty

III. Acquisition Price: Possible Alternatives

There is another aspect that needs to be consideredwhen the target is a corporation (this is not applicableto limited partnerships, notwithstanding a 2014 deci-sion of the Federal Administrative Tax Court) locatedin Brazil and, instead of the buyer acquiring existingshares in the target, new shares are issued at a pre-mium and the buyer acquires those new shares. Inthese circumstances, no taxable capital gain is trig-gered and the taxation of the goodwill is deferred untilsuch time as the new shares are effectively sold. Theside effect of this alternative is that the ‘‘seller’’ re-mains an equity holder, albeit its holding is diluted. Itshould be noted that the Federal Tax AdministrativeCourt does not permit this alternative if the transac-tion has no economic purpose, especially when it isfollowed by a capital reduction, with the formershareholder taking the goodwill in cash.

Another alternative that may be considered, de-pending on the intended result of the transaction, isan exchange of shares instead of a cash payment. Caremust, however, be exercised in implementing this al-ternative, since the Federal Administrative Tax Courthas ruled against taxpayers in cases where shares ofone entity were exchanged for shares of another entityand there was a difference between the values of thetwo sets of shares. Taxpayers have argued that no ef-fective capital gain arises from such a transaction,since the shareholder does not liquidate its invest-ment, but merely exchanges shares. This argumentappears to be more persuasive when the owner of theshares is an individual, since the tax legislation makesit clear that a capital gain only arises to an individualwhen there is a sale, so that a simple exchange doesnot constitute a taxable event. Neither the Federal TaxAdministrative Court nor the Federal Tax JudicialCourt has yet resolved this controversy.

It should be noted that, where either of the above al-ternatives is used, the tax authorities may deem thetransaction to be invalid if it lacks a reasonable eco-nomic purpose (such as is likely to be the case whenthe ‘‘seller’’ leaves the company shortly after the trans-action, or when the traded company is merely a cashvessel and not an operating entity). In such circum-stances, the transaction could be considered a sham,the seller could be assessed accordingly and, insteadof the regular fine of 75% of the tax due being im-posed, a fine of 150% may be imposed.


IV. Financing the Transaction With Debt

A. General Rules

Assuming the FC buyer is acquiring assets or sharesthrough a Brazilian subsidiary, the following rules willapply if the transaction if financed with debt.

Under Brazilian tax law, for a particular item of ex-penditure to be deductible, the item must comply withthe general rules on deductibility. Under these rules,for an expense to be deductible, it must be ‘‘usual, op-erational and necessary.’’ Expenses are usual, opera-tional and necessary if they: (1) are effective (i.e., thereis an actual reason for incurring them); (2) are re-quired, reasonable, and appropriate for the perfor-mance of the taxpayer’s business activities or themaintenance of its assets; and (3) benefit the taxpayerand not another party.

Usually, financing expenses are considered opera-tional unless they relate to resources obtained for pur-poses other than those of the business’ regularactivities. In summary, if an expense, including an in-terest expense, meets all of the above requirements, itwill, in principle, be deductible (subject, in the case ofinterest, to the additional rules described below).

B. Limits on Deductibility Under Thin CapitalizationRules

Article 24 of Law 12,249/10 provides that interest paidor credited by a Brazilian company to a related indi-vidual or legal entity1 resident or domiciled abroad(although Article 24 does not apply to interest paid orcredited to a recipient resident in a low-tax jurisdic-tion2 or subject to a privileged tax regime3) will onlybe deductible from the Brazilian company’s CIT baseif: (1) the interest payments are necessary for the com-pany’s business activities; and (2) the amount of thecompany’s debt owed to the related party, on the dateof recognition of the interest expense, is not higherthan twice the value of the equity investment that therelated party holds in the Brazilian company mea-sured by reference to the company’s net worth.

In addition, the value of all the Brazilian company’sdebt owed to foreign related parties, on the date ofrecognition of the interest expense, cannot be higherthan twice the value of all the equity investments thatall such related parties hold in the Brazilian companymeasured by reference to the company’s net worth.

Cases in which payments of interest are made by aBrazilian company to an individual or a legal entitythat is resident or domiciled in a low-tax jurisdictionor that is subject to a privileged tax regime are gov-erned by the provisions of Article 25 of Law 12,249/10.Under Article 25, such interest payments will only bedeductible from the Brazilian company’s CIT base if:(1) the payments are necessary for the company’sbusiness activities; and (2) the amount of all debtsowed to all individuals and entities located in low-taxjurisdictions or subject to privileged tax regimes doesnot exceed 30% of the Brazilian company’s net worth.

Under both Article 24 and Article 25, all forms of fi-nancing, whatever their terms, must be taken into ac-count for purposes of calculating the indebtednesslevel of the Brazilian company, regardless of whetherthe relevant contract is registered with the Brazilian

Central Bank. Furthermore, the provisions of Articles24 and 25 apply to all debt transactions of a Brazilianentity in which a guarantor, an agent or an intermedi-ary is, respectively, a related party, or a party locatedin a low-tax jurisdiction or subject to a privileged taxregime.

Where a Brazilian company’s debt exceeds thelimits set forth in Articles 24 and 25, the amount of theinterest related to the excess will be considered unnec-essary and, therefore, will not be deductible for pur-poses of calculating the company’s taxable base forCIT purposes.

It is important to note that the fact that the excessinterest amount is not deductible does not preventwithholding income tax from being imposed when therelevant interest payments are made to the nonresi-dent recipient and also will not lead to the amountbeing reclassified as a dividend.

B. Transfer Pricing

Transactions entered into by a Brazilian legal entitywith a nonresident that is resident in a low-tax juris-diction or subject to a privileged tax regime or with anonresident that is a related party (wherever resident)are within the scope of the Brazilian transfer pricingrules.

In relation to the deduction of interest, Law 12,766/2012 provides that interest on related-party loans isonly deductible up to specified maximum rates as fol-lows:s Fixed-interest-rate U.S. dollar loans: the maximum

deductible rate is the market rate on sovereignbonds issued by the Brazilian government on the ex-ternal market, indexed in U.S. dollars;

s Fixed-interest-rate Brazilian real loans: the maxi-mum deductible rate is the market rate on sovereignbonds issued by the Brazilian government on the ex-ternal market, indexed in Brazilian real; and

s All other loans: the maximum rate is the six-monthLIBOR for the appropriate currency.

A spread margin of 3.5% (the margin percentage isset by the Treasury Minister) is added to the aboverates in the case of inbound loans.

C. Tax on Exchange Transactions

If the FC buyer finances the acquisition of assets orshares through a Brazilian finance institution, theloan will be subject to the tax on exchange transac-tions (IOF), specifically:s ‘‘IOF-Credit’’ at a 0.0041% daily rate, limited to

1.5%, plus an additional rate of 0.38% of the amountlent; and

s ‘‘IOF- Exchange’’ levied on foreign currency ex-change transactions entered into to enable the out-flow and inflow of funds, at the rate of 0.38%(outflow and inflow).

It should be noted that, since IOF-Exchange is onlylevied on effective exchange transactions, it may bepossible to argue that IOF-Exchange should not leviedon the kind of transaction contemplated here if theamount used to pay for the assets or shares is remit-ted directly to a seller resident in Brazil.

On the other hand, if a Brazilian entity (such as asubsidiary of the FC buyer) enters into a loan agree-


ment, IOF-Credit is not levied, but IOF-Exchange islevied at an increased rate of 6% where the loan has aterm of 360 days (one year) or less, as demonstratedby loan registration information recorded with theBrazilian Central Bank. The 6% IOF is levied on theamount of the loan. Loans with a term of more than360 days are not subject to IOF-Exchange.

V. Amortization of Goodwill

Another matter that needs to be addressed whenstructuring a cross-border M&A involving a Braziliantarget company is the legal provision that allows theamortization of goodwill acquired on the acquisitionof the equity of a Brazilian entity by another Brazilianentity.

Before the new Brazilian accounting standardscame into effect, acquired goodwill could be amor-tized for tax purposes, provided there was documen-tation and evidence to show that the acquiredgoodwill arose from the future profitability of the in-vested company. In addition, the target company hadto merge with the buyer that acquired the goodwill.

The new accounting standards changed the proce-dure for allocating the value of an equity investmentto acquired goodwill, but not the tax benefit itself. Ac-cordingly, as from the entry into effect of Law 12.973/2014, the value of an equity investment is to beallocated among the accounting entries in the follow-ing order (the ‘‘Purchase Price Allocation’’ or PPA): (1)net equity; (2) asset value surplus or decreased value(i.e., the difference between the fair value of the netassets acquired and the net equity of the company in-vested in); and (3) future profitability goodwill, whichcorresponds to the residual value that cannot be in-cluded in items (1) or (2) (i.e., after the proper alloca-tion of the total equity value into net equity and assetvalue surplus/decrease). The goodwill so determinedmay then be amortized at a maximum rate of 1/60 permonth. These entries must be recorded in separatesub-accounts, and the surplus of assets must be basedon a report prepared by an independent expert to befiled and recorded with the proper authorities.

Furthermore, it should be noticed that the ability toamortize goodwill for CIT purposes requires that thetransaction giving rise to the goodwill is entered intobetween unrelated parties. Thus, goodwill recordedwith respect to transactions between related parties isnot allowed to be amortized for CIT purposes.

VI. Use of Acquisition Vehicle

There are other, non-tax aspects that need to be con-sidered when deciding to invest in Brazil through asubsidiary (an ‘‘investment vehicle’’). For tax pur-poses, one of the most important reasons for usingsuch a vehicle is that it affords the possibility of amor-tizing the goodwill acquired on the acquisition ofshares. As noted in item V., above, it is only possible toamortize goodwill for tax purposes when there is amerger or spin-off of the investing company into theinvested company. In these circumstances, only a Bra-zilian entity acquiring the goodwill will trigger theamortization for CIT purposes.

Nonetheless, there must be relevant economicgrounds reasons for structuring a transaction through

an investment vehicle beyond its tax benefits (such asthe ability to amortize goodwill), since the tax au-thorities may challenge the transaction if there is noevidence to justify using an investment vehicle to ac-quire a Brazilian company (for example, a regulatoryrequirement) or the vehicle lacks substance.

In practice, the substance-over-form concept is ap-plied with respect to all transactions, and there is nostatutory or case law that is conclusive in relation tothe minimum standards that must be met for the taxauthorities to accept a transaction.

VII. Carryfoward of Net Operating Losses

An entity may carry forward indefinitely tax losses in-curred in previous fiscal years, but such carried for-ward losses may be set off only to the extent of 30% ofthe taxable income of any given year.

Net operating losses (NOLs) may only be set-offagainst operational taxable income and the 30% limi-tation applies in this context as well. Usually, a gain orloss from the sale of inventory is considered to be again or loss from an operational activity, while a gainor loss from the sale of assets (equipment, buildings,land, etc.) is considered to be a gain or loss from anon-operational activity.

Where there is a change in the ownership of a com-pany as a result of an M&A transaction, existing NOLsmay only be used if the core business of the targetentity remains the same between the tax period inwhich the losses were incurred and the tax period inwhich they are used. Thus, if there is a change in thecontrol of the target and a modification of its corebusiness, previously accumulated NOLs will be lostand consequently will not be available for set off.

VIII. BEPS and Brexit

Although Brazil has recently filed a formal request tobecome an OECD member, it is difficult to anticipateany impact related to that action (which would in-clude the BEPS project).

The fact is that, in practice, Brazil adopts a neutralposition in relation to OECD initiatives since it wishesto maintain its independence regarding tax policy andthe adoption of international tax standards. As a con-sequence, in practice, Brazil has adopted only a fewBEPS-inspired measures, such as the Voluntary Dis-closure Program and the exchange of informationbased on bilateral and multilateral agreements.

Therefore, neither the BEPS initiative nor theUnited Kingdom’s exit from the European Union,should have any impact on the transactions analysedhere from a tax perspective.

IX. Non-Tax Factors

The structures of M&A transactions involving FCbuyers and Brazilian sellers, as well as the terms of therespective transaction documents, are similar to thoseused in other jurisdictions. Typically FC buyers andhome country (here Brazilian) sellers will completenon-disclosure agreements, letters of intent, share orasset sale and purchase agreements, and other com-monly used transaction documents.

The typical M&A agreement will provide for tax rep-resentations, warranties and indemnities. These are


particularly important because numerous (and, notuncommonly, overlapping) taxes may be imposed andoften extremely complex Brazilian municipal, stateand federal tax laws and regulations will apply. As aresult, virtually every Brazilian company is a party tojudicial and administrative proceedings initiated byor against the Brazilian tax authorities.

The general statute of limitations for indemnifica-tion claims resulting from a breach of contract (in-cluding losses arising out of incorrect or misleadingrepresentations and warranties) is three years fromthe date the respective loss was incurred or the FCbuyer acquired knowledge of the breach. Brazilianlaws, however, allow the parties to agree contractuallyto a different statute of limitations, which they willvery often do.

Other non-tax factors that FC buyers should takeinto account when acquiring Brazilian shares orassets include:

s Restrictions on foreign ownership: an FC buyermay be prevented from acquiring more than a speci-fied percentage ownership interest in certain regu-lated Brazilian businesses. Controlled sectors andassets include: (1) the financial sector; (2) miningand exploration for mineral and energy resources;(c) farmland; and (d) the broadcasting and newsmedia sector;

s Registration with the Central Bank of Brazil: invest-ments made by FC buyers in shares of Braziliancompanies must be properly registered with theCentral Bank of Brazil. Failure to so register mayprevent an FC buyer from remitting abroad divi-dends and other distributions from the acquiredcompany, as well as giving rise to other problems;

s Non-compete conditions: a non-compete provisionneeds to be carefully crafted with respect to, at least,its scope, its territorial coverage and the period cov-ered in order to avoid its being struck down by thecourts on constitutional and labor grounds; it is notuncommon for the parties to agree to separate, rea-sonable non-compete compensation;

s Non-compete conditions: a non-compete provisionneeds to be carefully crafted with respect to, at least,its scope, its territorial coverage and the period cov-ered in order to avoid its being struck down by thecourts on constitutional and labor grounds; it is notuncommon for the parties to agree to separate, rea-sonable non-compete compensation;

s Antitrust notification and approval: transactionsthat meet certain criteria must be cleared with theBrazilian Administrative Council for Economic De-fense (Conselho Administrativo de Defesa Economicaor CADE) prior to closing. In assessing a transac-tion, the CADE will analyze whether: (1) the transac-tion has actual or potential effects in Brazil; (2) theparties to the transaction meet certain revenuethresholds in Brazil; and (3) the transaction mayresult in the forming of a ‘‘concentration,’’ as definedin Brazil’s Competition Laws.

If a share purchase agreement provides for arbitra-tion, it is generally understood that the parties maychoose between Brazilian law and some other law(typically, the law of the state of New York) as the gov-erning law of the agreement. Otherwise, Brazilian law

will typically govern the agreement. Shareholdersagreements must always be governed by Brazilianlaw.

NOTES1 ‘‘Related party’’— the following persons are related to aBrazilian entity: (1) the entity’s foreign headquarters; (2)the entity’s foreign branches; (3) the entity’s controllingpartners or shareholders (whether individuals or legal en-tities), foreign affiliates and foreign controlled legal enti-ties; (4) any foreign legal entity, if that legal entity and theBrazilian legal entity are under common corporate con-trol or common management, or when at least 10% of thecapital of both entities is held by the same individual orlegal entity; (5) any individual or legal entity domiciledabroad that, together with the Brazilian legal entity, holdsan equity stake in the capital of a third legal entity, if thetotal investment qualifies the first two parties as control-ling shareholders or affiliates of the third legal entity; (6)any individual or legal entity domiciled abroad that par-ticipates with the Brazilian entity in any enterprise undera consortium or condominium arrangement, as definedby the Brazilian legislation; (7) any individual domiciledabroad who is related by blood or marriage, up to thethird degree, to, or any spouse or significant other of, amanager, controlling partner or controlling shareholderof the Brazilian legal entity, taking into account directand indirect investments; (8) any individual or legalentity domiciled abroad that has exclusive rights as anagent, a distributor or a dealer of the Brazilian legalentity, to purchase goods, services or rights; and (9) an in-dividual or legal entity domiciled abroad in relation towhom/which the Brazilian legal entity has exclusiverights, as an agent, a distributor or a dealer, to purchaseand sell goods, services or rights.2 ‘‘Low-tax jurisdiction’’— low tax jurisdiction is a juris-diction whose legislation does not allow access to infor-mation about the shareholding structure of legal entitiesor their ownership, or the identity of the beneficialowners of income earned by nonresidents, and/or a juris-diction that does not tax income or taxes income at maxi-mum rates that are lower than 20%, taking into account:(1) the tax legislation applicable to individuals or legal en-tities, depending on the nature of the person with whom/which the relevant transaction is performed; and (2)separately, the taxation of labor and capital (literal trans-lation of the law).Listed low-tax jurisdictions are: Andorra; Anguilla; Anti-gua and Barbuda; Aruba; Ascension Island; the Bahamas;Bahrain; Barbados; Belize; Bermuda; Brunei; CampioneD’Italia; the Channel Islands (Alderney, Guernsey, Jerseyand Sark); the Cayman Islands; Cyprus; Singapore; theCook Islands, Costa Rica; Djibouti; Dominica; the UnitedArab Emirates; Gibraltar; Granada; Hong Kong; Kiribati;Labuan; Lebanon; Liberia; Liechtenstein; Macao; Ma-deira; the Maldives; the Isle of Man; the Marshall Islands;Mauritius; Monaco; Montserrat; Nauru; the NetherlandsAntilles; Niue; Norfolk Island; Panama; the Pitcairn Is-lands; French Polynesia; Qeshm; American Samoa; West-ern Samoa; San Marino; Saint Helena; Saint Lucia; SaintKitts and Nevis; Saint Peter and Saint Miguel Islands;Saint Vincent and the Grenadines; the Seychelles; theSolomon Islands; Swaziland; Oman; Tonga; Tristan daCunha; Turks and Caicos; Vanuatu; the British Virgin Is-lands; and the U.S. Virgin Islands3 Definition of a privileged tax regime—A privileged taxregime is a regime that satisfies one or more of the follow-ing criteria: (1) it does not tax income, or taxes income at


maximum rates that are lower than 20%; (2) it providestax advantages to nonresidents (whether individuals orlegal entities) conditioned on the non-performance ofsubstantial economic activities in the relevant jurisdic-tion, or without requiring the performance of substantialeconomic activities in the relevant jurisdiction; (3) it doesnot tax income earned outside the relevant jurisdiction,or taxes such income at maximum rates that are lowerthan 20%; and/or (4) it does not allow access to informa-tion about the shareholding structure of legal entities, theownership of assets and rights or economic transactionsperformed.The listed privileged tax regimes are the regimes appli-cable to: (1) a Sociedad Anonima Financiera de Inversion(SAFI) under the legislation of Uruguay until December31, 2010; (2) a holding company under the legislation ofDenmark or the Netherlands, if such company does notcarry on significant economic activities; (3) an Interna-

tional Trading Company (ITC) under the legislation ofIceland; (iv) an Offshore KFT under the legislation ofHungary; (5) a limited liability companies (LLC) in a U.S.State that is formed by nonresidents and is not subject tofederal income tax, under the legislation of the UnitedStates; (6) an Entidad de Tenencia de Valores Extranjeros(ETVE) under the legislation of Spain; (7) an Interna-tional Trading Company (ITC) and an International Hold-ing Company (IHC) under the legislation of Malta; and(8) any type of entity established in Switzerland whoseincome is taxed at a rate lower than 20%. The inclusion ofthe regimes applicable to Dutch holding companies andETVEs was challenged by the Dutch and Spanish govern-ments and these regimes have been temporarily excludedfrom the list by Declaratory Executive Acts (ADEs) 10/10and 22/10, respectively, until a final decision is handeddown on the matter.


CANADARobert McCulloghDeloitte Canada, Montreal

I. Acquisition by Foreign Country Buyer ofCanadian Business From Canadian Sellers

In Canada, a taxable acquisition of a Canadian busi-ness can generally take the form of the purchase of theshares of the target corporation or the purchase of theassets of the business from the corporation that ownsthem.1

A. Share Sale—Tax Treatment for Vendors

Canadian resident individuals are subject to Canadianincome tax on 50% of any capital gains realized on thedisposition of property at their marginal personalincome tax rates. A lifetime capital gains exemption isavailable for Canadian resident individuals to reducecapital gains with respect to the sale of certain quali-fying shares, up to a current lifetime maximum ofCan. $835,716.2 In order for shares to qualify for theexemption, they generally must satisfy the followingcriteria:s The shares must be shares of a Canadian-controlled

private corporation, and 90% or more of the fairmarket value of the corporation must be attribut-able to assets used principally in an active businesscarried on in Canada by the corporation;

s The shares must have been held by the individualfor two years prior to the date of the disposition; and

s Throughout the two-year period prior to the date ofthe disposition, more than 50% of the value of theassets of the corporation must have been used in anactive business carried on by the corporation inCanada.

Capital losses of the Canadian vendor may be car-ried back for three taxation years and carried forwardindefinitely to reduce a capital gain.

Canadian corporations are subject to Canadianincome tax on 50% of any capital gains realized on adisposition of property. The tax rate applicable to thesale varies depending on whether the Canadian corpo-rate vendor is or is not a Canadian-controlled privatecorporation. Capital losses of the Canadian corporatevendor may be carried back for three taxation yearsand carried forward indefinitely to reduce a capitalgain.

On July 18, 2017, the federal government releasedproposed changes to certain detailed rules concerningthe lifetime capital gains exemption, as well as capitalgains realized by Canadian-controlled private corpo-

rations.3 The government has initiated a consultationon the proposals, so the final rules are yet to be deter-mined. Taxpayers and their advisors should considerthe impact of these proposed changes on their specifictransaction.

Where shares of a corporation are disposed of in ex-change for shares of another corporation, a deferral ofthe realization of any accrued gain may be availablefor Canadian income tax purposes where the sharesdisposed of are shares of a taxable Canadian corpora-tion and the shares received in exchange are shares ofanother taxable Canadian corporation;4 however, nosuch deferral is available on the disposition of sharesof a Canadian corporation in exchange for shares of aforeign corporation. As a result, exchangeable shareacquisition structures are often considered in order toprovide deferral opportunities to Canadian residentvendors of shares of a Canadian corporation wherethe consideration includes shares of a foreign residentcorporation. These transactions are generally struc-tured using a Canadian subsidiary of the foreign pur-chaser to acquire the shares of the Canadian target inexchange for shares of the Canadian subsidiary thatare exchangeable into shares of the foreign purchaser.Such a structure may provide for a Canadian residentvendor to dispose of its shares of the Canadian targeton a tax-deferred basis, while participating in thesame economics as a shareholder of the foreign pur-chaser.

The sale of shares for Canadian indirect tax pur-poses is generally considered to be the supply of a fi-nancial instrument and, as such, will have no indirecttax consequences.

B. Asset Sale—Tax Treatment for Vendors

On a disposition of assets, a Canadian corporatevendor will be subject to income tax with respect toany gain and then may distribute its net-after tax pro-ceeds to its shareholders. The income tax cost to thecorporate vendor will depend on the nature of assetssold and their tax basis. A capital gain, which is 50%taxable, may be realized on the sale of capital propertyin excess of its cost. Recapture of capital cost allow-ance (i.e., previously claimed tax depreciation), whichis 100% taxable, may be realized on the sale of depre-ciable property (as of 2017, goodwill is a depreciableproperty—prior to 2017, the tax treatment was differ-ent from that described in this paper5).


There are no statutory rules in the Act concerningthe allocation of purchase price. There is jurispru-dence that supports the position that a purchase priceallocation agreed to by arm’s length parties should berespected by the tax authorities, subject to an objec-tive reasonability standard.

The shareholders of the corporate vendor are thensubject to tax on the distribution of the after-tax pro-ceeds. The Canadian taxation system was designedwith the intention that the ultimate tax paid on a saleof assets by a Canadian corporate vendor with Cana-dian resident shareholders should be the same regard-less of whether the shareholders held the assetsdirectly or indirectly through a Canadian corporation,though there can be instances where this does notoccur. It should be noted that this integration prin-ciple does not apply where a Canadian corporatevendor has non-resident shareholders; as noted ear-lier, non-resident shareholders may not be subject totax on the disposition of shares of a Canadian corpo-ration, whereas the shareholders would be subject towithholding taxes on dividend distributions of theafter-tax proceeds of an asset sale by the corporation(and such proceeds would be reduced by any corpo-rate tax liability realized by the corporation on theasset sale). As noted previously, taxpayers and theiradvisors should consider the potential impact of theJuly 18, 2017, proposals.6

A Canadian resident vendor may transfer certaineligible property (which generally includes depre-ciable capital property, capital property and inventory,among other items) to a taxable Canadian corporationon a tax-deferred basis in exchange for considerationthat includes shares of the capital stock of the pur-chaser, provided the vendor does not receive non-share consideration in excess of the vendor’s cost ofthe property it disposed of.7 The purchaser and thevendor must file a joint election with respect to thetransfer to treat it as tax-deferred. If such non-shareconsideration is in excess of the vendor’s cost of theproperty, such excess may result in an income inclu-sion or capital gain realization by the vendor to theextent of such excess. The acquiring entity will inherita lower tax cost in the assets on a tax-deferred asset-for-share exchange than if it had acquired the assetson a transaction that was taxable to the vendor.

C. Share Purchase—Tax Treatment for Purchasers

1. Canadian Acquisition Company

Where a non-resident acquires shares of a Canadiancorporation, it is generally beneficial to use a Cana-dian corporation as the purchaser.

The paid-up capital of a class of shares can gener-ally be returned to a shareholder as a Canadian tax-free distribution. Paid-up capital is generallycomputed using the legal stated capital of the sharesof a Canadian corporation as a starting point, and iscomputed on a class-by-class basis. Since paid-upcapital is determined with respect to a class of shares,as opposed to the shareholder, the paid-up capital ofshares does not change when the shares are sold.Shares of the Canadian target corporation may have apaid-up capital that is less than the current purchaseprice. By establishing its own Canadian acquisition

corporation, a non-resident purchaser can ensure thatthe paid-up capital of the shares it holds is equal to thecurrent purchase price, thereby maximizing theamount that can be returned without assessment ofCanadian withholding tax (discussed below). Suchfair market value paid-up capital is also important forpurposes of the application of the ‘‘foreign affiliatedumping’’ rules, which are discussed in I.C.6., below).

2. Deduction of Financing Costs

The Canadian income taxation system does not allowfor consolidation. As a result, in the context of an ac-quisition, it is important that the costs of any debt in-curred by the Canadian acquisition company areincurred directly in a Canadian corporation that hastaxable income. Where the Canadian acquisition cor-poration has no operations of its own, the acquisitiondebt must be ‘‘pushed down’’ to a taxable Canadiantarget operating entity in order to allow for the use ofthe interest deduction on any debt financing (subjectto the interest deductibility analysis and the applica-tion of the thin capitalization rules, as discussed infurther detail in I.C.3., below).

The most typical method for accomplishing such apush-down involves a legal combination of the Cana-dian acquisition company with the Canadian targetcorporation by way of an amalgamation (i.e., merger)of the two entities or a wind-up (i.e., liquidation) ofthe target entity into the purchaser. Generally, amal-gamations are more common than wind-ups becauseof their simpler legal requirements and related shortertime frames.

3. Interest Deductibility and Canadian ThinCapitalization Rules

Interest paid or payable in a taxation year is generallydeductible for Canadian tax purposes if it is paid/payable pursuant to a legal obligation to pay intereston borrowed money for purposes of earning incomefrom a business or property (subject to transfer pric-ing restrictions and the reasonability of the interestrate).8

However, a deduction for interest paid or payablewith respect to outstanding debt to specified non-residents may be denied pursuant to the Canadianthin capitalization rules where the average of themonthly highest balance of the outstanding debtsowed to non-resident shareholders of the debtor cor-poration that (together with non-arm’s length per-sons) hold shares with more than 25% of the votes orfair market value of the Canadian debtor (or non-resident persons that are at non-arm’s length withsuch shareholders) exceeds 1.5 times the equityamount of the debtor corporation for the year.9 Wherethis 1.5:1 debt-to-equity ratio is exceeded, a pro rataportion of the interest on the outstanding debt is notdeductible for Canadian income tax purposes. Fur-thermore, such denied interest is deemed to be a divi-dend subject to Canadian withholding tax on anaccrual basis.

It is important to note that a non-resident corpora-tion must hold shares of the Canadian corporation di-rectly for the paid-up capital and contributed surplusof those shares to be considered equity for purposes ofthe thin capitalization rules. Therefore, issues may


arise, for example, where a non-resident parent makesa loan to a second-tier Canadian subsidiary, i.e., a sub-sidiary of its direct Canadian subsidiary, as that enti-ty’s shares are held by a Canadian resident.

4. Repatriation of Profits

Canadian cash flow may be repatriated to a non-resident purchaser by way of a few methods, namely:s dividends,s return of capital,s payment of interest on intercompany debt, ands repayment of intercompany debt.

Dividends paid to non-resident shareholders of aCanadian corporation are subject to Canadian with-holding tax at the rate of 25%, though such rate maybe reduced pursuant to the terms of an applicableincome tax treaty.

A return of the paid-up capital with respect to theshares of a Canadian corporation to a non-residentshareholder is not subject to Canadian withholdingtax. There is no requirement for Canadian purposesthat earnings be distributed prior to paid-up capital.The amount of the return of paid-up capital reducesthe non-resident shareholder’s tax cost in the shares ofthe Canadian company; if the return of capital ex-ceeds the paid-up capital available, the excess istreated as a deemed dividend subject to withholdingtax. A return of paid-up capital may also have an effecton the application of the thin capitalization limita-tion.

A repayment of loan principal is not subject to with-holding tax. Foreign exchange planning is advisablefor both the lender and the borrower when imple-menting a debt financing; foreign exchange gains real-ized by the Canadian company on the repayment ofprincipal are taxable, and if the gain is capital innature, only 50% of the gain is included in income.

Though interest payments made to arm’- length per-sons are not subject to Canadian withholding tax, Ca-nadian withholding tax at the rate of 25% is imposedon interest paid to non-arm’s-length persons, thoughsuch rate may be reduced pursuant to the terms of anapplicable income tax treaty. Canada recently intro-duced back-to-back loan rules that can result in addi-tional withholding tax, depending on the source offunding of intercompany debt.

5. Step-up Opportunities

On the acquisition of the shares of a Canadian corpo-ration, the underlying assets of that corporation gen-erally retain their historical cost basis (includingdepreciable basis). However, a transaction—commonly referred to as a ‘‘bump’’ transaction10—may achieve an increase of the tax cost of certain non-depreciable capital property (including shares of asubsidiary), an underlying partnership or land of aCanadian target following the acquisition of 100% ofthe shares of the target. (It should be noted that depre-ciable property, including goodwill, is not eligible fora bump transaction.)

A bump may be achieved by way of either an amal-gamation of a Canadian purchaser with the Canadiantarget corporation acquired or a wind-up of the Cana-dian target corporation into the Canadian purchaser.

The available bump amount is generally determinedto be the Canadian purchaser’s tax cost in the sharesof its subsidiary less the tax cost of the net assets of theCanadian target corporation. The bump rules containdetailed technical provisions that limit the availabilityof a bump in certain situations.

Given that bump transactions can result in thestep-up of the tax cost of non-depreciable capitalproperty, such transactions are generally advanta-geous where a post-acquisition sale of certain targetassets is contemplated, where there are foreign sub-sidiaries of a Canadian target that the purchaserwishes to reposition within its corporate group, orwhere it is wished to facilitate the push-down of debtinto subsidiaries of the Canadian target.

6. Canadian Foreign Affiliate Rules and ForeignAffiliate Dumping

The Canadian foreign affiliate dumping rules were in-troduced to deter cross-border transactions that wereviewed as inappropriately eroding the Canadian taxbase.11 Generally, these rules may apply when a Cana-dian resident corporation that is controlled by a non-resident corporation makes an investment in a foreignaffiliate. If these rules apply, a dividend equal to theamount of the investment is deemed to have been paidto the non-resident parent corporation and is subjectto Canadian withholding tax, though an election maybe filed to reduce such deemed dividend to the extentof the paid-up capital of the shares of the Canadiancorporation.

7. Additional Rules on an Acquisition of Control

An acquisition of shares by an arm’s-length purchasertypically results in an acquisition of control of thetarget corporation for Canadian tax purposes. An ac-quisition of control of a Canadian corporation has cer-tain Canadian income tax implications, including:s An acquisition of control results in a deemed taxa-

tion year-end for Canadian tax purposes immedi-ately before the acquisition of control.12 This stubperiod is considered a full taxation year for aging oflosses and other timing matters that are measuredfrom a taxation year-end.

s Canadian tax law provides for certain loss stream-ing rules where there has been an acquisition of con-trol. The rules are dependent on the types of lossesgenerated, which may be categorized as businesslosses, property losses or capital losses. Any capitallosses or property losses will not be available in taxa-tion years following an acquisition of control.Losses from a business may be carried forward (sub-ject to usual carryforward restrictions) after an ac-quisition of control.13 Such losses may be applied ina taxation year after the acquisition of control pro-vided the business that generated the losses is car-ried on throughout the particular taxation year forprofit or a reasonable expectation of profit. Thelosses may be used against the income from thatbusiness or a ‘‘similar’’ business carried on by thecorporation. Immediately prior to an acquisition ofcontrol, the target will be deemed to have disposedof its capital property at fair market value to theextent the assets have any inherent unrealizedlosses, i.e., where tax basis exceeds the fair market


value of the asset. Where the taxpayer owns non-depreciable capital property (i.e., land or shares),capital losses may be realized in the taxation yearending immediately before the acquisition of con-trol.

s An election may be available to recognize any ac-crued gain, i.e., where fair market value exceeds taxbasis, on capital property (for example, share invest-ment in subsidiaries) in order to absorb any lossesthat could not be otherwise utilized.14 Where theelection is made, the losses are embedded into thetax basis in the capital property, reducing gain/income in future taxation years.

s Similarly, for depreciable assets, there is a deemedrealization of any accrued losses on an acquisitionof control. This adjustment is treated as a tax depre-ciation (i.e., capital cost allowance) claim for Cana-dian income tax purposes. This deduction maycreate or increase a loss for the taxation year endingimmediately before the acquisition of control. Thededuction should be considered to be a loss from thebusiness in which the depreciable property is used.

D. Asset Purchase—Tax Treatment for Purchasers

On the acquisition of assets, the purchaser shouldobtain fair market value tax basis in the assets ac-quired and should therefore benefit from the futuretax deductions associated with the increase in any de-preciable tax basis (though certain limitations applyto the increase in tax basis with respect to assets ac-quired from non-arm’s length persons15).

Depreciable tax basis would, starting in 2017, in-clude 100% of any goodwill or other unlimited life in-tangibles, which will be deductible for tax purposes ata rate of 5% using a declining balance method.16

The Goods and Services Tax/Harmonized Sales Tax(GST/HST) is a federally administered value-addedtax that is imposed on the provision of most goods,services, and intangible personal property in Canada.The provinces of New Brunswick, Nova Scotia, New-foundland, Ontario, and Prince Edward Island have afully harmonized system with the federal governmentunder a single federal administration, known as theHST. In addition to the GST/HST, some provinceshave a second layer of tax that is administered provin-cially. The province of Quebec administers a separatevalue-added tax, the Quebec Sales Tax (QST), which islevied on the provision of most goods, services, and in-tangible personal property in Quebec. The provincesof British Columbia, Manitoba, and Saskatchewaneach levy and separately administer a more tradi-tional end-use retail sales and use tax (ProvincialSales Tax or PST) on the provision and use of mostgoods and certain services purchased or consumed inthe specific province. The province of Alberta does notlevy a PST.

A sale of assets would be subject to GST/HST and/orQST. As both the GST/HST and the QST are value-added taxes, such amounts would generally be recov-erable to the purchaser. On the sale of all orsubstantially all17 of the property necessary for thepurchaser to carry on the business or part of the busi-ness, an election18 may be available for GST/HST/QSTpurposes if certain conditions are fulfilled so that noGST/HST/QST would apply to the transaction, thus

reducing cash flow concerns. Additionally, related par-ties engaged exclusively in taxable commercial activi-ties may be entitled to utilize an election19 to treatsupplies made between the parties as having beenmade for nil consideration for GST/HST/QST pur-poses in some circumstances. This would also mini-mize cash flow concerns. Where property is located inthe province of Manitoba, British Columbia or Sas-katchewan, PST may also be applicable to the sale ofassets from those jurisdictions. The PST would gener-ally be a cost to the purchaser.

Local land transfer taxes may also apply on the saleof real property.

II. Share Acquisition From Foreign Sellers

In general, non-residents of Canada (that do not carryon a business in Canada) should not be subject to Ca-nadian taxation on the disposition of shares of a cor-poration unless those shares are considered to betaxable Canadian property (TCP).20 Shares of a pri-vate corporation may be TCP if, at any time in the 60-month period preceding their disposition, more than50% of the fair market value of the shares was deriveddirectly or indirectly from real or immovable propertysituated in Canada, Canadian resource property,timber resource properties, or options with respect tosuch properties. Shares of a publicly traded corpora-tion may also be considered to be TCP if the afore-mentioned 50% threshold is surpassed and thevendor, together with non-arm’s length persons, hold25% or more of the issued shares of any class of thecapital stock of the corporation.

Under many of Canada’s current tax treaties, the cir-cumstances in which a non-resident may be taxed ona capital gain in Canada is further narrowed. Typi-cally, such a treaty effectively eliminates the 60-month‘‘look-back’’ period requirement, as well as the Cana-dian taxation of gains with respect to publicly tradedshares. Treaty developments should be monitoredsince Canada signed the Multilateral Convention toImplement Tax Treaty-Related Measures to PreventBase Erosion and Profit Shifting (MLI) in June 2017,and has announced its intention to add limitation onbenefits (LOB) provisions to its treaties on a bilateralbasis.

A non-resident individual is not eligible to claim thecapital gains exemption described above with respectto a gain on the sale of shares of a Canadian company.

In the context of an asset sale, TCP generally in-cludes property used by a taxpayer in a business car-ried on in Canada. In general, the sale of Canadianbusiness assets by a non-resident is taxable under do-mestic law, and Canada’s tax treaties provide thatincome and gains arising from the sale by an enter-prise of the treaty partner country of business assetsassociated with a Canadian permanent establishment(PE) (including gains from the sale of the PE itself) aresubject to tax in Canada.

Where a non-resident person disposes of TCP, otherthan certain excluded property (which includes,among other things, property the gain on which isexempt from Canadian tax pursuant to a tax treaty),the purchaser is required to withhold and remit 25%of the purchase price to the Canadian tax authoritiesabsent the vendor obtaining a clearance certificate


(known as a ‘‘Section 116 Clearance Certificate’’) fromthe Canada Revenue Agency. Similar rules applywhere the property is a taxable Quebec property, inwhich case the rate of withholding is 12.875%. Theamounts withheld are an advance payment of tax andcan be credited against the non-resident’s actual Ca-nadian (and/or Quebec) income tax liability.

III. BEPS

The main area discussed in this paper where BEPS ac-tions are expected to have an impact would be theanti-treaty-shopping measures.

On June 7, 2017, representatives from 68 jurisdic-tions, including Canada, gathered at the OECD’s head-quarters in Paris for the signing of the MLI. As at thetime of signing, Canada registered provisional reser-vations with respect to most provisions of the MLI,meaning that such provisions will not, pending thefuture narrowing or withdrawal of such reservations,apply to modify Canada’s treaties. Canada has ad-opted those provisions that set out the BEPS mini-mum standards for preventing treaty abuse, as well asthe provisions relating to dispute resolution.

A subgroup of 25 jurisdictions, including Canadaand 16 EU Member States, have opted into the man-datory binding arbitration provisions, based on theprinciples set out in the final report on BEPS Action14 on making dispute resolution mechanisms moreeffective.

Canada has indicated that it will continue to evalu-ate its positions with respect to the MLI provisions,and it will ultimately decide to withdraw or keep itsreservations at the time the MLI is ratified.

Canada has, at the time of signing, listed 75 of its ex-isting tax treaties as covered tax agreements. Notableexceptions are the Canada-Switzerland and Canada-Germany tax treaties, which are in the process ofbeing renegotiated on a bilateral basis, as well as theCanada-United States tax treaty, the United States notbeing expected to sign the MLI. Additionally, theCanada-Barbados and Canada-Brazil tax treaties,among others, remain unaffected, given that such ju-risdictions have not yet signed the MLI.

As Canada has adopted the Principal Purpose Test(PPT) only and has not opted to permit the applicationof the simplified LOB in any of its covered tax agree-ments, notwithstanding the choices of other parties tosuch agreements, the simplified LOB should have noapplication to Canada’s tax treaties. The PPT appliesto deny treaty benefits with respect to a particulartransaction or arrangement where it may reasonablybe concluded, having regard to all relevant facts andcircumstances, that one of the principal purposes ofthe transaction or arrangement was to obtain thetreaty benefit. The OECD has provided very limited in-terpretative guidance on the application of the PPT.Accordingly, the widespread adoption of the PPT islikely to result in additional uncertainty as to theavailability of treaty benefits for taxpayers.

Canada has indicated an intention to negotiate,over the longer term and on a bilateral basis, a de-tailed LOB provision that would meet the BEPS mini-

mum standard, and that should, all else being equal,help to reduce some of the uncertainty associatedwith a PPT

IV. Non-Tax Factors

Tax representations, warranties, and indemnities gen-erally play a larger role in a share transaction, becausethe tax liabilities of the target corporation remain li-abilities of the target corporation after the transac-tion. Asset deals, on the other hand, often simplyinclude an indemnity for taxes of the selling corpora-tion and pre-closing taxes that relate to the purchasedbusiness. Since so few pre-closing taxes can be as-sessed against the purchaser in an asset deal, this sim-plified indemnity is adequate for a purchase ofbusiness assets.

Buyers and sellers of a Canadian business have theflexibility to designate the applicable law in the salescontract. In cross-border transactions, our experienceis that either English or New York law is standard inmulti-jurisdictional asset or stock acquisitions.

NOTES1 This paper does not address situations in which thebusiness assets are held by a partnership or trust, or inthe form of an unincorporated joint venture.2 Income Tax Act, RSC 1985, c. 1 (5th Supp.), as amended(‘‘the Act’’), section 110.6. Unless otherwise noted, allstatutory references in this paper are to the Act.3 See Canada, Department of Finance, Tax Planning UsingPrivate Corporations (Ottawa; Department of Finance,July 18, 2017).4 Subsection 85(1).5 For a discussion of the changes to the treatment ofgoodwill, see Ryan Adkin and Christopher Gimpel, Eli-gible Capital Expenditure Changes, 2016 British ColumbiaTax Conference, page 13:1 (Toronto: Canadian Tax Foun-dation, 2016).6 See note 3 above.7 See note 4 above.8 Paragraph 20(1)(c).9 Subsection 18(4).10 Paragraph 88(1)(d).11 Section 212.3. The foreign affiliate dumping rules aredescribed in Angelo Nikolakakis and Penelope Woolford,Foreign Affiliate Dumping, 2012 Conference Report, page26:1 (Toronto: Canadian Tax Foundation, 2013). Therules have undergone some amendments since that paperwas written but the paper provides a good review of acomplex set of rules at the time of their introduction.12 Subsection 249(4).13 Subsection 111(5).14 Paragraph 111(4)(e).15 Paragraph 13(7)(e).16 Schedule II of the Income Tax Regulations, Class 14.1.17 Generally considered to be 90% or more.18 Pursuant to Excise Tax Act, R.S.C. 1985, c. E-15, (ETA),section 167 and Act Respecting the Quebec Sales Tax,CQLR, c. T-0.1 (QSTA), section 75.19 Pursuant to ETA, section 156 and QSTA, section 334.20 ‘‘Taxable Canadian property’’ is defined in subsection248(1).


PEOPLE’SREPUBLIC OFCHINAPeng TaoDLA Piper, Hong Kong

I. Acquisition by Foreign Country Buyer of ChineseBusiness From PRC Sellers

It is assumed for purposes of the discussion that fol-lows that the purpose of the share or asset acquisitionis to enable the Foreign Country buyer (FC buyer) tooperate the acquired business in China.

It should be noted that in China the income tax onindividual taxpayers is different and separate from theincome tax on corporate taxpayers. For simplicity’ssake it is therefore assumed that all the parties in-volved in the scenario envisaged here are corporateentities and that the PRC individual income tax issuesare not discussed. Specifically, for purposes of thissection, it is also noted that the shareholder in thetarget PRC company or the seller is assumed to be aPRC company.

Because China has foreign exchange controls andcertain restrictions on foreign investment, it is impor-tant to understand the potential consequences of ashare acquisition as compared to those of an asset ac-quisition, so that the parties can identify a feasible ac-quisition strategy even before any tax considerationsare taken into account.

By way of background, it should be noted thatChina would require a foreign company to set up acommercial presence in China in order to operate abusiness in China. This means that a foreign companyhas to set up a subsidiary in China if it wishes to oper-ate a business in China—a foreign company is not al-lowed to operate acquired assets directly as a foreigncompany without setting up a Chinese subsidiary.This will preclude the possibility of a foreign companyacquiring the assets of a Chinese company directly.While it is, in theory, possible for a foreign company toacquire assets in China without operating them andimmediately make a capital contribution comprisingthe acquired assets to a newly created subsidiary, inreality there is no guidance on implementing such atransaction. Therefore, in practice, if an asset acquisi-

tion is ever desired, a foreign company will normallyopt first to set up a new subsidiary in China (or ifavailable, use an existing Chinese subsidiary) andthen use the new (existing) subsidiary to acquire theassets. This means that the transaction will be a PRCdomestic asset acquisition rather than a cross-borderacquisition of Chinese assets.

The following discussion will compare the tax con-sequences of a cross-border share acquisition withthose of a PRC domestic asset acquisition.

A. Gain/Loss for Sellers of Shares or for Sellers of Assetsand Liabilities

1. Cross-Border Share Acquisition

The gain or loss of the PRC seller in a share acquisi-tion will comprise the gross proceeds from the sale ofthe shares less the seller’s cost basis in the shares sold,which will be characterized as an investment gain orloss of the seller. Such investment gain or loss can bepooled with the seller’s normal gains or losses frombusiness operations. The net gain after any loss set-offwill be subject to enterprise income tax at the rate of25% (unless such rate is otherwise reduced), or anyloss can be carried forward for deduction for fiveyears. There is no basket restriction limiting the use oflosses.

2. Domestic Asset Acquisition

The PRC seller in an asset acquisition will be subjectto the same income tax treatment as the seller in thecase of a share acquisition scenario as described inI.A.1., above, except that its gain or loss will compriseits gross proceeds from the assets sold less its costbasis in the assets sold, and the gain or loss will beconsidered normal gain or loss from business opera-tions.


B. Advantages or Disadvantages in Shares Being IssuedRather Than Cash Being Used to Pay Acquisition Price


Because special approval and registration require-ments must be met by a Chinese company wishing tomake an offshore investment, a cross-border shareswap is very difficult—if not impossible—to imple-ment in practice.


If the majority consideration is in the form of equity,the parties to the asset acquisition might be able toelect for tax deferral treatment if all other conditionsfor such treatment are fulfilled.

C. Disposal of Shares Received Shortly After Transaction


This question does not arise, since a share swap in thecontext of a cross-border share acquisition is very dif-ficult (if not impossible) to implement (see I.B.1.,above).


If the taxpayer qualifies for and elects for tax deferraltreatment, a 12-month continuity of interest require-ment must be met. Thus, the sale of the shares re-ceived under a share-for-share exchange before theexpiration of the 12-month period can disqualify thetaxpayer from benefitting from the tax deferral treat-ment originally opted for.

D. Ability to Use or Restrictions on Use of Debt toFinance Acquisition


China generally does not impose restrictions on an FCbuyer using debt to finance an acquisition.


It should be possible for an FC buyer to use debt to fi-nance an asset acquisition. However, the interest rateon the debt may not be higher than the comparablebank loan rate, and the interest must be capitalized sothat it forms part of the cost basis in the acquiredassets. Also, there is a thin capitalization restrictionon the deductibility of interest that applies if the un-derlying debt is owed to a related party.

E. Ability of Buyer to Step Up Tax Basis


A step-up will be available, since the cost basis of theFC buyer in the shares acquired will equal the pur-chase price it paid for such shares.


The PRC buyer will have a cost basis in the acquiredassets equal to the purchase price it paid to the PRCseller.

F. Depreciation of Goodwill


No goodwill should arise as a result of a share acqui-sition.


The difference between the total asset acquisitionprice and the fair market value of the identifiableassets, or the premium, may be booked as goodwill.No amortization is allowed with respect to such ac-quired goodwill, but the amount of the goodwill canbe deducted when the business of the company is soldas a whole or when the company is liquidated.

G. Ability to Utilize Preacquisition Business Losses


The buyer cannot utilize the losses of the target busi-ness. The target company will be the same legal entityafter the share acquisition as it was before the shareacquisition and hence it will be able to continue utiliz-ing its losses that arose before the acquisition.


This issue is not relevant in the context of a domesticasset acquisition.

H. Use of an Acquisition Vehicle


It is generally advisable to use a foreign holding com-pany vehicle rather than a Chinese holding companybecause of the cash trap issue (in the form of the statu-tory reserve requirement) associated with the use of aChinese holding company.


As explained above it is necessary to set up a PRC sub-sidiary to own and operate the Chinese assets ac-quired.

II. Share Acquisition From Foreign Sellers

As noted in I., above, because a foreign company isgenerally not allowed to own and operate businessassets in China directly, the scenario in which a for-eign company owning Chinese assets sells its Chineseassets to another foreign company will not beaddressed—only cross-border share acquisitions willbe discussed. (For the treatment of a PRC domesticasset acquisition, see I., above.)

By way of background, it should be noted thatwhere the shareholder(s) in a Chinese company is(are) foreign, the Chinese company will be considered


to be a foreign-invested enterprise (FIE). Thus, thesale of the shares in an FIE to another FC buyer willbe regarded as a foreign-to-foreign sale. The foreignseller will be subject to withholding income tax on thecapital gains arising on the sale. The various other taxconsiderations are summarized in II.A.-H., below.

A. Gain/loss for Sellers of Shares or for Sellers of Assetsand Liabilities

It is assumed for purposes of the discussion that fol-lows that the foreign seller has no permanent estab-lishment (PE) in China or, if it has such a PE, the saleof its shares in the Chinese target company is not con-nected with such PE. The foreign seller will be subjectto PRC withholding income tax at the rate of 10% onany capital gain arising from the disposal of its sharesin the target. The capital gain will comprise the grossproceeds from the sale of the shares less the seller’scost basis in those shares. No loss can be deducted forwithholding income tax purposes.


Because the share sale in these circumstances will bea foreign-to-foreign sale, the form in which the con-sideration for the share acquisition is paid will be ofno concern to the PRC authorities. Hence, the partieswill be able to negotiate and agree on the form of con-sideration on their own terms, unless any special taxdeferral treatment is available that requires that theconsideration should be in form of equity and theseller wishes to avail itself of such deferral.

C. Disposal of Shares Received Shortly After Transaction

While it is extremely difficult for a cross-border shareacquisition to qualify for tax deferral treatment inChina, if tax deferral treatment is somehow obtained,a 12-month continuity of interest requirement ap-plies. Hence, a sale of the shares received before theexpiration of the 12-month period can disqualify thetaxpayer from benefitting from the tax deferral treat-ment originally opted for.

D. Ability to Use or Restrictions on Use of Debt toFinance Acquisition

China generally does not impose restrictions on a for-eign buyer using debt to finance an acquisition.

E. Ability of Buyer to Step up Tax Basis

As is the case where the shares are acquired from aPRC seller, the cost basis of the FC buyer in the sharesacquired will be equal to the purchase price it paid forsuch shares.

F. Depreciation of Goodwill

No goodwill should arise as a result of a share acqui-sition.

G. Ability to Utilize Preacquisition Business Losses

As is the case where the shares are acquired from aPRC seller, the buyer cannot utilize the losses of thetarget business. The target company will be the samelegal entity after the share acquisition as it was beforethe share acquisition and hence it will be able to con-tinue utilizing its losses that arose before the acquisi-tion.


The considerations that will be relevant for the FCbuyer in using an acquisition vehicle are the same asthose that apply where the shares are acquired from aPRC seller. It is generally advisable to use a foreignholding company vehicle rather than a Chinese hold-ing company because of the cash trap issue (in theform of the statutory reserve requirement) associatedwith the use of a Chinese holding company.


The author does not foresee any notable changes tothe position set out above due to the BEPS initiativeor the exit of the United Kingdom from the EuropeanUnion.

IV. Non-Tax Factors

Tax representations, warranties, or indemnities aremore important in the context of a share acquisitionthan they are in the context of an asset acquisitionsince, in the former case, the buyer will step into theshoes of the seller in terms of operating the acquiredtarget company, and any potential tax liabilities of thetarget company will remain unchanged regardless ofthe share acquisition.

The relevant Chinese rules require the governinglaw to be PRC law when a foreign company acquires aPRC domestically owned enterprise (i.e., not an FIE).As to a foreign-to-foreign share transfer in an FIE, thegoverning law may be foreign law; however, such ashare transfer will be subject to PRC approval and reg-istration requirements, which will often make it morebeneficial for both parties to adopt PRC law as thegoverning law. Where the acquisition is a domesticasset acquisition, the governing law must be PRC lawsince such an acquisition involves two PRC compa-nies.


DENMARKChristian EmmeluthEMBOLEX Advokater, Copenhagen

I. Acquisition by Foreign Country Buyer of DanishBusiness From Danish Sellers

A. Acquisition of Business Assets

For purposes of the following discussion, it is as-sumed that the Danish sellers and the Foreign Coun-try (FC) buyer are unrelated and that no transferpricing issues arise as a consequence of the transac-tion.

In general, gains arising from the sale of machinery,equipment, and ships used for business purposes aresubject to capital gains taxation under the Act on TaxDepreciation,1 the gains being included in ordinarycorporate income and taxed at the corporate rate of22%. The tax is levied on the difference between thesale price and the written-down value for tax pur-poses.

Capital gains arising from the sale of real property2

are subject to ordinary corporate taxation at the rateof 22%.3 The original acquisition price is increased byan annual allowance of DKK 10,000. The allowance isgranted for the income year in which the property issold, unless the property is sold in the same year asthat in which it is acquired. The acquisition price isfurther increased by maintenance expenses to theextent they exceed DKK 10,000 annually and to theextent such expenses have not otherwise been de-ducted for income tax purposes.4 If the property wasacquired prior to May 19, 1993, the allowance is onlyavailable for years subsequent to that date. Expensesincurred in connection with the rebuilding or refur-bishment of depreciable property that have been de-ducted for tax purposes cannot be added to theacquisition price. Expenses incurred in connectionwith the artistic decoration of the property that can bedepreciated under the Act on Tax Depreciation cannotbe added to the acquisition price for purposes of cal-culating the taxable gain.5 If the property is used foragricultural purposes or is a forestry property,6 thetaxpayer may elect to have the acquisition price in-dexed as stipulated in Section 5A of the Act on Taxa-tion of Gains on Real Property.

The acquisition price of real property is reduced bydepreciation deductions that, under the Act on TaxDepreciation, are not recaptured in connection withthe disposal of the property. The acquisition price is

also reduced by depreciation on demolished buildingsand losses previously deducted for income tax pur-poses.

For purposes of calculating the gain, the sale pricemust be calculated on a cash basis. The difference be-tween the original acquisition price and the sale priceconstitutes the taxable gain.

A ring fence principle applies with regard to the de-duction of losses incurred on the disposal of real prop-erty: losses may be set off only against gains from thesale of other real property.7 Losses exceeding taxablegains may be carried forward indefinitely and set offagainst future gains arising from the disposal of realproperty.

For the tax treatment of intangible assets, see I.G.,below.

B. Acquisition of Shares

A Danish seller of shares in a company, whetherDanish or foreign, is subject to taxation under the Acton Taxation of Gains and Losses on Shares.8

The taxation treatment of gains arising on the saleof shares by a company depends on the classificationof the shares in question. Under the Act on Taxation ofGains and Losses on Shares, shares are divided intothe following categories: shares in a subsidiary;9

shares in a group company;10 treasury stock;11 sharesacquired as a trader;12 and portfolio shares.13

1. Definition of Shares in a Subsidiary

Shares in a subsidiary are defined as shares in a com-pany of which a corporate shareholder owns at least10% of the share capital. Either the subsidiary mustbe subject to taxation under the Corporate Tax Act orthe taxation of dividends from the subsidiary must bewaived or reduced under Denmark’s domestic lawimplementation of the EU Parent-Subsidiary Direc-tive or a tax treaty between Denmark and a country inwhich the company has its registered office.14

Shares in the subsidiary are deemed to be directlyowned by those direct or indirect shareholders in theparent company (the ‘‘interim parent company’’) thatare subject to taxation under the Corporate Tax Act,the rules on international joint taxation or the con-trolled foreign company (CFC) rules, and at each levelbetween the shareholder and the interim parent com-


pany, own at least 10% of the share capital in the un-derlying company. This rule, however, applies only if:(1) The primary object of the interim parent company

is to hold shares in subsidiaries or in group compa-nies;

(2) The interim parent company does not carry on anactual economic activity in relation to its holding ofthe shares in question;

(3) The interim parent company does not own theentire share capital in the subsidiary or the interimparent company owns the entire share capital in asubsidiary that is not taxable in Denmark or, in thecase of direct ownership, no relief for double taxa-tion is available under the EU Parent-Subsidiary Di-rective or an applicable tax treaty;16 15

(4) The shares in the interim parent are not listed on aregulated market; and

(5) More than 50% of the share capital of the interimparent company is owned, directly or indirectly, byDanish companies or Danish permanent establish-ments (PEs) that would not have been able to re-ceive dividends tax-free had the shares in thesubsidiary concerned been held directly.

Condition (3) eliminates the possibility of setting upintermediate holding companies to circumvent the10% holding requirement.

If, under the rules described above, the shares areowned by a number of interim parent companies,then the shares are considered to be directly owned bythe ultimate parent company.17

If the shares referred to above in (5) enjoy preferen-tial rights with regard to dividend distributions, thenthe following holdings in the interim parent companyare to be taken into consideration for purposes of de-termining whether the thresholds referred to above in(5) are met:(1) Shares owned by individuals having a ‘‘determin-

ing influence,’’ as defined in Section 16H of the TaxAssessment Act;

(2) Shares owned by ‘‘closely related individuals,’’ asdefined in Section 16H of the Tax Assessment Act;and

(3) Portfolio shares controlled by individuals referredto in (1) and (2).18

Under subsection 6 of Section 16 of the Tax Assess-ment Act, a more than 50% ownership share consti-tutes a ‘‘determining influence.’’

‘‘Closely related individuals’’ are a spouse, parentsand grandparents, descendants and their spouses.

The term ‘‘shares in a subsidiary’’ does not encom-pass convertible bonds and subscription rights to con-vertible bonds.

Example 1: An intermediate holding company (IH)owns 40% of the shares in a company (D) engaged inordinary trade and business. The shares in IH areowned by companies A (60%), and B and C (20%each). A would own 24% (i.e., 60% x 40%) of theshares in IH if it owned those shares directly, and Band C would each own 8% (i.e., 20% x 40%). The 50%threshold set forth above in condition (5) is not ful-filled, and IH’s holding of shares is not disregarded.

Example 2: An intermediate holding company (IH1)owns 40% of the shares in a company (D). The sharesin IH1 are held by IH2 (60%) and S (40%). The sharesin IH2 are owned by F1-F4 (25% each). If they owned

the shares directly, F1-F4 would each own 6% (i.e.,25% x 60% x 40%) of the shares in D. If it owned theshares directly, S would own 16% (i.e., 40% x 40%) ofthe shares in D. F1-F4 and S are deemed to own theshares in D directly. The shares held by S exceed the10% threshold and are thus still treated as shares in asubsidiary. If IH1 were to acquire the remainingshares in D, the anti-avoidance provision would notapply as the indirect ownership of F1-F4 would be15% each (i.e., 25% x 60% x 100%). However, thechange in the status of their shareholdings would trig-ger capital gains taxation of F1-F4 19 (see further,below).

2. Definition of Shares in a Group Company

Shares in a group company are defined as shareswhere the shareholder and the company in which theshares are held are jointly taxed or may be jointlytaxed under the rules concerning domestic or interna-tional joint taxation.20 Shares held by a foundation ora trust controlling more than 50% of the votes of thecompany in which the shares are held are also consid-ered shares in a group company. Shares in a groupcompany are deemed to be held by the shareholders inthe parent company if the conditions in Section 4A.3(I)–(IV) of the Act on Taxation of Gains and Losses onShares discussed above are fulfilled. Bonds and op-tions to bonds that may be converted into shares in agroup company do not fall within the definition ofshares in a group company.

3. Definition of Portfolio Shares

Shares that do not fall within the definition of sharesin a subsidiary, shares in a group company, treasurystock or shares acquired by a share trader are treatedas portfolio shares.

4. Taxation Treatment of Shares in a Subsidiary andShares in a Group Company

Capital gains (or losses) losses realized by a corporatetaxpayer on shares in a subsidiary or a group com-pany do not form part of the corporate taxpayer’s tax-able income, irrespective of the length of time forwhich the shares are owned.21

5. Taxation Treatment of Portfolio Shares

Capital gains on portfolio shares are exempt fromcapital gains taxation if they are owned by a companyand the portfolio company is subject to Danish corpo-rate income taxation or is a foreign company subjectto similar foreign taxation.22 It is a further conditionfor exemption that the value of listed shares in whichthe portfolio company may have invested does notexceed 85% of the equity of the portfolio company.23

Otherwise, capital gains on portfolio shares are tax-able.24 Losses on such shares are deductible if the tax-payer calculates its taxable income on an inventorybasis, meaning that taxable gains and losses are calcu-lated on an annual basis even where not realized.25 Ifthe taxable income is computed on a realization basis,losses may only be deducted from gains on shares thatare realized in the same income year and taxed on thesame basis.26 Excess losses may be carried forward


for set off against future gains on shares but notagainst other kinds of income. If a taxpayer taxed on arealization basis subsequently elects to be taxed on aninventory basis, then losses on shares previously taxedon the realization basis may be set off against gainstaxable on the inventory basis.27 Losses on bonds thatmay be converted into shares in a subsidiary or agroup company are not deductible.28

6. Taxation Treatment of Treasury Stock

Gains and losses on treasury stock do not form part oftaxable income.

7. Taxation Treatment of Shares Acquired as a Trader

If the taxpayer is considered to be trading in shares fortax purposes (for example, a bank, a mortgage institu-tion or any other professional investor), then gainsand losses realized as a trader form part of the taxpay-er’s taxable income. A trader is required to use the in-ventory basis in calculating its taxable income. Atrader may also hold shares that do not form part ofits trading assets, such as shares in a subsidiary or an-other group company. Gains and losses on suchshares are not taxed as trading income. Losses sus-tained by a trader on shares held as trading assets canbe deducted.

C. Cash or Share Transaction

A common corporate structure in Denmark is a topholding company owning one or more subsidiaries.Where this structure is in place, the sale by the hold-ing company of shares in a subsidiary, whether forcash or shares, is tax-free as noted in I.B.4., above.

However, where the shares in a Danish target com-pany are owned by individuals, the rules on exchangesof shares may prove to be beneficial, as the taxation ofgains arising on the sale of the shares in the target ispostponed until the shares received in exchange aredisposed of.

An exchange of shares may be effected tax-freeunder the Act on Taxation of Gains and Losses onShares.29 An exchange of shares is defined in the EUMerger Directive30 as an operation whereby a com-pany acquires a holding in the capital of another com-pany such that it obtains a majority of the votingrights in that other company in exchange for the issueto the shareholders of that other company, in ex-change for their securities, of securities representingits capital (i.e., the capital of the first company) and, ifapplicable, a cash payment not exceeding 10% of thenominal value of those securities. Under Danish law,however, no cash payment is allowed. A tax-free ex-change of shares is not possible if the transferring orreceiving entity is considered a transparent entity forDanish tax purposes. An exchange of shares may becarried out either with or without the permission ofthe tax authorities (see further below).

The succession principle also applies in the case ofexchanges of shares. The shares acquired for theshares exchanged are deemed to be acquired at thesame time and for the same price as the shares ex-changed. Either the shares must be issued by a com-pany covered by the EU Merger Directive or, if theyare issued by a company incorporated outside the Eu-

ropean Union, the company must be similar to aDanish Aktieselskab or Anpartsselskab.31

Even if the majority requirement contained in thedefinition of a share-for-share exchange is met, atransaction will fall outside the scope of the exemp-tion provided for in the Act on Taxation of Gains andLosses on Shares if the voting rights are limited undera shareholders’ agreement. The majority requirementis met even if the receiving company immediately fol-lowing the exchange is divided in a tax-free reorgani-zation.32

An exchange of shares must be carried out, at thelatest, within six months after the agreed date of ex-change.33

If an application for approval is filed with the taxauthorities, one of the conditions for approval is thatone of the main objects of the transaction should notbe tax evasion or avoidance. When reviewing an appli-cation, the Danish authorities will require the tax-payer to submit a reasoned explanation of thecommercial background for the transaction. The factthat tax savings play a significant role is not sufficientground for refusing an otherwise commercially justi-fied transaction. If the share-for-share exchange ispart of a transaction transferring the business to anew generation or partner, the likelihood of obtainingpermission to carry out the exchange on a tax-freebasis is significantly increased.

If the exchange of shares is carried out without thepermission of the tax authorities having been ob-tained,34 the requirement concerning the absence oftax avoidance or evasion does not apply. However, inthese circumstances, it will be a condition for tax-freetreatment that the shares are issued by a companycovered by the EU Merger Directive or, if they areissued by a company incorporated outside the Euro-pean Union, that the company is similar to a DanishAktieselskab or Anpartsselskab. The majority require-ment described above will apply and, additionally, thevalue of the shares received in exchange for the sharestransferred will be deemed to be equivalent to themarket value of the shares transferred.35

It is not necessary to obtain permission from the taxauthorities if the following conditions are met:

s The transferring company does not dispose ofshares received for a period of three years. Thetransfer of assets does not become a taxable transac-tion if the shareholder subsequently participates ina tax-free reorganization provided the considerationunder the tax-free reorganization consists solely ofshares. The three-year holding requirement then ap-plies to such shares.

s The transferring company is controlled by a share-holder resident in a country that is a Member Stateof the European Union or the European EconomicArea (EEA), or a country with which Denmark has atax treaty.

s The limitation provision concerning exchanges ofshares in investment companies and investment as-sociations (see below) is not triggered.

Shares in an investment company36 may only be ex-changed for shares in another investment company.37


D. Disposal of Shares Shortly After Completion ofthe Transaction

Any gain realized by a corporate shareholder on thedisposal of shares is tax-free irrespective of the periodof share ownership, unless the shares disposed of areclassified as portfolio shares. Gains on the disposal ofportfolio shares are taxable unless the shares areissued by a Danish company or a foreign companysubject to a tax system similar to the Danish system.An individual taxpayer may have to adhere to theownership requirements laid down in the rules con-cerning exchanges of shares (see I.C., above).

E. Limitations on Debt Financing

Denmark’s original debt-to-equity provision was in-troduced in 1998.38 In principle, under this provision,a deduction for interest on loans granted by a control-ling party of the borrowing company is disallowed ifthe ratio of the borrowing company’s debt to its equityat the end of an income year exceeds 4:1. The limita-tion only applies if the controlled debt exceeds DKK10 million (approximately US$1.45 million). For pur-poses of this rule, one entity is deemed to control an-other entity if the first entity, directly or indirectly,owns more than 50% of the share capital or, directlyor indirectly, controls more than 50% of the votes inthe second entity.

A further limitation provision was enacted in2007.39 Under this provision, interest expense of up toDKK 21.3 million (2016) is fully deductible. Net inter-est in excess of that amount may only be deducted tothe extent the amount of the interest payments doesnot exceed the taxable value of the borrowing compa-ny’s assets multiplied by a standard interest rate. Thestandard interest rate is calculated annually by theCopenhagen Stock Exchange in accordance withRegulation (EC) No 63/2002 of the European CentralBank of December 20, 2001, concerning statistics oninterest rates applied by monetary financial institu-tions to deposits and loans vis-a-vis households andnon-financial corporations.40

Finally, what is known as the ‘‘EBIT rule’’ also cameinto effect in 2007.41 Under this limitation rule, net in-terest expense as limited under the two rules de-scribed above may not exceed 80% of the borrowingcompany’s taxable income before net finance expenses(EBIT). Thus, taxable income may not be limited to anamount less than 80% of EBIT. This limitation ruleapplies not only to Danish companies but also to PEsof foreign companies.

F. Step-up in Tax Cost

An asset transaction between an independent FCbuyer and Danish sellers may result in a step up in thetaxable basis of the assets sold, as the price for the in-dividual assets is fixed at arm’s length.

G. Depreciation of Intangibles

The purchase price of goodwill, patents, know-how,trademarks, and copyrights may be depreciated at therate of 1/7 per annum.42 This also applies to an ex-pense incurred in connection with an agreement con-cerning the relinquishment of an agency or a

restrictive covenant when the relevant payment ismade by way of a lump sum. However, if the amountof the payment is less than 5% of the total salary ex-penses of the taxpayer’s business in the income yearconcerned, the expense may be deducted in full.43 Apayment made for a license to conduct preliminarysurveys with respect to, exploration for and the extrac-tion of hydrocarbons may be depreciated pro rata overthe term of the license.44

Goodwill, patents, and copyrights may not be de-preciated in the year in which they are sold.45 If suchassets are transferred between an individual and acompany or between companies where one of the par-ties has a controlling interest in the other, the basis fordepreciation is reduced by an amount up to or equalto the taxable gain realized by the seller and any unde-preciated portion of the seller’s original purchaseprice. A ‘‘controlling interest’’ for these purposes is de-fined as the direct or indirect ownership of more than50% of the shares, or direct or indirect control of morethan 50% of the votes in the company concerned.46

Certain types of intellectual property may be depre-ciated in full in the year of acquisition. This applies toknow-how and patents acquired in connection with ataxpayer’s business.47 Expenses incurred in licensingintellectual property, and for know-how and patentsmay also be depreciated in full.

H. Loss Carryforward

A net business loss, as computed for tax purposes andincluding certain capital losses, may be carried for-ward indefinitely for set off against future taxableincome.48 Taxable income may be reduced by carriedforward losses to the extent those losses do not exceedDKK 8,025,000 (2017). If the losses carried forwardexceeds this amount, only 60% of the excess amountmay be set off against taxable income. The remaining40% may be carried forward to the following tax year.A taxpayer may not defer the set-off of losses to afuture year if it has income in the current year. It is notpossible to carry back a net loss.

Since tax returns must be filed electronically, tax-able losses are reported electronically. An electronicregistry of tax losses49 has been established. Informa-tion on all taxable losses incurred in or after 2002must be filed in the registry. No carryforward is avail-able with respect to losses that have not been filed. Atax return that is not filed electronically but on paperis deemed not to have been filed. If a debt of the tax-payer is reduced according to a composition with thetaxpayer’s creditors, then any taxable loss is reducedby an amount equivalent to the amount relin-quished.50 The amount of the loss is not reduced,however, if:s The amount relinquished is taxable in the hands of

the taxpayer;s The amount relinquished is a tax-free distribution,

such as a dividend; ors The creditor is a group company that cannot deduct

the loss on the amount relinquished.

A similar provision applies in the case of a capitalcontribution.51

If more than 50% of the share capital of a companyat the end of an income year is owned by shareholdersother than those that owned it at the beginning of an


earlier income year in which a taxable loss was in-curred, then the taxable income cannot be reduced toan amount lower than the net positive capital incomeof the company.52 The net capital income is the totalof interest and interest expenses, taxable gains andloss on claims and debentures, taxable dividends, nettaxable gains on shares and certain banking fees, asset forth in Section 8 of the Tax Assessment Act.

If a company, at the time its shares are sold or itsshare capital is increased resulting in a change in itsownership, is not conducting any business activities,then any loss carryforward is disallowed. If the busi-ness activities are carried on by a subsidiary, theparent must own at least 25% of the subsidiary toavoid any limitation of loss carryforward on a changeof ownership.

I. Investment Vehicle

In planning the acquisition of a Danish company byan FC buyer, it is necessary to carry out an analysiscomparing the relevant foreign tax system to theDanish tax system in order to determine whether it isadvisable to use a Danish or foreign company to carryout the investment: It is not necessary under Danishlaw to use a Danish company for these purposes.

In this context, the general anti-avoidance rule(GAAR) introduced with effect from May 1, 2015,must be taken into consideration. The GAAR is in linewith the provisions in Council Directive (EU) 2015/121 of January 27, 2015, amending Directive 2011/96/EU on the common system of taxation applicablein the case of parent companies and subsidiaries ofdifferent Member States. The provisions concernedare contained in Section 3 of the Tax AssessmentAct.53

Section 3 of the Tax Assessment Act provides thatthe benefits of the Directive (i.e., broadly the elimina-tion of withholding taxes on payments of dividendsbetween associated companies resident in differentEU Member States and the prevention of the doubletaxation of EU parent companies on the profits oftheir EU subsidiaries) will not be available where anarrangement or a series of arrangements that hasbeen put into place for the main purpose or one of themain purposes of obtaining a tax advantage that de-feats the object or purpose of the Directive is not genu-ine, having regard to all the relevant facts andcircumstances. An arrangement may comprise morethan one-step or part. For purposes of these provi-sions, an arrangement or a series of arrangements willbe regarded as ‘‘not genuine’’ to the extent it is not putinto place for valid commercial reasons that reflecteconomic reality.

The wording of the Danish Act implementing theParent-Subsidiary Directive is in line with that of theDirective. The Court of Justice of the European Union(CJEU) will consequently decide the final scope of ap-plication of the GAAR.

The GAAR also applies to transactions that fallwithin the scope of Council Directive 2003/49/EC ofJune 3, 2003, on a common system of taxation appli-cable to interest and royalty payments made betweenassociated companies of different Member States aswell as Council Directive 2009/133/EC of October 19,2009, on the common system of taxation applicable to

mergers, divisions, partial divisions, transfers ofassets, and exchanges of shares concerning compa-nies of different Member States and to the transfer ofthe registered office of a Societas Europaea (SE) or So-cietas Cooperativa Europaea (SCE) between MemberStates.

At the same time,54 a general GAAR, limiting theavailability of benefits under Denmark’s tax treaties,was also introduced.

Under Section 3.3 of the Tax Assessment Act, a tax-payer will not be entitled to enjoy the benefit of one ofDenmark’s tax treaties if it is reasonable to conclude,taking all the relevant facts and circumstances intoconsideration, that the obtaining of such benefit isone of the main objects of any arrangement or trans-action that directly or indirectly leads to the obtainingof the benefit, unless it is demonstrated that the ob-taining of the benefit is in accordance with the con-tents and object of the specific provisions of the treatyconcerned.

When the new provision was introduced, it was em-phasized that the GAAR is in line with Action 6 of theOECD BEPS Action Plan.

Similar anti-avoidance provisions can be found inthe 1996 Protocol to the Denmark-United Kingdomtax treaty, which amends (among other things) treatyArticles 10, 11, and 12 on dividends, interest, and roy-alties, respectively. Under this amendment, a specificanti-avoidance provision was introduced under whichthe provisions of the relevant article are not to apply ifit was the main purpose or one of the main purposesof any person concerned with the creation or assign-ment of the shares or other rights in respect of whichthe dividend is paid (or the debt-claim in respect ofwhich the interest is paid or the rights in respect ofwhich the royalties are paid) to take advantage of thearticle by means of that creation or assignment.

The interaction between the limitation of benefitsunder the tax treaty GAAR and under the Parent-Subsidiary Directive GAAR is governed by Section 3.4of the Tax Assessment Act, which provides that if anEU resident taxpayer can invoke both a tax treaty andthe EU Parent-Subsidiary Directive, the GAAR intro-duced under the Directive takes precedence over theGAAR introduced with respect to tax treaties.


The Corporate Tax Act contains an exhaustive list ofthe kinds of Danish-source income on which a non-resident corporate taxpayer is liable to Danish incometaxation. The list does not include capital gains onshares and consequently a nonresident corporateseller of shares in a Danish company is not subject toDanish corporate income taxation on the gain.

If the shares are held by a Danish PE of the nonresi-dent corporate seller, the rules described under I.,above will apply.


The Danish Tax Authority (SKAT) has incorporated anumber of the BEPS recommendations in its LegalGuide (juridisk vejledning).55


A. Action 5

In a 2016 ‘‘informative notice,’’56 the SKAT describesthe rules on the spontaneous exchange of informa-tion. The notice follows the principles laid down inAction Plan 5, ‘‘Countering Harmful Tax PracticesMore Effectively, Taking into Account Transparencyand Substance’’ and incorporates the guidelines setforth in Chapter 5 of the Action Plan concerning theexchange of information. Regarding the exchange ofinformation within the European Union, Council Di-rective 2011/16/EU of February 15, 2011, on adminis-trative cooperation in the field of taxation andrepealing Directive 77/799/EEC, applies.

B. Actions 8-10

The revised Chapter 1 concerning the arm’s lengthprinciple and Chapter VI regarding special consider-ations for intangible property, as described in theTransfer Pricing Guidelines, have been incorporatedin Chapter C.D.11.7 of the Legal Guide, which dealswith business restructurings. The chapter is in linewith the recommendations of Actions 8-10.

C. Action 13

Chapter C.D.11.13.1 of the Legal Guide contains avery detailed description of the transfer pricing docu-mentation requirements. The rules are to a very largeextent in accordance with Chapter 5 of Action Plan 13on transfer pricing documentation and country-by-country reporting, and a new transfer pricing execu-tive order has been published.57

Chapter C.D.11.13.2 of the Legal Guide now de-scribes the country-by country reporting provisionsset forth in Section 3 B of the Corporate Tax Act.58

The revised version of Chapters I, VI, VII and VIII ofthe Transfer Pricing Guideline for Multinationals andTax Administrations (2010) set forth in Action Plans8-10, ‘‘Aligning Transfer Pricing Outcomes with ValueCreation,’’ has been incorporated in Chapter C.D.11 ofthe Legal Guide and will therefore be applied by theSKAT.

D. Action 14

According to chapter C.D.11.15.1 of the Legal Guide,the recommendations set forth in Action 14, ‘‘MakingDispute Resolution Mechanisms More Effective’’ willbe followed by the SKAT in conducting mutual agree-ment procedures

IV. Non-Tax Factors

Sale agreements usually provide for the typical taxrepresentations, warranties, and indemnities. The taxrepresentation usually expires in accordance with thestatute of limitation laid down in Section 26 of the TaxAdministration Act (Skatteforvaltningsloven), Act No.1267 of November 11, 2015. An assessment cannot bemade later than May 1 in the fourth income year afterthe end of the income year in question. In a case in-volving a transfer pricing issue, an assessment mustbe made no later than in sixth income year after theend of the income year in question.

NOTES1 Act No. 1147 of August 29, 2016 (Afskrivningsloven).2 Act No. 1200 of September 30, 2013, Act on Taxation ofGains on Real Property (Ejendomsavancebeskatning-sloven, TGRP).3 3 Act No. 1164 of September 6, 2016 (Selskabsskattel-oven, CTA), sec. 17.4 TGRP, Sec. 5.2.5 TGRP, Sec. 4.10.6 TGRP, Sec. 5A.7 TGRP, Sec. 6.3.8 Act No. 1148 of August 29, 2016 (Aktieavancebeskatning-sloven, TGLS).9 TGLS, Sec. 4A.10 TGLS, Sec. 4B.11 TGLS, Sec. 10.12 TGLS, Sec. 17.13 TGLS, Sec. 4C.14 TGLS, Sec. 4A2.15 TGLS, Sec. 4A3.16 Council Directive 2011/96/EU of November 30, 2011,on the common system of taxation applicable in the caseof parent companies and subsidiaries of differentMember States.17 TGLS, Sec. 4A4.18 TGLS, Sec. 4A5.19 TGLS Sec. 33A.20 TGLS, Sec. 4B.21 TGLS, Sec. 8.22 TGLS, Sec. 4C3.23 TLGS, Sec. 4C4.24 TGLS, Sec. 9.1.25 TGLS, Sec. 9.2.26 TGLS, Sec. 9.3.27 TGLS, Sec. 9.4.28 TGLS, Sec. 9.4.29 TLGS, Sec. 36.1.30 Council Directive 90/434/EEC of July 23, 1990, on thecommon system of taxation applicable to mergers, divi-sions, transfers of assets, and exchanges of shares con-cerning companies of different Member States (the ‘‘EUMerger Directive’’) as amended by Council Directive2005/19/EC of February 17, 2005, and Council Directive(EU) 2015/121 of January 27, 2015.31 TLGS, Sec. 36.1.32 TLGS, Sec. 36.1.33 TLGS, Sec. 36.4.34 TGLS, Sec. 36.6.35 TGLS, Sec. 36.1.36 TGLS, Sec. 19.37 TGLS, Sec. 36.3.38 CTA, Sec. 11.39 CTA, Sec. 11 B.40 ECB/2001/18.41 CTA, Sec. 11 C.42 Act No. 1147 of August 29, 2016, Tax Depreciation Act(Afskrivningsloven, TDA), Sec. 40.1.43 TDA, Sec. 40.3.44 TDA, Sec. 45.2.45 TDA, Sec. 40.4.46 TDA, Sec. 40.5.47 TDA, Sec. 41.48 CTA, Sec. 12.49 CTA, Sec. 35.50 CTA, Sec. 12A.51 CTA, Sec. 12C1.52 CTA, Sec. 12D2.53 Act No. 1081 of September 7, 2015.


54 Bill No. 167 of March 20, 2015, on the amendment ofthe Tax Assessment Act, the Estate Tax Act, the Act onTaxation of Foundations, the Tax Administration Act andother Tax Acts.

55 Available at www.skat.dk in Danish.56 SKM2016.308 SKAT of June 30, 2016.57 Executive order 401/2006.58 Act No. 680 of May 20, 2015, Corporate Tax Act.


FRANCEStephane Gelin & Claire AylwardCMS Bureau Francis Lefebvre, Neuilly-sur-Seine

From a French tax standpoint, the choice between ashare deal and an asset deal entails a consideration ofvarious consequences for both the buyer and theseller. Sellers generally tend to prefer a share deal,while buyers may find advantages in an asset deal.

I. Tax Treatment of the Sale at the Level of theSellers

A. French Sellers

1. Sale of Shares

Gains realized by a French company on the disposalof shares are included in its income subject to corpo-rate income tax (CIT) at the standard rate of 331⁄3%.Capital gains are calculated as the difference between:(1) the sale price (minus expenses related to the sale);and (2) the net book value of the shares, which is usu-ally the acquisition price1 (less acquisition expenses).

Gains realized on disposals of certain shares maybenefit from a favorable regime provided the sellerhas held the shares for more than two years and pro-vided the shares constitute ‘‘participation equity.’’ Par-ticipations exceeding 5% of the target company’sshare capital are deemed to constitute participationequity. This regime does not apply to equity that is notconsidered to be participation equity (for instance,portfolio investments) or with respect to certain typesof target companies, notably real estate companies.

If the relevant conditions are fulfilled, capital gainsfrom the disposal by a French company subject to CITof participation equity of a target company are taxexempt, apart from a recapture equal to 12% of thegross capital gain (resulting in an effective CIT rate of4%).

If the seller is an individual, the capital gain is sub-ject to personal income tax at progressive rates (of upto 41%) and to social contributions (15.5% flat rate).Rebates on the tax basis are available, subject to cer-tain conditions, if the individual has held the sharesfor at least two years and/or the target company is asmall or medium-sized enterprise.

2. Sale of Business Assets

Unlike capital gains realized on the sale of shares,gains realized on the sale of business assets cannot

benefit from the quasi-exemption regime. Capitalgains on the sale of business assets will generally besubject to CIT at the standard rate. The gain is calcu-lated as the difference between the purchase price andthe net book value of the asset concerned. In the caseof assets that have been depreciated for accountingpurposes, the amount of the capital gain will auto-matically be higher.

A reduced rate of 16% may be available to a busi-ness operating in the form of a sole proprietorship(with respect to the sale of certain business assets thathave been held for at least two years), but is not avail-able to a company subject to CIT. A special 15% ratemay be available with respect to gains arising fromdisposals of certain IP assets.

Other significant tax issues from the seller’s stand-point arise from the fact that the sale of all or some ofthe assets of a business may be regarded as constitut-ing a cessation of activity. Where this is the case, theconsequences are that:s After selling its French business assets, the seller

will generally no longer be able to use any lossesgenerated by the French business; and

s The sale will trigger the immediate taxation of thecurrent year profits and of unrealized capital gains,and the collection of deferred taxes.

B. Foreign Sellers

1. Sale of Shares

A foreign seller of shares in a French target companymay be subject to tax in France if the shares representa significant participation in the target, i.e., more than25% of the target’s capital. In such circumstances,France may levy a 45% withholding tax on the capitalgains realized by the seller, subject to the provisions ofan applicable tax treaty.

Most of France’s tax treaties allocate the right to taxsuch capital gains to the country of residence of theseller, and therefore prevent the imposition of Frenchwithholding tax. However, certain of France’s treatiescontain a ‘‘significant participation’’ clause that en-ables France to tax such capital gains. If the sharesconcerned qualify for the favorable regime describedin I.A.1., above, then a procedure is available thatallows the seller to obtain the benefit of the quasi-exemption.


A foreign company selling shares of a French com-pany may also be subject to tax in France if the sharesare issued by a predominantly real estate company,subject to the provisions of an applicable tax treaty. Itshould be noted that many of France’s treaties allowFrance to tax gains derived from the sale of companyshares by a seller resident in the treaty partner coun-try, where the company’s assets are comprised mostlyof French-situs real estate.

2. Sale of Business Assets

A foreign company selling French business assets willgenerally be subject to tax in France on any resultinggain, since it is likely that the gain will be derived bythe foreign company through a French permanent es-tablishment (PE). Such a sale may also entail the im-position of French transfer taxes, though these will bepayable by the purchaser, unless the parties agree oth-erwise.

Capital gains realized by a foreign company on thesale of French real estate will usually be subject to taxin France, regardless of whether the foreign companyhas a PE in France.

C. Tax Consequences of the Payment of theConsideration in Shares

From the seller’s standpoint, the payment of the con-sideration in shares (for instance, in the context of ashare for share exchange) entails important tax conse-quences, since transactions where the considerationis in this form may benefit from a rollover regime.Rollover regimes are available to both corporate andindividual sellers, subject to certain conditions re-garding the form of the payment and the country ofresidence of the company that issues the shares remit-ted in exchange.

Under the rollover regimes available to companiesand to individuals, no gain is recognized during theyear of the exchange. However, gain will be recog-nized and be taxable during the year of disposal of theshares remitted in exchange, the amount of the gainbeing determined by reference to the value of theshares initially held by the seller.

II. Tax Treatment of the Acquisition at the Level ofthe Buyer

It should be noted that except where otherwise indi-cated, this section concerns French buyers.

A. Tax Treatment of the Acquisition

1. Share Deal

In the case of a share deal, the buyer will generally in-clude the shares of the target company in its balancesheet at an amount corresponding to their purchaseprice. Purchase expenses relating to stock may gener-ally not be deducted immediately, but must be in-cluded in the book value of the shares of the targetcompany and may be amortized over a five-yearperiod.

In the case of a share deal, French law does notallow for a step-up in the basis of the assets of the ac-quired company. The target company will, therefore,

continue to amortize its assets in the same way as itdid before the acquisition. Built-in gains are fre-quently present in the case of share deals (for in-stance, there may be built-in gains in the real estateheld by the acquired company). As no step-up in thebasis of the assets is available, the reduction of thepurchase price to take into account the potential taxa-tion of the built-in gains may be a subject of negotia-tions between the buyer and the seller.

The shares of the target company may not be amor-tized by the buyer. While the acquired stock may bedepreciated, such depreciation is not deductible fortax purposes.

The tax losses of the target company are generallyunaffected by the transfer of its shares. Under Frenchlaw, tax losses may be carried forward indefinitely.However, losses may only be set off against taxableprofit subject to a limit of one million euros + 50% ofthe tax year’s profit. In other words, even where car-ried forward losses are available for set off, at least50% of profits exceeding one million euros will alwaysbe taxed.

The profits of the French target company wouldusually be transferred to the foreign buyer by way ofdividend payments, which are subject to a 30% with-holding tax, subject to the provisions of an applicabletax treaty. Dividend distributions are usually not sub-ject to withholding tax if made to an EU parent com-pany (subject to an anti-abuse clause).

2. Asset Deal

In case of an asset deal, the target business assetsenter the balance sheet of the buyer at their purchaseprice. The purchase price is split between the tangibleand intangible assets, and any remaining sums are al-located to goodwill. Therefore, if the assets have ap-preciated, the book values of the assets are likely to bestepped-up in an asset deal and the subsequent amor-tization and/or depreciation will be based on thesebook values.

Only fixed assets that have a foreseeable duration ofuse may be amortized. Shares in a subsidiary may notbe amortized, but the parent company may book de-preciation, which is not, however, deductible for taxpurposes. In certain cases, certain intangible assetssuch as IP may be amortized if they have a foreseeableduration of use. Goodwill may not be amortized.

The acquisition of business assets in France by aforeign buyer may lead the buyer to have a PE inFrance if the business nexus with France is sufficient(the mere acquisition of French real estate, for in-stance, will not automatically give rise to a PE inFrance).

French CIT is based on a territorial system, mean-ing that profits from business carried on in France aretaxable in France, while profits from business carriedon outside France are not taxable in France. A foreignbuyer that has a PE in France will have to comply withdeclarative obligations in France and the profits of theFrench PE will be subject to CIT.

B. Transfer Taxes

The acquisition of shares in most French commercialcompanies is subject to a 0.1% transfer tax. However,


if the French target company is considered to be pre-dominantly a real estate company, the transfer taxrate is 5%.

The acquisition of a French business (or going con-cern) is subject to a 5% transfer tax, as is the transferof certain French trademarks.

Unless provided otherwise in the acquisition agree-ment, transfer taxes are borne by the buyer.

C. Structuring via a Holding Company

Foreign companies acquiring French businesses maychoose to structure the acquisition via a French (orforeign) holding company.

Where business assets are acquired, the acquisitionmay be structured via a French company in order toavoid the recognition of a PE of the foreign acquiringcompany in France. In this case, the French holdingcompany would be subject to CIT in France. The for-eign buyer would have no taxable presence in Franceand would be subject to French tax, as the case maybe, only on dividends paid to it by the French holdingcompany.

In a share deal, the use of a French holding com-pany is quite common, particularly in the context ofLBO schemes where the acquisition of a French targetis financed by debt contracted by a French holdingcompany. This enables the French target companyand the French holding company to form a tax con-solidation group, under which their respective profitsand losses may be pooled for CIT purposes. Thisstructure may be of interest where the French target isa profitable company and the French holding com-pany is in a loss-making position, in particular be-cause of the level of its interest expenses. However, asexplained in II.D., below, French law contains anumber of mechanisms that limit the deductibility ofinterest.

The acquisition of a French company may be struc-tured through a holding company established in an-other EU Member State (for example, Luxembourg orthe Netherlands). However, a French target companymay not be tax-consolidated with a foreign company.

D. Ability to Use/Restrictions on Use of Debt to Financethe Acquisition

The use of debt to finance the acquisition is possible.The following comments concern borrowers that areFrench companies subject to CIT.

Interest incurred in connection with a loan con-tracted to finance the acquisition of French shares orbusiness assets is in principle deductible, providedthree requirements are met:

s The interest expense is incurred in the general inter-ests of the borrowing company’s business;

s The debt is accounted for in the borrower’s books;and

s The interest effectively represents the cost ofmonies borrowed.

However, there are a number of provisions in theFrench Tax Code (FTC) that may limit the tax deduc-tion of interest expenses.

1. Maximum Rate for Interest Paid to Related Parties

Interest paid to a related company is deductible pro-vided the interest rate does not exceed a ceiling estab-lished each trimester by decree. The ceiling rate was2.03% for the financial year ending on December 31,2016. Where the interest rate exceeds the ceiling rate,the interest is deductible only if the paying companycan demonstrate that the amount paid corresponds toan arm’s length, market rate.

2. Thin Capitalization Rules

Article 212 of the FTC2 imposes a limit on the deduct-ibility of interest based on certain ratios. In France,the thin capitalization rules apply only to:s Interest paid to a related company;3 ands Interest paid on certain loans secured by a related

company, i.e., interest paid on a loan granted by athird party such as a bank, if the repayment of theloan is secured by a related party (subject to certainexceptions).

The thin capitalization rules provide for the non-deductibility for tax purposes of a portion of the inter-est paid by a French company in a fiscal year in whichall the following three conditions are fulfilled:s The ratio of debt to equity exceeds 1.5 to 1, mean-

ing that interest is deductible for the borrowingcompany provided its indebtedness owed to (or se-cured by) a related company or companies does notexceed 150% of its net equity;

s Interest expense exceeds 25% of adjusted operatingincome before tax, meaning that interest is deduct-ible provided the amount of the interest does notexceed 25% of current operating and financialincome less amortization expense; and

s Interest expense exceeds interest received from re-lated parties, meaning that interest is deductibleprovided the amount of interest paid does notexceed the amount of interest received from relatedparties.

If interest paid by the borrower during a year ex-ceeds all three of the above ceilings, the portion of theinterest that exceeds the highest of the three ceilings isnot deductible for tax purposes. However, if the excessamount is less than 150,000 euros, the entire amountof the interest will still be deductible.

The excess amount of interest disallowed as a de-duction in a fiscal year may be carried forward and de-ducted in subsequent years, subject to certain limits.

3. Anti-Hybrid Rule

Interest paid by a French company to a related partyis deductible only to the extent the corresponding in-terest income received by the lender is subject to tax ata rate equal to at least 25% of the ordinary French CITrate, which means in practice that the interest re-ceived by the lender must be subject to tax at a mini-mum rate of 8.33%.

This provision applies in relation to interest on bothloans owed to companies established in France andloans owed to companies established abroad. Thisrule has a much wider scope of application than itsname implies, i.e., it does not apply just to interestpaid under hybrid instruments.


4. ‘Carrez Amendment’

Under Article 209 IX of the FTC (the ‘‘Carrez amend-ment’’), a French acquiring company will fall withinthe scope of an interest expense recapture mechanismif the company cannot provide evidence to the effectthat: (1) the decisions in relation to the acquired stockare effectively taken by the French buyer; and (2) theFrench buyer effectively exercises control or influenceover the acquired company.

5. General Limitation on the Deduction of FinancialExpenses

Article 212 bis of the FTC provides for a general limi-tation on the deductibility of net financial expensesexceeding 3 million euros. Financial expenses inexcess of this amount are subject to a 25% recapture.

III. Potential Impact of International Tax Changes

A. BEPS and EU Law: Recent Developments

Generally speaking, France intends to apply the mea-sures recommended by the BEPS reports. Moreover,France is affected by changes in EU law, in particularthe Anti-tax Avoidance Directive (ATAD)4 and therecent changes made to the Parent-Subsidiary Direc-tive.5

The main measures that are likely to have an impacton foreign acquisitions of French businesses are:

Limitations on interest deductions: both the BEPSreport and the ATAD contain measures limiting thedeductibility of interest to a certain percentage of theEBITDA of the borrower. They also contain measuresdesigned to restrict interest deductions in the contextof hybrid arrangements.

Anti-treaty-shopping measures: the BEPS projectcontains one report dealing with the abusive utiliza-tion of tax treaties. Under the ATAD, an anti-abuseclause is intended to prevent the obtaining of treatybenefits when an entity or an arrangement does nothave sufficient substance or business purpose/is taxmotivated. An anti-abuse clause already applies withrespect to the exemption of intra-EU dividends. Ac-quisitions structured via an EU holding company (forinstance, in Luxembourg or the Netherlands) are in-creasingly scrutinized by the French tax authorities.Such structures should always correspond to anactual business purpose and the holding companyshould always have a sufficient level of substance inits country of incorporation.

B. Potential Impact of Brexit

Brexit should not have a significant impact on the ac-quisition of a French business by a U.K. buyer. Indeed,even though some specific EU regimes will no longer

be available to U.K. buyers or sellers after Brexit, theFrance-United Kingdom tax treaty should generallyachieve similar outcomes (for instance, an exemptionfrom withholding tax for dividends paid from Franceto the United Kingdom is available under the treaty,subject to certain conditions). Moreover, the France-United Kingdom tax treaty contains an informationexchange clause and an administrative assistanceclause.

IV. Non-Tax Factors

A. Tax Representations

Tax representations, warranties and indemnities are afrequent feature of share deals, because the buyer isexposed to the risks linked to the tax liabilities of thetarget company. On the other hand, asset deals gener-ally do not include tax warranties, since the tax liabili-ties of the target business are not transferred to thebuyer.

Tax representations and warranties may take theform of an ‘‘objective clause’’ or of a number of specificrepresentations. Items that are typically covered bytax representations include, for instance, the correctand timely filing of tax returns, the accuracy and com-pleteness of the elements contained in the tax returns,and the validity of any options exercised for tax pur-poses.

Buyer-side insurance for representations and war-ranties is becoming increasingly common in sharedeals in France.

B. Determination of Applicable Law

The parties are free to determine the applicable law inthe sale contract, which may be the law of the countryof incorporation or residence of the buyer.

Transfers of French going concerns (fonds de com-merce) must be registered in France. Transfer taxesmust also be paid.

NOTES1 The net book value is not always the acquisition price,however, particularly where certain kinds of corporate re-organization have previously been carried out.2 French Tax Code (‘‘Code general des impots’’).3 Under FTC, Art. 39-12, a ‘‘related company’’ means: (1) aparent company in relation to a subsidiary, where theparent company, directly or indirectly, holds more than50% of the capital of the subsidiary or de facto controlsthe subsidiary; or (2) a company that is controlled, di-rectly or indirectly, by the same parent company as thecompany concerned.4 Directive 2016/1164 of July 12, 2016.5 Directive 2011/96/EU of November 30, 2011.


GERMANYPia DorfmuellerP+P Pollath + Partners Rechtsanwalte und Steuerberater mbB, Frankfurt

I. Acquisition by Foreign Country Buyer of GermanBusiness From German Sellers

Investments in German companies can be structuredas either share deals or asset deals. The two types oftransaction are significantly different from each otherin terms of their economic and legal effects. Whethera share deal or an asset deal is preferable has to be de-termined by taking all interests of both sellers andpurchasers into consideration. Identifying an appro-priate transaction structure is, therefore, certainlychallenging. However, it is often even more challeng-ing to design and implement an optimized acquisitionstructure that takes into account the annual taxburden on the purchaser, as well as the appropriatetaxation of a subsequent exit from the investment.

A. Sellers’ Preference for a Share Deal

Against the background of the overall lower taxationof capital gains (especially if the seller is a corpora-tion), sellers will tend to prefer to structure a transac-tion as a share deal.

B. Purchasers’ Preference for an Asset Deal

With respect to current taxation, the acquisition of abusiness by a German acquisition vehicle via an assetdeal is mostly more advantageous than a share dealfor the purchaser. The purchaser can directly convertthe purchase price into tax-efficient depreciation (i.e.,achieve a step-up in the basis of the assets) to theextent the assets acquired are depreciable. The pur-chase price is allocated among the acquired assets,which are entered in the balance sheet as of the acqui-sition date at their fair market value, includinggoodwill—if any—and are amortized over their usefullifetime (15 years in the case of goodwill). However,land can be written off only to the extent its fairmarket value is permanently lower than its purchaseprice.

C. Acquisition of Partnership Interests

There are three types of German partnership: the civillaw association (GbR); the general partnership(OHG); and the limited partnership (KG). All assets,liabilities and income of a partnership are allocatedfor tax purposes to the partners in proportion to theirpartnership interests (i.e., a partnership is transpar-

ent). However, the possibility of setting off losses gen-erated by a KG at the level of a limited partner isgenerally restricted to the amount of the respectivecommitted equity.

Partnerships can either obtain business income orconduct private asset management. Regarding busi-ness income, the general rules apply; all income re-lated to the business qualifies as business income.Partnerships that solely conduct private asset man-agement (generating interest, dividend income, leas-ing income, and capital gains) do not earn businessincome, except for partnerships that generate deemedbusiness income because of their structure (i.e., wherethe general partner is a corporation and there is nomanaging limited partner).

Exemptions are provided in relation to the taxationof dividend income and capital gains. Dividendincome and capital gains arising from the disposal ofshares in a corporation are 40% tax-exempt, and 40%of related costs are non-deductible (Teileinkunftever-fahren). Interest income is not tax-exempt, and relatedcosts are fully deductible.

The tax rates for partners are equivalent to the taxrates for individuals. If a partnership conducts busi-ness activities, as noted above, the entire income ofthe partnership (i.e., including income from non-commercial activities) qualifies as business incomeand is, thus, subject to trade tax. To a large extent, thetrade tax burden can basically be offset by the per-sonal income tax liability of an individual partner inproportion to its equity interest in the partnership.

For tax purposes, the acquisition of partnership in-terests is basically equivalent to the acquisition ofassets from a seller. The same tax principles apply tothe acquisition of partnership interests, since a part-nership is transparent for tax purposes.

The acquisition of partnership interests permits theinclusion of certain investors’ expenses in the tax cal-culation of the partnership income—for example, in-terest expenses that arise from the acquisitionfinancing at the partner level. From a German taxpoint of view, such interest expenses are allocable tothe partnership. In the foreign partner’s jurisdiction,however, such interest expenses may be allocated tothe business at the partner level, thus providing adouble dip with respect to the interest expenses—i.e.,in Germany and in the foreign investors’ country ofresidence. The availability of such double dips has


been eliminated with the recent introduction of § 4i ofthe German Income Tax Act (EStG) as a consequenceof the BEPS discussions. The new provision applies toany deductions claimed on or after January 1, 2017.Hence, structures set-up before January 1, 2017,would also be caught by the anti-hybrid rule.

D. Share Deal With Respect to a Corporation

The capital gain resulting from the transfer of sharesin a German corporation is 95% tax-exempt if theseller is a corporation and 40% tax-exempt if the selleris an individual who holds or has held at least 1% ofthe shares at one point in time within the last fiveyears or holds the shares as business assets.

If the seller is a partnership, income tax/corporatetax is imposed at the partner level and the availabilityof tax exemptions depends on the status of the partner(i.e., as an individual or a corporation); trade tax ispayable at the partnership level (if the shares are at-tributable to a domestic permanent establishment(PE)). With respect to foreign investors, a capital gainmay be fully tax-exempt in Germany under an appli-cable tax treaty (if the shares are not allocable to a do-mestic PE).

Thus, the transfer of shares in a corporation is pref-erable for both the seller and the investor with respectto a subsequent exit from the investment. Where theshares in a corporation are acquired, there is nostep-up of the assets of the corporation and the sharesare capitalized at their acquisition cost (with no step-up). Shares in a corporation are not depreciable; anextraordinary write-down is only possible if the fairmarket value of the shares is continuously below theiracquisition cost. Such a write down is 60% tax-effective only if the shares are held as business assetsby an individual (or to the extent that an individual isa partner in a business partnership holding theshares) and the shares form part of German businessassets. Otherwise, such a write-down is not tax-deductible. Therefore, following a share deal, the pur-chaser cannot make tax-effective use of the built-ingains in the acquired business assets through depre-ciation.

As the acquired corporation qualifies as a separatetaxpayer, additional consideration is required tomatch the operating profits of the target corporationwith the acquisition debt financing costs at the pur-chaser level.

E. Loss Utilization

Under German rules, tax losses for a financial year canbe carried back to the previous year up to an amountof 1 million euros for income tax/corporate tax pur-poses but not for trade tax purposes, and can be car-ried forward without time restriction for income tax,corporate tax and trade tax purposes. However, theutilization of loss carryforwards is limited by theminimum taxation rule. Under this rule, a baseamount of 1 million euros of loss carryforward can beutilized annually without restriction. Any loss carry-forward in excess of that amount can only be utilizedto the extent of 40% of the remaining positive tax basefor the financial year concerned.

Such loss carryforwards are of value to a legal entityif it generates taxable profits in subsequent financial

years (i.e., are a deferred tax asset). However, in thecourse of a sale transaction, loss carryforwards maybe forfeited or reduced. The most important rules re-garding the forfeiture of loss carryforwards on achange of ownership are as follows:s Asset deal: loss carryforwards cannot be trans-

ferred.s Direct transfer of a partnership interest: trade tax

loss carryforwards at the partnership level will beforfeited in proportion to the percentage of partner-ship interests transferred. If not all the partnershipinterests are transferred, the remaining loss carry-forwards can be utilized only to the extent that apartner remains in the partnership (i.e., loss carry-forwards for trade tax purpose are ‘‘personal’’). Taxloss carryforwards for income tax purposes at thepartner level are subject to the change of controlrule (see next bullet).

s Transfer of shares in a corporation:/ Change of control rule (§ 8c): If, within a period

of five years, more than 25% but no more than50% of a corporation’s shares are transferred toone purchaser, related parties of such purchaseror a group of purchasers acting in concert, thenthe corporation’s loss carryforwards and currentlosses (for corporate tax and trade tax purposes)will be forfeited pro rata.1 If more than 50% of theshares are transferred within five years, the entireamount of loss carryforwards will be forfeited.Both rules apply, irrespective of whether thetransfer to the purchaser is a direct or an indirecttransfer.

/ An exemption from the loss forfeiture rules ap-plies to the extent the losses do not exceed thetaxable built-in gains in the domestic businessassets of the corporation at the time of the harm-ful transfer. In these circumstances, the unuti-lized losses are preserved. In general, built-ingains are determined as the (proportional) differ-ence between the shareholders’ equity in the cor-poration as computed for taxation purposes andthe market value of the corporation’s shares tothe extent they are subject to domestic taxation.The same rules apply to trade tax loss carryfor-wards of a partnership held by a corporationwhere the shares in the corporation are trans-ferred (whether directly or indirectly).

/ The German Federal Constitutional Court(Bundesverfassungsgericht or BVerfG) has de-clared the change of control rule in § 8c of theKStG to be unconstitutional to the extent it pro-vides for a forfeiture of tax losses on a pro ratabasis, i.e., in the case of a more than 25% but nomore than 50% change of control.2 The Court fol-lowed an order for reference of the Fiscal Courtof Hamburg3 and ordered, by December 31,2018, at the latest, an amendment of the rule withretroactive effect for the period January 1, 2008,to December 31, 2015. However, this decisiondoes not directly apply to a greater than 50%share transfer, which results in the forfeiture ofthe entire loss carryforward under the provisionsof § 8c of the KStG. Since an alternative lossregime was introduced by Germany in the formof § 8d of the KStG with effect from January 1,2016, onward (see below), and the case con-


cerned the former regime, the Court did not haveto rule on whether the current change of controlrule is in line with the constitutional principle ofequal taxation.

/ To avoid the consequences of the application of§ 8c of the KStG, the seller may realize built-ingains before carrying out the transaction by uti-lizing loss carryforwards and then selling thebusiness via a share deal, with the assets havingincreased tax book values. The effect of the mini-mum taxation rules would, however, have to beconsidered.

s Alternative loss regime (§ 8d): under the newly in-troduced provisions of § 8d of the KStG, tax lossesare entirely deductible at the taxpayer’s election ifcertain specified conditions are fulfilled. To qualifyunder the regime, the loss company must have car-ried on the same business for at least three yearsbefore the harmful share transfer. The term ‘‘busi-ness’’ means the company’s entire business activity,maintained with a consistent profit motivation anddefined by qualitative characteristics, in particular:the offered services and products; the customer andsupplier base; the markets served; and the qualifica-tions of the employees.

The election is not available if the loss company: ter-minates a business, suspends a business, changes itsbusiness purpose, starts an additional business, in-vests in a partnership, is a parent in a German taxgroup, or transfers assets at below their fair marketvalue. These are all considered harmful events.

If the relevant conditions are fulfilled, the taxpayermay elect to apply the new alternative regime, whichprovides for a survival of tax losses. If a harmful eventoccurs, the company forfeits tax losses incurred as ofthe end of the calendar year before the harmful event.Hence, if a partial share transfer would lead to a prorata forfeiture under the standard regime, and the tax-payer elects to apply the new regime, the entire lossesand not just a pro rata proportion of the losses are for-feited if a harmful event occurs.

F. Interest Deduction

The deduction of interest from business income inGermany is limited by the interest barrier (Zinss-chranke).

As a general rule, net interest expenses (i.e., interestexpenses in excess of interest income) are deductiblein the financial year in which they are incurred only tothe extent of 30% of the business’ tax accounting-based earnings before interest, tax, depreciation andamortization (EBITDA).

Interest expenses that are non-deductible in a finan-cial year are carried forward to subsequent financialyears, in which they can only be deducted within thelimits of the interest barrier rule. Interest carryfor-wards are forfeited under the rules providing for theforfeiture of tax loss carryforwards.

The interest barrier does not apply if:s The net interest expenses (i.e., the excess of interest

expenses over interest income for a financial year) ofa business unit are less than 3 million euros;

s the business (a tax group qualifies as a single busi-ness despite the fact that separate legal entities areincluded) is not (or only partially) consolidated in

the consolidated financial statements of a group(IFRS, German GAAP, other EU GAAP or even U.S.GAAP can be applied); or

s the business is fully consolidated in the consoli-dated financial statements of a group, but the debtto asset ratio of the business unit on a stand-alonebasis is not lower by more than two percentagepoints than the debt to asset ratio of the group in theconsolidated financial statements (certain tax-related adjustments of GAAP affecting tax equitymust be accounted for).

Where the borrower is a corporation or a partner-ship held by a corporation, the last two exceptionsabove apply only if no harmful shareholder financingis in place. The financing of a stand-alone businessentity is harmful if a shareholder with more than a25% shareholding, a related party of such shareholderor a third party (for example, a bank) with recourse(back-to-back financing) to such shareholder or re-lated party grants loans to the entity and the intereston such loans exceeds 10% of the net interest expenseof the entity. Where the borrower is a group entity, fi-nancing is harmful if a non-consolidated but morethan 25% shareholder of any group entity, or a relatedparty or a bank with recourse to such shareholder orrelated party grants loans to any (domestic or foreign)entity belonging to the group and the interest on suchloans exceeds 10% of the net interest expense of thespecific entity concerned.

The requirements that have to be met to qualify foran exception are challenging and careful tax planningis recommended.

To the extent interest expenses are deductible forincome tax/corporate tax purposes, a 25% add-back tothe trade tax base is generally applicable.

G. Structuring of Acquisition by Means of a Share Deal

If the acquisition vehicle is financed with respect tothe purchase price for the acquisition of the shares ofthe target entity, bank loans and/or shareholder loanswill be provided in addition to equity of the investor toachieve a leverage effect. Interest expenses on the ac-quisition loan will be deducted from profits of the op-erating target to achieve a tax base that is as low aspossible in net terms. Generally, a German acquisitionvehicle is put in place to ensure that both the targetentity and the acquisition vehicle are subject toGerman taxation. In particular, the following taxstructures are usually recommended:

s Merger: The acquisition vehicle and the targetentity are merged on a tax-neutral basis. As a resultof the merger, the interest expenses are incurred di-rectly at the level of the target.

s Tax group: A tax group (Organschaft) is establishedcomprising the acquisition vehicle and the target.This requires, inter alia, that: (1) the target entity is acorporation; (2) the majority shareholder (i.e., thecontrolling entity) is an individual or a partnershipconducting business activities, or a corporation; and(3) a profit and loss transfer agreement is concludedfor a period of at least five years. In a tax group, thetaxable profit of a subsidiary (i.e., a controlled cor-poration) is transferred and taxed at the shareholderlevel (i.e., at the level of the tax group parent).


s Partnership model: The target is a business partner-ship or will be converted into a partnership (changeof legal form) on a tax-neutral basis. Interest ex-penses on debt financing to acquire the interests inthe target partnership are then allocated to the tax-able income of the partnership. Accordingly, the in-terest expenses are part of the tax base of the targetpartnership. However, since January 1, 2017, withthe introduction of the anti-hybrid rule in § 4i of theEStG, such an interest expense deduction is notavailable if an interest expense deduction is alsotaken in a foreign country (i.e., if there would be adouble dip). It should be noted that no grandfather-ing has been granted for existing structures.

H. Real Estate Transfer Taxes

The direct transfer of real estate in the course of anasset deal is subject to real estate transfer tax (in mostfederal states, the rate is approximately 6%). If, in-stead, the real estate is held by a corporation or a part-nership and less than 95% of the shares in therespective company are sold, no real estate transfertax will be triggered. Structuring a real estate transac-tion as a share deal (involving 94.9% of the shares)can, therefore, be a means of avoiding real estatetransfer tax.

I. Transfer of Liabilities

Since a share deal leads to the assumption of all theexisting claims and liabilities of the target company,whether known or unknown to the purchaser, a thor-ough review of the target company (i.e., legal due dili-gence) is advisable. In contrast, in the case of an assetdeal, there is no such automatic transfer of rights,claims or liabilities. Nevertheless, if it continues theexisting business (or at least the substantial core ofthe business) represented by the assets transferred, apurchaser of assets may be liable for debts or obliga-tions initially incurred by the seller under special pro-visions. The purchaser may also, to a limited extent,be liable for prior taxes (in particular, value added tax(VAT), trade tax, wage tax and withholding tax) under§ 75 of the Fiscal Code (AO); however there is no suchliability where assets are acquired from the insolvencyadministrator in the course of insolvency proceed-ings.

J. Exit Scenarios

An exit from a German business investment is subjectto income tax/corporate tax at the seller level and, inmost cases, is also subject to trade tax. Tax relief (inthe form of a lower rate of income tax) may be avail-able to an individual selling an entire business or part-nership interest, if certain requirements are met.

Trade tax is not triggered where:

s an individual or a partnership disposes of all itsassets or a separate business unit (the sale of thebusiness by a corporation is subject to trade tax); or

s an individual or a partnership disposes of all itsassets or a separate business unit (the sale of thebusiness by a corporation is subject to trade tax); or

s an individual disposes of his or her entire partner-ship interest.

Because of the tax implications for the seller on exit(i.e., taxation at the full rate), an asset deal is often dis-advantageous as compared to a share deal, and invest-ments are thus more likely to be transferred by way ofa share deal than by way of an asset deal.

With respect to the possibility of achieving a tax-efficient exit from an investment in a partnership, atax-neutral conversion of the partnership into a cor-poration might prove attractive; however, if full ad-vantage is to be taken of a subsequent transfer of theshares in the corporation, a holding period of sevenyears must be observed.


A. Share Sale

If the transaction is a sale of shares, a foreign sellerwill generally be subject to the same considerations asapply to a German seller. However, a foreign seller willnot be subject to German trade tax, unless it main-tained a PE in Germany and the shares sold are allo-cated to such PE. The effect of any applicable taxtreaty on Germany’s right as the situs country to taxany gains arising from the sale of the shares will haveto be taken into account.

From the buyer’s perspective, the German tax con-siderations are the same as those that apply in thecase of a purchase of shares from sellers that areGerman residents.

B. Asset Sale

If the transaction is a sale of assets, a foreign sellerwill be subject to considerations similar to those thatapply to a German seller. Such a sale of assets will besubject to taxation if, for example, the assets are assetsof a German PE or consist of German real estate. Theeffect of any applicable tax treaty on Germany’s rightas the situs country to tax any gains arising from thesale of the assets will have to be taken into account.

From the buyer’s perspective, the German tax con-siderations are the same as those that apply in thecase of a purchase of assets from sellers that areGerman residents.


Generally, Germany has agreed to adopt the measuresproposed by the OECD’s BEPS actions. Hence, doubledips (even multiple dips) should be harder to achievein an acquisition structure (see I.G., above).

As few German tax provisions applicable to M&Atransactions require EU membership, the impact ofthe exit of the United Kingdom from the EuropeanUnion on such transactions will be rather limited.However, it will no longer be possible to effect a reor-ganization after an acquisition (such as a cross-bordermerger or a cross-border contribution of shares (intoa joint holding company)) on a carryover basis, wherethe reorganization involves a U.K. company. Also, areturn of capital will be fully taxable if received from aU.K. company after the United Kingdom has left theEuropean Union.

The author understands that the United Kingdomwould like to continue granting and receiving benefits


under the EU Parent-Subsidiary Directive, but thiswill depend on the results of the exit negotiations.

IV. Non-Tax Factors

Tax representations, warranties, and indemnities gen-erally play a larger role in a share deal, because the taxliabilities of the target corporation remain liabilitiesof the target corporation after the transaction. In anasset deal, the purchaser may also, to a limited extent,be liable for prior taxes (in particular VAT, trade tax,wage tax and withholding tax) under § 75 of the AO;however, there is no such liability in the case of an ac-quisition from the insolvency administrator in thecourse of insolvency proceedings.

The availability of insurance for representationsand warranties and the rise of alternative dispute

resolution mechanisms, which are sometimes usedfor disputes that might give rise to an indemnificationclaim but have not yet arisen, have become importantconsiderations in the cross-border context.

It should be noted that an acquisition of shares in aGerman corporation requires a notarial deed. Suchnotarization is usually done by a German notary whomust read out the entire deed to the parties. The costof notarization will depend on the volume of the deal.

NOTES1 § 8c, German Corporate Tax Act (KStG).2 Judgment published March 29, 2017, 2 BvL 6/11.3 Dated April 4, 2011, 2 K 33/10; see Dorfmueller/Demel,Tax Notes Int’l., June 6, 2011, p. 777.


INDIARavi S. RaghavanMajmudar & Partners, International Lawyers, Mumbai

I. Acquisition by Foreign Country Buyer of IndianBusiness From Indian Sellers

A foreign country buyer (FC buyer) can acquire anIndian business in any one of the following ways:

s the acquisition of shares,

s the acquisition of assets, by way of:/ acquiring the entire business, or/ acquiring only the individual assets;

s merger; or

s demerger.


Capital gains from the disposal of listed shares thathave been held by an Indian resident seller for aperiod exceeding 12 months and are sold on a recog-nized stock exchange in India after payment of securi-ties transaction tax (STT) will be tax exempt.1 Capitalgains from the disposal of listed shares that are heldfor a period of less than 12 months2 and on which STThas been paid will attract a short term capital gainstax at the rate of 15% (excluding any surcharge andcess).3

Capital gains from the sale of unlisted shares thathave been held by an Indian resident seller for aperiod exceeding 24 months from the date on whichthey were acquired4 will be taxed as long-term capitalgains at the rate of 10%.5 Capital gains from the saleof unlisted shares that have been held by an Indianresident seller for a period less than 24 months fromthe date on which they were acquired will be taxed asshort-term capital gains at the rate of 30% (excludingsurcharge and education cess.)

The sellers of the shares in the Indian resident com-pany will have to comply with the valuation rulesunder the Indian exchange control laws when sellingthe shares to the FC buyer. Under the Income-tax Act,1961 (the ‘‘Act’’), if the shares are sold by the Indianresident sellers to the FC buyer at a price that is lessthan their fair market value, the difference betweenthe fair market value and the consideration receivedwill be deemed to be income from other sources in thehands of the FC buyer and taxed at the rate of43.26%.6

There is no tax withholding requirement where theseller is an Indian resident.7 A buyer would prefer to

obtain a no-objection certificate issued by the tax au-thorities from the seller or agree to contractual in-demnities.

The continued availability of accumulated taxlosses to be set off against future profits will dependon whether the company whose shares are beingtransferred is a company in which the public is sub-stantially interested, and the Act lays down certainconditions in this respect. A listed company or thesubsidiary of a listed company will qualify as a com-pany in which the public is substantially interested ifit fulfills certain specified conditions.8 The Act pro-vides that, in the case of a company in which thepublic is not substantially interested that undergoes achange in shareholding representing 51% or more ofits voting power at the end of the financial year, thecompany’s accumulated tax losses will expire and noset-off of such losses will be allowed in the year inwhich the change in shareholding takes place or anysubsequent year. (The provision does not apply in thecase of a company in which the public is substantiallyinterested.) There are certain exceptions to this rule,one of them being where the change in the sharehold-ing of the Indian company is the result of an amalga-mation or a demerger of the Indian company’s foreignholding company, subject to the condition that at least51% of the shareholders of the amalgamating or de-merged foreign company continue to be the share-holders of the amalgamated or resulting foreigncompany. These provisions governing the expirationof tax losses apply only to business losses and to capi-tal losses; they do not affect the continuing availabil-ity of any unabsorbed depreciation with respect to theassets of the company whose shares are being trans-ferred.

The target company does not include or recognizeintangible assets in its books in the case of a share ac-quisition.

Share transfer transactions attract stamp dutyunder Indian laws at the rate of 0.25% of the agreedtransaction value. Stamp duty applies only to physicalshares, not to dematerialized shares.

B. Acquisition of Assets

An asset acquisition may be concluded in one of twoways, i.e., by the acquisition of: (1) the entire Indianbusiness; or (2) identified individual assets of theIndian seller. In the case of (1), the assets and liabili-


ties of the business are acquired for a lump sum con-sideration. In the case of (2), individual assets of thebusiness are acquired that do not in aggregate neces-sarily constitute an entire business undertaking.

1. Acquisition of Entire Business

The Act provides for the acquisition of a business inthe form of a ‘‘slump sale,’’ defined as ‘‘the transfer ofone or more undertakings as a result of the sale for alump sum consideration without values being as-signed to the individual assets and liabilities in suchsales.’’9

In the case of a slump sale, the Indian resident selleris liable to pay taxes on the gains derived from the saleat rates that vary depending on the length of time forwhich the business undertaking had been held by theseller up to the date of transfer. If the undertaking washeld by the seller for a period of more than 36 months,the applicable rate of tax will be 20% (excluding sur-charge and education cess). If the undertaking washeld for less than 36 months, the transfer will be con-sidered a transfer of short term capital assets, and anygains arising will be treated as short-term capitalgains and charged to tax at the normal applicablerates of tax.10

If the seller in a slump sale transaction is an Indiancompany, no withholding tax requirement applies tothe buyer.11

Goods and service tax (GST) is a tax on the supplyof goods or services or both, and a transaction canqualify as a ‘‘supply’’ if there is a ‘‘supply of goods orservices’’ that is made ‘‘in the course or furtherance ofbusiness.’’ The courts have held, however, that a slumpsale does not amount to a supply of goods, because itis a contract for the sale of a business and not themere sale of goods.12

The transfer of assets by a taxpayer while any pro-ceedings are pending under the Act will be consideredvoid unless the taxpayer obtains a no objection certifi-cate from the income tax authorities for the transfer.13

In a slump sale, the accumulated tax losses of thebusiness whose assets are being sold are not trans-ferred to the buyer. The credit with respect to mini-mum alternate taxes is also retained only by the sellerin such a transaction.

The buyer is allowed to allocate a portion of theconsideration to intangible assets that may be ac-quired as a part of the business undertaking, subjectto the provisions contained in Indian AccountingStandard 103.

The stamp duty applicable to the transaction willdepend on the Indian state in which the assets to betransferred are located. Some Indian states levy stampduty on immovable property only, but most states pro-vide for the levy of stamp duty on movable assets aswell. Usually, in the case of an asset transfer, stampduty is paid by the buyer, but responsibility for payingthe duty can be commercially negotiated by the par-ties to the transaction.14

2. Acquisition of Individual Assets

Where individual assets are acquired that do not in ag-gregate constitute an entire business, the acquisitionof such assets is treated differently from the acquisi-tion of a business as a whole under Indian tax law.

Where there is an individual or itemized sale of assets,the tax consequences differ as between depreciableand non-depreciable assets.

If the seller is an Indian company, no withholdingtax requirement applies to the buyer with respect tothe proceeds from an itemized sale of assets.15 GSTwill, however, have to be accounted for with respect tothe movable assets transferred at the applicable ratesbased on the Indian state in which the sale takesplace.16

Buyers often insist on the seller obtaining a no ob-jection certificate from the income tax authoritiesbefore consummating a transaction.

In the case of the sale of individual assets, tax lossesare not transferred to an FC buyer. Further, the creditwith respect to applicable minimum alternate taxes isretained by the seller.

The stamp duty applicable to the transaction willdepend on the Indian state in which the assets to betransferred are located. Some Indian states levy stampduty on immovable property only, but most states pro-vide for the levy of stamp duty on movable assets aswell. Usually, in the case of an asset transfer, stampduty is paid by the buyer, but responsibility for payingthe duty can be commercially negotiated by the par-ties to the transaction.17

C. Other Considerations

Normally, interest recorded in a company’s accountsis allowed as a deduction for tax purposes. Other in-terest (whether paid to a resident or a nonresident) isdeductible from business profits, provided appropri-ate taxes have been withheld from the interest pay-ments and paid over to the government treasury.

Under the general anti-avoidance rule (GAAR), if anarrangement is declared to be an impermissibleavoidance agreement, then debt may be recharacter-ized as equity or vice versa. India had no thin capital-ization rules prior to April 1, 2017, but such rules havenow been introduced into the Act with effect from thatdate.18 The way in which a company is capitalizedoften has a significant impact on the amount of profitit reports for tax purposes, since the tax legislation ofmost countries typically allows a deduction for inter-est paid on debt but not for dividends distributed withrespect to equity.19 Thus, the higher the level of debtowed by a company, the lower, generally, will be itstaxable profit because of the correspondingly higheramount of interest it pays. Thus, debt is often a moretax-efficient method of financing than equity. For thisreason, many countries have introduced rules thatplace a limit on the amount of interest that can be de-ducted in computing a company’s profit for tax pur-poses. Such rules are designed to protect a country’stax base by countering the cross-border shifting ofprofit via excessive interest payments.

Following the OECD’s BEPS initiative, the Act pro-vides that the deduction of interest expense paid by anentity to associated enterprises is to be restricted tothe lesser of: (1) 30% of the entity’s earnings before in-terest, taxes, depreciation and amortization(EBITDA); or (2) the actual amount of interest paid toassociated enterprises. The provision concerned ap-plies to a borrower that is an Indian company or anIndian permanent establishment (PE) of a foreign


company that pays interest with respect to any formof debt issued to a nonresident or a PE of a nonresi-dent that is an ‘‘associated enterprise’’ of the borrower.Further, with a view to targeting only large interestpayments, the Act provides that the restriction onlyapplies where interest expenses exceed a threshold ofINR 10 million per financial year. The rule does notapply to banks or insurance companies.

D. Merger and Demerger

1. Acquisition by Way of Merger

A merger requires the approval of the National Com-pany Law Tribunal (NCLT). On a merger, the assets, li-abilities, and employees of a transferor entity aretransferred to a transferee entity. The transferor entityis dissolved by operation of law. The shares of thetransferee entity are then issued to the shareholders ofthe transferor entity in the form of consideration forthe merger. Under the Act, any transfer of shares in ascheme of amalgamation is tax exempt.20

Where one foreign entity is amalgamated with an-other foreign entity and capital assets, being shares inan Indian company or shares of a foreign companythat derive their value substantially from shares in anIndian company, are transferred, there will be no capi-tal gains tax consequences in India if the followingconditions are fulfilled: (1) at least 25% of the share-holders of the foreign transferor entity remain share-holders of the foreign transferee entity; and (2) thetransfer is not chargeable to capital gains tax in thecountry in which the foreign transferor company is in-corporated.21 The transferee entity is entitled to carryforward the accumulated tax losses and unabsorbeddepreciation of the transferor entity for a fresh periodof eight years if certain conditions are fulfilled by thetransferor and transferee entities.22

2. Acquisition by Way of Demerger

Unlike in a merger/amalgamation, in a demerger onlythe identified business undertaking is transferred tothe transferee entity, the transferor entity remainingin existence post-demerger. A demerger is also under-taken through a process requiring approval from theNCLT, which allows all the assets and liabilities, alongwith employees of the identified business undertak-ing, to be transferred to the transferee entity. As partof the demerger consideration, the transferee entityissues shares to the shareholders of the transferorentity. The income tax laws specifically provide for atax-neutral demerger, in which no capital gains taxconsequences will arise for the transferor entity on thetransfer of capital assets to the transferee entity, pro-vided the resulting company is an Indian company.23

The transferee entity is entitled to carry forward theaccumulated tax losses and unabsorbed depreciationof the transferor entity for a fresh period of eight yearsif certain conditions are fulfilled by the transferor andtransferee entities.24

Where one foreign entity is demerged into anotherforeign entity and capital assets, being shares in anIndian company, are transferred, there will be no capi-tal gains tax consequences in India if the followingconditions are fulfilled: (1) at least 75% of the share-

holders of the foreign transferor entity remain share-holders of the foreign transferee entity; and (2) thetransfer is not chargeable to capital gains tax in thecountry in which the foreign company transferor is in-corporated.

3. Merger of Indian Company With Foreign Company

The former Companies Act, 1956 (the ‘‘1956 Act’’) con-tained provisions for the merger of a foreign companyinto an Indian company but not vice versa. The Com-panies Act, 2013 (the ‘‘2013 Act’’) made a significantchange by introducing provisions enabling the mergerof an Indian company into a foreign company. Theprovisions relating to both inbound and outboundmergers, along with the corresponding amendmentsto the Companies (Compromises, Arrangements andAmalgamations) Rules, 2016, were notified on April13, 2017. Under these rules, an Indian company canmerge with a foreign company only if the foreign com-pany: (1) is regulated by a securities market regulatorthat is a signatory to the International Organization ofSecurities Commission’s Multilateral Memorandumof Understanding or that has signed a bilateral memo-randum of understanding with the Securities and Ex-change Board of India; or is in a jurisdiction wherethe central bank is a member of the Bank for Interna-tional Settlements; and (2) is incorporated in a juris-diction that is not identified in the public statement ofthe Financial Action Task Force (FATF) as a jurisdic-tion that: (a) has deficiencies regarding strategic anti-money laundering measures or measures to combatthe financing of terrorism; or (b) has not made suffi-cient progress in addressing such deficiencies or hasnot committed to an action plan developed with theFATF to address such deficiencies.

The Reserve Bank of India’s (RBI’s) approval mustbe obtained prior to merging an Indian company intoa foreign company or vice versa. After receiving theRBI’s approval, the Indian company concerned mustobtain the approval of the jurisdictional NCLT. Theconsideration for the merger owed to the sharehold-ers can be discharged by way of cash or the issuanceof depository receipts, or partly in cash and partlythrough depository receipts. The transferee companymust ensure that the relevant valuation is made by amember of a recognized professional body (in the ju-risdiction of the transferee company) and is in accor-dance with internationally accepted standards onaccounting and valuation. A declaration to this effectmust be made to the RBI. It should be noted that the1956 Act did not mandate that the valuation report bedisclosed to the shareholders, although, in practice,valuation reports were generally included in the docu-ments shared with the shareholders and also in courtfilings. This enabled the shareholders to understandthe business rationale for the merger and make in-formed decisions. The 2013 Act now requires themerger scheme to contain the valuation certificate,and the certificate or valuation report must also be an-nexed to the notice of meetings to approve the mergerscheme.25 This requirement may represent a chal-lenge for internal reorganizations where only nominalconsideration is contemplated.

With businesses no longer limited by borders, per-mitting Indian companies to merge with foreign com-


panies is to be applauded. However, the requirementthat RBI approval be obtained for mergers of Indiancompanies (which can otherwise invest overseasunder the RBI’s automatic route) seems unnecessaryand will add to the time required to close such deals.In addition, given that the NCLT is still new (it hasbeen in existence only since June 1, 2016) and has notyet been established in all Indian states, its ability todeal with complex restructuring schemes in a timelymanner has yet to be tested.

As a separate matter, India’s tax laws currently donot contain provisions to enable cross-border mergersto be carried out on a tax-neutral basis. Nor do theyprovide any guidance on the applicability of theGAAR, the impact of the OECD BEPS initiatives,transfer pricing and related issues. Additionally, the2013 Act is silent on the issue of cross-border demerg-ers. Another important aspect is stamp duty, becausethe stamp duty laws of some Indian states levy stampduty on share issuances made under merger schemesapproved by the High Courts.


The important aspects from a foreign seller’s perspec-tive are as follows.

Typically, in the case of a direct sale of shares in anIndian company, a foreign seller will be subject tocapital gains tax in India, subject to any relief avail-able under an applicable tax treaty. The seller will berequired to submit a tax return in India after obtain-ing a permanent account number from the tax au-thorities. A tax withholding requirement arises wherethe seller is a nonresident and sells shares or assets ofan Indian company to another nonresident. Typically,the parties will prefer to obtain a tax withholding cer-tificate from the income tax authorities that either cer-tifies a zero or reduced rate of withholding tax on thetransfer. Sometimes a buyer will agree to withhold taxat reduced rate or not to withhold tax at all, subject tocontractual indemnities and insurance under a sharepurchase/transfer agreement.

India has signed tax treaties with a large number ofcountries. A few of these treaties (such as those withCyprus, France, Mauritius, the Netherlands and Sin-gapore) provide that any capital gains that arise on thesale of shares of an Indian company by a seller resi-dent in the treaty partner country are not taxable inIndia, but may only be taxed in the country of resi-dence of the seller. Relief under one of these treatiescan be claimed if the nonresident seller satisfies thelimitation on benefits criteria prescribed under therelevant treaty and provides a tax residence certificateobtained from the foreign tax authorities concerned.

India has introduced a GAAR that is effective fromApril 1, 2017, and allows for a tax treaty override inthe case of a transaction that lacks commercial sub-stance.26 The GAAR empowers the tax authorities todeclare an ‘‘arrangement’’ entered into by a taxpayerto be an ‘‘impermissible avoidance agreement’’ result-ing in the denial of a tax benefit under the provisionsof the Act or an applicable treaty. An impermissibleavoidance agreement is an arrangement, the mainpurpose of which is to obtain a tax benefit and thatcreates rights and obligations that are not ordinarilycreated between persons dealing at arm’s length, re-

sults in the misuse or abuse of tax provisions, lackscommercial substance, or is not for a bona fide pur-pose.

Indirect share transfers are important in multi-layerscenarios where Indian shares and or assets are soldnot directly but by way of the sale of an intermediaryvehicle that holds the Indian shares or assets. Underthe provisions of the Act, the income of a nonresidentis deemed to accrue or arise in India if it arises, di-rectly or indirectly, through or from any business con-nection in India, through or from any property inIndia, through or from any asset or source of incomein India, or through the transfer of a capital asset situ-ated in India. The indirect transfer of shares provi-sions were introduced in the Finance Act, 2012, byway of Explanation 5 to Section 9(1)(i) of the Act,which makes it clear that an offshore capital asset willbe considered to be situated in India if it substantiallyderives its value, directly or indirectly, from assets (in-cluding shares) located in India. The indirect transferprovisions apply where the value of the assets locatedin India exceeds INR 100 million, and the assets inIndia represent at least 50% of the value of all theassets owned by the offshore transferor company. Thevalue of an asset is its fair market value on the speci-fied date without any reduction for liabilities, if any,with respect to the asset, determined in such manneras is prescribed in the tax rules.

Under the Act, the indirect transfer provisions donot apply: (1) where the transferor of shares or inter-ests in a foreign entity, together with its related par-ties, does not hold: (a) a right of control ormanagement; or (b) voting power or share capital oran interest exceeding 5% of the total voting power ortotal share capital or interest in the foreign companydirectly holding the Indian assets (the ‘‘Holding Co’’);or (2) in the case of a transfer of shares or interests ina foreign entity that does not hold the Indian assets di-rectly, where the transferor, together with its relatedparties, does not hold: (a) a right of management orcontrol in relation to such entity; or (b) any right insuch entity as would entitle the transferor either to ex-ercise control or management of the Holding Co orentitle the transferor to voting power exceeding 5% inthe Holding Co.

The Act imposes a reporting obligation on theIndian entity through which the Indian assets are heldby the foreign entity and requires the Indian entity tofurnish information relating to an offshore transac-tion that will have the effect of, directly or indirectly,modifying the ownership structure or control of theIndian entity. Any failure to furnish such informationwill attract a penalty ranging from INR 500,000 to 2%of the value of the transaction.

From a buyer’s perspective, the Indian tax consider-ations are the same as those for a purchase of stockfrom sellers that are Indian tax residents.

III. BEPS

The BEPS initiative would impact target companiesthat have structures that rely on hybrid arrangementsor instruments. Such companies could suffer an in-creased effective tax rate if proposals contained inBEPS Action 2 are enacted. Interest payments oncompulsorily convertible debentures (CCDs) could be


disallowed in India if those payments are character-ized as ‘‘dividends’’ eligible for a participation exemp-tion in the country of the debenture holder. Targetcompanies with significant overseas operations andthat earn substantial passive income (such as divi-dends, interest or royalties), which are typically sub-ject to a reduced level of tax, may be affected if strictercontrolled foreign company (CFC) rules are made ap-plicable to companies in India. Structures underwhich investors invest in India via jurisdictions withfavorable tax treaties could potentially come underscrutiny and if treaty benefits are denied, gains on exitcould become taxable in India.

IV. Non-Tax Factors

Tax representations, warranties and indemnities gen-erally play a larger role in a share deal, because the taxliabilities of the target corporation remain liabilitiesof the target corporation after the transaction. Anasset deal, on the other hand, often simply includes anindemnity for taxes of the selling corporation and pre-closing taxes that relate to the purchased business.Since so few pre-closing taxes can be assessed againstthe purchaser in an asset deal, this simplified indem-nity is adequate for a purchase of business assets.

The availability of insurance for representationsand warranties and the rise of alternative disputeresolution mechanisms, which are sometimes usedfor disputes that might give rise to an indemnificationclaim but have not yet arisen, have become importantconsiderations in the cross-border context.

Buyers and sellers of an Indian business have theflexibility to designate the applicable law in the salescontract. The Indian Contract Act, 1872 regulates allprovisions relating to contracts in India. There are nostatutory restrictions regarding the choice of law withrespect to the contract, and if one of the contractingparties is a foreign national or entity, then the parties

may expressly agree to any governing law, as long asthe choice of foreign law does not violate India’spublic policy. However, foreign law must be proved inIndian courts in the same manner as any other evi-dence. Therefore, if the parties agree to have foreignlaw govern a contract, then that law must be provedbefore an Indian court to enforce the contract.

NOTES1 Income-tax Act, 1961, Sec. 10(38).2 Income-tax Act, 1961, Sec. 2(42A).3 Income-tax Act, 1961, Sec. 111A.4 With effect from Assessment Year 2017-8.5 Income-tax Act, 1961, Sec. 112.6 Income-tax Act, 1961, Sec. 56(2)(x).7 Income-tax Act, 1961, Sec. 195.8 Income-tax Act, 1961, Sec. 79 read with Sec. 2(18).9 Income-tax Act, 1961, Sec. 2(42C).10 Income-tax Act, 1961, Sec. 50B.11 Income-tax Act, 1961, Sec. 195.12 Coromandel Fertilizers Limited vs. State of AndhraPradesh (1998) 27 APSTJ 313; Sri Ram Sahai vs. Commis-sioner of Sales Tax (1963) 14 STC 275 (All).13 Income-tax Act, 1961, Sec. 281.14 Indian Stamp Act, 1899, 1961, Sec. 29(f).15 Income-tax Act, 1961, Sec. 195.16 Central Goods and Services Tax Act, 2017, Sec. 2(86),Sec. 7 and Sec. 12.17 Indian Stamp Act, 1899, 1961, Sec. 29(f).18 Income-tax Act, 1961, Sec. 94B.19 Income-tax Act, 1961, Sec. 36(1)(iii) and Sec. 37.20 Income-tax Act, 1961, Sec. 47(vi).21 Income-tax Act, 1961, Sec. 47(via).22 Income-tax Act, 1961, Sec. 72A.23 Income-tax Act, 1961, Sec. 47(vib).24 Income-tax Act, 1961, Sec. 72A.25 Companies Act, 2013, Sec. 232(d).26 Income-tax Act, 1961, Chapter X-A.


IRELANDLouise Kelly and Marian KennedyDeloitte, Dublin

I. Introduction

There are many Irish consequences to be consideredwhen undertaking an M&A transaction, including tax,legal, and commercial consequences, from the per-spective of all parties to the transaction. The discus-sion below focuses on the tax implications. In terms ofparties to the transaction, the discussion focuses onthe acquiring party being a foreign company buyer(‘‘FC buyer’’ or ‘‘purchaser’’), but explores differentscenarios for the vendor, i.e., whether the vendor isIrish or foreign and a company(ies) or individual(s).The company that is being acquired is referred to asthe ‘‘Target’’ and is assumed to be Irish incorporatedand Irish tax resident.

II. Overview of Capital Gains Tax

From an Irish tax perspective, capital gains tax (CGT)is currently charged at a rate of 33% on the chargeablegain realized on the sale of any asset and is payable bythe person making the sale, i.e., the vendor. Any CGTdue from a company (except with respect to develop-ment land) is included with the regular corporationtax liability of the company. While the corporation taxrate is lower than the CGT rate, any chargeable gainsare ‘‘grossed up’’ for tax purposes so that the effectiverate on the gains equals the 33% CGT rate.

The chargeable gain/profit for Irish CGT purposes(discussed further below in terms of calculation) iscomputed as follows (subject to certain exceptionssome of which are discussed below):

Chargeable gain/profit = consideration received onsale of the asset less original cost1 of the asset lessqualifying enhancement expenditure and qualifyingexpenses of sale/acquisition

An allowable CGT loss can be used in the period inwhich it arises to shelter other capital gains. To theextent there are excess capital losses, it is generallypossible to carry forward such losses indefinitely inthe company in which they arose but such losses areonly available for use against capital gains arising infuture periods.2

In terms of territorial scope, both Irish tax residentindividuals and companies are subject to Irish CGT onthe sale of assets, regardless of where the assets are lo-cated, i.e., worldwide assets. Conversely, forcompanies/individuals that are non-Irish resident and

not ordinarily resident,3 a charge to CGT only ariseswith respect to certain ‘‘specified assets,’’ namely Irishland and buildings, certain mining/mineral rights andshares in a company that derive the greater part oftheir value from such assets, or capital assets used forpurposes of a trade carried on in Ireland through abranch or agency.

The facts of each case will need to be examined todetermine the optimal structure to effect the transac-tion for both the vendor and purchaser, including pre-sale structuring, financing and exit strategies, all ofwhich are discussed below.

III. Share Sale Versus Asset Sale

Whether a deal should be structured as a share sale orasset sale is an important consideration and will havedifferent implications for both parties. It may gener-ally be the case that the purchaser’s preference is foran asset purchase, for a variety of reasons exploredbelow, but this may be overridden by stamp duty costson acquisition. While stamp duty considerations arenow less material since the top rate of stamp duty hasbeen reduced from 9% to 2% with respect to assets,relative to a stamp duty charge of 1% in relation toshares in an Irish incorporated company, it may stillrepresent a significant tax saving to pursue a sharepurchase. Coupled with the vendor’s natural prefer-ence (in most cases) for a share sale, most acquisitionsin Ireland generally take the form of a share sale/purchase.

A. Perspective of the Vendor

The implications for the vendor will depend on theresidence of the vendor but should not be impacted bythe residence of the purchaser. In each case, unless thevendor wishes to sell only a part of its business or ifthere is another compelling reason (for example, theasset in question has a high base cost such that therewould be no significant liability on a sale), the vendorwill usually have a preference for a share sale for anumber of reasons.

1. Capital Gains Tax Calculation on Asset Sale

In the case of an asset sale, the calculation of CGT isrelatively straightforward and derived from the for-mula set out in II., above. There may be some oppor-


tunities for planning from the perspective of thevendor (for example, transferring assets to companieswith existing capital losses), but these are outside thescope of this paper. Broadly speaking, there are lim-ited exemptions from CGT arising on assets sold by anIrish company. There is an exemption for ‘‘wastingassets,’’ which are assets with an expected useful lifenot exceeding 50 years that are not used for businesspurposes and have not qualified for tax depreciation(‘‘capital allowances’’).

In terms of territorial scope regarding an asset sale,the discussion below assumes that the vendor of theassets is an Irish resident company, the company thatwould be the Target in a share acquisition.

As mentioned above, a vendor usually has a prefer-ence for a share sale for a number of reasons. Perhapsthe most compelling of these is that the vendor may beexposed to a double charge to taxation in the event ofan asset sale. The chargeable gain arising on the saleof assets should be subject to CGT, but the proceedsfrom the sale of the assets are likely to be trappedwithin the company that has made the sale until suchtime as they are repatriated to the shareholders,which potentially may be subject to the higher mar-ginal rate of tax.

The example below demonstrates the double taxa-tion issue, i.e., a sale of assets with a subsequent repa-triation of net proceeds to the shareholders in theform of dividends. (The example assumes an Irishresident individual shareholder, subject to the mar-ginal rate of tax. Dividend withholding tax has beenignored):

EurosProceeds from sale of assets 1,000,000Cost of assets (400,000)Gain arising in company 600,000CGT on gain – 33% (200,000)Proceeds available for distribution 400,000

Income tax on extraction (marginalrate of 52%) (208,000)

Net proceeds received by shareholder 192,000

In the case of corporate shareholders, it may be pos-sible for cash to be repatriated more tax efficiently, forexample, because dividends paid between Irish com-panies are exempt from tax. But it is important to re-member that in some cases anti-avoidance legislationmay apply; for example, where a company is to be liq-uidated shortly after the sale of its assets, Irish anti-avoidance legislation may apply to treat any pre-liquidation dividends received by shareholders as acapital transaction, which may result in the doublecharge to taxation seen in the above example (unlessthe participation exemption applies).

In summary, it is important to remember that a saleof assets does not give the shareholder, whether an in-dividual or a corporate shareholder, the direct benefitof the sale proceeds, which are effectively trappedwithin the company until such time as they are ex-tracted. This may lead to very tax inefficient outcomesas explored in the above example, where the effectivetax rate is 68%.

Should the company selling the assets incur a capi-tal loss on the sale, such loss will be ring-fencedagainst future capital gains arising in that company

and non-transferable. In the event that the company issubsequently liquidated, the capital loss will be lost,i.e., it remains non-transferable.

In the case of a sale of goodwill, it is generally thecase that the goodwill will have no tax basis. In thesame vein, there is no scope for a step-up in tax basiswith respect to goodwill. Thus, any gains made withrespect to the sale of goodwill may be significant.

2. Capital Gains Tax Calculation on Share Sale

In direct contrast to the above, in the case of a sharesale, shareholders, whether individual or corporate,will receive the cash, net of CGT, directly on a sale.

While the 33% rate of CGT is generally payable onall asset sales, in the case of a sale of shares, there maybe scope to reduce or eliminate the CGT liability aris-ing:s In the case of an individual vendor, the 33% tax rate

is much more attractive than the marginal tax rateapplying to regular income (for example, wages anddividends) received by an individual. However, ifcertain conditions are fulfilled, an individual vendormay be able to avail him/herself of retirement reliefon the sale of his/her shareholding in a company.Such conditions include that the individual has beeninvolved in the running of the business and has at-tained a certain age (without actually having toretire). The company itself must fulfil a number ofconditions, including being a trading company anda ‘‘family’’ company within the meaning of the sec-tion concerned, meaning that the individual, eitheron his/her own or with family members, must hold acertain percentage of the share capital/voting rights.

If all relevant conditions are fulfilled, proceedsunder a prescribed cap should be exempt from CGT,with marginal relief available with respect to any pro-ceeds over the amount of the cap.s Another relief that may be available to an individual

vendor is entrepreneurial relief, which, subject tocertain conditions being fulfilled, may allow an en-trepreneur to apply a CGT rate of 20% on chargeablegains arising on the disposal of certain businessassets on or after January 1, 2016, up to a lifetimelimit of 1 million euros.

s In the case of a corporate vendor, relief from CGTmay be available under Irish legislation via the par-ticipation exemption. Where certain conditions arefulfilled, there is an exemption from CGT on anygain on the sale of a subsidiary company. At a veryhigh level, the conditions to be fulfilled are as fol-lows:/ The shares sold must be shares in a company

resident in an EU Member State (including Ire-land) or a country with which Ireland has a taxtreaty.

/ The vendor must have held a shareholding of atleast 5% for a continuous period of 12 monthswithin the 24 months prior to the date of sale.

/ The Target must be a company whose businessconsists ‘‘wholly or mainly’’ of the carrying on ofa trade. Alternatively, it is possible to look at thevendor and all of its subsidiaries, which, whentaken together, must be wholly or mainly trad-ing. In both cases, ‘‘wholly or mainly’’ means inexcess of 50%.


/ The shares in the company must not derive thegreater part of their value from specifiedassets.4

While the participation exemption states that theTarget must be resident in a particular jurisdiction,i.e., an EU Member State, including Ireland, or acountry with which Ireland has a tax treaty, it does notimpose any tax residence obligations on the vendor.However, as an FC vendor would only be subject toIrish CGT on the sale of shares where those sharesderive the greater part of their value from specifiedassets and the participation exemption does not applywhere the shares derive the greater part of their valuefrom specified assets, in reality, the participation ex-emption should not apply to FC vendors.

If the vendor of the shares is an Irish company, itwill be subject to CGT on the gain arising on the saleof its subsidiary, but the participation exemption maywork to exempt this gain from tax. A capital loss is notavailable for set off against other chargeable gains tothe extent that any gain would have been exempt.

Where a capital loss arises on the sale of an Irishsubsidiary by a foreign country parent, such loss willbe subject to the rules of the country of residence ofthe parent. A capital loss that arises on the sale ofshares that derive the greater part of their value fromIrish specified assets is available to set off only againstfuture gains arising on the sale of specified assets.

Where an exemption may apply, it is necessary toconsider the facts of each individual case to ascertainwhether the conditions for the exemption are fulfilled.

3. Other Considerations for the Vendor—Share SaleVersus Asset Sale

Apart from the desire to avoid potential double taxa-tion, there are a number of other considerations forthe vendor in establishing whether it wishes to struc-ture a deal as a share sale:

s In general, in Ireland, where an asset on whichcapital allowances (tax depreciation) have beenclaimed is sold, the tax written-down value of theasset is compared to its net book value to determinewhether a tax charge (or indeed allowance) mayarise. In the event of a share sale, since the assetsremain in the company with their base cost unaf-fected, the vendor should not be liable for any claw-back of allowances previously claimed in the eventan asset is sold.

s One aspect that should be given consideration bythe vendor before the decision on whether a sharesale or asset sale is pursued is that a share sale mayresult in less consideration receivable by the vendorbecause of potential latent gains in the company. Asmentioned above, in the event of a share sale, theassets remain in the company with their base costunaffected. A latent gain can arise to the new ownersin the future where the asset is subsequently sold, inthat the lower original base cost attaches to a poten-tially appreciating asset. Where this is identifiable atthe time of sale, it may be factored into the sale priceand may result in the vendor receiving lower consid-eration.

s Tax losses transfer with the entity and may be used(see IV., below).

s There is usually no need to consider employmenttax matters, as the individual employees remainwithin the Target, with the exception of any payrolltaxes that may crystallize depending on how anyshare-based schemes are impacted.

B. Perspective of the Purchaser

There are a number of reasons why a purchaser mayprefer an asset deal over a share deal that would needto be considered by both parties:

s The issue of latent gains mentioned in III.A.3.,above, may also translate as a disadvantage for thepurchaser, as the purchaser may be exposed to alarge unknown liability in the future on the sale ofthe assets acquired. As also mentioned above, wherethis is identifiable at the time of sale, this should befactored into the sale price.

s Similarly, an asset sale involves less risk for the pur-chaser, as the purchaser does not take over the inher-ent liabilities or claims in the company as it wouldwith a purchase of the share capital of the company.

s An asset sale facilitates the selective acquisition ofassets.

s The tax-deductible cost of individual assets may bethe price paid, i.e., an asset sale may allow the pur-chase price to be written off for tax purposes. In theevent of a share sale, the original base cost and pre-viously claimed amounts move with the asset. Thisis not the same as the step-up in basis found in otherjurisdictions—the relevant Irish rules are discussedin further detail in V., below.

s Even though the stamp duty charge on an asset saleis higher than on a share sale (2% vs. 1%), it is pos-sible to benefit from certain exemptions from stampduty, for example, where assets can transfer by deliv-ery or if certain exemptions apply (such as the stampduty IP exemption).

C. Conclusion: Asset Sale Versus Share Sale

While it is a broad rule of thumb that a vendor willgenerally prefer a share sale, this is not always thecase: the preference would ultimately depend on therespective facts and circumstances of the vendor andthe transaction. Vendors may be amenable to an assetsale where, for example, they have a high tax-deductible base cost in the assets to be sold and, incontrast, a low tax-deductible base cost in the sharesin the company. Equally, an asset sale may be prefer-able where the vendor wishes to sell certain assets butcontinue to carry on the business overall.

In the same vein, while a purchaser may have a pref-erence for an asset sale, this is not always the case andwhere high value assets are being bought/sold, thehigher stamp duty rate may be a deterrent and changethe preference of the purchaser to a share sale.

However, the vast majority of such transactions arestructured as share sales in Ireland, for all or some ofthe reasons discussed above, especially the avoidanceof double taxation on an asset sale and the potential toobtain a CGT exemption on a share sale.


IV. Utilization of Losses in Target

A. Trading Losses

As a general rule, trading losses that arise in a com-pany are available for use indefinitely, but only againstprofits of the same trade and in the same company inwhich they arose. There is the possibility that currentyear losses can, in some cases, be group-relieved or re-lieved against other sources of income, and group-relieved to other companies.

As mentioned above, where tax losses have accruedin a company and the shares in that company havebeen bought, there may be the opportunity to utilizethe losses post acquisition against profits of the sametrade. However, Ireland has rules that apply wherethere is a change in the ownership of a company withtax losses that aim to prevent the purchase of a com-pany solely for the large tax losses that have accruedin it. Where there is a change in the ownership of acompany with tax losses, it may therefore be neces-sary to consider the provisions of the legislation con-cerning loss buying, which may work to disallow anyfuture use of historic losses. This also applies to capi-tal allowances (tax depreciation), since these aretreated as deductions in Ireland and would be in-cluded in the accumulated losses.

Broadly speaking, Irish legislation5 disallows theuse of historic accrued losses if:

s Within a period of three years, there is both achange in the ownership of a company and (eitherearlier or later in that period, or at the same time) amajor change in the nature or conduct of the tradecarried on by the company; or

s At any time after the scale of the activities of thetrade carried on by a company becomes small ornegligible, and before there is any considerable re-vival of the trade, a change in the ownership of thecompany occurs.

The three-year rule is important in that it not onlyincorporates the period post-acquisition but also thethree-year period preacquisition so that it is necessaryto consider whether the previous owners have madeany significant changes in the business in the periodup to acquisition. It will also be important for the pur-chasers to consider the direction in which they intendto steer the business.

Aside from the three-year rule, the individual ele-ments of the above rule are explored in greater detailin legislation and case law. A change in ownership isconsidered by reference to the beneficial holdings ofthe company’s ordinary share capital, with a changetaking place where more than 50% of the ordinaryshare capital changes hands. A major change in thenature or conduct of the trade includes a majorchange in the type of property dealt in, or services orfacilities provided, in the trade, or a major change incustomers, outlets or markets of the trade. The indi-vidual facts need to be examined in each case, as it hasbeen suggested that a ‘‘major’’ change is one that issomething more than significant but less than funda-mental. In addition, the suggestion in Willis v. PeetersPicture Frames Ltd.6 is that a major change in thenature or conduct of a trade refers to qualitativerather than quantitative change.

Where the section has effect, no relief is giventhrough setting off a loss incurred by the company inan accounting period beginning before the change ofownership against any income or other profits of anaccounting period ending after the change of owner-ship. Where the change of ownership takes place inthe middle of an accounting period, there may be atime-apportioned split period with the first periodending on the date of the change of ownership. Anylosses occurring in the period up to that point may berelieved on a current year basis, with any accruedlosses remaining at that time constituting preacquisi-tion losses and being subject to the loss buying rules.

The rules should be the same regardless of whetherthe original vendor is a foreign company/individualsor an Irish company/individuals, i.e., the nature of theshareholders of the Target, as companies or individu-als, should have no impact as the issue lies at theTarget company level. What it is important to remem-ber is that the losses may be used in the future only inthe Irish company and only against profits of the sametrade, subject to there not being a major change in thenature or conduct of the trade accompanying thechange in ownership within the time limits pre-scribed.

B. Capital Losses

It is also important to consider whether the Target hasany unused capital losses on acquisition and whethera change in ownership may affect the availability ofthese losses. At a very high level, capital losses thatarose in the Target in the period pre acquisitioncannot be used to relieve capital gains arising on thesale of preacquisition assets of the purchaser’s preac-quisition business.

Where a preacquisition asset of the Target is sold inthe period post acquisition, there are rules to deter-mine how much of the loss is attributable to the peri-ods pre and post acquisition and, as above, thepreacquisition loss should be unavailable for useagainst gains on the sale of preacquisition assets ofthe purchaser.

V. Step-up in Basis and Capital Allowances

A. Step-up in Basis—Future Sale of Assets/SharesAcquired

An election to create a step-up in the tax basis is not aconcept in Irish tax law in the same way as it is insome other jurisdictions. The acquisition cost for CGTpurposes for the purchaser of individual assets willdepend on whether there is an acquisition of theassets themselves or an acquisition of the shares of thecompany.

If individual assets are purchased from the vendor,the price that the purchaser pays to acquire the assetsshould constitute the base cost for CGT purposes onthe occasion of any future sales. While this may, insome respects, be seen as a step-up in the tax basis onthe original cost of the assets, it is not possible toachieve a step up in tax basis when the shares of thecompany have been acquired—the base cost and taxwritten-down value of the assets will remain the samein the Target in the period post-acquisition.


If this is considered in the context of a potentialfuture sale of the assets by the purchaser, it is impor-tant to remember at this point that a company that isa nonresident of Ireland is generally only liable toIrish CGT on the sale of specified assets.

Where individual assets are sold to an FC buyer, thebase cost for those assets going forward will be theprice paid by the FC buyer for the purchase of theassets, i.e., the consideration paid to the vendor. How-ever, in the future, the FC buyer should be liable toIrish CGT only to the extent it acquired and subse-quently sells specified assets, in which case, the FCbuyer should be liable to CGT at the rate of 33% on thedifference between the market value of the assets atthe time of sale and the price for which it bought theassets, i.e., the consideration paid to the vendor, notthe original cost of the assets.

In the event of a share sale, the individual assets willhave remained within the company with their basecost unaffected and the purchaser will acquire thesame original base cost of the individual assets on theacquisition of those assets. Therefore, assuming theTarget remains resident in Ireland post transaction, inthe event of a subsequent sale of the assets that re-mained in the Target, it will be the Target on whichCGT is charged. As mentioned above, in the absenceof planning, this leaves the company open to poten-tially crystallizing a large latent gain on a subsequentsale of the assets and if such latent gain is known priorto the acquisition of the company, it may be factoredinto the consideration paid by the purchaser.

The FC buyer should be directly liable to CGT onlyto the extent the shares in the Irish company are sub-sequently sold and the company derives its value fromIrish land or buildings.

B. Step-up in Basis and Capital Allowances/TaxDepreciation

The step-up concept will have an impact on any capi-tal allowances (tax depreciation) that may be claimedby a company. A deduction for 12.5% of the cost of anasset (i.e., total cost over eight years) may be claimedby an Irish resident company. It is critical for theavailability of a deduction that the asset be used forpurposes of the Irish company’s trade at the end of theyear.

A step-up in tax basis (of sorts) with respect to anytax deductible capital allowances (tax depreciation) isonly possible where individual assets are acquired andit is on the price paid for them on which the purchasermay be eligible to claim capital allowances. However,this assumes that the assets continue to be used aspart of a trade in Ireland. If this is not the case and theFC buyer utilizes the assets for a trade elsewhere, for-eign tax law may need to be consulted as the implica-tions in the foreign country concerned may bedifferent.

If the shares of the company are acquired, as men-tioned above, the company’s individual assets willretain the same base cost and transferring tax written-down value. It is on this basis that the acquiring com-pany claims capital allowances. Therefore, thecompany may be entitled to reduced, or even no, capi-tal allowances with respect to some assets if those

assets were wholly/substantially written down for taxpurposes prior to the acquisition.

There are different rates for different assets (for ex-ample, IP and industrial buildings), but the mostcommon capital allowances rate is 12.5%.

VI. Non-Cash Consideration and SubsequentResale

The underlying assumption to this point in the paperhas been that the transactions have all been effected inexchange for cash consideration; however, it is pos-sible for the purchaser to issue shares in itself in con-sideration in lieu of cash.

The possibility of retirement relief or the participa-tion exemption applying was explored in III.A.2.,above, and it is important to note that these work toexempt the gain with respect to a cash transaction. Ashare-for-share exchange, however, is a deferralmechanism only and, on a subsequent sale of theshares received as consideration, the tax implicationswill need to be considered. This applies equally irre-spective of whether the vendor is corporate or indi-vidual.

Where a number of conditions are fulfilled, the leg-islation provides that the shares disposed of aretreated as an exchange for new shares in the FC buyer.The provision concerned applies in such a way thatthe new shares in the FC buyer are treated as acquiredat the same time and for the same base cost as theshares that are sold, i.e., the shares in the Target. Ef-fectively, this rolls up the gain and defers it until suchtime as the new shares are disposed of, at which timeCGT may be payable.

A certain amount of caution is, therefore, requiredwhen the provisions of this section are relied on, asthe subsequent sale of the shares should result in theCGT liability crystallizing, with the original cost anddate of acquisition applying. There may, therefore, beno benefit where the vendor intends to dispose of theshares acquired in the exchange shortly after thetransaction has completed.

The territorial scope of CGT also needs to be consid-ered. If the vendor of the Target is Irish resident, therewill be a deferral of the CGT due at the time the sub-sidiary is sold and instead the CGT should be payablein the future in the event of a future sale of the sharesissued in the FC buyer. If the former shareholders ofthe Target were nonresident, such a transactionshould have no Irish CGT implications unless theTarget or, in the future, the FC buyer derived thegreater part of its value from Irish specified assets.

VII. Structuring the Acquisition—Financing andUse of a Vehicle

Under current law, there are no thin capitalization orEBITDA rules regarding interest. However, there arestill certain provisions in the Irish tax legislation thatcan deny a full deduction for interest payments in cer-tain circumstances. The difficulty that may arise withrespect to interest incurred on debt used to fund anM&A transaction is whether the interest is deductiblein the first instance. Broadly, a deduction for interestin Ireland may be expected to be available where the


company falls into one of three categories, i.e., it isone of the following:

s A trading company in Ireland. This is the moststraightforward category. A full deduction againsttaxable income is generally available in Ireland forinterest and other financing costs of a revenuenature incurred by an Irish incorporated and taxresident corporate borrower in the course of the bor-rower’s trade. A deduction for interest may be al-lowed in the case of some asset purchases, or wherethe existing trading debt of the company is refi-nanced, provided the interest was incurred ‘‘whollyand exclusively’’ for purposes of the company’strade.

s A securitization vehicle (i.e., an ‘‘s.110 company’’7).An s.110 company is an Irish resident special pur-pose vehicle that holds and/or manages ‘‘qualifyingassets.’’ It is a tax-efficient vehicle and may be usedin limited circumstances, where the transaction isfor the acquisition of financial assets. This is not dis-cussed in any further detail for purposes of thispaper.

s A company complying with the requirements ofsection 247 of the Taxes Consolidation Act 1997 (i.e.,an ‘‘s.247 company’’).

Interest incurred on debt to finance an M&A dealwill likely not be deductible with the regular expensesof a company’s trade (other than in relation to someassets/refinancing) and, therefore, for M&A deals, themain area of focus will be section 247. Especiallywhen there is a cross-border element, care should betaken and a consideration for the FC buyer may bewhether it is efficient to have debt in Ireland com-pared to other jurisdictions.

Section 247, which gives relief for interest as acharge,8 should only apply where an Irish residentcorporate purchaser is involved and is financing theacquisition in whole or in part by debt. It is a verycomplex piece of legislation and certain conditionsneed to be fulfilled before relief can be granted underthe section. These conditions include: ‘‘Day 1 tests’’(i.e., tests that must be satisfied as of the date of theacquisition); ongoing tests over the life of the loan;having to contend with strict recovery of capital(deemed deleveraging) rules over the life of the loanthat may work to reduce/eliminate the tax relief ondebt financing; and ensuring that the interest actuallyqualifies to be treated as interest as a charge. It is im-portant that the company acquired is either a tradingcompany or a holding company of companies that,taken together, are wholly or mainly trading.

In order to secure s. 247 interest relief as a charge,the FC buyer will need to make the acquisitionthrough an Irish resident holding company (HoldCo)vehicle. Where the acquisition and acquisition debt(including the fulfilment of a number of conditions forthe interest expense to qualify for interest relief as acharge) are structured correctly in a share acquisition,the interest expense incurred by the Irish resident pur-chasing subsidiary of the FC buyer should be treatedas interest relief as a charge and set off against otherprofits arising in the s. 247 company. If there are nosuch profits in the s. 247 company, the excess chargecan be group relieved to other Irish companies against

their total profits in the period in which the interest ispaid, as relief is given on a paid basis.

While, as noted above, there are no EBITDA rulesregarding interest, a consideration in the future forcompanies with debt financing will be the EU Anti-TaxAvoidance Directive (ATAD). This provides for a 30%restriction on interest deductibility with reference toEBITDA, but at this stage it is not clear whether the30% restriction proposed by the ATAD will be imple-mented in Ireland in 2019 or 2024. If the existing Irishrules, including section 247, can be seen as ‘‘equally aseffective’’ as the ATAD rules, then implementationmay be deferred until 2024. It will be necessary toreview the proposed legislation, once available, to de-termine the working of the provisions and how theymay affect companies with debt financing.

VIII. Other Considerations

A. BEPS/Post-Acquisition Opportunities

Depending on the intention of the purchaser in thecase of a share acquisition, the Target may or may notremain in Ireland post completion of the transaction.A planning opportunity may exist if there is substanceat the Target level. The purchaser, or the MNC ofwhich the purchaser is a part, may make the decisionto keep Ireland within the structure to support otherstrategies within the group, for example, making theTarget the Principal Company.

B. CG50 Clearance Certificate

With respect to a share sale, an area that may providedifficulty for the parties is that of CGT clearance. Thelegislation provides that, where the consideration (inmoney or money’s worth) exceeds 500,000 euro andthe shares acquired derive more than 50% of theirvalue from specified assets,9 the purchaser is requiredto apply a 15% withholding tax to the consideration.However, this 15% withholding tax can be avoidedwhere the seller obtains a CG50 clearance certificatefrom the Revenue Commissioners and provides thepurchaser with this certificate prior to the consider-ation being paid or delivered to the seller. This maycause delays for completion and should be an area ofpriority where more than 50% of the assets are speci-fied assets.

C. Contracting Arrangements

As a general principle, the statute of limitations forcontractual claims is six years from the date of com-mencement or accrual of the cause of action, i.e., fromthe date of completion of the deal instead of the dateon which the contract was entered into. As alreadymentioned, the warranties and indemnities are moreonerous with respect to a share sale and usually thereare extensive warranties and indemnities in a sharesale. Usually, there will be no ‘‘fundamental provi-sions’’ that survive beyond the statute of limitations inIreland.

The law governing the contract depends on the con-tracting parties to the agreements. In many cases,where an Irish company and a U.S. company are partyto the contract, the law of a U.S. state may take prece-


dence. Similarly, U.K. law may take precedence whena party to the contract is a U.K. company. However, itwould be rare for either U.K. or U.S. law to take pre-cedence where no party to the contract is resident ineither country.

NOTES1 Indexation relief (or ‘‘inflation relief’’) may be claimed ifthe vendor acquired the asset disposed of before 2003.This also applies with respect to any qualifying enhance-ment expenditure in the year in which the expenditurewas incurred. If this applies, the market value of the assetat the time of purchase is increased by reference to pre-scribed inflation rates.2 Subject to certain restrictions where the loss arose onthe disposal of the asset to a connected person.3 An individual becomes ordinarily resident in Ireland ifhe/she has been tax resident in Ireland for each of thethree immediately preceding tax years. Once a person be-comes ordinarily resident, he/she will continue to be ordi-narily resident in Ireland until he/she has beennonresident for three consecutive income tax years.

4 As described in II., but only relevant for the participa-tion exemption are Irish land and buildings, certainmining/mineral rights and shares in a company thatderive the greater part of their value from such assets, i.e.,not branch assets or shares deriving their value from thesame.5 Taxes Consolidation Act (TCA) 1997, sec. 401.6 [1983] STC 453.7 In line with TCA 1997, sec. 1108 ‘‘Charges’’ are amounts deductible against a company’stotal taxable profits (i.e., its income and capital gainschargeable to corporation tax) rather than in computingits taxable trading income. Charges are deducted after allother deductions (other than group loss relief) have beengiven against total taxable profits. A deduction forcharges is only given for amounts actually paid duringthe accounting period concerned.9 As in the case of the participation exemption, only rel-evant for the CG50 Clearance Certificate are Irish landand buildings, certain mining/mineral rights and sharesin a company that derive the greater part of their valuefrom such assets, i.e., not shares deriving their value frombranch assets.


ITALYCarlo GalliClifford Chance, Milan

I. Acquisition by Foreign Country Buyer of ItalianBusiness From Italian Resident Seller

When an Italian business is to be acquired, the choicebetween a share deal and an asset deal, or a combina-tion of the two, will be at the heart of the negotiations,as the two options have very different consequencesfor both the seller and the purchaser.

A. Asset Deal Versus Share Deal: Seller Perspective

An Italian resident seller or an Italian permanent es-tablishment (PE) of a nonresident seller would nor-mally have every reason to opt for a share deal, or, if ashare deal were not immediately available (because,for example, the business to be disposed of was part ofa wider business all contained within the same legalentity), to convert an asset deal into a share deal.

In the case of an asset deal, the capital gain (loss)deriving from the disposal of the business (azienda)will be subject to Italian corporate income tax (IRES)at a rate of 24%. If it has held the business for at leastthree years, the seller may be able to opt to have thecapital gain taxed in equal instalments in the fiscalyear of the transfer and subsequent years (up to thefourth).1 The capital gain arising on the disposal of abusiness is not subject to the regional tax on businessactivities (IRAP) or any other Italian taxes.

In the case of a share deal, the seller will normallyhave access to the participation exemption,2 with theconsequence that only 5% of the capital gain will besubject to IRES at a rate of 24%, resulting in an effec-tive rate of 1.2%. The capital gain will not be subjectto IRAP. Any capital loss arising from the disposal ofshares eligible for the participation exemption regimewill not be deductible.3

If the conditions for the participation exemptionare not fulfilled, the capital gain will be fully subject toIRES at the rate of 24% (again no IRAP will apply),without prejudice to the option to have the capitalgain taxed in equal instalments in the fiscal year of thetransfer and subsequent years (up to the fourth) pro-vided the shares have been recorded as fixed financialassets in the last three financial statements.

Should a share deal not be immediately available,Italian tax law provides a special regime allowing forthe hive-down of a business into a separate companyaccompanied by rollover relief, with the participation

exemption then being available with respect to thedisposal of the shares of the recipient company.4 Morespecifically:s The transferor rolls over the tax basis of the busi-

ness into the shares; ands The tax basis of the assets and liabilities of the busi-

ness is preserved in the hands of the transferee.

As a consequence, any difference between the ac-counting value of the business transferred and that ofthe shares received represents a capital gain or loss foraccounting purposes only. At the same time, thestepped-up accounting value of the assets received, in-cluding goodwill, is not recognized as tax basis in thehands of the recipient company, so that it does notgive rise to amortization or depreciation for purposesof either IRES (at the rate of 24%) or IRAP (at the rateof 3.9%).

The shares of the recipient company may then bedisposed of by the seller, which may be able to take ad-vantage of the participation exemption, as describedabove. The holding period of the shares will bedeemed to correspond to the holding period of thebusiness hived down, so that the seller will not need towait 12 months between the contribution and the saleof the shares. Hence, the transaction as described hasthe effect of transforming an asset deal into a sharedeal and taking advantage of the fact that the capitalgain arising is taxed at an effective rate of only 1.2%.However, this course of action will not be beneficial tothe purchaser and may have consequences in terms oftransfer taxes (see I.B., below).

B. Asset Deal Versus Share Deal: Buyer Perspective

Conversely, from the buyer’s perspective, a share dealwould not allow a step-up of the tax basis of the assetsof target, although with proper transaction and post-transaction structuring such a step-up may beachieved (see below).

In the case of an asset deal, on the other hand, theassets acquired (including goodwill) will be allocateda tax basis equal to the relevant price paid. Such taxbasis may be amortized and depreciated for purposesof both IRES (at the rate of 24%) and IRAP (at thegeneral rate of 3.9%).

Special attention would need to be paid to transfertaxes, for which both parties are legally jointly andseverally liable, though such taxes are commercially


allocated to the purchaser under prevailing marketpractice. Under Italian tax law, the outright sale of abusiness is subject to registration tax at varying rates(the general rate being 3% of the value of the relevantassets). Such transfer tax is normally borne by thebuyer, which would ‘‘compensate’’ the acquisition ofthe full tax basis in the relevant assets.

Conversely, the contribution of a business is subjectto a registration tax of 200 euros. Similarly, the trans-fer of shares is not normally subject to registrationtax—when a transfer of shares is subject to registra-tion tax, the tax is imposed in a fixed amount of 200euros. In light of the associated tax benefits for sellers(see I.A., above), it has become common practice inItaly to execute the transfer of a business by way of ahive-down of the business into a newly-establishedcompany followed by sale of the shares of the newly-established company to the acquirer. However, the taxauthorities and tax courts are consistently character-izing such transactions as outright sales of the rel-evant business, requiring the imposition of thetransfer tax at a rate of 3% (or such other higher rateas may apply with respect to a particular asset, such asreal property).5 It has, therefore, become morecommon to provide that the possible consequences ofsuch a recharacterization of the transaction will beborne by the seller, in whose sole interest this particu-lar transaction structure will have been implemented.

Finally, and only in the case of share deals involvingshares and similar rights in Italian joint stock compa-nies (societa per azioni), the Italian financial transac-tion tax is levied on the transfer of shares andparticipating financial instruments (at the rate of0.1% for transfers executed on certain qualified mar-kets and at the rate of 0.2% in other cases).

C. Treatment of Funding Costs

The acquisition of either shares or assets may be, andnormally is, funded through shareholder or third-party debt. Any interest payable on such debt is de-ductible for Italian tax purposes, subject to therelevant limitations, only if incurred by an Italiancompany or an Italian PE of a nonresident enterprise(i.e., interest incurred by a foreign entity will not bedeductible for Italian tax purposes unless it is effec-tively connected with an Italian PE of the entity).

Any interest expense is subject to the interest bar-rier rule in Article 96 of the Income Tax Code. Morespecifically, interest expenses borne by an industrialcompany or a parent company of an industrial group(irrespective of whether they are related to loansgranted or guaranteed by shareholders), other thancapitalized interest expenses, are deductible up to theamount of interest income accruing to the companyin each tax period. Any excess is deductible for IRESpurposes, under the accrual principle, to the extent of30% of the company’s ‘‘gross operating income.’’‘‘Gross operating income’’ is the difference between:

The ‘‘value of production,’’ i.e. turnover (item A ofthe profit and loss accounts scheme contained in Ar-ticle 2425 of the Italian Civil Code); and

The costs of production (item B of the profit andloss accounts scheme contained in Article 2425), ex-cluding depreciation, amortization and financial leas-ing instalments relating to business assets, and

extraordinary income or losses deriving from thetransfer of a going concern or parts of a going con-cern.6

Any excess of interest expenses over the abovethreshold (i.e., 30% of EBITDA) is nondeductible inthe current year but may be carried forward for de-duction in subsequent tax periods to the extent the netinterest expenses (i.e., interest expenses exceeding in-terest income) accrued in such tax periods are lessthan 30% of EBITDA. Any excess of 30% of EBITDAover net interest expenses derived from tax periods be-ginning on or after January 1, 2010, may be used to in-crease the EBITDA threshold for subsequent taxperiods. Subject to certain conditions, interest ex-penses in excess of 30% of EBITDA (or any carried for-ward interest) generated by a company after itsinclusion in a tax consolidation may be used to offsetthe taxable income of another company within the taxconsolidation up to the amount of 30% of such com-pany’s EBITDA that has not been used to enable thatcompany to deduct its own interest expenses.

In the past, the use of leverage in acquisition trans-actions has been the subject of intense controversy be-tween taxpayers and the Italian tax authorities. Thetax authorities will try to disallow the deduction of in-terest expenses incurred by a leveraging acquisitionvehicle intended to be merged into the acquired com-pany immediately after the acquisition of the relevantshares. The tax authorities reviewed their approach inCircular no. 6 of March 30, 2016, stating that: (1) in-terest expenses on third-party debt that are borne by aspecial purpose vehicle in order to accomplish an ac-quisition are recognized as being functionally con-nected to the purchase of the target company and thededuction of such interest expenses should be allowed(under general rules); and (2) leveraged buyout trans-actions are recognized as being grounded in soundeconomic reasons, as they are aimed at acquiring con-trol over a target company. Leveraged transactionsshould not therefore, in principle, be regarded as abu-sive.

All the above being said, an increasing number ofItalian acquisitions are being financed through equityto take advantage of the notional interest deduction(NID). The NID, which is also known as the allowancefor corporate equity (ACE), is a special tax regime de-signed to foster the equity financing of companies.The NID is equal to: (1) the positive difference be-tween any capital increase shown in the financialstatements for a given fiscal year compared to theequity shown in the financial statements as of Decem-ber 31, 2010, net of any 2010 accrued profits; (2) mul-tiplied by a notional yield of 1.6% (for fiscal year 2017)and 1.5% (from fiscal year 2018 onwards). The NID isnot subject to the interest barrier rule.

Eligible capital increases are: (1) any shareholdercontributions in the form of cash (or in the form ofcredit forgiveness); and (2) profits recorded in dispos-able profit reserves (i.e., current year profits can con-stitute an eligible capital increase once accounted foras profit reserves).

For each fiscal year, the NID base is capped at thelower of the capital increases for NID purposes or thenet accounting equity shown in the financial state-ments of the relevant fiscal year.


The amount of notional yield that exceeds the nettaxable income of the relevant fiscal year can be car-ried forward and used to offset the net taxable incomeof the following fiscal years. The excess NID not usedfor IRES purposes in a particular fiscal year can, as analternative to being carried forward for IRES pur-poses, be used as a tax credit to be deducted, in fiveequal annual instalments, from the IRAP due in thefiscal year concerned and the subsequent four fiscalyears.

Capital increases accruing to a company must be re-duced, for NID purposes, by any amount related toany of the following:(1) Cash contributions made to Italian related entities

(for example, subsidiaries);(2) Acquisitions of shares in Italian related entities

from other Italian related entities;(3) Acquisitions of businesses from Italian related en-

tities;(4) Cash contributions originating, directly or indi-

rectly, from non-Italian resident entities controlledby Italian resident entities;

(5) Cash contributions from companies resident in ju-risdictions that do not allow for an exchange of in-formation with Italy (‘‘blacklisted resident entities’’in this respect, the Italian tax authorities have

made it clear that reference is to be made to contri-butions directly or indirectly originating fromblacklisted resident entities, on the basis of a look-through approach);

(6) Financing granted to Italian related companies;and

(7) Increases of the stock in securities and financialinstruments, other than shares, as compared to theamount held on December 31, 2010 (this limitationdoes not apply to capital increases accruing tobanks and insurance companies).

Except for the limitation in (7), the above reduc-tions can be overcome by the taxpayer, if it is able todemonstrate (through documentary evidence) thatthe relevant transaction does not achieve an undueduplication of the NID benefit.

D. Tax Losses and Notional Interest DeductionCarryforward

In the case of an asset deal, tax losses7 accrued are nottransferred with the business, but remain with thetransferring company, regardless of whether theywere generated by the business being transacted.

In the case of a share deal, the tax losses remainwith the target, subject to certain limitations.8 Morespecifically, losses will be forfeited if: (1) control overthe company is transferred to third parties; and (2) themain activity (that generated the losses in the firstplace) is changed (or has been changed) in the twofiscal years following the acquisition (or in the twofiscal years preceding the acquisition). This limitationdoes not apply if: (1) the relevant company had at least10 employees in the two years preceding the year inwhich the change of control occurs; and (2) the com-pany’s P& L account relating to the fiscal year prior tothat in which the change of control occurs recordedgross income and labor costs (and related social secu-rity contributions) equal to at least 40% of the averageof these elements during the two previous years.

The same tests also apply with respect to the NID.

E. Post-Transaction Restructuring to Obtain Recognitionof Tax Basis

Following a share deal, the acquirer will normally bein a position to obtain recognition as tax basis of thedifference between the accounting value of the rel-evant assets and their existing tax basis. If the sellerhas hived down the business into a new company andthen sold the shares (as described in I.A., above), theaccounts of the target company will normally reportthe assets at their transaction value, which will pre-sumably be higher than the relevant tax basis (whichis not updated as a result of the contribution since fullrollover relief is applicable). If, instead, following a‘‘plain vanilla’’ share deal, the assets in the accounts ofthe target company are at their historical value, thetarget can be merged with the acquisition vehicle.9 Asa consequence, the purchase price of the shares willbe allocated to the various assets (including goodwill)of the target company, thus revealing a discrepancybetween the accounting value and the tax basis of therelevant assets (which is not affected by the merger).

Where there is a difference between the accountingvalue and the tax basis of the assets, Italian tax law10

grants the opportunity to step the tax basis up to theaccounting value, subject to payment of a substitutivetax (at rates ranging from 12% to 16%). The new taxbasis will apply both for purposes of calculating de-preciation and amortization and for purposes of cal-culating capital gains and losses. A more favorableregime is provided for goodwill and trademarks.11

There may be limitations on the carryforward oflosses, non-deductible interest and the NID in the caseof a merger/reverse merger.

II. Acquisition From Foreign Seller

If the seller is not a resident of Italy or is not operatingthrough an Italian PE, the sale would normally takethe form of a share deal. An asset deal might be con-templated when the seller has an Italian PE (whosebusiness would be disposed of).

In the case of a share deal, a nonresident seller willnormally be protected from any Italian tax by the ap-plication of the relevant tax treaty (virtually all taxtreaties concluded by Italy contain a clause corre-sponding to Article 13(4) of the OECD Model Conven-tion12). Should Italy retain its taxing rights withrespect to the capital gain concerned, IRES would beimposed at the rate of 24% on 58.14% of the capitalgain, resulting in an effective rate of 13.95%.13

If the seller is the Italian PE of a nonresident enter-prise, the same regimes as described in I., abovewould apply. The question may arise as to whatregime should be applicable where a nonresident en-terprise disposes of the entire business constituting itsItalian PE (in an asset deal). Under one interpretation,the nonresident should be regarded as having realizeda capital gain or loss otherwise than through the PE,the latter being the object of the alienation rather thanbeing the alienator. However, according to the prevail-ing opinion, the Italian PE should be regarded ashaving disposed of a business and be subject to Italian


tax accordingly; all the regimes described in I., abovewould normally be applicable.


The structuring of M&A transactions in Italy shouldnot be significantly affected by developments in theinternational tax environment, such as BEPS andBrexit. The structuring of inbound acquisitions or theextraction of the proceeds from disposals would nor-mally have to take into account the Italian tax authori-ties’ strict approach to the concepts of beneficialownership and substance, which are normally used tocombat (what is perceived to be) treaty or directiveabuse. More specifically, as set out in the above-mentioned Circular no. 6 of March 30, 2016, the Ital-ian tax authorities will pay very close attention towhether foreign recipients of Italian-source interest,dividends and capital gains can be regarded as thebeneficial owners of the relevant income streams,which will include assessing whether they haveenough substance to make and manage the invest-ments from which they are drawing Italian-sourceincome. This approach is likely to be reinvigorated inthe wake of the BEPS initiative.

As to Brexit, U.K. companies will no longer be eli-gible to invoke the Parent-Subsidiary Directive or theInterest and Royalties Directive, thus losing the abilityto receive Italian-source dividends, interest and royal-ties free of Italian tax. The Italy-United Kingdomtreaty will mitigate, but not eliminate, Italian-sourcecountry taxation. This would impact mainly, or solely,multinational groups headquartered in the UnitedKingdom, since the United Kingdom is not commonlyused as an intermediate jurisdiction from which tomake investments in Italy (Luxembourg being thenatural candidate for this role in most cases).

IV. Non-Tax Factors

In planning an acquisition in Italy, the treatment oflatent tax liabilities would be at the heart of the nego-tiation of representations, warranties and indemni-ties. In the case of a share deal, it is normal for a buyerto expect full representations and warranties with re-spect to taxes (and transfer pricing) running until therelevant statute of limitation expires and with a low,or no, materiality threshold. The use of insurancepolicies to cover representations and warranties, in-cluding with respect to tax, is becoming increasinglycommon. As to the applicable law, while it is in prin-ciple possible to opt for the application of foreign law(such as English or New York law), Italian law is usedin the vast majority of Italian M&A transactions.

In the case of an asset deal, a solution on the shar-ing of tax liabilities may be more easily reached. As ageneral principle, under Italian tax law, tax rights andobligations stay with the person (individual or com-pany) to which they relate, rather than following thebusiness whose activity may have generated the li-abilities. To enhance the protection of tax claims, it isexpressly provided in Article 14 of Legislative Decreeno. 472 of December 18, 1997 that the parties to anasset deal are jointly and severally liable for taxes andpenalties originating from violations incurred in theyear of the transfer (for example, 2016) and in the two

previous years (for example, 2015 and 2014). The par-ties are also jointly and severally liable for violationsof tax laws notice of which is given during the sameperiod of time, even if the relevant violations occurredin prior years. The acquirer’s liability is limited to anamount equal to the value of the business acquired(and mitigated by the beneficium escussionis: i.e.,claims must be raised first against the seller and maybe raised against the purchaser only if, and to theextent that, enforcement against the seller is unfruit-ful). Furthermore, to mitigate the tax liability of theacquirer, Italian tax law expressly provides that theseller (or, subject to the seller’s permission, the ac-quirer) may ask the tax office to issue a certificateidentifying the violations that may be claimed againstthe seller. The liability of the acquirer will be limitedto the amounts stated in the certificate (if no claimsare shown, the acquirer would have no liability). If thetax office does not issue the certificate within 40 daysof the request, the certificate is deemed to have beenissued without claims (thus exempting the acquirerfrom any liability for tax purposes). Hence, in all assetdeals, the use of the certificate has become common-place and the acquirer will have a clear view of theamounts and types of claims with respect to which itmay be subject to secondary liability. This will signifi-cantly limit the need for due diligence and/or compre-hensive tax representations and warranties.

NOTES1 Presidential Decree no. 917 of December 22, 1986 (ITC),Art. 86.2 Under ITC, Art. 87, the participation exemption regimerequires, basically, that four conditions be fulfilled: (1)the shares must have been held without interruption atleast since the beginning of the 12th month preceding thesale; (2) the shares must have been accounted as fixed fi-nancial assets in the first financial statements after acqui-sition; (3) the company in which the participation is heldmust have carried on a commercial activity at least sincethe beginning of the third tax period preceding the sale (ifthe company is a listed company, this condition need onlybe fulfilled for any of the three tax periods in which thecompany was not listed); and (4) the participated com-pany must have been resident at since least the beginningof the third tax period preceding the sale in a country thatdoes not have a privileged tax regime as defined in ITC,Art. 167(4).3 ITC, Art. 101(1).4 ITC, Art. 176.5 See, inter alia, Supreme Court Decision No. 25487 of De-cember 18, 2015; Decision No. 9582 of May 11, 2016; De-cision No. 6758 of March 15, 2017; Ruling of the taxauthorities No. 97/E of July 25, 2017.6 Since January 1, 2016, it has been possible to include inthe calculation dividends paid by foreign controlled com-panies (as specified under the Civil Code).7 Under the general rule, tax losses can be used to offsetup to 80% of the taxable profit of a given fiscal year. Thepercentage is increased to 100% in the case of losses in-curred in the first three years of activity.8 ITC, Art. 84.9 A merger should be carefully evaluated, taking into ac-count its possible consequences for the carryforward oftax losses and the NID.


10 The step-up tax regime is contained in ITC, Art. 172(10-bis) ITC and Law Decree no. 185 of November 29, 2008,Art. 15, as amended from time to time.11 Under Law no. 208 of December 28, 2015, Art. 1(95),subject to the payment of a 16% substitute tax, deprecia-tion of goodwill and trademarks will be deducted for taxpurposes over a five-year period instead of the ordinary18-year period.12 The most notable exception being the Italy-France taxtreaty, which allows the capital gains to be taxed in the

situs State if the alienator holds, alone or together with itsaffiliates, a participation representing more than 25% ofthe capital of the target company.

13 On the assumption that the shares represent more than20% of the voting rights or 25% of the capital of the rel-evant Italian company (reduced to 2% and 5%, respec-tively, in the case of a listed company). If lowerpercentages are transacted, the relevant capital gain willbe subject to a 26% substitute tax.


JAPANEiichiro Nakatani and Akira TanakaAnderson Mori & Tomotsune, Tokyo

I. Acquisition by Foreign Country Buyer of JapaneseBusiness From Japanese Sellers

The following provides an outline of the differencesbetween an acquisition of shares in a company (a‘‘Share Purchase’’) and an acquisition of businessassets and assumption of liabilities (an ‘‘Asset Pur-chase’’) from a Japanese tax perspective. Unless other-wise explicitly noted, the following responses assumethat such acquisitions are made at an arm’s-lengthprice, that a Foreign Country buyer (‘‘FC buyer’’) or anacquisition vehicle (a Japanese branch or a Japanesesubsidiary) of an FC buyer acquires shares in a Japa-nese company (a ‘‘Target Company’’) in the case of aShare Purchase, and that an acquisition vehicle (aJapanese branch or a Japanese subsidiary) of an FCbuyer acquires business assets and assumes liabilitiesof a Target Company in the case of an Asset Purchase.

A. Gain or Loss for Sellers of Shares or Sellers of Assetsand Liabilities

In the case of a Share Purchase, the seller of the TargetCompany (i.e., the shareholder of the Target Com-pany) realizes capital gains or losses in the amount ofthe difference between the sale price and the bookvalue of the shares, and such capital gains are subjectto Japanese income tax at the rate of 20.315% wherethe seller is an individual1 or to Japanese corporatetax at the rate of approximately 30% where the selleris a corporate.2 The Target Company is not subject toJapanese corporate tax. Neither the FC buyer nor theacquisition vehicle of the FC buyer is subject to Japa-nese corporate tax.

In the case of an Asset Purchase, the Target Com-pany realizes capital gains or losses in the amount ofthe difference between the sale price and the bookvalue of the assets sold, and such capital gains aresubject to Japanese corporate tax at the rate of ap-proximately 30%.3 The shareholder of the TargetCompany is not subject to Japanese taxes unless theTarget Company distributes the sale proceeds. Wherethe Target Company is a Japanese non-listed companyand distributes sale proceeds as dividends to theshareholder, if the shareholder is an individual, thenthe shareholder is subject to Japanese income tax ondividend income at progressive rates (the highest rateis 55.945%).4 If the shareholder is a corporate, thenthe shareholder is not, in general, subject to Japanese

corporate tax, since the corporate shareholder is eli-gible to exclude dividends from its taxable income.5

The acquisition vehicle of the FC buyer is not subjectto Japanese taxes. As discussed in I. F., below, the ac-quisition vehicle may be eligible for tax benefits de-rived from the amortization of goodwill.

B. Advantages or Disadvantages of Shares Being IssuedRather Than Cash Being Used to Pay Acquisition Price

In the case of a Share Purchase, in general, there areno advantages or disadvantages to using shares asconsideration for the acquisition instead of cash.From a Japanese tax perspective, the seller of theTarget Company (i.e., the shareholder of the TargetCompany) is subject to Japanese income tax or corpo-rate tax on its capital gains as discussed in I.A., above,even where shares are used to pay the acquisitionprice. That being said, if a share-for-share-exchange(kabushiki-kokan), which is one of the corporate reor-ganization regimes stipulated by the Companies Actof Japan, is carried out between the Target Companyand the Japanese subsidiary of the FC buyer, the sellerof the Target Company may be eligible for a tax defer-ral. Although the Target Company is generally subjectto Japanese corporate tax on its deemed capital gainswith respect to certain of its assets if it carries out ashare-for-share-exchange, if such share-for-share-exchange meets the requirements of a qualified share-for-share-exchange, the FC buyer may be eligible forexemption from taxation.6 However, it is generally dif-ficult to meet the requirements for a qualified share-for-share-exchange where a share-for-share-exchangeis carried out between companies that do not belongto the same corporate group.

In the case of an Asset Purchase, in general, thereare no advantages or disadvantages to using shares asconsideration for the acquisition instead of cash.From a Japanese tax perspective, the Target Companyis subject to Japanese corporate tax on its capitalgains as discussed in I.A., above, even where sharesare used to pay the acquisition price. That being said,if the Asset Purchase transaction meets the require-ments for a qualified contribution-in-kind, the TargetCompany may be eligible for a tax deferral pertainingto capital gains derived from the transaction.7 How-ever, it is generally difficult to meet the requirementsfor a qualified contribution-in-kind where the transac-


tion is between companies that do not belong to thesame corporate group.

C. Disposal of Shares Shortly After Completion ofTransaction

As discussed in I.B., above, in the case of a Share Pur-chase, the shareholder is generally subject to Japaneseincome or corporate tax on its capital gains at the timeof the transaction and therefore the tax book value ofthe received shares will be their fair market value atthe time of the transaction. As a result, it is likely thatthe sale price of the received shares will basically bethe same as their tax book value and, as long as thesale price is the same as the tax book value, the share-holder will not be subject to Japanese income or cor-porate tax when disposing of the shares. With respectto a share-for-share exchange, if the shareholder dis-poses of the received shares shortly after the share-for-share exchange it is unlikely that the share-for-shareexchange would meet the requirements for a qualifiedshare-for-share-exchange.

As also discussed in I.B., above, in the case of anAsset Purchase, the Target Company is generally sub-ject to Japanese corporate tax on its capital gains atthe time of the transaction and therefore the tax bookvalue of the received shares will be their fair marketvalue at the time of the transaction. As a result, it islikely that the sale price of the received shares will ba-sically be the same as their tax book value and, as longas the sale price is the same as the tax book value, theTarget Company will not be subject to Japanese cor-porate tax when disposing of the shares. With respectto a contribution-in-kind, if the shareholder disposesof the received shares shortly after the contribution-in-kind, it is unlikely that the contribution-in-kindwould meet the requirements for a qualifiedcontribution-in-kind.

D. Use of Debt to Finance Acquisition and AssociatedRestrictions

If the head office or a foreign office of the FC buyerprocures the funds for the acquisition, the issue ofwhether the FC buyer uses such debt for tax purposes(i.e., whether the FC buyer is able to deduct intereston the debt from its taxable income) is an issue depen-dent on the relevant foreign tax law. The following,therefore, discusses the Japanese tax treatment of thedeductibility of interest on a loan received by the ac-quisition vehicle of the FC buyer (a Japanese branchor a Japanese subsidiary).

Regardless of whether the transaction is a SharePurchase or an Asset Purchase, in principle, the acqui-sition vehicle of the FC buyer is eligible to deduct in-terest on the loan from its taxable income.8 However,it should be noted that there are some rules that re-strict such a deduction. Where the acquisition vehicleis a Japanese branch of the FC buyer, the branch maybe subject to the interest deduction limitation rules,which are similar to the thin capitalization rules,9 andthe earning stripping rules.10 Where the acquisitionvehicle is a Japanese subsidiary of the FC buyer, thesubsidiary may be subject to the thin capitalizationrules11 and the earning stripping rules.12

E. Step-up in Tax Cost

In the case of a Share Purchase, since the Target Com-pany is not subject to Japanese taxes at the time of thetransaction, as discussed in I.A., above, the basis inthe Target Company’s assets is not stepped up. Accord-ingly, the FC buyer is unable to obtain the tax benefitof a step-up in the Target Company’s assets.

In the case of an Asset Purchase, since the TargetCompany is subject to Japanese corporate tax on itscapital gains as discussed in I.A., above, the basis inthe Target Company’s assets is stepped up. Accord-ingly, the FC buyer is able to obtain the tax benefit ofa step-up in the Target Company’s assets.

F. Depreciation of Goodwill and Other Intangibles

In the case of a Share Purchase, amortizable goodwillis not recognized.

In the case of an Asset Purchase, the purchase priceshould be allocated among individual assets based ontheir respective fair market values. The excess of thepurchase price over the total of the values allocated toeach of the individual assets is treated as goodwill forJapanese tax purposes. The recognized goodwill willbe amortized over five years (20% of the base cost an-nually).13

G. Ability to Utilize Preacquisition Business Losses ofTarget Company’s Business

In the case of a Share Purchase, the FC buyer is ableto utilize preacquisition business losses (net operatinglosses carried forward) of the Target Company, unlessan anti-tax avoidance provision applies that limits theutilization of net operating losses carried forwardthrough the purchasing of loss-rich companies.14 Ifthe FC buyer intends to change the Target Company’sbusiness substantially, this would generally increasethe risk of the anti-tax-avoidance provision being ap-plied and it would therefore be important for the FCbuyer to analyze the risk closely in advance.

In the case of an Asset Purchase, since tax lossesand other tax attributes are not transferred to thebuyer, the FC buyer will be unable to utilize preacqui-sition business losses (net operating losses carried for-ward) of the Target Company.

H. Choice of Acquisition Vehicle

In the case of a Share Purchase, in general, it is notnecessary for the FC buyer to use an acquisition ve-hicle in order to continue to conduct the business ofthe Target Company. It is often the case that a foreigncompany purchases shares in a Japanese companywithout establishing an acquisition vehicle.

In the case of an Asset Purchase, in general, it isnecessary for the FC buyer to use an acquisition ve-hicle in order to continue to conduct the business ofthe Target Company, from both a commercial law per-spective and a business perspective.

As discussed in I.D., above, one of the important taxadvantages of utilizing an acquisition vehicle is thatthe acquisition vehicle is eligible for a deduction of in-terest on loans, which can reduce its tax burden, al-though the acquisition vehicle may be subject tocertain interest deduction limitation rules as dis-


cussed in I.D., above. Another tax advantage is thatthe acquisition vehicle will be able to remit surplusfunds to the FC buyer (the head office of the FC buyer)as a repayment of the principal intercompany loan,such remittance not being subject to tax. In general,Japan’s effective corporate income tax rate is higherthan that of other countries, and it is often the casethat a buyer will intend to minimize its taxableincome in Japan, even if the contemplated transac-tions increase the income taxable in foreign countries,which is a popular tax plan.

It may be beneficial for the FC buyer to use a foreignacquisition vehicle if the Japanese withholding taxeson the dividends from the Target Company or, at thetime of exit, the Japanese corporate tax on capitalgains from the disposal of the shares in the TargetCompany, are eligible to be eliminated or reducedunder an applicable treaty between Japan and thecountry in which the acquisition vehicle is located.However, there is a risk that such a scheme would beconsidered a tax avoidance act and may not be eligiblefor tax benefits under anti-treaty shopping clausesstipulated in Japan’s tax treaties.


The following responses assume that: (1) in the case ofa Share Purchase, the FC buyer acquires from the for-eign seller shares in a Japanese subsidiary owned bythe foreign seller; or (2) in the case of an Asset Pur-chase, the FC buyer acquires assets and assumes li-abilities of a Japanese subsidiary or a Japanesebranch of the foreign seller. The following discussionaddresses only significant differences between the taxtreatment in the case of a domestic seller and that inthe case of a foreign seller.

With respect to I.A.-C., above, regarding a SharePurchase, in general, the foreign seller is subject toJapanese income or corporate tax on its capitalgains.15 Nevertheless, the foreign seller may be eli-gible for an exemption from such taxes under an ap-plicable tax treaty. In relation to I.A.-C., above,concerning an Asset Purchase, the tax treatment of aforeign seller will be different from that of a domesticseller when the Target Company distributes the saleproceeds as dividends. A foreign seller will not be re-quired to file a tax return with respect to such divi-dends provided the foreign shareholder does not havea permanent establishment (PE) in Japan. In general,the foreign seller will be subject to Japanese withhold-ing taxes on such dividends (at the rate of 20.42% ifthe dividend paying company is a non-listed com-pany), but the foreign seller may be eligible for an ex-emption from, or a reduced rate of, withholding taxunder an applicable tax treaty.


A. BEPS

Actions 4 (interest deductions), 6 (treaty abuse) and14 (multilateral instrument) may potentially have animpact on tax planning with respect to both a SharePurchase and an Asset Purchase, as set out in III.A.1.and 2., below.

1. Action 4

Japan already has a number of measures relating tothe issue of interest deductions, as discussed in theAction 4 final report, in the form of: (1) transfer pric-ing rules, (2) thin capitalization rules, and (3) earn-ings stripping rules.

The fixed ratio rules recommended by the Action 4final report are similar to Japan’s earnings strippingrules, but there are the following differences betweenthe two sets of rules:s The fixed ratio for purposes of the Japanese earn-

ings stripping rules is 50%, as compared to ratios ofbetween 10% and 30% under the OECD’s recom-mended fixed ratio rules; and

s Although the Japanese earnings stripping rulesapply only to net interest payments to foreign groupcompanies, the OECD’s fixed ratio rules apply to allnet interest payments, irrespective of whether theinterest is paid to group or non-group companiesand whether it is paid to companies resident in oroutside Japan.

If the Japanese earnings stripping rules areamended in line with the fixed ratio rules recom-mended in the Action 4 final report, there is a possibil-ity that the scope of non-deductible interest will beextended significantly. In addition, with respect topayments of net interest derived from domestic trans-actions, since such interest is subject to Japaneseincome tax in the hands of the recipient, there is a pos-sibility that double taxation will arise on a large scale.

Although Japan has not promulgated or proposedany measures in relation to the fixed ratio rules rec-ommended in the Action 4 final report, it is expectedthat the Japanese Government may examine whetherto amend the earnings stripping rules in line with thefixed ratio rules. If the earning stripping rules areamended, this may have an impact on an acquisitionfunding scheme as discussed in I.D. and H., above.

2. Actions 6 and 15

The Action 6 final report recommends that countriesinclude in their bilateral income tax treaties one of thefollowing provisions to prevent ‘‘treaty-shopping:’’ (1)a Limitation on Benefits (LOB) Article; (2) a principalpurpose test (PPT); or (3) a combination of the two.

Japan has already concluded tax treaties that con-tain: (1) an LOB Article; (2) a PPT rule; or (3) both anLOB Article and a PPT rule.16 For Japan, therefore,the recommendations in the Action 6 final report arenothing new. It is expected that Japan will continue tonegotiate with other countries so that, going forward,Japan’s new or amended treaties will contain suchprovisions.

In addition, based on the recommendations underthe Action 15 final report, on June 7, 2017, Japansigned the Multilateral Convention to Implement TaxTreaty Related Measures to Prevent Base Erosion andProfit Shifting (Convention to Implement Measures toPrevent BEPS). This multilateral convention coversthe recommendations in the Action 6 final report. As aresult, it is expected that the existing tax treaties towhich Japan is a party will reflect the recommenda-tions in the Action 6 final report. As discussed in I.D.and H., above, amendments to anti-treaty shopping


rules may have an impact on the choice of location ofan acquisition vehicle.

B. Brexit

It is unlikely that Brexit would have an impact on taxplanning for Share Purchases or Asset Purchaseswithin Japan.

IV. Non-Tax Factors

With respect to licenses or regulatory permissionsheld by the Target Company, in the case of a SharePurchase, the Target Company to be owned by the FCbuyer (or the acquisition vehicle of the FC buyer) willgenerally continue to hold such licenses and regula-tory permissions, which is an important non-tax ad-vantage for a Share Purchase. On the other hand, inthe case of an Asset Purchase, such licenses and regu-latory permissions will not be transferred to the FCbuyer (or the acquisition vehicle of the FC buyer).

With respect to contingent liabilities of the TargetCompany, in the case of an Asset Purchase, the FCbuyer (or the acquisition vehicle of the FC buyer) isable to avoid taking on the risks of contingent liabili-ties by specifying the assets and liabilities to be trans-ferred from the Target Company in the asset purchaseagreement (business transfer agreement), which is animportant non-tax advantage for an Asset Purchase.On the other hand, in the case of a Share Purchase, itis difficult for the FC buyer to avoid taking on the risksof contingent liabilities. It is therefore important forthe FC buyer to provide for representations, warran-ties and indemnities concerning contingent liabilitiesin the share purchase agreement (business transferagreement). It is also vital for the FC buyer to avoid

taking on the risk of being subject to undisclosed taxliabilities of the Target Company. Accordingly, it isusual for the FC buyer to request, and the seller to pro-vide, tax representations, warranties or indemnities asto any undisclosed tax liabilities of the Target Com-pany that might survive a statute of limitations.

The governing law of the acquisition contract is de-termined based on negotiations between the buyerand the seller on a case-by-case basis.

NOTES1 Special Tax Measures Act (STMA), Arts. 37-10 and 37-11.2 Corporate Tax Act (CTA), Art. 61-2.3 CTA, Art. 22 Para. 2.4 Income Tax Act (ITA), Art. 24.5 CTA, Art. 23. If a corporate shareholder owns one thirdor less of the shares in the Target Company, the exclud-able ratio will be limited to 50% or 20% of the dividendsreceived, as the case may be.6 CTA, Art. 62-9.7 CTA, Art. 62-4.8 CTA, Art. 22 Para. 3.9 CTA, Art. 142-4.10 STMA, Art. 66-5-2.11 STMA, Art. 66-5.12 STMA, Art. 66-5-2.13 CTA, Art. 62-8.14 CTA, Art. 57-2.15 ITA, Art. 161 Para. 1 Item 3, Enforcement Order of theITA, Art. 281 Para. 1 Item 4, CTA, Art. 138 Para. 1 Item 3and Enforcement Order of the CTA, Art. 178 Para. 1 Item4.16 In addition to an LOB Article and a PPT rule, some ofJapan’s tax treaties include an anti-conduit rule.


MEXICOJose Carlos Silva and Juan Manuel Lopez DuranChevez, Ruiz, Zamarripa y Cıa., S.C., Mexico City

I. Acquisition by Foreign Country Buyer of MexicanBusiness From Mexican Sellers

Under Mexican corporate and tax law, the acquisitionof a Mexican business can generally take the form ofeither a purchase of assets and an assumption of li-abilities or a purchase of the stock of the target corpo-ration. In entering the Mexican market, which is themore efficient alternative from a tax perspective willbe an important consideration in deciding whether toparticipate in an ongoing concern through the acqui-sition of shares or the acquisition of assets.

As will be explained in further detail below, anumber of important differences in their tax conse-quences must be borne in mind when deciding be-tween the two alternatives—for example, in the caseof a share acquisition, the deduction for the cost ofshares is deferred until a future sale of the shares; inthe case of an asset acquisition, the cost of the assetsmay begin to be deducted (by way of tax depreciation)almost immediately after the acquisition. Another im-portant consideration is the fact that both acquirers ofassets and shareholders/partners may be responsiblefor tax liabilities incurred with regard to preacquisi-tion activities.

A. Asset Deal

1. Consequences for Foreign Country Buyer

In an asset acquisition, the buyer would normally takea cost of fair market value basis in the assets acquired,which often represents a step-up in basis where assetshave appreciated. The buyer will be entitled to begintaking depreciation and other deductions immedi-ately upon purchase, thus sheltering income from op-erations. This contrasts with a share deal, where noallocation of price into the assets is allowed, which ef-fectively means that no current deduction is allowed(for more on this subject, see I.B., below).

It should be noted that asset deals where the pur-chaser is not a resident of Mexico are rare. The mainreason for this is that foreign ownership of assets willresult in the further operation of the business beingcarried on through a permanent establishment (PE)in Mexico. This situation is far from ideal: Although,in essence, the taxation of a PE should not differ sig-nificantly from that of a Mexican corporation, formal

rules (both tax and other rules) make managing a cor-poration easier than managing a PE. Investors shouldconsider the formation of a corporation, using a struc-ture that allows the corporation to be treated for taxpurposes as a pass-through entity from the owner’sperspective. One example of such a structure wouldinvolve the formation of an SRL, which is treated as acorporation for Mexican corporate law and tax pur-poses, but may be treated as a branch of its U.S. inves-tors under the U.S. check-the-box rules.

It is worth highlighting two major tax consequencesof an acquisition of assets that directly impact thecash flow involved in the purchase. The direct pur-chase of most assets (land is a notable exception) willattract a value-added tax (VAT) charge at the rate of16%. Although it should be possible to recover the VATcharged via further credits or a refund, the financingof an up-front cash outlay must be considered. In ad-dition, a tax on the acquisition of immovable propertylevied at a local (state or municipal) level is only im-posed in the case of an asset purchase (i.e., not in thecase of a purchase of shares). This tax normally is im-posed at a rate ranging from 3% to 5% on the value ofthe property acquired.

None of the consequences described above are al-tered if the agreed consideration is paid by the deliv-ery to the seller of shares rather than in cash. Wherethe consideration is paid in shares, the transaction isconsidered to be a barter transaction, involving twosales of goods, with the corresponding tax conse-quences for each party to the transaction. In these cir-cumstances, the seller is taxed in the same way as itwould have been if it had received cash. If the seller re-ceives shares issued by the buyer or a related party ofthe buyer, it will treat the sale price of the assets soldas its basis in the shares received. Any gain on a fur-ther sale of the shares will be taxed, the gain being de-termined as the difference between the sale price andthe basis.

No deduction is allowed with respect to goodwillunder Mexican tax law, even if the goodwill is ac-quired from third parties.

Normally, a purchase of assets will also limit theextent of the tax liabilities assumed in the transaction.However, if the entire group of assets and obligationsof a corporation is purchased, the buyer is jointlyliable for tax debts incurred with respect to activitiescarried out by the prior ongoing concern, even when


the ongoing concern at that time belonged to anotherperson. The liability will not exceed the value of thepurchase.

2. Financing the Purchase

If the foreign country purchaser incurs debt to enableit to acquire the assets, interest on the debt paid tothird parties may be allocated, on a reasonable basis,as a deduction to the PE. Withholding obligations willarise on the payment of interest to a nonresident, sub-ject to the provisions of an applicable tax treaty.

General thin capitalization rules apply to intra-group financing that limit the deduction of interest as-sociated with debt in excess of a maximum 3:1 debt toequity ratio.

3. Consequences for the Seller

Where a Mexican corporation sells assets to nonresi-dents, any gain on the sale will be subject to a 30% taxat the level of the selling corporation, plus an addi-tional 10% on the distribution of a dividend if the re-cipients of the dividend are individuals ornonresidents of Mexico. Where the recipient of thedividend is resident in a country that has signed a taxtreaty with Mexico, the applicable treaty may reducethe rate of tax on dividends to 5% or even 0%. The im-position of this dividend tax may make a sale ofshares, in which the dividend tax is bypassed, prefer-able from a seller’s perspective

If the seller incurs a loss on the sale of the assets, norestrictions apply to the seller’s right to set off suchloss against its future income, other than the general10 year-loss expiration deadline. However, if a changeof ownership occurs (whether direct or indirect) thenthe use of losses is restricted, so that they may gener-ally only be set off against income arising from thesame line of business as that carried on prior to thesale of the assets. The same rule applies if the com-pany participates in a merger process as a survivingcompany. If the company ceases to exist as a conse-quence of the merger, the losses expire unused.

B. Share Deal

1. Consequences for the Buyer

Unlike an asset deal, the purchase of shares will notentail any immediate deductibility with respect to theacquisition cost for Mexican tax purposes. The pricepaid for the shares will be deducted only in computinga capital gain or loss in the event of a future sale ofthose shares.

In the case of a share deal, the buyer inherits all theliabilities of the target company existing at the time ofpurchase, which translates into the inclusion of com-plex representations and warranties in the share pur-chase agreement. A thorough due diligence exercisemust be executed prior to the acquisition. Guaranteesin the form of escrows are not uncommon.

Unused net operating losses may be used to shelterfuture income of the target company; however, since achange of ownership will have occurred at the level ofthe (direct or indirect) shareholders, it will normallyonly be possible to use the losses to reduce income

arising from the same line of business as that whichgave rise to the losses (see I.A.3., above).

Tax attributes other than losses are fully preservedin the target corporation. This will include the target’sCUFIN account, which records after-tax profits that ingeneral may be distributed to shareholders withoutfurther corporate taxation (it should be noted, how-ever, that a 10% dividend withholding tax may stillapply, as explained in I.A.3., above).

In terms of the immediate use of cash involved inthe transaction, unlike an asset deal, a share dealavoids the 16% VAT charge associated with the pur-chase, as well as the imposition of local real estatetransfer tax (at a rate ranging from 3% to 5%).

In a reorganization, there is no ‘‘step-up’’ in basis.Instead, the basis of the transferred property is car-ried over to the buyer.

Non-tax reasons for preferring a share acquisitionover an asset acquisition may include the fact thatfewer filings with governmental agencies are required.

In general, the buyer, as a shareholder, becomesjointly and severally liable for liabilities incurred withrespect to activities carried on by the corporationwhile it is a shareholder, but such liability is limited tothe buyer’s interest in the corporation’s capital stock.

2. Financing the Purchase

If debt is used to finance the purchase of shares, sev-eral issues must be considered. If the purchaser is adomestic corporation, and either already a member ofthe acquisition group or created as an acquisition ve-hicle, the absence of a comprehensive consolidationregime for Mexican tax purposes will cause the pur-chaser to accrue losses. Dividends distributed by aMexican subsidiary to its Mexican parent do not con-stitute taxable net income in the parent’s hands, whichmeans that, in the absence of further planning, the fi-nancing cost may turn into losses that will most likelyexpire unused after the expiry of the statutory 10-yeardeadline for the utilization of losses. Debt-push-downmechanisms are regarded as aggressive tax-planningand are rejected by the Mexican Tax AdministrationService (SAT).

3. Tax-Free Acquisitions

It may be possible to structure an acquisition so thatthe seller’s tax on the gain is deferred for Mexican taxpurposes, where the entities involved are members ofthe same group of companies. Generally, in the case ofreorganizations of corporations belonging to the samegroup, it is possible to obtain from the SAT an autho-rization to defer the payment of tax on the gain on thedisposal of the relevant shares. The deferral periodends with a subsequent disposal of shares resulting inthe exclusion from the group of the corporationwhose shares were the subject of the initial authoriza-tion.

A deferral authorization is only granted if: (1) appli-cation for deferral is made before the reorganizationactually takes place; (2) the consideration covenantedconsists solely of an exchange of shares issued by thecorporation that purchases the shares being trans-ferred; (3) the purchaser and the seller are not subjectto a preferential tax regime (as defined for purposes ofthe Mexican controlled foreign company (CFC) rules);


and (4) generally, neither the seller nor the purchaseris resident in a country with which Mexico does nothave a broad agreement for the exchange of tax infor-mation.

Additional formalities must also be complied with,such as: (1) the appointment of a legal representativein Mexico; (2) usually, the provision of an independentaccountant’s report supporting the computation; and(3) annual submission to the SAT of documents prov-ing that the corporation whose shares are covered bythe authorization has not left the group.

4. Deductibility of Interest Where a Mexican Vehicle IsUsed

Interest on acquisition indebtedness, like other in-debtedness of a corporation, is generally deductible.The deductibility of interest is, however, subject tomany limitations. Some of the most significant limita-tions are as follows:

s The interest rate must be a fair market value rate.Any interest paid at a rate in excess of a fair marketvalue rate will be non-deductible.

s Debt may be recharacterized as equity based on amultifactor test (for example, where the debt quali-fies as a back-to-back loan). If such a recharacteriza-tion is successful, payments with respect to theresulting ‘‘equity’’ interest will be treated as non-deductible dividends that may be subject to differenttax burdens and formalities than those to which in-terest is subject.

s Interest on debt that: (1) exceeds the equivalent ofthree times the taxpayer’s shareholders’ equity; and(2) is contracted with nonresident related parties, isnot deductible.

Interest paid to a foreign entity that controls or iscontrolled by the taxpayer is non-deductible where:(1) the recipient of the interest payment is consideredto be a transparent entity for tax purposes in its coun-try of residence; (2) the payment is considered not toexist (i.e., is disregarded) for tax purposes in the coun-try or territory in which the recipient entity is located;or (3) the entity does not treat the payment as incomesubject to tax under applicable tax provisions.


The Mexican tax implications that follow where thesellers are foreign country sellers rather than Mexicansellers are discussed in II.A. and B., below.

A. Share Deal

Where the shares sold are issued by a Mexican resi-dent company or more than 50% of the accountingvalue of such shares derives directly or indirectly fromreal property located in Mexico, their sale by a foreignseller would give rise to income from a source ofwealth located in Mexico, and, hence, to a taxableevent for Mexican tax purposes.

In these circumstances, income tax at a rate of 25%would be imposed on the gross income earned, with-out any deductions. The seller would have to file a taxreturn before the SAT, unless the acquirer was a Mexi-can resident or a nonresident with a PE in Mexico, in

which case the tax would be paid via withholding (thetax being withheld by the Mexican resident/MexicanPE).

That being said, it is possible for such a seller to optto be taxed at the rate of 35% on a net basis if it ap-points a proxy in Mexico, provided the income derivedby the seller is neither subject to a preferential taxregime (as defined for purposes of the Mexican CFCrules) nor a resident of a country that has a territorialtaxation system. The proxy would be obliged to com-pute (and file) the nonresident’s tax liability and thecomputation would need to be supported by an inde-pendent accountant’s report.

To the extent the gain derived by the foreign sellerarose from the disposal of shares issued by a Mexicancompany traded on the Mexican Stock Exchange, onan exchange operating under concession, or on a rec-ognized derivatives market, the applicable tax ratewould be 10%.

The seller’s nonresident status would mean that, if itsuffered a loss on the sale of the shares, it would beunable to set off the loss in a subsequent tax year forMexican tax purposes.

As noted above, the consideration agreed betweenthe parties could consist of either cash or sharesissued in exchange; in the latter case, the exchangewould be regarded as a barter transaction, involvingtwo disposals of goods, with the corresponding taxconsequences for each party to the transaction.

B. Asset Deal

If the transaction is a sale of assets, the computationof the gain/loss should be simple since it may be madeon a fair market value basis. The buyer would nor-mally take a cost or fair market value basis in theassets transferred, which often represents a step-up inbasis where the assets have appreciated in value.However, this would not necessarily mean that thetransaction is taxable in Mexico.

A sale by a foreign seller of immovable property lo-cated in Mexico would give rise to income from asource of wealth located in Mexico, and hence, to ataxable event for Mexican tax purposes. In such cir-cumstances, income tax would be imposed at a rate of25% on the gross income earned, without any deduc-tions. The seller would have to file a tax return beforethe SAT, unless the acquirer was a Mexican resident ora nonresident with a PE in Mexico, in which case thetax would be paid via withholding.

It would be possible for the seller to opt to be taxedat a rate of 35% on a net basis in the case of a sale ofimmovable property if a proxy were appointed inMexico and the transaction were carried out before aNotary Public. In this case, the Notary Public wouldbe obliged to compute the nonresident’s tax liabilityand file before the SAT.


Neither the BEPS actions nor the exit of the UnitedKingdom from the European Union has generatedany substantial change that would affect the Mexicantax treatment applicable to the sale of either shares orassets in the circumstances envisaged here.


Some BEPS-inspired provisions, however, have re-

cently been adopted. Since 2014, the Mexican Income

Tax Law has contained a restriction on the deductibil-

ity of intra-group interest payments, royalties and

payments for technical assistance, in certain circum-

stances.

Also, in order to prevent the abuse of Mexico’s tax

treaties, since 2014, in the case of transactions among

related parties, the Mexican tax authorities have been

able to require a nonresident wishing to claim benefits

under a tax treaty to which Mexico is a party to dem-

onstrate, via a sworn declaration from its legal repre-

sentative, that double juridical taxation would arise if

the treaty concerned were not to apply.

IV. Non-Tax Factors

Tax representations, warranties and indemnities gen-erally play a larger role in a sale of shares, because thetax liabilities of the entity concerned remain liabilitiesof the entity after the transaction. Therefore, buyersrequire more specific clauses in order to establish theresponsibility and consequences that could derivefrom any legal contingency. Asset deals, on the otherhand, often simply include an indemnity for taxes ofthe selling corporation.

Under legal provisions on regular transactions in-volving different jurisdictions, the applicable lawwould be that of the place where the contract wouldhave effect; however, under Mexican law, the partieshave the flexibility to designate the applicable law inthe sales contract.


THENETHERLANDSMartijn JudduLoyens & Loeff N.V., Amsterdam

I. Introduction: Key Features of Dutch CorporateTaxation

When a foreign country buyer (‘‘FC buyer’’) wishes toacquire a Dutch business, whether from a Dutch selleror a foreign country seller (‘‘FC seller’’), both the buyerand the seller will have to decide how the deal shouldbe structured. They may consider an acquisition ofshares in a company, or an acquisition of its businessassets and assumption of its liabilities. Further, theymay consider whether the consideration for the acqui-sition should be cash or shares issued by the FC buyer.Apart from the civil law and commercial aspects, anumber of tax aspects and tax differences will need tobe considered.

This paper describes some of those main aspectsand differences. It is assumed that both the buyer andthe seller are regularly taxed companies in their coun-try of residence and that the Dutch business that is thetarget of the acquisition constitutes either a regularlytaxed Dutch company or a regularly taxed Dutch per-manent establishment (PE).

This paper addresses only the corporate tax aspectsof acquiring a Dutch business (i.e., other tax aspects,such as the possible value added tax (VAT) and realestate transfer tax aspects are not dealt with). Beforegoing into the main tax aspects and tax differences, itmay be useful to address some of the key features ofthe Dutch corporate tax regime, consisting of corpo-rate income tax and dividend withholding tax.

Dutch corporate income tax is levied on the world-wide income of Dutch-resident companies, includingany net profits and capital gains, unless an exemptionapplies. One important exemption is afforded by theparticipation exemption regime, which provides a fullexemption for dividends and capital gains/losses fromqualifying domestic or foreign participations.1 Theconditions for qualifying for the participation exemp-tion include a threshold ownership test (generally,5%). In addition there is a motive test: i.e., the partici-pation must be held with a business motive ratherthan a portfolio investment motive. Examples of casesin which there is deemed to be a portfolio investmentmotive would be when the company in which the par-

ticipation is held is predominantly engaged in holdinginvestments comprising less than 5% ownership per-centage or functions as a group financing, leasing orlicensing company.

As an alternative to passing the motive test, a par-ticipation may also qualify by passing an asset test(which, in short, normally requires that less than 50%of the direct and indirect assets of the company inwhich the participation is held should consist of low-taxed portfolio investments) or a subject-to-tax test(which requires the company in which the participa-tion is held to be subject to a ‘‘realistic levy,’’ in short,a tax imposed at a rate of at least 10% on a compa-rable tax base). The participation exemption also ap-plies with respect to costs incurred in connection withthe sale or acquisition of a participation (i.e., renderssuch costs non-deductible). Costs incurred in connec-tion with the holding of a qualifying participation (forexample, interest expense on acquisition debt) aregenerally deductible, albeit there are a number oflimitations on the deductibility of interest expense.The participation exemption also applies with respectto certain earn-out arrangements and purchase priceadjustments. Subject to stringent conditions and limi-tations, an exception to the participation exemptionapplies for losses that arise on the liquidation of aqualifying participation, so that such liquidationlosses are deductible.2

Other exemptions are available in the context ofbusiness reorganizations, such as business mergers,share-for-share mergers, and statutory mergers or de-mergers, each subject to their own rules and condi-tions.3 One common factor is that thesereorganization exemptions only offer deferral: eventhough an exemption is provided on the occurrence ofthe transaction, tax claims are generally preserved byway of the roll-over of tax book values and the appli-cation of further conditions.

Another feature of the Dutch corporate tax systemis the fiscal unity or tax consolidation regime.4 Sub-ject to certain conditions, including a 95% ownershipthreshold, a parent company and a subsidiary com-pany can elect to join in a fiscal unity, with the effectthat all the assets, liabilities and results of the subsid-


iary are attributed to the parent company and corpo-rate tax is levied on a consolidated basis only on theparent company (even though all companies in thefiscal unity remain liable). Among other things, thisenables profits of companies within the fiscal unity tobe offset by losses of other companies within the fiscalunity. The regime is subject to various conditions. Fur-thermore, detailed anti-abuse rules apply when afiscal unity is established (for example, it is manda-tory for receivables/liabilities of the companies con-cerned to be valued on the same basis), during the lifeof the fiscal unity (for example, both a ring-fence anda profit split apply with respect to the use of pre-fiscalunity losses, and limitations are imposed on the de-duction of interest expenses on acquisition debtagainst the profits of a target) and on a company’sleaving the fiscal unity (for example, taxation is im-posed on hidden reserves embodied in assets trans-ferred by or to the company shortly before it leaves thefiscal unity).

Dutch corporate income tax is also levied on non-resident companies, but only with respect to certainincome from Dutch sources.5 Among the most impor-tant of these is business income derived from a Dutchenterprise, i.e., an enterprise conducted in whole or inpart through a Dutch PE. In general, the Netherlands’tax treaties allocate to the Netherlands taxation rightswith respect to the profits allocable to such a PE. Theactual tax treatment of nonresident companies (bothin terms of tax base and tax rate) is largely the same asthat of Dutch resident companies. Another item oftaxable Dutch-source income is income from a sub-stantial interest (in short, an interest of 5% or more)in a Dutch resident company, if one of the main pur-poses for which the interest is held is the avoidance ofa Dutch personal income tax and/or dividend with-holding tax liability of another person (for example,via an intermediate holding) and an artificial arrange-ment is in place (i.e., an arrangement that is not put inplace for valid business reasons that reflect economicreality). The actual tax treatment (i.e., tax base and taxrate) will depend on the facts and circumstances andmay be reduced, in whole or in part, under an appli-cable tax treaty.

Dutch dividend withholding tax is imposed at therate of 15% on dividends distributed by a Dutch resi-dent company; the tax is imposed on the recipient butis withheld and paid by the distributing company.6

The concept of dividends encompasses more than justordinary dividends and includes, among other items,distributions in excess of contributed capital on therepurchase of shares or liquidation. Under Dutch do-mestic rules, an exemption may apply to distributionsto domestic corporate shareholders eligible for theparticipation exemption (generally, a 5% ownershipthreshold) or to qualifying EU/European EconomicArea (EEA) shareholders (again, a 5% threshold). Anexemption or reduced rate may also be availableunder an applicable tax treaty, subject to certain con-ditions and formalities.

The Netherlands only imposes corporate incometax on the profits allocable to a PE and does notimpose a ‘‘branch profits tax’’ on remittances of profitsmade by a PE to its foreign head-office.

II. Acquisition by Foreign Country Buyer of DutchBusiness From Dutch Resident Seller

A. Treatment of Gain or Loss on Sale of TargetedBusiness or Targeted Company in Hands of Dutch Seller

When an FC buyer acquires a Dutch business from aDutch seller through the acquisition of the businessassets and the assumption of the liabilities of the busi-ness, the transaction will result in an immediate real-ization for Dutch corporate income tax purposes forthe Dutch seller. Any excess of the purchase price overthe tax book value of the assets and liabilities sold willbe considered a taxable gain to be included in the tax-able income of the Dutch seller. Similarly, the sale andtransfer may trigger certain recapture claims and/orthe release of tax reserves and provisions connectedwith the business. For example, investment deduc-tions claimed over the previous three years may haveto be added back on divestment.

Because of the immediate tax charge, the sale andtransfer of assets and liabilities is usually not the pre-ferred choice of sellers. This might not be the case ifthe seller has available a tax loss carryforward to shel-ter the taxable gain, particularly if the seller would nototherwise be able to utilize the loss before it elapsedbecause of the nine-year limit on tax loss carryfor-wards. (It should be noted that a tax loss available forcarryforward is normally a tax attribute that belongsto an entity rather than to a business, so that it cannotbe transferred together with a business.) Nor might itbe the case if the seller were able to form a reinvest-ment reserve for the whole or a large part of the profitrealized on the sale and transfer.7 The reinvestmentreserve is a facility that, subject to certain conditions,allows capital gain on a business asset to be rolledover into a reinvestment in another business asset,provided the reinvestment is intended to be made, andis actually made, within three years of the end of theyear of the disposal giving rise to the capital gain. Forthese purposes, a distinction must be made betweenassets depreciable over a short term and assets thatare not depreciable or are only depreciable over a longterm because gain on an asset of the latter kind mayonly be rolled over against reinvestment in an assetthat is also not depreciable or only depreciable over along term and that has the same functionality as theasset disposed of.

Another case in which the seller might not be averseto a transfer of assets/liabilities is where the sellerwould realize a loss on the transfer and would be ableto make effective use of that loss, in particular wherethe seller or the shareholder(s) of the seller could ben-efit from such tax loss or a deductible liquidation loss(see below). When the deal is structured as a sale andtransfer of assets and liabilities, it is not only the ini-tial sale price that is considered to produce a taxableresult, but also any earn-out arrangements and/or pur-chase price adjustments. Costs incurred in connectionwith the transaction are, in principle, tax-deductible.

When an FC buyer acquires a Dutch business froma Dutch seller via the acquisition of the shares in theDutch company that holds the business assets and li-abilities, the transaction will have a number of differ-ent consequences. At the level of the target company,the immediate taxable realization described above


will not occur. Instead, the target company will merelybe the subject of the transaction and will normallycontinue with its tax book values, tax reserves and taxprovisions entirely unaffected. In this case, there willbe a realization event for the Dutch seller that is sell-ing and transferring the shares. However, in view ofthe low ownership threshold and other conditions forqualifying for the participation exemption, in the caseof a Dutch target with a business enterprise, the Dutchseller is likely to be able to invoke the participation ex-emption with respect to any capital gain arising on thesale and transfer of the shares. Both the target com-pany and the seller may therefore prefer a sale andtransfer of the shares in the target company to the saleand transfer of its assets/liabilities, because theformer will enable:

(1) avoidance of the immediate taxation of hidden re-serves, tax reserves and goodwill in the target com-pany, although it is likely that the purchase price forthe shares will also reflect such deferred tax liabil-ity; and

(2) direct enjoyment of the participation exemptionwith respect to any capital gains arising on the sale.As noted in I., above, the participation exemptionalso extends to (changes in the value of) certainearn-out arrangements and purchase price adjust-ments.8

Where the purchase price is to be paid in one ormore installments, and the overall amount of suchpayment(s) or their number is uncertain, perhapseven depending on future events or future profitabil-ity, the participation exemption covers not only the es-timated overall consideration, but also changes in thevalue of the earn-out arrangement, and hence, theactual amount of the consideration. This also applieswith respect to purchase price adjustments (for ex-ample, payments for balance sheet guarantees, war-ranties and indemnities that are structured aspurchase price adjustments). Costs incurred in con-nection with the sale (or acquisition) of a participa-tion are also covered by the participation exemptionand are, therefore, not tax-deductible.

Even though the participation exemption may beadvantageous in many cases (mostly in cases wherethe target is profitable), where there is a loss on theshareholding concerned, the exemption may not beadvantageous. The participation exemption applies tocapital losses arising on the sale and transfer of a par-ticipation, thus rendering such losses non-deductiblefor a Dutch seller. In some cases, a Dutch seller mayachieve a more tax-efficient result if, instead of sellingthe shares, it has the company in which the participa-tion is held sell the assets and liabilities (which willconstitute a taxable realization event) and then liqui-dates the company. Subject to stringent conditionsand limitations, an exception to the participation ex-emption applies with respect to losses arising on theliquidation of a qualifying participation.9 By liquidat-ing rather than selling the participation, the Dutchseller may be able to realize a loss that is deductible. Acase-by-case review is required to establish the ap-proach that is both the most beneficial and also themost convenient, with many conditions and limita-tions having to be taken into account.

The discussion above addresses the situation inwhich the target company is a stand-alone taxpayerthat is not part of a fiscal unity with the Dutch seller.Where the target company is part of a fiscal unity, spe-cial attention will be required10—with regard to,among other things, the tax effects of exiting the fiscalunity on the share transfer, which may in some casesconstitute a tax-triggering event, particularly if assetsin which hidden reserves are embodied have beentransferred within the fiscal unity shortly before thetarget leaves the fiscal unity. Even leaving that aside, itwill be necessary to determine what will be the taxbook values allotted to the target company on decon-solidation (i.e., whether those that applied in the fiscalunity or special valuations prescribed by special rules,for example, for receivables/payables between compa-nies) and whether the deconsolidation will result inrevaluations. Another factor that will need to be con-sidered is whether tax loss carryforwards can be at-tributed to the company (or certain recapture claimsmust be so attributed). One important considerationfor a company leaving a fiscal unity is its joint liability,which will continue after the company’s departurefrom the fiscal unity, for unpaid corporate income taxof the fiscal unity over the period during which thecompany was part of the fiscal unity.11

B. Tax Facilities Where Consideration for TransferIs Shares in Foreign Country Buyer Rather Than Cash

The discussion in II.A., above is based on a sale andtransfer in exchange for cash consideration. An FCbuyer and a Dutch seller may also consider having theconsideration paid in the form of shares issued by theFC buyer rather than cash.

When the sale and transfer are of the businessassets and liabilities, the general principles discussedabove will generally provide for immediate realizationand taxation of the seller, and the seller will have toconsider whether it will be able to pay the tax liabilityso triggered. In recognition of the difficulties that canarise where cash is not available, Dutch tax law pro-vides certain reorganization facilities, including facili-ties for business mergers, statutory mergers anddemergers, each subject to its own rules and condi-tions. The facility that could apply here is the facilityfor business mergers.12 If the facility applies, thetransaction will not result in the seller having to rec-ognize a taxable realization. However, the relevant taxclaim will only be deferred, effectively being trans-ferred to the acquiring company, which will be re-quired to continue the tax accounts of the transferor(i.e., there will be a full roll-over of tax book values tothe acquiring company). Availability of the facility issubject to various conditions, including, in short:

(1) The transfer must be of an enterprise or an inde-pendent part of an enterprise;

(2) The acquiring company must already be a tax-payer or must become a taxpayer;

(3) The consideration for the transfer must consistonly of shares in the acquiring company;

(4) Both the transferor and the transferee companymust be subject to the same fiscal regime;

(5) The acquiring entity may not have any availabletax loss carryforward; and


(6) The levying of tax at some later date must be en-sured (i.e., among other things, the tax book valuesmust be rolled-over).

If all the above conditions are fulfilled, the facilitymay be applied based on the law. If any of conditions(4) to (6) are not met, or the fulfillment of additionalconditions is required to ensure the later levying oftax, the merger facility may only be granted if an ad-vance joint request is submitted and ministerial ap-proval is obtained, subject to the issuing of additionalconditions (some of which are standard conditionsand have been published: for example, if the trans-feree has a tax loss carryforward, the transferee mustapply a profit split and may not use the tax loss carry-forward to offset profits of the acquired business). Ananti-abuse condition applies irrespective of whetherthe facility is invoked under the law or under ministe-rial approval: if the merger is predominantly designedto avoid or defer taxation, the merger facility will notbe available.

A merger is deemed to be so designed if it is notbased on business reasons, such as the restructuringor rationalization of the activities of the transferor orthe transferee. Business reasons are deemed to beabsent if the shares in the transferor or the transfereeare, in whole or in part, transferred within three yearsof the merger to an entity that is not a related entity ofthe transferor and the transferee. This presumptionmay be rebutted by evidence to the contrary. Hence,possible issues may arise for the seller, where the con-sideration for the sale takes the form of shares, if theshares received are disposed shortly after the merger.Such circumstances may result in the facility beingwithdrawn, with retroactive effect, with the result thatthe taxation that was initially expected to be deferredis triggered. This will then also impact the position ofthe FC buyer (for example, because the buyer willobtain a step-up in the basis of the transferor’s assets).

In general, for both the seller and the FC buyer, theissuance of shares as consideration will require the ex-ercise of additional diligence (whether or not themerger facility is to be claimed, whether or not the fa-cility is allowed, and both at the time the transactionis completed and subsequently), which will in turn re-quire the documentation to contain additional taxclauses and will entail increased uncertainty about theposition going forward. When the sale and transfer isof the shares of the target company, the general prin-ciples will be unaffected by the fact that the consider-ation consists of shares in the FC buyer—the sellerwill likely apply for the participation exemption andwill thus not need to avail itself of any tax facility. Inthe unlikely event that the participation exemption isnot granted, the seller may be eligible for the facilityfor qualifying share-for-share mergers, again subjectto certain conditions and formalities.

An aspect that the seller will have to consider iswhether, going forward, the share investment in theFC buyer will qualify for the participation exemptionor will be a taxable investment.

C. Treatment of Foreign Country Buyer Acquiring DutchBusiness

An FC buyer that acquires a Dutch business from aDutch seller by acquiring the assets and assuming the

liabilities of the business will become subject to Dutchcorporate tax: The FC buyer will be a nonresident tax-payer with a Dutch enterprise, since the businessassets and liabilities transferred will be considered toconstitute a Dutch PE (see I., above). The Netherlandswill tax the FC buyer on the profits allocable to the PE.The Netherlands’ tax treaties normally do not limit theNetherlands’ ability to tax the profits allocable to aDutch PE.

The FC buyer will normally get a ‘‘clean start’’ forDutch tax purposes with respect to its Dutch enter-prise (unless a roll-over facility was invoked). Thismeans that the tax liabilities of the seller will normallyremain with the seller. At the same time, the tax attri-butes of the seller, such as any available tax loss carry-forward, will normally also remain with the seller andthe FC buyer will be unable to have them transferredtogether with the business. The FC buyer will set upan opening balance sheet for the newly acquired busi-ness assets and liabilities, and will be allowed to takeinto account a step-up of the tax cost basis in theassets and liabilities. The FC buyer will be able tochoose its own valuation and depreciation methods(within the limits of Dutch sound business practicebut regardless of the methods used by the seller). TheFC buyer will, thus, have a stepped-up cost basis in theassets acquired and may even have acquired goodwill,which may be depreciated for tax purposes. The FCbuyer will have to be aware of a number of limitationson the depreciation of assets that apply with respect toreal estate, goodwill and other business assets.13

This paper will not go into detail with respect tothese limitations, but the following important aspectsshould be noted. Regarding real estate, no deprecia-tion is allowed below a certain tax cost base, which is100% of market value (as periodically determined bythe municipalities) in the case of real estate held as aportfolio investment and 50% of market value in thecase of real estate used in the enterprise. Regardinggoodwill, the maximum annual depreciation amountis 10% of the amount of the goodwill. Regarding otherbusiness assets, the maximum amount is 20%. Inprinciple, impairments to lower going concern valueare still allowed.

When an FC buyer acquires a Dutch business froma Dutch seller by acquiring the shares in the companyholding the business assets and liabilities, the transac-tion will have different consequences. As noted above,the transaction will, in principle, have no directimpact at the level of the target company. This meansthat there will be no immediate realization event andno taxation will be triggered. At the same time, therewill be no step-up in tax cost basis, but instead a con-tinuation with the same tax book values, tax reservesand tax provisions. In acquiring the Dutch company,the FC buyer will indirectly also acquire the compa-ny’s tax history and tax position, including current,deferred, and/or contingent tax liabilities.

Like the tax losses available for carryforward, thetarget company’s other tax attributes will normallyremain with the target company. In this context, itshould be noted that the use of tax loss carryforwardsmay be subject to limitations.14 Any losses remainsubject to the usual time limits (i.e., nine years carryforward after the year in which the loss arose), and thelimits on the use of losses deriving from holding ac-


tivities and intra-group financing activities (which re-strict the use of losses to years in which the targetcompany continued to qualify as a holding/financecompany or years in which the intra-group financingvolume was not increased). In addition, there is also alimitation on the use of tax losses after a substantialchange in the ultimate ownership of a company, de-signed in particular to prevent the use of tax lossesafter a tax loss company has been traded for losses de-rived from portfolio investment activities. In essence,if there has been a change of 30% or more in the ulti-mate ownership interest in the company concerned ascompared to the ultimate ownership interest at thestart of the oldest year from which losses are availablefor carryforward, losses incurred before the change inthe ultimate ownership interest can no longer be car-ried forward.

The result of the year of change must be split be-tween the result allocable to the period before andthat allocable to the period after the change, and anegative result of the first or second period is allocatedto the preceding or subsequent year, respectively. Anexception to the limitation applies if the following cu-mulative conditions are fulfilled:

(1) in both the loss year and the profitable year, 50% ormore of the company’s assets do not consist for atleast nine months of passive, portfolio type invest-ments;

(2) the total volume of the activities preceding thechange in the ultimate ownership interest has notbeen reduced to less than 30% of the total volume ofactivities at the beginning of the oldest loss year;and

(3) at the time of the change in the ultimate ownershipinterest, there is no intention to reduce the totalvolume of the activities within three financial yearsto less than 30% of their pre-change volume.

If the first condition is fulfilled but the second andthird conditions are not, the loss carryforward maystill be available but may only be set-off against profitattributable to activities that were already being car-ried on before the change in the ultimate ownershipinterest. If, because of the application of these limita-tions, losses incurred may no longer be set off, thecompany is allowed to release certain reserves andtaxable revaluations to avoid the evaporation of thelosses. As the business assets and liabilities remainwith the separate Dutch company, the FC buyer willnot itself directly become a nonresident taxpayer sub-ject to Dutch corporate income tax, as it does not itselfhave a Dutch PE as a result of the transfer of the assetsand liabilities.

In theory, based on its holding of a substantial inter-est in a Dutch company, the FC buyer may become anonresident taxpayer subject to Dutch corporateincome tax with respect to the future results derivedfrom that substantial interest. However, actual taxa-tion will only be triggered if:

(1) one of the main purposes for which the interest isheld is to avoid a Dutch personal income tax and/ordividend withholding tax liability of another person(for example, via an intermediate holding);

(2) an artificial arrangement is in place (i.e., an ar-rangement that is not put in place for valid businessreasons that reflect economic reality); and

(3) no tax treaty protection can be invoked. 15

Although this possibility will certainly have to betaken into account in setting up the structure, wherethe structure is a genuine business structure, nonresi-dent taxation normally should not be an issue. Eventhough it is unlikely that the FC buyer will becomesubject to Dutch corporate taxation as a nonresidenttaxpayer as a result of holding the shares, it is worthnoting, as a general comment, that Dutch tax law doesnot allow for depreciation on shares or on goodwillembedded in shares.

The FC buyer will need to consider whether divi-dends distributed by the acquired Dutch target com-pany will be effectively subject to the standard 15%dividend withholding tax or whether the FC buyer willbe entitled to an exemption, either under Dutch do-mestic rules or under an applicable tax treaty. UnderDutch domestic rules, certain qualifying EU/EEAshareholders may be entitled to an exemption (gener-ally, where a 5% ownership threshold and certainother requirements are met).

Under an applicable treaty, an exemption from, or areduced rate of, withholding tax may apply subject tothe fulfillment of certain conditions and formalities.Dutch treaty policy aims to provide an exemption forinvestment dividends (generally, where a 25% invest-ment threshold is met). Of course, the actual appli-cable treaty is decisive. The Dutch government hasannounced its intention to provide a unilateral ex-emption where a comprehensive tax treaty applies(i.e., an exemption regardless of the treaty rate), sub-ject to certain conditions designed to prevent the useof the exemption in abusive cases.16

D. Use of an Acquisition Vehicle

In any acquisition, an FC buyer will consider whetherit is more desirable to fund the acquisition with equityor debt, and in particular the ability to use or restric-tions on the use of debt to finance the acquisition, es-pecially the deductibility of interest in connectionwith the acquisition. Debt funding and interest de-ductibility considerations may be particularly impor-tant in an FC buyer’s decision as to whether to use aDutch acquisition vehicle.

An FC buyer that acquires a Dutch business from aDutch seller by acquiring the assets and assuming theliabilities of the business will become subject to Dutchcorporate taxation on the profits allocable to theDutch PE that will arise as a consequence of that ac-quisition. In principle, there are no statutory rulesthat explicitly aim to limit the deductibility of interestin connection with the acquisition of a business. How-ever, the FC buyer will have to consider the generalprinciples and rules applicable to any taxpayer in thisrespect. In the case of an FC buyer with a Dutch PE,the first questions will be whether or not the acquisi-tion debt is to be allocated to the PE and how to deter-mine the allocable interest expenses. The Netherlandsgenerally follows the principles enshrined in Article 7of the OECD Model Convention and the Commentarythereon and has published policy on the Netherlands’preferences where these principles allow a range ofchoices.17 The question of the allocable equity anddebt can be the first hurdle that has to be overcome inattempting to deduct the interest on the acquisition


debt against the target business profits. The use of aDutch acquisition vehicle may be advisable if thishurdle is to be overcome. Where there is an acquisi-tion vehicle that is a separate entity, it will be muchclearer from the corporate and civil law structurewhat is the equity and debt to be allocated. Eventhough the corporate and civil law structure will betaken as a starting point, limitations on the deductionof interest may still arise if the debt funding providedactually functions as equity, constitutes a non-business-like shareholder loan, or falls within thescope of any of the general anti-base erosion rules lim-iting the deductibility of interest expense (see below).

In addition to commercial reasons, an FC buyermay also have a number of tax reasons for consideringthe use of a Dutch acquisition vehicle. One suchreason may be that the FC buyer may prefer not tobecome subject to Dutch corporate taxation but to usea separate entity to carry on its new Dutch businessactivities. The Dutch acquisition vehicle would ofcourse be taxable as a Dutch tax resident. Anotherreason may be that allocating the debt funding to thenew Dutch acquisition vehicle may be less problem-atic, allowing the associated interest expense to be de-ducted from the target’s business profits. If it choosesto use an acquisition vehicle, the FC buyer will have toconsider the possibility that holding shares in such avehicle could result in the FC buyer becoming subjectto Dutch nonresident taxation (though this is gener-ally unlikely) and/or dividend withholding tax (whichis likely). However, the FC buyer may be entitled to anexemption from, or a reduction of tax, under an appli-cable tax treaty, or may look at other structuring alter-natives with a view to mitigating dividendwithholding tax (if any).

As explained above, an FC buyer that acquires aDutch business from a Dutch seller by acquiringshares in a Dutch company will likely not become sub-ject to Dutch corporate taxation, as it will not have aDutch PE and will likely not have a taxable substantialinterest. Since the FC buyer in this scenario is not sub-ject to tax in the Netherlands, even if it uses debt fund-ing to acquire the shares, it will have no deduction forDutch tax purposes for the interest on the acquisitiondebt funding. In practice, to achieve an effective debtpush down and interest deduction in the Netherlands,buyers frequently make use of a (partly) debt-fundedDutch acquisition vehicle in combination with thefiscal unity regime, the Dutch acquisition vehicle in-cluding the Dutch target company in a fiscal unity. Asexplained in I., above, the effect of the fiscal unity isthat all assets, liabilities and results of a subsidiary areattributed to its parent company and corporate tax islevied on a consolidated basis on the parent company.Among other benefits, this enables losses of compa-nies within the fiscal unity to be set off against profitsof other companies within the fiscal unity. Specifically,in the case at hand, it would allow the interest ex-penses on the acquisition debt to be set off within thefiscal unity against the profits of the acquired targetcompany.

The FC buyer would, however, have to take into ac-count the fact that there are limitations to this kind ofstructuring where the debt funding is deemed exces-sive. Specifically, an anti-base erosion rule providesfor a limitation on the deduction of interest (interest

expenses and other financing costs) with respect to aloan taken out to acquire (or increase) an investmentin a subsidiary where the subsidiary is included in afiscal unity with the acquirer.18 The limitation appliesto interest on both third-party and related party debt,to the extent the interest expense exceeds the amountof the ‘‘own profits’’ of the (fiscal unity of the) acquirerexcluding the profits of the subsidiary (or subsidiar-ies). As a result, the maximum amount of deductibleinterest under the main rule equals: The profit of thefiscal unity -/- the profit attributable to the subsidiar-ies + the relevant interest. Interest that is non-deductible under this rule in a particular year may becarried forward to subsequent years when the interestcan be deducted to the extent the main rule does notresult in a restriction. There are two exceptions to therule based on which the limitation applies only to thelower of: (1) the amount of relevant acquisition debtinterest that would not be deductible under the mainrule, less a fixed amount of 1 million euros (however,this amount may not be less than zero); or (2) theamount of the ‘‘excessive acquisition interest.’’ The ex-cessive acquisition interest is the aggregate of: (1) theacquisition debt interest due in the relevant year onexcessive acquisition debt with regard to the compa-nies included in the fiscal unity during that year; and(2) the acquisition debt interest due on excessive ac-quisition debt with regard to the companies includedin the fiscal unity in preceding years. Acquisition debtis excessive to the extent that debt relating to the ac-quisition (or increase) of an investment in one ormore companies included in the fiscal unity in a spe-cific year exceeds 60% of the acquisition price(s) ofsuch companies (by the end of the year). This percent-age will be reduced by 5% per year until it reaches25% (i.e., 60%, 55%, 50% and so on to 25%). Similarlimitations apply where the acquisition debt and thetarget business are combined as a result of a reorgani-zation such as a merger or split-off.

Even with this limitation, buyers commonly use thedescribed approach for their acquisition structuring,making use of the allowed percentage of debt and/orthe allowed deductibility. Although the limitation oninterest deductibility described above is the most spe-cific rule designed to combat base erosion resultingfrom the use of leveraged acquisition holding compa-nies, it should be noted that the Netherlands also im-poses a number of other limitations, including thefollowing:19

s A taxpayer may not deduct interest on a loan that isdeemed to function in reality as equity (in short, aparticipating loan: a loan with no fixed repaymentterm, or a repayment term of more than 50 years,that is subordinated to all concurrent creditors andthe terms of which provide for remuneration that isprofit-contingent).

s Based on the arm’s-length principle, adjustmentscan be made if a taxpayer does not apply arm’s-length transfer pricing in its transactions with re-lated persons.

s A taxpayer may not deduct interest on a loan from arelated party where the loan is connected with cer-tain deemed tainted transactions, including divi-dend payments by or capital repayments to, andcapital contributions to or share acquisitions in acompany that is, or becomes, a related company,


unless the taxpayer can demonstrate predominantbusiness motives for both the transaction concernedand the related party loan. This limitation should beconsidered, inter alia, where an attempt is made toachieve some push-down of acquisition debt, par-ticularly when this is done by converting the target’sequity into related-party debt.

s A taxpayer may not deduct (actual or imputed) in-terest on a loan with a term of more than 10 yearsthat bears no interest or bears interest at a rate thatdeviates from an arm’s-length rate by more than30%. This is designed to prevent the exploitation ofmismatches in qualification or transfer pricing.

s A taxpayer may not deduct interest on debt financ-ing (on which interest would normally be deduct-ible) if the taxpayer is deemed to have excessive debtfinancing for investments made in participations(which would normally produce exempt income).This limitation is based on certain specific formulae.There are exceptions for financing for qualifying ad-ditional operational investments.

III. Acquisition From Foreign Seller

A. Treatment of Gain or Loss on Business or Shares inHands of Foreign Country Seller

When an FC buyer acquires a Dutch business from aforeign country (FC) seller rather than from a Dutchseller, the tax consequences will be rather differentfrom those described in II., above, particularly for theseller. It is assumed that the FC seller either: (1) holdsthe business assets and liabilities directly and thensells and transfers them; or (2) holds the shares in aDutch resident company (that holds the businessassets and liabilities) and then sells and transfersthem.

In the first situation, the FC seller will be subject toDutch corporate taxation as a nonresident taxpayerwith a Dutch enterprise (since the business assets andliabilities will be considered to constitute a PE, asnoted in I., above). On that basis, the Netherlands willtax the FC seller on the profits allocable to the DutchPE. The Netherlands’ tax treaties normally do notlimit the Netherlands’ right to tax the allocable profitsof a PE. The same applies to the gain (or loss) arisingfrom a sale and transfer of the business assets and li-abilities. As in the case of a Dutch seller (see II.,above), the transaction will result in an immediate re-alization for Dutch corporate income tax purposes forthe FC seller. In principle, the same rules apply forpurposes of determining the taxable profits of non-residents with a Dutch enterprise as apply to Dutchresidents. If the business activities of the target werethe only reason that the FC seller was treated as a non-resident taxpayer in the Netherlands, the sale andtransfer may also result in the FC seller ceasing to betaxable in the Netherlands. In this case, the FC sellerwould be subject to final or exit taxation on any resultsnot yet taken into account by it, would not be able toset up a reinvestment reserve and would have no effec-tive future use for any possible tax loss carryforward.

If the sale and transfer is not effected for cash, butrather in exchange for shares in the FC buyer, the FCseller may be eligible for the business merger tax facil-

ity subject to similar conditions to those describedabove in relation to a Dutch seller, with similar conse-quences for the FC buyer (i.e., it will have to accept taxdeferral due to continuing with the same tax bookvalues and positions as those of the PE of the FCseller). If the FC seller ceases to be taxable in the Neth-erlands, rendering its tax loss carry forward unusable,a published policy approval may be available allowingthe tax loss carryforward to be transferred to the ac-quiring company.20

In the second situation, the FC seller sells and trans-fers the shares in the Dutch target company. No im-mediate realization or taxation will arise at the level ofthe Dutch target. As the Dutch target will merely bethe subject of the transaction, it will normally con-tinue with its tax book values, tax reserves and taxprovisions fully intact, albeit the change of ownershipmay impact the availability of its tax loss carryfor-wards, as described above. In theory, the FC sellermay be a nonresident taxpayer subject to Dutch cor-porate income tax, for example, because of the exis-tence of a Dutch enterprise to which the shares in theDutch company belong. In that case, the FC sellerwould most probably be able to claim the participa-tion exemption (see the analysis in II., above in rela-tion to a Dutch seller). In theory, the FC seller mayalso be a nonresident taxpayer subject to Dutch corpo-rate income tax on the basis that it holds a substantialinterest in the Dutch target company.21 However,actual taxation would only be triggered if: (1) one ofthe main purposes for which the interest was held wasto avoid a Dutch personal income tax and/or dividendwithholding tax liability of another person (for ex-ample, via an intermediate holding); (2) an artificialarrangement is in place (i.e., an arrangement that isnot put in place for valid business reasons that reflecteconomic reality); and (3) no tax treaty protection canbe invoked. In the case of a genuine business struc-ture, nonresident taxation should not normally be anissue, but this possibility will certainly require the at-tention of the FC seller (although normally this shouldhave been considered in advance of the sale and trans-fer). When taxation is triggered, the substantial inter-est regime does not allow for the application of theparticipation exemption. The applicable tax base andtax rate will depend on the facts and circumstances ofthe case. It will also be difficult, if not impossible, toobtain roll-over relief, particularly in the case of an ex-change for shares in the FC buyer (i.e., foreignshares).

B. Treatment of Foreign Country Buyer, Use of DebtFunding and Use of an Acquisition Vehicle

Where the acquisition is made by an FC buyer from anFC seller rather than from a Dutch seller, the Dutchtax treatment and other Dutch matters that the FCbuyer will need to consider remain similar to those de-scribed in II. C. and D., above. This applies whetherthe assets of a Dutch business are acquired and its li-abilities assumed, or the shares in a Dutch companyare acquired from the FC seller.


IV. BEPS and EU Developments

There are a large number of OECD and EU initiativesthat significantly impact the tax rules in many coun-tries, including the Netherlands. The Netherlands isactively participating in these initiatives, has alreadyimplemented the outcome of certain initiatives and isalso expected to implement certain other initiatives.These developments and the Netherlands’ views andplans have been described in detail in previous issuesof the Tax Management International Forum and willnot be repeated in this paper.22

The Dutch system has traditionally had an interna-tional focus, with various strengths that contribute tothe investment climate (for example, the participationexemption regime, the tax treaty network, the avail-ability of advance certainty under the advance taxruling (ATR)/advance pricing agreement (APA) prac-tice, and the absence of withholding tax on interestand royalties). The Dutch government recognizes thatthis international focus and the differences betweennational tax systems also have a downside, in thatsome businesses are tempted to use the Dutch systemand the Netherlands’ treaty network for unintendedpurposes. The Netherlands has therefore committeditself to the OECD’s BEPS project.

The Netherlands has consistently taken the ap-proach that base erosion and profit shifting are inter-national problems that can best be resolved in aninternational context, i.e., not by the Netherlandsadopting unilateral measures, which would be harm-ful to the international competitive position of theNetherlands and the business community. Neverthe-less, the Netherlands has in certain areas unilaterallyaddressed potential tax treaty abuse involving ‘‘letter-box companies’’ by introducing enhanced substancerequirements and spontaneous information ex-change. Further, the Netherlands has been and contin-ues to be a frontrunner in certain transparencyinitiatives, including the common reporting standard(CRS), country-by-country (CbC) reporting, the ex-change of information on tax rulings, and the registerof ultimate beneficial owners. The Netherlands recog-nizes that the final BEPS reports present standardsand solutions for tackling tax avoidance in an impres-sive number of areas. The Netherlands believes thatcombating international tax avoidance and abuse isdesirable and the adoption of coordinated measuresfor this purpose is unavoidable. Therefore, the Nether-lands has been actively participating in the OECDBEPS project and is committed to adhering to manyof its outcomes and recommendations. Also, the Neth-erlands is among the early signatories to the Multilat-eral Instrument (MLI), which may have a rapidimpact on existing treaty relations, particularly in theareas of hybrid mismatches, dual tax residence, theprevention of treaty abuse, low-taxed PEs and the ar-tificial avoidance of PE status.

As an EU Member State, the Netherlands will alsoimplement the EU initiatives that follow from various(amendments to) EU Directives. Transparency initia-tives are also being implemented in an EU context,(for example, CRS, CbC-reporting and informationexchange with respect to tax rulings). Further initia-tives are being implemented, or will be implemented,based on the Anti-Tax Avoidance Directive(s), gener-

ally referred to as ATAD1 and ATAD2.23 ATAD1 pro-vides for the mandatory introduction of: a limitationon interest deductions in the form of an earningsstripping rule, rules on exit taxation; a general anti-abuse rule (GAAR), controlled foreign company (CFC)rules, and anti-hybrid rules in an EU context. ATAD2amended the anti-hybrid rules with application in anEU context and provided for anti-hybrid rules fornon-EU hybrid mismatches. The time limit for imple-menting the respective rules varies. However, therewill certainly be changes to the Dutch tax rules as aresult of the OECD and EU initiatives. The Nether-lands is also mindful of the future tax and investmentclimate, wishing to remain attractive to foreign anddomestic investors while at the same time upholdingthe principle that businesses should make fair taxcontributions. The Netherlands appears to be adher-ing to a strategy of continuing to take a proactive ap-proach to combatting international tax avoidancewhile maintaining a favorable tax climate with a com-petitive corporation tax rate.

There are thus a large number of initiatives thathave already been implemented, are pending imple-mentation or are still anticipated. However, thus far,these initiatives would not seem to involve any signifi-cant changes to the Dutch tax regime that would di-rectly impact the comparison between structuring theacquisition of a Dutch business as an acquisition ofbusiness assets or as an acquisition of shares in aDutch company. However, any FC buyer, Dutch selleror foreign seller will need to consider the rules andpossible changes to them. For example, a general de-velopment, which had already started before theOECD BEPS and EU initiatives, and which is still un-derway, as is apparent from recent legislative mea-sures and draft legislative measures, is that theNetherlands is looking for genuine structures withsubstance. As another example, ATAD1 may have ageneral impact in this respect.24 On the one hand, thiswill result in the introduction of limitations on inter-est deductions in the form of an earnings strippingrule, which the Netherlands currently does not have.On the other hand, it may be cause to examine thescope of and need for many of the Netherlands’ exist-ing limitations on interest deductions, perhaps result-ing in the repeal or amendment of some of the rules.To take another example, the anti-hybrid rules mayplay a role in acquisition structuring and/or the debtfunding thereof, although their impact would seemprimarily to be felt under the rules of the jurisdictionof the FC buyer rather than the Dutch rules describedabove. Further developments will need to be moni-tored.

IV. Non-Tax Factors

It is not only from a Dutch tax perspective that therewill be various differences between an acquisition ofassets and assumption of liabilities and an acquisitionof shares in a company. Differences may also arisefrom corporate law, civil law, commercial law (includ-ing competition law and permits), labor law, environ-mental law and so on. For example, an acquisition ofassets and assumption of liabilities generally requiresan effort to list the relevant assets and liabilities, andpossibly contractual arrangements relevant to the


business. Arrangements must also be made for theactual transfer of assets/liabilities, if possible (for ex-ample, some permits may be non-transferable), withthe relevant transfer requirements for each asset or li-ability having to be met, which may possibly involvethird party consents and/or new registrations.

The acquisition of shares in a Dutch company gen-erally requires the transfer of the shares, which isoften subject to the requirement of a notarial deed (asis the case with shares in a Dutch besloten vennootsc-hap met beperkte aansprakelijkheid (B.V.), one of themost common legal forms for business activities).This in turn effects the transfer of the shares in thecompany together with all of its assets, liabilities, con-tracts and so on. This sounds easier than it may actu-ally be: For example, change of control provisionsrelevant to the business may also require third-partyconsents where it is intended to transfer the shares inthe company. Further, the transfer of the company to-gether with all of its assets and liabilities implies thatthe buyer obtains a company, with its own history, andwith all of the risks and liabilities connected there-with, which are then indirectly for the risk of thebuyer. These are just some examples. Generally speak-ing, both the FC buyer and the seller would do well toretain legal counsel to guide them through the rel-evant differences entailed in the alternatives.

Tax representations, warranties and indemnitiesgenerally play a small(er) role in the case of an acqui-sition of assets and assumption of liabilities, althoughit is still recommended that the buyer should obtainan indemnity for tax liabilities of the seller and pre-closing taxes related to the newly acquired business.Tax representations, warranties and indemnities gen-erally play a larger role in the case of an acquisition ofshares in a company, particularly for the reasonsnoted above: the buyer obtains the shares in a com-pany, with its own history, and thus (indirectly) withall of the risks and liabilities connected therewith. Thetax position, which may be current, deferred or con-tingent, and tax matters generally, play a larger rolealso when compared to other matters dealt with in theshare purchase agreement. There are many reasonsfor this. For example, taxes may easily involve largeamounts, with a significant impact on the value of thecompany, and thus a significant impact on the (ac-ceptable) purchase price. Further, it is not uncommonfor the tax position to be characterized by uncertainty,either because of uncertainties as regards the applica-tion and/or interpretation of the rules or because ofthe tax planning or tax reporting strategy of the targetcompany.

Another element of uncertainty derives from thefact that the tax reporting is usually done a long timeafter the year-end closing. Although the standardfiling term is five months, it is very common to obtaina filing extension for up to a total term of 16 or 18months. The tax uncertainty is increased, or at leastprolonged, by the fact that the Dutch tax authoritieshave a long period before they have to issue a final taxassessment (generally, three years after the year-endclosing, plus any filing extension term granted). Evenafter a final assessment has been issued, an additionalassessment and/or other adjustments may still bemade subject to stricter conditions (for example,where new facts are discovered, if the taxpayer acted

in bad faith and/or in cases of substantial tax devia-tion).25 Thus, the uncertainty may well be long-term(generally lasting for five years after the year-endclosing—12 years where foreign aspects or results areinvolved—plus any filing extension term).

Another reason why the tax position and tax mat-ters generally play a large role is because of the taxcompliance obligations with respect to which tax cov-enants are normally to be made by seller and buyer,i.e., to arrange their respective tasks and rights and re-sponsibilities with regard to tax compliance and in thecase of possible tax controversy between the targetand the tax authorities.

The tax matters to be dealt with in a share purchaseagreement may be further complicated if the targetcompany was previously part of a fiscal unity. Asnoted above, the target company is and remains liablefor the corporate income tax of the fiscal unity overthe period that it formed part of the fiscal unity.Hence, uncertainties about the tax position of thefiscal unity and/or uncertainties about the payment oftax, should be considered. The risk is normally dealtwith, or at least reduced, through indemnities, andparent company or top holding company guarantees.Further, also as noted above, tax compliance (includ-ing in relation to the results of the target company) isnormally carried out by the fiscal unity taxpayer, re-sulting in additional matters to be addressed in thecovenant on tax compliance. Furthermore, deconsoli-dation of the target company from the fiscal unity mayalso have an impact on the tax position of the targetcompany (for example, whether the target companycan be attributed tax loss carryforwards, what will bethe tax book values that the target company will begiven on deconsolidation and whether the deconsoli-dation results in revaluations).

This paper does not address all of the many aspectsthat can play a role. Suffice it to say that tax mattersdefinitely play an important role in a share purchaseagreement, are generally dealt with separately fromother matters, and are commonly not subject to thesame monetary limits and time limits as other mat-ters.

Dutch law generally allows the flexibility to desig-nate the applicable law in the sale and purchase agree-ment, whether related to the acquisition of assets andassumption of liabilities, or to the acquisition ofshares in a Dutch company. In an international con-text, it is not uncommon to apply Dutch law, but it isalso not uncommon to apply U.K. law, all dependingon the parties’ preferences. However, in the case of theacquisition of certain assets and the assumption ofcertain liabilities, the transfer requirements stipulatedin Dutch law will need to be complied with for thetransfer to be effected (for example, the requirementof a notarial deed for the transfer of shares in a B.V.referred to above).

NOTES1 Wet op de vennootschapsbelasting 1969 (Corporate TaxAct 1969— CTA), Art. 13.2 CTA, Art. 13d.3 CTA, Art. 14, 14a, 14b.4 CTA, Arts. 15, 15aa through 15aj, and 15a. This papertakes into account only the basic form of fiscal unity in-


volving a parent company and a (direct) subsidiary com-pany. Other fiscal unity configurations (for example,sister companies with a joint EU shareholder) may alsobe available subject to certain conditions.5 CTA, Arts. 17, 17a, 18. The Dutch government has pub-lished for consultation a draft legislative proposal withsome changes. This paper is based only on the 2017 rules.6 Wet op de dividendbelasting 1965 (Dividend Tax Act1965—DTA).7 CTA, Art. 8. Wet op de inkomstenbelasting 2001 (IncomeTax Act 2001— ITA), Art. 3.54.8 CTA, Art. 13(6).9 CTA, 13d.10 CTA, Arts. 15, 15aa through 15aj, and 15a.11 Invorderingswet 1990 (Act on Tax Collection 1990), Art.39.12 CTA, Art. 14.13 CTA, Art 8 in conjunction with ITA, Arts. 3.30 and3.30a.14 CTA, Arts. 20 and 20a.15 See note 5, above.16 The Dutch government has announced this intention inparliamentary letters and discussions and published forconsultation a draft legislative proposal to such effect.17 CTA, Art. 18. Decree 15 Jan. 2011, IFZ2011/457M,Stcrt. 2011/1375.18 CTA, Art. 15ad.19 CTA, Arts. 10(1)d (hybrid loans deemed to function asequity), 8c (arm’s-length principle), 10a (anti-base ero-sion), 10b (long-term low-yield instruments) and 13l(deemed excessive debt funding of participations).20 Decree 20 August 2015, BLKB2015/520M.21 See note 5, above.

22 See Martijn Juddu, Host Country Rules to Prevent BaseErosion and Profit Shifting, Netherlands response, TaxManagement International Forum, September 2013;Martijn Juddu, The Deductibility of Interest Paid to For-eign Persons, Netherlands response, International Forum,August 2014; Martijn Juddu, Unilateral Anti-BEPS Mea-sures Promulgated or Proposed by Host Country Since July2013, Netherlands response, Tax Management Interna-tional Forum, September 2015; Martijn Juddu, CurrentStatus and Practical Considerations in the Implementationof BEPS Measures, Netherlands response, Tax Manage-ment International Forum, September 2016; MartijnJuddu, Current Status and Practical Considerations in theImplementation of BEPS Measures, Netherlands re-sponse, Tax Management International Forum, Decem-ber 2016.23 Council Directive (EU) 2016/1164, Council Directive(EU) 2017/952.24 The Dutch government has published for consultationa draft legislative proposal with some proposed changesto implement ATAD1, particularly to implement earningsstripping rules, implement CFC rules according toATAD1, Model A (the allocation of certain categories ofincome), and to make some changes to the existing ruleson exit taxation. With respect to the GAAR, the consulta-tion proposes to rely on the already existing anti-abusedoctrine developed in case law (fraus legis). With respectto the anti-hybrid rules, considering their later imple-mentation date, the consultation announces a later con-sultation. This paper is based only on the 2017 rules.25 Algemene wet inzake rijksbelastingen (General Taxes Act—GTA), Arts. 11 (final assessment) and 16 (additional as-sessment).


SPAINEduardo Martınez-Matosas and Luis CuestaGomez-Acebo & Pombo Abogados SLP, Barcelona

I. Acquisition by Foreign Country Buyer of SpanishBusiness From Spanish Sellers

An essential starting point for any acquisition or take-over of a company’s business is the decision whetherto purchase the company’s assets or its shares. Bothtypes of acquisition are common under the Spanishlegal system and are carried out in accordance withinternational custom and practice, particularly as re-gards buyer protection mechanisms in the form ofrepresentations and warranties provided by the seller.

The main differences from a Spanish tax point ofview between the two types of business acquisitionand the advantages and disadvantages of each are de-scribed below.

It should be noted that the tax implications de-scribed below are those that the follow from the gen-eral Spanish tax system, which is applicable in allparts of the country except the Basque region. Specificcorporate income tax (CIT) provisions apply in theBasque Autonomous Community, which has autono-mous legislative powers in tax matters. Thus, the taxconsequences for companies subject to Basque au-tonomous regulations could be different from thosedescribed below.


Under Spain’s general tax law rules, as a consequenceof the acquisition of Spanish assets, where such assetsconstitute a line of business or an economic unit or agoing concern, the transferor (the ‘‘Spanish seller’’)and the transferee (the foreign country buyer (‘‘FCbuyer’’)) will be jointly and severally liable for the taxdebts and contingencies incurred prior to the closingthat relate to the transferred assets. In this sense,there is a succession of a company when the transferconcerned involves an economic unit that retains itsidentity after the transfer, an economic unit being un-derstood as an entire, organized means of carrying onan essential or accessory economic activity. Accord-ingly, in order to determine whether or not a corpo-rate succession has occurred, it is necessary toestablish whether there has been an effective transferof the company’s material and human resources,which would allow for the continuity of the activity.

The transferee with respect to the assets (i.e., the FCbuyer) is entitled (provided it obtains the express con-sent of the seller) to request a certificate from the

Spanish tax authorities regarding the tax debts andcontingencies relating to the assets to be transferred,with the following legal consequences: (1) if the cer-tificate shows no debts or liabilities or the certificate isnot granted within a period of three months, it will re-lease the transferee from any tax liabilities in connec-tion with the transferred assets; and (2) if thecertificate shows the existence of tax debts or liabili-ties with respect to the assets to be transferred, thetransferee’s liability will be limited to the debts andcontingencies referred to in the certificate.

When an FC buyer acquires a business in Spain, thebusiness acquired becomes a permanent establish-ment (PE) in Spain of the FC buyer. A Spanish PE of aforeign company is taxed in the same way as a Span-ish resident company. Additionally, a Spanish PE issubject to a branch tax at the rate of 19% on profits re-patriated to its foreign head office, as well as on royal-ties, interest and commissions paid to the head office.However, this branch tax does not apply where thecompany with the Spanish PE is resident in anotherEuropean Union (EU) Member State or in a countrythat has a tax treaty with Spain, unless provided oth-erwise in the applicable treaty.

Under general rules, the FC buyer must record theassets acquired at the consideration delivered in ex-change for them. This acquisition cost will also consti-tute the tax basis of the acquired assets for purposes ofcalculating future tax depreciation and any gain orloss on a future transfer of the assets. Where assets areacquired from a related party, they must be valued inaccordance with the arm’s length principle. The por-tion of the purchase price not allocated to specificassets will be deemed to be attributable to goodwill, asrequired by the accounting rules.

Under the Spanish Value Added Tax (VAT) Law,transfers of assets between VAT taxpayers are gener-ally subject to VAT (currently at the rate of 21%). How-ever, if the transfer involves all of the assets andliabilities of a business (i.e., it is a transfer of an au-tonomous economic business unit), the transfer willnot be subject to VAT. In this scenario, however, trans-fer tax (the rate of which ranges from 8% and 11%, theapplicable rate depending on the meeting of certainrequirements) will apply, but only with respect to anyreal estate transferred in the transaction. In addition,if other assets that are recorded in Spanish public reg-istries are transferred (for example, IP rights regis-


tered in the relevant IP Registries) and their transferwas documented in a public deed, stamp duty (therate of which ranges from 0.5% to 1.5%, depending onthe Autonomous Region concerned) will be imposedon the public deed.

If the assets to be transferred cannot be consideredto constitute an autonomous economic business unitor going concern, Spanish VAT will be applicable, on acase-by-case basis, in accordance with the corre-sponding location rules and at the relevant rates. Thismeans that the global price to be paid for the assetswill have to be allocated among each of the assetstransferred and the goodwill acquired, if any, in orderto enable the VAT applicable to each asset acquired tobe determined.

From a seller’s point of view, the difference betweenthe consideration received and the assets’ tax basis isa capital gain subject to CIT at a rate of 25%. The ex-isting tax attributes of the seller company, such as netoperating losses (NOLs) or other tax credits, however,do not carry over to the buyer.

From an FC buyer’s perspective, it is generally pref-erable to acquire business assets directly via a Spanishvehicle (to the extent a step-up in the assets’ tax basiscan be obtained by the buyer and the buyer is able torecord amortizable goodwill). Conversely, a Spanishseller will generally not be inclined to structure a saletransaction as an asset deal, as it will generally preferto avoid the double layer of taxes (at the level of sellerand the level of the shareholders if the participationexemption regime is not applicable) that can resultfrom an asset deal.


In the case of a share deal, the acquired entity (target)remains in existence, and its historical or contingentliabilities remain with it after the completion of thetransaction. Impairment loss on shares is not deduct-ible. Even if the price paid for the shares is higherthan the book value or market value of the underlyingassets, it is not possible for the acquired company tostep-up the tax basis of its assets or to recognize thegoodwill implicit in the purchase price for tax pur-poses. The target is entitled to carry over its tax attri-butes (such as NOLs and tax credits).

In Spain, NOLs can be carried forward withouttime limit (the carryback of NOLs is not allowed).However, the right of the Spanish tax authorities toaudit tax losses that have been set off or are carriedforward is subject to a statute of limitation of 10 years,running from the day after the filing of the CIT returncorresponding to the fiscal year in which the tax losswas generated.1

In addition to the absence of a time limit for the set-off of tax losses, the amount of taxable income in ayear that may be offset by NOLs is limited to 70%/50%/25% of the tax base (depending on the company’sturnover), though, in all cases, a set-off of up to anamount of 1 million euros is permitted.

Spain’s CIT rules provide for the application of cer-tain anti-NOL abuse rules where all of the followingcircumstances are present:

s The majority of the share capital of the target com-pany is acquired by a person or an entity, or a group

of persons or entities, after the end of the fiscal yearin which the tax loss was generated.

s The majority of the share capital of the target com-pany is acquired by a person or an entity, or a groupof persons or entities, after the end of the fiscal yearin which the tax loss was generated.

s The persons/entities referred to above (i.e. thosetaking control of the company) held less than 25% ofthe share capital of the company at the end of thefiscal year in which the tax loss was generated.

s The company satisfies one of the following criteria:/ the company did not carry on a business activity

in the three months preceding the change of own-ership;

/ in the two years after the change of ownership,the company carries on a business activity differ-ent from, or additional to, the activity it carriedon before the change of ownership, with the com-pany’s turnover in that period being 50% higherthan its average turnover in the two-year periodpreceding the change;

/ the company is considered to be an asset-holdingcompany; or

/ the company has been deregistered from thecensus of taxpayers because it did not file a CITreturn for three consecutive tax periods.

An acquisition of shares generally does not have anyimmediate Spanish tax implications for an FC buyer.The basis in the target’s underlying assets carries overand is not stepped up. Consequently, it is not possiblefor the FC buyer to benefit from any additional taxamortization or depreciation of the underlying assets.Nor can the FC buyer benefit from any additionalprice paid that is attributable to the goodwill of thebusiness carried on by the company whose shares theFC buyer acquires.

Transfers of shares of Spanish companies are gener-ally exempt from the payment of transfer tax andstamp duty and/or VAT.2

As regards the financing of the acquisition, financeexpenses incurred on loans from companies in agroup to acquire shareholdings from other groupcompanies or to make capital contributions to othergroup companies are not tax-deductible, unless thetaxpayer can provide that there were sound businessreasons for the acquisition.

On the other hand, the use of a Spanish special pur-pose vehicle (SPV) by an FC buyer to carry out the ac-quisition of a Spanish target, followed by the mergeror the application of the Spanish consolidated taxregime to the SPV and the target, has traditionallybeen a common way to push down the debt related tothe acquisition of a Spanish target.

However, a specific restriction applies in the case ofthe acquisition of a holding in another entity if, afterthe acquisition, the acquired entity is included in thetax group of the acquirer or is merged with the ac-quirer, with a view to preventing the acquired activityfrom bearing the finance costs incurred on its acquisi-tion. In this situation, finance costs related to the ac-quisition of the holding over and above a ceiling equalto 30% of the operating income of the acquirer for theperiod are not deductible. For these purposes:


s The restriction is limited in the case of a merger oran inclusion in a consolidated tax group that takesplace within the four years following the acquisi-tion;

s It is possible to set off the finance costs that are notdeductible because of the restriction in subsequentyears (in accordance with the general rules on thedeductibility of finance costs); and

s The restriction on the deduction of finance costsdoes not apply if the debt incurred to finance thetransaction does not exceed 70% of the acquisitioncost of the shares and the debt decreases propor-tionally in each of the eight years following the ac-quisition date, to 30% of the acquisition price.

From the seller’s perspective, the gain or loss arisingon a transfer of shares is calculated as the differencebetween the consideration received and the tax basisof the shares. However, if the stake held by the sellerprior to the transfer amounted to at least 5% (or its ac-quisition cost exceeded 20 million euros) and washeld without interruption for at least one year, theseller may (subject to certain anti-abuse provisions)qualify for full exemption of the gain (under the par-ticipation exemption regime).

Additionally, it should be noted that the SpanishCIT law provides a special tax-neutral regime for cer-tain qualifying corporate restructurings (such asmergers, spin-offs, special contributions-in-kind andexchanges of shares representing a company’s sharecapital), based on the EU Merger Directive tax regime.It is therefore possible to structure the acquisition of aSpanish target in one of the transactions describedabove so that it will be tax-neutral. Particularlycommon is the use of an ‘‘exchange of shares’’ transac-tion, whereby all or some of the shareholders in atarget company (the acquired company) transfer all orpart of their shares to another company (the acquiringcompany) in exchange for shares in the acquiringcompany, as the consideration received by the con-tributors may include a cash component not exceed-ing 10% of the value of the shares.



The transfer of a business operation in Spain by anonresident ordinarily represents the transfer of a PEin Spain. This will be treated as a gain realizedthrough the PE, which is taxed in accordance with thesame rules as apply to resident corporate income tax-payers.

Gains arising to a nonresident without a PE inSpain from the disposal of assets located in Spain andsecurities issued by Spanish residents are subject tonon-resident income tax (NRIT) at the final rate of19%, unless an applicable tax treaty provides other-wise. Gains realized by EU residents (except residentsof listed tax havens) from the transfer of personalproperty may also be exempt.


Gains obtained by a nonresident without a PE inSpain from the disposal of shares issued by a Spanish

resident entity are subject to NRIT at the final rate of19%, unless an applicable tax treaty provides other-wise.

Gains realized by a nonresident are exempt if:s an applicable tax treaty so provides, ors the taxpayer is a resident of an EU Member State

and is not resident in a listed tax haven.

However, Spain’s tax treaties often allow situs-country taxation of capital gains realized by a residentof the other Contracting State—not only in the case ofcompanies directly or indirectly holding real estate inSpain, but also in the case of substantial sharehold-ings (as defined under the applicable treaty) in Span-ish companies.

The exemption does not apply to:s the sale of shares in a company the assets of which

mainly consist, directly or indirectly, of real estatelocated in Spain;

s the sale of a substantial shareholding (i.e., a share-holding of 25% or more in the capital of a Spanishcompany at any time in the preceding 12 months) bya nonresident individual; or

s the sale by a nonresident entity of a shareholdingthat would not qualify for the participation exemp-tion regime under the CIT Law (for instance, asshareholding of less than 5% and with an acquisi-tion cost of less than 20 million euros, or a share-holding that is held for less than one year).


The BEPS Action Plan has had a significant impact onthe Spanish tax system. Spain was one of the firstcountries to introduce and develop the tax measuresrecommended in the BEPS project, almost all of thembeing implemented in the context of Spain’s 2015fiscal reform. Among other measures, anti-abuse rulesregarding hybrid instruments, controlled foreigncompany (CFC) rules and transfer pricing provisionswere introduced to be in line with the OECD BEPSrecommendations. The ‘‘BEPS spirit’’ has also beenembraced by the Spanish Courts. Therefore, no sig-nificant additional BEPS-related changes are ex-pected except for those that will follow from theMultilateral Instrument.3

From a Spanish tax perspective, the exit of theUnited Kingdom from the European Union is onlylikely to have a major impact on the potential applica-tion of the EU Directive exemptions to cross-bordertransactions between Spain and the United Kingdom.

IV. Non-Tax Factors

The performance of a complete due diligence exerciseand the negotiation of representations and warrantiescan be particularly important in the case of a share ac-quisition, as the buyer will want to obtain more exten-sive representations and warranties from the seller inorder to cover the risks involved in this type of acqui-sition. However, it is the authors’ experience that thetax representations and warranties or indemnitieswould not outlast the statute of limitations.

Asset purchases may also give rise to relevant non-tax issues. For instance, from a corporate law perspec-tive, an asset purchase may sometimes not beadvisable where it may not be possible to transfer (or


renegotiate) licenses, agreements and contracts with-out incurring additional costs or undergoing a cum-bersome administrative procedure. On the otherhand, although any acquisition of a company mayentail a lengthy negotiation of representations andwarranties, it can generally be said that an asset pur-chase entails fewer representations and warrantiesgiven that the risk of hidden liabilities is lower, pro-vided the tax certificate referred to in I.A., above is ob-tained.

Broadly speaking, it can be said that a seller willgenerally prefer a sale of shares over a sale of assets,for the following two reasons:s A sale of assets may be subject to double taxation,

i.e., taxation of the company as a result of the sale aswell as taxation when the funds from the sale are de-livered to the shareholder; and

s A seller will always wish to make a ‘‘clean break’’and the cleaner break is achieved through a sale ofshares, except, of course, that the seller will remainbound by the obligations arising from the represen-tations and warranties it granted. With an asset sale,however, the seller continues to own the companywhose assets are transferred, with all the problemsand complications that can arise from its position asshareholder.

Conversely, a buyer will normally prefer to purchaseassets rather than shares (although, transfers aremore complicated in this case). There are two mainreasons for this preference:s The ability to ‘‘cherry-pick’’: With an asset purchase,

the buyer can select what it wants and what it doesnot want to acquire; and

s The buyer does not acquire any hidden contingen-cies the company may have, with the exception ofthose that may arise from the labor, social securityand tax obligations described above.

Finally, buyers and sellers of a Spanish target havethe flexibility to designate the applicable law in therelevant contract. However, it is common practice in

the market to apply Spanish law when the target busi-ness is located in Spain. In cross-border transactions,when the Spanish business is not the main target, thelaw that applies to the asset or share deal is that de-sired by the parties.

NOTES1 Once the 10-year period has expired, the Spanish tax au-thorities are not entitled to audit the tax losses; neverthe-less, the taxpayer must be capable of demonstrating theorigin of the tax losses that it wishes to set off with thesubmission of its tax return and accounting records.

2 By way of exception, a share transfer is subject to trans-fer tax at a rate ranging from 7% to 11% (depending onthe Spanish region entitled to tax the transfer) and/or VAT(depending on which tax is applicable in each case), whenthe transfer is carried out in order to avoid paying the taxthat would have been applicable had the real property be-longing to the acquired company been purchased di-rectly. Such avoidance is presumed when: (1) as a resultof the share acquisition, the buyer takes control of a com-pany at least half of whose assets comprise real propertyin Spain that is not connected with business or profes-sional activities, or the shareholding is increased oncesuch control is obtained; or (2) the buyer takes control ofa company whose assets include securities that allow it toexercise control of another company at least half ofwhose assets comprise real property in Spain not con-nected with business or professional activities, or theshareholding is increased once such control is obtained.

3 On June 7, 2017, Spain and 67 other jurisdictions signedthe Multilateral Convention to Implement Tax Treaty Re-lated Measures to Prevent BEPS. At the time of signature,Spain submitted a list of 86 tax treaties entered into withother jurisdictions that Spain would like to designate asCovered Tax Agreements, i.e., tax treaties to be amendedvia the Multilateral Instrument. Together with the list oftax treaties, Spain also submitted a provisional list of res-ervations and notifications with respect to various provi-sions of the Multilateral Instrument.


SWITZERLANDWalter H. Boss and Stefanie Maria MongeBratschi Wiederkehr & Buob AG, Zurich

I. Introduction

The acquisition of a business situated in Switzerland(a ‘‘Swiss Business’’) from a Swiss resident seller by aforeign country buyer (‘‘FC buyer’’) is addressed in II.,below. The acquisition of a Swiss Business from a for-eign resident seller by an FC buyer is addressed in III.,below.

Both sections describe the differences between theSwiss tax treatment of the acquisition of shares in aSwiss company holding the Swiss Business and theacquisition of assets and assumption of liabilities per-taining to the Swiss Business.

The following assumptions are made:s The buyer and the seller of the Swiss Business are

not related parties.s The Swiss Business does not comprise any Swiss

real estate.s In the case of a share acquisition, the seller sells

100% of the shares in the Swiss company holdingthe Swiss Business to the FC buyer.

s In the case of an asset acquisition, the FC buyeruses a newly incorporated Swiss resident companylimited by shares as the acquisition vehicle (also re-ferred to as the ‘‘Swiss acquisition vehicle’’). Theassets and liabilities of the Swiss Business remainsubject to Swiss taxation in the Swiss acquisition ve-hicle.

II. Acquisition by Foreign Country Buyer of SwissBusiness From Swiss Resident Seller


1. Individual Swiss Resident Seller Holding Shares asPart of Private Assets

If the Swiss resident seller is an individual who holdsthe shares as part of his/her private assets, the Swissresident seller, in principle, will realize an income-tax-free capital gain.1 A loss realized by the Swiss residentseller, in principle, is not tax-deductible.

Exceptions to the above rule apply where:s The sale of the shares qualifies as an ‘‘indirect par-

tial liquidation’’ (see below);2

s An election has been made to treat the shares asbusiness assets for tax purposes;3 or

s The seller qualifies as a securities dealer for tax pur-poses.4

Where one of the exceptions listed above applies,the Swiss resident seller will realize a taxable gain(equal to the difference between the sale price or fairmarket value of the shares, as the case may be, and thetax value of the shares). Provided the seller has heldthe shares for at least one year, for purpose of the fed-eral income tax, the partial taxation rule will apply.5

The indirect partial liquidation concept can be ex-plained as follows: Privately held Swiss companiesoften have considerable retained earnings in view ofthe ability of Swiss resident shareholders to realizeincome tax-free capital gains on the sale of the shares.These earnings are ‘‘sold’’ with the shares in the targetcompany. Shortly after the acquisition of the shares,the buyer causes these earnings to be distributed bythe company. Under the indirect partial liquidationconcept, accumulated funds of the target companyare subject to income tax at the level of the seller, if thetarget company distributes the funds to the buyerafter the acquisition. This concept has been incorpo-rated in the Federal Direct Tax Act and the FederalHarmonization Tax Act, as well as in the cantonal taxlaws.6

The conditions for an indirect partial liquidationare as follows: The seller (who is an individual holdingthe shares as private assets) sells a participation of atleast 20% in the target company to a corporate buyeror to an individual buyer who will hold the shares asbusiness assets, and the target company distributesdividends out of distributable profits and reserveswithin a period of five years after the sale of theshares, with the cooperation of the seller. Such coop-eration is usually assumed. If these conditions are ful-filled, the tax-free capital gain is (partly) reclassified asa taxable dividend distribution. The tax basis corre-sponds to the smallest of the following amounts:s purchase price;s the amount actually distributed (in the form of a

dividend distribution or a hidden profit distribu-tion) after the share acquisition (restructurings,such as a merger between the buyer or the acquisi-tion vehicle and the target company may qualify asa harmful distribution);

s distributable retained earnings as per the last bal-ance sheet date before the sale; or

s the fair market value of non-operating assets.


2. Individual Swiss Resident Seller Holding Shares asPart of Business Assets

If the Swiss resident seller is an individual who holdsthe shares as part of his/her business assets, there willbe a taxable realization of the hidden reserves embod-ied in the shares at the level of the Swiss residentseller, i.e., the Swiss resident seller will realize a tax-able gain (equal to the difference between the saleprice and the tax value of the shares). The partial taxa-tion rule will apply for federal income tax purposes,provided the seller has held the shares for at least oneyear.7 If a loss (equal to the difference between the saleprice and the higher tax value of the shares) is realizedby the Swiss resident seller, such loss will be deduct-ible for income tax purposes. The tax loss carryfor-ward period is seven years.8

3. Corporate Swiss Resident Seller

If the Swiss resident seller is a company limited byshares, there will be a taxable realization of thehidden reserves embodied in the shares at the level ofthe Swiss resident seller, i.e., the Swiss resident sellerwill realize a taxable gain (equal to the difference be-tween the sale price and the tax value of the shares).9

If a loss (equal to the difference between the sale priceand the higher tax value of the shares) is realized bythe Swiss resident seller, such loss will be deductiblefor corporate income tax purposes. The tax loss carry-forward period is seven years.10 Given that the Swissresident seller is selling a 100% participation in thecompany, the participation exemption will apply forfederal and cantonal corporate income tax purposes,provided the seller has held the shares for at least oneyear.11 The participation exemption does not take theform of an exclusion of the capital gain from the taxbase, rather it takes the form of a tax abatement.

The sale of shares qualifies as an exempt transac-tion for Swiss value added tax (VAT) purposes.12

If one of the parties to the share purchase agree-ment or an intermediary involved in the transactionqualifies as a securities dealer for purposes of federaltransfer stamp tax, federal transfer stamp tax will bedue at the rate of 0.15% of the acquisition price of theshares.13

B. Acquisition of Business Assets

As a rule, there will be a taxable realization of hiddenreserves embodied in the assets of the Swiss Businessat the level of the Swiss resident seller, i.e., the Swissresident seller will realize a taxable gain (equal to thedifference between the sale price and the tax value ofthe business assets). This applies irrespective ofwhether the Swiss resident seller (i.e., the owner ofthe Swiss Business) is an individual or a legal entity.

If a loss (equal to the difference between the saleprice and the higher tax value of the shares) is realizedby the Swiss resident seller, such loss will be deduct-ible for income tax purposes. The tax loss carryfor-ward period is seven years.14

In principle, the transaction will be VAT taxable fora Swiss resident seller that is subject to Swiss VAT. Incertain circumstances, the VAT reporting procedurewill apply.15

C. Advantages or Disadvantages in Shares Being IssuedRather Than Cash Being Used to Pay Acquisition Price

1. Acquisition of Shares

In principle, the tax consequences outlined in II.A.,above, apply irrespective of whether the considerationfor the shares in the target company is cash paid bythe FC buyer or shares in the FC buyer.

Provided the share-for-share exchange meets the re-quirements for qualifying as a ‘‘quasi-merger’’(Quasifusion), a share deal will qualify as a tax-neutral restructuring. The requirements for qualifyingas a quasi-merger are as follows: (1) a corporate buyerincreases its share capital and issues new shares to beused in the share-for-share exchange with a seller; (2)on the exchange of the shares, the corporate buyerholds at least 50% of the voting rights in the targetcompany; and (3) the seller receives shares in the cor-porate buyer: If the seller receives cash considerationin addition to shares, the consideration other thanshares may not exceed 50% of the value of the totalconsideration (including the shares in the corporatebuyer).16

2. Acquisition of Business Assets

In this scenario, the Swiss resident seller receives con-sideration in the form of shares in the Swiss acquisi-tion vehicle of the FC buyer rather than cash. Inprinciple, the tax consequences outlined above inII.A., above will apply, irrespective of whether the con-sideration is cash paid by the Swiss acquisition ve-hicle or shares in the Swiss acquisition vehicle.

C. Disposal of Shares Shortly After Completion ofTransaction


This scenario does not give rise to any particularSwiss tax issues.


This scenario does not give rise to any particularSwiss tax issues

D. Limitations on Debt Financing


There are two possible alternatives: (1) the FC buyerobtains debt to finance the share acquisition; or (2)the FC buyer interposes a Swiss holding company thatacquires the shares in the Swiss target company andobtains debt to finance the share acquisition.

a. Alternative 1

Because the FC buyer is a foreign taxpayer, it is notsubject to Swiss taxation. In principle, there are noSwiss tax restrictions on the FC buyer with respect toobtaining debt to finance the share acquisition, exceptin the case of a transaction that qualifies as an indirectpartial liquidation (see II.A., above)—for example,


where the FC buyer obtains debt from the target com-pany to finance the share acquisition.

b. Alternative 2

The Swiss holding company interposed by the FCbuyer that acquires the shares in the Swiss targetcompany and obtains debt to finance the share acqui-sition must observe the Swiss thin capitalization rulesset forth in the Swiss Federal Tax Administration’s Cir-cular No. 6, dated June 6, 1997, on hidden equity capi-tal.17

Interest paid by the Swiss holding company basedon an intercompany loan agreement to a relatedlender must be at arm’s length. The Swiss Federal TaxAdministration publishes annual circulars listing safeharbor interest rates for both Swiss franc-denominated and foreign currency-denominatedinter-company loans.


Under this scenario, the Swiss acquisition vehicle ofthe FC buyer obtains debt to finance the acquisition ofthe business assets. The Swiss acquisition vehiclemust observe the Swiss thin capitalization rules setforth in the Swiss Federal Tax Administration’s Circu-lar No. 6, dated June 6, 1997, on hidden equity capi-tal.18

Interest paid by the Swiss acquisition vehicle basedon an intercompany loan agreement to a relatedlender must be at arm’s length. The Swiss Federal TaxAdministration publishes annual circulars listing safeharbor interest rates for both Swiss franc-denominated and foreign currency-denominated in-tercompany loans.



In the case of a share acquisition, it is not possible tostep up the tax basis of the assets pertaining to theSwiss Business of the Swiss target company.


In case of an acquisition of business assets, there is astep-up in tax basis up to the fair market value of theassets pertaining to the Swiss Business. Consequently,there is potential for corporate income tax-effectivedepreciation on such assets.

The Swiss acquisition vehicle books the assets ac-quired at acquisition cost (i.e., fair market value) in itsbooks and the liabilities assumed at nominal value.

F. Depreciation of Intangibles


In principle, in the case of a share acquisition, it is notpossible to write down the goodwill component of theshares acquired for tax purposes.


In the case of an asset acquisition, the Swiss acquisi-

tion vehicle may record goodwill separately in its

books and depreciate it for tax purposes, i.e., may

write down the goodwill against taxable income.

Goodwill may generally be depreciated over a period

of five years or more.

G. Utilization of Losses


The target company’s tax losses carried forward may

be utilized by the target company even where there is

a change of shareholder, i.e., where the target compa-

ny’s shares are transferred from the Swiss resident

seller to the FC buyer.


The FC buyer or the Swiss acquisition vehicle cannot

use the tax loss carryforward of the Swiss Business.

The losses remain with the Swiss resident seller or the

company holding the Swiss Business before the dis-

posal of the business assets and can be used to offset

any gain realized by the seller on the disposal of the

assets.



Dividends distributed by the Swiss target company to

the FC buyer will be subject to the 35% federal with-

holding tax. Depending on whether a tax treaty ap-

plies, the FC buyer may be able to reclaim—partially

or fully—the federal withholding tax withheld by the

Swiss target company. If the FC buyer is unable to re-

claim the federal withholding tax or is able to do so

only partially, it may be advisable to interpose a for-

eign acquisition vehicle resident in a country with

which Switzerland has concluded a favorable tax

treaty allowing for a full refund of the federal with-

holding tax. It must, however, be ensured that the for-

eign acquisition vehicle meets the beneficial

ownership test, i.e., there may not be any tax avoid-

ance motive.


In the case of an asset acquisition, it is advisable to use

a Swiss acquisition vehicle. Interest payments on debt

obtained by the Swiss acquisition vehicle to finance

the asset acquisition will be deductible from the profit

realized by the Swiss Business for tax purposes.


III. Acquisition From Foreign Seller

A. Gain or Loss Where Shares or Assets and LiabilitiesAre Sold


A foreign resident seller is not subject to Swiss taxa-tion. Consequently, the capital gain/loss realized bythe foreign resident seller will not be subject to Swisstaxation.


As a rule, there will be a taxable realization of hiddenreserves embodied in the assets of the Swiss PE hold-ing the Swiss Business, i.e., the Swiss PE will realize ataxable gain (equal to the difference between the saleprice and the tax value of the assets).

A loss realized by the Swiss PE (equal to the differ-ence between the sale price and the higher tax value ofthe assets) will be deductible for income tax purposes.The tax loss carry forward period is seven years.19

If the Swiss PE is subject to Swiss VAT, in principle,the transaction will be taxable. In certain circum-stances, the VAT reporting procedure will apply.20



A foreign resident seller is not subject to Swiss taxa-tion. Consequently, the capital gain/loss realized bythe foreign resident seller will not be subject to Swisstaxation, irrespective of whether the consideration isin cash or in shares of the FC buyer.


In the case of an acquisition of assets, the Swiss PE ofthe foreign resident corporate seller will realize a tax-able gain/deductible loss for income tax purposes, ir-respective of whether the consideration is in cash orshares of the FC buyer.

C. Disposal of Shares Shortly After Completion of theTransaction


The fact that the seller is a foreign resident corporatedoes not change the position set out in II.C.1., above.


The fact that the seller is a foreign resident corporatedoes not change the position set out in II.C.2., above.

D. Limitations on Debt Financing


The fact that the seller is a foreign resident corporatedoes not change the position set out in II.D.1., above.


The fact that the seller is a foreign resident corporatedoes not change the position set out in II.D.2., above.



The fact that the seller is a foreign resident corporatedoes not change the position set out in II.E.1., above.


The fact that the seller is a foreign resident corporatedoes not change the position set out in II.E.2., above.

F. Depreciation of Intangibles


The fact that the seller is a foreign resident corporatedoes not change the position set out in II.F.1., above.


The fact that the seller is a foreign resident corporatedoes not change the position set out in II.F.2., above.

G. Utilization of Losses


The fact that the seller is a foreign resident corporatedoes not change the position set out in II.G.1., above.


The fact that the seller is a foreign resident corporatedoes not change the position set out in II.G.2., above.



The fact that the seller is a foreign resident corporatedoes not change the position set out in II.H.1., above.


The fact that the seller is a foreign resident corporatedoes not change the position set out in II.H.2., above.

IV. BEPS and Brexit

A. BEPS

The authors do not anticipate any major changes tothe positions set out above as a consequence of thesignificant international tax changes following fromthe OECD-driven BEPS actions. It is, however, the au-thors’ experience that the Swiss tax authorities aretending to examine M&A transactions more closelyfrom an anti-avoidance and anti-abuse perspective. In


particular, the tax authorities are closely scrutinizingshare deals in which the seller achieves a tax-free capi-tal gain.

B. Brexit

Since Switzerland is not a member of the EuropeanUnion, the authors do not expect any major changesto Swiss tax legislation as a result of the United King-dom’s exit. However, because the European Union isSwitzerland’s most important trading partner, Brexitmay have an indirect impact on Swiss tax legislationthat at present cannot be predicted.

V. Non-Tax Factors

A. Tax Representations, Warranties, or Indemnities


In a share acquisition, the tax risks remain in theSwiss target company and are, consequently, indi-rectly assumed by the buyer.

The Swiss statutory framework for sale and pur-chase transactions provides the buyer with a basic setof representations (the implied representations). In acase concerning a share acquisition, the Swiss FederalSupreme Court held that the object of the sale is theshares and not the underlying company/business,even when 100% of the issued shares are acquired.Consequently, in a share acquisition, the Swiss statu-tory framework does not provide sufficient protectionfor the buyer with respect to the underlying company/business. The buyer will, therefore, normally insist onobtaining an elaborate set of representations and war-ranties from the seller assuring specific qualities ofthe underlying business.

A customary tax warranty reads as follows: ‘‘Thetarget company has timely filed all required tax re-turns; all the required tax returns are complete andcorrect; all taxes due have been timely paid; and allother public levies due before the signing of the sharepurchase agreement have been paid.’’ The term ‘‘tax’’usually includes all direct and indirect taxes, duties,and sometimes also social security contributions.

With respect to tax warranties from the seller, thebuyer will usually insist on a period of time thatcovers the applicable statute of limitations plus a fewmonths for bringing a claim, if necessary.

On the other hand, especially in the case of a shareacquisition involving a Swiss resident seller who is anindividual and holds the shares as private assets, theseller will usually insist on including in the share pur-chase agreement a tax indemnification clause toensure that the buyer indemnifies the seller for anyadverse tax consequences resulting from an indirectpartial liquidation, i.e., the reclassification of the tax-free capital gain into a taxable dividend distributionas a result of post-acquisition actions of the buyer.


The seller in an asset acquisition is not expected togrant a tax warranty because, under Swiss law, claimsfrom the tax authorities for taxes accrued before the

closing date can only be directed at the seller as theowner of the legal entity. The buyer in an asset acqui-sition will, however, insist on a warranty from theseller to the effect that the assets sold are not subjectto any liens or encumbrances for taxes accrued beforethe closing date.

B. Governing Law


In a share purchase agreement between a Swiss resi-dent seller and a foreign resident buyer, the governinglaw will usually be Swiss law. A share purchase agree-ment can, however, provide for a foreign governinglaw. Nevertheless, mandatory Swiss laws would stillapply.


In an asset purchase agreement between a Swiss resi-dent seller and a foreign resident buyer regarding thesale of assets and liabilities pertaining to a Swiss busi-ness, the governing law will normally be Swiss law.

NOTES1 Federal Direct Tax Act of December 14, 1990, asamended (FDTA), art. 16, para. 3; Federal Tax Harmoni-zation Act of December 14, 1990, as amended (FTHA),art. 7, para. 4, litera b.2 FDTA, art. 20a, para. 1, litera a; FTHA, art. 7a, para. 1,litera a.3 FDTA, art. 18, para. 2; FTHA, art. 8, para. 2.4 FDTA, art. 18, para. 1; FTHA art. 7, para. 1.5 FDTA, art. 18b. The cantonal tax laws provide for simi-lar partial taxation rules6 FDTA, art. 20a, para. 1, litera a; FTHA, art. 7a, para. 1,litera a.7 FDTA, art. 18b. The cantonal tax laws provide for simi-lar partial taxation rules8 FDTA, art. 31, para. 1; FTHA, art. 10, para. 3.9 FDTA, art. 58, para. 1; FTHA, art. 24, para. 1.10 FDTA, art. 67, para. 1; FTHA, art. 25, para. 2.11 FDTA, art. 69 et seq.; FTHA, art. 28, para. 1 and 1bis.12 Federal Act on VAT of June 12, 2009 (‘‘VAT Act’’), art. 21,para. 2.13 Federal Stamp Tax Act of June 23, 1973, art. 13; sharesin Swiss companies: 0.15%; shares in foreign companies0.3%.14 Seller is individual: FDTA, art. 31, para. 1, FTHA, art.10, para. 3; seller is a legal entity: FDTA, art. 67, para. 1;FTHA, art. 25, para. 2.15 VAT Act, art. 38.16 Circular no. 5 on restructurings of the Swiss FederalTax Administration dated June 1, 2004, Sec. 4.1.7.17 Kreisschreiben Nr. 6 der ESTV vom 6. Juni 1997 betref-fend verdecktes Eigenkapital (DBG, art. 65 und 75) beiKapitalgesellschaften und Genossenschaften.18 Kreisschreiben Nr. 6 der ESTV vom 6. Juni 1997 betref-fend verdecktes Eigenkapital (DBG, art. 65 und 75) beiKapitalgesellschaften und Genossenschaften.19 Seller is individual: FDTA, art. 31, para. 1; FTHA, art.10, para. 3; seller is a legal entity: FDTA, art. 67, para. 1;FTHA, art. 25, para. 2.20 VAT Act, art. 38.


UNITED KINGDOMJames RossMcDermott Will & Emery LLP, London

I. Acquisition by Foreign Country Buyer of U.K.Business From U.K. Resident Seller

There are significant differences in the tax conse-quences of share sales and asset sales in the UnitedKingdom for both buyer and seller. In the majority ofcases, an asset sale will be more beneficial to the buyerand a share sale will be more advantageous to theseller (which is consistent with the fact that from ageneral legal perspective, it is normally preferable tobuy assets and sell shares).

This response considers the comparative tax treat-ment of the acquisition of the assets of a U.K. businessfrom the company that owns them and the acquisitionof the shares of the company itself. In some circum-stances, a hive-down of the assets to a new U.K. com-pany and the sale of the shares of that company canresult in tax consequences that offer some of the ben-efits of each approach to the relevant party: These arealso considered below.

It is assumed for the purposes of this paper that thebusiness in question involves the carrying on of atrade in the United Kingdom through a permanent es-tablishment (PE) in the United Kingdom, meaningthat its profits would be subject to corporation tax inthe United Kingdom whether it is owned by a U.K.resident or a foreign-resident company.

A. Asset Acquisition

Given this assumption, a foreign country buyer (FCbuyer) that directly buys a U.K. business will, as aresult, acquire a PE in the United Kingdom. UnderU.K. domestic law, a company that has a PE in theUnited Kingdom is taxable on trading profits arisingdirectly or indirectly through or from the PE, incomefrom property rights used by, or held by or for the PE,and chargeable (i.e., capital) gains arising on the dis-posal of assets used in or for purposes of the PE or thetrade carried on through it.1

Where the FC buyer is resident in a territory thathas a tax treaty with the United Kingdom, the profitsand gains that are taxable in the United Kingdom willbe limited in accordance with the terms of that treaty:This, however, does not normally produce a differentresult, as the domestic law rules for calculating theprofits of a PE are drafted to be consistent with theOECD guidance on the attribution of profits to PEs.

There is no branch profits tax on remittances ordeemed remittances made by the PE to the territory ofresidence.

While a U.K. PE does not have any particular ad-verse tax consequences, it will entail the FC buyerhaving to file annual tax returns in the United King-dom and, normally, having to register with the U.K.Registrar of Companies and file annual accounts andcertain other information, which will be placed on thepublic record. As many FC buyers will prefer not to besubject to these requirements, they will generallymake an acquisition through a U.K. acquisition ve-hicle. No withholding tax is payable on dividends paidby such a company to its foreign parent.

On an asset acquisition, the buyer will acquire abasis in the assets that reflects the price paid for thoseassets. This will be particularly beneficial to the buyerif the consideration can be attributed to assets whosevalue can then be written down for tax purposes, suchas plant and machinery (with respect to which capitalallowances can be claimed), and certain classes of in-tangible fixed assets (which can benefit from amorti-zation). The seller will naturally also have an interestin how the purchase price is apportioned between theassets, depending on its own tax basis in them.

The apportionment of consideration between thedifferent assets is normally negotiated and agreed be-tween buyer and seller, and set out in the business pur-chase agreement. Legislation relating to capital gainsand capital allowances provides only that any appor-tionment must be done on a ‘‘just and reasonable’’basis;2 in the case of intangible fixed assets (whose taxtreatment derives largely from accounting practice),the valuation placed on them must satisfy generallyaccepted accounting practice. While HM Revenue &Customs (HMRC) has published guidance on pur-chase price apportionment on business acquisitions,3

this is primarily concerned with ‘‘trade related prop-erty’’ sales where it is difficult to separate the value ofthe goodwill of a business from the property at whichthe business is carried on, examples being hotels andrestaurants. In other situations, it is highly unusualfor HMRC to challenge an apportionment that hasbeen agreed between the parties.

A buyer will be able to claim capital allowances onthe price paid for plant and machinery and certainother qualifying capital assets. The rate of allowanceswill depend on the precise nature of the asset and the


wider profile of the buyer’s group. To the extent con-sideration is attributable to intangible fixed assets, thebuyer will be able to claim amortization or impair-ment deductions in line with the accounting treat-ment of the assets,4 or alternatively will be able toelect to write down the expenditure at a fixed rate of4% per year on a straight-line basis (i.e., effectivelyover 25 years).5 However, amortization is no longeravailable with respect to expenditure on goodwill, cus-tomer lists or relationships, and unregistered trade-marks acquired on or after July 8, 2015.6 It is,therefore, of increased importance to allocate the pur-chase price between the different intangible assetsthat have been acquired.

The selling entity will be subject to corporation tax(currently charged at the rate of 19%) on any profits orgains arising with respect to the assets being disposedof. It should be possible to transfer the profits to a cor-porate shareholder by way of a distribution withoutfurther U.K. tax being payable. However, getting theprofits to an individual U.K.-resident shareholder byway of a distribution or liquidation of the seller wouldresult in further U.K. tax being payable by the share-holder. An individual seller of a business will pay capi-tal gains tax on any gains, but may be able to claimentrepreneurs’ relief, which reduces the rate of taxfrom 20% to 10% if he/she has owned the business forat least a year. Entrepreneurs’ relief can be claimed ona maximum of £10m of gains in the individual’s life-time.

On an asset acquisition, transfer taxes will onlyapply to the extent an interest in land is acquired bythe purchaser. In England and Northern Ireland, thisis known as stamp duty land tax (‘‘SDLT’’). In Scot-land, SDLT has been replaced by land and buildingstransaction tax, and in Wales, land transaction tax willreplace SDLT in April 2018. The tax base and ratesdiffer as between the different jurisdictions.

The sale of assets will not attract value added tax(VAT) where the assets form part of a business that isbeing transferred as a going concern. This test will,broadly, be satisfied where the business is capable ofseparate operation and continues operations withouta break at the time of transfer. Additional complexitiesarise where the assets being transferred include landor buildings: Where the seller has elected to waive theVAT exemption with respect to supplies relating toreal property, the buyer must also do so in order tobenefit from going concern treatment.

B. Share Acquisition

A sale of shares will generally result in more favorabletax treatment for a seller, whether that seller is an in-dividual or a corporation.

1. Corporate Seller

Where the seller of the shares is a U.K.-resident com-pany, it will in principle be charged to corporation taxwith respect to any gain arising on those shares. In agreat many cases, however, the gain will be exemptedby operation of the ‘‘substantial shareholding exemp-tion’’ (SSE).

Schedule 7AC provides that a gain realized by acompany on the disposal of shares in another com-pany will not be a chargeable gain (and conversely,

any loss on such a disposal will not be an allowableloss) where the company making the disposal has helda 10% interest in the shares of the other company fora continuous period of at least 12 months within thepreceding two years. In addition, for the relief toapply, the trading requirements must be met from thestart of that 12-month period to the date of disposaland immediately thereafter. These requirements arethat:

s The company making the disposal is either a soletrading company or a member of a trading group;and

s The company whose shares are being disposed of iseither a sole trading company or the holding com-pany of a trading group or sub-group.

The exemption also applies in certain circum-stances where all the conditions are not met at thedate of disposal but would have been met on a hypo-thetical disposal at some point in the preceding twoyears.

The Government has proposed a number ofchanges to the SSE: These include the abolition of thetrading requirement for the company making the dis-posal; the extension of the ‘‘look back’’ period in whichthe 10% interest must have been held from two yearsto six years; and the introduction of a new exemptionfor disposals of interests in non-trading companieswhere the company making the disposal is held tosome extent by qualifying institutional investors.These amendments were introduced in the 2017 Fi-nance Bill to take effect beginning in April 2017, andalthough the relevant provisions were dropped beforethe recent general election, the Government plans toreintroduce them to Parliament this autumn and willretain the effective date of April 1, 2017.7

2. Individual Seller

Where the seller is an individual, any gain on theshares will be chargeable to capital gains tax. The toprate of capital gains tax is currently 20%, but two al-ternative reliefs reduce this to 10% on a maximum of£10m of lifetime gains per taxpayer. Entrepreneurs’relief8 can be claimed by an individual making a dis-posal of a shareholding in a trading company (or theholding company of a trading group) of which the in-dividual has been an employee or director, providedhe/she has held a 5% interest in the company for atleast one year. Investors’ relief9 can be claimed wherethe individual is disposing of shares in a trading com-pany, provided the individual has never been an em-ployee of the company, subscribed for the shares at atime when the company was unlisted and has heldthem for at least three years.

A sale of shares will generally not affect the targetcompany’s basis in its assets or its tax attributes,unless it also triggers a de-grouping charge. This isconsidered further in the discussion below on hive-downs.

3. Use of an Acquisition Vehicle

The use of one or more acquisition vehicles iscommon for a variety of structuring reasons. The useof a U.K. company to make the acquisition allows theintroduction of debt into the structure that will give


rise to interest deductions that can be set off againstthe profits of the target company by way of grouprelief, subject to the rules governing the deductibilityof interest, which are discussed further below.

C. Transfer Taxes and Value-Added Tax

A sale of shares in a U.K.-incorporated company at-tracts a liability to stamp duty at the rate of 0.5% ofthe consideration. This is generally paid by the buyer.Stamp duty is chargeable on any earn-out element ofthe consideration if any specific figure is contained inthe share purchase agreement (such as a maximumearn-out payment)––in such circumstances duty willbe payable on the amount specified in the agreement,even if the final amount of the earn-out payment is dif-ferent.

A sale of shares does not attract VAT.

D. Hive-Down of Business Followed by Share Acquisition

Where the U.K. seller is a company carrying on otherbusiness activities in addition to those it wishes to sell,it can consider hiving down the business to be soldinto a new company (‘‘NewCo’’) and then selling theshares in NewCo as an alternative to a straight sale ofthe business.

The initial transfer of assets to NewCo will be atransaction between two members of the same groupof companies, and as such will be treated for tax pur-poses as giving rise to neither a gain nor a loss.10 How-ever, if NewCo then leaves the group of the U.K. sellerwithin six years, it is deemed11 to have sold and reac-quired the relevant assets for their market value at thetime of the original intra-group transfer. This is com-monly referred to as a ‘‘degrouping charge.’’

The degrouping charge takes effect in differentways with respect to different assets. Any gain with re-spect to intangible fixed assets created or acquiredfrom an unrelated party by the U.K. seller on or afterApril 1, 2002, will be taxable in the hands of NewCo,although there is a facility to enter into an election toreallocate the gain to the U.K. seller or anothermember of its group that is within the U.K. tax net.The effect of this is to rebase the assets in the hands ofNewCo, thus allowing the buyer to obtain the eco-nomic benefits of amortizing them.

Gains with respect to all other assets will be treatedas increasing the amount of the gain arising to theU.K. seller on its disposal of the shares in NewCo. Thisgain may benefit from the SSE, as where NewCo car-ries on a trading business previously conducted by HCSeller, it will be treated as having held the NewCoshares throughout the period in which it carried onthat business itself. This will have the effect of rebas-ing the assets held by NewCo, but will not permit it toclaim any amortization relief with respect to any in-tangibles it holds. This is because amortisation reliefis only available with respect to post-2002 intangiblesand the degrouping charge does not have the effect ofbringing pre-2002 intangibles within the new regime.

A hive-down may result in some of the tax conse-quences of asset sales and some of the consequencesof share sales. The extent to which it resembles onemore than the other will depend on the nature of theassets involved.

E. Use of Shares as Consideration

Where a U.K. seller of shares is issued shares in thecapital of the buyer by way of consideration, section135 of the Taxation of Chargeable Gains Act 1992 willapply if one of the following three circumstances ap-plies:s The buyer holds, or in consequence of the exchange

will hold, more than 25% of the ordinary share capi-tal of the target company;

s The buyer issues its shares in exchange for theshares of the target company as a result of a generaloffer to all shareholders in the target company thatwas made on conditions that, if satisfied, wouldresult in the buyer having control of the target; or

s The buyer holds, or in consequence of the exchangewill hold, the greater part of the voting power in thetarget company.

The effect of section 135 is that the U.K. seller istreated as having made no disposal of the target com-pany shares. The new shares in the buyer are treatedas if they were the shares in the target company, ac-quired at the same time and for the same price as theU.K. seller acquired those shares. In essence, any gainon the target company shares is rolled into the sharesof the buyer and will become taxable when thoseshares are disposed of.

Section 135 applies to both individual and corpo-rate sellers, although where the SSE also applies inthe case of a corporate seller, it will take priority oversection 135.12 Section 137 provides that section 135will only apply where the share-for-share exchange iseffected for bona fide commercial reasons and is notpart of a scheme or arrangement whose main purpose(or one of whose main purposes) is the avoidance oftax. There is a statutory advance clearance mecha-nism whereby a taxpayer can obtain confirmation thatHMRC will not seek to use section 137 to disapply sec-tion 135.

An individual U.K. seller who receives shares inconsideration for the sale of a business will roll overany gain into the shares issued by the buyer.13 He/shecan elect not to claim rollover relief (which might bepreferable if the sale of the business would benefitfrom entrepreneurs’ relief but a subsequent disposalof the shares would not).

A corporate U.K. seller who receives shares in con-sideration for the sale of business assets cannot rollover its gain and will therefore be immediately tax-able. A seller in this position may prefer to undertakea hive-down and sale instead.

There should be no adverse consequences per se ifthe seller disposes of the shares acquired pursuant tothe exchange shortly thereafter. Any gain that hasbeen rolled over on the exchange will be brought intocharge at that point. In the case of a corporate seller, ifthe prior gain on the target company shares wouldhave benefited from the SSE rather than section 135relief, the SSE will not apply to the subsequent dis-posal if the seller has not held the shares in the buyerfor at least a year: although if the shares have not risensignificantly in value during that short period, thereshould be no gain to tax.

Where section 135 did apply to the initial exchange,a subsequent swift disposal of the shares in the buyermay also lead HMRC to question whether the exit was


pre-ordained, which may in turn lead them to ques-tion whether there was a tax avoidance purpose to theoriginal exchange (particularly if, in the meantime,the seller has ceased to be resident in the United King-dom).

F. Use of and Restrictions on Debt to Finance theAcquisition

Similar considerations with respect to the use of debtapply to both a share and an asset acquisition. In prin-ciple, interest expense on debt taken on by a U.K.buyer of assets or shares should be deductible and canbe set against the trading profits of the company itself(in the case of an asset purchase) or against the trad-ing profits of the target by way of group relief (in thecase of a share purchase).

Interest deductibility is, however, subject to anumber of potential limitations. The most significantsuch limitations are as follows:s Interest will not be deductible insofar as the loan re-

lationship on which it is paid has an unallowablepurpose,14 being a purpose that is not among thebusiness or commercial purposes of the company(which specifically includes a main purpose of se-curing a tax advantage). In practice, debt taken on tofinance an acquisition will not normally be regardedas having an unallowable purpose, whether it de-rives from an external lender or a related party.

s Interest that has certain equity-like characteristicswill be treated as a distribution and will not there-fore be deductible. This includes interest on certainconvertible and stapled securities, interest that is de-pendent on the results of the company’s business,and interest payable on related party loans that havean indefinite term or a term of more than 50 years.

s Intra-group lending is subject to transfer pricingrules, meaning that interest will not be deductible tothe extent the terms of the loan (including theamount of the debt and the interest rate) are notconsistent with what the entity could borrow apply-ing the arm’s length standard.

s Net interest and equivalent expense is not deduct-ible in the United Kingdom to the extent it exceedsthe gross financing expense of the worldwide group(the ‘‘debt cap’’).15

s Interest expense is within the scope of the newhybrid mismatch rules introduced with effect begin-ning January 1, 2017, and may be disallowed insofaras it gives rise to a deduction/non-inclusion ordouble deduction outcome.

s From April 1, 2017, deductions for interest expensein the United Kingdom will16 be capped at 30% ofthe EBITDA for the U.K. group, subject to a ‘‘groupratio’’ rule that will permit additional deductions ifthe worldwide group’s EBITDA to interest ratio islower. These rules will incorporate a modified ver-sion of the debt cap limitation.

G. Use of Preacquisition Business Losses of U.K. TargetBusiness

At the time of writing, the use of carried-forward taxlosses is more tightly constrained than the use of cur-rent year losses. Current year losses of a particulartype can generally be set against total profits of the

same company or surrendered by way of group reliefto set against the profits of other group companies.However, carried-forward losses can generally only beset against profits of the same company and of a simi-lar nature: Thus, trading losses can only be set againstprofits of the same trade, and certain types of non-trading losses (in particular, interest expense wherethe loan is not integral to a trade) can only be setagainst non-trading profits of the same company.Carried-forward capital losses can only be set againstcapital gains, but there is an elective mechanismwhereby they can be set against gains arising to othergroup companies in future years.

Thus, on a business acquisition from an unrelatedparty, the buyer will not acquire the benefit of preac-quisition losses of the seller, whereas on a share acqui-sition, the company will transfer with the benefit ofpreacquisition losses, which will in principle be avail-able for use post-completion.

There are two main exceptions to this principle.First, where a trade is transferred from one companyto another company under common ownership, cer-tain tax attributes of that trade will also transfer. Inparticular, the successor company will be able to uti-lize the same brought forward trading losses andclaim the same capital allowances as the predecessorcompany would have been able to utilize and claimhad it retained the trade.17 As a consequence, a hive-down can be a means of enabling the buyer of a tradeto get the benefit of the losses associated with it. How-ever, where the transferred trade becomes part of alarger trade within the successor, the losses will be‘‘streamed,’’ meaning that they can only be set againstprofits attributable to the trade that has been trans-ferred and not against profits attributable to the pre-existing trade of the successor.

Additionally, the United Kingdom has anti-lossbuying rules18 that potentially apply within threeyears of a change in ownership of a company. Where,within that time frame, there is a major change in thenature or conduct of the trade, the trading losses ofthe company will be disallowed with effect from thechange in ownership. In the case of a company withan investment business, there will be a disallowanceof non-trading losses where there is a major change inthe nature or conduct of its trade or a significant in-crease in the amount of its capital. There are alsorules19 preventing the use of ‘‘pre-entry’’ capital lossesagainst gains realized within the buyer group follow-ing the acquisition of a target company.

The Government is expected to bring forward legis-lation in the autumn that will permit the use ofcarried-forward losses of any nature (other than capi-tal losses) against profits of any nature, and will alsoallow them to be surrendered through group relief toother group companies. These changes will only applyto losses arising in accounting periods beginning onor after April 1, 2017, and will be accompanied by newprovisions to counteract loss-buying: Losses of thetarget will be prevented from being surrendered intothe acquiring group for five years from the date of ac-quisition, and the ‘‘major change’’ disallowance ruleswill be extended to apply for the same period. In addi-tion, loss carryforwards (whenever they arose) will


only be permitted to offset 50% of a group’s taxableprofits in future years to the extent they exceed £5 mil-lion.

II. Acquisition From Foreign Seller

Nonresident sellers of business assets will, in mostcases, be taxed for all practical purposes in the sameway as residents. A non-U.K. resident individual sellerof business assets carrying on a trade in the UnitedKingdom through a U.K. branch or agency will becharged to capital gains tax on gains arising with re-spect to assets used in or for purposes of the trade, orused or held for purposes of the branch or agency. Anonresident company seller’s liability will be chargedto corporation tax rather than to capital gains tax, andis defined by reference to a PE rather than a branch oragency: HMRC has confirmed that the concepts of‘‘branch or agency’’ and ‘‘permanent establishment’’are broadly equivalent.20 As the United Kingdom’s taxtreaties generally permit the United Kingdom to taxgains arising from the disposal of assets forming partof a PE, a treaty will not protect a foreign seller fromthe taxation of such gains in the United Kingdom.

A nonresident seller will not, however, be taxed inthe United Kingdom on a disposal of shares, on the as-sumption (which is almost always the case) that theshares do not form part of a branch, agency or PE inthe United Kingdom.

The U.K. tax considerations for a buyer of eitherassets or shares will be the same as described for pur-chases from U.K. sellers.


The United Kingdom has, in general, been an enthusi-astic proponent of the BEPS process and several ofthe measures mentioned above––in particular, thehybrid mismatch and interest limitation rules––are di-rectly inspired by BEPS actions. The United Kingdomhas also signed the OECD Multilateral Instrument,which will operate to modify the majority of its taxtreaties. This will have an impact on the structuringand financing of transactions, particularly with re-spect to ensuring that interest and royalty flows acrossborders benefit from treaty relief from withholdingtax.

Although the consequences of the United King-dom’s exit from the European Union are far from clearat the time of writing, it is not expected to have a sig-nificant impact on the tax treatment of mergers andacquisitions. U.K. companies may cease to benefitfrom the EU Parent-Subsidiary and Interest and Roy-alty Directives, which eliminate withholding taxes onmany dividend, interest and royalty payments be-tween related parties, but in many cases the UnitedKingdom’s tax treaty network offers equivalent ben-efits. The United Kingdom may also no longer bebound by the anti-avoidance directives emanatingfrom the European Commission, but to the extent thatthese are inspired by the BEPS process, it is likely totake equivalent measures in any event: It has alreadyeither implemented all the requirements of the June2016 Anti-Tax Avoidance Directive or announced clearplans to do so, despite the fact that the Directive maynot bind the United Kingdom after March 2019.

IV. Non-Tax Factors

The governing law of the sale and purchase contractwill be agreed by the parties. Domestic U.K. transac-tions will typically be governed by English law, al-though the law of Scotland or of Northern Irelandmay be chosen where the transaction has a particularnexus to either jurisdiction. Cross-border transactionsare, in the author’s experience, most commonly gov-erned either by English or New York law. Deals gov-erned by the laws of countries whose legal systemsderive from English law (such as Australia, Ireland,and certain other Commonwealth jurisdictions) tendto follow the English model and approach.

Market practice differs between deals governed byEnglish law and the laws of U.S. jurisdictions, whichhas led to the perception that English law is moreseller-friendly. Sellers under English law deals gener-ally give warranties rather than representations withrespect to the condition of the business at completionand these are not normally given on an indemnitybasis. A breach of warranty will not entitle a buyer topound-for-pound recovery of loss, but instead enableit to recover damages on a standard contractual basis,which is to put the buyer in the position that it wouldhave been in had the warranty been correct. Thiswould typically entitle the buyer to recover an amountequivalent to the diminution in the value of the targetas a result of the breach of warranty, which is oftenless than the actual tax cost.

A buyer will also typically receive a covenant forpre-completion taxes, entitling it to pound-for-poundrecovery in the event of a breach. Covenants are typi-cally more detailed than an indemnity under a U.S.law agreement, setting out a detailed set of exclusionsand providing for the preparation of tax returns ofpre-completion periods and the conduct of claims.

Buyers will generally rely on warranties primarilyto elicit disclosure of material concerns from the sell-ers and on the tax covenant to recover with respect toany liabilities that come to light.

There is case law authority21 for the propositionthat the right to sue for breach of contract can consti-tute an asset for purposes of capital gains tax. Thismeans that there is a risk that payments for breach ofwarranty or under the tax covenant might be treatednot as an adjustment to purchase price but as givingrise to a taxable gain for the buyer. While HMRC hasissued an Extra-Statutory Concession22 to confirmthat warranty and indemnity payments from seller tobuyer under a contract of purchase and sale will notnormally be treated in this fashion and will instead betreated as purchase price adjustments, it is commonfor a buyer to require any such payments to begrossed up for any taxes on such payments (whetherthey are deducted at source or chargeable in the handsof the buyer).

NOTES1 Corporation Tax Act 2009, sec. 19.2 Taxation of Chargeable Gains Act 1992, sec. 52; CapitalAllowances Act 2001, sec. 562.3https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/365426/practice-note.pdf.4 Corporation Tax Act 2009, sec. 729.5 Corporation Tax Act 2009, secs. 730, 731.


6 Corporation Tax Act 2009, sec. 816A.7 https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/628642/list_of_provisions.pdf.8 Taxation of Chargeable Gains Act 1992, Part V Chapter3.9 Taxation of Chargeable Gains Act 1992, Part V, Chapter5.10 Taxation of Chargeable Gains Act 1992, sec. 171; Cor-poration Tax Act 2009, sec. 775.11 Taxation of Chargeable Gains Act 1992, sec. 179; Cor-poration Tax Act 2009, sec. 780.12 Taxation of Chargeable Gains Act 1992, Schedule 7AC,para. 4.

13 Taxation of Chargeable Gains Act 1992, sec. 162.14 Corporation Tax Act 2009, sec. 441.15 Taxation (International and Other Provisions) Act 2010(TIOPA), Part 7.16 Subject to the legislation of new TIOPA, Part 10, whichwas expected to be included in the Finance Bill to be in-troduced into Parliament in September 2017.17 Corporation Tax Act 2010, Part 22, Chapter 1.18 Corporation Tax Act 2010, Part 14.19 Taxation of Chargeable Gains Act 1992, Schedule 7A.20 HMRC International Manual para INTM 262040.21 Zim Properties v. Proctor, 58 TC 371.22 Extra-Statutory Concession D33 (issued December 19,1988, and revised January 27, 2014).


UNITED STATESPeter A. GlicklichDavies, Ward, Phillips & Vineberg LLP, New York

I. Acquisition by Foreign Country Buyer of U.S.Business From U.S. Sellers

Whether to buy stock or assets of a target company isa fundamental consideration in any acquisition of anincorporated business. The importance of this deci-sion is heightened in the cross-border context, whereownership of a business in the United States canresult in a foreign acquirer becoming subject to U.S.federal income taxes.

In addition to federal income taxes, the individualstates of the United States and some localities alsolevy tax. Often state and local taxes are based on a tax-payer’s income as calculated for federal income taxpurposes. The discussion below focuses mainly onfederal-level taxation, but some state tax conse-quences that do not necessarily follow the federalsystem are also described.

The following discussion first describes tax conse-quences of an all-cash purchase and later discussesconsequences of providing shares or other consider-ation in connection with an acquisition. In all cases,and in all remaining questions, it is assumed that thetarget business represents both a trade or businessand a permanent establishment (PE) in the UnitedStates.

In the United States, a taxable acquisition of a U.S.business can generally take the form of the purchaseof the assets of the U.S. business from the corporationthat owns them or the purchase of the stock of the cor-poration itself.

A. Taxable Asset Acquisition

In a taxable asset acquisition, the buyer takes a cost orfair market value basis in the assets acquired, whichoften represents a step-up in the bases where theassets have appreciated, and the buyer may be able tolimit the liabilities assumed in the transaction, includ-ing undisclosed obligations that would affect thetarget corporation. For these reasons, U.S. buyersgenerally prefer to structure the acquisition of a U.S.business as an asset acquisition.

Like a U.S. buyer, an FC buyer should generallyprefer an asset acquisition. However, an FC buyer’sstatus as a foreign person creates the following issues:s Purchasing assets is likely to cause the FC buyer to

have a U.S. trade or business within the meaning ofthe Internal Revenue Code of 1986, as amended (the

‘‘Code’’), in which case any income of the FC buyerthat is effectively connected with the U.S. trade orbusiness (ECI) would be subject to U.S. federalincome tax on a net basis at graduated rates, muchlike the income of a U.S. person. If the FC buyer’scountry of residence has entered into a tax treatywith the United States, then the U.S. business is alsolikely to cause the FC buyer to have a PE in theUnited Sates, in which case the treaty will not pro-tect the FC buyer from U.S. federal income taxationwith respect to its profits from the business.

s The FC buyer will be required to report any ECIfrom the acquired U.S. business annually on a U.S.federal income tax return.

s The FC buyer may be subject to branch profits taxat a rate of 30% with respect to its earnings from itsU.S. business (although the rate of the branch prof-its tax is often reduced or the tax eliminated by anapplicable tax treaty).

Accordingly, the FC buyer is likely to make the ac-quisition through a U.S. acquisition vehicle. In thiscase, the income of the U.S. vehicle would be subjectto U.S. federal income tax obligations and tax report-ing requirements, and the FC buyer would be treatedas receiving a dividend from the U.S. vehicle. Underthe Code, a dividend paid from a U.S. corporation(such as the U.S. vehicle) to a foreign shareholder(such as the FC buyer) is generally subject to U.S. fed-eral withholding tax at a 30% rate, which may be re-duced (often to 15%, or 5% for significant holders ofthe target corporation’s shares) if the foreign share-holder qualifies for the benefits of an applicable taxtreaty.

In the case of an asset sale, the purchase price forthe U.S. business must be allocated among the U.S.business’s assets for U.S. federal tax purposes usingthe ‘‘residual method’’ prescribed by applicable Trea-sury Regulations. This methodology requires the pur-chase price to be analyzed through a waterfallconsisting of seven asset classes, with the residualamount allocated to goodwill. The FC buyer’s costbasis in the assets (as well as the amount and charac-ter of the seller’s gain or loss on the transaction) is de-termined by the amounts allocated to each class ofasset.

The purchase price allocation must be reported tothe U.S. Internal Revenue Service (IRS) by both thebuyer and the seller on Form 8594. Purchase agree-


ments in the United States generally require the buyerand the seller to agree on the purchase price alloca-tion and to report consistently on Form 8594. Becauseof differing costs and expenses, however, the alloca-tions on the buyer’s and the seller’s Form 8594 are notlikely to be exactly the same. A buyer and a seller thatcannot agree on an allocation will occasionally basetheir Forms 8594 on different allocations, althoughthis practice is not recommended.

The purchase price allocation forms the basis of thebuyer’s cost recovery deductions after the transaction.Assuming the value of the assets appreciated in theseller’s hands, the buyer will enjoy increased deprecia-tion and amortization deductions going forward. Pur-chase price allocated to certain intangibles, such asgoodwill, and consideration for non-compete cov-enants can be amortized over a 15-year period.

Other assets may be depreciated or included ininventory—a buyer can typically choose its own in-ventory and cost recovery methods as well as its owntaxable year (through the use of a newly created U.S.vehicle); these options s might not be available to abuyer of shares. Generally, U.S. tax rules limit the useof built-in or previously reported tax losses and cred-its.

The buyer’s direct assumption of fixed liabilities ofthe seller in an asset acquisition is generally treated asadditional consideration and increases the amount re-alized on the sale. Assumption of a future or contin-gent obligation, however, generally does not give riseto income or gain for the seller, and the buyer may beable to deduct expenses (or capitalize and amortize ordepreciate a related asset) relating to future or contin-gent obligations.

B. Taxable Stock Acquisition

Sellers, on the other hand, generally prefer a stock ac-quisition because the amount of gain is often lowerand is subject to capital gains rates, which are lowerthan ordinary rates in the case of sellers that are indi-viduals or trusts. In addition, capital gains can beoffset by a seller’s capital losses. Moreover, the statesdo not generally tax a seller of stock, but do tax a sellerof assets located in their jurisdiction. Non-tax reasonsto prefer a stock acquisition over an asset acquisitiongenerally include fewer third party consents, fewer fil-ings with governmental agencies and fewer localtransfer tax issues.

The buyer in a stock acquisition effectively succeedsto and bears the historical tax liabilities of the targetcorporation. Accordingly, stock purchase agreementsgenerally include extensive representations, warran-ties, and indemnity provisions that seek to force sell-ers to cover a U.S. corporation’s pre-closing taxliabilities.

Except as described further in I.C., below (in con-nection with an election under Section 338 of theCode), a target corporation’s basis in its assets and itsuse of tax attributes are generally not affected by astock sale.

C. Section 338: Stock Acquisitions Treated as AssetAcquisitions

If the buyer and seller agree to structure an acquisi-tion of a U.S. business as a stock purchase, the buyer

may be able to obtain a step-up in basis in the assetsof the U.S. business by making an election under Sec-tion 338 of the Code. If this election is made, thebuyer, the seller and the target corporation are treatedas if the target had sold all of its assets in a taxabletransaction and then liquidated. This has the effect of‘‘pushing down’’ a basis adjustment into the target, butat the cost of triggering both corporate- andshareholder-level gain. As a result, such an election isgenerally made only where the target has losses orother tax attributes to shelter corporate-level gain.

A Section 338 election is only available if the buyeris a corporation and purchases 80% or more of the tar-get’s stock. A similar election has recently becomeavailable under Section 336(e), which does not re-quire the buyer to be a corporation.

In a narrow category of cases, a joint election isavailable where the seller is filing a consolidatedreturn with the target, or the target is an ‘‘S corpora-tion.’’ In those cases, involving a Section 338(h)(10)election, only one level of gain is reported (share-holder level gain is ignored). Contracts relating tosuch acquisitions carefully detail what elections areexpected and who is to bear the cost of any error. Con-sistent allocation of consideration by the buyer andthe seller in such a transaction is required by regula-tions and is generally reported jointly by the seller andthe buyer.

D. Deductibility of Interest and Losses

Interest on acquisition indebtedness, like other in-debtedness of a corporation, is generally deductible.The deductibility of interest is subject to many limita-tions under the Code and case law. Some of the mostsignificant limitations are as follows:s The party that is primarily liable with respect to the

relevant debt can be redetermined, with the resultthat the original borrower is not respected as theparty entitled to the interest deductions.

s Debt can be recharacterized as equity based on amultifactor court-based test. If such a recharacter-ization is successful, payments with respect to theresulting ‘‘equity’’ interest will be treated as non-deductible dividends that may be subject to differentwithholding tax and reporting rules.

s Recently issued regulations under Section 385 ofthe Code automatically treat debt between relatedparties as equity in certain circumstances, althoughthis is subject to many exceptions and limitations.The provision also requires extensive documenta-tion of inter-company debt.

s Section 267(a)(3) of the Code delays a deduction forinterest paid to a related foreign person until the in-terest is actually paid.

s Section 163(j) of the Code, which addresses ‘‘earn-ings stripping’’ transactions, limits the deductibilityof interest paid to a related lender where the lenderdoes not include that interest in income and wherethe borrower’s debt-to-equity ratio exceeds 1.5 to 1.

Other provisions limit the deductibility of intereston ‘‘applicable high-yield debt instruments’’ and con-vertible debt (and other debt if the interest is payablein equity).

Generally, the use of net operating losses (NOLs) bythe target company after a stock acquisition will be


limited under Sections 382-384 of the Code. The mostsignificant of these limitations, Section 382, applies ifthe target corporation undergoes an ‘‘ownershipshift,’’ which generally occurs if a shareholder’s inter-est in the corporation increases by 50 percentagepoints (including a new shareholder whose interestincreases from 0% to 50% or more) over the course ofa three-year period. The result of an ownership shift isthat, after the ownership shift, the historic NOLs ofthe corporation cannot be used to offset more than athreshold amount of the corporation’s income eachyear. The threshold is generally equal to the value ofthe corporation’s assets at the time of the ownershipshift multiplied by the ‘‘long-term tax-exempt rate’’published by the IRS (2.04% for July 2017).

Losses can also be limited under Section 269 of theCode, which allows the IRS to disallow deductions (orother tax benefits) in situations where a person ac-quires control of a corporation with the principal pur-pose of obtaining such deductions. This provisionapplies both to direct acquisitions and tax-free trans-actions, which are discussed in more detail in I.F.,below.

If a target corporation becomes a member of agroup of affiliated corporations that join together infiling a consolidated tax return, applicable regulationsmay apply to limit deductions for the target corpora-tion’s NOLs or prevent the duplication of loss deduc-tions.

E. Inversions

If an FC buyer acquires the stock of a U.S. corpora-tion, the inversion rules under Section 7874 of theCode may apply if, after the acquisition, the formerowners of the U.S. corporation own a thresholdamount of the stock of the FC buyer, and the expandedaffiliated group that includes the FC buyer does nothave ‘‘substantial business activities’’ in the foreigncountry in which the FC buyer is organized.

If the former owners of the U.S. corporation ownbetween 60% and 80% of the stock of the FC buyerafter the acquisition, the expatriated entity must paytax on its ‘‘inversion gain’’ for 10 years after the inver-sion. Inversion gain is generally any income from thetransfer or licensing of property either in connectionwith the inversion or, if after the inversion, to a foreignrelated person. Inversion gain cannot be offset by taxattributes such as NOLs. If the former owners of theU.S. corporation own 80% or more of the stock of theFC buyer after the acquisition, the FC buyer is treatedas a domestic corporation for all U.S. federal tax pur-poses after the acquisition.

F. Tax-Free Acquisitions

If stock is issued by an FC buyer as consideration forthe target corporation’s stock or assets instead of cashor other property, it may be possible to structure theacquisition so that the seller’s gain is deferred for U.S.tax purposes under Section 368 of the Code, which de-fines several types of ‘‘reorganization’’ that do notresult in immediate taxation of the seller. Generally,for a transaction to be a reorganization, at least 80%of the consideration in the transaction must consist of

acquirer stock, although some types of reorganizationprohibit the use of any consideration other than ac-quirer stock.

In a reorganization, there is no ‘‘step-up’’ in thebasis of the target corporation’s assets or stock. In-stead, the basis of transferred property either carriesover to the buyer or is replaced (known as ‘‘substitutedbasis’’) in the hands of the selling shareholder.

In a cross-border context, Section 367 of the Codegenerally disqualifies a transaction that would other-wise qualify as a tax-free reorganization under Sec-tion 368 by treating the foreign buyer as ‘‘not acorporation’’ for purposes of determining the amountof gain to be recognized on the transaction. There areseveral exceptions to Section 367, however, that maypermit such a reorganization to remain tax-free.

One exception to Section 367 that could be availableto an FC buyer with respect to the purchase of a U.S.business would be the exception for transfers of thestock or securities of a U.S. corporation to a foreignbuyer. This exception would be available if: (1) theU.S. seller receives 50% or less of the FC buyer’s stockin the sale; (2) U.S. persons who are officers or direc-tors of the target corporation or hold 5% or more ofthe target corporation’s stock do not own more than50% of the FC buyer’s stock; (3) the U.S. seller eitherholds less than 5% of the FC buyer’s stock, or holds 5%or more of the FC buyer’s stock and enters into a ‘‘gainrecognition agreement’’ with the IRS; and (4) the FCbuyer has been actively engaged in business for atleast three years.


A. Asset Sale

If the transaction is a sale of assets, a foreign sellerwill be subject to considerations similar to those towhich a U.S. seller is subject. The Code includes pro-visions that treat gain of a foreign seller as taxable ECIif such gain results from a disposition of assets thathad generated ECI previously. These provisions applyeven after the cessation of the business that generatedthe ECI and with respect to assets that were removedfrom such an ECI-generating business within the pre-vious ten years. Since it is assumed here that the U.S.business represents a PE for tax treaty purposes, a taxtreaty will not protect a foreign seller’s gain from ECI-generating assets from U.S. taxation.

The U.S. federal tax considerations for an FC buyerwith respect to assets purchased from a foreign sellerare generally the same as those described in I., above.

B. Stock Sale

If the transaction is a stock sale, a foreign seller willgenerally not be subject to tax on any gain realized onthe sale. For U.S. federal income tax purposes, gain onthe sale of personal property, such as stock, is gener-ally sourced with reference to the residence of theseller. Therefore, gain on a foreign seller’s dispositionof stock is generally foreign-source income for theseller and is accordingly not taxable in the UnitedStates. This general rule does not apply in the case of


a nonresident alien individual who is present in theUnited States for 183 days or more during a taxableyear.

From the buyer’s perspective, the U.S. federal taxconsiderations are the same as for a purchase of stockfrom sellers that are U.S. persons.

In general, the United States has agreed to refrainfrom imposing higher taxes on foreign sellers than ondomestic sellers under the non-discrimination provi-sions of its tax treaties.

III. BEPS

Generally, the United States has declined to adopt themeasures proposed by the OECD’s BEPS actions, soBEPS is not likely to have a significant direct impacton the U.S. federal income taxation of stock and assetdeals.

Some BEPS-inspired provisions, however, havebeen adopted by the Treasury Department in the latestversion of the U.S. Model Tax Treaty. For example, thenew provisions include restrictions relating to ‘‘trian-gular permanent establishments’’ and ‘‘special tax re-gimes’’ that are intended to combat treaty shopping inways that are consistent with the OECD’s recommen-dations. The changes are likely to limit the availabilityof tax treaties for buyers and sellers of U.S. busi-nesses.

The United States has enacted rules similar to theBEPS actions on interest deductions and hybrid enti-

ties that may reduce the availability of certain tax ben-efits to foreign buyers.

IV. Non-Tax Factors

Tax representations, warranties and indemnities gen-erally play a larger role in a stock deal, because the taxliabilities of the target corporation remain liabilitiesof the target corporation after the transaction. Assetdeals, on the other hand, often simply include an in-demnity for taxes of the selling corporation and pre-closing taxes that relate to the purchased business.Since so few pre-closing taxes can be assessed againstthe purchaser in an asset deal, this simplified indem-nity is adequate for a purchase of business assets.

The availability of insurance for representationsand warranties and the rise of alternative disputeresolution mechanisms, which are sometimes usedfor disputes that might give rise to an indemnificationclaim but have not yet arisen, have become importantconsiderations in the cross-border context.

Buyers and sellers of a U.S. business have the flex-ibility to designate the applicable law in the sales con-tract. Delaware and New York are the jurisdictionsmost often specified in U.S.-based transactions. Incross-border transactions, it is the author’s experiencethat either U.K. or New York law is standard in multi-jurisdiction asset or stock acquisitions.

Members


Forum Members andContributors

Chairman and chief editor: Leonard L. SilversteinBuchanan Ingersoll & Rooney PC, Washington, D.C.

* denotes Permanent Member

ARGENTINA

Guillermo Teijeiro*Teijeiro y Ballone, Buenos Aires

Guillermo Teijeiro writes and lectures frequently on corporateand international tax law, with articles and books published byBloomberg BNA, Law & Business Inc., Euromoney, Tax Analysts,The Economist, Thomson Reuters, Lexis-Nexis, Kluwer, GlobalLegal Group, and Ediciones Contabilidad Moderna, among others,and was named Bloomberg BNA’s Contributor of the Year in 2015.Mr. Teijeiro has been a member of the Board of the City of BuenosAires Bar Association, as well as of the Board of the Argentine IFABranch (Argentine Association of fiscal studies) and is currentlypresident of the Argentine IFA branch for the period 2016-2018. Aformer plenary member of IFA Permanent Scientific Committee(2006-2014), he is currently a member of IFA General Council andvice president of the IFA LatAm Regional Committee. He gradu-ated LL.B from La Plata University, Argentina, and obtained anLL.M degree from Harvard University, and later spent a year atHarvard Law School as a visiting scholar, under the sponsorshipof the International Tax Program and the Harvard Tax Fund. Mr.Teijeiro teaches International Taxation at the Master Program inTaxation, Argentine Catholic University, CIDTI, Austral Univer-sity, and is a member of the Advisory Board of the Master Pro-gram in Taxation of Universidad Torcuato Di Tella, Buenos Aires.

Ana Lucıa Ferreyra*Pluspetrol, Montevideo, Uruguay

Ana Lucıa Ferreyra, a William J. Fulbright Scholarship (2002-2003) and University of Florida graduate (LL.M. 2003), currentlyworks as Tax Counsel for New Business at Pluspetrol. Previously,she was a partner at Teijeiro y Ballone Abogados offices in BuenosAires, Argentina. She is a member of the International Bar Asso-ciation and has been appointed as Vice-Chair of the Tax Commit-tee for the period 2016-2017. Mrs. Ferreyra has authored severalpublications related to her practice in Practical Latin AmericanTax Strategies, Latin American Law & Business Report, WorldwideTax Daily, International Tax Review, Global Legal Group, Errepar,among others. She has been speaker on tax matters at IBA, IFALatin America, and IFA Argentina congresses and seminars. Shehas been a professor of International Taxation at the Master Pro-gram in Taxation, Argentine Catholic University and CIDTI, Aus-tral University.

Maximiliano A. BatistaPerez Alati, Grondona, Benites, Arntsen & Martınez de Hoz(h), BuenosAires

Maximiliano A. Batista is a partner with Perez Alati. He was for-merly an associate at Deloitte & Touche LLP (New York) (1999-2001) and counsel at the Argentine Federal Superintendency ofInsurance (1997-1998) and currently is professor of the MasterPrograms in Law & Economics and in Taxation of the Torcuato DiTella University in Buenos Aires. He is the author of the bookTributacion de Entidades sin Fines de Lucro (Abeledo Perrot, 2009)and several articles in specialized reviews. Admitted to practice inNew York, Madrid, and Buenos Aires, he is also a member of theInternational Fiscal Association (IFA), the Argentine Associationof Tax Studies, and the Institute of Insurance Law ‘‘Isaac Halp-erin.’’ He received his Argentine law degree cum laude from the

University of Buenos Aires in 1996 and his Spanish law degreefrom the University of Valencia in 2003. A graduate of the Inter-national Tax Program (ITP) of Harvard Law School (1998-1999),he was member of the Harvard Law School Council (1998-1999).

AUSTRALIA

Adrian Varrasso *Minter Ellison, Melbourne

Adrian Varrasso is a partner with Minter Ellison in Melbourne,Australia. Adrian’s key areas of expertise are tax and structuringadvice for mergers, acquisitions, divestments, demergers and in-frastructure funding. Adrian has advised on an extensive range ofgeneral income tax issues for Australian and international clients,with a special interest in tax issues in the energy and resourcessectors and inbound and outbound investment. His experience in-cludes advising on taxation administration and complianceissues, comprehensive tax due diligence reviews and managingtax disputes. Adrian also has tax expertise in the automotivesector and infrastructure sector.

He received his BComm (2002) and an LLB (Hons) (2002) bothfrom the University of Melbourne. He is admitted as a barristerand solicitor in Victoria, and is a member of the Law Council ofAustralia (Taxation Committee Member and National Chair andalso a member of the National Tax Liaison Group (NTLG)); theTaxation Committee of the Infrastructure Partnerships Australia;the Law Institute of Victoria; and an Associate of the Taxation In-stitute of Australia.

Grant Wardell-Johnson*KPMG LLP, Sydney

Grant Wardell-Johnson joined KPMG in December 1987 and hasbeen a partner since July 1997. From 2007 to 2009, he served asthe leader of the KPMG Tax Mergers & Acquisitions Practice andsince 2012, has served as head of the KPMG Australian TaxCentre. He was lead tax partner on several high-profile acquisi-tions and listings, including Dyno-Nobel, $1.7b (2005), BoartLongyear, $2.7b (2006), and Westfarmers acquisition of Coles,$20b (2007). Other clients have included AGL, CHAMP, CorporateExpress, CSR, Lend Lease, Macquarie, Optus, and Standard Char-tered Bank. An adjust professor of business and tax law at theUniversity of New South Wales, Grant is also a Fellow of the Uni-versity of Western Australia. He serves as co-chair of the Austra-lian Tax Office’s National Tax Liaison Group (until December2017), chair of the Tax Technical Committee of Chartered Ac-countants of Australia and New Zealand, a member of the BaseErosion and Profit Shifting Treasury Advisory Group, an advisorto the Board of Taxation, and a member of the Expert Panel to theBoard of Tax Working Group on Hybrids. He holds a bachelor ofEconomics and bachelor of Laws from the University of Sydney.

Robyn Basnett*KPMG LLP, Sydney

Robyn Basnett serves as a senior consultant with KPMG’s Austra-lian Tax Centre and previously served as audit learning & develop-ment manager with the firm. Before joining KPMG, she served asaccounting lecturer at Charles Darwin University and as taxationlecturer and course coordinator at the University of Kwazulu-


Natal. She graduated cum laude from the University of Kwazulu-Natal with a degree in Business Science (Finance) in 2003, andcompleted her B. Comm (Honours) degree in Accounting in 2008.She received a Master of Commerce (Taxation) from Rhodes Uni-versity in 2016. A Chartered Accountant (South Africa), Robynalso completed courses as Chartered Tax Advisor (CTA1) Founda-tions and CommLaw1 Australian Legal Systems at The Tax Insti-tute (2016).

Elissa RomaninMinterEllison, Melbourne

A partner with MinterEllison, Elissa has experience in advisingon various matters including the tax considerations involved inmergers and acquisitions, divestments, capital reorganisations,tax due diligence, and contract drafting. Elissa also advises ontrusts taxation matters, including public trading trust rules, dis-tributions, present entitlement and trust resettlements, as well astrust deeds for private clients. She received her BComm (2007)and an LLB (Hons) (2007) both from Monash University and anLL.M (2014) from the University of Melbourne. She is admitted topractise in Victoria and in the High Court of Australia, and is amember of the Taxation Institute. She was the Australian Na-tional Tax Reporter for the International Bar Association 2012 &2013, and was a finalist for the Tax Institute of Australia’s Tax Ad-viser of the Year (Emerging Tax Star Category) 2014. Elissa cur-rently serves as a Young Lawyer Programme Officer for the IBATaxes Committee.

Sarah SapuppoMinterEllison, Melbourne

Sarah is a lawyer with MinterEllison, with experience in the cor-porate tax advisory area. Sarah has advised on a variety of corpo-rate income tax issues including international tax structuring,mergers and acquisitions, tax due diligence and contract drafting.Sarah received her BComm (2011) and JD (2014) both from theUniversity of Melbourne and is currently completing an LL.Mwith the University of Melbourne. She is admitted to practice inVictoria and in the High Court of Australia, and is a member ofthe Law Institute of Victoria.

Amanda KarafilisMinterEllison, Melbourne

Amanda has broad experience in providing advice to clients in thepublic and private sector on the GST and stamp duty implicationsof commercial transactions, including mergers and acquisitions,capital raising and corporate restructures. This includes advisingon the application of the GST-free going concern concession tothe sales of businesses, assessing the stamp duty liabilities andlodgement obligations arising on the purchase of assets across alljurisdictions, facilitating interactions with the ATO and revenueauthorities on behalf of clients, and tax structuring and planning.Amanda received her BComm (2011) and LLB (2011) both fromLa Trobe University. She is admitted to practice in Victoria and inthe High Court of Australia, and is a member of the Tax Instituteand Law Institute of Victoria.

BELGIUM

Howard M. Liebman *Jones Day, Brussels

Howard M. Liebman is a partner of the Brussels office of JonesDay. He has practiced law in Belgium for over 34 years. Mr. Lieb-man is a member of the District of Columbia Bar and holds A.B.and A.M. degrees from Colgate University and a J.D. from Har-vard Law School. Mr. Liebman has served as a Consultant to theInternational Tax Staff of the U.S. Treasury Department. He ispresently Chairman of the Legal & Tax Committee of the Ameri-can Chamber of Commerce in Belgium. He is also the co-authorof the BNA Portfolio 999-2nd T.M., Business Operations in theEuropean Union (2005).

Jacques Malherbe *Simont Braun, Brussels

Jacques Malherbe is a partner with Simont Braun in Brussels andProfessor Emeritus of commercial and tax law at the University ofLouvain. He is the author or co-author of treatises on companylaw, corporate taxation and international tax law. He teaches atEDHEC (Ecole des Hautes Etudes Commerciales) in France aswell as in the graduate programmes of the Universities of Bolognaand Hamburg. He is a corresponding member of the SpanishAcademy of law and jurisprudence.

Pascal Faes *Antaxius, Antwerp

Pascal Faes is a tax partner with Antaxius in Antwerp. He receivedhis J.D. from the University of Ghent (1984); Special Degree inEconomics, University of Brussels (VUB) (1987); and his Master’sin Tax Law, University of Brussels (ULB) (1991). He is a SpecialConsultant to Tax Management, Inc. Bloomberg BNA.

Thierry Denayer*Stibbe, Brussels

Thierry Denayer is presently tax counsel at the Brussels office ofStibbe. Thierry holds a law degree from the Katholieke Univer-siteit Leuven (1978). He served as staff member at the Interna-tional Bureau of Fiscal Documentation in Amsterdam (the‘‘IBFD’’). He practised tax law in Belgium for 30 years at the Brus-sels office of Linklaters and since 2009 at Stibbe, specializing innational and international corporate tax. He was Chairman of theBelgian branch of the International Fiscal Association from 2012to 2014.

Valerie OyenJones Day, Brussels

Valerie Oyen is an associate in the Brussels office of Jones Day.She is a member of the Brussels Bar and holds a Law and Tax Lawdegree from the Katholieke Universiteit Leuven and an LL.M.degree from the London School of Economics and Political Sci-ence (International Tax, Corporate and Finance Law)

BRAZIL

Henrique de Freitas Munia e Erbolato *LBMF Advogados, Sao Paulo

Henrique Munia e Erbolato is of counsel at LBMF Advogados,Sao Paulo, Brazil. Henrique concentrates his practice on interna-tional tax and transfer pricing. He is a member of the BrazilianBar. Henrique received his LL.M with honors from NorthwesternUniversity School of Law (Chicago, IL, USA) and a Certificate inBusiness Administration from Northwestern University—KelloggSchool of Management (both in 2005). He holds degrees fromPostgraduate Studies in Tax Law—Instituto Brasileiro de EstudosTributarios—IBET (2002)—and graduated from the PontifıciaUniversidade Catolica de Sao Paulo (1999). He has written nu-merous articles on international tax and transfer pricing. Heserved as the Brazilian ‘‘National Reporter’’ of the Tax Committeeof the International Bar Association (IBA)-2010/2011. Henriquespeaks English, Portuguese and Spanish.

Pedro Vianna de Ulhoa Canto *Ulhoa Canto, Rezende e Guerra Advogados, Rio de Janeiro

Pedro is a tax partner of Ulhoa Canto, Rezende e Guerra Advoga-dos, Rio de Janeiro, Brazil, and concentrates his practice on inter-national and domestic income tax matters, primarily in theFinancial and Capital Markets industry. Pedro served as a foreignassociate in the New York City (USA) office of Cleary, Gottlieb,Steen & Hamilton LLP (2006–2007). He is a member of the Bra-zilian Bar. Pedro received his LL.M from New York UniversitySchool of Law (New York, NY, USA) in 2006. He holds degreesfrom his graduate studies in Corporate and Capital Markets(2006) and Tax Law (2004) from Fundacao Getulio Vargas, Rio deJaneiro, and graduated from the Pontifıcia Universidade Catolicado Rio de Janeiro (2000). Pedro speaks Portuguese and English.

Pedro Andrade Costa de CarvalhoTax lawyer, Sao Paulo

Pedro Carvalho concentrates his practice on domestic and inter-national tax matters. He is a member of the Brazilian Bar. Pedroreceived his LL.M from Insper (Sao Paulo, Brazil) in 2016. Hegraduated from the Pontifıcia Universidade Catolica de Sao Paulo(2013). Pedro speaks Portuguese and English.

CANADA

Rick Bennett *DLA Piper (Canada) LLP, Vancouver

Rick Bennett is senior tax counsel in the Vancouver office of DLAPiper (Canada) LLP. He is a Governor of the Canadian Tax Foun-dation, and has frequently lectured and written on Canadian taxmatters. Rick was admitted to the British Columbia Bar in 1983,graduated from the University of Calgary Faculty of Law in 1982,and holds a Master of Arts degree from the University of Toronto


and a Bachelor of Arts (Honours) from Trent University. Rickpractices in the area of income tax planning with an emphasis oncorporate reorganizations, mergers and acquisitions, and inter-national taxation.

Jay Niederhoffer *Deloitte LLP, Toronto

Jay Niederhoffer is an international corporate tax partner of De-loitte, based in Toronto, Canada. Over the last 17 years he has ad-vised numerous Canadian and foreign-based multinationals onmergers and acquisitions, international and domestic structur-ing, cross-border financing and domestic planning. Jay hasspoken in Canada and abroad on cross-border tax issues includ-ing mobile workforce issues, technology transfers and financingtransactions. He obtained his Law degree from Osgoode Hall LawSchool and is a member of the Canadian and Ontario Bar Asso-ciations.

Robert McCulloghDeloitte, LLP, Montreal

Robert McCullogh is a senior tax advisor in Deloitte’s Interna-tional Corporate Tax Services group in Montreal. He has morethan 25 years of experience serving Canadian and foreign basedmultinational clients primarily in the pharmaceutical, technologyand manufacturing sectors. Robert leads assignments involvingcross-border corporate reorganizations, mergers and acquisi-tions, and foreign affiliate planning.

PEOPLE’S REPUBLIC OF CHINA

Julie Hao*Ernst & Young, Beijing

Julie Hao is a tax partner with Ernst & Young’s Beijing office andhas extensive international tax experience in cross-border trans-actions such as global tax minimization, offshore structuring,business model selection, supply chain management and exitstrategy development. She has more than 20 years of tax practicein China, the United States and Europe, and previously workedwith the Chinese tax authority (SAT). She holds an MPA degreefrom Harvard University’s Kennedy School of Government andans International Tax Program certificate from Harvard LawSchool.

Peng Tao*DLA Piper, Hong Kong

Peng Tao is of counsel in DLA Piper’s Hong Kong office. He fo-cuses his practice on PRC tax and transfer pricing, mergers andacquisitions, foreign direct investment, and general corporateand commercial issues in China and cross-border transactions.Before entering private practice, he worked for the Bureau of Leg-islative Affairs of the State Council of the People’s Republic ofChina from 1992 to 1997. His main responsibilities were to draftand review tax and banking laws and regulations that were appli-cable nationwide. He graduated from New York University withan LL.M in Tax.

DENMARK

Nikolaj Bjørnholm *Bjørnholm Law, Copenhagen

Nikolaj Bjørnholm concentrates his practice in the area of corpo-rate taxation, focusing on mergers, acquisitions, restructuringsand international/EU taxation. He represents U.S., Danish andother multinational groups and high net worth individuals invest-ing or conducting business in Denmark and abroad. He is an ex-perienced tax litigator and has appeared before the SupremeCourt more than 15 times since 2000. He is ranked as a leadingtax lawyer in Chambers, Legal 500, Who’s Who Legal, WhichLawyer and Tax Directors Handbook among others. He is amember of the International Bar Association and was an officer ofthe Taxation Committee in 2009 and 2010, the American Bar As-sociation, IFA, the Danish Bar Association and the Danish TaxLawyers’ Association. He is the author of several tax articles andpublications. He graduated from the University of Copenhagen in1991 (LL.M) and the Copenhagen Business School in 1996 (Di-ploma in Economics) and spent six months with the EU Commis-sion (Directorate General IV (competition)) in 1991–1992. He waswith Bech-Bruun from 1992–2010, with Hannes Snellman from2011–2013 and with Plesner from 2014–2016.

Christian Emmeluth *EMBOLEX Advokater, Copenhagen

Christian Emmeluth obtained an LLBM from Copenhagen Uni-versity in 1977 and became a member of the Danish Bar Associa-tion in 1980. During 1980-81, he studied at the New YorkUniversity Institute of Comparative Law and obtained a Master’sdegree in Comparative Jurisprudence. Having practiced Danishlaw in London for a period of four years, he is now based in Co-penhagen.

FRANCE

Stephane Gelin *C’M’S’ Bureau Francis Lefebvre, Paris

Stephane Gelin is an attorney, tax partner with C’M’S’ BureauFrancis Lefebvre. He specializes in international tax and transferpricing. He heads the CMS Tax Practice Group.

Thierry Pons *Tax lawyer, Paris

Thierry Pons is an independent attorney in Paris. He is an expertin French and international taxation. Thierry covers all tax issuesmainly in the banking, finance and capital market industries, con-cerning both corporate and indirect taxes. He has wide experi-ence in advising corporate clients on all international tax issues.He is a specialist of litigation and tax audit.

Claire AylwardC’M’S’ Bureau Francis Lefebvre, Paris.

Claire joined C’M’S’ Bureau Francis Lefebvre in 2015. She advisescompanies and individuals about their international tax matters.She assists French and foreign corporations on their cross-bordertransactions and restructuring issues and assists private clients,including managers and sports professionals. She also regularlylitigates tax matters before French administrative courts.

GERMANY

Dr. Jorg-Dietrich Kramer *Siegburg

Dr. Jorg-Dietrich Kramer studied law in Freiburg (Breisgau), Aix-en-Provence, Gottingen, and Cambridge (Massachusetts). Hepassed his two legal state examinations in 1963 and 1969 inLower Saxony and took his LL.M Degree (Harvard) in 1965 andhis Dr.Jur. Degree (Gottingen) in 1967. He was an attorney in Stut-tgart in 1970-71 and during 1972-77 he was with the Berlin tax ad-ministration. From 1977 until his retirement in 2003 he was onthe staff of the Federal Academy of Finance, where he becamevice-president in 1986. He has continued to lecture at the acad-emy since his retirement. He was also a lecturer in tax law at theUniversity of Giessen from 1984 to 1991. He is the commentatorof the Foreign Relations Tax Act (Auszensteuergesetz) in Lip-pross, BasiskommentarSteuerrecht, and of the German tax trea-ties with France, Morocco and Tunisia in Debatin/Wassermeyer,DBA.

Pia Dorfmueller *P+P Pollath + Partners, Frankfurt

Pia Dorfmueller is a partner at P+P Pollath + Partners in Frank-furt. Her practice focuses on corporate taxation, international taxstructuring, M&A, finance structures, European holding compa-nies, German inbound, in particular, from the United States, andGerman outbound structures.

For her PhD thesis ‘‘Tax Planning for US MNCs with EU HoldingCompanies: Goals—Tools—Barriers’’, Pia received the Award ‘‘In-ternational Tax Law’’ from the German Tax Advisor Bar in 2003.Moreover, Pia is a frequent speaker on Corporate / InternationalTax Law and has authored over 80 publications on tax law. She isa current co-chair of the International Tax Committee of the In-ternational Law Section of ABA.

INDIA

Kanwal Gupta *PricewaterhouseCoopers Pvt. Ltd.

Kanwal Gupta works as Senior Tax Advisor in the PwC Mumbaioffice . He is a Member of the Institute of Chartered Accountantsof India. He has experience on cross-border tax issues and invest-


ment structuring including mergers and acquisitions. He is en-gaged in the Centre of Excellence and Knowledge Managementpractice of the firm and advises clients on various tax and regula-tory matters.

Ravishankar Raghavan *Majmudar & Partners, International Lawyers, Mumbai, India

Mr. Ravishankar Raghavan, Principal of the Tax Group at Majmu-dar & Partners, International Lawyers, has more than 18 years ofexperience in corporate tax advisory work, international taxation(investment and fund structuring, repatriation techniques, treatyanalysis, advance rulings, exchange control regulations, FII taxa-tion, etc.), and tax litigation services. Mr. Raghavan has a post-graduate degree in law and has also completed his managementstudies from Mumbai University. Prior to joining the firm, Mr.Raghavan was associated with Ernst & Young and PWC in theirrespective tax practice groups in India. He has advised DeutscheBank, Axis Bank, Future Group, Bank Muscat, State Street Funds,Engelhard Corporation, AT&T, Adecco N.A., Varian Medical Sys-tems, Ion Exchange India Limited, Dun & Bradstreet, BarberShip Management, Dalton Capital UK, Ward Ferry, Gerifonds, In-stanex Capital, Congest Funds, Lloyd George Funds and severalothers on diverse tax matters. Mr. Raghavan is a frequent speakeron tax matters.

IRELAND

Peter Maher *A&L Goodbody, Dublin

Peter Maher is a partner with A&L Goodbody and is head of thefirm’s tax department. He qualified as an Irish solicitor in 1990and became a partner with the firm in 1998. He represents clientsin every aspect of tax work, with particular emphasis on inboundinvestment, cross-border financings and structuring, capitalmarket transactions and U.S. multinational tax planning andbusiness restructurings. He is regularly listed as a leading adviserin Euromoney’s Guide to the World’s Leading Tax Lawyers, TheLegal 500, Who’s Who of International Tax Lawyers, ChambersGlobal and PLC Which Lawyer. He is a former co-chair of theTaxes Committee of the International Bar Association and of theIrish Chapter of IFA. He is currently a member of the Tax Com-mittee of the American Chamber of Commerce in Ireland.

Louise Kelly *Deloitte, Dublin

Louise Kelly is a corporate and international tax director with De-loitte in Dublin. She joined Deloitte in 2001. She is an honoursgraduate of University College Cork, where she obtained an ac-counting degree. She is a Chartered Accountant and IATI Char-tered Tax Adviser, having been placed in the final exams for bothqualifications. Louise advises Irish and multinational companiesover a wide variety of tax matters, with a particular focus on tax-aligned structures for both inbound and outbound transactions.She has extensive experience on advising on tax efficient financ-ing and intellectual property planning structures. She has advisedon many M&A transactions and structured finance transactions.She led Deloitte’s Irish desk in New York during 2011 and 2012,where she advised multinationals on investing into Ireland.Louise is a regular author and speaker on international tax mat-ters.

Marian KennedyDeloitte, Dublin

Marian Kennedy is a corporate tax manager with Deloitte inDublin. She joined the Deloitte international direct tax practice in2011. She is an honors graduate of the University of Limerick,where she obtained an accounting degree, and also obtained amasters of accounting from Smurfit Business School. She is aChartered Accountant and AITI Chartered Tax Adviser.

ITALY

Dr. Carlo Galli *Clifford Chance, Milan

Carlo Galli is a partner at Clifford Chance in Milan. He specializesin Italian tax law, including M&A, structured finance and capitalmarkets.

Giovanni Rolle *WTS R&A Studio Tributario Associato, Member of WTS Alliance,Turin—Milan

Giovanni Rolle, Partner of WTS R&A Studio Tributario AssociatoMember of WTS Global, is a chartered accountant and hasachieved significant experience, as an advisor to Italian compa-nies and multinational groups, in tax treaties and cross-border re-organizations and in the definition, documentation and defenseof related party transactions. Vice-chair of the European branchof the Chartered Institution of Taxation, he is also member of thescientific committee of the journal ‘‘Fiscalita e Commercio inter-nazionale’’. Author or co-author of frequent publications on Ital-ian and English language journals, he frequently lectures in thefield of International and EU taxation.

JAPAN

Yuko Miyazaki *Nagashima Ohno and Tsunematsu, Tokyo

Yuko Miyazaki is the head of the Tax Practice Group of Na-gashima Ohno & Tsunematsu. She holds an LLB degree from theUniversity of Tokyo and an LL.M degree from Harvard LawSchool. She was admitted to the Japanese Bar in 1979, and is amember of the Dai-ichi Tokyo Bar Association and IFA.

Eiichiro Nakatani *Anderson Mori & Tomotsune, Tokyo

Eiichiro Nakatani is a partner of Anderson Mori & Tomotsune, alaw firm in Tokyo. He holds an LLB degree from the University ofTokyo and was admitted to the Japanese Bar in 1984. He is amember of the Dai-ichi Tokyo Bar Association and IFA.

Akira TanakaAnderson Mori & Tomotsune, Tokyo

Akira Tanaka is an associate of Anderson, Mori & Tomotsune. Heholds an LL.B degree from the University of Tokyo. He was admit-ted to the Japanese Bar in 2008. Mr. Tanaka is a member of theDai-ni Tokyo Bar Association.

MEXICO

Terri Grosselin *Ernst & Young LLP, Miami, Florida

Terri Grosselin is a director in Ernst & Young LLP’s Latin AmericaBusiness Center in Miami. She transferred to Miami after work-ing for three years in the New York office and five years in theMexico City office of another Big Four professional services firm.She has been named one of the leading Latin American tax advi-sors in International Tax Review’s annual survey of Latin Ameri-can advisors. Since graduating magna cum laude from WestVirginia University, she has more than 15 years of advisory ser-vices in financial and strategic acquisitions and dispositions, par-ticularly in the Latin America markets. She co-authored TaxManagement Portfolio—Doing Business in Mexico, and is a fre-quent contributor to Tax Notes International and other major taxpublications. She is fluent in both English and Spanish.

Jose Carlos Silva *Chevez, Ruiz, Zamarripa y Cia., S.C., Mexico City

Jose Carlos Silva is a partner in Chevez, Ruiz, Zamarripa y Cia.,S.C., a tax firm based in Mexico. He is a graduate of the InstitutoTecnologico Autonomo de Mexico (ITAM) where he obtained hisdegree in Public Accounting in 1990. He has taken graduate Di-ploma courses at ITAM in business law and international taxa-tion. He is currently part of the faculty at ITAM. He is the authorof numerous articles on taxation, including the General Report onthe IFA’s 2011 Paris Congress ‘‘Cross-Border Business Restructur-ing’’ published in Cahiers de Droit Fiscal International. He sits onthe Board of Directors and is a member of the Executive Commit-tee of IFA, Grupo Mexicano, A.C., an organization composed ofMexican experts in international taxation, the Mexican Branch ofthe International Fiscal Association (IFA). He presided over theMexican Branch from 2002-2006 and has spoken at several IFAAnnual Congresses. He is the Chairman of the Nominations Com-mittee of IFA.

Juan Manuel Lopez DuranChevez, Ruiz, Zamarripa y Cia., S.C., Mexico City

Juan Manuel joined Chevez Ruiz Zamarripa in 2007 where he isnow associate manager. From 2002 to 2005, Juan Manuel workedfor Deloitte. He is a lawyer from the Universidad Iberoamericana


and also a public accountant who graduated summa cum laudefrom the Escuela Superior de Comercio y Administracion. JuanManuel holds a Master’s degree in Tax Law from the UniversidadPanamericana. He also holds both a certification as public ac-countant and a certification as a tax professional from the Mexi-can Institute of Public Accountants (IMCP). He is a member ofthe National Association of Corporate Lawyers (ANADE) and alsoa member of the Mexican College of Public Accountants (CCPM).

THE NETHERLANDS

Martijn Juddu *Loyens & Loeff, Amsterdam

Martijn Juddu is a senior associate at Loyens & Loeff based intheir Amsterdam office. He graduated in tax law and notarial lawat the University of Leiden and has a postgraduate degree in Eu-ropean tax law from the European Fiscal Studies Institute, Rot-terdam. He has been practicing Dutch and international tax lawsince 1996 with Loyens & Loeff, concentrating on corporate andinternational taxation. He advises domestic businesses and multi-nationals on setting up and maintaining domestic structures andinternational inbound and outbound structures, mergers and ac-quisitions, group reorganizations and joint ventures. He also ad-vises businesses in the structuring of international activities inthe oil and gas industry. He is a contributing author to a Dutchweekly professional journal on topical tax matters and teaches taxlaw for the law firm school.

Maarten J. C. Merkus *Meijburg & Co, Amsterdam

Maarten J.C. Merkus is a tax partner at Meijburg & Co. Amster-dam. He graduated in civil law and tax law at the University ofLeiden, and has a European tax law degree from the EuropeanFiscal Studies Institute, Rotterdam.

Before joining Meijburg & Co, Maarten taught commercial law atthe University of Leiden.

Since 1996 Maarten has been practicing Dutch and internationaltax law at Meijburg & Co. Maarten serves a wide range of clients,from family-owned enterprises to multinationals, on the tax as-pects attached to their operational activities as well as matterssuch as mergers, acquisitions and restructurings, domestically aswell as cross-border. His clients are active in the consumer and in-dustrial markets, travel leisure and tourism sector and the realestate sector.

In 2001 and 2002 Maarten worked in Spain. At present Maarten isthe chairman of the Latam Tax Desk within Meijburg & Co, witha primary focus on Spain and Brazil.

SPAIN

Luis F. Briones *Baker & McKenzie Madrid SLP

Luis Briones is a tax partner with Baker & McKenzie, Madrid. Heobtained a degree in law from Deusto University, Bilbao, Spain in1976. He also holds a degree in business sciences from ICAI-ICADE (Madrid, Spain) and has completed the Master of Lawsand the International Tax Programme at Harvard University. Hisprevious professional posts in Spain include inspector of financesat the Ministry of Finance, and executive adviser for InternationalTax Affairs to the Secretary of State. He has been a member of theTaxpayer Defence Council (Ministry of Economy and Finance). Aprofessor since 1981 at several public and private institutions, hehas written numerous articles and addressed the subject of taxa-tion at various seminars.

Eduardo Martınez-Matosas *Gomez-Acebo & Pombo SLP, Barcelona

Eduardo Martınez-Matosas is an attorney at Gomez-Acebo &Pombo, Barcelona. He obtained a Law Degree from ESADE and amaster of Business Law (Taxation) from ESADE. He advises mul-tinational, venture capital and private equity entities on their ac-quisitions, investments, divestitures or restructurings in Spainand abroad. He has wide experience in LBO and MBO transac-tions, his areas of expertise are international and EU tax, interna-tional mergers and acquisitions, cross border investments andM&A, financing and joint ventures, international corporate re-structurings, transfer pricing, optimization of multinationals’global tax burden, tax controversy and litigation, and privateequity. He is a frequent speaker for the IBA and other interna-tional forums and conferences, and regularly writes articles inspecialized law journals and in major Spanish newspapers. He isa recommended tax lawyer by several international law directo-

ries and considered to be one of the key tax lawyers in Spain byWho’s Who Legal. He is also a member of the tax advisory com-mittee of the American Chamber of Commerce in Spain. He hastaught international taxation for the LL.M in International Law atthe Superior Institute of Law and Economy (ISDE).

Luis Cuesta CuestaGomez-Acebo & Pombo SLP, Barcelona

Luis Cuesta Cuesta is an associate in the tax practice of Gomez-Acebo & Pombo, SLP, Barcelona. He is a graduate of the Univer-sidad Abat Oliba CEU, obtaining his law degree in 2011 and adegree in Business Administration in 2012. He also has a MasterExecutive in Business Law from the Centro de Estudios Garrigues(2012), and graduated from an International taxation course fromthe Centro de Estudios Financieros (2014). Prior to joiningGomez-Acebo & Pombo in 2014, he was an associate in Garrigues’Spanish and International Tax practice area (2011-2014). He pro-vides tax advice on an ongoing basis to Spanish and multinationalbusiness groups from a variety of business sectors, being anexpert in taxation under the consolidated tax regime and in inter-national taxation. He has extensive experience in the provision oftax advisory services in relation to M&A transactions and restruc-turing processes of family and multinational groups. He also hasconsiderable experience in due diligence processes, private client/wealth management and in inspection proceedings carried out bythe Spanish tax authorities. Luis speaks Spanish, Catalan andEnglish. He regularly publishes in firm-issued materials and inspecialized journals.

SWITZERLAND

Walter H. Boss *Bratschi Wiederkehr & Buob AG, Zurich

Walter H. Boss is a graduate of the University of Bern and NewYork University School of Law with a Master of Laws (Tax)Degree. He was admitted to the bar in 1980. Until 1984 he servedin the Federal Tax Administration (International Tax Law Divi-sion) as legal counsel; he was also a delegate at the OECD Com-mittee on Fiscal Affairs. He was then an international tax attorneywith major firms in Lugano and Zurich. In 1988, he became apartner at Ernst & Young’s International Services Office in NewYork. After having joined a major law firm in Zurich in 1991, heheaded the tax and corporate department of another well-knownfirm in Zurich from 2001 to 2008. On July 1, 2008 he became oneof the founding partners of the law firm Poledna Boss Kurer AG,Zurich, where he was managing partner prior to joining BratschiWiederkehr & Buob.

Dr. Silvia Zimmermann *Pestalozzi Rechtsanwalte AG, Zurich

Silvia Zimmermann is a partner and member of Pestalozzi’s Taxand Private Clients group in Zurich. Her practice area is tax law,mainly international taxation; inbound and outbound tax plan-ning for multinationals, as well as for individuals; tax issues relat-ing to reorganizations, mergers and acquisitions, financialstructuring and the taxation of financial instruments. She gradu-ated from the University of Zurich in 1976 and was admitted tothe bar in Switzerland in 1978. In 1980, she earned a doctorate inlaw from the University of Zurich. In 1981-82, she held a scholar-ship at the International Law Institute of Georgetown UniversityLaw Center, studying at Georgetown University, where she ob-tained an LL.M degree. She is Chair of the tax group of the ZurichBar Association and Lex Mundi, and a member of other taxgroups; a board member of some local companies which aremembers of foreign multinational groups; a member of the SwissBar Association, the International Bar Association, IFA, and theAmerican Bar Association. She is fluent in German, English andFrench.

Stefanie Maria MongeBratschi Wiederkehr & Buob AG, Zurich

Stefanie Maria Monge was educated at the University of Zurich(1998) and obtained a Master of Laws Degree from the Universityof Michigan Law School (2003). Mrs. Monge was admitted to theZurich bar in 2001 and the New York bar in 2005. In 2015 shegraduated as certified tax expert. From 1998 until 1999, sheserved as a juridical clerk with the District Court of Uster/Zurich.She then was a legal trainee and associate with a Zurich law firm.In 2004 she joined Greenberg Traurig, LLP in their Chicago officeas a law clerk. After having spent several years with two major lawfirms in Zurich as a tax and corporate lawyer in the team ofWalter H. Boss, an internationally well-reputed tax lawyer, she isnow with the law firm Bratschi Wiederkehr & Buob AG in theirZurich office, where she is part of the tax team.


UNITED KINGDOM

Charles Goddard *Rosetta Tax LLP, London

Charles Goddard is a partner with Rosetta Tax LLP, a U.K. lawfirm which specializes in providing ‘‘City’’ quality, cost-effectivetax advice to businesses and professional services firms. Charleshas wide experience of advising on a range of corporate and fi-nance transactions. His clients range from multinational blue-chip institutions to private individuals. The transactions on whichhe has advised include corporate M&A deals, real estate transac-tions, joint ventures, financing transactions (including Islamic fi-nance, structured finance and leasing), and insolvency andrestructuring deals.

James Ross *McDermott, Will & Emery UK LLP, London

James Ross is a partner in the law firm of McDermott Will &Emery UK LLP, based in its London office. His practice focuses ona broad range of international and domestic corporate/commercial tax issues, including corporate restructuring, trans-fer pricing and thin capitalization, double tax treaty issues,corporate and structured finance projects, mergers and acquisi-tions and management buyouts. He is a graduate of Jesus College,Oxford and the College of Law, London.

UNITED STATES

Patricia R. Lesser *Buchanan Ingersoll & Rooney PC, Washington, D.C.

Patricia R. Lesser is associated with the Washington, D.C. office ofthe law firm Buchanan Ingersoll & Rooney PC. She holds a li-cence en droit, a maitrise en droit, a DESS in European Commu-

nity Law from the University of Paris, and an MCL from theGeorge Washington University in Washington, D.C. She is amember of the District of Columbia Bar.

Peter A. Glicklich*Davies Ward Phillips & Vineberg LLP, New York

Peter Glicklich is a partner in the corporate tax group. For over 25years, Peter has counseled North American and foreign-basedmultinationals on their domestic and international operationsand activities. Peter advises corporations in connection withmergers and acquisitions, cross-border financings, restructur-ings, reorganizations, spin-offs and intercompany pricing, in di-verse fields, including chemicals, consumer products, real estate,biotechnology, software, telecommunications, pharmaceuticalsand finance. He has worked with venture funds, investmentbanks, hedge funds, commodities and securities dealers and in-surance companies. Peter is a contributing editor of the CanadianTax Journal, and a contributor to the Tax Management Interna-tional Journal. He was a national reporter for the InternationalFiscal Association’s project on Treaty Non-discrimination, and isthe author of BNA Tax Management Portfolio: Taxation of Shippingand Aircraft. Peter is a frequent speaker and author of numerousarticles. Presently, Peter is the Finance Vice-President and an Ex-ecutive Committee member of IFA’s USA Branch, and a memberof the U.S. Activities of Foreign Taxpayers and Foreign Activitiesof U.S. Taxpayers Committees of the Tax Sections of the AmericanBar Association; the International Committee of the Tax Sectionof the New York State Bar Association; and Tax Management Ad-visory Board — International. Peter is included in The Interna-tional Who’s Who of Corporate Tax Lawyers 2004, The Best Lawyersin America, and Super Lawyers. Peter graduated with high honorsfrom the University of Wisconsin—Madison and received his J.D.(cum laude) from the Harvard Law School. Peter joined the firmas a partner in 2003.


tax management international forum - bratschi€¦ · embolex advokater, copenhagen 38 france...

Documents