Association of Corporate Counsel · Tax on Inbound Investment 2016 Contributing editors Peter Maher...

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Tax on Inbound Investment

Tax on Inbound InvestmentContributing editorsPeter Maher and Lew Steinberg

2016© Law Business Research Ltd 2015

Tax on Inbound Investment 2016

Contributing editorsPeter Maher and Lew Steinberg

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SubscriptionsSophie [email protected]

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Adam [email protected]

Dan [email protected]

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© Law Business Research Ltd 2015No photocopying without a CLA licence.First published 2007Tenth editionISSN 1753-108X

The information provided in this publication is general and may not apply in a specific situation. Legal advice should always be sought before taking any legal action based on the information provided. This information is not intended to create, nor does receipt of it constitute, a lawyer–client relationship. The publishers and authors accept no responsibility for any acts or omissions contained herein. Although the information provided is accurate as of October 2015, be advised that this is a developing area.

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© Law Business Research Ltd 2015

CONTENTS

2 Getting the Deal Through – Tax on Inbound Investment 2016

Australia 5Greg Reinhardt and Seema MishraHenry Davis York

Brazil 10Marcio Sperling and Paulo César Teixeira Duarte FilhoRothmann, Sperling, Padovan, Duarte Advogados

China 15Ulrike Glueck and Gilbert ShenCMS, China

Croatia 20Aleksandra RaachKaranović & Nikolić

Curaçao 24Jeroen Starreveld and Maike BergervoetSpigt Dutch Caribbean

Dominican Republic 29Enmanuel MontásMS Consultores

France 32Christel AlbertiScemla Loizon Veverka & de Fontmichel (SLV&F)

Germany 37Wolf-Georg von RechenbergCMS Hasche Sigle

Greece 42Theodoros SkouzosIason Skouzos & Partners Law Firm

India 48Mukesh ButaniBMR LegalShefali GoradiaBMR & Associates LLP

Indonesia 55Freddy Karyadi and Anastasia IrawatiAli Budiardjo, Nugroho, Reksodiputro

Ireland 60Peter Maher and Philip McQuestonA&L Goodbody

Italy 64Claudia Gregori and Giorgio VaselliLegance – Avvocati Associati

Japan 70Eiichiro Nakatani and Kai IsoyamaAnderson Mōri & Tomotsune

Lithuania 74Laimonas Marcinkevičius and Ingrida SteponavičienėJuridicon Law Firm

Luxembourg 80Frédéric Feyten and Michiel BoerenOPF Partners

Mexico 85Ana Paula Pardo Lelo de Larrea, Jorge San Martin and Sebastian AyzaSMPS Legal

Netherlands 90Friggo Kraaijeveld and Ceriel CoppusKraaijeveld Coppus Legal

Nigeria 95Dayo Ayoola-Johnson and Bidemi Daniel OlumideAdepetun Caxton-Martins Agbor & Segun

Panama 99Ramón Anzola, Maricarmen Plata and Andrés EscobarAnzola Robles & Asociados

Poland 107Janusz FiszerGESSEL Law Office

Portugal 110Rogério M Fernandes Ferreira, Mónica Respício Gonçalves and Rita Arcanjo MedalhoRFF & Associados – Tax & Business Law Firm

Russia 116Petr Popov and Alexander KovalevPepeliaev Group

Spain 120Guillermo Canalejo Lasarte and Alberto Artamendi GutiérrezUría Menéndez

Turkey 125Orhan Yavuz MaviogluADMD Law Office

Ukraine 129Pavlo Khodakovsky and Olga BaranovaArzinger

United Kingdom 134Jeanette Zaman and Zoe AndrewsSlaughter and May

United States 139Alden Sonander, Christian J Athanasoulas, Jason R Connery and Jennifer Blasdel-MarinescuKPMG LLP

Venezuela 145Jesús Sol-Gil, Elina Pou-Ruan, Nathalie Rodríguez-Paris and Rodrigo Lepervanche-RiveroHoet Pelaez Castillo & Duque


www.gettingthedealthrough.com 3

PREFACE

Getting the Deal Through is delighted to publish the tenth edition of Tax on Inbound Investment, which is available in print, as an e-book, via the GTDT iPad app, and online at www.gettingthedealthrough.com.

Getting the Deal Through provides international expert analysis in key areas of law, practice and regulation for corporate counsel, cross-border legal practitioners, and company directors and officers.

Throughout this edition, and following the unique Getting the Deal Through format, the same key questions are answered by leading practitioners in each of the jurisdictions featured. Our coverage this year includes Brazil, Italy, Japan, Poland and Russia.

Getting the Deal Through titles are published annually in print. Please ensure you are referring to the latest edition or to the online version at www.gettingthedealthrough.com.

Every effort has been made to cover all matters of concern to readers. However, specific legal advice should always be sought from experienced local advisers.

Getting the Deal Through gratefully acknowledges the efforts of all the contributors to this volume, who were chosen for their recognised expertise. We also extend special thanks to the contributing editors, Peter Maher of A&L Goodbody and Lew Steinberg, for their continued assistance with this volume.

LondonOctober 2015

PrefaceTax on Inbound Investment 2016Tenth edition


Henry Davis York AUSTRALIA


AustraliaGreg Reinhardt and Seema MishraHenry Davis York

Acquisitions (from the buyer’s perspective)

1 Tax treatment of different acquisitions

What are the differences in tax treatment between an acquisition of stock in a company and the acquisition of business assets and liabilities?

The taxation consequences for a non-resident differ depending on whether the non-resident acquires shares (or stock) in an Australian company or assets and liabilities of a business. Further, the taxation liability upon the sale or exit from the business will also be affected by whether there is a share sale or an asset sale.

Stock versus business assetsThe purchase of shares or stock in an Australian company which carries on an active business will ordinarily be treated as a capital transaction. When those shares are ultimately sold, unless the company holds signifi-cant property interests, there will generally be no further tax imposed on the non-resident.

However, where a non-resident has purchased business assets and liabilities directly, it is likely they will be treated as carrying on business through a fixed place of business in Australia (that is through a permanent establishment). Where this is the case, the non-resident will generally be liable to tax on any eventual sale of those assets.

As such, it is important in deciding on a stock versus asset acquisi-tion that consideration be given as to how each may be treated on ultimate disposal.

Tax cost of assets acquiredThe direct acquisition of shares in an Australian target company (for fair market value) by a non-resident ordinarily results in a market value cost base in the shares for capital gains tax (CGT) purposes (the CGT rules applicable to non-residents are discussed in questions 15 and 16). However, the tax cost of the underlying assets of the company will not be reset to market value. Rather, the purchaser will inherit the existing tax values of assets from the vendor. In contrast, if a non-resident directly purchased the business assets of an Australian target company, the tax cost of the assets acquired would be equal to what has been paid for the business assets (ie, their fair market value).

Differences in the tax cost of assets acquired by the purchaser may pro-duce divergent tax outcomes on the subsequent disposal of the assets of the company. That is, a share acquisition (as compared to an asset acquisi-tion) may give rise to a greater exposure to Australian tax when the under-lying assets of the company are disposed of.

Australia’s tax consolidation regime is designed to ensure that there is little difference between purchasing the assets as opposed to the shares in a company. If an inbound investor establishes a new Australian acquisition company (or holding company) to acquire 100 per cent of the Australian target company, the two Australian companies may form a tax consoli-dated group (see questions 2 and 3). The advantage of forming a tax con-solidated group is that the tax cost of the assets of the target company will be reset with reference to the amount paid for the shares in the company. That is, there is an opportunity to spread or pushdown the market value of the shares acquired to the underlying assets of the company in proportion to their market values.

Stamp dutyAnother key difference between a share acquisition and an asset acquisi-tion is the rate of stamp duty imposed on each acquisition. Stamp duty is imposed by each of the Australian states and territories in respect of trans-fers or transactions involving the transfer of property.

The rate of stamp duty varies between the jurisdictions and in respect of the different types of transactions and property. Importantly, the resi-dence of the transacting parties is not the critical feature which gives rise to stamp duty. Rather, the essential connecting factors that give rise to a liability to stamp duty in any state or territory include: whether a document is executed within the jurisdiction, whether the transaction relates to prop-erty located within the jurisdiction, and whether the transaction relates to ‘any matters or things done or to be done’ within the jurisdiction.

The transfer of listed shares are exempted from duty in each jurisdic-tion, however, landholder duty may apply.

New South Wales currently imposes duty on transfers of shares in an unlisted company. This is scheduled to be repealed from 1 July 2016. The rate of duty imposed on the acquisition of shares in a company is consid-erably lower than that imposed in respect of the acquisition of business assets (especially real property).

For instance, New South Wales imposes duty at a rate of 0.6 per cent on the transfer of shares in an unlisted company, whereas asset trans-fers may be subject to duty at a rate between 1.5 per cent and 5.5 per cent (depending on the value of the assets acquired).

Although stamp duty bias points in favour of a share (rather than asset) acquisition, this is not always the case as a higher rate of duty may be charged on the transfer of shares in an unlisted company where the com-pany is a ‘landholder’ or ‘land-rich’ (that is holds interests in real estate assets over a certain threshold value) under relevant state and territory legislation.

2 Step-up in basis

In what circumstances does a purchaser get a step-up in basis in the business assets of the target company? Can goodwill and other intangibles be depreciated for tax purposes in the event of the purchase of those assets, and the purchase of stock in a company owning those assets?

A non-resident purchaser may be entitled to a step-up in basis in the busi-ness assets of the target company under the following circumstances:• if the non-resident purchases the business assets of the target com-

pany directly for fair market value; or• if the non-resident company structures the acquisition of the target

company through an Australian acquisition company and a tax con-solidated group is formed (see question 3).

Depreciation of goodwill and intangiblesGoodwill cannot be depreciated for tax purposes in Australia. However, certain specified intangible assets can be depreciated for tax purposes in Australia. These assets include, for example, mining rights, items of intel-lectual property (including patents, copyright and registered designs), in-house software, certain rights to use telecommunications cable systems and spectrum licences.


AUSTRALIA Henry Davis York


3 Domicile of acquisition company

Is it preferable for an acquisition to be executed by an acquisition company established in or out of your jurisdiction?

In order to take advantage of the step-up in the tax base under Australian tax consolidation rules, it is preferable for an acquisition to be executed by an acquisition company (or holding company) established in Australia. The key advantage of establishing a wholly owned holding company is that it enables the formation of a tax consolidated group.

It should be noted that a tax consolidated group may also be formed as a multiple entry consolidated (MEC) group. This may occur where a holding company is outside Australia and directly purchases multiple Australian subsidiaries. Those Australian subsidiaries may form an MEC group, which excludes the non-resident holding company.

4 Company mergers and share exchanges

Are company mergers or share exchanges common forms of acquisition?

Company mergers and share acquisitions are a relatively common form of acquisition in Australia, and may be undertaken with capital gains tax rollover relief in certain cases. ‘Scrip for scrip’ rollover relief is generally available where interests held in one entity are exchanged for replacement interests in another entity, typically as a result of a takeover offer or merger. Where rollover relief is elected, the capital gain that would otherwise have arisen on the disposal of the original shares is disregarded, and effectively deferred until the replacement shares are disposed of.

Importantly, scrip for scrip rollover is only available where certain conditions are satisfied. One important condition is that the exchange of interests must arise under a single arrangement that must result in an entity becoming the owner of 80 per cent or more of the specified interests in the target company.

5 Tax benefits in issuing stock

Is there a tax benefit to the acquirer in issuing stock as consideration rather than cash?

Generally, there is no benefit. However, there may be a benefit to the ven-dor in issuing stock as consideration rather than cash. As noted above, the vendor may be eligible for scrip for scrip rollover relief for capital gains tax purposes.

6 Transaction taxes

Are documentary taxes payable on the acquisition of stock or business assets and, if so, what are the rates and who is accountable? Are any other transaction taxes payable?

Stamp duty may be payable by the purchaser on the acquisition of unlisted shares in an Australian private company, depending on where the company is registered and on the acquisition of business assets. New South Wales imposes duty at ad valorem rates on transfers of shares in an unlisted company. The acquisition of shares is generally subject to duty at a rate of 0.6 per cent.

In contrast, the acquisition of business assets is generally subject to higher rates of duty than the acquisition of shares. These rates vary depend-ing on the location, type of asset and value of asset acquired. For example, in New South Wales, duty rates vary from 1.25 per cent to 5.5 per cent.

Australia imposes a goods and services tax (GST) on taxable supplies at the rate of 10 per cent. It is calculated on the value of the taxable supply which is ten–elevenths of the GST inclusive price received by the supplier as consideration for the supply. Generally, registered entities can claim a credit for GST paid on supplies. Therefore it is the end user who in an eco-nomic sense usually bears the tax. It is, however, the supplier who has the legal liability to pay the tax.

Acquisition of sharesThe acquisition of shares in an Australian company is a financial supply and input taxed for GST purposes. This means that no GST is charged on the purchase price, but the purchaser is not generally entitled to claim input tax credits in respect of the acquisition.

Acquisition of assetThe acquisition of business assets will be GST-free if the purchaser acquires the assets of the business as a ‘going concern’. Several conditions are required to be satisfied for a transfer of a business as a going concern. Where these conditions are satisfied, no GST will be charged on the pur-chase price but the purchaser may be entitled to claim input tax credits in respect of the acquisition.

7 Net operating losses, other tax attributes and insolvency proceedings

Are net operating losses, tax credits or other types of deferred tax asset subject to any limitations after a change of control of the target or in any other circumstances? If not, are there techniques for preserving them? Are acquisitions or reorganisations of bankrupt or insolvent companies subject to any special rules or tax regimes?

Companies must satisfy stringent rules in Australia in order to carry for-ward and utilise prior year losses.

Broadly, a company cannot deduct a tax loss unless it satisfies either the continuity of ownership test (COT) or alternatively the same business test (SBT). A modified version of the COT and SBT applies to a tax con-solidated group. Unless a company passes one of these tests, it cannot carry forward its tax losses for offset against future income.

The COT broadly requires that shares carrying more than 50 per cent of all voting, dividend and capital rights be beneficially owned by the same persons at all times from the start of the loss year until the end of the income year.

Prior year losses may be transferred into a tax consolidated group. The rate of utilisation of such losses is restricted by the approximate contribu-tion of the loss company to the consolidated group or the ‘available frac-tion’. The contribution of the loss company to the consolidated group will reflect the proportion that the market value of the respective loss company bears to the total market value of the consolidated group.

Becoming insolvent will not result in a company automatically los-ing any losses that have been accumulated unless the company is actually wound up and dissolved. Often, an insolvent company may be sold and as such the company may not satisfy the COT and may seek to apply the SBT requirements. Any business restructures by the new owners to improve profitability may result in a change of business that could disqualify the ability to carry forward the losses. As such, a restructure must be carefully considered if losses are to be maintained.

8 Interest relief

Does an acquisition company get interest relief for borrowings to acquire the target? Are there restrictions on deductibility where the lender is foreign, a related party, or both? Can withholding taxes on interest payments be easily avoided? Is debt pushdown easily achieved? In particular, are there capitalisation rules that prevent the pushdown of excessive debt?

Interest is generally deductible to the extent to which it is incurred in gain-ing or producing assessable income or carrying on business for the purpose of gaining or producing assessable income, and is not of a capital, private or domestic nature. This test generally depends on the existence of a nexus between the interest expense and the derivation of income from business activities where that income is itself subject to Australian income tax. In general, deductibility of interest is determined by examining the purpose of the borrowing and the use to which the borrowed funds are put.

An Australian acquisition company may be entitled to a tax deduction for interest incurred on borrowing to acquire a target company (subject to transfer pricing and thin capitalisation limits). Where the Australian hold-ing company and the target company form a tax consolidated group, the interest costs on borrowing to fund the acquisition of the target company will generally be deductible against the operating income of the consoli-dated group (note that intra-group dividends paid from a subsidiary com-pany to a head company are ignored for income tax purposes).




If the acquisition company does not form a consolidated group with the target company, interest may be deductible if the interest is incurred for the purpose of rendering the target company profitable and for the purpose of producing future assessable income in the form of dividends. However, the deductibility of interest will ultimately depend on the facts and circumstances of each case and the satisfaction of the general provi-sions for deductibility.

Restrictions on deductibilityThere are restrictions on the deductibility of interest under Australia’s thin capitalisation rules, regardless of whether the lender is foreign, a related party or both. Australia’s thin capitalisation rules generally limit the deductibility of interest where the debt-to-asset ratio of the company exceeds 60 per cent. Special rules and limits apply to financial entities and authorised deposit-taking institutions. If a group consolidates, the thin capitalisation rules apply to the head company of the group.

The thin capitalisation rules apply to inward and outward investing entities. An inward investing entity is an Australian entity that is foreign-controlled or a foreign entity that either invests directly in Australia or operates a business at or through an Australian permanent establishment or branch.

Withholding tax on interest paymentsWithholding tax on interest payments to non-residents (discussed further in question 13) will usually apply to interest payment made to non-resi-dents. The rate of interest withholding tax is 10 per cent (subject to reduc-tion under Australia’s double taxation agreements (DTAs)).

However, there is a domestic exemption from interest withholding tax in respect of interest on certain publicly offered debentures and debt inter-ests (see question 13) which are issued offshore.

In some cases, interest withholding tax is reduced to zero under Australia’s DTAs (for example, interest payments to US or UK financial institutions under Australia’s DTAs with the USA and UK).

Debt pushdownDebt pushdown is achievable on the acquisition of an Australian target company in circumstances outlined in question 3. That is, an Australian acquisition company is established and the acquisition company borrows to fund the 100 per cent acquisition of a target company (which forms a tax consolidated group).

There are also other debt pushdown strategies which can be imple-mented regardless of whether an Australian acquisition company is used. Strategies include borrowing to pay a dividend or return capital to the non-resident acquirer.

9 Protections for acquisitions

What forms of protection are generally sought for stock and business asset acquisitions? How are they documented? How are any payments made following a claim under a warranty or indemnity treated from a tax perspective? Are they subject to withholding taxes or taxable in the hands of the recipient?

Acquirers will usually seek tax warranties and indemnities on the acquisi-tion of shares in a target company. This could include, for example, war-ranties that the target company has complied with all tax laws and that adequate provision has been made for tax in the companies accounts.

Such warranties and indemnities are typically included in a share pur-chase agreement with the vendor or by a separate deed of tax covenant.

More limited tax warranties and indemnities are generally required in relation to business asset acquisitions.

If a matter gives rise to a claim against the seller under the tax warran-ties and indemnities, and if requested by the seller and agreed to by the acquirer, then any payment made for breach of warranties and indemnities may (depending on the contract) be treated as an equal reduction in the purchase price of each share. This has the consequences that the seller’s taxable gain, either as capital gain or income, is reduced, and the acquirer will not pay tax on the receipt of the payment under the warranty or indem-nity, although it will reduce its CGT cost base for the shares.

Post-acquisition planning

10 Restructuring

What post-acquisition restructuring, if any, is typically carried out and why?

Post-acquisition restructuring may involve debt refinancing. For example, a company may seek to refinance its existing debt and return any excess cash back to its shareholders via a dividend or capital return.

Assets may also be transferred between companies within a tax con-solidated group without triggering any income tax consequences (although stamp duty and GST will need to be considered).

11 Spin-offs

Can tax-neutral spin-offs of businesses be executed and, if so, can the net operating losses of the spun-off business be preserved? Is it possible to achieve a spin-off without triggering transfer taxes?

It may be possible to achieve a tax-neutral demerger of a business in Australia. A demerger essentially occurs where the head entity in a corpo-rate group undertakes a restructure in order to pass ownership of one or more of its subsidiary entities to shareholders of the head entity. In these circumstances, it may be possible to obtain CGT rollover relief where cer-tain conditions are satisfied. The CGT relief will apply at both the share-holder and entity levels.

Stamp duty and GST may still be payable on the demerger transaction, however limited exemptions are available.

Generally, losses remain within the corporate group and cannot be spun off into separate business structures.

12 Migration of residence

Is it possible to migrate the residence of the acquisition company or target company from your jurisdiction without tax consequences?

It is not generally possible to change the place of incorporation of a com-pany in Australia to outside Australia (though it may be possible to migrate incorporation into Australia). A company is considered to be a resident of Australia for taxation purposes if the company is incorporated in Australia, or alternatively, if a company carries on business in Australia and has its central management and control in Australia. Central management and control is generally the place where the directors of the company meet to conduct the business of the company.

If the company is incorporated outside Australia, it may be possible to change its central management and control such that the company is no longer considered to be an Australian company. However, tax con-sequences will arise on the change of residency. For instance, where an Australian resident company becomes a non-resident, there are deemed disposal and acquisition rules for CGT purposes. Where a company ceases to be a resident of Australia, there is a deemed disposal of all of the CGT assets owned by the company for market value, except a CGT asset that is ‘taxable Australian property’ (as these assets will continue to be caught by Australia’s CGT regime on disposal). It should be noted, however, that there is a specific exception for taxable property that is an ‘indirect Australian real property interest’ (for example shares in a landowning com-pany). In that case, a CGT liability is likely to arise in respect of the indirect Australian real property interest when the company ceases residency.

13 Interest and dividend payments

Are interest and dividend payments made out of your jurisdiction subject to withholding taxes and, if so, at what rates? Are there domestic exemptions from these withholdings or are they treaty-dependent?

Australia generally imposes withholding tax on interest, unfranked divi-dends and royalties paid to non-residents. Withholding tax operates as a final tax in the sense that interest, unfranked dividends and royalty pay-ments that are subject to withholding tax are not also subject to income tax in Australia.


AUSTRALIA Henry Davis York


There are domestic exemptions from withholding tax in certain cir-cumstances. The rate of withholding tax levied under domestic law is also subject to reduction under Australia’s DTAs.

Interest withholding taxUnder Australian domestic law, interest withholding tax is charged at a rate of 10 per cent on the gross amount of the interest payment (ie, without deducting expenses incurred in deriving that interest). Interest withhold-ing tax is generally payable on interest derived by a non-resident.

A number of interest payments are exempt from withholding tax under domestic law, including interest on certain public debentures and debt interests issued by companies. Broadly, the interest withholding tax exemption is conditional upon satisfaction of one of five ‘public offer’ tests. The public offer tests are designed to ensure that lenders on overseas capi-tal markets are made aware that debentures and debt interests are being offered for subscription by an Australian company.

The interest withholding tax rate of 10 per cent may be reduced under Australia’s DTAs. In particular, the Australian government has signed a number of new or amended DTAs with the United Kingdom, the United States, Finland, Norway, France, Japan, South Africa and New Zealand, as well as more recently with Switzerland. Under the new or amended DTAs, withholding tax does not apply to interest paid to financial institutions that are resident of the relevant treaty country and that are unrelated to and dealing wholly independently with the issuer.

Dividend withholding taxDividend withholding tax is imposed at a rate of 30 per cent on ‘unfranked’ dividends paid from Australian resident companies to non-residents. Unfranked dividends are essentially dividends paid out of untaxed profits, in other words, profits which have not suffered Australian tax at the corpo-rate tax rate of 30 per cent. Franked dividends (ie, dividends paid out of taxed profits) are not subject to withholding tax.

In addition, Australia has a withholding tax exemption for ‘conduit foreign income’. Conduit foreign income would cover for example a non-portfolio dividend received by an Australian company from a non-resident company.

Withholding tax is imposed on the gross amount of the unfranked dividend. The dividend withholding tax rate of 30 per cent is generally reduced to 15 per cent (and in some cases to nil) where dividends are paid to residents of countries with which Australia has a DTA. Dividend with-holding tax may be reduced to nil under Australia’s DTAs with the UK and USA if certain ownership requirements are satisfied (broadly, a US or UK company has owned shares representing 80 per cent or more of the voting power of the Australian dividend paying company for a period of 12 months) and the US or UK recipient is a company listed on a recognised stock exchange.

14 Tax-efficient extraction of profits

What other tax-efficient means are adopted for extracting profits from your jurisdiction?

Profits are generally extracted from Australia by way of a franked dividend. These dividends, as noted above, are not subject to withholding tax.

Under the CGT provisions, profits can be accumulated in an Australian company and the profits turned into a capital gain by way of a sale of shares in the company. Provided the shares are not indirect Australian real prop-erty interest, the sale would be tax-free in Australia.

Profits can also be extracted by way of royalties which are subject to 30 per cent withholding tax but significantly reduced in most of Australia’s tax treaties. For example, the royalty withholding tax rate is 5 per cent under Australia’s DTA with the USA.

Disposals (from the seller’s perspective)

15 Disposals

How are disposals most commonly carried out – a disposal of the business assets, the stock in the local company or stock in the foreign holding company?

Gains on disposals of business assets by an Australian resident company will generally be subject to tax.

A gain on the disposal of shares in an Australian resident company by a foreign resident may be subject to tax in Australia. However, the taxation consequences may vary depending on whether the shares are held on rev-enue account (ie, for short term profit) or capital account (ie, for long-term investment).

A non-resident is subject to tax on Australian sourced income. Therefore, if the non-resident holds shares on revenue account, Australian sourced revenue gains on disposal of the shares will be prima facie subject to Australian tax. However, a DTA may grant relief from Australian taxation if the non-resident does not have a permanent establishment in Australia (under the ‘business profits’ article of the relevant DTA) and the inter-est does not constitute ‘taxable Australian property’. Taxable Australian property essentially includes direct or indirect interests in Australian real property (including certain mining rights) and the business assets of an Australian permanent establishment of the non-resident.

Essentially, non-residents holding shares in Australian companies where the shares are not ‘taxable Australian property’ will no longer be subject to Australian CGT on the disposal of those shares, and if in a treaty country will be able to claim exemption even if on revenue account and otherwise Australian-sourced.

Update and trends

There have been significant reforms made to taxation laws to encourage foreign investment in Australia and to remove tax uncertainty facing investors.

In order to facilitate foreign investment in real estate, the government has previously introduced special rules for eligible domestic investment trusts that are widely held, referred to as managed investment trusts (MITs). MIT investors resident in qualifying foreign countries are subject to concessional withholding tax rates of 15 per cent (rather than 30 per cent) on ‘fund distributions’ (comprising rental income and net capital gain) made by MITs.

Further changes to the taxation of MITs, including the method of taxation applicable to qualifying MITs, have been proposed to address the complex rules that currently apply to tax trusts. an exposure draft of the new rules has recently been released for comment by industry. The new rules are intended to apply from 1 July 2016, with an earlier elective date of 1 July 2015.

Following extensive industry consultation and review, Australia has also introduced an investment manager regime (IMR), which took effect from 1 July 2015, with an option to elect retrospective application from 1 July 2011.

The main purpose of the IMR is to incentivise foreign funds to invest into Australian markets and to engage Australian fund managers and intermediaries by providing relief from Australian tax with respect to most investments in Australia. The IMR has been developed following extensive consultation with industry and is based broadly on the UK investment manager exemption model.

The scope of the tax reforms show the commitment of the Australian government towards creating greater tax certainty and attracting foreign investment into Australia with a view to increasing the size and strength of the asset management industry.




16 Disposals of stock

Where the disposal is of stock in the local company by a non-resident company, will gains on disposal be exempt from tax? Are there special rules dealing with the disposal of stock in real property, energy and natural resource companies?

In certain limited circumstances, capital gains on the disposal of shares in an Australian company that holds real property will be exempt from tax in Australia. A capital gain on the disposal of shares in an Australian company that holds real property will be exempt from tax in Australia where the non-resident company holds an interest in the Australian company that is less than 10 per cent, or the market value of the Australian company’s non-real property assets exceed the market value of its real property assets.

As discussed in question 15, a non-resident (other than an entity that holds stock on revenue account) will no longer be subject to tax on disposal of shares in an Australian company unless the shares are taxable Australian property. These may include shares in a company that holds land or mining rights (specially mining, quarrying or prospecting rights where the miner-als, petroleum or quarry materials are situated in Australia).

17 Avoiding and deferring tax

If a gain is taxable on the disposal either of the shares in the local company or of the business assets by the local company, are there any methods for deferring or avoiding the tax?

Capital gains tax rollover relief is available in certain circumstances for the transfer of CGT assets within a wholly owned group provided at least one of the companies in the group is a foreign resident. CGT rollover allows the vendor to disregard any capital gain arising on the disposal of the shares where the requisite conditions for rollover are satisfied.

Under Australia’s CGT rules for foreign residents, rollover relief will be available in respect of ‘taxable Australian property’. Accordingly, a non-resident may disregard a capital gain on the disposal of shares in an Australian company which holds land or mining rights in Australia where the shares are acquired by a member of the same wholly owned company group.

Greg Reinhardt [email protected] Seema Mishra [email protected]

44 Martin PlaceSydney NSW 2000Australia

Tel: +61 2 9947 6000Fax: +61 2 9947 6999www.hdy.com.au


BRAZIL Rothmann, Sperling, Padovan, Duarte Advogados


BrazilMarcio Sperling and Paulo César Teixeira Duarte FilhoRothmann, Sperling, Padovan, Duarte Advogados




If shares are acquired by an entity domiciled in Brazil, it will be possible for it to register an amortisable goodwill amount, pro-vided that some requirements are met. In this respect, see questions 2 and 3. Transactions between the Brazilian target company and a new, related foreign shareholder will be subject to transfer pricing control.

If otherwise the foreign person decides to acquire the assets and liabil-ities of a target company instead of acquiring its shares, through a company (branch or subsidiary) in Brazil, some transactional taxes could apply in addition to the corporate taxes on capital gains or profits. Corporate taxa-tion will depend on the assets being transacted, as immoveable property, merchandise, fixed assets, etc.

Accordingly, social contributions on gross revenues (PIS/COFINS) will be charged on income arising from such sale (except for fixed assets, which are exempt). A combined rate of 9.65 per cent on gross amounts applies in the case the acquirer is subject to the ‘non-cumulative’ regime, which establishes higher rates and the possibility to register credits to be offset in subsequent transactions. A combined 3.65 per cent rate, on the other hand, is applicable under the ‘cumulative’ system, which does not allow the registration of credits.

A federal VAT (IPI), with rates that vary according to the product’s essentiality and a state VAT (ICMS), usually charged at an 18 per cent rate, will also levy. In addition, sale of real estate, if any, is subject to a municipal tax (ITBI), which levies at variable rates – in São Paulo, for instance, the usual ITBI rate is 3 per cent. Finally, the amounts received as consideration for the sale of assets will be subject to corporate income tax (IRPJ) and a social contribution on net profits (CSLL), at a combined rate of approxi-mately 34 per cent.

The liability for all the taxes mentioned above is attributed to the Brazilian seller. Even so, the burden corresponding to them is, in practice, included in the sale price, so that the acquirer will be the party effectively incurring in the financial burden of these taxes.

It is important to mention that, as a rule, PIS/COFINS (when under the ‘non-cumulative’ regime) and IPI/ICMS are recoverable to Brazilian enti-ties under a VAT-like system.

Note that, if there is the full acquisition of a commercial establish-ment, ICMS and IPI will not be triggered.

With respect to existing liabilities, the party acquiring the assets is fully liable to the tax debts if the previous owner ends his or her activities (eg, full acquisition of the commercial establishment). If such previous owner continues to explore economic activities or interrupts them for no more than six months, then the acquirer will have a subsidiary liability to the debts of the establishment existing until the date of acquisition (ie, pri-mary liability remains with the seller).

2 Step-up in basis


The contribution made for purposes of acquiring the investment can be made at book or market value. In this second case, a step-up of the busi-ness assets will be possible. Nonetheless, the amortisation of this value is not immediate, but rather depends on the subsequent reorganisation – merger, consolidation, spin-off – that is it depends on the realisation of the investment. The calculation of the fair value of the assets, including for purposes of costs amortisation, shall be based on a report elaborated by an independent auditor. We note that, if between the investment acquisition and the future merger, for instance, there is an increase in the market value of the assets, this difference will not be amortisable.

Upon acquisition of shares, the acquirer will book the price paid to the selling party for the transaction considering the following procedure:• registration of the acquisition costs;• registration of the fair value of assets transferred (amortisable); and• registration of the goodwill, which is the residual value of the invest-

ment after deduction of the two previous values and that may be amortised in a term of a minimum of 60 months.

The possibility to amortise the goodwill is only applicable to transactions between unrelated parties. Note, also, that it will only be possible to amor-tise the goodwill in the event the target company is merged or spun-off, or subject to consolidation, and after any of these situations.

In principle, it is possible to amortise intangibles, provided that these have a direct connection with the main activities of the company and have a limited legal or contractual useful term.



In the case a company domiciled in Brazil executes the acquisition, the main tax consequence is that this company could register an amortisable goodwill value, provided that the transaction occurs between unrelated parties. This goodwill may be amortised within at least 60 months, after the liquidation of the investment (eg, merger), as previously explained. A foreign acquiring entity shall not benefit from the goodwill amortisation in Brazil; moreover, future transactions carried out between the companies will be subject to transfer pricing control.

Thus, from a mere tax perspective, it may be preferable to execute the acquisition by a Brazilian entity.



Company mergers are widely exploited in Brazil due to tax reasons, such as goodwill amortisation, use of tax losses, transference of tax credits, etc. In the past, there was no concrete rule limiting transactions carried out between unrelated parties, so that numerous economic groups performed


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corporate restructurings with the sole intention of generating amortis-able goodwill or to use a deficit company with lots of tax losses to dimin-ish the taxable basis of a profitable group company. Such structures were severely challenged by tax authorities based on anti-avoidance principles. Currently, as mentioned, the possibility of amortising goodwill is limited to unrelated parties and substance-over-form analysis, but it is still a rel-evant tax advantage in the mergers and acquisitions market.

Note that the extinction of a company by virtue of a merger makes it impossible to use its accrued tax losses.

Share exchanges are also used for corporate restructuring purposes. There are some relevant precedents in the past few years in which this alternative was adopted, for example, the consolidation between Itaú and Unibanco and in the same way, the consolidation between TAM and LAN airline companies. This may be an important preliminary step in the convergence of the parties and may facilitate future corporate changes. It could also be possible to use this alternative for the purposes of establish-ing a joint venture.

The main concern regarding share exchange transactions is to define whether they could trigger capital gains taxation. In principle, the mere exchange of goods, regardless of their cost, cannot be deemed as a transac-tion giving rise to taxable income. Moreover, even where it is deemed that there was a capital gain, if the acquisition is made through the exchange market, an exemption applies – this was the decision adopted by judicial courts in the LAM–TAN case. There are some relevant precedents in this regard rendered by Brazilian courts, both administrative and judicial.

Irrespective of the above, tax authorities usually challenge this struc-ture based on two arguments:• in many cases, taxpayers opt to proceed with it with the sole purpose of

avoiding taxation, without a proper business purpose, creating a com-plex restructuring with apparent unnecessary steps; and

• the accounting value of the shares exchanged, if different, constitutes taxable capital gain.

Thus, in the event the parties intend to perform the business acquisition by means of a share exchange, a risk assessment is mandatory, based on the steps to be carried out for the corporate restructuring.



The issuance of stock rather than cash could be treated as a share exchange, in the terms explained above (see question 4). Accordingly, there are grounds to support the idea that no capital gain would arise in this case, and therefore no income tax would be due. There are precedents favourable to taxpayers in this respect. Moreover, tax legislation provides for an exemption for capital gains arising from transactions carried out in the exchange market.

That said, the risks mentioned previously should be taken into consid-eration, mostly the risks of challenging by tax authorities, under the argu-ment of an abusive tax planning scheme or that the exchange of stock, in fact, constitutes taxable income.

6 Transaction taxes


There are no documentary taxes payable on the acquisition of stock or business assets. As previously explained, the acquisition of shares gener-ates taxable capital gains only. If a sale of business assets is performed, transactional taxes can be charged – PIS/COFINS/ICMS/IPI, in the condi-tions explained – see question 1.

Irrespective of the above, one should not disregard bureaucratic costs related to these kinds of transactions (several registrations required, update of data before various administrative bodies, etc).



Net operating loss (NOL) may be carried forward indefinitely, and may be used to offset up to 30 per cent of the taxable profit of a given fiscal period. In other words, if the taxpayer earns profits, at least 70 per cent of such profits shall be taxed. This threshold has been already challenged in courts, but the Brazilian Supreme Court confirmed its constitutionality. As men-tioned, IRPJ and CSLL are charged on taxable profits at a combined rate of nearly 34 per cent. No carry-back is allowed.

The legislation on this matter is not assertive on how to treat the accrued tax losses upon extinction of the legal entity (eg, bankruptcy fol-lowed by liquidation). There were several decisions rendered by admin-istrative courts accepting the non-application of the threshold upon liquidation of the company. However, there are recent decisions in which it was understood that the possibility to offset 30 per cent of the profits for the period is actually a tax benefit – therefore, this threshold should also apply even upon extinction of the company. In other words: if the company is closed, it is possible that accrued tax losses become irrecoverable.

Note that bankrupted companies are treated as regular taxpayers for transactions performed in the period previous to their liquidation.

Other tax credits such as VAT credits (IPI/ICMS and, as the case may be, PIS/COFINS) may be recovered by means of the sale of the commer-cial establishment that generated such credits, provided that the acquirer keeps the operational activities of this establishment. As a rule, the mere transfer of the credits or sale to third parties is not possible.

8 Interest relief


If the foreign entity lends money to the Brazilian one, interest arising from this agreement will be taxed at source at a general 15 per cent rate. In Brazil there is no special rule exonerating borrowings from interest for the pur-pose of acquiring a company. Interest (partial or total) relief will depend on the existence of double tax conventions or reciprocity recognition between Brazil and the relevant country (for example, in the case the lender is a bank owned by the government of the other country).

Some conventions also provide for a ‘matching credit’ (ie, it is deemed that the withholding tax in Brazil was charged, for instance, at a 20 per cent or 25 per cent rate, instead of 15 per cent).

Interest payments are usually deductible for corporate tax – IRPJ and CSLL – purposes. However, there are some restrictions to deductibility in the case the lender is a related party, which affects potentially existing debt pushdown strategies. The location of the lender is also relevant to define if any limits will apply (eg, loans received from a tax haven, as explained below).




The first restriction refers to transfer pricing – specific limits shall be met in the case the lender is a foreign related party, as set forth by Law No. 9,430/96. These limits apply also if the foreign entity is not a related company, but is located in a tax haven or subject to a privileged tax regime (as per an official list published by tax authorities in Normative Ruling No. 1,037/10). The calculation is, in general, based on the LIBOR rate for six-month US$-deposits added to a spread established by the Ministry of Treasury – currently, 3.5 per cent. However, this calculation varies on a case-by-case basis.

The second restriction refers to thin capitalisation rules. Accordingly, in the case of indebtedness with a related legal entity resident abroad not holding shares of the legal entity resident in Brazil, such indebtedness shall not exceed twice the value of the net equity of the Brazilian entity. If the foreign lender participates in the capital of the Brazilian borrower, the indebtedness shall not exceed twice the value of the participation. Finally, if the foreign entity is located in a tax haven or subject to a privileged tax regime, the indebtedness of the Brazilian company shall not exceed 30 per cent of its net equity.

Note that tax havens are defined as countries providing for a maximum 20 per cent income tax rate. In the case of countries aligned with interna-tional tax transparency standards, this rate is reduced to 17 per cent. Other situations in which countries are deemed as tax havens are: granting of tax incentives to foreign companies without requiring the development of sub-stantial economic activities; and non-disclosure of information regarding the partners of the company therein located, the activities performed by it or the owners of goods or rights.

It is possible that application of transfer pricing and thin capitalisa-tion rules results in different deductible amounts of interest. Even though there is no precise definition on which value should prevail, it is commonly understood that taxpayers should adopt the lower deductible amount, so as to avoid any risks of challenging by tax authorities.



As a rule, the seller guarantees that no further tax liabilities exist in connec-tion with the business to be acquired. In order to do so, it is common in the Brazilian market that the parties set an indemnity in favour of the acquirer.

In the event the Brazilian seller pays an indemnity to the foreign acquirer by virtue of a new tax liability, regular income tax will be levied at source, at a general 15 per cent rate. No exemption rule applies in this case.


10 Restructuring


If the acquisition is carried out between unrelated parties, the acquirer may register a goodwill amount, as explained previously. It is possible to merge the acquired entity or liquidate the investment by means of other restructuring means in order to amortise the goodwill value in a minimum 60-month term.

Since there is a legal provision prohibiting the offsetting by the acquir-ing company of tax losses of the target one, it is usual in Brazil to execute a reverse merger, where the profitable company is merged into the one which has accrued tax losses. The viability of a reverse merger needs to be analysed on a case-by-case basis, as tax authorities may challenge it based on anti-avoidance rules if the transaction does not have a proper business purpose. The verification of business purposes of a reverse merger could be evaluated on the following factors:• the successor transfer its head offices to the location of the merged

company;• the corporate name is changed to the name of the merged company;

and• the managers of the successor company step down from their posi-

tions and the managers of the merged company become the new ones.

11 Spin-offs


Upon a spin-off of a company, it is not possible to merely segregate and preserve the existing NOL in one single company. This could be considered as an inappropriate tax planning structure, subject to the risk of challeng-ing by tax authorities.

Note that no transfer taxes are levied upon a spin-off.



In Brazil, there are no rules providing for migration of companies. In gen-eral, companies are liquidated or incorporated. Please note that no exit taxes exist in Brazil upon migration of businesses of a company to another country.

Update and trends

The Brazilian federal government has recently changed the definition of ‘tax haven’, as per Ordinance No. 488, rendered by the Minister for Finance in November 2014. Prior to this rule, a country was deemed as a tax haven, among other situations, if local taxation of income did not exceed a 20 per cent rate. Ordinance No. 488/14 reduced this rate to 17 per cent, but only to those countries that are aligned with internationally accepted tax transparency standards.

According to Normative Ruling No. 1,530/14, countries that have concluded or already signed treaties with Brazil containing a clause for exchange of information are deemed as aligned with the international standards mentioned above. The same goes for jurisdictions committed to criteria defined in international forums aimed at addressing tax evasion and in which Brazil participates, such as the Global Forum on Transparency and Exchange of Information for Tax Purposes of the OECD.

Despite that, Normative Ruling No. 1,037/10 already lists the jurisdictions which are deemed as tax havens by Brazilian authorities,

as well as the current privileged tax regimes. If any of these countries wishes to be excluded from the list, a formal governmental request to Brazilian authorities is required.

Anther important innovation to Brazilian legislation was the enacting of Law No. 12,973/14, which substantially modified the corporate taxation system. A major example is the determination and amortisation of goodwill. Currently, Brazilian rules are aligned with international standards (IFRS). Before this new Law, the entire amount corresponding to the difference between the price of acquisition and the net equity of the target company could be amortised as goodwill. This has even led to numerous tax planning structures and to discussions in judicial and administrative courts. With the new rules, restrictions to the determination of goodwill were introduced, as explained in particular in question 2.


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Dividend payments are not subject to withholding taxes. Even so, note that they are not deductible at corporate level (IRPJ/CSLL).

On the other hand, interest payments are subject to withholding income tax at a rate of 15 per cent, the deduction of these values being possible (please refer to deductibility limitations as explained in question 8). Brazilian double tax conventions allow the country to maintain with-holding taxation, and the resident country shall grant a credit against the 15 per cent withholding tax.

In some cases, the double tax convention establishes a lower tax rate for certain kinds of loans and matching credit provisions of, for example, 20 per cent or 25 per cent for interest paid out of Brazil. This is the case, for instance, for treaties with Austria, France, Italy, Japan and others. Thus, even though the effective withholding rate is 15 per cent, a higher credit may be considered by the foreign lender against its own corporate taxes on the interest received.



Besides the most common investment alternatives (and corresponding receipt of dividends, interest and royalties), Brazilian legislation provides for a remuneration calculated on net equity accounts – juros sobre o capital próprio (interests on equity (IoE)). IoE are allocated profits and, at the same time, deducted from the legal entity’s net profit, which decreases consider-ably the levy on the corporation’s income. Those are calculated over the net equity, both flat and floating, using the long-term interest rate on a daily pro rata basis. Only those entities that calculate their corporate tax through the ‘actual profits’ method can distribute profits as IoE. Applicable limits are:• 50 per cent of the accounting profit before the payment of IoE and cor-

porate income tax; or• 50 per cent of the annual budget surplus before the payment of IoE and

corporate income tax.

IoE are taxed at source at a 15 per cent rate.It is worth mentioning that during 2015 several tax measures were

enacted by the Brazilian federal government in order to overcome the eco-nomic crisis which currently affects the country. One of the measures that is currently being studied is the modification, if not the extinction, of the full deductibility of the IoE.


15 Disposals


All the forms mentioned above are commonly carried out in Brazil. It is possible to mention, among others, a dropdown of assets or the transfer of the full commercial establishment.

The most appropriate way to undertake a disposal of a business depends on the intended goals for the parties after the restructuring. For instance, it may be a goal to unite the investments in the same economic group – in this case, a sale of shares could be more effective.

The first type of acquisition (ie, shares) will generate capital gains for the selling person:• in the case the seller is a company and domiciled in Brazil, the capital

gain shall be included in the calculation basis of the corporate taxes – corporate income tax (IRPJ) and social contribution on net profits (CSLL); and

• in the case the seller is an individual resident in Brazil, the capital gains will be subject to a definitive flat income tax of 15 per cent.

Capital gains correspond to the difference arising from the price paid and accounting value of the stock.

The IRPJ is charged at a 15 per cent rate on the profitable taxes for the period. An additional 10 per cent is charged on profits higher than 240,000 reais per year. Finally, the CSLL rate is 9 per cent. The calculation basis for IRPJ and CSLL is very similar, so that it is possible to affirm that profits are taxed at an aggregate rate of approximately 34 per cent.

Should the seller be a person, individual or legal entity, resident abroad, the capital gain will be subject to a withholding tax of 15 per cent. The party responsible for withholding the tax is the representative of the acquirer. Brazil has signed double tax treaties with more than 30 countries. Article 13 of all double tax treaties signed by Brazil allows the source taxa-tion over capital gains arisen from the selling of shares in a company domi-ciled in Brazil. The contracting country where the beneficiary of the capital gains is resident will apply the methods to avoid double taxation, which is generally the credit method.

The sale of shares among related parties, once the acquirer or the seller is domiciled abroad, is in principle subject to transfer pricing rules. However, based on practicability reasons, the application of such rules is almost impossible and, for the same reasons, the tax authorities usually do not audit it.

On the other hand, as mentioned in question 1, the sale of assets is subject to transactional taxes – PIS and COFINS contributions (but for the part of the sale corresponding to fixed assets), ICMS and IPI. The last two taxes are not charged in the case there is the full transfer of the commercial establishment. This option depends on the analysis of many factors, such

Marcio Sperling [email protected] Paulo César Teixeira Duarte Filho [email protected]

Av Nove de Julho, 4.939, 6th floorJardim PaulistaSão Paulo 01407-200Brazil

Tel: +55 11 3704 0788Fax: +55 11 3704 0777www.rothmann.com.br




as the assumption of potentially existing tax liabilities, labour matters, assumption of civil and commercial rights and obligations, among others.



Even though the seller (and maybe the acquirer of the shares) is a non-resident company, the gains arising from the sale of shares in a Brazilian company will be subject to capital gains taxation in Brazil, due to the genu-ine link to the assets that generate the income. Capital gains earned by a non-resident are subject to a 15 per cent tax.



There are no methods in this regard. Nonetheless, there is a common strat-egy adopted by corporate groups in order to acquire participation in a com-pany with a deferral of the capital gains taxation, by using an investment fund which concentrates its investing activities in stock and similar items. This is because, if the fund is the party that holds the participation in the target company and is the one to sell the quotas related to this investment, the capital gains arising from this transaction are not immediately subject to tax. Accordingly, taxation will be triggered only when the quotas in the fund are redeemed, sold or amortised.


CMS, China CHINA


ChinaUlrike Glueck and Gilbert ShenCMS, China




PRC tax law distinguishes between acquisition of shares and acquisition of business assets and liabilities. Under both scenarios, as a general rule, gains shall be recognised and taxed upon acquisition. Generally speaking, for the seller, a share deal is often more tax-efficient than an asset deal.

In the case of acquisition of shares in a company, the corporate income tax (CIT) issues of the target company will remain intact. The capital gains or losses realised by the share transferor shall be calculated based on the difference between the share transfer price (which is normally determined based on the fair market value of the shares to be transferred) and the original investment costs. If the share transferor is an individual tax resident, 20 per cent individual income tax (IIT) on the gains (if any) shall be paid by the share transferor. If the share transferor is a Chinese tax-resident enterprise (TRE), the gains or losses shall be included into its overall taxable income subject to 25 per cent CIT. If the share transferor is a non-PRC-resident enterprise (non-TRE), 10 per cent withholding tax on the gains (if any) shall be paid in China. If the share transferor is a foreign individual or entity, PRC income tax may be waived if the applicable dou-ble taxation treaty stipulates that China does not have the taxation right over the gains.

In the case of acquisition of business assets and liabilities, the tar-get company shall recognise its gains/losses derived from the asset deal. Such gains and losses shall be included in the overall taxable income of the target company subject to 25 per cent CIT. After the asset deal, if the shareholders of the target company liquidate the target company, the shareholders shall recognise their gains from disposing the investment. Such gains are subject to 20 per cent IIT (in case of individual sharehold-ers) or 25 per cent CIT (if the shareholder is a TRE) or 10 per cent withhold-ing tax (if the shareholder is a non-TRE). PRC income tax on the capital gains of the foreign shareholders may be waived if the applicable double taxation treaty so provides. Upon liquidation, the retained earnings of the target company are deemed as distributed as dividends. Consequently, its shareholders are also requested to pay income tax for the ‘dividends’. In addition to the above income tax implications, an asset deal may also trigger various transaction taxes when the assets are transferred from the target company to the acquisition company.

Under certain circumstances, if the relevant conditions are met so that special tax rules apply, it is possible to conduct a share deal or asset deal in a tax-neutral manner without triggering income tax. The relevant conditions for qualifying for special tax rules are elaborated in detail in question 4.

2 Step-up in basis


In the case of acquisition of shares in a target company, the tax basis of the business assets of the target company will not be affected by the acquisi-tion. That is, no step-up in basis will occur. Goodwill of a share acquisition, if any, is included in the total acquisition cost (if the share transfer price is higher than the fair market value of the shares under transfer). The acquisi-tion costs of the shares cannot be amortised or deducted for CIT purposes until the acquired shares are further disposed of.

In the case of acquisition of business assets and liabilities in a target company, unless the special tax rules apply, the tax basis of the acquired assets is stepped up to the then fair market value. If the total purchase price is larger than the fair market value of the acquired assets and liabilities (on a stand-alone basis), the surplus shall be recognised as goodwill. Such goodwill cannot be amortised for tax purposes and can only be deducted when the acquired business is disposed of.



In order to use a local acquisition company to execute an acquisition, the acquisition company can be established in the form of a ‘holding company’ subject to certain requirements (among others, for foreign-invested hold-ing companies, a registered capital of US$30 million is required, which can only be used for new investment). A foreign-invested enterprise (other than a holding company), due to changes in the foreign exchange regulations, since June 2015 can also use its registered capital to make acquisitions.

In the case of acquisition of shares in a target company, whether it is preferable to establish an acquisition company in China depends on the following factors:• under PRC Company Law, dividends can be paid out only after a com-

pany has set aside 10 per cent of its after-tax profits as statutory reserve fund. As such, where a Chinese acquisition company is used to hold shares in the target company, the problem of dual reserve fund alloca-tion will occur, which will reduce the dividend distribution capacity to the ultimate foreign shareholder;

• when the target company distributes dividends to the Chinese acquisi-tion company, such dividend income of the Chinese acquisition com-pany is exempted from CIT, which means dividend distribution to the ultimate foreign shareholder via a Chinese acquisition company has no tax disadvantages. If reinvestment of the dividends from the target company is intended, having a Chinese acquisition company has its tax advantages, because dividends declared to a foreign company will immediately trigger withholding tax even if such dividends are rein-vested in China; and

• resale of the acquired shares in the target company by a Chinese acquisition company is generally not tax-efficient, because the capi-tal gains will be included in the overall taxable income of the Chinese


CHINA CMS, China


acquisition company that is subject to CIT at 25 per cent and when the gains are distributed as dividends there will be withholding tax. However, the ultimate foreign shareholder may choose to sell its shares in the Chinese acquisition company to avoid the 25 per cent CIT on the gains. China-sourced capital gains realised by a foreign company are only subject to 10 per cent withholding tax. Under some tax trea-ties concluded by China with other tax jurisdictions (eg, Switzerland), China may not have the taxation right over such capital gains from the share transfer, especially when the share transferor holds less than 25 per cent shares in the relevant Chinese company.



Company mergers and share exchange are often used for intra-group restructurings. In case of transactions with non-affiliated parties, if the seller remains involved in the business or a combination of businesses is intended, such forms of acquisition are also used in practice.

A merger has the tax benefits of not triggering transactional taxes (VAT, business tax, etc). If certain requirements are met for special tax rules, the transfer of assets during a merger is not taxable and the previous losses of the disappearing company can be utilised by the surviving com-pany with certain limitations. These conditions are:• the merger must have a reasonable commercial purpose and not be

conducted mainly to reduce, avoid or postpone tax payments;• the assets that are transferred during the merger must reach 50 per

cent of the assets owned by the enterprise being merged;• the assets involved in the merger must be used to continue the origi-

nal actual business activities within 12 months after completion of the merger;

• the consideration received by the original shareholder of the enter-prise being merged must mainly consist of payment in the form of shares and the portion of such share payment must exceed 85 per cent of the total consideration. In the case of a merger between two enter-prises under common control, no consideration is needed; and

• the original shareholder receiving payment in the form of shares (in the surviving enterprise) during the merger must not transfer such shares received within 12 months after completion of the merger.

Share exchange, ie, acquisition of shares in the target company in exchange for new shares in the buyer, is a precondition for the share acquisition to be non-taxable under special tax rules. The following conditions shall be met in order to make the share acquisition non-taxable, ie, the CIT pay-able by the share transferor is exempted by rolling the tax basis to the share transferee:• the share transfer has business reasons and is not conducted mainly

for the purpose of reducing, avoiding or postponing tax payments;• no less than 50 per cent of the shares in the target company are

transferred;• the target company will continue its original substantial business oper-

ation within 12 months after the share transfer;• the buyer issues new shares to the seller as the main consideration

(above 85 per cent of the share price) for acquiring the shares in the target company;

• the main original shareholder of the target company will not transfer the shares received from the buyer (as a consideration for transfer-ring shares in the target company) within 12 months after the share transfer;

• if a non-tax resident enterprise (non-TRE) transfers its shares in a TRE to another non-TRE:• the non-TRE transferee must be 100 per cent directly owned by

the non-TRE transferor;• the share transfer must not change the withholding tax burden

when the shares are later resold; and• the non-TRE transferor must commit not to transfer its shares in

the non-TRE transferee within three years after the transaction; and

• if a non-TRE transfers its shares in a TRE to another TRE, the trans-feree TRE must be 100 per cent directly owned by the non-TRE.



Among other requirements, in order for the acquisition to be qualified for special tax rules where the target company and its shareholder do not need to pay income tax, the shareholder of the target company must receive new shares in the acquirer as the main consideration (above 85 per cent). That is, issuing new shares by the acquirer may avoid income tax for the target company and its shareholder. However, the acquirers will generally not have tax benefits from the special tax rules with the exception of a qualified merger where utilisation of pre-merger losses of the merged company may be possible under special tax rules.

6 Transaction taxes


In the case of acquisition of shares, each party (buyer and seller) shall pay stamp duty at 0.05 per cent of the share price. There are no other transac-tional taxes for a share transfer.

In the case of acquisition by merger, no transactional taxes will be trig-gered when the assets are transferred from the merged company to the surviving company. The input VAT balance of the merged company can be further credited in the surviving company.

In the case of acquisition of business assets, various transactional taxes may occur. For transfer of tangible moveable assets and some intan-gible assets, VAT (standard rate is 17 per cent for tangible moveable assets and 6 per cent for intangible assets such as technical know-how, patents, copyrights, etc) is payable by the target company. Business tax (BT) at 5 per cent is payable by the seller for transfer of other intangible assets and immoveable properties. VAT is generally neutral as the buyer can claim a credit. However, BT costs are not recoverable due to the lack of an input-output credit system. Where VAT or BT is paid, various surcharges shall also be paid at around 10 per cent of the VAT or BT amount. However, if during the asset deal, the relevant liabilities, receivables and employees connected with the acquired business are also transferred, the asset deal is not subject to VAT or BT. For transfer of land-use rights and buildings, the buyer shall pay deed tax at 3 to 5 per cent and the seller shall pay land appre-ciation tax at progressive rates from 30 to 60 per cent of the ‘appreciated amount’ of such properties. Stamp duty shall also be paid by each party for transfer of properties at 0.03 per cent or 0.05 per cent as the case may be.



The target’s net operating losses, tax credits or other types of deferred tax assets are not affected by a change of control of the target. In the event of a merger, the tax losses of absorbed companies can be utilised within an annual limitation under the circumstance that the special tax rules described in question 4 apply. There are no special rules or tax regime for acquisitions or reorganisations of bankrupt or insolvent companies.


CMS, China CHINA


8 Interest relief


An acquisition company gets interest tax relief for borrowings to acquire the target, that is the relevant interest can generally be deducted before tax. However, if the acquisition company’s registered capital has not been fully contributed, deduction of interest for borrowings will be restricted. In addition, any interest accrued due to the agreed interest rate in excess of the comparable rate of bank loans of the same kind cannot be deducted before tax. There are no specific restrictions where the lender is foreign.

However, if the lender is a related party, the general transfer pricing rule of arm’s-length principle shall be followed. The portion of the inter-est paid to a related party exceeding the arm’s-length principle is not tax-deductible. Further, deduction of interest paid to related parties are restricted by thin capitalisation rules. In case the loans are directly or indi-rectly provided or guaranteed by related parties (‘loans from affiliates’), the following thin capitalisation rule shall apply:• If loans from affiliates exceed a certain ratio of the equity investment

in the borrower, the interest expenses corresponding to the exceeding amount of debts are generally not deductible before tax. The standard affiliated loan-equity ratio is 2:1 and 5:1 respectively for non-financial institutions and financial institutions.

• There is an exception to the above thin capitalisation rule: although the standard ratio is exceeded, if the borrower can prove to the tax authority that the interest rate is based on an arm’s-length principle, the interest expenses corresponding to the excessive loans from affili-ates may still be deductible. However, the documentation task in this respect is quite burdensome.

Payment of interest abroad is subject to PRC withholding tax at 10 per cent and business tax at 5 per cent plus surcharges of around 10 per cent of the business tax. Such withholding taxes on interest payments cannot be easily avoided. However, if the applicable double taxation treaty provides a lower withholding tax rate, the lower treaty rate shall prevail if the foreign lender qualifies as ‘beneficial owner’ as mentioned in the treaty. The PRC domes-tic tax regulations define the ‘beneficial owner’ status as follows:• the applicant owns or controls the income or the rights or property

from which the income is derived;• the applicant carries out substantive business activities; and• an agent or a conduit company, incorporated for the purpose of avoid-

ing or reducing taxation, or transferring or accumulating profit with-out any substantive business activities (such as manufacturing, trading and management), is not a ‘beneficial owner’.



Protections in the forms of representations and warranties are commonly used for stock and business asset acquisitions. They are normally docu-mented in the relevant purchase contract. Also, often for the payment of the purchase price, an escrow account arrangement is used. For an escrow account arrangement, a separate agreement must be concluded between the buyer, the seller and the escrow bank. Payments made following a claim under a warranty or indemnity are taxable in the hands of the recipi-ent, if the recipient is a Chinese tax resident. If the payments are made to a foreign tax resident, the PRC tax law does not provide clear rules on whether PRC withholding tax shall apply. In practice, it is very likely that withholding tax is levied.


10 Restructuring


There are no typical post-acquisition restructurings. Whether any post-acquisition restructuring will take place depends on the needs of the new shareholder which may not be driven by tax reasons, although a restructur-ing inevitably will have certain tax consequences.

11 Spin-offs


It is possible to execute tax-neutral spin-offs with the net operating losses of the spun-off business being preserved (ie, special tax rules apply), pro-vided that all the required conditions are met. These conditions include:• the spin-off has business reasons and is not conducted mainly for the

purpose of reducing, avoiding or postponing tax payments;• the assets involved in the restructuring will be used to continue its

original substantial business operation within 12 months after the spin-off; and

• the spin-off is basically a non-cash transaction (ie, above 85 per cent of the consideration in the form of shares).



Under PRC Corporate Income Tax Law, PRC tax-resident enterprises include companies incorporated in China (Chinese companies) and for-eign companies with their effective management institutions located in China.

A Chinese company remains PRC tax-resident even if its management institution is moved outside China. In this case, it is possible that the for-eign country where the company’s management institution is moved to also treats it as tax-resident of that foreign country. It is possible then under the relevant double taxation treaty for China to make a concession and no longer treat it as PRC tax-resident. A foreign company (with its manage-ment institution in China) can cancel its PRC tax residence by moving the management institution outside China.

Where a company ceases to be PRC tax-resident, it is regarded as con-ducting liquidation from a tax point of view. Consequently, the difference between the fair market value of its assets and their book value becomes taxable. Further, its shareholders are regarded as receiving dividends (corresponding to the company’s retained earnings) and realising capital gains from disposing the investment, which will trigger income tax for the shareholders.



Interest and dividend payments made out of China are subject to 10 per cent withholding tax under the PRC domestic tax law. In addition, interest payment is subject to 5 per cent business tax plus various sur-charges at around 10 per cent of the business tax. Domestic exemptions from these withholdings are generally not available. However, dividends paid out of pre-2008 profits are exempted from withholding tax. Further, until now, dividends paid by foreign-invested enterprises to their foreign individual shareholders are still exempt from Chinese income tax. Tax exemptions or reductions may be available depending on treaty clauses.


CHINA CMS, China




The commonly used means of profit extraction is dividends paid out of after-tax profits. However, 10 per cent withholding tax (or a lower rate pro-vided by an applicable tax treaty) will be triggered if the shareholder is a foreign entity.

Other means of profit extraction include interest, royalties, service fees, etc. The relevant expenses are normally tax-deductible in China sub-ject to transfer pricing requirements and thin capitalisation rules. PRC tax regulations promulgated recently further strengthen the enforcement of anti-avoidance rules imposed on cross-border related party services and royalty arrangements. More stringent tests such as beneficiary test (ie, whether the service recipient indeed benefits from the services), share-holder activity test (ie, whether the services, in effect, are for the interest of shareholders) and service duplication test (ie, whether the results of ser-vices have already been obtained through other channels) are adopted to assess whether the relevant cross-border related party payments are nec-essary and indeed deductible for CIT purposes. Apart from income taxes payable for these outbound payments, indirect taxes also apply. Interest is subject to 5 per cent BT, plus surcharges that cannot be recovered. Royalties are subject to 6 per cent VAT plus surcharges (creditable by the Chinese company). Services are subject to either VAT (creditable) or BT (non-recoverable) depending on the types of services involved.


15 Disposals


There is no simple answer to this question. The following factors are essen-tial to determine the deal structure:• Whether it is intended to dispose the whole business or only a branch

of the business. If only a branch of the business is to be disposed, a disposal of the relevant business assets rather than disposal of stock

is more often used. Of course, in such case, it is also possible to con-duct a spin-off followed by disposal of the stock in the spun-off local company.

• Whether certain favourable tax attributes (eg, tax holiday, previous losses) of the local company is valuable to the buyer. Such tax attrib-utes remain intact if the stock in the local company or stock in the for-eign holding company is disposed.

• Whether the local company has large tax exposures that the buyer wants to avoid by all means.

• What is the composition of the assets and liabilities of the target com-pany? For disposal of certain business assets (eg, real estate), heavy transactional taxes may be triggered. In such case, it is often more tax-efficient to undertake a stock disposal.

• Income tax burden of asset disposal is often higher than that of stock disposal. If business assets are disposed, the local company needs to recognise the relevant capital gains which are subject to 25 per cent cor-porate income tax (if there are no sufficient previous losses to absorb the gains). Subsequently, when the local company is liquidated, the retained earnings of the local company and the capital gains derived by its shareholders are further subject to income tax. If the stock of the local company is directly disposed, the 25 per cent corporate income tax at the local company level can be avoided.

• Disposal of the stock in the foreign holding company will normally have no PRC tax implications and may be a more tax-efficient exit strategy. However, under certain circumstances, due to lack of busi-ness substance of the legal structure, Chinese tax authorities may look through the intermediary holding structure and impose withholding tax on the gains.



Under PRC domestic tax law, such gains are subject to 10 per cent with-holding tax. There is no tax exemption provided by domestic tax law. Such

Update and trends

The foreign exchange regulations recently eliminated the restriction of using registered capital contributed by foreign investors to non-holding company foreign-invested enterprises (FIEs) for equity investment by the FIEs in China.

In the past, one of the conditions for qualifying for the special tax rules under which no capital gain tax is triggered was that the assets or shares for acquisition should be at least 75 per cent of the total assets or shares of the target company. Such percentage has now been reduced to 50 per cent.

During post-acquisition periods, the foreign affiliates or parent company may charge service fees or royalties to the Chinese target company as means of profit extraction. The newly promulgated tax regulations have clarified various tests to assess the deductibility of service fees before tax on the Chinese target company’s side under the service arrangements between the Chinese target company and the foreign shareholder or related parties. In particular, under the following situations, the charged ‘service fees’ are not tax-deductible:• the service fees charged by overseas affiliates are for activities

which are not relevant to the functions and risks undertaken by the Chinese company;

• the charged fees are for investment-related activities that directly or indirectly benefit the shareholders (eg, activities of controlling, managing and supervision of the invested companies);

• the services provided by affiliated companies overlap with the activities already conducted by the charged company itself or those purchased by the charged company from third parties;

• although the company benefits from being a member of a certain company group, it has not received specific services from overseas affiliates;

• the relevant activities of overseas affiliates have already been compensated for in other transactions; and

• other ‘service’ activities of overseas affiliates that do not bring benefits to the Chinese company.

In respect of royalties, the licence fee rate shall be determined considering the contributions made by the relevant parties in the creation of the intangibles as well as the extent to which such intangibles benefit the Chinese company.

The PRC State Administration of Taxation (SAT) has strengthened the subsequent administration of restructuring transactions to which special tax rules are applied. In addition, the transaction parties are no longer able to get confirmation from the tax authorities for the application of special tax rules.

In many cases, when a foreign investor decides to exit an investment in China, it may consider disposing the offshore intermediate holding company which holds the equity interests in the Chinese enterprise. During the past year, the SAT has clarified that the entity or individual who owes payment obligations to the share transferor (which would usually be the buyer) has the obligation to withhold the income tax for the foreign transferor within seven days of the withholding obligation arising if such indirect transfer of the Chinese company does not have reasonable business purposes and aims to avoid PRC income tax liabilities. The foreign transferor has the obligation to self-declare income tax to the PRC tax authorities if the withholding agent does not fulfil the withholding obligation in time. The SAT has also defined the ‘reasonable business purposes’ with various assessment factors, including but not limited to the source of the offshore share value, constitution of offshore intermediate holding company’s assets and incomes, function and risk of the offshore intermediate holding company and the Chinese enterprise, surviving period of the holding structure and business model, offshore income tax liabilities, scenario analysis of replacing the indirect offshore disposal with direct onshore disposal and relevant treaty arrangements.


CMS, China CHINA


taxation right may be limited or even fully denied by some double taxa-tion treaties concluded by China. However, if the main assets of the local company are real estate located within China, China has the taxation right under all its double taxation treaties.



As discussed in question 1, it is possible to achieve a tax-free rollover effect to defer the tax on the relevant capital gains. For such purpose, the relevant

conditions must be met so that the restructuring will qualify as a ‘special enterprise restructuring’.

Among other conditions, if the shares in a local company are to be transferred by its foreign shareholder, the tax-free rollover treatment is only possible if the transferee is 100 per cent directly held by the transferor.

Ulrike Glueck [email protected] Gilbert Shen [email protected]

2801 Plaza 66, Tower 21266 Nanjing Road WestShanghai 200040China

Tel: +86 21 6289 6363Fax: +86 21 6289 0731www.cmslegal.cn


CROATIA Karanović & Nikolić


CroatiaAleksandra RaachKaranović & Nikolić




The most popular acquisition form in Croatia is a stock acquisition. A stock acquisition, rather than an asset purchase, tends to be preferred by the seller because of the expense of VAT and real estate transfer tax (RETT). A share purchase in itself is not subject to VAT, whereas an asset purchase may be carried out as the transfer of a business unit (a going concern) or as the sale of a single asset.

An asset acquisition is generally subject to VAT (25 per cent), unless an entire business unit is transferred. In the case of immovable assets, if the seller of a building is a VAT payer, his or her tax obligation will depend on whether the building is new or has been in use for a proceeding period of up to two years. If a building has been in use for more than two years, a tax rate of 5 per cent will be applied pursuant to the RETT. In cases where the buyer is a taxpayer of VAT, he or she can choose to pay VAT at a 25 per cent tax rate. Considering the transferable nature of VAT, this option is relied upon by agencies and entrepreneurs in order to transfer VAT on to the final buyer. If a building has been in use for a period of less than two years, the seller must pay VAT at a rate of 25 per cent. In order to harmonise the Value Added Tax Act with EU legislation, VAT is now applied to the transfer of construction plots without any attached construction at a rate of 25 per cent, regardless of the usage period.

In certain cases, the transfer of assets as a contribution in kind to the share capital of a company eliminates transfer taxes.

Upon accession to the European Union on 1 July 2013, Croatia imple-mented the EU Merger Directive, which, if the transaction is compliant, offers a tax-neutral way of acquiring a business unit and an additional com-fort level in the tax treatment of transactions when both the seller’s and the acquirer’s domicile are in the EU.

2 Step-up in basis


In a share deal, the target’s assets are not revalued for tax purposes and consequently there is no step-up. The acquirer (or more precisely, the tar-get) continues with the tax depreciation of each asset. Likewise, in a share deal, the assets of the target are not revalued for tax purposes and accord-ingly there is no step-up.

A step-up in value may arise only in an asset deal, as the assets should be recorded in the business records of the acquirer at their purchase value, which is also the future depreciation basis.

In the case of a purchase of assets, the agreed value is usually above book value and this increased cost base may be used by the acquirer for capital gains tax and depreciation purposes. Moreover, any historical tax liabilities generally remain with the vendor and are not transferred with the purchased assets.

Goodwill which arises in acquisitions is generally subject to annual impairment testing for accounting purposes. Any impairment of goodwill cannot be deducted for tax purposes under Croatian legislation.



Whether it is preferable to execute an acquisition through a non-resident company or by establishing a SPV (special purpose vehicle) in Croatia depends on the acquirer’s future plans.

The domicile of an acquiring company has the most impact on profit repatriation and financing options. Generally, it is preferable to execute an acquisition through a holding company which is seated in a tax jurisdic-tion abiding by international participation rules and adherent to a valid double taxation treaty (DTT) with Croatia in order to facilitate tax-efficient financing.

As a new EU member state, Croatia has implemented the Parent–Subsidiary Directive and the Interest and Royalties Directive in cases where an investor is a resident of another EU member state. Consequently, withholding tax on dividends and profit sharing is not applicable when div-idends and profit-sharing are distributed to a business entity form subject to the common taxation system applicable to the parent company and the subsidiaries of EU member states, provided that the recipient of dividends or profit-sharing holds a minimum of 10 per cent capital of the company distributing dividends or profit-sharing for an uninterrupted period of 24 months.

Under the same conditions, payment of interest and royalties to related companies is not subject to withholding tax provided that these payments are made to a beneficiary owner of another member state or to a permanent establishment of a company located in another member state but with a registered office in the Republic of Croatia.

If a foreign company intends to do business in Croatia (by using acquired assets) on a permanent basis, a Croatian company (or at least a branch office in Croatia) must be incorporated according to Croatian cor-porate and tax legislation. Croatia has concluded numerous DTTs, which in detail regulate the right of taxation in relation to such permanent estab-lishments. If the assets of a permanent establishment are sold, regular Croatian CPT and VAT rules are applicable.

It should be noted that transactions between tax havens and Croatian entities may trigger a 20 per cent withholding tax (note: the usual with-holding tax in Croatia is 15 per cent and 12 per cent on dividends).



Company mergers, acquisitions and share exchanges are common forms of status changes in Croatia.

Corporate changes are mostly used to restructure businesses, organise financing and to organise companies or a group of companies in a man-ner that will be attractive to potential buyers. Mergers of related compa-nies are the most commonly used form of restructuring, since they provide tax benefits such as utilising tax losses carried forward and minimising the corporate profit tax base.


Karanović & Nikolić CROATIA


The Croatian corporate income tax legislation implemented in the EU Merger Directive enables taxpayers to make corporate changes without incurring tax ramifications at the time of restructuring, if certain require-ments are met.



There are no specific tax benefits awarded if a company issues shares as a consideration rather than entering into a cash transaction.

6 Transaction taxes


Share deals and asset deals are subject to certain stamp duties, public notary fees and the costs of publication in the Croatian Official Gazette. Such stamp duties and fees are usually not considered material.

As stated above, share deals are not subject to VAT.An asset deal carried out as a going concern is not subject to VAT if the

seller and buyer are registered VAT payers.Where a single asset is acquired, VAT is levied at the general tax rate of

25 per cent. If the acquired asset is immoveable property (a building) and the supply is not subject to VAT, then the transaction will be subject to real estate transfer tax (RETT). As a general rule, RETT will be levied at the rate of 5 per cent where the selling or market price of the immoveable property is considered the tax base. RETT is payable by the immoveable property purchaser.



A tax loss can be carried over and offset by reducing the tax base for up to five years following the initial carry-over.

If the right to offset losses occurring in a merger process, acquisition or division is transferred to a legal successor during a tax period, the right to carry loss over begins after the expiry of the period in which the legal suc-cessor acquired the right to carry over the loss.

Losses from previous tax periods may be used to reduce the tax base; however, the tax base must first be reduced by earlier losses.

A legal successor will not have the right to offset tax loss if:• in a tax period, a legal successor’s ownership structure is changed by

more than 50 per cent compared with the ownership structure at the beginning of the tax period; or

• the legal predecessor was not engaged in business activities during two tax periods prior to the change of status, or has significantly changed the business activities of the legal predecessor during two tax periods prior to the change of status.

If this is the case, the legal successor is required to increase the tax base by the amount of the applied tax loss for the tax period in which the right to carry over the tax loss expired.

A legal successor who has significantly changed business activities in order to save jobs or for business recovery is exempt from this rule.

Generally, acquisitions and reorganisations of bankrupt or insolvent companies are permitted. However, they may be subject to the approval of the competent authorities and creditors. There is no specific tax regime for acquisitions and reorganisations of bankrupt and insolvent companies.

8 Interest relief


Interest on borrowings to acquire a target is generally tax-deductible. The acquiring company is obligated to prove that the deducted interest is related to business.

There are some cases in practice where the tax authorities have chal-lenged the interest related to share deals if the holding company has no other business activity besides holding shares.

If financing for an acquisition is granted by a related party, the tax deductibility of interest is also subject to transfer pricing and thin capitali-sation rules.

In line with transfer pricing rules, interest on loans between related parties must be charged at the market rate, which is currently determined at 7 per cent (the basic rate of the Croatian National Bank).

According to the Croatian thin capitalisation rules, interest on loans received from a shareholder or a company member holding at least 25 per cent of shares, equity capital or voting rights of a taxpayer exceeding four times the amount of the shareholder’s or company member’s share in capital or voting rights (determined in relation to the amount and dura-tion of loans in the tax period), including loans from third parties guaran-teed by the shareholder or company member, are not tax-deductible. The amount of shareholder or company member participation in the taxpayer (loan recipient) capital for a tax period is determined on the last day of each month of the tax period as an average of paid-in capital, retained profit and reserves.

Payment of interest abroad is generally subject to a 15 per cent with-holding tax in Croatia, unless specified otherwise by the applicable DTT.



If a company is acquired by share purchase, the purchaser takes over all liabilities, including contingent liabilities. Since the purchaser effectively becomes liable for any claims or previous liabilities of the entity (includ-ing tax), it is common practice to require more extensive indemnities and warranties than in the case of an asset purchase and to arrange a due dili-gence exercise, including a review of the tax, legal and financial status of the target.

In the case of an asset deal, the tax liabilities related to the transferred assets are not transferred to the acquirer.


10 Restructuring


Post-acquisition company restructurings differ from case to case and there is no preferred manner. Recent post-acquisition restructurings have mostly been concentrated on organisational changes and headcount reductions. However, all corporate status changes may be performed in a tax-neutral way, provided that legal requests are fulfilled.


CROATIA Karanović & Nikolić


11 Spin-offs


A spin-off is not subject to taxation if there are no changes in the valuation of assets and liabilities during the spin-off process, comparable to all other status changes prescribed by the Croatian Company Law.

A spin-off could be subject to corporate profit tax if hidden reserves are discovered or if a revaluation of assets is required by accounting legislation.

VAT and RETT are not applicable according to this status change.A spin-off business can transfer net operating loss under the condi-

tions described in question 7.



The transfer of a registered office from the Republic of Croatia to another EU member state or from an EU member state to the Republic of Croatia is subject to taxation of profit derived from assets and liabilities of the com-pany in the EU member state from which the registered office has been transferred. This is provided that these companies remain effectively con-nected by a permanent establishment of the company in the EU member state from which the registered office has been transferred.



Withholding tax will be paid on interest, dividends, profit-sharing, royal-ties and other intellectual property rights (copyrights, patents, licences, trademarks, design or model, production processes, formulae, blueprints, plans, industrial or scientific experience and other similar rights) payable to foreign entities that are not natural persons.

Withholding tax shall not be applied to interest paid:• on commodity loans for the purchase of goods used for carrying out

business activities;• on loans granted by non-resident banks or other financial institutions;

and• to holders of government or corporate bonds, who are non-resident

legal persons.

The rate of withholding tax is 15 per cent, with the exception of dividends and profit-sharing which are subject to a 12 per cent withholding tax.

Croatia is a signatory to various DTTs providing for reduced withhold-ing tax rates or even the elimination of Croatian withholding tax on inter-est. In order to apply DTT protection, a ‘certificate of residency’ must be submitted to the tax authorities before payment of the withholding tax.

With Croatia’s accession to the EU on 1 July 2013, certain provisions of the acts and regulations that derive from EU directives and relate to with-holding tax treatment of payments made between EU member states came into force. The main changes affect certain payments between related companies seated in the EU, which would be exempt from withholding tax.

Withholding tax is not paid on interest and royalty payments made between related parties seated in different EU member states if the follow-ing conditions are met:• the payer has a direct minimum share of 25 per cent of capital of the

recipient;• the recipient has a direct minimum share of 25 per cent of capital of the

payer; or• a third party has a direct minimum share of 25 per cent of capital of the

recipient and the payer, and such shares relate to companies from the EU.

The above-stated minimum conditions should be fulfilled continuously for at least 24 months.

A withholding tax (WHT) exemption will apply only if the recipient is considered a beneficial owner of the interest or royalties.

However, a WHT exemption does not apply for:• payments of interest or royalties, which represent the distribution of

profit or return on capital;• interest payments on loans, which carry the right to participate in the

debtor’s profit;• interest payments on loans that give the loan provider the right to

exchange his right on interest with the right to participate in debtor’s profit;

• payments from loans that do not contain provisions regarding the repayment of the principal, or if the repayment of the principal is due after 50 years; and

• interest payments and royalties made for the purpose of tax evasion and tax avoidance.

Dividends and share in profits made to related parties seated in other EU member states are exempt from withholding tax if the related company holds at least a 10 per cent share of the taxpayer’s capital continuously over a period of at least 24 months. Withholding tax will be paid if determined that the payment of dividends or shares in profit are made for the purpose of tax evasion or tax avoidance.

Provisions from EU directives are not applicable to payments on inter-est, royalties, dividends and shares in profit made to companies seated outside the EU. For these payments, withholding tax liability will be deter-mined in accordance with the provisions of the acts and corresponding regulations that are currently in force, as well as the provisions of the appli-cable treaties.



An arm’s-length basis is the general rule applicable to all transactions related to the extraction of profits.

After payment of the corporate profit tax, the profit is distributed to the shareholders in the form of dividends.

The withholding tax on dividend distribution is 12 per cent.

Update and trends

Amendments to the Croatian Company Profit Tax Act that are in force from the beginning of 2015 have made conditions for obtaining tax benefits for reinvested profit much stricter. Tax benefits may now be used only under the following conditions:• reinvested profit must be invested in long-term assets;• long-term assets must be procured under market conditions;• the beneficiary must maintain the same number of employees

for a minimum of two years after the period for which this tax benefit is expressed; and

• investments must be realised during the tax period for which the tax application regarding the tax benefit is filed.

Tax benefits for reinvested profit cannot be used together with tax benefits provided for investors pursuant to legislation aimed at promoting investment and developing the investment climate in Croatia.

The amendments also created a withholding tax exemption on payments of profit to foreign legal entities earned before 29 February 2012.


Karanović & Nikolić CROATIA


Any distribution made to a parent company without observing the transfer-pricing principles may be characterised as a deemed dividend and taxed as such. Related-party transactions have recently become a main focus of the Croatian tax authorities; therefore, the manner in which profits are repatriated should be evaluated from the transfer pricing perspective prior to putting plans into action.


15 Disposals


Disposals are carried out by the sale of shares of a local company. Capital gains derived from the sale of shares of a Croatian company by a non- Croatian resident to another non-Croatian resident are not subject to CPT in Croatia, unless the sale is carried out by a permanent establishment of the foreign seller.

Capital gains derived from a Croatian company or a permanent estab-lishment of a foreign seller from the sale of shares or assets are subject to the regular CPT of 20 per cent in Croatia.

The sale of assets is taxed, as described above.



Capital gains derived from the sale of shares in a Croatian company by a non-Croatian resident to another non-Croatian resident are not subject to corporate profit tax in Croatia. There is no special tax regime for the dis-posal of real estate, energy or natural gas companies.



If the disposal of shares or of business assets is taxable, gains from such a disposal with deducted acquisition costs will form a part of the regular tax base and be taxed at the standard corporate profit tax rate of 20 per cent.

According to Croatian tax legislation, there is no specific regime for avoiding or deferring tax. It is possible to apply for payment of the tax liability in instalments, which can be granted by the tax authorities under special circumstances.

Aleksandra Raach [email protected]

Radnička cesta 52/R310000 ZagrebCroatia

Tel: +385 1 5601 330Fax: +385 1 6011 410www.karanovic-nikolic.com


CURAÇAO Spigt Dutch Caribbean


CuraçaoJeroen Starreveld and Maike BergervoetSpigt Dutch Caribbean




In general, the advantage of an asset acquisition is that the buyer will not inherit any historic tax liabilities relating to the business acquired; those will remain with the company that has sold the business. With a stock acquisition all historic tax liabilities will remain with the target company and therefore the buyer will seek a full tax indemnification from the seller. An advantage could be that losses of the company will in most cases be available to the buyer of the stock in that company.

Transfer duties of 4 per cent could apply with regard to transfer of real estate. This tax is not due on a stock transaction. With an acquisition of business assets the buyer should be able to apply the tax depreciation regu-lations based on the sale price (step-up). This is not applicable on acquisi-tion of stock.

While the turnover tax (general rate of 6 per cent in 2015, 9 per cent applies in case of luxury goods) applies to deliveries of goods and the pro-viding of services in case of the acquisition of stock or the acquisition of an enterprise or part of an enterprise no turnover tax will be due.

Curaçao does not levy capital duties. Note that stamp duties (to cover the government’s administrative fees) are applicable in certain circum-stances; however, these are minimal.

2 Step-up in basis


Assets acquired by the buyer will be valued at the actual price paid. This price (step-up) will be the basis for the buyer for his depreciation/amor-tisation schedule. With regard to acquired goodwill from a third party, the amortisation rules will apply and the write-down period is generally allowed in five to 10 years.

A tax incentive is the investment deduction of 8 per cent, or for certain assets 12 per cent, in the year of purchase of a business asset and again in the next year. These amounts reduce the taxable profit and are a perma-nent difference in commercial and fiscal profit.

In the situation that stock of a company is acquired, there will be no step-up within the target company of the base cost of its assets. In addi-tion, no depreciation on assets or amortisation of intangibles or goodwill is allowed in this case with regard to the shares. Of course, the target com-pany will be allowed to continue to apply its own regular business deprecia-tion or amortisation schedule to its assets.



First of all, it is important to note that Curaçao does not impose withhold-ing tax on dividend distributions to shareholders, local or foreign. Hence,

in this respect there is no preference for an acquisition company to be established in or outside Curaçao.

With respect to an acquisition company established outside Curaçao, Curaçao does not impose profit tax on dividend distributions made to or capital gains realised by such foreign corporate shareholder, irrespective of the country of residence.

With respect to an acquisition company established in Curaçao, a favourable participation exemption regime could be applicable, under which any dividend received from, or gain realised upon disposal of, the shares in a Curaçao target are fully tax-exempt. The participation exemp-tion applies if:• the Curaçao acquisition company holds an interest of at least 5 per cent

of the paid in share capital of the Curaçao target or 5 per cent of the vot-ing rights;

• is a member of a coöperatie or of an onderlinge waarborgmaatschappij; or

• the acquisition price exceeds US$500,000.

If a shareholder would prefer to finance a Curaçao acquisition company with equity rather than debt, a capital contribution on (newly issued) shares could take place without negative Curaçao tax consequences. Curaçao tax law does not contain a capital tax. The repayment of capital may take place without negative tax consequences as well.

If a buyer wishes to acquire the target company with debt, an acquisi-tion company established in Curaçao is allowed to form a ‘fiscal unity’ with the target company. Under this status the profit of the target company can be consolidated with the finance burden of the acquisition company. See question 8, in which the possibilities of creating this leverage are described further in the case of a Curaçao acquisition company.



The Curaçao Profit Tax Ordinance contains a business merger exemption whereby the enterprise based in Curaçao or part of such enterprise is trans-ferred to another Curaçao-based company in exchange for shares issued by the other company to the transferring company.

Note that the following conditions apply:• future Curaçao taxation needs to be guaranteed and thus the acquiring

company must continue with the book values used in the transferring company;

• the Curaçao company to which the enterprise or part of the enterprise is transferred may not be entitled to loss compensation;

• both companies should apply the same principles to determine profits; and

• the shares issued to the transferring company may not be alienated for a period of three years.

Upon request of a Curaçao taxpayer, the Ministry of Finance may deviate from the above-mentioned conditions, if sound business reasons are avail-able which could justify such a deviation. The business merger exemption might be an option as an alternative to an assets and liabilities acquisition or in case the acquirer does not want to acquire the shares in the transfer-ring company (to minimise liabilities).


Spigt Dutch Caribbean CURAÇAO


The Curaçao Profit Tax Ordinance does not contain other merger or share exchange facilities specifically aimed at facilitating acquisitions. But note that the Curaçao tax authorities are in principle willing to facili-tate mergers or share exchange facilities. However, these facilities are not granted if aimed at a disposal of the shares. Clearance in advance is there-fore required under all circumstances.



If the consideration is made in cash by a Curaçao acquisition company, it needs to be considered whether leverage can be created whereby interest payments are set off against future profits of the Curaçao target company. The fiscal unity regime is only applicable if the acquiring company acquires 100 per cent of the shares of the target company. Please see question 8.

The standard tax rules applicable in Curaçao at the level of buyer make no distinction between a consideration in stock or in cash since there is no capital tax due on the issuing of shares. (Perhaps an element to consider could be the bank licence fee. The Central Bank of Curaçao levies a bank licence fee of 1 per cent on amounts transferred abroad. Some companies are granted an exemption of this licence fee if their activities are focused on international activities.)

The valuation of the stock might give some flexibility to the taxable amount but in theory these amounts should be equal. If the seller of the company would acquire a qualifying interest (see question 3), the partici-pation exemption would apply and any benefits from these stocks, either dividends distributed or capital gains realised, would be fully tax-exempt at the level of the seller.

6 Transaction taxes


Curaçao does not levy capital duties. Curaçao does not have a value added tax but a turnover tax on each transaction. However, the acquisition of stock or the acquisition of a whole business or part of a business are exempt from turnover tax.

Stamp duties (to cover the government’s administrative fees) are applicable if registration is needed. Registration is advisable to have proof of the date of the transaction as well as the content of the transaction. The stamp duties are for each A4 page a stamp of 10 Netherlands Antilles guil-ders and one extra stamp of 5 Netherlands Antilles guilders per total docu-ment. No stamps are due on filing of tax returns, submitting appeals and ruling requests.

With regard to an acquisition of assets, a transfer tax of 4 per cent is due regarding acquisition of real property. This tax is not due if only the economic ownership is being transferred while the legal ownership remains with the seller, or if a company owning real estate is transferred



In general, losses incurred by a Curaçao target company can be carried for-ward for a maximum of 10 years and can be used to set off future profits of the company.

There is an anti-abuse measure; the carry-forward of losses will not be possible if the activities of the target company have been liquidated or ended for 90 per cent or more, unless the future profits go to the natural persons that are in majority (equal to or greater than 70 per cent share-holder) the same (in)direct recipients as at the moment of liquidation or ending of the activities. Thus to avoid this measure the company should continue its business and sell it as a running business.

If the seller has applied the investment incentive on business assets the sale could trigger a disinvestment payment if the sale takes place within six years after the year in which the investment was made and 15 years if the investment concerned a building. The disinvestment amount is the same percentage of the investment incentive applied to the sale price and is added to the profit of the seller. Also in the next year, the same amount must be added to the profit of the seller.

Additionally, if the seller has made use of the tax-allowed replacement provision to replace a business asset, such provision will have to be added to the profit of the seller once the enterprise is sold by way of assets trans-action, unless the seller continues with a business in which the replace-ment of the business assets will still occur.

These consequences could be avoided if the rules of the merger (busi-ness for shares) can apply. Under these rules the acquirer must continue with the book values of the seller and will become liable to the disinvest-ment rules as if the investment was made by the acquirer. The acquirer will also have to have the intent to use the replacement provision to acquire a replacement. The seller will thus have no profit to be subjected to profit tax because the book values continue. The merger exemption rules contain several conditions before the advantages are applicable. The acquirer has, for example, the obligation to hold the acquired shares for at least three years. It will be possible to discuss the exact tax consequences with the tax inspector and thus achieve a tax beneficial solution for both parties.

Acquisitions or reorganisations of bankrupt or insolvent companies are subject to the same tax rules that are discussed in this chapter.

8 Interest relief


In general, Curaçao tax laws allow for interest relief. An acquisition com-pany will most likely be entitled to the participation exemption for the divi-dends and capital gains acquired from and through the target company. Since those advantages will be fully exempt from profit tax the conse-quence is that interest on debt with which the participation/target com-pany in Curaçao has been acquired are deductible, but the interest relief is not effective and will not lead to a direct tax advantage at the level of the acquisition company, unless the acquisition company has other income. In this circumstance it is therefore advisable to ask for a fiscal unity under which the results of the two companies are consolidated. In fact this will have a pushdown of debt effect.

The Curaçao profit tax does contain the general rule that interest relief is only granted when the conditions of the loan are at arm’s length. To judge whether this is the case all circumstances are relevant, including whether the recipient of the interest is subject to profit tax at a reasonable rate (10 per cent will be reasonable). The tax inspector has in the first instance the obligation to claim that the loan does not have arm’s-length conditions.

In addition, Curaçao tax law contains some anti-abuse interest deduc-tion rules where parties are related. For example, no interest relief is applicable for borrowings that are made between related parties if those borrowings are related to a dividend payment or a repayment of capital by the Curaçao taxable entity.

However, interest relief will be granted if the Curaçao taxable entity can acceptably prove that the borrowings have a business purpose/reason, or that the creditor, who receives the interest payments, is subject to a simi-lar Curaçao profit tax regime. A 10 per cent profit tax rate is considered reasonable. If one of the two conditions is met, the company is permitted to take the interest deduction.

Thus debt pushdown is achievable if the interest expenses in connec-tion with a group company are subject to tax in the hands of the recipient.

Further, Curaçao has no other interest withholding tax rules in effect.Finally Curaçao group companies can be interesting for group financ-

ing activities, since the interest received from group companies and paid to group companies will be completely ignored as long as the corporation itself is not running real risks.






On a stock acquisition, the seller will generally provide a tax indemnity (in either the share purchase agreement or in a stand-alone tax deed) to the buyer in relation to the target’s unexpected historic tax liabilities arising in the pre-completion period or from pre-completion events. It will also cover against the risk of tax liabilities being placed on the target company as a result of it having been a member of the seller’s group. Should a seller resist in the giving of a tax indemnity or warranties, the pre-acquisition tax due diligence exercise conducted by the buyer becomes even more important. Although under Curaçao civil law the seller is also responsible for inform-ing the buyer of the possible liabilities that the company might have.

Liability under the tax indemnity will be on a guilder-for-guilder basis; if the circumstances contemplated by the indemnity arise, the seller is liable. There are numerous exclusions and limitations from the general tax liability (including carveouts, time limits and financial limits). The tax indemnity also contains provisions dealing with the conduct of the target’s tax affairs for pre-completion periods and tax claims. The indemnity for profit tax will generally last for five years, this being the time in which the Curaçao tax authorities can generally look at the tax affairs of a Curaçao company. If a company is considered to be handling in bad faith, the term for profit tax assessments is extended to 10 years.

The seller will also provide tax warranties in the share purchase agree-ment. These do not duplicate the cover provided by the indemnity but are aimed at providing information regarding the target to help the buyer assess the target’s future tax liability that may not be covered by the indem-nity. Typically they cover the tax compliance position of the target, its records and documentation and its dealings with the tax authorities (eg, in Curaçao it is quite common to discuss the tax position with the tax authori-ties and agree to it in writing – this is called a tax ruling). If serious issues surface, the buyer can seek specific tax indemnities, get a price reduction or refuse to proceed with the acquisition. Breach of warranty gives rise to a damages claim against the seller for breach of contract and is subject to the normal contractual rules on limitation of damages. Consequently, if a tax liability arises a buyer will first pursue a claim under the tax indemnity as recourse could be on a guilder-for-guilder basis. The share purchase agree-ment will contain a prohibition on double recovery, which prevents the buyer from claiming under both the tax indemnity and tax warranties in respect of the same matter. The time limit for claims under the tax warran-ties will usually mirror that under the indemnity. The aggregate maximum liability under both the tax indemnity and the tax warranties is often set at the purchase price.

On an asset acquisition, the tax liabilities and tax assets do not pass to the buyer but remain in the selling company, so the seller will provide only a short set of tax warranties in the asset purchase agreement and no tax indemnity. Administrative and compliance warranties and warran-ties relating to the tax position of the assets themselves are usually pro-vided. Should the parties make use of the business merger facility (see question 4) a broader range of tax indemnities will be implemented.


10 Restructuring


Any post-acquisition tax restructuring will depend upon the circumstances of both the buyer and the target company. Where a Curaçao acquisi-tion vehicle has been debt-funded to make the acquisition, the ability to

consolidate the profits through the fiscal unity regime means a request must be filed with the tax authorities and the unity will apply as of the beginning of the book year in which the shares in the target are owned. This regime would only be possible if 100 per cent of the shares in the tar-get company are acquired and both companies apply the same accounting rules, such as the depreciation schedule on business assets.

It would also be possible for the Curaçao target company to be liqui-dated and its business hived off to the acquisition vehicle without any profit tax due even if the value of the enterprise thus received in the acquisition vehicle would be higher than the price paid. This results from the applica-ble participation exemption (see question 3). Of course, the liquidation of the target company could result in profit tax due and this should be care-fully examined.

Where a Curaçao acquisition vehicle has not been used (eg, where a foreign holding company with Curaçao subsidiaries has been the target company) it may be possible to set up a new Curaçao holding company to make an internal, debt-funded acquisition of, say, the Curaçao operating companies and form a fiscal unity.

If the buyer is an existing trade buyer then there may be scope for combining its business with that of the Curaçao target post-acquisition. This can be done either through a hive-up or hive-down of the respective business and in both cases should be capable of being undertaken in a tax-neutral manner, applying the business merger exemption mentioned in question 4. Care must be taken to ensure that there is no major change in the nature or conduct of the trade in the target company (eg, through combination) if it is intended to utilise existing carry-forward losses of the target company. The position is best discussed with the tax inspector and the way forward can be agreed in a tax ruling.

11 Spin-offs


For Curaçao profit tax purposes a spin-off of businesses can be established as tax-neutral when a transfer of the business or an independent part of the business with regard to the spin-off to another taxable entity (or future taxable entity) meets certain conditions. The other entity (buyer) must be a tax resident in Curaçao or in a country with which Curaçao has a tax treaty. A spin-off is also effective if the other entity (buyer) exclusively, or almost exclusively, issued all shares or acquired similar certificates of the business/company or an independent department/section of the business. The profit realised through the transfer of assets will not be taxable at the seller’s side if the following conditions are met:• due to the change of ownership the carry-forward losses are restricted

for the other entity (buyer), see question 7;• the levy of future taxation is guaranteed;• the shares issued may not be alienated for a period of three years; and• both companies should apply the same principles to determine profits.

The other entity (buyer) starts with its assets and debts valued at the same values used by the seller prior to the spin-off. Depreciation investment deduction and replacement provision values remain in place. They switch over to the buyer. An advance tax ruling can be requested by the company (seller or buyer) at the Inspectorate of Taxes. Such ruling will confirm the tax status and loss position of the (prior) spin-off of businesses.

A request to the Minister of Finance can be submitted to transfer the carry-forward losses which are related to the spin-off businesses to the other entity (buyer). Such request must be submitted by both parties (buyer and seller). The Minister of Finance will provide separate conditions in this regard. These losses will subsequently be used to offset future profits, pro-vided that the profit is made with the spin-off business only.

The transfer tax on real estate cannot be avoided.



A company is deemed to be a resident in Curaçao if it is either incorpo-rated in Curaçao or its central management and control is exercised within Curaçao. If there is a tax treaty in place the tax-residency will be

Update and trends

Curaçao and the Netherlands should adopt a new tax arrangement (to avoid double taxation) as per 1 January 2016. The new tax arrangement provides for a 0 per cent dividend withholding tax rate, in case dividends are distributed by a Dutch company. Certain strict requirements need to be met to benefit from this route.


Spigt Dutch Caribbean CURAÇAO


determined based on the terms therein, in connection with the actual facts and circumstances. The actual place of management of the business is the leading factor.

In general upon migration there will be a profit tax exit charge appli-cable to the undisclosed reserves, which are valued based on the differ-ence between the market value and the book value. These exit results are taxable at 25 per cent profit tax (regular profit tax rate in 2015) just before the moment the company migrates outside Curaçao. Should capital assets remain in Curaçao and through these assets a Curaçao trade be carried on, they will most likely be seen as a permanent establishment and in such case no exit charge will apply.



Curaçao has no dividend withholding tax in force.



The normal method for extraction of profits is by means of a dividend as this does not give rise to any obligation to pay withholding tax. Dividends can only be paid out of distributable reserves. The annual accounts of the Curaçao company would show the existence of these. It is quite easy for a Curaçao company to be able to create distributable reserves through a reduction or cancellation of share capital.

Dividends are in essence paid out of post-tax profits, whereas repatria-tion of money by means of interest on debt financing will be pre-tax. So, subject to application of anti-avoidance rules, Curaçao companies could be financed with debt lent by group companies. See question 8.

Hybrid financial instruments (the purpose of which is for the return to be treated as equity in the recipient’s hands but debt in the payer’s) could be used as a means of extracting profits from Curaçao. The Supreme Court ruled when to qualify a loan as equity, which is not quickly done.

The other tax-efficient way for extracting profit from a Curaçao com-pany is to sell the company or put the company into liquidation. The pro-ceeds from either route will not generally be subject to Curaçao tax in the hands of a non-Curaçao resident shareholder. Liquidation could trigger profit tax at the level of the company itself and would therefore be less attractive than a sale.


15 Disposals


From a tax perspective, a seller will prefer to sell stock in a Curaçao com-pany rather than have the Curaçao company sell its business assets to a purchaser.

When a regularly taxed Curaçao company holds the shares in a qualifying participation (local or foreign), the dividends and capital gains received/realised in connection with this qualifying participation are 100 or 63 per cent exempt from the regular profit tax rate of 25 per cent (tax rate in 2015). Expenses incurred in connection with a qualifying participation (including capital losses) are not deductible, unless it can be demonstrated that these expenses are indirectly incurred in respect of the realisation of profit that is subject to tax in Curaçao. Please note there is an exception: the participation exemption is limited to 63 per cent exemption if divi-dend distributions are received from a participation that earns more than 50 per cent of the core business through dividends, interest and royalties, and the profit of that participation has not been subjected to a similar profit tax rate at a minimum rate of 10 per cent. A participation whose business exclusively or almost exclusively contains real estate qualifies under the scope of the 100 per cent participation exemption.

A qualifying participation is defined as an interest of 5 per cent of the paid-in share capital (or voting rights or profit certificates) of a company. An interest that does not meet this criterion may nevertheless be con-sidered a qualifying participation if the acquisition price of the interest amounts to at least US$500,000.

In general the profit that arises from the sale of assets is taxable at a profit tax rate of 25 per cent.

With regard to the special E-zone regime the tax consequences of the sale of goods, including assets, differ depending on the residency of the buyer. If the buyer is a resident of Curaçao, the sale has to comply with cer-tain conditions. The profit that arises from the sale of assets to the local market of Curaçao is taxable at the profit tax rate of 25 per cent. The profit on a sale of the assets will be subject to the special tax rate of 2 per cent if the buyer is another company within the E-zone of Curaçao or a foreign country.



The non-resident company is not hit with Curaçao tax upon the sale of shares in a Curaçao-based company, unless the shares are held as an asset

Jeroen Starreveld [email protected] Maike Bergervoet [email protected]

Scharlooweg 33WillemstadCuraçao

Tel: +599 9 461 8700Fax: +599 9 461 8073www.spigtdc.com




by a permanent establishment in Curaçao. However, the sale of shares may trigger a taxable event for the non-resident individual shareholder(s) if there has been a residency in Curaçao in the past. The following condi-tions apply: a shareholder must own – alone or together with his or her rela-tives, directly or indirectly – at least 5 per cent or more of the shares and/or profit rights and/or options on shares and the shareholder must have been a resident of Curaçao in the past 10 years prior to the share sale transaction.

The profits from certain energy and natural resource companies are exempt from Curaçao profit tax.

With regard to disposal of stock in real property no special rules are in place. A company whose business contains exclusively or almost

exclusively real estate qualifies under the scope of the 100 per cent partici-pation exemption (see question 15).



The Curaçao profit tax allows a replacement provision if a business asset is sold and the company has the intent to acquire a new similar business asset. The replacement must occur within four years of the sale.


MS Consultores DOMINICAN REPUBLIC


Dominican RepublicEnmanuel MontásMS Consultores




The main difference between those transactions is connected to the ITBIS (the Dominican Republic’s VAT) since stock acquisitions are not subject to such burden, which is currently fixed, for most items and services, at 18 per cent. However, stock transfers, when the seller is an individual and the purchaser is an entity, are subject to a 2 per cent withholding of the value of the transaction.

Another topic connected to stock acquisitions under Dominican law is that, since 2011, whenever an entity acquires the stock of another entity it must withhold 1 per cent of the value paid to the seller that is applied to the capital gain of the latter. The seller could evidence that no capital gain applies to such transaction, for example, as a result of a capital loss, and the tax authority may waive, at its own discretion, the withholding obligation previously mentioned.

An important difference between those transactions under Dominican law is connected to the applicability of the asset tax, which includes and is not limited to cash deposits, accounts receivable, real estate and intangible assets and would apply to the assets purchased. If stock is purchased, the transaction per se does not involve asset tax but the underlying assets of the entity would be taxable unless it benefits from a special tax regime.

Despite the fact that the asset tax is due to be eliminated in 2015, such elimination is subject to the performance of the Dominican economy pur-suant to the terms of the National Development Strategy Statute where some economic ratios must be met in order to implement such reduc-tion. No change is expected to occur despite the extraordinary results of Dominican macroeconomic policies.

2 Step-up in basis


A purchaser is entitled to receive step-up in basis in the assets acquired. It is important to point out that the tax authority (DGII) has the right to adjust the price of the transaction (for tax purposes only) if the value of the assets is under fair market value. This is a mechanism used by the DGII in order to deal with increasing attempts to evade capital gain tax as well as the ITBIS, consisting of the use of low prices of the assets to be transferred. It is, therefore, a practice commonly carried out by the DGII.

The same rationale applies in case of stock purchases, since the DGII actively considers that the fair value of stocks includes the market value of its underlying assets, particularly when the acquired entity has no regular operations but does have assets.

Intangible assets may be amortised reflecting the ‘life span’ of such assets and using the straight-line depreciation method when that period of time is limited. Despite that, intangible assets are also subject to asset tax, as mentioned in question 1.



From a tax perspective, it is irrelevant to use a local or a foreign entity since all entities are subject to the same tax scheme pursuant to Dominican tax laws. However, the use of offshore entities is highly recommended in those circumstances where the purchaser needs confidentiality (if possible) since shareholder and directors’ information is public under Dominican law, stating that corporate documents must be filed before the commercial registry.

It is also useful, sometimes, to use an offshore entity when the stock-holders anticipate a quick and eventual liquidation of the entity, or when by any reason they need extreme flexibility that certain jurisdictions are capable to offer.



Company mergers are relatively common considering the particularly small size of the Dominican economy as compared to other international jurisdictions with a more complex and diversified economy. Company mergers usually occur within regulated markets (banking, pension funds, insurance, among others) rather than ordinary businesses. In that regard, stock and asset acquisitions is a much more active market, particularly since it is easier to mitigate the likelihood of facing ‘successor liability’ claims.

Share exchanges are not a common form of acquisition. Although there are a few cases where the parties agreed to a exchange of shares, the corporate structure of most Dominican entities is highly concentrated in individuals and very close relatives or friends, and therefore the willing-ness to include additional partners rarely exists.



Besides the possibility to increase its borrowing capacity, there is no par-ticular benefit, particularly from the capital tax perspective. If the shares received by any of the parties as consideration has a higher value than the shares that were disposed of, capital gain would also apply. However, it is important to mention that dividend distributions in stock, rather than cash, are not subject to dividend withholding, but of course, this option only applies to existing stockholders.

In addition, limits may be observed regarding the reciprocal stock par-ticipation of each of the parties in a stock for stock transaction.

6 Transaction taxes


There are no stamp duties on the acquisition of stock or business assets, but some formalities that bear certain costs must be carried out in order


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to formalise the transaction. For example, stock transfers must be regis-tered before the Commercial Registry, and the rates vary depending on the authorised capital of the target entity.

As we mentioned before, ITBIS may apply to asset acquisitions and this is of paramount importance when structuring the transaction con-sidering the 18 per cent tax rate. As previously mentioned with regards to the asset tax, the ITBIS rate is going to be reduced to 16 per cent as long as some macroeconomic goals are met in accordance with the terms of National Development Strategy Statute. We do not anticipate such reduc-tion to occur.



Net operating losses may be deducted from the benefits obtained within the next five years following the losses and following these rules:• the operating losses shall not be deductible at any time if such losses

arise from a reorganisation process, particularly but not limited to mergers; and

• the maximum amount that shall be deducted yearly is 20 per cent of the total amount of the losses, but during the fourth year the losses shall be offset to up to 70 per cent of the net taxable income and during the fifth year increases to up to 80 per cent.

Change of control does not necessarily affect the possibility to deduct operating losses or tax credits; this may be possible in the case of acquisi-tions, but again, and particularly in the case of mergers and acquisitions of related companies operating losses are not deductible.

The Dominican Republic is about to enact a new statute on reorgani-sations and bankruptcy. Neither such statute, nor the tax laws, provide for any special tax treatment of distressed entities.

8 Interest relief


There is no interest relief for borrowings to acquire entities in the Dominican Republic. However, interest paid in order to fulfil the obliga-tions assumed before a lender to finance a transaction that without a doubt is connected to the ordinary course of business is a deductible expense.

Furthermore, when the entity financing the transaction is located off-shore (no domicile for tax purposes within the Dominican Republic), the debtor (acquirer) must withhold 10 per cent of the interest paid.

In case the lender is a related party, it is still possible to deduct interest paid provided that it is an arm’s-length transaction. Otherwise, the DGII may intervene and adjust the terms of the transaction to current market standards for similar transactions.

Although not very common, debt pushdown is not a topic specifically covered by Dominican tax laws. However, such laws provide for limits in the deduction of interest but despite that there are no capitalisation- specific rules preventing the pushdown of excessive debt.



From a tax perspective, protection for stock acquisitions typically includes warranties of compliance of tax laws since it is a liability that attaches to

the entity acquired. This is an important topic considering that manage-ment has a joint and several liability arising from the compliance of tax laws. Although less relevant, asset acquisitions may be subject to a similar burden when the assets purchased have an outstanding debt with the tax authorities.

Payments made under a warranty or indemnity clause are treated as extraordinary income subject to income tax. In this particular case, no withholding applies to such payment given its extraordinary nature.


10 Restructuring


There is no typical post-acquisition restructuring process since tax effi-ciency depends upon the purposes behind the acquisition. Several options are available including mergers, sale and lease-back as well price transfer structures (provided that transfer pricing regulation is complied with).

It is common to use offshore entities incorporated at more favourable jurisdictions to acquire Dominican entities in order to make an attempt to mitigate an eventual capital gain arising from the sale of the stock or assets acquired, or just to distribute dividends in a more favourable jurisdiction. However, it is important to consider that capital gain applies in case of dis-posal of the shares on an entity located offshore whenever such entity has assets or rights within the Dominican Republic.

11 Spin-offs


Tax advantages might be obtained as a result of spin-offs since income tax, for example, typically does not apply to those transactions. However, such transactions and other types of reorganisation structures do not benefit from express ITBIS exemptions, although the tax administration, de facto, does not apply ITBIS to the transfer of applicable assets. In spin-off cases the operating losses of the spun-off business are preserved but could not be used for tax purposes by the new entity, and therefore the transfer of operating losses, in practical terms, is not feasible.

Despite the foregoing, other taxes might apply. For example, if the spin-off involves real estate property, 3 per cent transfer tax over the value of the property must be paid unless the property is contributed in kind to a Dominican entity (the exemption does not apply when the contribution in kind is made to a foreign entity).



It is possible for Dominican entities to migrate their residence to another jurisdiction and no specific tax applies to such situation. In order to achieve this, the proper corporate documents must be drafted and filed before the tax registry and it is mandatory to notify such changes to the tax authori-ties. Registry fees before the commercial registry would apply which are based on the capital of the entity involved.

Beyond the foregoing, if the entity has assets or any other interests in the Dominican Republic it must continue with the submission of its fil-ings on a monthly and yearly basis (as applicable) even if it is not a ‘going concern’.



As a general rule, interest and dividend payments are both subject to with-holding in Dominican Republic at a 10 per cent tax rate. In the particular case of dividends, the applicable withholding, which is much lower than international standards, shall not be used as a credit by the distributing


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entity (as was possible until fiscal year 2012). It is important to consider that where the dividends are distributed in form of stock, the withholding does not apply, and also, that dividends must not strictly be distributed (although this could be an important issue where there are minority stock-holders and may not apply in case the structure used is a trust since distri-bution of benefits is mandatory).

Only applicable low-income individuals, as provided by law, may file a tax claim in order to apply for a refund of the amounts withheld as a result of payment of interests. In addition, interest payments made to entities located abroad are also subject to a 10 per cent withholding.

No exemptions apply to these withholdings unless a special law or tax treaty provides otherwise.



Tax-efficient solutions should always be addressed on a case-by-case basis, but a general outline of examples could be the following:• apply to a tax-exempted regime (free trade zones, tourism, film indus-

try or border development, among others);• dividend distribution in a more favourable jurisdiction when the entity

is incorporated offshore;• dividend distribution in form of stock when the stockholders have a

long-term perspective of the business;• when possible, stock redemption up to the minimum and under the

terms permitted by applicable law, since the paid-in capital would be proportionally reduced; this option has occasionally been challenged by the regulator;

• royalty payments provided that the criteria set forth by the tax admin-istration are followed; and

• management fees to entities located in more favourable tax jurisdic-tion provided that it is an arm’s-length transaction, but bearing in mind that ITBIS applies to this service.


15 Disposals


The typical mergers and acquisition transaction is an asset acquisition, since it mitigates the risks inherent to the acquired business, particularly the situations that might arise from a successor liability claim, although tax authorities may follow the outstanding debt of the seller to the purchaser of

the assets. However, it is highly unlikely for any other third party (except-ing former employees of the seller) to obtain a favourable outcome upon disposition of the assets. The economic impact of the due diligence is also heavier in case of stock acquisitions since the purchaser is going to keep operating the business, and therefore assuming the risks inherent to ‘going concerns’, and that is why asset acquisitions must be considered whenever contingencies are likely to appear in the future.

It is important to consider that asset acquisitions are not typically structured when the target company operates in a regulated market (bank-ing, insurance, pension funds, among others) where one of the main goals is to have access to the governmental permits of the target company.

It is very common for local operating businesses to be incorporated and owned by foreign entities. However, most stock transactions do not include the acquisition of foreign local companies since the vast majority of such entities are personal investment vehicles. The transactions struc-tured on the acquisition of the foreign holding company are usually very high-profile cases.

Finally, under Dominican law, the disposal of stock in a foreign hold-ing company having assets or rights locally is subject to capital gain. In order to determine the applicable capital gain tax, the tax authority consid-ers the value of the sale and the proportional value of the local assets as compared to the global net worth of the entity transferring the stock.



Where a non-resident company sells stock held in a Dominican entity, capital gain taxes apply (see question 15).

There are no special rules dealing with real property, energy and natu-ral resource entities; however, special laws that could provide otherwise usually govern companies dealing with the extraction of natural resources, particularly in the mining industry.



Dominican tax law does not specifically provide for mechanisms to defer or avoid capital gain tax. As mentioned in question 1, the buyer must with-hold 1 per cent of the value paid for the stock (does not apply to assets) as an advanced payment to capital gain tax.

Enmanuel Montás [email protected]

Torre Forum, Local 4A Avenida 27 de Febrero No. 495El MillónSanto Domingo 10139Dominican Republic

Tel: +1 809 541 1013Fax: +1 809 549 5277www.msc.com.do


FRANCE Scemla Loizon Veverka & de Fontmichel (SLV&F)


FranceChristel AlbertiScemla Loizon Veverka & de Fontmichel (SLV&F)




For tax purposes, the main differences consist in the ability to achieve a step-up in basis in the acquired assets and to transfer the tax losses of the seller, and in the tax rate applicable on the transfer, whether capital gains tax (CGT) or transfer tax (TT).

Indeed, an asset deal allows a tax-free step-up and the absence of transfer to the buyer of any existing or contingent liabilities. However, the tax cost of an asset deal is usually higher in terms of TT (generally 5 per cent – see question 6) and of CGT (generally standard corporate income tax (CIT) rate which is 34.43 per cent or 38 per cent for large companies), unless the seller has net operating losses (NOLs) available.

A stock deal will allow the buyer to retain the tax losses of the French corporate seller, if any (see question 7). In addition, it will entail a TT, which is generally limited to 0.1 per cent of the sale price for corporations and 3 per cent for partnerships (unless the target company qualifies as a real estate holding entity – see question 6), and the seller will generally benefit from the participation exemption regime on substantial shareholdings (see question 15).

2 Step-up in basis


As mentioned above, a purchaser will get a step-up in basis only through an asset deal. Intangibles may be depreciated only if it is anticipated on the date of their acquisition that their usefulness to the business will end after an assessable period of time. This is generally the case for patents, software, design and know-how as opposed to trademarks, which usually benefit from an indefinite protection. However, the outcome will depend on a case-by-case analysis.

As regards goodwill or ongoing concerns, only items that are distinct from the clientele may be depreciated, if they can be itemised and if they meet the condition mentioned above. However, any decrease in value of a non-depreciable asset may still be deducted for tax purposes by way of a provision.

Stocks of an acquired target held as participation are non-depreciable but they must be recorded at a value including their acquisition costs, which are depreciated over a five-year period for tax purposes. However, a new measure provides that subscriptions to the share capital of stocks in non-quoted, innovative SMEs by a company subject to CIT can give rise to a deductible depreciation over a five-year period if certain conditions are met. The entry into force of this measure depends on the confirmation by the European Commission that it is compliant with the European state aid rules.



The French holding company regime is attractive (95 per cent exemption for dividends and 88 per cent exemption for capital gains on substantial shareholdings), although it has been slightly weakened (as from 2015, the 95 per cent exemption is no longer applicable to dividends that are deduct-ible from the paying foreign subsidiary’s taxable income.

If the acquisition is debt-financed, a French holding company will gen-erally be more appropriate for it will allow offsetting the financial expenses incurred in connection with the acquisition against the operating profits of the target if a tax consolidation is implemented. In addition, dividends paid between companies belonging to the same tax group are tax-exempt unless for the 5 per cent taxable portion of dividends paid in the fiscal year during which the company making the distribution enters the tax group. The French tax consolidation regime requires a formal election and a mini-mum, direct or indirect, ownership of 95 per cent for each of its members. Indirect ownership is possible via French or EU subsidiaries. As from 2015, the French tax code also allows integrating French sister companies held through a common EEA parent company.

Two anti-avoidance rules restrict the deduction of interest expenses. First, pursuant to the Charasse amendment, the deduction of a portion of the financial expenses of the overall tax group is disallowed, for a nine-year period, where the acquisition is made between jointly controlled companies and the target enters into a tax consolidation with the acquiring company or is merged into a company member of the tax group. This rule applies even if no debt was incurred for the acquisition. Some limited exceptions exist, however (in particular, when the target company was acquired from unrelated companies with the view to being transferred shortly afterwards to a member of the French tax group, and when the shares of the new mem-ber of the tax group are sold between two companies that are already mem-bers of the same tax group).

Second, the deduction of financial interest is subject to the acquir-ing company proving that, with respect to the fiscal year during which it acquired such shares or the following fiscal year, the decisions relating to the target shares are actually taken by it or by a direct or indirect French affiliated company, and where control is exercised over the acquired com-pany, such control is exercised by the French acquiring company, or by a direct or indirect French affiliated company. A company is deemed to have control over the shares in the acquired company when it can claim to be an autonomous centre of management having the said shares at its disposal (eg, free to sell it without the approval of any third person).

The portion of disallowed interest is equal to the purchase price for the shares divided by the acquirer’s average indebtedness and applies in respect of the fiscal year during which the acquisition takes place and of the following eight fiscal years. Specific rules apply in case of merger, or similar restructurings.

A safeguard clause is, however, available where:• the value of the target shares is less than €1 million;• the acquisition was not debt-financed; or• the debt/equity ratio of the acquiring company is inferior to the one of

its economic group.

This anti-avoidance rule is aimed at counteracting leveraged buyout (LBO) structures situated in France but controlled and managed from abroad.


Scemla Loizon Veverka & de Fontmichel (SLV&F) FRANCE


Some other restrictions exist (see question 8).Tax, financial and legal consolidation may also be achieved through a

merger between the holding company and the target company. However, such a merger generally cannot be implemented in the short term since the French tax authorities (FTA) may consider it as abusive.



Acquisitions are generally not structured through tax-free mergers as they do not allow cash payment exceeding 10 per cent of the nominal value of the issued shares. It is the same for tax-free partial contribution of assets (including shares) which require a minimum three-year holding period (and for shares, a minimum level of participation) when the participation exemption regime may apply only after two years.

Share-for-share exchanges may be carried out on a tax-neutral basis for the French seller.

For French corporate sellers, if the share-for-share results from a pub-lic tender offer on a French or European stock exchange, it will not give rise to CGT. The non-recognition treatment is automatic. The tax value of the shares exchanged by the seller is carried over at its level only. There is no guideline as to the nationality of the companies that issued the shares. Therefore, foreign companies should be eligible. Share-for-share resulting from a merger or spin-off may also be tax-neutral upon election. In other situations, the participation exemption on substantial shareholdings may apply.

For French individual sellers, contribution of the shares to another company in exchange for newly issued shares by the recipient company does not trigger the taxation of the gain if the seller does not control the recipient company. The tax value of the contributed shares is carried over and taxation only arises upon transfer of the shares received in exchange. The basis in the shares contributed to the recipient company is stepped up and there is no holding period requirement. An immediate sale by the recipient company could, however, be challenged by the FTA as being abu-sive, unless the proceeds are appreciably reinvested in an economic activ-ity. The recipient company may be established outside France, in Europe or in a jurisdiction that has signed a double tax treaty with France providing for qualifying exchange of information.

Where the individual controls the recipient company, the suspension of taxation is replaced by an automatic tax deferral subject to reinvest-ment. Such deferral is terminated if the shares received in consideration of the contribution are sold, or the shares contributed are sold by the receiv-ing company within a three-year period following the contribution, unless the sale proceeds are reinvested up to at least 50 per cent in an economic activity within a two-year period following the sale.



There is no special tax benefit attached to a share-for-share deal between a foreign buyer and a French seller, other than the tax attributes of a stock deal (see question 1). The benefits are generally on the side of the French seller, which may claim rollover relief where he is not entitled to the partici-pation exemption regime (see questions 4 and 17).

6 Transaction taxes


TT is payable by the buyer, unless the parties agree otherwise. However, in case of non-payment, all parties are jointly and severally liable.

The sale of assets, which generally characterises a transfer of a going concern (including clientele, exploited trademarks, licences and other intangibles), triggers a 5 per cent TT on the portion of the purchase price (or fair market value if higher) that exceeds €200,000 (3 per cent from €23,000 to €200,000). This tax also applies to the liabilities of the seller, which are assumed by the buyer. Transfer of patents is subject to a €125 registration duty. On such transfer, no VAT applies and the VAT rights and obligations of the seller are passed on to the buyer.

Sale of real estate is generally subject to a 5.09 per cent TT unless the sale occurs within five years from completion, in which case VAT applies at a rate of 20 per cent. Since 1 March 2014, in most of the French Departments, the TT has been increased to 5.807 per cent (excluding Paris).

Specific rules apply for the transfer of land.Sale of stock triggers a 0.1 per cent TT per transaction (3 per cent for

sale of shares in partnerships). For listed companies, in the absence of any deed, no duty applies. However, transfers of certain listed shares are subject to a financial transaction tax (eg, purchase of shares in French pub-licly traded companies with a market capitalisation in excess of €1 billion attracts a 0.2 per cent tax). TT and financial transaction tax are mutually exclusive. Neither tax applies if the transfer is performed:• between companies that are members of the same French tax consoli-

dation or between companies that are, directly or indirectly, held by the same controlling company; or

• through mergers, partial contributions of assets and demerger which qualify for the favourable tax regime.

The sale of stock in a non-listed real estate holding company (the assets of which consist, directly or indirectly, in more than 50 per cent of French real property) entails a 5 per cent tax, regardless of whether the real property is used within the course of the company’s business. For sales realised before 31 December 2014, the tax applied to the fair market value of the French real estate assets taking into account only the liabilities related to these assets, other liabilities being disregarded. As from 2015, the tax applies to the value of the shares sold (or fair market value if higher).



A change in control of the target company does not per se limit the avail-ability of the tax losses. NOLs carried forward are available for 50 per cent of the current year profit for companies having a profit exceeding €1 mil-lion (no limitation otherwise). The excess is indefinitely carried forward and available within the same limitations. NOLs can also be carried back up to €1 million against the preceding year’s undistributed profits.

However, the activity generating the NOLs must be the same as the one at the time the NOLs are used. Therefore, tax losses may no longer be available, for instance, if the company sells part of its activities, or takes part in a restructuring.

Guidelines are provided in order to determine situations in which a change of activity is considered as an interruption of business for the pur-pose of NOLs carried forward. It will consist mainly of:• the addition of a new activity, the surrender or transfer of an activity

that gives rise to a change in turnover (or the average number of the employees and the gross value of fixed assets) that exceeds 50 per cent in comparison with the previous fiscal year; and

• the disappearance of the company’s means of operation for more than 12 months.

In such situations, subject to prior approval of the FTA, the taxpayer may avoid loss forfeiture if it is demonstrated that the restructuring was crucial for the pursuit of the business and the preservation of the jobs.

Financial debt waivers are not deductible unless granted to a company subject to insolvency proceedings.

As for tax-free mergers or spin-offs, NOLs may be transferred to the recipient company subject to a de jure ruling from the FTA granted if:• the operation is placed under the favourable tax regime of mergers;• the operation is economically grounded;• the transferred activity has not changed during the period in which the

NOLs were generated (see above); or• the transferred activity must be undertaken by the recipient company

for a minimum three-year period during which it shall not be amended so it could be considered as an interruption of business (see above).

Under the French tax consolidation regime, anti-debt pushdown provi-sions limit the use of NOLs if they are incurred in connection with the




acquisition from a controlling shareholder (or from a seller controlled by the controlling shareholder) of an entity entering the tax group directly, or absorbed by a company member of such group (see question 3). Also, the exiting entity of a tax group cannot recover the tax losses it incurred during the tax consolidation (an indemnity may however be considered depend-ing on the tax consolidation agreement). Where the former mother com-pany of a tax consolidation is 95 per cent acquired by, merged or demerged in, a company which is the parent company of another tax consolidation, NOLs of the former tax consolidation may be transferred to the tax con-solidation headed by the acquiring company in certain proportions and under certain conditions.

If some member companies are sold pursuant to the liquidation of the head of the tax group within the course of insolvency proceedings, the exiting members of the group may recover their NOLs and capital losses incurred during the consolidation period. This rule also applies if the com-pany exits the group because it is itself subject to insolvency proceedings. A specific rule also provides that the distressed companies may set up a tax group as of the opening of the fiscal year during which they were sold.

8 Interest relief


An acquisition vehicle may get relief for borrowings to acquire a target company (whether French or foreign) subject to several limitations.

First, a general limitation applies to the deduction of the inter-est if the net financial expenses paid by a company in a given fiscal year exceed €3 million. In this case, only 75 per cent of these net expenses are tax-deductible.

If the financial expenses exceed the €3 million threshold, the limita-tion applies to the entire amount of the net financial expenses, not only to the amount in excess. Rental payments relating to rented moveable assets (between related companies only), rentals with a purchase option and finance leases are also taken into account (after deducting depreciation).

This limitation applies to all interest expenses irrespective of the sta-tus of the borrowing company, the origin of the financing and the alloca-tion of the funds.

Any interest paid by the company that is not tax-deductible pursuant to other specific anti-abuse provisions (see question 3 and thin capitalisa-tion rules below) shall reduce the amount of the net interest expenses to be added back under this general limitation.

In the case of tax consolidation, the €3 million threshold applies at the level of the group, but covers only interest expenses paid to entities which are not member of the group.

The limitation is applied at the level of each company belonging to the tax group as if it were on a stand-alone basis, and then the parent company, when assessing the consolidated results, determines the total of the net financial expenses paid by the overall group to ‘non-related’ entities, and if the amount exceeds €3 million, the parent company applies the recapture rule.

Second, there are two anti-debt pushdown provisions that restrict the deductibility of interest expenses (see question 3).

Finally, the thin capitalisation rules relate to financing granted by affil-iates, whether French or foreign. These rules also apply to non-affiliated loans when the repayment is guaranteed by an affiliate except for:• loans granted under the form of bonds issued within the framework of

a public offer;• loans granted in order to repay a previous loan, where such repayment

becomes mandatory due to the change of control of the debtor; and• loans guaranteed exclusively by pledge of shares or receivables of the

debtor.

The related-party interest may be disallowed if capital of the debtor is not fully paid up and if the agreed interest rate is higher than a certain interest rate which is quarterly published (2.79 per cent for the fiscal year ending 31 December 2014), unless it can be demonstrated that the debtor would have obtained similar conditions from independent financial establishments.

Once it successfully meets the first test (even partially), the French indebted company has to apply a second set of tests. Interest might be dis-qualified if it exceeds the highest of these three thresholds:• the interest multiplied by debt-to-equity ratio of 1.5:1, computed by

reference to the net equity of the company and the amount of related party debt;

• 25 per cent of a pre-tax adjusted operating profit; and• the interest received from related parties.

However, the disqualified interest may be disallowed only to the extent that it exceeds €150,000.

The disallowed interest can be carried forward within certain limits, with a yearly reduction of 5 per cent applicable as from the second year of carry-forward.

A safe-harbour clause may, however, apply if the borrowing company proves that the debt/equity ratio of its group is higher than its own.

The 2014 Finance Bill has created a new restriction. The deduction of interest is allowed only if the related lender is subject to a minimum taxa-tion. Such minimum taxation is met where the borrower demonstrates that the lender is subject to CIT on the interest received and the CIT rate appli-cable to such interest is at least equal to 25 per cent of the French standard CIT rate.

Specific rules provide the order in which all these different mecha-nisms have to be applied.

Excessive interest paid to a related or non-related party established in a low tax jurisdiction may be disallowed and treated as a deemed distribu-tion, giving rise to a withholding tax (WHT).

Under domestic law, interest is generally paid free of WHT, except where paid in a non-cooperative state or territory (NCST), in which case a 75 per cent WHT applies (see question 13).



The main terms of a share purchase agreement generally include repre-sentations and warranties from the seller that will lead to indemnification relating in particular to tax matters. French acquisition agreements do not generally provide for a separate deed of indemnity relating to tax matters. Of course, the scope of indemnification they will entitle the buyer to will depend on the latter’s negotiating powers. For asset deals, the buyer will be more likely to get a confirmation from the seller of the value of the acquired assets since no liability incurred before the closing date is supposed to be assumed by the buyer. These are common practice in all western countries.

The tax treatment of payments under a warranty claim will depend on several factors. There is no specific rule provided by the French tax code, but the principles described hereafter have been developed by case law. If the payment aims at guaranteeing that the sale price corresponds to the real value of the acquired item, is made to the buyer and cannot exceed such sale price, then such payment may qualify as a price reduction. The seller will record a loss in the fiscal year during which the payment is made (ie, no retroactive reduction of the initial capital gain). Such capital loss will follow the tax treatment of the initial capital gain (either short or long-term). At the level of the buyer, the payment will not be taxed but will reduce the acquisition price of the acquired item. As a result, the buyer can claim for a reduction of the TT paid on the acquisition.

If the payment is made to the acquired company rather than the buyer and can exceed the sale price, it will qualify as a taxable compensation for the buyer and as a deductible expense for the seller.

In both cases, no French WHT applies to such payments.


Scemla Loizon Veverka & de Fontmichel (SLV&F) FRANCE



10 Restructuring


The most common restructuring measure is first to incorporate a French vehicle and set up with the target a tax consolidation which allows the interest expenses incurred in connection with the acquisition to be offset against profits of the acquired company and a full exemption of dividend paid between companies members of the tax group (except during the first year; see question 3).

A merger between the acquisition vehicle and the target is generally not implemented before repayment of the acquisition debt unless the tar-get is a former acquisition vehicle (secondary LBO).

The implementation of agreements within an international group allowing the deduction in France of management fees and royalties is also often organised.

11 Spin-offs


Tax-free spin-offs can be carried out with and without the survival of the spun-off company. The shareholders that decide the division must hold the shares received for at least three years and such holding requirement should cover at least 20 per cent of the shares.

NOLs of the spun-off business may remain available at the level of the recipient company subject to a de jure ruling from the FTA granted if cer-tain conditions are met (see question 7).

Divisions of holding companies are not eligible for this regime since the spun-off company must have at least two lines of business. However, it is also possible to proceed to a tax–free contribution of shares in exchange for shares followed by a tax-free distribution of the shares issued by the recipient company to the shareholder of the French contributing com-pany. In such case, shares must be distributed within the year following the hive-down and a prior ruling obtained from the FTA (this requires that the shareholders commit to hold the existing shares in the French distributing company and the distributed shares for at least three years, such require-ment being questionable with regard to the EU Merger Directive).

In both cases, if the tax-free regime is applied, only limited fixed reg-istration duties apply.



Relocation of the headquarters of a French company outside France is treated as a liquidation. This entails the immediate taxation of the cur-rent-year profits, but also of any unrealised capital gains on the assets transferred (including the ones subject to a tax deferral or carried over). In addition, any outstanding tax losses may no longer be carried forward.

For relocations within the EU, Norway or Iceland, taxation may be avoided if the assets remain attached to a French permanent establishment.

Any transfer of these assets outside France triggers CGT either immedi-ately or, upon election, over a five-year period (recent guidelines rule out this option for the 12 per cent taxable portion of the participation exemp-tion regime). The balance of the CGT becomes immediately payable in cases of a sale of the assets or transfer of these assets to another state other than those mentioned above, of the liquidation of the company, or non-compliance with the payment schedules.



A French WHT may be levied on dividends paid to non-resident sharehold-ers, the rate of which is:• 15 per cent if paid to a non-profit organisation;• 21 per cent if paid to EEA individuals;• 75 per cent if paid in an NCST; and• 30 per cent otherwise.

An exemption applies to dividends paid to EU parents subject to several conditions (mainly, both companies have to be liable to CIT, a minimum 10 per cent ownership and two-year holding period). However, following ECJ case law, the FTA agree to extend the WHT exemption to EEA parents holding only 5 per cent of the distributing company if they are unable to set off the French WHT in their country because the dividend benefits from a participation exemption regime. Anti-abuse provisions apply to both exemptions.

Another exemption applies to UCITS that are resident of another EU member state or a state that exchanges information with France under a tax treaty.

The after-tax income of branches of foreign companies established outside the EEA is subject to a branch remittance tax at the rate of 30 per cent. If the branch can prove that total income actually distributed by its foreign head office within the 12 months following the tax year is less than the branch’s net distributable profit, or has benefited French tax residents, an appropriate refund of the WHT is made. This branch tax is largely lim-ited or cancelled by double tax treaties.

No withholding tax is due on interest paid by a French borrower out-side France (to either a shareholder or a bank) except where the interest is paid to a bank account located in a NCST. In that case, a 75 per cent WHT applies (the deductibility of the interest is also subject to certain restric-tions) unless the taxpayer proves that the payments are not tax-driven.



Other than dividends and interest, another way is to use hybrid instru-ments (qualifying as a debt in France and as equity for the foreign investor); however, the FTA pay close attention to such instruments.

Within a group, it is also possible to implement management fees agreements or licence agreements in order to deduct at the level of the French company the corresponding expenses. In such case, these pay-ments will have to comply with transfer pricing rules.

Update and trends

The Growth and Economic Activity Bill (the Macron Bill), published on 8 August 2015, allows French companies subject to CIT to deduct from their taxable basis 40 per cent of the acquisition cost of certain assets allocated to their business and which are:• manufactured or purchased between 15 April 2015 and

14 April 2016;• eligible to the amortissement dérogatoire (accelerated standard

depreciation regime); and• listed among five categories, such as:

• equipment and tools used for industrial manufacturing or processing operations;

• equipment and tools used for scientific or technical purposes;• material-handling equipment;• facilities used for water and air treatment;• facilities producing steam heat or energy excluding the ones

producing electricity subject to a regulated tariff.

This 40 per cent increased depreciation applies to the original value of said assets excluding interest expenses borne in connection with their acquisition. This tax deduction is spread over the depreciation period of the asset on a straight-line basis. So far, no ceiling on the amount of the allowance has been set.





15 Disposals


A disposal of stock in the acquisition vehicle is generally favoured. Capital gains upon the disposal of substantial shareholdings (ie, 5 per cent own-ership for more than two years), to the exclusion of shares in real estate companies, are 88 per cent exempt (ie, average effective taxation at 4.13 per cent). Besides, if the acquisition vehicle implemented a tax consolida-tion (in case of initial share deal), the acquisition of more than 95 per cent of its shares will allow the buyer to set up a new tax group with a favourable treatment (in particular, ability to use the losses of the former group – see question 7).

Share buy-backs may also be useful to organise the exit of one of the shareholders. From 1 January 2015, they no longer qualify as a distribution but as a disposal of stock and, hence, are taxed as such.



In the absence of a permanent establishment in France, non-resident com-panies may be subject to WHT only on gains arising from the transfer of:• shares in companies whose assets principally consist of French

immoveable property (ie, for more than 50 per cent) that is not used within the course of their business (either in quoted companies if the shareholding exceeds 10 per cent, or in non-quoted companies). In these situations, the WHT is levied at a rate of:• 19 per cent if the seller is an EEA individual resident or an EEA

corporate seller who had been taxed at that rate had it been a French resident;

• 75 per cent if the seller is a resident of an NCST; and• 33.33 per cent otherwise;

• shares in a resident company, if the shareholding exceeded 25 per cent at any time in the five preceding years (as regards individuals, the shareholding threshold is computed at the level of their family group). The tax is assessed at a fixed rate of 45 per cent. However, most tax treaties entered into by France eliminate this liability.

For individual shareholders, the tax is not final and they may claim the refund of a certain amount, the computation of which is quite

complex. For companies, such tax used to be largely refunded if derived by a parent resident in an EEA country and subject to CIT in its residence state. This possibility is no longer officially recognised by the FTA despite the fact that it is highly likely to be declared incompat-ible with EU law; and

• shares in a resident company and realised by a resident of an NCST. The applicable WHT is 75 per cent, regardless of the level of par-ticipation in the resident company. This WHT is final and cannot be refunded.

Natural resource companies in France are not likely to qualify as real estate companies to the extent that the real estate is used for the business of the company. There are no special rules for energy companies.



As mentioned above, disposal of shares may benefit from the participa-tion exemption regime (88 per cent exemption – see question 15). Disposal of patents, either to related or non-related parties, may be subject to a reduced 15 per cent taxation. Capital gains on the disposals of other assets are generally fully taxable at the CIT standard rate (generally 34.43 per cent, 38 per cent for large companies).

For substantial shareholdings, or assets which constitute a going con-cern or a full line of business, a rollover relief may apply under certain cir-cumstances, in particular the contributing company has to:• keep the stock issued in exchange by the beneficiary company

(whether French, EU or treaty-protected) for at least three years;• carry over the tax value of the contributed assets; and• determine any capital gain on the issued stock with reference to the

value of the contributed assets.

However, if the beneficiary company is French, this may lead to double taxation (once upon the disposal of the assets, and once upon the sale of the issued stock should the latter not be in the scope of the participation exemption, such as stock in real estate companies).

As regards share transfers, a shareholder may envisage a distribution before he or she sells the shares of the distributing company (dividends being 95 per cent exempt under the participation exemption, whereas a sale is only 88 per cent exempt). However, close attention should be paid to these kinds of operations, as certain anti-avoidance rules have recently been adopted.

Christel Alberti [email protected]

83 Rue de Monceau75008 ParisFrance

Tel: +33 1 71 70 42 42Fax: +33 1 71 70 42 43www.slvf-associes.com


CMS Hasche Sigle GERMANY


GermanyWolf-Georg von RechenbergCMS Hasche Sigle




German tax law distinguishes between two fundamentally different cases of enterprise acquisitions.

The first (case 1) is the acquisition of stock in a corporation (share deal). The second (case 2) is the acquisition of the assets and liabilities of a corporation or other enterprise, the acquisition of a whole enterprise run by a single natural person and the acquisition of interests in a partnership. The asset deal rules also apply if only a part of a business shall be acquired. In addition German corporate and tax law provides rules where, under certain conditions, parts of the business could be split off on a book-value basis into a new or existing corporate entity.

Corporations are subject to German income tax and trade tax. Only a corporation possesses a fiscal identity separate from its shareholders. Therefore, in case 1, the book values of all the single assets and liabilities in the accounts of the target company remain unchanged for income tax and trade tax purposes. The purchase price paid by the buyer is allocated to the buyer’s acquisition cost of the shares in the corporation as such. Neither the buyer nor the target may facilitate the purchase price for tax-effective depreciations, apart from rare cases where the value of the company is per-manently decreasing because of permanent significant losses. In that sce-nario a current-value depreciation may be applicable. The purchase price only becomes tax-effective for the seller if it resells the target. If the seller is a corporation subject to German corporate income tax, only 5 per cent of the capital gains from the transaction are taxed.

The purchase of assets and liabilities of a business, no matter whether it is run by a single natural person or any other entity, for tax purposes is treated as if the buyer had bought all the single assets separately. The liabilities allocated to the target are treated as a (negative) part of the pur-chase price. Therefore, in case 2, the net purchase price paid by the buyer is equally allocated to the single assets of the target company up to the mar-ket value of the assets. If the purchase price exceeds the market value of all assets, the exceeding amount can be activated as goodwill. As far as the assets have a limited useful life, the buyer benefits from depreciation for purposes of its personal income taxation. In addition, the acquiring entity can deduct the depreciation of the assets from its trade tax base.

Partnerships are treated as being transparent for German income tax purposes. The acquisition of partnership interests for tax purposes is treated as if the buyer had bought, proportionately, all the single assets of the partnership.

2 Step-up in basis


Goodwill and other intangibles may only be added to the tax balance sheet of a company if they have been purchased (section 5(II) of the Income Tax Act (EStG)), the only exception being a merger. Since depreciation of an

item is inconceivable without its prior entry into the balance sheet, such assets need to be traded at least once before they can be used for tax depre-ciation. The buyer is advised to include in the purchase agreement a spe-cific price for each intangible to avoid later dispute over their value.

Assuming that goodwill and other intangibles are already included in the target’s balance sheet and thus responsible for a part of the share price, a depreciation of their market value can indeed be used for tax purposes in a type 1 deal, but only if that depreciation leads to a traceable loss in the share price. Buyers are advised that a type 1 deal does not provide in itself an opportunity to add intangibles to the balance sheet for later deprecia-tion. As for type 2 deals, they are generally open to tax depreciation, which becomes effective on the level of the buyer (see above). Tangible assets are treated no differently, as long as they have a limited useful life. Goodwill, for instance, is considered by the Income Tax Act to have a life span of 15 years (section 7(I)(3) EStG).

More generally, a step-up in basis in the business assets of the target company is only possible under German tax law in type 2 deals. A step-up in basis is realised if the purchase price plus the liabilities taken over is higher than the book values of the assets together. The excess purchase price is allocated to all the assets of the target proportionately to their market value. If there is still a mismatch between the purchase price and the accu-mulated market values of the assets, the difference is treated as acquired goodwill.



For the consequences of a purchase described in questions 1 and 2, it makes no difference in principle whether the acquisition company is established in Germany or abroad, as long as the target has a permanent establishment in Germany.

It may be preferable, however, to have a German acquisition com-pany, with respect to the tax treatment, in the post-acquisition time. The acquisition company and the target company may only form a tax group if the acquisition company has its residence or place of management in Germany. Forming a tax group enables the two companies to offset the losses of one company (eg, the interest expenses of the acquisition com-pany) against the profits of the other company (eg, the target company). Nevertheless, it is possible that a German permanent establishment (PE) of a foreign corporation may form a tax group with a German subsidiary, but only if the shares are held in this PE and limited to the profits and losses related to this PE.

A German acquisition company is also required if restructuring meas-ures are planned after the acquisition. For example, mergers can be struc-tured tax-neutrally, but this is only the case if the merger does not lead to a restriction of the German entitlement to levy income taxes on the assets transferred during the merger. The sole restriction of the German entitle-ment to levy trade tax does not have any adverse effects; this is mainly due to its design as a municipality tax.

If only a part of the shares in a target corporation is to be acquired, it can also be advantageous to structure the purchase with a German acquisi-tion vehicle in order to avoid adverse withholding tax issues with respect to future dividend payments. For dividends paid by a German corporation to a foreign shareholder, the EU Parent–Subsidiary Directive and many dou-ble taxation agreements stipulate minimum shareholding quotas in order


GERMANY CMS Hasche Sigle


to avoid or reduce withholding taxes. This problem can be avoided by using a German acquisition vehicle, since a German corporation as a shareholder can generally receive almost (95 per cent) tax-free dividends and demand a refund of the withholding taxes.



Company mergers and share exchanges are frequently chosen forms of acquisition in Germany, since the Reorganisation Tax Act (UmwStG) gen-erally provides for the parties having the choice of whether they want to realise a step-up in basis in an amount to be determined flexibly up to any amount up to fair market value of the assets or if the buyer takes a carry-over basis in the assets acquired. However, the UmwStG generally only applies if both companies have been founded under the laws of a mem-ber state of the EU or the European Economic Area (EEA) and have their residence and place of business in one of these states. In addition, it is generally required that the transferred assets or corporation shares remain subject to German taxation after the transaction in order to have the option to valuate the assets or corporation shares at a value lower than the market value. Therefore, the receiving company will need to have its residency, place of management or at least a branch in Germany. However, a step-up in the single assets owned by the target company is only possible in a com-pany merger or demerger. In a share exchange, the assets of the target have to be valued on a carry-over basis. The right to opt for a step-up refers only to the shares of the acquired company. If no choice is made in the context of the first tax return after the merger, a step-up in basis is the rule.



From the seller’s perspective, issuing own shares as consideration for shares in the target can be advantageous, since the UmwStG allows for the option to take a carry-over basis in the shares acquired instead of a reali-sation of the hidden reserves in the target shares. However, choosing this option would be disadvantageous for the buyer, since the buyer would then have less acquisition cost for the target shares acquired and would there-fore realise a higher taxable profit in a future sale of the shares. This effect may be of less importance because the profit from the later sale of the shares would be 95 per cent exempt from tax. If the option is not exercised, issuing stock as consideration is not treated differently from paying cash.

6 Transaction taxes


There are no documentary taxes in Germany. The sale of shares in a cor-poration or partnership is generally VAT exempt, but the seller is entitled to opt for VAT. This can be sensible under certain circumstances, for exam-ple, if the seller has received certain services with respect to the shares in the past, which have been burdened with input VAT. There are no other transaction taxes in Germany that apply to company sales. Nevertheless, one has to bear in mind that fees for notarisation and registration to the commercial register and the land register have to be paid.

However, special attention must be paid to real estate transfer tax if the target owns real estate that has a great value. The acquisition of at least 95 per cent of the shares in a corporation or partnership that owns a piece of land by one buyer or related parties is treated as if the piece of land itself was sold. In this case, real estate transfer tax of 3.5 to 6.5 per cent of the value of the piece of land becomes due (section 1(II)(a) and III of the Real Estate Transfer Tax Act (GrEStG)). The rates depend on the German federal state where the real estate is located. In the past this result could be avoided by ‘RETT-blocker structures’. If the target company is of the non-incorporated type, the tax can be avoided by leaving at least 5.1 per cent of its shares in the hands of the original owners. After a waiting period of five years, the remaining stake can be transferred to the buyer without any negative fiscal consequences. This solution is not an option if the target company is a corporation or a partnership. To avoid the real estate transfer tax in this latter case, a permanent division of the target’s shares into two separate entities is necessary and those entities must not

belong to the same group. Section 6(a) GrEStG exempts an otherwise tax-able transfer within the same group, but this exception only works when the target has belonged to the buyer for at least five years before the trans-fer takes place. New legislation came into force in 2013. The new rule looks not at the nominal percentage of 95 per cent but takes an ‘economic view’ and takes into account all direct or indirect participations of the buyer in the respective company. Nevertheless the new rule does not apply to reor-ganisations within a group of companies.



Section 10(d) of the EStG stipulates a so-called minimum taxation, which works as follows: If a net annual loss arises, it may be carried back to the previous fiscal year up to an amount of €511,500. If the loss still is not neu-tralised after that, it is carried forward into future fiscal years. Once the company makes a surplus, the minimum taxation rule prevents it from instantly setting off all accumulated losses against new surpluses. Instead, usage of carry-forward losses is capped at 60 per cent for each fiscal year. Only the first million of losses can be offset without limitations. For exam-ple, a company with a surplus of €10 million in 2013 and an equal amount of carry-forward losses has a taxable income of €3.6 million, which may be called the minimum taxable income. The remaining losses are carried on until they are used up. Forming a tax group can reduce the impact of the minimum taxation clause by eliminating losses within the group immedi-ately instead of carrying them forward.

While the aforementioned limitations only defer the usage of carry-forward losses, additional rules pertaining to a change of control in type 1 deals affect the very preservation of such losses. Acquiring a com-pany’s shares eliminates carry-forward losses either proportionately (25.1 per cent to 50 per cent of shares acquired; anything less has no effect) or entirely (50.1 per cent and above) for purposes of corporate income and trade tax (section 8(c)(I) of the Corporate Income Tax Act (KStG) and sec-tion 10(a)(X) of the Trade Tax Act (GewStG)). Shares bought by a group of acquirers with common interests are added. The loss-elimination clause covers not only direct transfers of shares, but any similar type of transac-tion, leaving almost no room for a preservation of losses. However, the elimination does not kick in if the target and acquiring corporation entirely belong to the same group or if the target’s carry-forward losses exceed its existing hidden reserves.

In 2010, a reorganisation clause was implemented in German corpo-rate tax law (section 8(c)(I)(a) KStG). If the transfer of shares is performed in order to save a corporation from going bankrupt and to preserve its fundamental structures, all accumulated losses can be maintained in its books for future offsetting. This requires a restructuring agreement with the works counsel, the preservation of the number of jobs in the company for several years or significant investments into the target com-pany. According to a ruling by the European Commission, however, this clause is an unfair state aid and therefore violates European law. Action of nullity against this judgment has been filed by the Federal Republic of Germany to the European Court of First Instance, which confirmed the position of the European Commission. The appeal was dismissed by the European Court of Justice in July 2014, therefore the clause remains inap-plicable. Simultaneously, a proceeding before the German Constitutional Court is currently looking into the compatibility of section 8(c)(I)(1) KStG with article 3(I) of the German Constitution. Should the court rule section 8(c)(I)(1) KStG to be unconstitutional, a revision of the loss limita-tion clause can be expected.

If the company realises profits in the course of a reorganisation due to a cancellation of debt, the tax authorities may grant a deferral and later a waiver of the taxes on these profits, but only after all net operating losses and losses carried forward have been used up to offset against these profits.

Tax credits (ie, withholding tax credits that have been accumulated before the acquisition) stay with the corporation even after a change of control. They are subject to the regular limitation periods.




In type 2 deals the tax losses accumulated by the target before the change of control can generally not be used by the acquirer in the future, because they always stay with the former shareholder or owner of the business.

8 Interest relief


German tax law has extremely strict limitations to the deductibility of interest payments by a company belonging to a group (the ‘interest-barrier rule’ (section 8(a) KStG and section 4(h) EStG)); it is one of the greatest obstacles to deal with in large transactions in Germany.

If a group company has outgoing interest payments that exceed its incoming interest earnings by €3 million, only 30 per cent of the profits (earnings before interest, taxes, depreciation and amortisation) can be offset against interest payments. In contrast to the minimum taxation rule discussed in question 7, the interest-barrier rule spares no base amount from this restriction, so it is all or nothing in this case. Additionally, profits that have not been offset against interest expenses can be carried forward for five years at the most, but they may be lost in a case of change of con-trol. If they remain unused until then, they become definite profits. Unused excess interest, on the other hand, can theoretically be carried forward indefinitely.

A group company remains unaffected by the interest-barrier rule if its equity-to-assets ratio is higher or equal to the ratio of the corporate group as a whole.

This rule does not only apply if the lender is foreign, a related party, or both, but applies to interest payments to any kind of lender. To make matters worse, the exceptions provided for companies not belonging to a group or equipped with a good equity-to-asset ratio are largely over-riden by special stipulations in section 8(a)(II) and (III) KStG if more than 10 per cent of the excess interest payments go to a person that owns at least one quarter of a corporation, or to someone related to or controlling that person (section 8(a)(II) and (III) KStG).

Withholding taxes on interest payments are usually not an issue, since the obligation to withhold taxes on interest payments applies only if the debtor is a bank or financial institution or the loan has been registered in a public debt register. However, for related-party debt, additional restric-tions apply, since the interest payments are only deductible if assessed at arm’s length. Otherwise, they are treated as hidden profit distributions and trigger withholding tax. If the acquirer is a foreign company, any withhold-ing taxes can be a definite tax burden.

Debt pushdown cannot be achieved by a simple assumption of debt, since this can be treated as a hidden profit distribution from the target to the acquirer. In this case, withholding taxes become due. Under certain circumstances these consequences may be avoided by executing the debt pushdown as a reorganisation under the Reorganisation Tax Act, but this is more complicated and expensive than a simple assumption of debt.

There are no restrictions for debt pushdown other than those men-tioned above. Should the acquirer be unwilling to undergo the effort of a reorganisation, he or she can at least realise a partial debt pushdown to take full advantage of the €3 million interest excess allowance per com-pany and year.



Protections for acquisitions are found in most asset- or share-purchase agreements concluded in Germany. Usually the seller guarantees that all tax obligations have been fulfilled in the past and that the tax liabilities as presented in the annual accounts and the documents provided during the due diligence have given the purchaser the complete and correct picture of

the situation. The seller commits himself to pay any taxes assessed after the transaction by the tax authorities, as far as the cause of these taxes is to be found in the time before the transaction.

Payments under a warranty claim reduce the profit from the sale on the side of the seller. If the payment is made to the purchaser it reduces the acquisition price and at the same time, the value of the target. A tax would be triggered only at further sale. If the payment is made into the target company it would be treated as extraordinary income and would be subject to the normal tax in the respective business year. No withholding tax would become due.


10 Restructuring


A typical restructuring measure after the acquisition of a company is a merger of the acquisition vehicle into the target in order to realise debt pushdown without the adverse tax consequences a simple assumption of debt would have (see question 8).

Another frequent post-acquisition measure is a change of legal form in order to change the tax treatment of the profits distributed by the target to the buyer under the relevant double taxation agreement. For example, a transformation of a partnership into a corporation might be sensible if the respective double taxation agreement provides for a withholding tax relief for dividends, while a transformation the other way around can be advantageous if there is no withholding tax relief in the double taxation agreement.

An upstream merger of the target into the acquisition vehicle might help avoid the taxation of 5 per cent of the profit distributions of the target to the acquisition vehicle pursuant to section 8(b) KStG.

If the target owns real estate that is rented to other parties, it is advis-able to transfer the real estate from the target into a separate company. Rental income is free of trade tax (sections 9(1) and 2 to 6 GewStG), but only for companies that exclusively rent out real estate and do not partici-pate in any other business activities.

Another post-acquisition restructuring is the formation of a tax group between the target and the acquisition vehicle for corporate tax and trade tax. This can usually be achieved by signing a profit-and-loss-sharing agreement with a minimum term of five years but may be achieved retro-actively if the profit-and-loss-sharing agreement is properly registered in the commercial register until the end of the respective year. VAT tax groups arise automatically if the daughter company is sufficiently integrated into the mother company (section 2(II)(2) Value Added Tax Act).

11 Spin-offs


A tax-neutral spin-off can generally be achieved under the UmwStG, but a sale of more than 20 per cent of the shares in the spun-off business within the following five years will lead to a retroactive taxation of the hidden reserves (section 15(II)(4) UmwStG).

The net operating losses cannot be transferred in their entirety; rather they follow the spin-off in proportion to the assets received from the trans-ferring company (section 15(III) UmwStG).

In a spin-off scenario real estate transfer tax of 3.5 to 6.5 per cent (depending on the federal state in which the property is located) becomes due on the value of real estate transferred in course of the spin-off. Spin-offs taking place within a group of companies are exempt from the real estate transfer tax if 95 per cent of the shares in the spin-off are held for at least five years by the transferring company or another member of the group (section 6(a) GrEStG).


GERMANY CMS Hasche Sigle




If a corporation’s residence is migrated from Germany to a state that is not a member of the EU or EEA, the corporation is treated as if it were liq-uidated (section (12)(III)(1) KStG), pursuant to the market value, and the shareholders are taxed on this basis. .

If a partnership’s residence is moved to any foreign state or a corpora-tion’s residence is moved to an EU or EEA state, this will not lead to adverse tax consequences as long as no assets are moved away from Germany. Several recent court decisions suggest that, even when moved away, their hidden reserves remain taxable under section 49 EStG, but this judicial twist may yet be overturned by new legislation.



Interest payments are only subject to withholding taxes if either the debtor is a bank or other financial institution or the debt has been registered in a public register (section 43(I)(1)(7) EStG). This restriction applies irrespec-tive of the residency of the lender. If the lender is a foreign entity, which is not subject to unrestricted tax liability, the interest payments are – in addition – only subject to withholding taxes if the debt is collateralised by German real estate (section 49(I)(5)(c)(aa) EStG).

Dividends paid by German corporations are generally subject to German withholding taxes under national German law (section 43(I)(1) EStG).

The withholding tax rate for interest and dividends is 25 per cent (sec-tion 43(a)(I)(1)(1) EStG). The tax may partly be reimbursed on the grounds of a double tax treaty. If a particular certificate can be obtained before the dividend is paid, no withholding tax will be charged in the first place (sec-tion 50(d)(II) EStG).

Until February 2013 under the old German tax regime dividends to shareholders holding over 10 per cent were not subject to withholding tax if the shareholder was resident within the EU or were only subject to a reduced withholding tax under the respective tax treaty if the shareholder was resident in a country outside the EU. Whereas for German sharehold-ers with participation under 10 per cent there was basically no withholding tax burden, shareholders in other member states were left with the definite withholding tax burden of 15 per cent on dividends received. With the Act for the implementation of the decision of the European Court of Justice of 20 October 2011 in case C-284/09 German legislation followed the order of the court to review the withholding tax regime for minority shareholders. The new law has been in force since 1 March 2013. The main details of the new law are as follows:• All dividends paid after 28 February 2013 to shareholders with a share-

holding of up to 10 per cent are subject to withholding tax, regardless of the residency of the shareholder, whereas capital gains from the alien-ation of shares remain exempt from tax for domestic shareholders.

• For all dividends paid to shareholders before 1 March 2013 the new sec-tion 32(5) of the German Corporate Tax Act entitles foreign entities to

reclaim withholding tax that has been paid to the German tax admin-istration under the old regime.

• There is a complex list of conditions foreign shareholders have to comply with and evidence to be provided if they want to success-fully reclaim the withholding tax, and the new law also contains rules under which investment funds under the German Investment Tax Act can benefit for the past and the future. According to these provisions, foreign investment funds that are exempt from tax in their country of residence are not entitled to a refund of withholding tax.

• To solve pending disputes about the competent authority for the reclaiming process a new rule has been implemented to centralise the administration process at the Federal Central Tax Office.

Under the revised EU Parent–Subsidiary Directive, a further anti- avoidance rule will have to be implemented in European jurisdictions under which dividends can only be tax-free if the respective amount has been subject to tax paid at the subsidiary level.



Since dividend payments are not tax-deductible on the corporation level, but interest and royalty payments are, it is generally more efficient to pay royalties and interest rather than dividends, as long as the relevant double taxation agreement between Germany as the state of residency of the tar-get and the state of residency of the acquirer allocates the right to levy taxes on interest or royalty income to the state of residency of the party receiv-ing the payments. However, the acquirer has to meet certain ‘substance’ requirements in order to avoid the application of a special German anti-avoidance rule (section 50(d)(III) EStG, anti-treaty-shopping rule), and the royalties or interest rates have to be negotiated at arms’ length in order to avoid the assumption of hidden profit distributions by the tax authorities.

Section 50(d)(III) has recently been revised after its precursor was deemed too harsh by the European Commission. The latest version denies a foreign company the reimbursement of withholding taxes to the extent that its shares are held by anyone who would not be entitled to a reimburse-ment himself and the company’s income does not stem from its own eco-nomic activity. However, the legislator accepts a structuring which shifts dividends out of Germany as long as both a good non-fiscal reason can be shown and sufficient business operation facilities exist to participate in the market.


15 Disposals


In German tax law, a choice between share or asset deal only exists when the sold company is a corporation (see question 1). In all other cases, the type of deal is predetermined by the nature of the target. It must be remembered that this statement is true only in the area of tax law and does not extend to trade law for example. Also, in restructuring matters the UmwStG strives to put all kinds of transformations on a par.

A disposal of the business assets of a German company as well as a sale of the shares in a partnership (type 2 deals as described in question 1) will generally lead to a full taxation of the difference between the book values of the assets and the purchase price received. In a sale of the shares in a German corporation by another corporation, only 5 per cent of the prof-its are subject to tax in Germany, so with a corporate income tax level of 15 per cent, the effective tax rate is less than 1 per cent. Germany does not levy taxes if a foreign holding company sells its assets in a German unin-corporated company, provided that the holding company’s shareholders are also resident abroad. The transaction will be taxed only in the state of residence of the holding company, therefore when determining the seat of the holding company the seller should heed the advantages of a low-tax jurisdiction.

Update and trends

There is legislation pending but not enacted, which would eliminate tax-free treatment of capital gains received by corporations on the sale of shares in other corporations. It is not clear yet whether this will come into force in 2016.

There is legislation pending in connection with the BEPS discussions on hybrid mismatches under which the deductibility of expenses would be restricted in the respective amount not treated as income on the side of the recipient.

There is a trend that the rate of real estate transfer tax levied by the federal states is being increased up to 6.5 per cent.






As explained above, the disposal of stock in a local company by a non-resident company is generally subject to German tax. There are no special rules for the disposal of stock in energy and natural resource companies, but for real property companies the real estate transfer tax issues described in question 6 must be contemplated. Another problem with respect to the disposal of stock in a real property company is that the trade tax exemp-tion described above (section 9(1)(2–6) GewStG; question 10) may become inapplicable for the future if the sale of the real estate is treated as a trading business.



Since the disposal of shares in a corporation is subject only to a very low effective tax burden if both parties of the deal are corporations, a restruc-turing of the holding may be desirable before a sale. It is possible to trans-fer the shares into a corporation’s property in a tax-neutral way under the Reorganisation Tax Act, but a waiting period of seven years until the disposal must be adhered to in order to avoid a retroactive taxation of the reorganisation (section 22(I)(1) UmwStG). Upon disposal of German real estate that belonged to the company’s assets for at least six years, the hid-den reserves may be transferred to a new asset, if the substitute asset is acquired within four years (section 6(b) EStG).

Wolf-Georg von Rechenberg [email protected]

Lennéstraße 710785 BerlinGermany

Tel: +49 30 20360 1806Fax: +49 30 20360 2000www.cms-hs.com


GREECE Iason Skouzos & Partners Law Firm


GreeceTheodoros SkouzosIason Skouzos & Partners Law Firm




We distinguish these more common forms of acquisition:• transfer of shares or parts in a company and in particular:

• company shares not listed on a stock exchange;• shares and other transferable securities listed on a stock exchange;

and• equity stakes or parts in partnerships.

Transfer also includes the contribution of such securities in order to sub-scribe or increase a company’s capital, that is:• transfer of an entire business, in other words transfer of all shares,

equity stakes or parts in it.

These forms of acquisition may be analysed as follows.

Transfer of shares or parts in a companyCompany shares not listed on a stock exchange (either domestic or non-domestic)Income arising from the goodwill from transfers of company shares not listed on a stock exchange that take place from 1 January 2014 onward will be deemed to be income from capital transfer goodwill, and in the case of Greek natural persons will be taxed at a rate of 15 per cent without such persons having to submit a tax return at the time of the transfer, since the income will be included that person’s annual income tax return and will be taxed at the end of the year. In the case of Greek legal entities, income gen-erated from the goodwill from transferring these securities will be deemed to be income from business activities and will be subject to income tax for legal entities, as appropriate. Goodwill means the difference between the acquisition price the taxpayer paid and the sale price collected. Any expenses associated directly with the purchase or sale of securities are included in the acquisition price and sale price. Sale price is the price the contracting parties have declared that is recorded in the transfer agree-ment, which cannot be below the value of the equity of the company issu-ing the securities being transferred, at the time of transfer. Acquisition price includes the price computed based on the value of the equity of the company issuing the securities being transferred, at the time of acquisition of the securities, or the price recorded in the transfer agreement at the time the securities are transferred, whichever is lower.

The equity of companies that keep double-entry accounting books means the equity shown in the last monthly trial balance for the company before the date of transfer. Any entries made by the date of transfer in those accounts are taken into account. To calculate the acquisition price in these cases, regard is had to company transactions up to the time of the transfer, such as any share capital increases or decreases, irrespective of whether they change the number or value of securities, etc. It is self-evident that where shares are offered gratis as part of a share capital increase by capi-talising reserves (premium on capital stock reserve, taxed profits reserve, etc), those shares will affect the acquisition price of the shares and conse-quently the goodwill generated when shares in that company are sold.

The equity of companies that keep single-entry accounting books is the capital shown in the articles of association from the time the company was incorporated and any amendments to those articles of association. Regard is also had to the purchase of any fixed assets, subsidies and grants that have not been included in the acquisition cost of fixed assets and the coverage of other costs, and other items demonstrating an increase in capi-tal for which the company has not amended its articles of association. In the case of legal persons or legal entities that do not keep accounting books (such as not-for-profit legal persons), the acquisition cost will be deemed to be zero if it cannot be determined due to the absence of lawful invoices, etc. These matters are subject to audit by the competent auditing authority in all events. If a natural person has engaged in successive acquisitions of securities and then transferred all or part of them, the acquisition price of the securities sold will be deemed to be the average acquisition price based on the total acquisition cost of the securities divided by the total quantity. Where the transferred securities have been acquired as part of an inherit-ance, donation or parental grant, the acquisition price of those securities will be the tax paid for acquiring them since all expenses, including that tax, associated with purchasing securities and acquisition of securities in general are included in the acquisition price of securities.

Where the goodwill calculations generate a negative figure, that nega-tive figure will be carried forward for the next five years and only offset against future goodwill gains generated exclusively from the transfer of those securities. In order to calculate the final result (profit or loss) from such transfers, regard is had to the algebraic sum of the transactions that have taken place in the same tax year for all categories of securities. Note that where the result of securities transfers is a loss, the loss will be recog-nised for tax purposes unless it is a loss from the transfer of securities of foreign origin, in which case it is not recognised, but may be offset against income generated from other member states of the EU or EEA.

Company shares listed on a stock exchange (either domestic or non-domestic)Note that goodwill for natural persons from the transfers of shares and other transferable securities listed on a stock exchange (whether the Athens Exchange or a foreign exchange) from 1 January 2014 onwards is considered to be income from the goodwill from transfer of capital and is taxed at a rate of 15 per cent, only if the transferor (a Greek natural per-son) participates in the share capital of the company with a holding of at least 0.5 per cent and the transfer relates to securities acquired after 1 January 2009. In order words, it exempts cases from goodwill tax that relate to:• securities acquired before 1 January 2009, irrespective of the trans-

feror’s holding in the company’s share capital; and• securities acquired after 1 January 2009 where the transferor’s holding

in the company’s share capital is below 0.5 per cent.

Since certain shareholders with a holding of 0.5 per cent or more in the share capital of a societe anonyme (at the time of sale) may have acquired shares in the company both before and after 1 January 2009, it has been accepted that if those shares are sold, the first in first out (FIFO) method will apply so that after the elapse of a certain time period the shares which had been acquired by that critical time period will have been eliminated and the law will apply in all cases from that point on.

To that end, a list must be requested from securities companies which must be held by the natural person and submitted in the case of an audit.


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In the case of Greek legal entities, income generated from the goodwill from transferring these securities will be deemed to be income from business activities and will be subject to income tax for legal entities, as appropriate. The acquisition and sale prices of securities which are traded on a regulated market or multilateral trading facility, including the Athens Exchange’s Alternative Market (such as shares, Greek Treasury bonds, derivative financial products) are set by the transaction documentation issued by securities companies, credit institutions or any operator who executes transactions, on the date the transaction is settled.

Expenses associated directly with the purchase or sale of securities are included in the acquisition or sale price. Consequently, commission charged by securities companies, HELEX transfer fees, ATHEX fees, stock exchange transaction tax at 2 per thousand, etc, affect the final result gen-erated by the sale of securities. Note that the provisions of article 9(2) of Law No. 2579/1998 and article 27(2) of Law No. 2703/1999, which impose a 2 per thousand tax on the value of shares which are sold, have been retained in effect.

Company ‘parts’ in other types of companiesThe points above on the transfer of shares in companies not listed on a stock exchange apply to transfers of equity stakes or parts in limited liabil-ity companies or in partnerships, etc, from 1 January 2014 onwards. Shares include equity stakes in general partnerships that function like shares, pro-vided they are presented like shares in accordance with article 284(1) of Law No. 4072/2012 and each stake in the partnership corresponds to one or more shares.

Although not expressly specified in the law, the transfer of equity stakes or parts in companies also includes income from the goodwill from transfers of holdings in joint ventures given that under the provisions of article 293(3) of Law No. 4072/2012 if a joint venture carries on commer-cial activity the provisions on limited partnerships apply to it by analogy. Moreover, those same provisions also include the transfer of equity stakes in limited liability companies, private companies, social enterprises and civil associations.

Transfer of a business as a ‘going concern’These points also apply to the transfer of entire businesses, in other words the transfer of all shares and equity stakes or parts in it, as well as the transfer of a sole-trader enterprise or branch thereof from 1 January 2014 onwards. If a sole-trader enterprise that keeps single-entry accounting books is being transferred, the sale price and acquisition price will be the price stated in the transfer agreement. If the acquisition price cannot be computed, it will be deemed to be zero. More specifically, when the tax authority is carrying out an audit the assets of a sole-trader enterprise in the year of the transfer and in the year operations commenced, such as the business’ fixed assets, inventories, receivables, liabilities, etc, help deter-mine the sale and acquisition value of the business being transferred. The goodwill from transfer of a sole-trader enterprise does not relate to the sale of fixed assets and merchandise per se to the new owner, since they are gross income of the transferor in all events. It is self-evident that in the case of depreciated business assets, the entire sale price is taxable revenue from business activity. In this case, goodwill corresponds to intangible assets such as name, trademark, privileges, reputation and clientele, and is taxed at 15 per cent but does not relate to income from business activity.

2 Step-up in basis


The valuation of the assets of a target company may be subjective depend-ing from whose perspective it is viewed, namely the seller, the buyer or the tax authorities, whose interests may all be at odds. Of course the tax authorities will favour higher taxation, that is, higher valuation of the assets to be transferred. The seller will wish to set a higher value (consid-eration) but not necessarily to pay tax for it, which unfortunately in Greece often leads to ‘under the table’ cash transactions. The seller, on the other hand, will usually be interested in paying less and showing more.

The most usual method of objective valuation, followed often in the most serious business transactions, is valuation by neutral certified

auditors. Goodwill and other intangible assets are subject to wide interpre-tation and looser methods of valuation because of their nature.

The case is somewhat different when, instead of cash, we deal with a contribution in kind, in consideration of shares issued after an increase in the share capital. Again, the tax authorities will be interested to an increased value of the assets (tangible or intangible) contributed. Apart from the contracting parties, there is the supervising authority (the Ministry of Development, formerly the Ministry of Commerce) that, being the guardian of third-party creditors of the company, has a tendency for a lower (or at least objective) valuation of the assets to be contributed. Until very recently, contribution in kind upon the formation or the increase of share capital of an SA company was only conducted by the supervis-ing authority, a three-member committee consisting of two employees of the Ministry of Development and one representative of the Chamber of Commerce (representing the interests of the businesses). This is the ‘article 9 committee’, named after the relevant article of SA Companies Law No. 2190/1920.

According to Law No. 3604/2007 article 14, which amended article 9, the founders of SA companies, or their board of directors, can choose to appoint certified auditors instead of an article 9 committee. Another devi-ation exists in the case of restructuring by virtue of Law No. 2166/1993, which gives tax and other incentives for restructurings that lead to the for-mation of bigger business entities. According to that law, there is no need to evaluate the assets of companies being merged or otherwise restructured by application of that Law, because the whole process of restructuring is based on the figures that appear on the balance sheets of the companies involved. The possible avoidance of valuation that law grants is considered a great advantage, and one of the most serious reasons for its adoption by companies following a restructuring process. There is, however, a disad-vantage in that, contrary to the similar tax incentive in LD 1297/1972, there is no room for appreciation of assets. LD 1297/1972 not only provides for the appreciation but also allows the postponement of its taxation. Despite that advantage, the procedure of LD 1297/1972, which requires valuation, is often abandoned because of the delays involved.

Furthermore, a purchaser gets a step-up in basis in the business assets of the target company in case of any restructuring (ie, a merger, a divi-sion or split-up, a transfer of assets or spin-off against company shares or an exchange of shares), either a cross-border one under Directive 2009/133/EC as currently in force or a domestic one under the new Income Tax Code (Law No. 4172/2013 as currently in force). Articles 52–55 thereof both transpose Directive 2009/133/EC in the Greek legislation and regu-late domestic restructurings. In particular, although no official (ie, by the Ministry of Finance) guidance on the interpretation and implementation of these provisions has been issued yet, it ensues from their wording that a calculation of capital gains, albeit exempted from taxation, is carried out anyway by reference to the difference between the market value and the book value of the assets transferred, which gives a step-up in basis in the business assets .

According to the new Income Tax Code, goodwill and other intan-gibles must be depreciated at 10 per cent annually (with the exception of software, which must be depreciated at 20 per cent annually). Said depreciation rate (10 per cent) is applicable unless the initial agreement provides for a different economic life (ie, other than 10 years), in which case the depreciation rate is equal to 1 per cent over the years of economic life. Furthermore, as per the law, in case of any of the above restructurings the receiving company must carry out the depreciation of the transferred assets in accordance with the rules applicable to the transferring company had the transfer of assets not been made. Therefore, in the event of pur-chase of those assets and the purchase of stock in a company owning those assets, the receiving company will acquire the transferred assets at a depre-ciated value and will carry out the depreciation in the future in accordance with the rules applicable to the transferring company had the transfer of assets not been made.



Under the recent Ministry of Finance Decision No. 1032/2015 relating to legal persons and legal entities not tax resident in Greece, given that income from business activities generated in Greece is only income acquired via a permanent establishment here, it is clear that income from the goodwill from the transfer of securities that such entities acquire will only be taxed




in Greece when they have a permanent establishment in Greece and the product of the transfer can be attributed to the permanent establishment, otherwise they are exempted from goodwill tax. Consequently, if such per-sons are granted an exemption, there is no need to refer to Conventions for the Avoidance of Double Taxation, and there is also no need to submit a zero tax return. Note that the concept of ‘permanent establishment’ in Greece for foreign legal persons also includes foreign legal persons or legal entities that operate on a not-for-profit basis and carry on activity in Greece via an office, branch, etc (such as foreign educational institutions operating in Greece).

On the other hand, one should take into account Law No. 2166/1993 (mentioned above), according to which, as already analysed, in case of a restructuring subject to its provisions (ie, a domestic restructuring) the assets of the companies involved do not have to be evaluated because the whole process of restructuring is based on the figures appearing on their balance sheets. This is considered to be a significant incentive to opt for the restructuring process specified by that law. At the same time, one could opt for Incentive LD 1297/1972 (which is applicable to domestic restructur-ings), where the transferred assets are appreciated but the taxation of any capital gains arising therefrom is deferred.



There is no clear trend and no form of acquisition is significantly more common than another, because the preferred method varies according to the details of each particular case. It should be remembered that the Greek capital market is still in the process of defining its identity, being based to a large extent on family-driven corporations. That said, share exchanges are not particularly popular at present. Under article 573 of the Civil Code, an agreement for the exchange of goods is treated as if it were two inde-pendent sale-purchase agreements, with all the relating tax and other implications. Recently, by virtue of Law No. 3517/2006 article 2(3), a share exchange was statutorily defined as:

[…] the act by which a company acquires participation in the share cap-ital of another company at a percentage that it gives to the acquiring company the majority of voting rights of the other company or, having already acquired such a participation, it further acquires a subsequent participation and, in consideration for the shares acquired, it gives to the shareholders of the second company share titles to the first (acquir-ing) company and possibly also cash, which latter may not exceed in amount the 10 per cent of the nominal value of such shares, and in case there is no such nominal value, it may not exceed 10 per cent of the book value of such shares.

Tax-neutral mergers and exchanges of shares (cross-border or domestic ones) are now explicitly provided for by the new Income Tax Code. Article 42, paragraph 7 of the new Income Tax Code states that points made above relating to the transfer of securities also apply to goodwill arising from the exchange of shares or mergers. However, where a company (which owns securities (equity stakes or shares) in a Greek company) is absorbed by another company, the merger does not entail any goodwill taxation at the time of the merger.



It is possible that assets used in a business that are capable of being evalu-ated in money terms be contributed to an existing SA company, which may issue shares in consideration for those assets, to the increase of its share capital equal to their value. For the said SA company, the mere fact that it issues shares as opposed to paying cash is an advantage from a purely business perspective. Regarding tax considerations, such a contribution will not be subject to article 13 of the Income Tax Code (see question 1) because it does not constitute a sale but an acquisition of a participation in a business. Under the recent Ministry of Finance decision referred above, the contribution of securities to subscribe capital or increase a company’s capital is treated as a transfer of securities, so the points made above apply. Such a tax would not be payable if cash was the consideration for the acqui-sition of those business assets.

Furthermore, as per the new Income Tax Code (Law No. 4172/2013 article 52), the receiving company may carry forward the losses of the transferring company related to the transferred assets or sector under the same terms that would be applicable to the transferring company had the transfer not taken place.

In addition, the receiving company may carry out the depreciations in accordance with the same rules that would be applicable to the transferring company had the transfer of assets not taken place.

Finally, the receiving company may assume any reserves and provi-sions of the transferring company relating to the transferred assets or sector, and enjoy tax exemptions under the same terms that would be applicable to the transferring company had the transfer of assets not taken place. Any rights and obligations in connection with said reserves and pro-visions are assumed by the receiving company.

6 Transaction taxes


According to Law No. 2859/2000 (the VAT Code) article 5(4), transfer of business assets or businesses as a whole, branches of businesses whether gratuitously or for consideration or as contribution to the share capital of an existing or newly formed legal entity are not considered as delivery of goods and so are not subject to VAT. The acquirer is considered for the pur-poses of VAT as a successor in all rights and liabilities of the transferring person. The above do not apply if any of the contracting parties is exempt from VAT. According to article 15 of the Stamp Duty Code, every contract between business persons, between a business person and a commercial company or between commercial companies that relates exclusively to the business exercised by them is subject to stamp duty at 2.4 per cent, which is payable upon drafting of the contract. It is irrelevant whether the con-sideration for such a contract has been paid or not. Transfers of shares are not subject to any other duty. In view of the above, the transfer of busi-ness assets or of businesses as a whole falls without the scope of VAT and therefore falls within the scope of stamp duty, in principle subject to stamp duty at a rate of 2.4 per cent. This has been confirmed through Ministerial Circular 1103/1990. In principle, the issuer of the invoice is accountable for the duty, whereas if no invoices are issued (eg, in case of the transfer of business as a whole and not for the transfer of each individual business asset), both counterparties are in principle accountable for the duty. The transfer of business in the context of a restructuring falls outside the scope of stamp duty and is subject instead to capital duty, whereas the transfer of each business asset falls within the scope of stamp duty (subject to the exemptions provided for by Law No. 2166/1993 or LD 1297/1972).

The sale of shares falls within the scope of VAT, therefore it falls out-side the scope of stamp duty. Furthermore, although it falls within the scope of VAT, it is exempted from VAT pursuant to article 22 paragraph 1 of the VAT Code.

The sale of listed shares is subject to the 0.2 per cent transaction duty, as per above (see question 1).



Net operating losses (NOLs) of the acquiring company (only) survive and may be set off against profits of the same, according to the provisions of the Income Tax Code (may be carried forward for five tax years). This is provided in article 2 of Law No. 2166/1993, as amended by article 322, para-graph 3 of Law No. 4072/2012.

The survival of NOLs is also dealt with by the new Income Tax Code (Law No. 4172/2013 articles 52 and 54), dealing with intra-community deals. This provides that a target company’s NOLs of previous years that are capable of being carried forward according to the general income tax provisions may be carried forward and set off against future profits of an acquiring company’s permanent establishment in Greece.




Article 20, paragraph 2 of recent Law No. 3756/2009 states that the loss incurred by an acquiring affiliate from the cancellation of the shares it held in the target (mother) is not recognised for deduction from its taxable income (applicable for unified balance sheets after 1 January 2008).

In case of a transfer of assets in exchange for the transfer of securities representing the capital of the company receiving the assets, article 52 of the new Income Tax Code stipulates that the transferring company must keep the securities acquired in exchange for the transfer of assets for a time period of at least three years unless it substantiates that the transfer of securities does not have tax evasion or tax avoidance a principal objective.

Furthermore, as per the general clause of article 56 of the new Income Tax Code, the benefits provided for by articles 52–54 are wholly or partially withdrawn where it appears that one of the operations referred to in those provisions has tax evasion or tax avoidance as a principal objective. The fact that the operation is not carried out for valid commercial reasons, such as the restructuring or rationalisation of the activities of the companies participating in the operation, may constitute a presumption that the oper-ation has tax evasion or tax avoidance as a principal objective.

Finally, in certain types of restructuring under Incentive LD 1297/1972 the benefits provided for are ipso jure withdrawn if more than 75 per cent of the acquiring company’s shares are transferred within a time period of five years of the date of completion of the restructuring. On the contrary, in case of a restructuring under Incentive Law No. 2166/1993, such limitation is not provided for by the law.

Bankrupt companiesBy virtue of article 133 of the Bankruptcy Code, ‘every contract and every transaction which takes place according to articles 135–145 of this code, the transfers of property thereof, the registrations in the public registries and every other necessary act are exempt from every tax, stamp duty or other right in favour of the state or third parties, with the exception of VAT which remains payable. The above mentioned exceptions are automatic, without the need to submit any application before the competent tax office.’ The provisions of articles 135–145 provide for the transfer of a bankrupt com-pany’s business ‘as a going concern’.

8 Interest relief


Loans from related entities may also trigger other tax complications, such as transfer-pricing issues. There are also company law-related restrictions on loans between companies and their directors, etc. Withholding taxes exist on interest paid to individuals and non-domestic tax resident legal entities (see elsewhere hereunder). As far as non-domestic tax residents are concerned, any double tax treaty provisions as well as the Interest-Royalties Directive (2003/49/EC), if applicable, should be examined for possible exemptions or differences in tax rates. Other legal methods for avoiding tax may be available in individual cases. Debt pushdown may be achieved in the form of a transfer of loan from the target company to the acquiring company, subject to the consent of the lender and to the imposi-tion of stamp duty at 2.4 per cent.

As per the deductibility or non-deductibility rules of the new Income Tax Code, interest from loans received by a business entity from third par-ties, except for bank loans, interbank loans and bond loans issued by soci-etes anonymes, is not deductible from gross income so long as it exceeds the interest which would be payable if the applicable interest rate was equal to the interest rate applicable to current account loans with non-financial business entities mentioned in the Bulletin of Conjunctural Indicators issued by the Bank of Greece for the closest time period prior to the bor-rowing date.

Furthermore, as per the new thin capitalisation rules, interest is also not deductible so long as the excess amount of interest expenses (interest payable) as compared to the amount of interest income (interest receiv-able) exceeds:• 60 per cent of taxable earnings before interest, taxes, depreciation and

amortisation (EBITDA) from 1 January 2014 onwards;• 50 per cent of taxable EBITDA from 1 January 2015 onwards;

• 40 per cent of taxable EBITDA from 1 January 2016 onwards; and• 30 per cent of taxable EBITDA from 1 January 2017 onwards.

Notwithstanding the above, interest expenses (ie, extra interest expenses exceeding 30 per cent of EBITDA) are fully recognised as deductible busi-ness expenses, provided the amount of net interest expenses entered in the accounting books does not exceed €3 million a year. That limit of €3 mil-lion applies to interest expenses incurred in tax years commencing from 1 January 2016 onwards, while in the transitional period (ie, in tax years commencing from 1 January 2014 to 31 December 2015) the limit for inter-est expenses is €5 million.

In addition, any amount paid to an individual or legal entity being a tax resident in a non-cooperative country or being subject to a preferential tax regime as further determined in the new Income Tax Code, is not deduct-ible unless the taxpayer or paying entity substantiates that said amount relates to actual transactions, carried out in the ordinary course of business and not resulting in the transfer of profits, income or capital outside the Greek jurisdiction with the aim of tax avoidance or tax evasion. This rule is not applicable if the amount is paid to a tax resident in an EU or EEA member state, provided that there is a legal basis for information exchange between Greece and said member state.

Finally, it should be noted that as per the new general anti-avoidance rule introduced into the Greek tax law through Law No. 4174/2013, the tax authority may disregard any artificial arrangement or series of arrange-ments aiming at tax avoidance and leading to a tax benefit. An arrange-ment is deemed to be artificial if it lacks commercial substance. In order to decide whether the arrangement or the series of arrangements has led to a tax benefit, the tax authority compares the amount of tax due by the tax-payer after acceptance of such arrangements with the amount of tax that would be due by this taxpayer under the same circumstances but for such arrangements.



Apart from conducting due diligence, protection for the acquiring com-pany is sought by inserting contractual clauses (guarantee clauses) to the effect that the seller will be responsible for:• any hidden debt or liability that does not appear in the accounting

books of the company;• tax audits that may be conducted after the acquisition on tax years

prior to the acquisition; and• generally, any liability or debt that refers to the time prior to the

acquisition.

From a direct tax (income tax) perspective, any payments made following a claim under a warranty or indemnity are not treated as income and there-fore they do not constitute taxable items, because they only constitute pay-ments to compensate a damage or loss suffered (cash flows), thus only a cash flow. Therefore, they fall outside the scope of income tax, thus neither being subject to withholding tax (WHT) nor being taxable in the hands of the recipient. On the other hand, from an indirect tax (VAT, stamp duty) perspective, such payments do not fall within the scope of VAT because they do not constitute a consideration for a service rendered, therefore they fall within the scope of stamp duty, which shall be due upon payment at a rate of 2.4 per cent.


10 Restructuring


Post-acquisition planning depends on the structure that has been finalised, the size of its capital and the identity and diversification of its shareholders. It also depends on whether the main aim is the reinvestment or the distri-bution of profits. There is no typical trend apart from the common tactic to form holding companies in low-tax jurisdictions within the EU. A general tax-planning tool used is the tax-free reserves that minimise the tax burden




and increase the production capacity of the company. However, as per arti-cle 72, paragraph 13 of the new Income Tax Code companies finalising their balance sheets from 31 December 2014 onwards may not form and keep tax-free reserve accounts anymore except for those provided for by invest-ment laws or by any other special law.

11 Spin-offs


Tax-neutral spin-offs are provided only by virtue of Law No. 2166/1993 or LD 1297/1972. However, the transfer of an NOL of a spun-off business is not possible due to the fact that NOLs are treated as losses of the company as a whole, and may not be isolated to the spun-off business. It is useful to note, as a minor exception to the non-divisibility of NOLs within the same company, that the NOLs of the exporting operation (branch) of a company may only be carried forward to be set off against NOLs of the same branch and not against the total profits of the company. A spin-off under Law No. 2166/1993 and LD 1297/1972 is exempted from transfer taxes.

A tax-neutral spin-off of a business may also be carried out in case of a transfer of assets (spin-off of business) in exchange for the transfer of securities representing the capital of the company receiving the assets in accordance with article 52 of the new Income Tax Code (Law No. 4172/2013) – either a cross-border one (in this regard, as already stated elsewhere, the provision also transposes Directive 2009/133/EC as cur-rently in force) or a domestic one. In particular, as per the aforementioned provision, any capital gains calculated by reference to the difference between the market value of the transferred assets, sector or business and their book value are exempted from taxation. Moreover, as per the same provision, in such case the receiving company may carry forward the losses of the transferring company related to the transferred assets, sector or business under the same terms that would be applicable to the transferring company had the transfer not taken place. However, it does not ensue from the wording of the law that the transfer of assets is exempted from transfer taxes. Therefore, a spin-off exempted from transfer taxes is only provided for by Law No. 2166/1993 or LD 1297/1972.



Article 6 of Law No. 2190/1920 defines a residence of a Greek SA company only as a city or municipality in Greece. The only instance where trans-fer of an SA company’s residence is provided is by virtue of article 29(3) of the same law. The latter sets only the increased quorum requirements for adopting a resolution for migration, but no other consequences are mentioned in the law because, following migration, the company shall no longer be subject to Greek laws. Law No. 4172/2013, which adopted Directive 2009/133/EC within the Greek legal system, allows transfer of seat of European companies and European cooperatives from one member state to another.

In case of emigration, the following should be taken into account. A legal entity is considered as a tax resident in Greece either if:• it has been incorporated or established in accordance with the Greek

law;

• it has its registered seat in Greece; or• during any period of time within a tax year the place of effective man-

agement is in Greece.

In order to decide whether the place of effective management is in Greece, one should be based on the factual background and the specific circum-stances of each individual case. In this regard, the following criteria must be indicatively taken into account:• the place where the everyday management is exercised;• the place where the strategic decisions are made;• the place where the annual GSM is held;• the place where the books and records are kept;• the place where the company’s board of directors’ or any other execu-

tive body’s meetings are held; and• the place of residence of the board of directors or any other executive

body’s members. The place of residence of the majority of the share-holders may also be taken into account, though only in conjunction with the above.

Further to the above, it should be noted that tax benefits provided for by investment laws (formation of tax-free reserves, tax exemptions, etc) may be subject to the condition that the beneficiary does not move its residence to another jurisdiction.



Interest payments are subject to 15 per cent WHT, whereas dividend pay-ments are subject to 10 per cent WHT. Said WHTs exhaust income tax liability if the recipient is an individual or a non-resident legal entity. These are subject to the Parent-Subsidiary Directive (2011/96/EU) and the Interest-Royalties Directive (2003/49/EC) respectively, as well as to the pertinent DTCs currently in force. Intra-group dividend payments are exempted from tax, including WHT, on certain conditions. Interest from Greece government bonds and T-bills is not subject to WHT if the recipient is an individual or a non-resident legal entity. Interest on loans granted by credit institutions, including default interest, is not subject to WHT.



Favourable holding regimes, outsourcing of activities, know-how, licences, intellectual property rights and management fees are often adopted, as well as transactions with controlled companies.

All the above can potentially be challenged by the tax authorities and there is a considerable degree of uncertainty about how they will be treated by a tax audit. In this regard, it should be noted that a general anti- avoidance rule was introduced for the first time into the Greek tax law through Law No. 4174/2013. According to this rule, the tax authority may disregard any artificial arrangement or series of arrangements aiming at tax avoidance and leading to a tax benefit. An arrangement is deemed to be artificial if it lacks commercial substance. In order to decide whether the arrangement or the series of arrangements has led to a tax benefit, the tax authority compares the amount of tax due by the taxpayer after accept-ance of such arrangements with the amount of tax that would be due by this taxpayer under the same circumstances but for such arrangements (see question 8).


15 Disposals


All the above are applicable. The most straightforward way is the sale of a controlling majority share capital.

Update and trends

In the fifth year after the commencement of the Greek economic crisis, there have been no considerable changes in the tax system apart from increases in the tax rates and the rate of the advance payment of taxes. Unfortunately the Greek policymakers still cannot see the benefit of stabilising the tax rates in order to attract foreign investment, but rather continue the narrow minded ‘tax collection approach’ which has a negative impact on investment. A good thing is that the socialist government, which took office for the first time at the beginning of 2015, did not challenge the foundations of the tax system, and this is at least a small sign of stability for the legislative framework in the coming years.






Yes, if a DTC in force is applicable. Otherwise, please refer to our analy-sis in question 1. Special rules apply to the sale of shares of a real estate investment company; it is subject to a special tax regime with a minimum share capital of €25 million. In particular, capital gains from the sale of said shares by an individual prior to their listing on an organised market are exempted from income tax, whereas if the seller is a legal entity, capital gains are not exempted from tax, subject to a DTC in force. Furthermore, capital gains from the sale of said shares by an individual subsequent to their listing on an organised market are not exempted from income tax if the seller participates in REISA’s share capital by at least 0.5 per cent (oth-erwise, exemption), whereas if the seller is a legal entity, capital gains are not exempted from tax, subject to a DTC in force.

No special rules apply to the disposal of shares of energy and natural resource companies (subject to possible special tax exemptions provided for by relevant government concession agreements ratified by the Greek Parliament).



No. As far as tax on the transfer of shares is concerned, the law obliges SA companies not to recognise anyone as a shareholder without submis-sion of documents proving that they acquired the shares and proof that the relevant tax has been paid. Moreover, in the latter case, the law holds the contracting buyer co-liable for the payment of tax. Restructuring of businesses according to Incentive LD 1297/1972 is favoured by postpone-ment of income taxation on capital appreciation. According to article 2 of LD 1297/1972, any capital appreciation that may occur on a merger or restructuring, subject to the conditions of this law, is not taxed upon restructuring but is registered on special accounts of the new entity until the date of its dissolution, and only then will tax be payable.

Tax on capital gains from the transfer of business assets is also deferred in case of any restructuring (ie, mainly a merger, a division or split-up, a transfer of assets or spin-off against company shares or an exchange of shares) under articles 52–55 of the new Income Tax Code, either a cross-border (under Directive 2009/133/EC as currently in force, which said articles transpose in the Greek legislation) or a domestic one. However, no official guidance on the interpretation and implementation of these pro-visions has been issued yet. It should be noted that the new law does not provide for the time at which in such case the deferred tax will be due.

Theodoros Skouzos [email protected]

43 Akadimias Street10672 AthensGreece

Tel: +30 210 36 33 243Fax: +30 210 36 33 461www.taxlaw.gr/en


INDIA BMR Legal and BMR & Associates LLP


IndiaMukesh Butani BMR LegalShefali Goradia BMR & Associates LLP




The key differences between an acquisition of stock in a company and the acquisition of business assets and liabilities are as follows:• In the case of acquisition of stock, the consideration paid by the buyer

becomes the cost of acquisition of the stock for the purpose of calcula-tion of capital gains on transfer of stock in future. However, there is no step-up in the cost basis of the assets of the company whose stock is being acquired. On the other hand, subject to certain conditions, in the case of an acquisition of business assets and liabilities, the buyer can achieve a step-up in the cost basis of the assets.

• Most tax holidays available to an Indian company would continue to be available despite an acquisition of stock (partial or complete) in such company. In the case of an acquisition of specific business assets and liabilities, the benefit of the tax holiday for the unexpired period is not available to the buyer. In cases where the business is acquired as a whole, while there is a possibility of the tax holidays being available to the buyer, the position is less secure as compared to an acquisition of stock.

• In the case of acquisition of stock in a private company (whose shares are not traded on the stock exchange), the tax losses of the company (other than unabsorbed depreciation) would not be permitted to be carried forward and set off if the acquisition is of shares in a company carrying more than 49 per cent voting power. This limit does not apply to a company whose shares are traded on the stock exchange and in certain other scenarios such as change in shareholding of an Indian company as a result of amalgamation or demerger of its foreign parent company, provided 51 per cent of the shareholders of the amalgam-ating or demerged foreign company continue as shareholders of the resulting company. In the case of an acquisition of business assets and liabilities, the tax losses are not available to the buyer unless the acqui-sition is approved by the court and satisfies prescribed conditions.

• In the case of acquisition of stock in a company, prepaid taxes and other tax credits (such as indirect tax credits) would continue to be available. Such prepaid taxes and tax credits do not normally trans-fer to the buyer upon an acquisition of business assets and liabilities. Further, the buyer would need to withhold taxes prior to making payment to the seller for the acquisition of the stock if the seller is a non-resident and if protection under a tax treaty is not available to the seller for such income. This requirement does not arise in the case of an acquisition of stock or acquisition of the business assets and liabili-ties if the seller is an Indian resident. However, this requirement would apply where the business assets and liabilities are sold by the Indian branch or liaison office of a non-resident seller.

• Capital gains on the sale of stock are treated as long-term if the stock (shares) is listed and held for more than 12 months prior to the sale. For unlisted stock, however, the gains on transfer will be considered as long-term if the same has been held for more than 36 months prior to the sale. In the case of a sale of business assets and liabilities, the capital gains will be treated as long-term only if the business has

been carried on for more than 36 months. Similarly, in the case of sale of stock, the consideration is received directly by the sharehold-ers, whereas in a sale of business assets and liabilities, the considera-tion is first received by the company and then has to be distributed to the shareholders, resulting in two levels of tax. Although these are seller issues, they could impact the pricing of the deal from a buyer’s perspective.

• Acquisition of business assets and liabilities may require a no- objection certificate from the revenue authorities to ensure that the transfer is not treated as void. The transfer is not treated as void where the transfer is for adequate consideration and the buyer has no knowledge of the pending proceedings against the seller. A no-objec-tion certificate could also be required in the sale of stock, and is now increasingly being insisted upon by the buyer. Guidelines have been issued for streamlining the procedure for the issue of no-objection certificates by the revenue authorities and laying down specific time-lines for the revenue authorities to respond to the application. If the no-objection certificate is either not given by the revenue authori-ties or cannot be obtained owing to lack of time, the buyer could take an indemnity from the seller pertaining to the potential tax liability arising on the stock sale or may negotiate with the seller to seek tax insurance.

2 Step-up in basis


A step-up in the cost basis of the business assets is only possible in the case of acquisition of the business assets of the target company on a going concern basis. The step-up would have to be justified by an independent valuation report. There are specific anti-abuse provisions, under which the step-up could be denied if the only purpose of the acquisition is to achieve a tax advantage.

The excess of the consideration over the fair value of the assets is rec-ognised as goodwill or intangibles in the books of the buyer. Intangibles (such as trademarks, patents, brand names, etc) are clearly specified to be depreciable assets under the law. The question of depreciation on goodwill has been a subject matter of intense debate in India and there have been some rulings where depreciation has been allowed if the amount represent-ing goodwill was actually on account of acquisition of certain intangibles such as customer lists, business rights, etc. The Indian Supreme Court has also subsequently ruled that even goodwill simpliciter (ie, goodwill aris-ing in case of an amalgamation as the difference between the amount paid and the cost of the net assets) is eligible for tax depreciation. The Supreme Court held that goodwill is a capital right that increases the market worth of the transferee and, therefore, satisfies the test of being an asset, thereby being entitled to tax depreciation. However, even following this Supreme Court ruling, litigation cannot be ruled out in certain circumstances.

In the case of acquisition of specific business assets, the consideration paid by the buyer for each asset becomes the cost of acquisition for the respective asset.


BMR Legal and BMR & Associates LLP INDIA


In the case of acquisition of stock, the entire consideration paid becomes the cost of acquisition of the stock for the buyer, but there is no step-up in the cost basis of the assets of the target company.



An acquisition of business assets and liabilities in India would have to be undertaken by a company incorporated in India, since a foreign company cannot directly own assets and carry on a business in India, except through a branch office, a project office or a liaison office in certain cases.

Where stock in a company is being acquired, it may be preferable for the acquisition company to be established outside India for the following reasons.

An Indian company is subject to corporate tax at the rate of 30 per cent (plus applicable surcharge and cess). In addition, the distribution of dividends is subject to dividend distribution tax (DDT) at the rate of 17.65 per cent (plus applicable surcharge and cess) in the hands of the com-pany and dividends are not tax-deductible. The gains arising on sale of shares in an Indian company triggers capital gains implications in India. Further, India does not permit consolidation of profits or losses for tax pur-poses for the group companies.

Thus, in the case of an Indian acquisition company, repatriation of profits from the target company by way of distribution of dividends could be subject to two levels of DDT (ie, first, when the target company distrib-utes dividends to the Indian acquisition company, and, second, when the Indian acquisition company distributes dividends to its foreign parent). This dual impact is, however, relaxed in cases where the Indian acquisi-tion company holds more than 50 per cent of the equity share capital of the target company. In such a case, the dividends distributed by the tar-get company on which the target company has paid DDT are allowed as a deduction in the hands of the Indian acquisition company. Upon the sale of stock of the target company by the Indian acquisition company, there would be two levels of tax – first, capital gains on the sale of shares, and, second, DDT on the distribution of the gains as dividends. In addition, the distribution of dividends is subject to Indian corporate laws, which permit dividends only to be paid out of profits.

On the other hand, if the acquisition company is outside India, there would be one level of tax in India, in the case of distribution of profits by the target company in the form of dividends. Further, in the case of sale of the shares in the target company, one level of capital gains tax would be triggered in India. The capital gains tax incidence can be mitigated if the acquisition is made from jurisdictions such as Cyprus, Mauritius, the Netherlands, Singapore, etc, by relying on the favourable tax treaties that India has with these countries. However, in recent years, there has been a significant debate in India on whether the benefits granted under the tax treaties are being abused by companies resorting to treaty shopping and the government has been considering renegotiation of tax treaties with some countries. While having a tax residency certificate (TRC) (disclosing prescribed particulars either in the TRC itself or in a separate prescribed form) from the revenue authorities of the home country is the basic and most essential requirement for claiming the tax treaty benefit, the revenue authorities are also laying increased emphasis on the substance in the off-shore holding companies set-up in jurisdictions with favourable tax trea-ties, especially where the tax treaty does not contain a limitation of benefits (LOB) clause.

Based on news reports, the government of India and the government of Mauritius are renegotiating the India–Mauritius tax treaty to include an LOB clause to prevent misuse of the beneficial provisions of the tax treaty. The LOB clause could possibly be along the lines of the LOB clause under the India–Singapore tax treaty, wherein gains arising to a resident of Singapore from alienation of shares of an Indian company are taxable in Singapore if shares of the Singapore company are listed on a recog-nised stock exchange in Singapore or if its total annual expenditure on operations in Singapore is equal to or more than S$200,000 in the imme-diately preceding period of 24 months from the date that the gains arise. That aside, the Financial Services Commission, Mauritius, has also noti-fied requirements to be complied with by a Mauritius Global Business License Company – Category 1 (GBL-1) (which is the kind of company primarily used for Indian acquisitions) to be eligible for obtaining a TRC. These requirements essentially necessitate GBL-1 companies to have eco-nomic substance in Mauritius such as having office premises in Mauritius

or employing a full-time Mauritian resident at technical or administrative level or have arbitration in Mauritius, etc. Cyprus has been identified by the Central Board for Direct Taxes as a ‘notified jurisdictional area’, which makes transacting with Cyprus entities onerous and imposes additional documentation requirements.

General Anti-Avoidance Rule (GAAR)It is pertinent to note that the Finance Act 2012 introduced the GAAR, which will come into effect from 1 April 2017. GAAR provisions could apply if an arrangement is declared an ‘impermissible avoidance arrangement’, in other words, an arrangement the main purpose of which is to obtain a ‘tax benefit’, and which satisfies certain other tests. The GAAR provisions effectively empower the revenue authorities to deny the tax benefit that was being derived by the taxpayer by virtue of the arrangement that has been termed ‘impermissible’.

Further, the GAAR provisions lay down certain scenarios in which an arrangement or transaction would be deemed to lack commercial sub-stance. One such scenario is if an asset or a transaction, or if one of the parties to the transaction, is located in a particular jurisdiction only for tax benefit. Thus, interposing SPVs in tax-friendly jurisdiction, devoid of any commercial substance or rationale, would be one practice that the revenue authorities would seek to challenge through GAAR. Furthermore, once GAAR is invoked, it will override the provisions of the tax treaties.

The GAAR provisions attracted immense criticism from the inves-tor fraternity across the globe. In the wake of such widespread criticism, the prime minister of India appointed an expert committee to undertake stakeholder consultations, review the GAAR provisions and finalise a plan for implementation as well as guidelines to ensure that the revenue authorities do not exercise their powers indiscriminately. The final report given by the committee suggests that GAAR should not empower the rev-enue authorities to challenge the genuineness of the residency of foreign entities where TRC is obtained from their home country. This is in line with an earlier notification issued by the Indian Revenue Administration on the same aspect. Similarly, where anti-avoidance rules exist in a tax treaty (such as the limitation of benefits clause in the India–Singapore tax treaty), the committee recommended that GAAR provisions should not be invoked. The committee’s recommendations in this respect have not yet been accepted.

However, a notification has been issued by the government laying down certain exclusions from the scope of applicability of the GAAR pro-visions. The revenue authorities will not be empowered to invoke GAAR in case of income arising to a person from transfer of investments made before 1 April 2017. Further, the revenue authorities will not be empowered to invoke GAAR in cases where the tax benefit in a year arising to all par-ties to the arrangement (in aggregate) does not exceed 30 million Indian rupees. GAAR will also not apply to:• foreign portfolio investors (subject to certain conditions). Foreign

portfolio investors are a specific class of foreign investors that typically invest in listed Indian securities; and

• non-residents, in respect of their investments in offshore derivative instruments which have listed or proposed-to-be-listed Indian securi-ties as the underlying.

Indirect transfersThe Finance Act 2012 introduced a retrospective provision for Indian taxa-tion on any gains from transfer of shares (or interest) of an offshore com-pany or entity that derive value substantially from assets located in India (indirect transfer provisions). The Finance Act 2014 has introduced further clarifications regarding the applicability of the indirect transfer provisions. Dual conditions are required to be fulfilled for the applicability of these provisions:• the fair market value (FMV) of Indian assets exceeds 100 million

Indian rupees as on the date on which the accounting period of the off-shore entity (indirectly holding such assets) ends preceding the date of transfer; and

• the FMV of Indian assets represents at least 50 per cent of all the assets owned by the offshore entity.

Further, to provide relief to minority shareholders, it has been provided that a transaction of indirect transfer will not be subject to Indian tax if the transferor (along with its associated enterprises) does not hold, directly or indirectly, the right of control or management and voting rights or share capital or interest exceeding 5 per cent in the foreign entity at any time in




the 12 months preceding the date of transfer. Indirect transfer of shares of an Indian company pursuant to amalgamation or demerger of foreign companies has also been exempted from Indian tax, subject to fulfilment of specified conditions.

While the law provides for taxation only of the proportionate gains attributable to the Indian assets, the manner of determination of attribut-able gains is yet to be prescribed. Certain issues which have been debated since the introduction of the indirect transfer provisions continue to remain unresolved. For instance, no measures have been made to solve potential double taxation in multilayered structures; key quantitative issues (such as cost step-up, indexation, etc) are yet to be resolved.



Mergers and demergers are preferred forms of acquisition in India. This is primarily due to a specific provision in the tax law that treats mergers and demergers as tax-neutral, both for the target company and for its share-holders, subject to the satisfaction of the prescribed conditions.

Other reasons why mergers and demergers are preferred are:• the unabsorbed business losses and depreciation of the transferor

company can be carried forward, subject to certain conditions. In the event of a merger, all the losses of the target company are trans-ferred to the buyer, while in a demerger only the losses pertaining to the undertaking being sold are transferred. An undertaking is broadly understood to mean an independent business activity operating as a separate division comprising its independent assets, liabilities, employees and contracts. In a merger, the period of carry-forward of the unabsorbed losses is renewed for a period of eight years from the date of merger, while in a demerger, the unabsorbed losses can only be set off and carried forward for the unexpired period;

• generally, tax holidays and other incentives would continue to be available to the acquiring company. However, there are specific tax holidays that may cease to be available in the event of a merger or demerger; and

• transfer of prepaid taxes and other tax credits from the target company to the acquiring company is permitted in certain cases.

However, the ability to achieve a step-up in the cost basis of the assets is difficult in both mergers and demergers. Further, these involve a court approval process, and therefore, are at present time-consuming.

The Companies Act 2013 (the Act), which replaced the Companies Act 1956 with effect from 29 August 2013, proposes to set up a National Company Law Tribunal (NCLT) which would deal with all business reor-ganisations. At present, it seems likely that approvals from NCLT may continue to be time-consuming. However, the Act specifically proposes to include a simplified and faster process for mergers and demergers for spec-ified ‘small private companies’ and between holding and wholly owned subsidiary companies, whereby the requirement to approach the NCLT for approval will be abolished.



There is no tax benefit to the acquirer in issuing stock as consideration instead of cash. It should be noted, however, that a payment of cash con-sideration could have an impact on the tax-neutrality of a merger and demerger.

There could be tax implications in case shares are issued at a price less or more than the fair market value.

In the case of shares issued at a premium to Indian residents (and not to non-residents), the issuer company could be made liable to tax for the amount of the premium received in excess of the fair market value of the shares. The fair market value for this purpose is a value that is the higher of the book value of the assets and liabilities of the issuer company deter-mined as per the prescribed manner or the fair market value of the stock determined by a merchant banker or an accountant as per the discounted free cashflow method. This tax does not apply to venture capital undertak-ings issuing shares to a venture capital fund registered with the regulatory authorities in India.

In the case of issue of shares at a price less than their fair market value, such fair market value or the difference between the fair market value of the shares received and the asset given up could be brought to tax in the hands of the recipient of the shares as ordinary income. Fair market value for this purpose is defined as the net asset value of the company issuing the shares, to be determined on the basis of book values of its assets and liabilities.

6 Transaction taxes


All forms of business acquisitions involve transaction taxes in some form, though the nature, incidence and quantification of the taxes vary. Typically, these include stamp duty and value added tax (VAT). Stamp duty is payable on execution of a conveyance or a deed and VAT is an indirect tax that is payable on the transfer of any goods. Who bears the stamp duty is negoti-ated between the buyer and the seller, although it is common for the buyer to bear it. VAT, being an indirect tax, is normally collected from the seller and paid or borne by the buyer. Depending on the facts, the buyer may be able to offset the VAT paid against its output VAT liability, if any.

The impact of transaction taxes and the applicable rates for different forms of acquisition are given below.

Acquisition of stockTransfers of shares in a company are liable to stamp duty at the rate of 0.25 per cent of the value of the shares. No stamp duty is levied where the stock is held in an electronic form with a depository (and not in a physical form). There is no VAT on the sale of shares.

Acquisition of business assetsAcquisition of business assets as part of an acquisition of an entire business does not attract VAT in most states. Stamp duty would apply on moveable and immoveable property if the transfer is undertaken by way of a con-veyance. The rate of stamp duty would depend on the nature of the assets transferred and their location. Generally, however, stamp duty is payable only on the immoveable property transferred on the basis that the move-able property is transferred by way of physical delivery.

In the event of an acquisition of specific business assets, VAT would be applicable on the transfer of moveable assets. The rate of VAT would depend on the nature of the assets and their location, and would vary within a range of 4 to 15 per cent. However, credit for the same should be available to the payer. The stamp duty implications would be the same as discussed above.

Mergers and demergersIn most states, mergers and demergers attract stamp duty. The stamp duty is normally based on the value of shares issued as a result of the merger or demerger and the value of the immoveable property transferred.



In India, unabsorbed business losses are allowed to be carried forward and set off for a period of eight years from the year in which they are incurred, while there is no time limit for carry-forward and set-off of unabsorbed depreciation.

The change in shareholding of a closely held company (ie, a private company whose shares are not listed on a stock exchange) by more than 49 per cent of shares carrying voting power in any year would result in the unabsorbed business losses of the company not being eligible for carry- forward and set-off in the future. However, the change in shareholding does not affect the carry-forward and set-off of unabsorbed depreciation, if any. Also, there is no impact of a change in shareholding of a company




whose shares are listed on the stock exchange and in certain other sce-narios such as change in shareholding of an Indian company as a result of amalgamation or demerger of its foreign parent company, provided 51 per cent of the shareholders of the amalgamating or demerged foreign company continue as shareholders of the resulting company. Tax cred-its (such as minimum alternate tax paid) or deferred tax assets are not impacted by a change in control of the target or upon its insolvency.

There are no special tax rules or tax regimes for acquisitions or reor-ganisations of bankrupt or insolvent companies. However, the transfer of land by a ‘sick company’ is not taxable in India subject to certain conditions.

8 Interest relief


Deductibility of interestAcquisition of stockThe deductibility of interest on acquisition finance used by the acquisition company to acquire stock in a target company would depend on the char-acterisation of income received from the target company, in other words, ordinary income versus investment income. Further, as a general rule under the domestic tax law, where any expense is incurred for earning tax-exempt income, no deduction is allowed for such expenditure.

Having said the above, investment in a company’s stock could result in dividend income (on an ongoing basis), and capital gains (on exit). Dividend income is tax-exempt in the hands of the shareholder. Therefore, any interest expense in relation to purchase of shares cannot be off-set against the dividend income earned by the acquisition company. As regards capital gains from exit, the domestic tax law allows only specific deductions against capital gains income, interest not being one of them. Therefore, as such, it is difficult for the acquisition company to achieve tax deductibility for interest on acquisition finance.

Acquisition of businessIn the event of acquisition of business assets, whether in the form of a busi-ness as a whole or specific assets, the interest on borrowings, which is relat-able to a capital asset, should be capitalised as the cost of the asset, while the interest payable on an ongoing basis should be allowed as a deduction, as such expenses would be incurred for the purposes of the business of the acquisition company.

Withholding taxes on interest paymentsPayment of interest by an Indian company to a foreign party that is a related party would be subject to Indian transfer pricing and exchange control regulations. The foreign loans are subject to maximum interest-rate ceil-ings on repatriation and end-use restrictions, such as the proceeds not to be used for on-lending, investment in a capital market, acquiring a company or a part thereof, repayment of existing rupee loan and real estate (exclud-ing development of integrated township as defined in the regulations). In the case of foreign-related party loans, only the arm’s-length interest would be allowed as a deduction. Payment of interest to a related Indian party would also be disallowed if it is higher than the arm’s-length interest.

The source-based rule is applied for taxation of interest in India. Generally, the interest payable by a resident is taxable in India. However, in certain cases, interest payable by a non-resident is also taxed in India if it is payable in respect of any debt incurred for the business or profession carried on in India by such person.

Thus, the interest payments made from India would be liable to tax in the hands of the recipient and would, therefore, be subject to withholding tax implications. The rate of withholding tax would depend on whether the borrowing is in foreign currency or in Indian currency. In the case of mon-ies borrowed in foreign currency before 1 July 2017, the rate of withhold-ing tax would be 5 per cent (plus applicable surcharge and cess) on gross amount. Interest payments on monies borrowed in Indian currency would be subject to withholding tax at the rate of 40 per cent (plus applicable sur-charge and cess) on a net income basis. However, some tax treaties, such as those with Cyprus, Luxembourg and the Netherlands, provide a beneficial

rate of withholding tax of 10 per cent on a gross basis. Recently, the Indian Tax Administration declared Cyprus as a notified jurisdictional area on the basis of a lack of effective exchange of information by Cyprus. As a conse-quence, until Cyprus’ status reverts, interest payments to unrelated parties in Cyprus would also be subject to transfer pricing. Further, such payments would attract withholding tax at 30 per cent on a gross basis or the normal withholding tax rate, whichever is higher. The excess amount of withhold-ing tax should be refundable for the Cyprus entity if it is able to successfully establish its entitlement to treaty benefit and furnish required information. Moreover, the Indian payer would not be able to claim a tax deduction for the interest payments unless it maintains prescribed documentation with regard to transfer pricing, the group structure and source of funds for the overseas lender, etc, which could be cumbersome.

Debt pushdownDebt pushdown is difficult to achieve in India and requires careful struc-turing in order to be achieved. In most cases, the exchange control regu-lations may make it difficult to achieve debt pushdown. Also, the Indian banks are not permitted to finance acquisitions in their normal course of business. Even the Indian corporate law restricts certain Indian companies from advancing loans for the purposes of acquisition of stock in any other company. There are, however, no specific thin capitalisation rules under the tax law.



In the case of a stock acquisition, the seller normally warrants that the tar-get has been compliant with all tax matters and that all disputed matters are either provided for or otherwise disclosed. An indemnity is provided that in case there are any tax dues that arise over and above what is dis-closed, the seller shall indemnify the buyer for the claims. Since tax dues can arise after several years, the indemnities are provided for a seven-to-10-year period, often without any monetary cap. To implement the indem-nity, part of the consideration could also be placed in an escrow account. These aspects are documented in the share purchase agreement entered into between the parties. The buyer could also insist that the seller obtains a nil tax withholding order from the revenue authorities for tax withhold-ing on the consideration for such sale, particularly in cases where the seller is claiming capital gains tax exemption under a favourable tax treaty.

In the case of an acquisition of assets and liabilities, the warranties and indemnities are less stringent, since the buyer does not acquire con-trol over the selling company itself, and any tax dues would fall upon the selling company. However, the seller agrees to indemnify the buyer against any action that the revenue authorities may take on the buyer or assets acquired by the buyer (or both) in respect of tax claims arising on the seller. It is also common for the buyer to insist that the seller obtain a specific approval from the revenue authorities for the sale of the assets.

Payments made pursuant to a claim under a warranty or an indemnity, are not liable to tax for the recipient if they are treated as capital receipt and, hence, are not subject to withholding taxes. However, if the indemnity relates to a revenue item, it may be taxable in the hands of the recipient and may be subject to withholding taxes. The payer of the claims is unlikely to be able to claim the amounts paid as a deduction against its income on the sale of the stock or assets and liabilities.


10 Restructuring


Post-acquisition restructuring would depend on the commercial and busi-ness objectives of the buyer. Consolidation with the other subsidiaries operating in India is often necessary. This is done by way of merger, slump sale or business transfer. Streamlining and alignment of the transfer pric-ing methodologies is also an important post-acquisition step.




11 Spin-offs


A tax-neutral spin-off of a business can be achieved by way of a court-approved demerger.

Demerger refers to transfer by the transferor (demerged) company of one or more of its undertakings to the transferee (resulting) company, sub-ject to the condition that it is undertaken as per the Indian corporate laws and satisfies the following conditions:• all the properties and liabilities of the demerged company become the

properties and liabilities of the resulting company and are transferred at book value;

• the resulting company issues shares to the shareholders of the demerged company on a proportionate basis;

• shareholders holding a minimum of 75 per cent of the value of shares of the demerged company become shareholders of the resulting com-pany; and

• the transfer of the undertaking is on a going-concern basis.

The concept of ‘undertaking’ is broadly understood as an independent business activity operating as a separate division comprising its inde-pendent assets, employees and contracts. Based on principles laid down by courts in India, an ‘undertaking’ would basically mean a separate and distinct business unit or division set up with identifiable investment and capable of being run and operated on a stand-alone basis.

A demerger which satisfies the above conditions is tax-neutral and the unabsorbed losses and depreciation pertaining to the transferred under-taking are allowed to be carried forward and set off by the resulting com-pany for the unexpired period. Transfer taxes as discussed in question 6 apply even in the case of demergers.



Under Indian tax law, a company incorporated in India is always treated as a resident in India. Indian laws do not permit migration of residence of an Indian company to any other jurisdiction. However, an Indian com-pany could have dual residential status and may be treated as a resident in another country. In such a case, the residential status of the Indian com-pany would be determined as per the ‘tie-breaker rule’ provided under the tax treaties. A foreign company can be treated as an Indian resident if its place of effective management (POEM) during the year is in India. POEM has been defined in the tax law to mean the place where key management and commercial decisions that are necessary for the conduct of the busi-ness of the foreign company as a whole are, in substance, made. The con-cept of POEM for determining residential status of a foreign company has been recently introduced in Indian tax law by the Finance Act 2015, and

more guidance on application of this concept is expected to be released by the Indian Revenue Administration soon.



InterestInterest payments made from India are liable to tax in India and, accord-ingly, are subject to withholding taxes. Under the domestic tax law, typi-cally the withholding would be at the rate of 20 per cent (plus applicable surcharge and education cess) on gross interest in the case of foreign cur-rency loans. In cases where the monies are borrowed in foreign currency before 1 July 2017 (subject to satisfaction of certain conditions), a lower interest rate of 5 per cent (plus applicable surcharge and education cess) on a gross basis shall be applicable. Interest received from an Indian rupee-denominated debt would attract tax as ordinary income at the rate of 40 per cent (plus applicable surcharge and education cess) on net income basis. The rate would reduce to 10 per cent (on gross interest) under some tax treaties, such as those with Cyprus, Luxembourg and the Netherlands.

DividendIn India, dividends distributed by Indian companies are exempt from tax in the hands of the shareholders; hence, no tax withholding applies. However, the company paying the dividend is subject to DDT at the rate of 17.65 per cent (plus applicable surcharge and education cess) of the gross dividends.



Buy-back of shares by a company was considered a tax-efficient means of extracting profits. Buy-back involves repurchase of its own shares by the company. As a general rule, the domestic tax law specifically provides that the proceeds received under a buy-back will not be treated as dividends; instead they will be characterised as capital gains. Therefore, in cases where the shares in an Indian company are held by a foreign company, and if the relevant tax treaty provides that capital gains shall not be liable to tax in India, share buy-back was an attractive option for repatriation of profits. However, buy-back of unlisted shares has recently been subject to a buy-back distribution tax (BDT) of 20 per cent (plus applicable surcharge and cess) in the hands of the Indian company implementing the buy-back. The BDT is levied on the ‘distributed income’, in other words, the difference between consideration paid to the shareholders on the buy-back of the shares and the amount received by the company on the issue of the shares (irrespective of the amount for which the shareholder may have acquired the shares, in the event of a secondary acquisition). No treaty relief is avail-able against this tax.

It should also be noted that a buy-back is subject to the provisions of the Indian corporate laws that lay down certain limits on the extent of

Update and trends

Indirect transfersThe Indirect Transfer provisions have been a source of concern for the foreign investor community ever since their introduction. The provisions introduced by the Finance Act 2015 provide some clarity on the taxability of indirect transfers, though some key aspects around computation of the tax liability or availability of tax credits in the case of multiple investment layers remain unanswered. The Indian Revenue Administration is expected to come up with further guidance on the matter, and it will remain to be seen whether the current ambiguities get answered therein.

POEMThe newly introduced concept of POEM for determining tax residency of a foreign company in India is also creating ambiguities in the minds of multinationals. The Indian Revenue Administration will be issuing further guidance on applicability of this concept as well shortly.

Goods and Services TaxThe Indian indirect tax regime is proposed to be overhauled with the introduction of the goods and services tax (GST), which is expected to make the regime simpler, eliminating tax cascading and putting the Indian economy on a high-growth trajectory. GST will subsume central indirect taxes like central excise duty, additional excise duty, service tax, etc, and state level taxes like value added tax or sales tax, central sales tax, etc. GST has been identified as one of the most important tax reforms post-independence in the indirect tax regime. The Indian government contemplates implementing GST by April 2016, though looking at the progress being made, the timeline does not appear to be realistic.




shares that can be bought back by a company in a year. As per the Indian corporate laws, buy-back of shares can be done for up to 25 per cent of the share capital in a year, subject to obtaining the approvals from the board or the shareholders, depending on the amount of buy-back. Further, only 25 per cent of paid-up capital and free reserves can be utilised for buy-back. The pricing of stock in such a case has to be in accordance with exchange control regulations.


15 Disposals


In a cross-border situation, disposals are most commonly carried out by a sale of stock in the foreign holding company or a direct sale of the stock in the local company. In the Finance Act 2012, India has introduced a retro-spective amendment (with effect from April 1961) to tax indirect transfer of Indian assets implemented by way of transfer of shares in an offshore company by treating such offshore company shares as assets situated in India. This provision would be triggered if the offshore company’s shares derive their value substantially from assets located in India. The same has been discussed in question 3. Such taxability of transfers in offshore hold-ing companies with underlying Indian assets had been a matter of intense debate over the past few years. India’s apex court ruling in the case of Vodafone International Holdings in 2012 held that India cannot bring such offshore transfers to tax. It is viewed that the above retrospective amend-ment seeks to nullify the ruling of the apex court and makes all indirect transfer of Indian assets liable to tax in India.

However, tax treaty relief would continue to be available to the non-resident seller. In this regard, in a recent ruling, the High Court has upheld the availability of relief from tax on indirect transfers under the India–France tax treaty. The revenue authorities have appealed against this rul-ing before the Supreme Court of India.

Where both the buyer and the seller are resident in India, disposals by way of sale of business assets is also common.



Under the domestic tax laws, the gains on disposal of stock in an Indian company by a non-resident company are liable to tax in India. Gain aris-ing on transfer of listed stock held for more than 12 months is charac-terised as long-term, whereas gain arising from listed stock held for 12 months or less is characterised as short-term. For unlisted stock, this time period has recently been increased to 36 months respectively for charac-terising the gain as long-term or short-term. Short-term gains arising on the sale of shares of an unlisted company are subject to tax at the rate of 40 per cent, whereas long-term gains on sale of unlisted securities are subject to tax at the rate of 10 per cent. For listed-company equity stock, short-term gains are subject to tax at the rate of 15 per cent where shares are sold on the floor of the exchange. Long-term gains on the disposal of equity shares of a listed company on the floor of the exchange are exempt from tax under the domestic law. In addition to tax at the above rates, it is required that surcharge and cess, as applicable, are paid.

BMR LegalMukesh Butani [email protected]

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The buyer is required to deduct taxes at the rates prescribed under the domestic tax law or the tax treaty, whichever is lower, from the sale consideration to be paid to the non-resident seller. In the case of a failure to withhold taxes at applicable rates, the revenue authorities could initi-ate proceedings against the buyer and seek to recover the amount of tax short withheld. The proceedings against the buyer can be independent of the proceedings that may be initiated against the seller. The buyer could also be liable to pay interest at the prescribed rates on the amount of tax ought to be withheld as well as penalty which is equivalent to the amount of such tax.

Under some tax treaties (such as those with Cyprus, Mauritius, the Netherlands, Singapore, etc), the capital gains are not liable to tax in India, subject to satisfaction of the applicable tax treaty conditions. Such capital gains exemptions may be subject to the GAAR scrutiny with effect from 1 April 2017 (see question 3).

Many tax treaties, such as the India–Netherlands tax treaty, provide for differential tax treatment for disposal of stock by a non-resident in an Indian company in the real property sector. The tax treaty provides that the gain on disposal of stock of an Indian company whose assets are comprised mainly of real property would be liable to tax in India.

There are no specific provisions for energy and natural resource com-panies in respect of capital gains taxation.



Gain arising on transfer of equity shares of a listed company (after holding them for more than 12 months) on the floor of the exchange are exempt from tax under domestic law. Capital gains tax on the gain arising on trans-fer of listed shares (after holding them for more than 12 months), other than those sold on the exchange, or unlisted shares or business assets (after holding them for more than 36 months) can be mitigated if such gain is invested in specified bonds within a period of six months from the date of transfer, subject to certain conditions. Such investment in bonds is to be held for a minimum period of three years from the date of investment in the bonds. At present, however, the amount of gains that can be protected is subject to a limit of 5 million Indian rupees.

* The authors would like to acknowledge contributions from Anubha Mehra, Sanjay Chauhan and Tejan Dargar in compiling this chapter.


Ali Budiardjo, Nugroho, Reksodiputro INDONESIA


IndonesiaFreddy Karyadi and Anastasia IrawatiAli Budiardjo, Nugroho, Reksodiputro




The differences in tax treatment between an acquisition of stock or shares in a company and the acquisition of business assets and liabilities can be described as follows.

Transfer of sharesTransfer of shares may result in the payment of income tax as a result of capital gain, which shall be borne by the seller, under the following conditions:• if the seller is an Indonesian tax subject, the obligation to pay tax on

the capital gains is the seller’s obligation. There is no obligation on the part of the buyer to withhold any amount from the sale price; and

• if the seller is not an Indonesian tax subject, the resident buyer must withhold 20 per cent of the estimated net income (ie, the capital gain amounting to 25 per cent of the transaction value) to the seller from the sale of the shares, except where the taxation of capital gains is reserved to the treaty partner by an applicable tax treaty. To obtain the benefit of the applicable tax treaty, the seller must comply with the certifica-tion, eligibility, information and reporting requirements in force in Indonesia. Currently, the seller would need to provide to the purchaser and the company a certificate of tax domicile issued by a competent tax authority (the Internal Revenue Services).

Transfer of assetsTransfer of assets may result in payment of income tax and value added tax. Any gains from the sale or transfer of property, including the following, by an Indonesian company is taxable as ordinary income:• gains from the transfer of property to a corporation, a partnership and

other entities in exchange for shares or capital contribution;• gains accrued by a corporation, a partnership or other entities from the

transfer of property to its shareholders, partners or members;• gains from a liquidation, merger, consolidation, expansion, split-up or

acquisition; and• gains from the transfer of property in the form of grant, aid or dona-

tion, except when given to relatives within one degree of direct line-age, or to religious, educational or other social entities or to small businesses including cooperatives as determined by the Minister of Finance, provided that two parties do not have a business relationship, ownership or control.

Article 4 of Law No. 7 of 1983, amended by Law No. 36 of 2008, regarding the Income Tax Law (ITL) states that if a taxpayer sells property at a price higher than the book value, or at a price higher than the acquisition cost or value, the difference in price is regarded as profit.

Basically, the ITL employs a system of income taxation under which all income items from whatever source or category are combined, totalled and cumulatively taxed. However, article 4 paragraph 2 of the ITL permits the government to tax certain categories of income (including transfer of land or building by an individual or corporate running property business) according to a special scheme, for reasons of simplicity, revenue certainty

and efficient tax administration. Income from the transfer or disposal of lands and buildings is subject to withholding tax at the rate of 5 per cent of the selling price, which is deducted with 60 million rupiahs.

Other than income tax issues, the transfer of assets (other than cash and shares) may be subject to value added tax (VAT). A 10 per cent VAT is imposed on the transfer of assets originally acquired by a taxable person, provided the VAT paid at the time of acquisition is creditable. Supply of machinery, buildings, tools, furniture or other assets which were originally not for sale by a taxable person for VAT purposes is subject to tax as long as VAT paid at the time of acquisition may be credited in accordance with the law. Accordingly, a supply of such assets is not subject to tax if the VAT paid at the time of acquisition cannot be credited pursuant to the applica-ble regulations.

Generally, capital gains are imposed with the general tax rate as men-tioned in question 13. However, there are some special tax treatments as described below.

Land and/or buildingProceeds from transfers of land and/or buildings are imposed by final flat tax rate amounting to 5 per cent if the seller is an individual taxpayer or corporate taxpayer running a real estate business. These rules also prevail for non-resident taxpayers.

Revaluations of fixed assets and its penaltySubject to Directorate of General Taxation (DGT) approval, corporate tax-payers and PEs who maintain rupiah accounting may undertake a revalua-tion of their non-current tangible assets for tax purposes. The revaluation must be conducted on a market or fair value basis. The market values must be determined by a government-approved appraiser. These are subject to DGT adjustments if the values, in the DGT’s view, do not represent the fair or market values of the assets. Once approved, the depreciation applied to depreciable assets must be based on the new tax book values (approved values).

The revaluation is made in accordance with prevailing market values for the assets, and may not be conducted if those assets have been revalu-ated within five years. The difference between the new market value and the old book value will be taxed at 10 per cent. After revaluating fixed assets, the calculation for the depreciation expense of the revaluated assets will be based on the new market value. Subject to DGT approval, taxpayers facing financial difficulties may pay this tax in instalments over 12 months.

If the taxpayer transfers the revaluated fixed assets before the new use-ful life elapses, an additional income tax at the highest corporate income tax rate minus 10 per cent will be imposed.

Listed sharesSales of shares in companies listed on an Indonesian stock exchange are subject to final withholding income tax at 0.1 per cent of the gross transac-tion value. Once an initial public offering takes place, additional income tax is also due on founder shares. Founder shareowners have the option of paying final income tax at 0.5 per cent of the company share value within a month after trading has begun in the shares on an Indonesian stock exchange. If the final tax is not paid, the gains from the sales of the founder shares are assessable in accordance with the general income tax rates.


INDONESIA Ali Budiardjo, Nugroho, Reksodiputro


Luxurious goodsUnder Minister of Finance Decree No. 82/PMK03/2009, the deemed taxable gain derived from the disposal of certain types of assets is at 25 per cent of the transaction value, which effectively subjects non-resident sellers to a final tax of 5 per cent (the 20 per cent capital gains tax rate times 25 per cent) based on the transaction. The regulation entered into force on 22 April. The 25 per cent rate applies to assets located in Indonesia valued at more than $1,000, including jewellery, diamonds, gold, luxury watches, antique goods, paintings, cars, motorcycles, cruise vessels and light aircraft.

The tax is based on a deemed gain as stipulated by the Finance Minister.

Thus, the tax is payable whether or not gain is actually realised. The regulation does not apply if an applicable tax treaty gives the seller’s resi-dent country an exclusive right of taxation. Tax is to be withheld by the purchaser of the assets if the purchaser is tax resident in Indonesia.

In addition to the above, the Minister of Finance recently issued a new regulation regarding income tax of luxurious goods. The regula-tion, Regulation of Minister of Finance of Republic of Indonesia No. 90/PMK.03/2015, amends the previous regulation as stated in Minister of Finance Regulation No. 253/PMK.03/2008. This regulation basically exempts the imposition of income tax for the purchase of some luxurious goods made by non-tax residents. For a detailed explanation on the goods exempted pursuant to the regulation, see ‘Update and trends’.

Special purpose vehicleBased on Minister of Finance Decree No. 258/PMK03/2008, 25 per cent of the transaction value is deemed taxable gain derived from the disposal of shares in a foreign company domiciled in a tax-haven country that acts merely as a special purpose vehicle and holds shares of an unlisted Indonesian company.

As such, the non-resident seller of the shares of the interposing com-pany abroad will be subject to a final effective tax of 5 per cent (that is, 20 per cent multiplied by 25 per cent), based on the transaction value. However, it is not specified how to determine whether a country is a tax haven.

Further, this regulation does not apply if an applicable tax treaty gives the resident country of the seller an exclusive right of taxation.

The tax is based on a deemed gain as stipulated by the Finance Minister.

Thus, it is payable regardless of whether or not the gain is actually realised. It is to be withheld by the purchaser of the shares if the pur-chaser is a tax resident of Indonesia. If the purchaser is a non-resident, the Indonesian company must account for the tax even if the transaction takes place abroad and may not be disclosed to the Indonesian company (as there is no change in the company’s shareholders).

2 Step-up in basis


The purchaser may get a step-up in the business assets of the target com-pany in the form of intangible assets of the target company, such as good-will, trademarks, or certain licences supporting the line of business of the target company which are not issued any more by the government, etc.

Goodwill and other intangible assets of a company may be amortised, and therefore may be depreciated for tax purposes in the purchase of assets or stocks and shares in a company owning such goodwill or intangible assets.



This depends on the location of the ultimate controller of the purchaser. If the ultimate controller of the purchaser is located in Indonesia, it is bet-ter if the acquisition is conducted by an entity established in Indonesia. Otherwise, we believe that it is better if the acquiring entity is located in a country which has a tax treaty with Indonesia.

This consideration relates to the distribution of dividends of the target company and the controlled foreign corporation rule, which allows the dis-tribution of dividends to any Indonesian tax resident meeting the required conditions. Pursuant to article 4 paragraph 3(f ) of the ITL, a dividend or profit share obtained or received by a limited liability company as a resi-dent taxpayer, cooperative, state-owned business enterprise or regional government-owned business enterprise, from capital participation in a business entity incorporated and domiciled in Indonesia is excluded from tax object provided that:• the dividend originates from a reserve of retained profit; and• for a limited liability company, state-owned business enterprise or

regional government-owned business enterprise that receives the div-idend, its share ownership in the entity which distributes the dividend must be a minimum of 25 per cent of the paid up capital.

On the other hand, if the abovementioned requirements are not fulfilled by the resident corporate taxpayer, the income in the form of dividend distri-bution will be subject to normal 25 per cent income tax.

Considering the above, if the ultimate controller of the acquiring com-pany is located in Indonesia, the ultimate controller might benefit from article 4 paragraph 3(f ) of the ITL (if it fulfils the requirements), so that it does not have to pay tax for the dividend obtained from the target com-pany. Otherwise, it will be better if the acquiring company is located in a low tax jurisdiction which has a tax treaty with Indonesia.



In Indonesia, the regulations regarding acquisition are regulated under Law No. 40 of 2007 regarding Limited Liability Companies (the Company Law) and Government Regulation No. 27 of 1998 regarding Merger, Consolidation and Acquisition of Limited Liability Companies (PP 27). The definition of a merger pursuant to the Company Law and PP 27 is a legal act, which is conducted by a company or more to merge itself into another company which has existed previously, where the merging company will then be dissolved. On the other hand, acquisition is defined as a legal act conducted by a legal entity or individuals to acquire either all or most of the shares in a company, which may result in a change of control of such company.

In a merger, since there will be transfer of assets and liabilities of the merging company into the merged company, it will also relate to taxation matters, such as:• transfer tax, which will be in the form of:

• VAT (in the event that one of the parties of the merger is not a reg-istered taxable entrepreneur); and/or

• fees for the acquisition of land and building (BPHTB) if the transfer relates to property or land. By request of the taxpayer, the Director General of Taxation may grant a BPHTB reduction of up to 50 per cent for land and building rights transfers in business mergers or consolidations at book value; and

• income tax as a result of capital gain by the transfer of assets and liabil-ities of the merging company to the merged company.

Further, transfer of assets in business mergers, consolidations or busi-ness splits must generally be conducted at market value. Gains resulting from this kind of restructuring are assessable, while losses are generally claimable as a deduction from income. However, a tax-neutral merger or consolidation, under which assets are transferred at book value, can be conducted subject to the approval of the Director General of Taxation, in which the merger or consolidation plan must pass a business purpose test by the Director General of Taxation. As for tax driven arrangement, it is prohibited and therefore tax losses from the combining companies may not be passed to the surviving company.

In acquisition, the acquisition can be achieved by means of (i) transfer of majority shares in the target company to the purchaser; or (ii) issuance of new shares in the target company to be subscribed by the new share-holder which dilutes the share proportion of the previous shareholder in the target company. If the acquisition is achieved by the means as stipu-lated in point (i), the tax implication will be the same as described above, where the seller will be obligated to pay taxes in relation to the capital gain achieved for the transfer of the shares. On the other hand, if the acquisition is achieved by the means as stipulated in point (ii), the subscription price




for such issuance of new shares will not be subject to tax, therefore it will not relate to any tax implication.



We believe that there is no implication for the acquirer in issuing stock as a consideration rather than cash, since the acquirer will not be subject to any tax in acquiring shares in a company.

6 Transaction taxes


Even though it will not affect the validity of the agreement, based on the practice in Indonesia, the parties to agreements, including but not lim-ited to the agreement which relates to acquisition of stocks and shares or business assets usually pay a documentary taxes by putting 6,000 rupiah stamp duties in the signatory block of the parties to the agreement.

Aside from the stamp duties or documentary taxes, other transaction taxes will also apply to the seller in the form of income tax, VAT, luxury sales tax, and/or BPHTB (for immoveable properties such as land and buildings), as described above.



There is no limitation on the net operating losses, tax credits or other types of deferred tax asset after a change of control of the target, or in any other circumstances as long as the transaction is not constituted as a merger transaction. In this regard, there is also no applicable technique for pre-serving them. We believe that there is also no special rule or tax regime for reorganisation of bankrupt or insolvent companies.

8 Interest relief


Interest tax relief for acquisition can be obtained if the acquisition would result in the acquirer owning under 25 per cent in shares of the target com-pany. However, the withholding of taxes on interest payment cannot be easily avoided. The debt to equity ratio (generally at 4:1) should also be observed in order to enable the interest relief to be obtained.

In relation to debt pushdown, it might be deemed that the target com-pany distributes dividends to the acquiring company or gives gifts to the acquiring company, which results in the acquiring company possibly being subject to income tax.



In the agreement for the sale of stock or business assets, the purchaser usually includes a representations and warranties clause where the seller

provides certain representations and warranties to the purchase in relation to the condition of the stock or business asset, such as:• the seller or the target company has paid all of its tax obligation to the

government as of the execution date of this agreement and will pro-vide the purchaser with a list of outstanding tax obligations that may incur in the future;

• in the event that, after the closing date, the result of the tax correc-tion made by the authorised agency appears to be beyond the reason-able tax propriety, the seller agrees and binds itself to bear all of the payments in connection to such tax correction provided that such the tax correction is resulted from the transaction completed by the target company prior to the closing date;

• the seller or the target company has made all returns, given all notices and submitted all computations, accounts or other information required to be made, given or submitted to any tax authority in accord-ance with the law and all such returns and other documentation were and are true, complete and accurate; and

• the seller or the target company has not carried out, been party to or otherwise been involved in any transaction where the sole or pur-pose was the unlawful avoidance of tax or unlawfully obtaining a tax advantage.

In addition to this, the purchaser could also add a tax covenant from the seller to the purchaser as a schedule to the agreement.

Aside from the representations and warranties clause itself, indem-nity or the payment for misrepresentation or incorrect warranties is usu-ally also regulated under the agreement. The parties to the agreement can state a certain amount of money as a remedy for such misrepresentations or incorrect warranties. The payment which relates to a claim for such mis-representation or incorrect warranties might be subject to income tax aside from the amount of loss suffered by the purchaser due to the misrepresen-tation or incorrect warranties. For example, if the amount of indemnity stated under the agreement is US$10,000, while the real amount of losses incurred by the target company is only US$8,000. In this regard, the excess amount of US$2,000 may be subject to income tax since it can be consid-ered as a capital gain earned by the purchaser.


10 Restructuring


The type of post-acquisition restructuring to be carried out depends on the purpose and the factual condition of the transaction itself. Some examples of the post-acquisition restructuring which might be conducted are, among others:• transfer of certain assets which is not profitable for the company;• merger; or• spin-off.

These kinds of post-acquisition restructuring might be conducted for the purpose of reducing the company losses due to bad assets, or by merging or spinning of the company with another entity which has lots of profit to balance the losses of the other entity.

11 Spin-offs


Spin-off is not recognised under Indonesian law, as the government regula-tion regarding spin-off has not yet been issued. Currently, the method of spin-off in Indonesia is conducted by establishing a new subsidiary where the previously established company will inject its assets to the newly estab-lished subsidiary.

In addition to this, see question 4 regarding tax-neutral merger or con-solidation, which should also apply to the method of spin-off which is usu-ally conducted in Indonesia.


INDONESIA Ali Budiardjo, Nugroho, Reksodiputro




Under Indonesian jurisdiction, it is not possible to migrate the residence of the acquisition company. The only possible way to conduct this is by liquidating the acquisition company in Indonesia and establishing another acquisition company at the other proposed jurisdiction.



Yes, they are subject to income tax and withholding taxes. The rates are as follows:

Interest

Resident taxpayer 15 per cent 15 per cent

Non-resident taxpayer 20 per cent 20 per cent

In the event that the taxpayer does not have Taxpayer Identification Number, the rate will be more than 100 per cent, as regulated under article 23 paragraph (1a) of the ITL.

Regarding the ‘Dividend’ column in the table, see the explanation in relation to dividend in question 3.

Aside from the tax treaty with certain countries, there are several domestic exemptions for the rate of the interest and dividend taxes, including those listed below.

InterestThe following interest is not subject to income tax:• if the interest is payable to a bank or other financial institution which

has a function as loan provider, or financing as regulated under Minister of Finance Regulation No. 251/PMK.03/2008 regarding income of financial services conducted by entity which has a function

as loan provider, or financing which is not subject to the withholding as regulated under article 23, namely:• finance companies aside from banks and non-bank financial

institutions which are specially established to conduct activities which are categorised as financing companies and have obtained a licence from the Minister of Finance; and

• a state-owned company or regional government-owned com-pany which is specially established to provide financing facility to micro, small or medium enterprises, and cooperatives, including PT (Persero) Permodalan Nasional Madani; and

• time saving, saving interest (which is obtained from bank) and SBI discount.

DividendIf the shareholder invests in certain line of business or in certain areas which obtain higher priority in national scale, it might receive a tax facil-ity in the form of imposition of income tax for dividend in the form of 10 per cent, unless there is a tax treaty which sets out a lower rate.



One of the tax-efficient means which is adopted for extracting profits from Indonesia is through a services scheme in which the local company in Indonesia will pay for a certain amount of fees as compensation for the ser-vices provided by an entity or person in the other jurisdiction. This kind of payment is still subject to income tax, unless the following criteria are met:• the foreign service provider does not have a permanent establishment

in Indonesia in relation to the service provided; and• there is a tax treaty between the country of origin of the foreign service

provider and Indonesia which exempts the service fee obtained by a foreign service provider from tax.

On investment in certain type of industries and investment in certain type of areas and industries, the taxpayer may be given a tax incentives under Government Regulation No. 18 of 2015. The tax incentives would include the reduction of net income by 30 per cent of the total investment,

Update and trends

As mentioned in question 1, the Minister of Finance recently issued an amendment to Regulation of Minister of Finance No. 253/PMK.03/2008 regarding Specific Tax Subject as Withholder of Income Tax from the Purchaser of Extremely Expensive Goods as amended by Regulation of Minister of Finance No. 90/PMK.03/2015. Pursuant to this regulation, several extremely expensive goods are excluded from the withholding of income tax for luxurious goods, if they are purchased by a non-subject tax resident. The exempted goods are:• private planes and helicopters;• cruises, yachts, etc;• houses and land with a sales amount exceeding of 5 billion rupiahs –

or with total area of more than 400 square metres;• apartments, condominiums, or similar with the total purchase

amount exceeding 5 billion rupiahs – or with total area of more than 150 square metres;

• four-wheel drive vehicles, such as a saloon, jeep, SUV, MPV, minibus, and its kind, that carries less than 10 people and having a sales value exceeding 2 billion rupiahs – or with an engine capacity of more than 3,000 cc; and

• two and three-wheel vehicles, with the purchase price of 300 million rupiahs – or with an engine capacity of more than 250 cc.

This regulation was later affirmed in Regulation of Director General of Taxation No. Per-19/PJ/2015 regarding Guidelines on the Collection of Article 22 of the Income Tax.

Recently, the government also introduced the debt-to-equity ratio for tax purposes regulation through the Regulation of Minister of Finance No. 169 of 2015.

Under the regulation, the debt-to-equity ratio should be no more than 4:1.

The following types of taxpayers are exempted from the above requirements:• banks;• financing institutions;• insurance and reinsurance institutions;• those engaged in the business of oil and gas, general mining and

other mining sectors bound in a production sharing contract, contract of work or coal contract of work cooperation agreement, and in such contract is stipulated or stated the provision regarding the debt-to-equity ratio limitation; and

• those for whom all of the income is imposed by final income tax; and

• those engaged in infrastructure business fields.

In the event that the debt-to-equity ratio of the taxpayer exceeds the ratio, the cost of loan which may be calculated in the calculation of taxable income is in the cost of loan in accordance with the debt-to-equity ratio.

The cost of loan is the cost of loan borne by the taxpayer in relation to the loan including:(i) loan interest;(ii) discount and premium regarding the loan;(iii) additional cost incurred related to the arrangement of borrowings;(iv) financial cost in the lease finance;(v) the consideration cost due to debt payment; and(vi) exchange rate difference occurring from the foreign exchange loan,

provided the difference is as for the adjustment to the interest cost and cost as stated in points (ii)–(v).




deducted for six years, each by 5 per cent. Such investment shall also meet the following criteria:• high investment value or for export;• significant labor absorption; or• high local contents.

The government also recently revised the tax holiday regulation by issuing Ministry of Finance Regulation No. 159 of 2015, which provides opportu-nity for new taxpayers running businesses in pioneer industries and satify-ing certain requirements to have income tax reductions from 10 per cent to 100 per cent exemption.


15 Disposals


This depends on the nature of the transaction and the profile of the seller itself. If the seller is a multinational company, they usually prefer to fin-ish the deal outside of Indonesia, in a country which has a favourable tax regime for them. For example, they usually own the shares in an Indonesian company through their subsidiary in country X (A) which has favourable tax regulations for them. Once they decide to exit from the Indonesian company, they will do the transaction through A so that the sale will be conducted in country X for the purpose of having less tax rate, rather than doing the transaction in Indonesia.

However, if country X is a tax haven country, the disposal of shares of A in country X might be subject to tax pursuant to the Regulation of Minister of Finance No. 258/PMK.03/2008 regarding Withholding of Income Tax, article 26 for the Income of Sale or Transfer of Shares as Intended under article 18 paragraph (3c) of Income Tax Law Which is Obtained by Non-resident Taxpayer (PMK 258). Pursuant to PMK 258, the transfer of shares

of a company which was established in a tax haven country and has a spe-cial relationship with Indonesian company or permanent establishment in Indonesia is subject to 20 per cent of the estimation of the net amount. The estimation of the net amount will be calculated as 25 per cent from the sale price. However, if the country origin of the seller has a tax treaty agreement with Indonesia, the withholding of income tax for the gains will only be conducted once the treaty provides that Indonesia has the right of taxation for this kind of transaction. We believe that there is no special rule dealing with the disposal of stock in real property, energy and natural resources companies.



The gains of disposal of stock by a non-resident company in an Indonesian Company are subject to 20 per cent income tax from the estimation of the net amount. The estimation of the net amount is calculated as 25 per cent from the sale price. However, if the country origin of the seller has a tax treaty agreement with Indonesia, the withholding of the income tax for the gains will only be conducted once the treaty provides that Indonesia has the right of taxation for this kind of transaction. We believe that there is no special rule dealing for the disposal of stock in real property, energy, and natural resources companies.



See question 15.

Freddy Karyadi [email protected] Anastasia Irawati [email protected]

Graha CIMB Niaga 24th FloorJl Jenderal Sudirman Kav 58Jakarta 12190Indonesia

Tel: +62 21 250 5 125/5136Fax: +62 21 250 5001/5121www.abnrlaw.com


IRELAND A&L Goodbody


IrelandPeter Maher and Philip McQuestonA&L Goodbody




There are a number of differences.In a share purchase the purchaser assumes the historic tax liabilities

of the company. In the case of an asset purchase, the purchaser does not generally assume past tax liabilities of the business.

Stamp duty is assessed on the transfer of Irish registered shares at 1 per cent of the consideration whereas the sale of assets, subject to certain exemptions (eg, non-Irish situate assets, intellectual property and assets transferred by delivery only), may be assessed for stamp duty at rates of up to 2 per cent of the consideration due.

Share sales are exempt from VAT. Irish asset sales are subject to VAT at rates of up to 23 per cent although full VAT relief can be obtained where, broadly, the assets are being transferred as part of a transfer of a business.

2 Step-up in basis


A purchaser will get a step-up in basis in the business assets of a company when buying the assets rather than acquiring stock. This may provide a tax benefit by reducing the gain on which tax is chargeable in the event that the purchaser sells the assets at a later date.

Capital expenditure on certain intangible assets like intellectual property, goodwill directly attributable to intellectual property, software and transmission capacity rights (as defined) may be depreciated for Irish tax purposes. Capital expenditure on other intangibles, not specifically accorded an entitlement to depreciation for Irish tax purposes under Irish tax legislation, generally does not benefit from tax depreciation. Similarly, the purchase of shares in a company will not of itself give rise to an entitle-ment to depreciate intangible assets owned by the company – of course, as explained, the company may itself have entitlement to depreciation allowances if it incurred capital expenditure on the purchase of qualifying intangibles.



In the case of a stock acquisition, Irish stamp duty will be charged on the acquisition of shares in an Irish company regardless of whether the acquisi-tion company is established in or outside of Ireland.

It may be advantageous to use an Irish-established, Irish tax-resident company as the acquisition company given that dividends received by it from another Irish tax-resident company are tax-exempt in Ireland. The use of such an acquisition vehicle may also allow for the Irish substantial shareholdings capital gains tax exemption to be availed of.

Even if the acquisition company is not an Irish-established, Irish tax-resident company, it is likely, given the extensive exemptions from Irish dividend withholding tax, that dividends may be paid by the Irish target free of Irish dividend withholding tax if the acquisition company is inter-nationally held. The use of a non-Irish tax-resident acquisition vehicle will not necessarily avoid a gain on the disposal of the stock being within the charge to Irish tax (see question 16).

In a business asset acquisition, if the business is intended to be car-ried on in Ireland after the acquisition, it may be preferable to use an Irish-established, Irish tax-resident acquisition company, as the carrying on of the Irish business by a non-Irish tax-resident company is likely to bring it within the charge to Irish tax by virtue of carrying on a business in Ireland. The non-Irish-resident acquisition company could thus be potentially lia-ble to both Irish and foreign tax on the Irish business income.



Irish company law that came into force on 1 June 2015 allows two Irish incorporated private companies to merge, whereby the assets and liabili-ties of one company are transferred to the other and the transferring com-pany is dissolved. Previously mergers between Irish companies were not possible. It remains to be seen whether or not Irish domestic mergers will become a common form of acquisition.

An Irish company may be merged with another company incorporated in the EU. A number of such mergers have been effected, but this is con-sequent to relatively recently introduced legislation, and generally in our experience has taken place within a group context, so it is not a common form of acquisition by third parties in Ireland at present.

Share-for-share exchanges are not uncommon forms of company acquisition. A share-for-share exchange may qualify for exemption from stamp duty subject to certain conditions.

A share exchange will most often arise where a publicly quoted com-pany is acquiring the target company as the former has a ready market for its shares.

Where the shares of the acquiring company are issued to the sharehold-ers of an Irish company as consideration for the acquisition of their existing shares, then, subject to certain conditions being satisfied, the transaction should qualify for Irish capital gains tax rollover relief for shareholders who would be within the charge to Irish capital gains tax on the sale. This relief provides that the selling shareholder is deemed not to have disposed of his shares in the original company and the new shares received in the acquir-ing company are deemed to be the same asset as the original shares with the same base cost and other tax attributes as the original shares. When the recipient of the shares subsequently disposes of the shares in the acquiring company for cash, shareholders who would be within the charge to Irish capital gains tax may be subject to tax at 33 per cent on the chargeable gain arising, subject to exemptions.


A&L Goodbody IRELAND




In the case of a stock issue it may be possible to avoid the 1 per cent stamp duty charge altogether. Furthermore, the chargeable gain in the hands of the selling shareholder (if within the charge to Irish tax on the sale) may be deferred, which has indirect economic benefit to the acquirer.

6 Transaction taxes


Yes. For further details on the stamp duty and VAT payable please refer to question 1.

In the case of a share sale, the accountable person to pay stamp duty is the purchaser of the shares.



Trading losses may survive a change in control of the target. However, on the change of ownership of a company with trading losses, in certain circumstances a special provision applies to disallow the carry-forward of the trading losses if there is both a change in ownership of the target and a major change in the nature or conduct of the trade carried on by the target.

8 Interest relief


A tax deduction is available for the acquisition company for interest pay-ments made by it in respect of borrowings to acquire the target, provided certain conditions are met.

There are no general thin capitalisation rules. However, restrictions have been introduced to disallow a deduction in certain circumstances, including in some cases where interest is paid on borrowings from a com-pany that is connected with it and where the borrowings are used to acquire ordinary share capital of a company from a company that is connected with it.

The avoidance of withholding tax on interest payments is generally achieved by borrowing from a lender in an appropriate jurisdiction to which interest can be paid gross (see question 13).

Debt pushdown may be achieved with appropriate structuring. It may be necessary to have a subsidiary of the target company that is connected with the acquisition company, in order for the conditions allowing deduc-tion to be met.



The accepted market practice in Ireland in a stock acquisition is for protec-tion to be given by the seller to the buyer in the form of both a tax indem-nity and tax warranties. A tax indemnity is generally given in the form of a separate tax deed. The documentation generally categorises such pay-ment as a reduction in the purchase consideration. To minimise the risk

of taxability of payments, the purchaser rather than the target should be indemnified.

Tax warranties are also sought, primarily to provide the buyer with the necessary tax history of the company required to deal with tax matters going forward. In addition, the warranties may cover certain matters not covered by the tax deed. The tax warranties are included in the share pur-chase agreement.

Tax warranties are also commonly sought in a business asset acqui-sition but are minimal given the limited circumstances in which Irish tax liabilities may attach to assets. The tax warranties are included in the asset purchase agreement.


10 Restructuring


It cannot be said that there is any typical tax-driven restructuring done in Ireland post-acquisition of either shares in a company or business assets.

Of course, restructurings will often be put in place post-acquisition, with attendant tax consequences, but in our experience these are usually driven by the business requirements of the company and the group acquir-ing the target.

For example, we have advised on restructurings that have seen the businesses of other group affiliate companies of the acquirer move to Ireland in order to obtain the benefit of the low Irish corporation tax rate of 12.5 per cent.

Additionally, we have seen restructurings put in place post-acquisition to enhance the business and tax efficiency of the target company. One example might be a company with manufacturing operations in Ireland, which instead enters into a contract manufacturing arrangement, and such a structure needs to be carefully managed in order to preserve the entitle-ment of the Irish company to the 12.5 per cent rate of corporation tax.

Finally, restructurings are often put in place in order to extract cash from the acquired company.

11 Spin-offs


It is possible for tax-neutral spin-offs of businesses to be executed in Ireland and for the trading losses of the spun-off business to be preserved. The transfer of a trade from one company to another is generally treated as the cessation and commencement of the trade, with trading losses not being available for use by the transferee. As an exception to this general rule, a provision allows a trade to be transferred from one company to another and, broadly, provided that the companies are in common ownership to the extent of not less than 75 per cent, the transferee is entitled to losses of the trade which arose while the trade was carried on by the transferor.

It is possible to avoid transfer taxes by executing a ‘hive down and hive out’ of a business, but various conditions must be met.



Irish incorporated companies are generally tax-resident in Ireland. There is an exception to this where an Irish-incorporated company that is regarded as resident in a treaty partner country of Ireland, and not resi-dent in Ireland for the purposes of the tax treaty between that country and Ireland, will be regarded as not resident in Ireland.

For companies incorporated before 1 January 2015 a second exemption also applies (until 31 December 2020 or earlier in certain circumstances). Such an Irish-incorporated company that is under the ultimate control of a person or persons resident in an EU member state or in a treaty country or which itself is, or is 50 per cent related to, a company whose principal class of shares is substantially and regularly traded on a stock exchange in an EU country or a treaty country, and which carries on a trade in Ireland or is 50


IRELAND A&L Goodbody


per cent related to a company which carries on a trade in Ireland, will not be tax-resident in Ireland if it is managed and controlled outside Ireland.

Where a company ceases to be resident in Ireland an exit tax regime applies. On ceasing to be resident, the company is deemed to have disposed of and reacquired all of its assets immediately before the event of chang-ing residence, at their market value at that time, notwithstanding that no actual disposal takes place. The exit tax is disapplied in certain instances including if the company is ultimately owned by a foreign company (ie, one controlled by a resident or residents of a country with which Ireland has a double tax treaty and not by an Irish-resident person).



Interest paid by an Irish-resident company is subject to withholding tax, currently at the rate of 20 per cent, absent an exemption. Under Irish domestic law various exemptions from interest withholding tax exist, in addition to exemptions provided for under certain Irish tax treaties.

Irish-resident companies are required to withhold tax, currently at the rate of 20 per cent, on dividends and other distributions. There are exten-sive domestic exemptions from this dividend withholding tax for non-Irish investors, subject normally to documentary filing requirements, and it is generally likely that dividends paid by an internationally held Irish com-pany may be paid free of Irish withholding tax without having to rely on an exemption under a relevant Irish tax treaty.



The making of a dividend or other distribution (whether in cash or in kind) is the most common means of extracting profits from an Irish company.

In certain cases there can be Irish company law impediments to the ability of an Irish company to make a dividend or distribution. Also, a divi-dend or distribution is not tax-deductible.

There are other means that could be adopted to extract profits effec-tively. With the introduction from 1 January 2011 of Irish transfer pricing rules (subject to certain exceptions and grandfathering provisions), such rules may now need to be considered in respect of these other means.

For example, interest could be paid on a loan made by an affiliate in a lower tax jurisdiction. The critical issues here would be to ensure that there is exemption from Irish withholding tax on the interest and also that the Irish company is entitled to a tax deduction for the interest paid, which is subject to detailed conditions.

Alternatively, if another income stream could be created from Ireland to a lower tax jurisdiction and if the payment was tax-deductible, then this could be a tax-efficient way for effectively extracting profits, such as if the Irish company was to license in intellectual property from an affiliate located in a lower tax country. The issue to ensure would be that withhold-ing does not apply, that the licensor company is not regarded as receiv-ing the income from an Irish source and that the payment made by the

Irish company is not excessive, as the excessive element could be denied deductibility.


15 Disposals


The method of carrying out disposals very much depends on the particular circumstances of the transaction. The disposal of the stock in a local com-pany or foreign holding company would generally be the most common method of disposal. This is driven in part by the seller wishing to avoid a double charge to tax, at both company and shareholder level, where the disposal is by way of an asset disposal.

The availability of the substantial shareholdings exemption (see ques-tion 17) may favour a disposal of stock rather than a disposal of assets.

The market practice in the case of a stock disposal for a seller of shares to give a tax indemnity and tax warranties for certain pre-completion tax liabilities of the target may, in certain circumstances, make an asset dis-posal preferable for the seller.

Differing Irish stamp duty rates (see question 1) may result in a buyer insisting on a stock disposal.



A disposal of stock in an Irish company by a company not resident in Ireland will be subject to tax in Ireland if the stock comprises unquoted shares deriving their value, or the greater part of their value, directly or indirectly from real estate in Ireland, Irish minerals or mineral rights, or exploration and exploitation rights in the Irish Continental Shelf.



As regards the disposal of stock in a company, a non-resident company should only be subject to Irish capital gains tax on a disposal if the shares are of the type referred to in question 16. This assumes that the shares were held as a capital asset by the seller.

If the seller is a company resident in Ireland, then the provisions of the Irish substantial shareholdings exemption may apply whereby if, broadly, the seller owns more than 5 per cent of the share capital of the target com-pany for the past 12 months and the target company is a trading company or part of a trading group, and is resident in an EU country (which includes Ireland) or in a country with which Ireland has signed a double tax treaty, the capital gains should be exempt from Irish capital gains tax.

Update and trends

Since 1 June 2015, when new Irish company law came into force, it is now possible for two Irish incorporated private companies to merge. Previously an Irish company could only merge with a company incorporated in another EU member state. It is too early to tell whether or not Irish domestic mergers will become a common form of acquisition. At present there are no specific provisions in Irish tax law addressing the new Irish domestic merger. The absence of specific tax legislation may, at least initially, hinder the use of Irish domestic merger as a form of acquisition.

Irish corporate tax residence rules, provided for in Irish tax legislation and which facilitated the ‘double Irish’ structure used by some US multinationals for their Irish operations, have been amended. Under the amended legislation, all Irish incorporated companies are regarded as Irish tax resident unless treated as tax resident in a treaty

partner country, and not tax resident in Ireland, under an Irish tax treaty. The new rules have effect from 1 January 2015 for companies incorporated on or after that date, and have effect from 1 January 2021 (or earlier in certain circumstances) for companies incorporated before 1 January 2015.

Ireland continues to be a favoured location for inversion combinations by US publicly listed companies involving the acquisition of an Irish target or the use of an Irish holding company, allowing future access to the benefits of the favourable Irish tax system and an expected reduction of the group effective tax rate. A recent example of such corporate inverson is Medtronic, Inc’s US$49billion acquisition of the Irish company Covidien plc. However, the number of corporate inversions has reduced when compared to previous years, primarily due to the proposal by the US government of certain measures.


A&L Goodbody IRELAND


To the extent that an Irish seller does not meet these criteria, one method of deferring the capital gains tax would be if the seller received shares from the acquiring company. As set out above, the gain is rolled over and will be realised on a disposal of those shares.

If the gain is taxable, there are a number of tax structuring routes that could be put in place to mitigate the gain, for example, in the case of an Irish corporate seller, effecting the disposal so that a large distribution is taken by the seller immediately before the sale.

As regards the disposal of assets, there is no opportunity for the vendor to roll over any gain as this rollover relief was abolished within the past few years. Again, if the assets were used as part of a branch trade in Ireland or if the seller is resident in Ireland or ordinarily resident, then the gain will be within the scope of Irish capital gains tax. The circumstances of the trans-action may allow some scope for tax structuring, such as the existence of prior losses within the group which could shelter the gain.

Peter Maher [email protected] Philip McQueston [email protected]

International Financial Services CentreNorth Wall QuayDublin 1Ireland

Tel: +353 1 649 2000Fax: +353 1 649 2649www.algoodbody.com


ITALY Legance – Avvocati Associati


ItalyClaudia Gregori and Giorgio VaselliLegance – Avvocati Associati




From the buyer’s perspective, the main elements to be taken into account in structuring the acquisition of an Italian business either by acquiring the business assets and liabilities themselves as a going concern (scenario 1) or the stock of the Italian company carrying out such business (scenario 2) are mainly the following:• the possibility for the buyer to step up the tax basis of the transferred

assets;• the ability to transfer the tax losses of the seller;• the applicable indirect tax burden; and• the transfer of the tax liabilities of the seller.

The acquisition of the business in scenario 1, if directly carried out by the buyer, ordinarily entails the establishment by the latter of a branch in Italy (qualifying as a permanent establishment for tax purposes), unless it is carried out through an Italian newly established subsidiary. Generally, the transfer of business assets allows the buyer to obtain the step-up for tax purposes of the same assets as well as, due to certain favourable rules pro-vided under Italian law, to limit the transfer to the same buyer of the con-tingent tax liabilities of the seller to those already assessed by the Italian tax authorities (ITA) at the time of the transfer. However, the applicable indirect tax burden is in principle substantially higher than that arising in scenario 2 and tax losses of the seller are not transferred to the buyer.

In scenario 2, no step-up of the tax basis of the assets of the acquired company would be recognised upon the stock transfer and the tax liabili-ties of the same company would be transferred; however, any tax losses of such company would be maintained (save for the application of certain anti-avoidance rules, see question 7). Moreover, the indirect tax regime would generally be less burdensome than in scenario 1 (financial transac-tion tax (FTT) may apply in certain cases, see question 6).

Also, from the perspective of the seller, scenario 1 is less attractive than scenario 2, since the capital gain arising from a business transfer is subject to full corporate taxation in the hands of the same seller, namely, to corporate income tax (IRES), applying at the ordinary 27.5 per cent rate. Conversely, upon sale of stock in scenario 2 an Italian resident corporate seller may benefit from the domestic participation regime under which, subject to certain conditions being met, only 5 per cent of the capital gain is subject to tax; moreover, a non-resident seller may benefit from full relief from taxation in Italy under the applicable tax treaty. Therefore, in the sell-er’s view scenario 1 may be a viable option only in the event it has tax losses to shelter the taxable capital gain.

2 Step-up in basis


As indicated above, a share deal does not trigger per se any step-up in the tax basis of the business assets of the target company while the purchase price paid constitutes the tax cost of the acquired stock in the hands of the buyer. No depreciation of such cost is generally allowed. A way to ensure that the purchase price paid is recognised as the tax basis of the assets of the target company is by carrying out the acquisition through an Italian company and then merging such company with the target. The merger deficit deriving from the acquisition may then be allocated to increase the value of the target’s assets, which, however, can be recognised for tax pur-poses only subject to the payment of an ad hoc substitutive tax, at rates ranging from 12 per cent to 16 per cent (such route is then ordinarily not followed, due to the level of the substitutive tax rates).

Conversely, acquisitions of business assets and liabilities trigger a step-up in the tax basis of the transferred assets in the buyer’s hands for the purposes of both IRES and regional tax on productive activities (IRAP), applying at the general rate of 3.9 per cent (different rates may apply depending on the nature of the business carried out by the company). Accordingly, the relevant depreciation and amortisation costs (which are generally deductible for tax purposes) would be determined with reference to such increased tax basis, thus determining a lower income tax burden for the buyer.

In such context, depreciation and amortisation of goodwill and other intangibles relating to the transferred going concern are generally deduct-ible for income tax purposes within certain limits set forth by applicable laws (eg, depreciation of goodwill is deductible in 18 years).



Italian law provides an attractive regime for Italian holding companies, which are entitled to benefit from a 95 per cent exemption for IRES pur-poses (ie, only 5 per cent is subject to IRES, leading to an effective tax rate of 1.375 per cent) on dividends received from subsidiaries as well as capital gains realised on the sale of participation (under the participation exemp-tion regime). For the participation exemption regime on capital gains to apply, certain requirements must be met, including a minimum holding period (starting from the beginning of the 12th month prior to the stock sale) and the fact that the participating company carries out an actual busi-ness activity for a certain period of time (such requirement is by operation of law not deemed to be met in the event the participating company is a real estate one). No minimum shareholding is required.


Legance – Avvocati Associati ITALY


Based on the foregoing, the carrying out of the acquisition through an Italian acquisition company may be a viable option in the case the acquisi-tion is debt-financed and subsequent debt pushdown is envisaged. In fact, such debt pushdown may be achieved post-acquisition either by merging the acquisition company with the target company or by having the two companies electing for tax consolidation for IRES purposes (no consolida-tion is allowed for IRAP purposes).

Furthermore, a favourable tax regime is provided in respect of divi-dends and interest payments to the parent company, provided that the lat-ter is EU-resident (see question 13).

The use of an Italian company is also the scenario that is generally implemented in the event the acquisition is carried out through an asset deal. In fact, in such a case the acquisition financing may be directly granted at the level of the acquiring company.

The carrying out of the acquisition through a non-Italian company generally occurs in the case no debt-pushdown is envisaged. In any event, to the extent possible the use of an acquisition company resident in an EU member state is advisable, since such company may benefit from a favour-able tax regime in respect of dividends, interest and capital gains (under EU directives and tax treaties, see question 13). Note that this scenario is also the most likely one in the event the target is a real estate company, since, as indicated above, an Italian holding company does not benefit from the participation exemption regime in respect of capital gains realised on the stock of such type of companies. In this regard, it is worth mentioning that in the past few years the ITA adopted a very aggressive approach vis-à-vis foreign acquisition holding structures, especially in the case the ultimate shareholder thereof is non-EU-resident. Therefore, it is essential that the acquisition company has an adequate degree of substance in its jurisdic-tion of incorporation (eg, in terms of organisational structure, manage-ment and financial capability).



Both mergers and share exchanges are commonly used in Italy for acquir-ing Italian target companies, where no (or limited) cash payment is involved in the transaction, as well as to set up joint ventures.

A merger of two Italian companies is treated as a transaction neutral for income tax purposes, since it does not trigger income tax liabilities either in the hands of the merging entities or their shareholders, entailing a rollover of the tax basis of the assets of the merging entities (although a step-up of such tax basis is allowed, subject to the payment of the sub-stitutive tax mentioned in question 2). Certain anti-avoidance rules apply aimed at tackling abuses (eg, with respect to the carry-forward of tax losses of the merging entities). Furthermore, the company resulting from the merger becomes liable vis-à-vis the ITA for the tax obligations and related duties of all the merged entities, with no limitation. Mergers also benefit from a favourable indirect tax treatment, since transfer taxes (currently €200) apply at a fixed rate.

Conversely, share-for-share offers are generally treated as taxable transactions for income tax purposes, thus triggering taxation of any capi-tal gain arising therefrom in the hands of the contributing shareholders. However, if certain conditions are met (eg, target shareholders receive shares in the buyer in exchange for target shares and the transaction occurs at book value), rollover treatment may be available. Where rollover applies, any tax charge on capital gain is deferred until the consideration shares are sold. In any event, where the contributing shareholder is an Italian com-pany the 95 per cent exemption set forth under the participation exemption regime may apply (subject to the relevant requirements being met).

Italy has implemented the EU Merger Directive: therefore both merg-ers and exchange of shares involving Italian and EU-based companies would in principle be treated as tax-neutral transactions, provided that cer-tain subjective, objective and territorial requirements are met.



There is no special tax benefit attached to a share-for-share deal between a foreign buyer and an Italian seller, other than as described under question 1 in respect of stock deals. Conversely, in a share-for-share deal, the Italian

seller could benefit from tax-neutrality (ie, exemption from capital gains), as outlined under question 4.

6 Transaction taxes


Sales of stock qualify as transactions falling within the scope of Italian VAT, but exempted from tax. The transfer agreement, if executed before a pub-lic notary (which is required by operation of law for limited liabilities com-panies) triggers registration tax at a fixed rate. Should the Italian-resident target company be a joint stock company, the transfer of its shares may be subject, in the buyer’s hands, to FTT equal to 0.2 per cent of the sale price, save for certain exceptions (including in respect of intra-group transac-tions) or reductions in the applicable tax rates.

Transfers of business assets and liabilities qualifying as a going con-cern (which is generally the case, see question 1) are outside the scope of VAT and, accordingly, are subject to registration tax at proportional rates. The taxable base for registration tax purposes is equal to the aggregate value of all the assets included in the going concern, net of the related lia-bilities, plus goodwill (if any). Registration tax rates vary depending on the nature of the assets included in the going concern, as follows:• 0.5 per cent for receivables;• 3 per cent for other assets (including goodwill); and• up to 12 per cent for real estate (in such a case, mortgage and cadastral

taxes would also be applicable at a fixed rate).

As a general principle, the seller and the purchaser of a going concern are jointly liable for the payment of the registration tax vis-à-vis the ITA. The parties are entitled to contractually allocate the related burden (which is generally borne by the buyer), it being understood that any such agreement is not be enforceable towards the ITA.



In the case of a change of control of the target, certain anti-abuse rules apply limiting the carry-forward of tax losses, aimed at tackling the acquisition of companies only for the purposes of utilising their tax losses. More specifi-cally, carry-forward of losses is not allowed if the following conditions are met: the majority of the voting rights of the company is transferred and in the fiscal year in which the transfer occurs (or in any of the two preceding or following fiscal years), the activity actually carried out by the company is changed. However, such limitation does not apply if the loss-making com-pany satisfies certain ‘vitality’ tests (ie, employees, revenues).

With specific regard to the ordinary regime of tax losses, starting from the 2011 fiscal year, they can be carried forward with no time limitation, but – for any fiscal year – they can be utilised to offset the taxable income only up to 80 per cent of the amount thereof.

Tax losses accrued during the first three years of business may be carried forward without limitations and set off in full against the taxable income of any subsequent fiscal year, provided that the same losses derive from a new business activity (ie, an activity that was not previously carried on by another person).

Certain anti-abuse rules also apply in the case of mergers and demerg-ers, limiting the carry-forward of losses by the surviving company, in the case certain ‘vitality’ tests are not met. In particular, in the case of a merger tax losses can be carried forward only:• if the income statement of the merging company shows, in respect of

the fiscal year preceding the completion of the merger, gross revenues and employment costs in an amount higher than 40 per cent of the average of the two preceding fiscal years; and

• up to the amount of the net equity of the merging company, as result-ing from the last financial statements (or, if lower, by the ad hoc




financial statements prepared for the purposes of the merger), without taking into account any equity injection made during the preceding 24 months.

The aforementioned rules also apply in the event of a demerger. However, based on the ITA’s practice the limitations provided for mergers apply nei-ther with respect to tax losses remaining in the demerging company nor to those transferred to the beneficiary company, provided that the latter is incorporated as an effect of the demerger.

Loss carry back is not allowed.With regard to acquisition and reorganisation of companies subject to

bankruptcy procedures, a favourable tax regime is provided, pursuant to which any waiver of debt of companies involved in a settlement with credi-tors (concordato fallimentare or concordato preventivo) does not give rise to any taxable income for the same company (ie, any tax losses remain unaf-fected). The same rule applies in respect of certain debt restructuring pro-cedures allowed under Italian law (both in and out of court) but, in such a case, the waiver would entail utilisation of the tax losses of the company, up to the amount thereof. Any excess would still not give rise to taxable income for the company.

8 Interest relief


In the case of an Italian acquisition vehicle, the deductibility of inter-est payments for IRES purposes is subject to thin capitalisation rules, as follows: interest payables are fully deductible within the limit of inter-est receivables. Any excess interest is deductible up to 30 per cent of the EBITDA of the company (earnings before interest, taxes, depreciation and amortisation, as resulting from the income statement, subject to certain adjustments). In this regard, it is worth mentioning that the aforesaid rule has a broad scope, since it applies to interest incurred vis-à-vis any third party, whether resident in Italy or not, related or unrelated. Furthermore, a broad definition of interest is provided, including any assimilated rev-enue and cost, deriving from facility agreements, financial leases, issue of bonds and assimilated securities as well as any other relationship having a financial nature (but excluding implied interest deriving from commercial payables). The amount of interest that is non-deductible may be carried forward and deducted in the following fiscal years (subject always to the 30 per cent EBITDA threshold described above); carry-forward is also allowed for any excess EBITDA not utilised in a given fiscal year.

The aforesaid rule may in principle substantially limit the deductibility of interest on acquisition financing entered into by an Italian acquisition company. However, in the event a company is part of a tax group for IRES purposes, the interest resulting as non-deductible for the group company concerned can be offset against the group aggregate taxable income, pro-vided that the EBITDA of the other group companies has not been entirely utilised by them for the purposes of the interest deduction (ie, any excess EBITDA can be utilised at group level). Based on the foregoing, as indi-cated in question 3, post-acquisition debt pushdown may be achieved by having the acquisition company and the target electing for tax consolida-tion for IRES purposes.

An alternative scenario to obtain debt pushdown is by merging the acquisition vehicle and the target company. In this regard, although no capitalisation rules are provided for Italian tax purposes, the Italian Civil Code provides for specific provisions in respect of merger-leveraged buy-out transactions, under which it is required, inter alia, that an economic and financial plan is prepared by the merging companies, showing the sus-tainability of the overall indebtedness post-merger. Thus, the tax consoli-dation described would be the only viable scenario in case the aggregate debt of the acquisition vehicle and the target company would lack such sustainability.

Interest is instead generally not deductible for IRAP purposes.Ad hoc rules apply, inter alia, with respect to banks and other finan-

cial entities, which are allowed to deduct interest expenses – for both IRES

and IRAP purposes – for 96 per cent of the amount thereof, and to interest expenses on loans secured by mortgage on real estate to be rented, which fall outside the scope of the general rule and are therefore fully deductible for IRES purposes.

Intra-group loans fall within the scope of the general tax regime described above. In addition, should the related party be a non-Italian resi-dent, transfer pricing rules would also be applicable, excluding the deduct-ibility of any interest payment in excess of the arm’s-length one.

Interest arising from loans granted to an Italian company by an Italian corporate lender (or a foreign lender acting though an Italian per-manent establishment) is generally not subject to withholding tax and triggers ordinary taxation in the hands of the recipient. Conversely, Italy still applies withholding tax on interest payments to a foreign lender (not acting through an Italian permanent establishment) at the rate of 26 per cent, which may be reduced (generally to 10 per cent) under the relevant tax treaty. In this regard, in order to decrease the burden put on the shoul-ders of Italian companies under gross-up provisions generally included in loan agreements, an exemption from withholding tax has recently been enacted in respect of interest on medium-long-term facilities advanced to Italian enterprises by certain non-Italian resident entities, including banks and financial institutions established in an EU member state as well as insurance companies incorporated and authorised pursuant to the rules of an EU member state. The scope of the exemption has recently been broad-ened, so as to include indirect lending from foreign institutional investors resident in white-list countries.

A full exemption from withholding tax in Italy also applies in the case of intra-group financing from a non-Italian lender under the Italian imple-menting legislation of the Interest and Royalty Directive (see question 13).



Sale and purchase agreements of stock generally contain specific rep-resentations, warranties and indemnities in respect of tax, given by the seller in favour of the buyer, the contents of which may substantially vary depending on the circumstances, including the outcome of the due dili-gence carried out by the buyer (if any). Such representations, warranties and indemnities are generally included in the agreement itself, since the entering into a deed of tax covenant is not customary in the Italian mar-ket. While a specific deadline is ordinarily negotiated between the seller and the buyer for the latter to enforce the general representation and war-ranties, this generally does not apply to tax matters, for which the term for enforcement is usually agreed to be the statute of limitations set forth under applicable laws. Moreover, considering the sensitivity of the mat-ter, in several cases tax representations and warranties are also excluded from other limitations agreed by the parties in respect of general matters (eg, cap, de minimis, aggregate thresholds).

Representations, warranties and indemnities are generally also given by the seller in the event of sale of business assets and liabilities (treated as going concern). In this regard, it should be noted that an ad hoc tool is provided under Italian law to protect the buyer against tax liabilities of the seller. In fact, as a general principle the buyer of a going concern is jointly liable with the seller for income and indirect taxes (including VAT) and rel-evant penalties referred to the going concern:• due in relation to the fiscal year of the acquisition and the previous two

fiscal years; or• already claimed by the ITA in the same period even if related to previ-

ous fiscal years.

However, the ITA can be requested to issue a tax certificate showing the pending tax liabilities of the seller. In such a case, the joint liability of the buyer would be limited to the liabilities indicated in the aforesaid tax cer-tificate. Should no certificate be issued within 40 days of the request, the buyer would be free from any joint liability with the seller. Such protection does not apply in the event the transfer of the going concern is a fraudulent one.

There is no official practice issued by ITA in respect of the tax regime applicable to amounts paid by the seller to the buyer in respect of breach of




representations and warranties. In general, such amounts are contractu-ally considered as adjustments of the purchase price paid by the buyer to the seller for the transferred stock or business assets and liabilities: accord-ingly, the payment would reduce any capital gain realised by the seller on the sale as well as the tax basis in the hands of the buyer of the acquired stock or business assets and liabilities. Should the payment instead be directly made by the seller to the target company, it would represent an extraordinary income for the latter, subject to ordinary corporate taxation.


10 Restructuring


As already indicated above, a common post-acquisition restructuring tech-nique is the merger of the target into the Italian acquisition company (or vice versa), in order to obtain debt pushdown. As an alternative, the elec-tion for tax consolidation between the acquisition company (to which the acquisition financing has been advanced) and the target is also a viable option.

In the event the buyer is part of a multinational group, the setting up of intra-group arrangements is also common, the object of which varies depending on the business concerned (eg, licences, management services).

11 Spin-offs


Neutrality of spin-off of businesses for both direct and indirect tax pur-poses can usually be achieved through either a demerger or a contribution of business assets and liabilities as a going concern.

On the one hand, demergers are subject to the same tax regime of mergers, as outlined under question 4, and, accordingly, they are neutral for income tax purposes and trigger transfer taxes at a fixed rate.

In the past few years demergers have often been challenged by ITA under anti-abuse rules, especially in the case the assets involved were rep-resented by real estate (thus requalifying the transaction for tax purposes as an asset transfer).

On the other hand, contributions of a going concern to an Italian company are neutral for income tax purposes, since they do not entail the realisation of any taxable capital gain for the contributing company, featuring a rollover of the tax basis of the relevant assets in the hands of the beneficiary company. A step-up of the values of the contributed assets for accounting purposes is allowed by law, which can also be recognised for tax purposes, by paying a substitutive tax at rates ranging between 12 per cent and 16 per cent. Transfer taxes apply at the fixed rate of €200. In this regard, see also question 17.



In the event an Italian resident company transfers its tax residence outside of Italy, it is subject to corporate income taxation on any unrealised capital gains on its assets transferred, determined by reference to the fair market value thereof, unless the same assets are attributed to an Italian permanent establishment of the migrating company.

Migration of Italian resident corporations does not per se trigger tax liabilities in the hands of the relevant shareholders.

Under the Italian exit tax regime, migration (of Italian companies) to EU member states or to EEA states that have signed with Italy an agree-ment for fiscal assistance pursuant to EU Directive 2010/24/EU are enti-tled to benefit from a suspension of the capital gains taxation outlined above, pursuant to the principles contained in the decision of the European Court of Justice No. C-371/10 National Grid Indus BV.



Under Italian law, dividends distributed by an Italian resident company to a non-Italian shareholder, not having a permanent establishment in Italy, are subject to a 26 per cent final withholding tax; however, a reimburse-ment of 11/26 of such withholding tax may be claimed by the shareholder, up to the amount of taxes paid by it outside of Italy in respect of the divi-dends, subject to certain conditions.

Dividends paid to EU companies trigger a reduced 1.375 per cent final withholding tax, provided that certain subjective conditions are met (in accordance with the decisions of the European Court of Justice No. C-170/05 Denkavit International and No. C-379/05 Amurta). EU companies may also benefit from a full exemption under the EU Parent-Subsidiary Directive, subject to certain requirements (including a 10 per cent shareholding and a minimum one-year holding period) and fulfilments.

Should the Italian company be listed on the Italian stock exchange, a substitutive tax applies instead of a withholding tax, at the same rates described above.

Interest payments are also generally subject to a 26 per cent final with-holding tax. As indicated above, specific exemptions apply in relation to medium-long term loans advanced by selected eligible entities (see ques-tion 8). Furthermore, EU companies may benefit from a full exemption under the EU Interest and Royalties Directive, subject to certain require-ments (including a 25 per cent shareholding and a minimum one-year hold-ing period) and fulfilments.

Withholding tax rates on dividends and interest may be reduced pur-suant to tax treaties signed by Italy, based on the OECD model.

Update and trends

In the context of a general reform of the Italian tax system, the Italian government has enacted or is currently enacting several delegated decrees, aimed at implementing a general reform of the Italian tax system, mainly concerning the following fields:• Italian taxation of inbound and outbound investments:

• a new type of tax rulings will be available to Italian and foreign taxpayers (in relation to, inter alia: possible assessments of Italian permanent establishments and allocation of profits and losses thereto; advance pricing agreements for transfer pricing purposes; and overall tax treatment of selected investment schemes envisaged by medium-large businesses);

• tax treatment of inbound dividends indirectly sourced in blacklisted jurisdictions;

• enhancement of the interest relief and consolidation tax regimes;

• simplification of the Italian permanent establishment and of the controlled foreign companies tax regimes;

• drafting of a new ‘white list’ of jurisdiction for tax purposes; and

• simplification of the Italian exit tax regime;• abuse of law and tax assessments:

• a new definition of abuse of law; and• new types of preliminary cooperation procedures between the

ITA and taxpayers (aimed at reducing tax litigation);• general reform of the tax penalties system; and• general reform of tax collection and enforcement procedures.






Considering that dividends are not deductible for tax purposes, extraction of profits may be carried out by payment of interest on intra-group financ-ing, which is deductible within the limits indicated under question 8 and, if the lender is a EU company, may benefit from a full exemption from taxa-tion in Italy. As indicated in question 10, management fees and royalties may also be a viable option.

In any event, all intra-group payments are subject to transfer pricing rules and, accordingly, need to be at arm’s length, which is a matter to which the ITA paid increasing attention in the recent years. Furthermore, in recent years, the ITA also adopted a very strict approach in respect of intra-group relationships, requiring:• on the one hand adequate and strong supporting evidence of the ser-

vices underlying the payments to foreign group companies, in order to allow deductibility of the relevant cost by the Italian company; and

• on the other, if the payment is made to a company resident in a juris-diction benefiting from exemption from withholding tax in Italy (eg, an EU member state) that such company has adequate substance (see question 3).


15 Disposals


Disposals are generally carried out through transfer of the stock of the target company, instead of by sale of business assets. As indicated above, such scenario is generally preferred by sellers since upon sale of stock an Italian resident corporate seller may benefit from the domestic participa-tion regime under which, subject to certain conditions being met, only 5 per cent of the capital gain is subject to tax (except in the case of real estate companies), while a non-resident seller may benefit from full relief from taxation in Italy under the applicable tax treaty.

Conversely, the capital gain arising from the transfer of business assets is subject to full corporate taxation in the hands of the seller.

Furthermore, the indirect tax regime is generally more burdensome in the latter case.



Capital gains realised by non-Italian resident companies, not having a permanent establishment located in Italy, from the sale of stock in Italian-resident companies are subject to the following tax regime:• in the case of sale of a ‘non-qualified’ participation into non-listed

companies (ie, up to 20 per cent of the voting rights or 25 per cent of the stated capital, considering sales made in any 12-month period on an aggregate basis), capital gains are in principle subject to a final 26 per cent substitutive tax. Shareholders resident or established in states included in the ‘white list’ are entitled to a full tax exemption, provided that certain procedural conditions are met;

• in the case of sale of a ‘non-qualified’ participation into listed compa-nies (ie, up to 2 per cent of voting rights or 5 per cent of the stated capi-tal, considering sales made in any 12-month period on an aggregate basis), capital gains are fully exempt from Italian taxation by operation of domestic law; and

• in the case of sale of a ‘qualified’ participation (ie, exceeding the afore-said thresholds), regardless of whether the company is listed or not, capital gains are partially exempt (ie, only 49.72 per cent of the amount thereof is subject to IRES at the ordinary 27.5 per cent rate).

Tax treaties signed by Italy, based on the OECD model, generally provide for full relief from Italian taxation on capital gains.

No special rules are provided in respect of real property, energy and natural resource companies.

Claudia Gregori [email protected] Giorgio Vaselli [email protected]

Via Dante, 7Milan 20123ItalyTel: +39 02 89 63 071Fax: +39 02 896 307 810

Aldermary House10–15 Queen StreetLondon EC4N 1TXUnited KingdomTel: +44 20 7074 2211Fax: +44 20 7074 2233

www.legance.it

Via di San Nicola da Tolentino, 67Rome 00187ItalyTel: +39 06 93 18 271Fax: +39 06 93 18 27 403






As indicated above, transfers of stock may benefit from the participation exemption regime (ie, 95 per cent exemption) or be fully exempt (for non-resident shareholders).

Tax efficiency may be achieved either:• through specific favourable provisions (such as EU directives imple-

mented by Italy and double tax treaties signed by Italy – as outlined above) depending on the nature on the transferred assets as well as the place of residence of the persons involved; or

• through more complex transactions such as mergers and spin-offs, which as discussed, are neutral transactions for both direct and indi-rect tax purposes.

In this respect, it is worth mentioning that in the past a structure commonly utilised by Italian sellers to sell business assets qualifying as a going con-cern was to contribute them to a newly incorporated company and then sell the new company’s stock to benefit from more favourable indirect tax

treatment (see under question 11), while the sale of the new company stock by the seller could benefit from the participation exemption regime under a specific favourable tax regime. However, in the past few years the ITA consistently challenged such structure, requalifying it for indirect tax pur-poses as a straight sale of a going concern. ITA’s view has been upheld by case law (including of the Supreme Court), which led to abandonment of the aforesaid structure (save in certain cases).

In any event, schemes aimed at avoiding and deferring Italian taxa-tion need to be grounded on substantial economic reasons and carefully assessed by the parties in order to avoid possible challenges by the ITA based on anti-abuse principles. In this respect, in the context of a broader reform of the Italian tax system, the Italian parliament has recently approved (for the first time in the Italian tax system, which only embed-ded specific anti-avoidance provisions) a provision empowering the Italian government to issue a decree defining the concept of ‘abuse of law’ for tax purposes (which so far has been only developed by case law). This is aimed at limiting an excessive recourse to such doctrine by the ITA against the taxpayers as well as to provide some milestones in respect thereof. The new definition of abuse of law would clearly distinguish such concept from ‘legitimate tax saving’ (generally allowed by Italian laws) and ‘tax evasion’ (which constitutes a crime).


JAPAN Anderson Mōri & Tomotsune


JapanEiichiro Nakatani and Kai IsoyamaAnderson Mōri & Tomotsune




From the perspective of corporation (income) tax, an acquisition of stock in a target company generally has no effect on the tax attributes of the target company. Thus, if the target company has net operating losses deductible from the taxable income, they may be carried forward to the years after the acquisition under the requirements provided by the law. (See question 7 as to the limitations to carrying forward net operating losses.) However, as the nature of the acquisition of stock has no effect on the target company’s tax attributes, step-up of the basis of the target company’s underlying assets is unavailable. Further, amortisable goodwill is not recognised even if the purchase price of the stock exceeds the aggregated value of the underlying assets of the target company.

A buyer may further benefit from acquiring the stock in the target com-pany. For example, no consumption tax, real estate acquisition tax and reg-istration and licence tax are imposed on the purchase of stock.

Contrary to acquisition of stock, a buyer of business assets of the tar-get company does not inherit the tax status of the target company (ie, the seller). The buyer is generally free from the potential tax liabilities of the target company. Further, goodwill may be recognised and the basis of the assets may be stepped up, which can be, except for certain assets including lands, depreciated or amortised for tax purposes. As a flip side, no benefit of net operating losses of the target company can be enjoyed by the buyer of the business assets.

However, unlike with stock purchase, in the case of asset purchase, consumption tax may be imposed on the asset transfers. Further, real estate acquisition tax and registration and licence tax are imposed on the transfers of real estates.

2 Step-up in basis


As mentioned in question 1, a buyer of stock in a target company does not achieve step-up of the basis of the underlying assets. In asset purchase, assets may generally be stepped up and depreciated or amortised for tax purposes.

In the case of purchase of intangibles, including goodwill, as a part of acquisition of business, the intangibles may be amortised over five years, 20 per cent of the basis each year. On the other hand, no goodwill or intan-gible is recognised in connection with purchase of stock; therefore, no amortisation is available. See also question 1.



It is preferable to establish an acquisition company in Japan if the foreign investor wishes to offset financing costs for the acquisition against the target company’s taxable income. This is because the offsetting can be achieved either through tax consolidation or merger between the acquisi-tion company and target company, and tax consolidation or merger can be conducted only between Japanese corporations. On the other hand, if the foreign purchaser wishes to offset financing costs for the acquisition against its own taxable profits, it is preferable to acquire the Japanese target company directly.



Although we see mergers and share exchanges used in mergers and acqui-sitions (M&A) transactions involving foreign entities, we are unaware of merger or share exchange conducted directly between foreign entities and Japanese corporations. This is for, rather than tax-related reasons, the corporate-law-related reason that according to the dominant view among practitioners, the corporate law of Japan does not allow such mergers or share exchanges.



Paying cash as consideration in restructure transactions, such as mergers, generally disqualifies the transaction from being recognised as ‘qualified’ restructuring for tax purposes. This means that by paying cash, the trans-action will be categorised as ‘unqualified’ restructuring, where the capital gains and losses of the target company’s assets will be recognised; net operating losses may not be able to be carried forward; and built-in losses of the target company’s assets may not be utilised. Paying consideration by issuing stock is not the only requirement to be treated as qualified restruc-turing, but the benefit of issuing stock may be fulfilling one of the require-ments of qualified restructuring.

6 Transaction taxes


The documents specified in the law are subject to stamp tax. Although agreements of acquisition of stock are not taxable, various documents which may be produced in M&A transactions, such as business transfer agreements, merger agreements, real estate agreements and ‘receipts of cash other than sales price or securities’, are listed as taxable documents. Note that stamp tax is imposed only on the documents physically executed, and thus, electronic copies and documents executed out of Japan are not subject to stamp tax.


Anderson Mōri & Tomotsune JAPAN


The rule to determine the amount of stamp tax varies according to the type of the documents. However, the amount of stamp tax does not exceed ¥600,000. Stamp tax is owed by the person who ‘prepared’ a taxable docu-ment, which means that in the case of agreement, both parties are jointly subject to stamp tax thereof.

Further, if real estate is transferred, registration and licence tax at a rate of up to 2 per cent and real estate acquisition tax at a rate of up to 4 per cent of the taxable value of the transferred real estate are applicable.



Although there is no provision that generally imposes limitation after a change of control, there are provisions applicable to specific types of deferred tax assets. For example, net operating losses in the target com-pany that experienced change of control may be restricted as explained below.

In general, net operating losses of a corporation may be carried for-ward for the next nine fiscal years (10 fiscal years, for the fiscal years commencing on or after 1 April 2017). Note that carry-forward of net oper-ating losses is allowed only if the corporation files a ‘blue return’ upon an approval of a relevant tax authority.

It should be further noted that net operating losses can be utilised to offset only up to 80 per cent (65 per cent for the fiscal years commencing on or after 1 April 2015, and 50 per cent for the fiscal years commencing on or after 1 April 2017) of the taxable income for each fiscal year, under certain conditions specified by the law. For example, this limitation may apply if the target company is a ‘large company’, within the meaning provided by the law, with more than ¥100 million in capital. In order for the limitation not to be applied, it may be worthwhile to consider reduction of the capital of the target company in some cases.

In M&A transactions, restrictions on the carry-forward of net operat-ing losses may be triggered if more than 50 per cent of the ownership of a target company with the losses is acquired and any of the events speci-fied by the law occurs within five years of the acquisition. For example, the restriction may be triggered if the target company ceases its previous busi-ness and receives a significant amount of investment or loan in comparison with the scale of the ceased business.

There is no comprehensive tax regime applicable to acquisitions or reorganisations of bankrupt or insolvent companies. However, some exceptions to the limitations to deferred tax assets are provided for the purpose of encouraging reorganisation of those companies. For instance, net operating losses of a corporation under the kosei-tetsuzuki revitalisa-tion procedure are not subject to the nine-year limitation of carry-forward, which is mentioned above, if it is utilised to offset the benefit of debt relief provided by certain creditors specified by the statute.

8 Interest relief


Interest is generally deductible from the taxable income of the paying cor-poration. Under this general rule, corporation (income) tax can be avoided in such a manner as follows.

A resident corporation can receive funding from its foreign share-holder in the form of a loan. In such an event, the resident corporation can reduce the amount of its profits (thereby reducing its corporation tax burden) by deducting the interest paid with respect to such loan under the general rule allowing such deduction as mentioned above. By contrast, dividends must be paid from the profits that are calculated after taking into account taxes. Therefore, a resident corporation may try to receive a

loan from the shareholder and include the interest as a deductible expense rather than obtaining additional capital from the shareholder and distrib-uting dividends to such shareholder.

To counter such a scheme, the thin capitalisation regime and excess interest regime may limit the deductibility of interest payable from the acquisition company to its foreign shareholders. Under the thin capitali-sation regime, a resident corporation that receives a loan from its foreign parent company in the amount of more than three times the amount of capital contributed by such foreign parent into the resident corporation is not allowed to include in deductible expenses the interest corresponding to such excess. Further, the excess interest regime may be applicable to the interest payable from the acquisition company. Under the excess interest regime, ‘net interest’ payments to affiliated persons in excess of 50 per cent of the ‘adjusted revenue’ of a corporation cannot be offset against the cor-poration’s revenues. The regime is not applicable if:• the amount of ‘net interest’ paid to affiliated persons in a given fiscal

year is not more than ¥10 million; or• the total amount of interest paid to affiliated persons in a given fiscal

year is not more than 50 per cent of the ‘total interest payments’ made by a corporation.

If both the thin capitalisation regime and excess interest regime apply to a corporation, the larger of the amounts disallowed to be deducted will be deemed to be the amount against which the revenues of the corporation in the relevant fiscal year cannot be offset.

Under the domestic statute of Japan, interest paid to a foreign lender is subject to withholding tax at the rate of 20.42 per cent, including recon-struction special income tax imposed until the end of 2037. However, the tax treaties entered into by the Japanese government basically comply with the OECD Model Tax Convention, and most of them limit the rate to zero or 10 per cent with several exceptions.

There is no rule prohibiting ‘debt pushdown’, which is allocating debts to a resident corporation by way of merger to reduce its taxable income by offsetting with interest payment of the debt.



It is common for the seller of stock or business assets to provide indemni-ties or warranties regarding any undisclosed or potential liabilities of the target company or defect of the assets. The tax treatment of the payment made under such indemnities or warranties is fact-specific and cannot be determined without looking into facts in detail. However, the payment generally has a nature of compensation of the damage suffered by the recipient (ie, buyer or target company). If the payment is characterised as such, it is not subject to the withholding tax and is included in the tax-able revenue of the recipient. Whether or not the damage is deductible is a separate issue that is determined upon the character of the damage. If the damage is deductible, it will be offset with the revenue accrued by receiv-ing the payment under indemnities or warranties.


10 Restructuring


It is common to conduct post-acquisition restructuring, such as consolidat-ing the acquired company and existing subsidiary in Japan. However, the forms and reasons of such restructurings vary depending on the situation.

11 Spin-offs


Japanese tax law recognises qualified reorganisation where assets are transferred at book value and the realisation of gains and losses are thus


JAPAN Anderson Mōri & Tomotsune


deferred for tax purposes. The reorganisation that may be recognised as qualified includes the one conducted in the form of company split, which can be regarded as spin-off of business in substance.

In the case of company split, the net operating losses of the spun-off business are preserved only upon the strict conditions, including being recognised as qualified company split, provided by the statute. The con-ditions become especially strict in the case of company split taking place within five years of the parties entering into parent–subsidiary relationship. In such a case, the conditions include the requirement of ‘joint business operation’, which can be broken down and summarised as follows:• the business to be split off and that of the receiving company are

related;• the amount of sales, number of the employees, capital amount and

other such variables representing the size of the business of a party does not exceed approximately quintuple of the other party;

• the size of the business to be split off does not exceed approximately double of that at the time when the parties entered into the parent–subsidiary relationship; and

• the size of the business of the receiving company does not exceed approximately double of that at the time when the parties entered into the parent-subsidiary relationship.

Alternatively, the conditions in the case above can be satisfied if:• the business to be split off and that of the receiving company are

related; and• one or more persons of each party, who are in the managing positions

specified by the statute (eg, CEO), are planned to be in the managing position of the receiving company.



As a matter of Japanese corporate law and tax law, all corporations estab-lished under Japanese law are regarded as residing in Japan and cannot migrate their residence.



Interest on a loan and dividend payments payable by a resident corpora-tion to a non-resident corporation without a permanent establishment in Japan are subject to the withholding income tax. The rate for both interest and dividends under the domestic law is generally 20.42 per cent, includ-ing reconstruction special income tax. The rate can be relieved depending on the applicable tax treaty.

Under the domestic law, interest on a loan paid to a resident corpora-tion is not subject to withholding tax. There is no exemption of the with-holding income tax on the dividends even for those payable between resident corporations. However, the withholding income tax can be cred-ited to corporation tax of the resident corporation filing tax returns to the Japanese government.



In addition to dividends and interest, it is common to extract the profit as service fees, which are not subject to withholding tax, if some service is actually rendered by the non-resident corporation. Further, royalties are utilised to extract the profit. Royalties are subject to withholding tax at the rate of 20.42 per cent (including reconstruction special income tax) under domestic law, which may be relieved by tax treaties to zero to 15 per cent.


15 Disposals


The methods of disposals vary from case to case.



If a non-resident corporation has a permanent establishment in Japan and disposes stock in a resident corporation, the capital gains that arise from that disposal will be subject to substantially the same corporation (income) tax that applies to resident corporations. The standard rate of corporation tax is reduced to 23.9 per cent from 1 April 2015.

On the other hand, a non-resident corporation that does not have a permanent establishment in Japan will not, in principle, be subject to corporation tax upon the capital gains arising from the disposal of stock in a resident corporation. This rule is subject to exceptions, including that applicable if:• the non-resident corporation, together with related person or persons,

owns or has owned 25 per cent or more of the shares of the resident corporation at any time during a period of three years on or before the end of the fiscal year in which the shares are disposed; and

• the disposed shares are 5 per cent or more of the shares of the resident corporation.

Update and trends

The Tokyo District Court, on 18 March 2014, issued a decision denying a taxpayer’s deduction of net operating losses of a related company acquired in a merger. In reaching this conclusion, the court triggered article 132-2 of the Corporation Tax Act (the Act), an anti-avoidance clause aimed at tax avoidance schemes involving organisational restructuring, for the first time since it was introduced in 2003. The court defined the scope of the provision to be broader than that of its sister provision applicable to transactions between related companies (article 132 of the Act). Under the broad scope of the provision, the court attached importance to the finding that although the requirements for the deduction were fulfilled in a technical sense, allowing the deduction of net operating losses on the basis of such artificial fulfilment of the requirements is against the purpose of the law of taxation regarding organisational restructuring. The decision was upheld by the Tokyo High Court on 5 November 2014, and an appeal process instigated by the taxpayer is currently under way in the Supreme Court.

On the other hand, in another decision of 9 May 2014, the Tokyo District Court denied triggering article 132 of the Act, an anti-avoidance

provision targeted at transactions between related companies. The scheme in that case arguably involved deductive net operating losses generated by a share buyback between related companies. The court, to uphold the taxpayer’s position, emphasised that there is no evidence that satisfies the burden of proof owed by the government to show that the tax reduction achieved under the scheme is ‘unjust’. Although the reasoning was technically different from that of the Tokyo District Court, the Tokyo High Court upheld the taxpayer’s position on 25 March 2015. The government has appealed, and the case is currently pending review in the Supreme Court.

The above two cases differ in the treatment of the provisions in issue: one is article 132-2 of the Act, aimed at schemes involving organisational restructuring, and the other is article 132 thereof for transactions between related companies. However, in practice, in many cases the scope of the provisions can overlap. Thus, the Supreme Court is drawing attention to whether and how it will reconcile the above two cases and what stance it will take toward aggressive tax planning.


Anderson Mōri & Tomotsune JAPAN


Another exception is that Japanese corporation tax to capital gains will apply to disposal of shares in a real estate holding corporation, which is a corporation where at least 50 per cent of the assets consist of real estate located in Japan. If a non-resident corporation owns more than 2 per cent (in the case where the real estate holding corporation is not listed) or 5 per cent (in the case where the real estate holding corporation is listed) of the shares in the real estate holding corporation, then the non-resident corporation is subject to taxation to capital gains arising from the disposal of any of those shares.

Regardless of the exceptional rule above, however, the capital gains may be exempt from tax if the applicable tax treaty grants the exemption.



As mentioned in question 16, a non-resident corporation without a perma-nent establishment in Japan is in general not subject to corporation tax on capital gains deriving from shares in a resident corporation. It should be noted, however, that the exception to this general rule, as mentioned in question 16, is applicable.

Eiichiro Nakatani [email protected] Kai Isoyama [email protected]

Akasaka K-Tower, 2-7Motoakasaka 1-chomeMinato-ku, Tokyo 107-0051Japan

Tel: +81 3 6888 1039 / 5871Fax: +81 3 6888 3039 / 6871www.amt-law.com/en/


LITHUANIA Juridicon Law Firm


LithuaniaLaimonas Marcinkevičius and Ingrida SteponavičienėJuridicon Law Firm




Regarding tax on corporate income, the acquisition of stock as such usually does not influence the balance of the profit and loss of the Lithuanian com-pany being acquired. However, under specific conditions Lithuanian tax laws allow transfer of all or a part of losses for 2010 and subsequent years within the group of legal entities, including the cross-border transfers. On the other hand, an acquisition of stock or an acquisition of business assets will affect the balance of the acquirer. Moreover, in an acquisition of a sepa-rate unit of property, rights or obligations, and subject to further activities in Lithuania, the acquirer may be recognised as acting through its perma-nent establishment in Lithuania, which may lead to the taxation of income of that activity in Lithuania.

The taxation of profit from further sales of purchased property differs as well. Profit on the sale of shares received by an acquirer with no other presence in Lithuania is not subject to tax on corporate income, but the sales of separate units of assets and liabilities might be. For example, sub-ject to the Law on Corporate Income Tax (hereafter the Law on CIT), profit from the sale of real property located in Lithuania is subject to a 15 per cent tax on corporate income.

The above-mentioned two forms of acquisition differ with respect to VAT. Pursuant to the Law on Value Added Tax (hereafter the Law on VAT) the sale-purchase of stock is not subject to VAT in Lithuania, even if the company whose stock is being purchased owns the real property. The transfer of the whole or a part of a business, as a complex unit of rights and obligations (including cases where the whole or a part of a business, as a complex, is transferred as a contribution of a member of the legal person), to the taxable person who continues the acquired activity, is also not sub-ject to VAT. According to the currently valid laws, the transfer of property during a reorganisation where the transferor is being dissolved may be subject to VAT: if the purchase or import VAT from a particular property or business activity was deducted, the corresponding acquisition of such property shall be subject to VAT in Lithuania.

If only a separate unit of property, rights or obligations is being pur-chased by the investor, such a purchase must be evaluated individually with respect to VAT. For example, the sale-purchase of real property that is deemed to be old according to the provisions of the Law on CIT in general is not subject to VAT in Lithuania, contrary to the sale-purchase of new real property.

It should also be noted that a foreign company owning real property in Lithuania must be registered in the register of taxpayers and pay the tax on real property, which is between 0.3 per cent and 3 per cent of the property’s taxation value per year. The owner of the stock of a Lithuanian company does not have to pay any taxes related to the ownership itself.

Finally, a transaction concerning a sale or purchase of stock needs to be certified by a notary only in particular cases (eg, in cases where 25 per cent or more shares of private limited company are sold or where the sales price exceeds €14,500 despite the number of shares on sale), but the transfer of a whole or a part of business as a complex unit of rights and obligations must always be.

2 Step-up in basis


The purchaser may get a step-up in basis if the business assets of the com-pany are purchased or exchanged for other property.

Under the Law on CIT, the income of a Lithuanian or foreign entity through its permanent establishment in Lithuania, received from the increase in the value of assets resulting from transfer of shares of a target entity, shall not be taxed in Lithuania in the event that:• the target entity is registered or otherwise organised in a state of the

European Economic Area (EEA) or in a state with which a treaty for the avoidance of double taxation is in force; the target entity is a payer of corporate income tax or an equivalent tax; the entity transferring the shares held more than 25 per cent of voting shares in the target entity for an uninterrupted period of at least two years; and the entity trans-ferring the shares does not transfer them to the entity that has issued these shares; or

• the shares of a target entity are transferred during the specific types of reorganisation referred to in the Law of CIT; the transferring entity held more than 25 per cent of voting shares in the target entity for an uninterrupted period of at least three years; and the entity transferring the shares does not transfer them to the entity that has issued these shares.

In accordance with the Law on CIT, the acquisition price of assets com-prises expenses incurred for acquiring the assets, including commis-sion paid and taxes related to the acquisition, except for VAT. Still, in an exchange of business assets for other assets the acquisition price of the newly acquired assets is the acquisition price of the assets exchanged. If the acquisition price of the assets exchanged cannot be determined, the acquisition price of the newly acquired assets will be their actual market price. It should also be noted that where securities are exchanged for other assets, the acquisition price of such assets shall be the actual market price of these securities at the moment of the acquisition of the assets.

Long-term assets and goodwill can be depreciated or amortised pursu-ant to the provisions of the Law on CIT.

Where the activity of another company as a complex, or a part of an activity constituting an independent unit capable of engaging in the com-mercial activity at its own discretion, is acquired, the value of positive goodwill is subject to depreciation for tax purposes for at least 15 years applying the linear method. Negative goodwill, created as a result of the above-indicated acquisition of the activity of the other company or a part thereof, shall be attributed to income at the moment of its acquisition.

Negative goodwill, as well as positive goodwill, created as a result of acquisition of stock aiming for control over the target’s net assets and activ-ity, can correspondingly be attributed to income or can be included in the limited allowable deductions for taxation purposes only after a subsequent merger of these companies or merger by acquisition of one company by another, if any.


Juridicon Law Firm LITHUANIA


The other purchased long-term intangibles can be depreciated for a minimum of two to four years, depending on the class of the assets and the manner of their use, applying the linear or double declining balance method.



For taxation purposes the acquirer can profit from tax exemptions in Lithuania if it is established in another EU member state, taking into con-sideration that the taxes due in that state are lower than the Lithuanian rates.

For example, dividends paid by a Lithuanian company to a foreign company that uninterruptedly for at least 12 months controls not less than 10 per cent of the voting stock in a Lithuanian company shall not be subject to taxation in Lithuania, except where the recipient of dividends is regis-tered or otherwise organised in target (tax haven) territories. For compari-son, dividends paid out to a company that does not correspond to the above criteria are taxed at 15 per cent on profit in Lithuania, unless a particular treaty on avoidance of double taxation provides for a more favourable regime.

Regarding taxation of interest, according to the currently valid Lithuanian tax laws the interest on loan paid by a local company to a for-eign company organised within the EEA, or within a state that has a treaty on avoidance of double taxation with Lithuania in force, and not received through the foreign company’s permanent establishment in Lithuania, is exempt from withholding tax on profit in Lithuania. For comparison, inter-est paid out to a foreign company that does not correspond to the above criteria is taxed at 10 per cent on corporate income in Lithuania, unless a particular treaty on avoidance of double taxation provides for a more favourable regime.

The royalties paid by a Lithuanian company to a related EU company (the beneficial owner), both corresponding to the criteria established by the Law on CIT, are also exempt from withholding tax in Lithuania when the royalties paid by a Lithuanian company to another foreign company with no permanent establishment in Lithuania are subject to 10 per cent withholding tax on profit in Lithuania, unless a particular treaty on avoid-ance of double taxation provides for a more favourable regime.

Furthermore, only a foreign entity, being the EU resident for taxa-tion purposes, is able to transfer all or a part of its losses to the related Lithuanian entity.

Finally, under the Law on CIT-only mergers, divisions or acquisitions with participants residing in the EU may be exempt from tax on corporate income on the capital gains and award a benefit for the acquirer to carry forward the losses of the acquired or transferring entity. In other cases the increase in the value of assets emerging from mergers and other forms of reorganisation or transfer shall be subject to tax on corporate income in Lithuania.



Both mergers and share exchanges have their own pros and cons. For example, if the merger corresponds to the requirements of the Law on CIT, the increase in the value of assets emerging from the merger shall be exempt from the tax on corporate income in Lithuania. Moreover, if the acquiring entity continues the activity taken over, or a part thereof, for a period not shorter than three years, it may carry forward the losses of the acquired or transferring entity or entities (except for the losses resulting from transfer of the securities or from derivative financial instruments) related to the transferred activity incurred before the completion of the reorganisation or transfer and not carried forward to the following year. On the other hand, the merger may be an incentive for the Tax Inspectorate to start a tax inspection of the transferor, of the acquirer or of the target, which may significantly prolong the merger process.

Some share exchanges can provide the above-mentioned tax advan-tages as well. In addition, they usually do not trigger tax inspections and the procedures are less time-consuming in comparison with company mergers.

Therefore, the most acceptable and efficient form of acquisition of a business or a part of it should be investigated carefully with respect to the individual situation, the kind of business being acquired and the goals of the acquisition. However, in practice mergers are more common than share exchanges in Lithuania.



In general, Lithuanian tax laws do not provide obvious tax benefits to the acquirer in issuing stock as a consideration rather than cash. Still, if the issue of stock as a consideration falls under the provisions of the Law on CIT regulating tax-free mergers and acquisitions, the acquirer may benefit from the exemption of taxation of capital gains resulting from the merger and from the possibility of carrying forward the losses of the acquired or transferring entity. On the other hand, issuing stock as consideration may lead to the different estimation of the acquisition price of either stock or business assets acquired that may be important for the acquirer for future transfers of the acquired property.

6 Transaction taxes


There are no stamp duties payable for the acquisition of stock or business assets as such.

However, subject to the Civil Code, some transactions, such as trans-actions on transfer of ownership of real property and on transfer of all or part of a company as a complex unit of rights and obligations, must be certified by a notary. This requirement means additional notary expenses for the parties, amounting to 0.45 per cent of the value of the transaction, but no more than €5,792.40. Starting from 2015, particular sales of shares also require certification at the notary (see question 1) leading to additional notary expenses amounting to 0.4 to 0.5 per cent of the securities’ sales price, but no more than €5,792.40. The other transfers of stock do not have to be certified by a notary, although that is possible at a parties’ request.

Additionally, the Register of Legal Persons of Lithuania must be informed of any change in shareholders or their share in the company by submitting the renewed list of shareholders to the Register. In this case the state levy of approximately €5.80 must be paid for registration of the change of registry data. Transfer of the ownership of some kinds of tangi-ble property (real property, motor vehicles, etc) should also be registered in the official register for an established registry fee that may amount to a maximum of €1,448.10, depending mostly on the type and value of the acquired property.

Regarding VAT taxation of the acquisition of stock or business, please refer to question 1.



In a purchase of stock, the losses of the target will be carried forward to the following fiscal year according to the ordinary rules prescribed by the Law on CIT. Losses for the tax period, except for the losses incurred as a result of transferring the securities and derivative financial instruments, may be carried forward for an unlimited period. However such carry-forward shall be terminated if the entity ceases the activities due to which the losses were incurred, except where the entity ceases the activities for reasons beyond its control. Losses incurred as a result of transferring the securities and derivative financial instruments may be carried forward for no more than five consecutive tax periods and can only be covered by the income received from the transfer of securities and derivative financial instruments.




The Law on CIT provides a special regime for carrying forward losses in reorganisations or transfers corresponding to its requirements (see ques-tion 4). Under the Law on CIT, the acquiring entity continuing the activity taken over, or a part thereof, for a period not shorter than three years, may carry forward the losses of the acquired or transferring entity or entities (except for losses resulting from transfer of securities and from derivative financial instruments) related to the transferred activity incurred before the completion of the reorganisation or transfer and not carried forward to the following year.

From the tax period of 2014 and subsequent tax periods the transfer of the amount of deductible tax losses except the small companies may not exceed 70 per cent of the taxpayer’s income of the tax period, calculated the income minus tax-exempt income, allowable deductions and limited allowable deductions, with the exception of tax losses of the previous tax year carried forward. This limitation is not applied in the case of losses incurred as a result of transferring the securities and derivative financial instruments because these losses may be carried forward for a limited period and can be covered only by the income received from the same activities.

Change of control of the target as such should not affect the tax cred-its of the target or other taxes deferred by the Law on CIT. Still, it should be noted that on application for the tax credit the taxpayer must submit to the Tax Inspectorate information on the current composition of sharehold-ers and planned changes, if any. Although the composition of sharehold-ers should not directly impact the possibilities to get the tax credit or to execute properly the received one, every case of tax credit is considered individually, thus information on shareholders might be important while evaluating the reliability and credit solvency of the taxpayer.

After the court decision to institute bankruptcy proceedings to the company becomes effective, and if the company is not able to further imple-ment the unexpired contracts, such contracts are deemed to have expired, and claims of the creditors arising by reason thereof are met according to the ordinary procedures specified by the Enterprise Bankruptcy Law of the Republic of Lithuania. Thus, in such a case the tax credits or other types of deferred tax asset of the company being bankrupt, shall not be preserved and shall be recovered by the state as a creditor of the company.

Lithuanian tax laws do not provide any special rules or regimes for the taxation of acquisitions or reorganisations of bankrupt or insolvent compa-nies, except for the provision of the Law on CIT and its official commentary stating that income received by the bankrupt Lithuanian company from the sale of its assets shall not be subject to the tax on corporate income. It should also be noted that according to the provisions of the Law on CIT, the same exemption should be applied to the income of a bankrupt for-eign company received through its permanent establishment in Lithuania. Unfortunately, practice on this question is lacking and the position of the Tax Inspectorate is controversial.

8 Interest relief


According to the tax laws, the interest on borrowings to acquire the target does not constitute a part of the target’s price. The interest payments on loans taken by the Lithuanian company to finance the acquisition might, however, be treated as allowable deductions for corporate income tax pur-poses. The tax laws also provide a few restrictions on the deductibility of interest payments where the lender is foreign or a related person.

Subject to the Law on CIT, payments to the lender organised in the tar-get territory can be treated as allowable deductions for calculation of tax on corporate income only if the paying Lithuanian entity or permanent estab-lishment supplies to the Tax Administration evidence that such payments are related to the usual activities of the paying and receiving entities, the receiving foreign entity controls the assets needed to perform such usual activities and there exists a link between the payment and the economi-cally reasonable operation.

The possibility of deducting interest for the loan received from the controlled party is restricted by reference to ‘thin capitalisation’ rules. Lithuanian thin capitalisation rules apply only to the extent to which the ratio between the capital borrowed from the controlling creditor and the fixed (equity) capital of the Lithuanian company (debtor) exceeds 4:1. The interest for the part of the loan exceeding the above-mentioned ratio can-not be deducted from the taxable income of the debtor, unless the debtor proves that the same loan could be provided or received on the same condi-tions between unrelated persons.

Finally, the interest on other loans received from related parties, even if not falling under thin capitalisation rules, must still comply with the arm’s-length principle. Otherwise, the Tax Inspectorate is able to recalcu-late the taxable profits of the Lithuanian company (borrower) engaged in the transaction.

Lithuanian withholding taxes on interest payments can be avoided only by using the tax exemptions prescribed by the Law on CIT (see question 13).

Debt pushdown can be achieved only by having the consent of the creditor and of other shareholders of the target company.



Since the area of taxation is quite sensitive and risky, all possible forms of protection of the acquirer with respect to the target’s fulfilment of its tax obligations for previous periods are recommended. Usually the representa-tions and warranties of the seller regarding the proper fulfilment of all of its or the target’s tax obligations are primarily related to the acquisition price of stock or business assets; if it becomes clear that these representations and warranties do not correspond to the real situation, the purchase price is accordingly decreased or the agreement on acquisition may be terminated. As an additional warranty, the payment of a part of the acquisition price may be postponed for the period during which potential risks are expected to arise or disappear. In a stock acquisition, it is always recommended for the acquirer to get official confirmation from the tax, social security and customs authorities proving the proper and complete settlement of the tar-get with the appropriate institution.

Depending on the particular circumstances and selected strategy, the warranty measures may constitute a part of the sale-purchase agreement, its annex or may be written in separate documents.

Following a claim under a warranty or indemnity, compensation for losses or payment of forfeit (fines or penalties for delay) is usually received.

The compensation of losses or forfeit received by a foreign legal entity that has no permanent establishment in Lithuania is not treated as sourced in Lithuania and therefore is not subject to Lithuanian tax on corporate income.

In general, the compensation for losses, including received related insurance benefits, that is not in excess of the value of losses or damages actually incurred and that is received by a Lithuanian or by a foreign entity through its permanent establishment in Lithuania, is exempt from tax on corporate income in Lithuania. However, all expenses attributed to the said non-taxable income shall be treated as non-allowable deductions for the purpose of the calculation of tax on corporate income.

The forfeit received by the local company or foreign entity through its permanent establishment in Lithuania is treated as non-taxable income except in cases where the forfeit is received from a foreign entity registered or otherwise organised in target (tax haven) territory or from a natural per-son being the resident of such territory.

It should also be noted that compensation for the damages caused or forfeit paid for the breach of the agreement is treated as non-allowable deductions of the payer and therefore they can not be deducted from tax-able income of the default party.

According to the Law on VAT, the forfeit and other similar sums are not treated as remuneration for goods or services and therefore are not subject to VAT in Lithuania.





10 Restructuring


The post-acquisition restructuring depends on many aspects, such as the objectives of the acquisition, current or planned activities and the structure of the group the acquirer belongs to. Restructuring is usually intended to increase the effectiveness of the acquired business and to integrate it into the acquirer’s team. It usually starts from a review of financial flows and labour resources.

11 Spin-offs


The Law on CIT provides for a few cases of tax-neutral spin-offs of busi-nesses. Pursuant to it, the participants in a tax-neutral spin-off must be Lithuanian companies, or foreign companies – tax residents in other EU member states, continuing the acquired activities through permanent resi-dence in Lithuania after the spin-off is executed. Additionally, the condi-tions of the spin-off must satisfy the following legal requirements:(i) a company, on being dissolved through a reorganisation, divides all its

assets, rights and obligations into a few parts and transfers them to a few existing or new companies. As a result the members of the divided company, in exchange for the shares held in it, receive pro rata shares issued by the acquiring entity;

(ii) a company, continuing its activity, transfers one or a few parts of its activity constituting an independent unit able to engage in commer-cial activity, to one or a few existing or new companies. This results in a decrease of the transferring company’s authorised capital and the members of the transferring company, in exchange for the shares held in it, receive pro rata shares issued by the receiving companies;

(iii) a company, continuing its activity, transfers all its activity or one or a few parts thereof to another company in exchange for the shares of the receiving company; or

(iv) a company, continuing its activity, divides proportionally a part of its assets, equity and obligations, and based on the divided part one or a few new companies are established.

The capital gains resulting from the spin-off of business corresponding to the specific requirements above are exempted from taxes on profit on the

condition that the shares acquired during the spin-offs indicated in points (i) to (iii) are not disposed of for three years.

The acquiring entity, continuing the activity taken over, or a part thereof, for a period not shorter than three years, may carry forward the losses of the transferring entity (except for the losses resulting from trans-fer of securities and derivative financial instruments) related to the trans-ferred activity and incurred before the completion of the reorganisation or transfer. From the tax period of 2014 and subsequent tax periods the transfer of the amount of deductible tax losses except the small compa-nies may not exceed 70 per cent of the taxpayer’s income of the tax period, calculated the income minus tax-exempt income, allowable deductions and limited allowable deductions, with the exception of tax losses of the previous tax year carried forward. This limitation is not applied in the case of losses incurred as a result of transferring the securities and derivative financial instruments because these losses may be carried forward for a limited period and can be covered only by the income received from the same activities.

Depending on the substance and form of the spin-off the transfer of assets may be subject to VAT. As mentioned in question 1, if the spin-off is not executed through the reorganisation and the transferee continues the acquired activity, the transfer of whole or a part of business, as a complex unit of rights and obligations, including cases where whole or a part of business, as a complex, is transferred as a contribution of a member of the legal person, shall not be taxable by VAT.

If the division of a part of business is executed as a special type of reor-ganisation corresponding to the requirements of the Law on Companies, during which the transferor is ending its activities or if the assets, not comprising whole or a part of business as a complex, are transferred as a contribution to the capital of legal entity, the transfer of the assets shall be subject to VAT provided that the purchase or import VAT from particular property or business activity was deducted by the transferor.



The Law on CIT provides the possibility to migrate residence from Lithuania to another EU member state only for European companies or European cooperative societies. In such case the capital gains shall not be treated as taxable income in Lithuania and the losses of the former Lithuanian company may be carried forward by the foreign company. The mentioned exemptions will be applied provided that, following the transfer of its registered office to another EU member state, the company continues to carry out its activities through a permanent establishment in

Update and trends

Ongoing financial information exchange with tax authoritiesGiven the fact that international organisations issued new measures increasing transparency in the taxation area, Lithuania has made some additional amendments to the Law on Tax Administration related to financial information exchange:• financial entities shall have to inform the Tax Inspectorate about

opened and closed accounts of local and foreign residents, of annual turnovers in the bank accounts (when they exceed €15,000), interests, loans and any other information required by the Tax Inspectorate;

• financial entities shall also provide the same information about foreign residents to the Tax Inspectorate;

• companies shall also be obliged to periodically inform the Tax Inspectorate of: their particular debts against natural persons; particular debts of the natural persons before the legal entities, should the outstanding amounts exceed €15,000 at the end of the financial year; and the services they received from foreign legal entities if their value exceeds €15,000 per year;

• natural persons shall inform the Tax Inspectorate about the sources of income and assets acquired after 1 January 2011 except the cases when this information has already been provided to the tax authority earlier. This information should be submitted until 30 June 2016; and

• the Tax Inspectorate shall be entitled to transfer the above-mentioned financial information about tax residents to other EU

member states and other foreign countries in accordance with its international obligations deriving from Council Directive 2014/107/EU of 9 December 2014 amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation.

All listed amendments above are due to come into force from 1 January 2016.

In addition, in September 2015 the first exchange of financial information between the Tax Administrators of Lithuania and the United States will be held, in accordance with Foreign Account Tax Compliance Act, which was signed by both countries in 2014.

Expanded list of cases for compulsory notary certificationFrom January 2015 the Civil Code of the Republic of Lithuania was amended and it now requires for the certification of a notary:• when 25 per cent or more of the shares of Lithuanian private limited

company are sold or in cases where the price of the sale of the shares (despite their amount being sold) is higher than €14,500;

• when a promissory note, the amount of which exceeds €3,000, is issued by a natural person or by a person who manages accounts in accordance with simplified accounting rules;

• when a loan agreement, the amount of which exceeds €3,000 and is performed in cash, is concluded.




Lithuania on the basis of the assets, rights and obligations formerly attrib-uted to the Lithuanian company.



Pursuant to the Law on CIT, the interest and the dividends paid by a Lithuanian company to a non-resident company are in general subject to Lithuanian withholding tax on corporate income. In general, interest is tax-able at 10 per cent and dividends at 15 per cent.

Still, interest paid to a foreign legal person registered or otherwise organised within a member state of the EEA or within a state that has and applies a treaty on the avoidance of double taxation with Lithuania is exempt from withholding tax on corporate income in Lithuania. In addi-tion, interest paid to a foreign legal person on securities issued by the gov-ernment on international financial markets, interest accrued and paid on deposits and interest on subordinated loans that meet the criteria set down by the legal acts of the Bank of Lithuania is also not subject to Lithuanian withholding tax.

Regarding exemptions for taxation of dividends, the dividends paid out to a foreign company that is not organised in a target (tax haven) terri-tory and that uninterruptedly for at least 12 months controls not less than 10 per cent of voting shares in a Lithuanian company shall not be subject to taxation in Lithuania (participation exemption).

The exemptions provided for in the national legislation are also appli-cable when the treaty on avoidance of double taxation provides a less favourable regime. If the treaty on avoidance of double taxation provides a more favourable regime, the provisions of this treaty should be followed and the lower tax rate should be applied.



Because of exemptions available for the taxation of interest (see ques-tion 13), the payment of interest for loans received from the shareholder is a quite popular way for extracting profits. However, this possibility is restricted by thin capitalisation rules and the arm’s-length principle (see question 8).

Payment of dividends is used for extracting profits mostly where the recipient is able to profit from the tax exemptions in Lithuania (see ques-tion 13), taking into consideration the taxation of dividends in the home country of the recipient.

Decrease of the authorised capital of the company and payment of the released funds out to the shareholders is also tax-free, if the part of the authorised capital being reduced previously was formed by the

contributions of the shareholders. Otherwise the sums paid out to the shareholders as a result of a decrease of the authorised capital shall be treated as dividends and shall be subject to taxation at the ordinary rates, taking into consideration the participation exemption (see question 13).

For a quite long time, owing to the different taxation of dividends and bonuses to management or supervisory board members, paid out to natu-ral persons (dividends were taxed at 20 per cent and bonuses at 15 per cent tax on personal income), bonuses were sometimes preferred. However, from 1 January 2014, both dividends and bonuses paid out to natural per-sons are taxed at 15 per cent on personal income, and therefore the tax advantage of bonuses is lost.

Purchase of services from the shareholder may also be used as a device to extract profits. However, the services must be necessary for the activi-ties of the daughter company, they must be provided in fact and the arm’s-length principle with respect to the price for the services must be followed.


15 Disposals


The manner of disposal depends on the particular situation and needs of the parties (preserving confidentiality, minimising taxes or other expenses, meeting deadlines, etc).

In general, capital gains received by a Lithuanian company on the dis-posal of business assets and stock are taxed at the same rate of tax on cor-porate income (currently 15 per cent). Still, in the event of disposal of stock, the Lithuanian company could benefit from the participation exemption for capital gains resulting from the transfer of stock of a company that is registered or otherwise organised in a state of the EEA or in a state with which a treaty for the avoidance of double taxation has been concluded and is applied, and which is a payer of corporate income tax or an equiva-lent tax if:• the company transferring the shares held more than 25 per cent of the

voting shares in the transferred entity for an uninterrupted period of at least two years; or

• the shares are transferred during a tax-exempt reorganisation or trans-fer and the transferor held more than 25 per cent of the voting shares in the transferred company for an uninterrupted period of at least three years.

Capital gains of the foreign company on transfer of stock and on transfer of business assets in general are not treated as sourced in Lithuania and therefore are not subject to Lithuanian tax on corporate income, except for the income received from the transfer of ownership to the immoveable property located in Lithuania.

For VAT on the disposal of stock and business assets see question 1.

Laimonas Marcinkevičius [email protected] Ingrida Steponavičienė [email protected]

Totoriu St 5–701121 VilniusLithuania

Tel: +370 5 269 11 01Fax: +370 5 269 10 10www.juridicon.com






Capital gains of a foreign company on transfer of stock are not treated as sourced in Lithuania and therefore are not subject to Lithuanian tax on cor-porate income.

Lithuanian laws do not provide for special rules dealing with the dis-posal of stock in real property, energy or natural resource companies.



If the gain subject to taxation in Lithuania is received by the foreign com-pany, the tax on corporate income must be deducted and transferred to the budget of Lithuania no later than 15 days after the end of the month during which the income was paid out. If the gain is received by the Lithuanian company, the tax on corporate income must be paid before the first day of the sixth month of the next tax year.


LUXEMBOURG OPF Partners


LuxembourgFrédéric Feyten and Michiel BoerenOPF Partners




An asset deal generally allows a buyer to achieve a step-up in basis in respect of the acquired assets and liabilities, whereas a share deal does not result in such a step-up (although there will obviously be a step-up in basis for the acquired shares). Depending on the nature of the assets and liabilities, an asset deal may result in a non-resident buyer to be considered to have a taxable presence in Luxembourg via a fixed place of business or permanent establishment which would bring the buyer within the scope of Luxembourg taxation, namely, direct taxes such as (corporate or per-sonal) income tax, net wealth tax and indirect taxes (VAT). The acquisi-tion of shares in a Luxembourg company does not necessarily result in a taxable presence in Luxembourg, however when acquiring a substantial participation in a Luxembourg company the buyer becomes subject to the Luxembourg non-resident capital gains taxation which could, albeit rarely, result in a gain to be subject to Luxembourg non-resident capital gains tax (as explained in more detail in question 16).

2 Step-up in basis


As mentioned above, the buyer enjoys a step-up in basis only in case of an asset deal. Goodwill and other intangibles can be depreciated for Luxembourg tax purposes only when they are specifically identified and acquired within the framework of an asset deal and depending on their nature (intangibles that do not reduce in value may not be depreciable). In case of a share deal, goodwill held by the acquired company can neither be depreciated by the buyer nor by the acquired company itself if such good-will has not been acquired separately but has been built up over time. In the event that a Luxembourg acquisition company acquires shares, such shares may under certain conditions be depreciated or written down, sub-ject to the application of Luxembourg’s recovery rules when the value of the shares rebounces.



For an asset deal there is not much difference between an acquisition of such assets by a foreign company or by a Luxembourg company, when the business continues to be carried out in Luxembourg via a permanent establishment. A permanent establishment in Luxembourg of a foreign company is generally subject to the same income tax and net wealth tax as is the case for a Luxembourg company. However, where profit repatria-tions from Luxembourg permanent establishments or branches to the for-eign head office are not subject to Luxembourg withholding tax, dividend

distributions made by Luxembourg companies are in principle subject to 15 per cent dividend withholding under Luxembourg domestic tax rules, unless a reduced rate or exemption applies on the basis of a tax treaty or pursuant to Luxembourg domestic tax law. Dividend withholding tax exemptions available under Luxembourg domestic tax law are addressed in question 13.

For a share deal, a Luxembourg acquisition company may allow for a better way to push down the acquisition debt to the business of the target company, for example, via a legal merger or via the establishment of a tax consolidation, pursuant to which tax group members can pool their indi-vidually determined taxable amounts into one taxable amount (allowing the offsetting of losses by one member against profits from another mem-ber). A Luxembourg permanent establishment of a foreign company can act as the consolidating parent in a Luxembourg tax consolidation, pro-vided the foreign company is a capital company (ie, a joint stock company with a capital divided and represented by shares) which is subject to a tax in its country of residence which is comparable to Luxembourg corporate income tax (ie, a tax levied on a compulsory basis by a public authority at a statutory rate of at least 10.5 per cent on a taxable basis that is comparable to the taxable basis determined under Luxembourg domestic tax rules).

For buyers who are not protected by a tax treaty or who do not qualify for dividend withholding tax exemption, it may make sense to acquire the shares of a Luxembourg target company via a Luxembourg acquisition company so as to ensure a tax efficient profit repatriation in the future via a proper funding (combination of debt and equity) of the Luxembourg acqui-sition company.



Mergers are common as a way to push down the acquisition debt to the level of the business of the (acquired) company. Interest expenses on acquisition debt (not pushed down via a downstream merger) are in prin-ciple tax deductible within the limits of Luxembourg thin capitalisation rules and provided the interest is at arm’s length and does not, for exam-ple, share in the profits of the debtor. However, such interest is, in any tax year, only tax-deductible to the extent it exceeds the amount of exempt dividend income received from the target in the same tax year. In other words, up to the amount of the exempt dividend income, the interest is not tax-deductible, whereas any excess interest is deductible and could pro-duce tax losses available for carry-forward (Luxembourg tax law does not permit loss carry-back).

Furthermore, any such deductible interest remains subject to Luxembourg’s recapture rules: as and when shares in the target are trans-ferred at a (deemed) gain, such gain will, up to the amount of recapture, be subject to Luxembourg income tax irrespective of the fact that the target may satisfy the conditions of the Luxembourg participation exemption. To the extent that the gain exceeds the amount subject to recapture, the gain is exempt from Luxembourg income tax provided the conditions of the participation exemption are satisfied. The amount of the taxable gain can be offset by the tax losses available for carry-forward. Consequently, unless the amount of interest on acquisition debt has effectively been off-set against other items of taxable income, the application of the recapture


OPF Partners LUXEMBOURG


rule should not, by itself, result in an effective tax liability for the acquiring entity.

Since the Luxembourg tax consolidation regime does not result in a full tax integration of its members, the above basically remains applicable even if a tax consolidation exists. A tax consolidation therefore does not achieve the same result as a debt pushdown carried out via a legal merger. Moreover, the tax consolidation regime requires a consolidation for at least five years. Failing to meet this condition would result in the tax consolida-tion to be retroactively denied.



Luxembourg imposes a 15 per cent dividend withholding tax and 0.5 per cent annual net wealth tax (the tax basis of which equals the esti-mated fair market value of the taxable assets of the company minus its deductible liabilities). However, Luxembourg generally does not impose withholding tax on at arm’s length interest, unless the interest would fall within the scope of the Luxembourg law of 23 December 2005 (which introduced a 10 per cent withholding tax on interest payments made by Luxembourg paying agents to the benefit of Luxembourg resident individ-uals or certain residual entities in which such Individuals have an interest) or would have a profit sharing nature. Consequently, there is generally no Luxembourg tax benefit for the buyer to finance the acquisition of the tar-get via the issuance of new shares (unless the seller is co-investing). In fact, from a Luxembourg (tax) perspective, it is generally more efficient and flexible to finance the acquisition with debt (or a combination of debt and equity) within the limits of Luxembourg thin capitalisation rules.

6 Transaction taxes


Asset deals are subject to VAT (the general rate of which equals 17 per cent), and may be subject to registration duties or transfer taxes, as is the case for real estate situated in Luxembourg (the transfer of real estate situated in Luxembourg City is subject to up to 10 per cent registration and transcription duties). An exemption of VAT is available in case of a transfer of a whole business or a business unit (acquisition of a going concern). VAT and real estate transfer taxes are borne by the buyer of the assets.

The transfer of shares in a Luxembourg company is not subject to any stamp duties or registration. Under very exceptional circumstances, the transfer of a Luxembourg real estate company could be assimilated to the transfer of the underlying real estate itself and therefore trigger real estate transfer taxes.



Under Luxembourg tax law, tax losses can be carried forward indefinitely, whereas loss carry-back is not possible. Luxembourg tax law does not contain specific change of control rules that prohibit loss carry-forward. However, tax losses can only be carried forward and claimed by the legal person that has incurred such losses. Consequently, tax losses may be lost in case of mergers or demergers. Generally, and where possible, the reor-ganisation ensures the loss making company to be the surviving entity. Alternatively, tax-neutral rollovers (which are available under certain conditions) are carried out only partially in view of utilising the tax losses before they would be lost.

A change of shareholders of a Luxembourg company, which has tax losses available for carry-forward, does not automatically result in such tax losses to be lost. This may be different in cases of abuse. On the basis of certain case law and a circular letter issued by the Luxembourg tax

authorities, loss carry-forward and usage of such losses could be denied in case of a change of shareholder if, on the basis of facts and circumstances, it appears that the transfer has been solely carried out for the purpose of using the tax losses. Examples of facts and circumstances that could indi-cate such abuse would be the discontinuation of the activity having given rise to the losses; the absence of any real value of the (assets of the) trans-ferred company (no economic substance); a change of activity concomi-tantly with the transfer of the shares, etc.

Debt waivers made in the framework of a financial reorganisation (eg, aimed at preventing the debtor becoming insolvent) may also lead to a reduction of losses carried forward.

8 Interest relief


Genuine business expenses are deductible insofar as they remunerate real services provided to the company, they are not economically linked to exempt income, they are arm’s-length and, as regards interest expenses, they are not profit-sharing.

Expenses which are economically linked to exempt income are not tax-deductible. Under the above conditions, financing expenses incurred by the buyer are thus deductible for Luxembourg income tax purposes (subject to recapture; see question 4).

Luxembourg tax law does not contain specific thin capitalisation rules. However, as of 1 January 2015, Luxembourg introduced transfer pricing legislation inspired by the arm’s-length principles laid down in article 9 of the OECD Model Tax Convention. Bearing in mind this principle, a company can thus be funded in compliance with thin capitalisation rules if it is funded under a debt-equity ratio under which an unrelated party would have funded the company having as sole collateral the assets held by the company. If such ratio cannot be demonstrated by the taxpayer, the tax authorities tend to apply an 85:15 debt-equity ratio in respect of the financing of participations. This ratio aims at avoiding excessive inter-est charges only. Consequently, debt funding in excess of this ratio is still acceptable provided the interest rate is reduced accordingly so that the total amount of interest would still be in line with an 85:15 debt-equity funding and provided the outcome thereof can still be considered arm’s-length. Simultaneously with the introduction of the arm’s-length principle, Luxembourg introduced rules that impose an obligation on taxpayers to document their transfer pricing (policy) and be able to demonstrate to the tax authorities the arm’s-length nature of the transfer prices used.

Interest expenses that are economically linked to exempt income are not deductible. However, for participations that qualify for the Luxembourg participation exemption regime, interest on acquisition debt is considered not linked to exempt income, and is thus fully tax deductible, insofar as the amount of interest for any given tax year exceeds the amount of exempt income (dividends or capital gains) derived from such participation during the same tax year. Such interest, therefore, continues to be tax deductible, albeit subject to recapture (as mentioned in question 4).

Luxembourg does not levy a withholding tax on arm’s-length interest, unless the interest is paid on certain types of profit sharing debt instru-ments and arrangements or in case the interest would fall within the scope of the Luxembourg law of 23 December 2005 (as mentioned in question 5).

Other than in view of the application of the Luxembourg law of 23 December 2005, the residence of the lender is of no relevance for the above. Contrary to other jurisdictions, Luxembourg does not have spe-cial rules which would deny or limit the deduction of interest depending on whether or not the beneficiary of such interest would be taxable on the interest income (this may be different for certain hybrid instruments once Luxembourg has enacted the amendments to the EU Parent-Subsidiary directive aiming at preventing cross-border hybrid mismatch arrange-ments within the EU). The deduction is dependent on the ordinary Luxembourg tax rules, including the application of transfer pricing legisla-tion. Consequently, for a debt pushdown structure, the same rules regard-ing deduction limitations and thin capitalisation rules, as mentioned




above, apply. For debt pushdown techniques (‘reverse’ or ‘downstream’ merger, tax consolidation, etc), reference is made to what is stated in ques-tion 4.



Protection takes the form of generally and internationally accepted rep-resentation and warranties combined with amounts left in escrow and or earn-out payments. An indemnity payment received is generally treated as a correction of the initial acquisition price (whether for asset deals or share deals), and should not lead to taxable income. Likewise, withholding tax issues should not arise unless payments (such as guarantees) represent interest payments due in which withholding taxes may arise under, for example, the EU Savings Directive as mentioned above.


10 Restructuring


Post-acquisition restructuring that typically comes to mind would be debt pushdowns, however Luxembourg does not have a very active domestic mergers and acquisitions market and mergers and acquisitions transac-tions involving Luxembourg entities very often concern targets in foreign jurisdictions.

11 Spin-offs


A tax-neutral spin-off is possible subject to certain conditions. A tax- neutral spin-off requires:• the transfer of a business or an autonomous part of a business, the

remaining portion being a business or autonomous part of a business as well;

• a safeguarding of a later taxation of the capital gains deferred as a result of the tax-neutral spin-off (ie, the tax book value of the assets subject to the spin-off are rolled over to the transferee); and

• the attribution of new shares issued to each shareholder on a pro rata basis whereby any cash payment may not exceed 10 per cent of the par value (or accounting par value) of the newly issued shares.

In case the tax book value of assets is continued following the spin-off, the historical acquisition date of such assets will also be continued.

Subject to similar conditions, a tax-neutral demerger of a Luxembourg company may be available when businesses or autonomous parts thereof are split towards two Luxembourg companies, towards one or more EU resident companies as well as a combination thereof.



Yes, this is possible, subject to the below.In principle, a migration of the residence of a Luxembourg com-

pany is considered a liquidation of that company for Luxembourg tax purposes, triggering a tax liability on any unrealised profits included in the assets of the migrated company. However, insofar the assets of such company remain attributable to a permanent establishment carried on in Luxembourg, the migration can be carried out at tax book value, which prevents a tax liability to arise on the unrealised profits connected to such assets. Similarly, a tax-neutral transfer of a Luxembourg permanent

establishment from a company established in an EU country (other than Luxembourg) to another company established in an EU country can be carried out, for example, upon a transfer resulting from a contribution of a business or an independent part thereof, upon merger, demerger or spin-off.

Furthermore, where assets are being transferred from Luxembourg to another EEA country, for example, upon migration of the Luxembourg company to such country, the taxpayer will, upon request, be entitled to a deferral of income taxation (attributable to the unrealised profit included in such assets at the time of transfer to another EEA country) for as long as it continues to be the owner of such assets and for as long as it continues to be a resident of another EEA country. The tax amount subject to deferral does not bear interest, and the taxpayer is allowed to renounce its request for tax deferral.



Luxembourg does not levy a withholding tax on arm’s-length interest, with the exception of interest paid on certain types of profit sharing debt instru-ments and arrangements and interest payments that fall within the scope of the Luxembourg law of 23 December 2005 (as mentioned in question 5).

In principle, 15 per cent dividend withholding tax will be due on profits distributions made by Luxembourg resident companies (see question 3). However, a domestic dividend withholding tax exemption applies if:• the dividend distribution is made to:

• a fully taxable Luxembourg resident company;• an EU entity qualifying under the EU Parent-Subsidiary Directive;• a Luxembourg branch of such EU entity or a Luxembourg branch

of a company that is resident of a treaty country;• a Swiss resident company subject to Swiss corporate income tax

without benefiting from an exemption; or to• a company which is resident in an EEA country or a country with

which Luxembourg has concluded a tax treaty and which is sub-ject to an income tax comparable to the Luxembourg corporate tax (ie, subject to a statutory tax rate of at least 10.5 per cent and a comparable tax base); and

• the recipient of such dividend has held or commits itself to continue to hold a direct participation in the Luxembourg company of at least 10 per cent of the share capital or such number of shares that repre-sent a historical acquisition price of €1.2 million for an uninterrupted period of at least 12 months.

In addition to the foregoing dividend withholding tax exemptions, the liquidation of a Luxembourg company is treated as a capital (gain) trans-action and is, therefore, not subject to Luxembourg dividend withholding tax. Only in very limited situations (and subject to treaty protection) non-resident shareholders may fall within the scope of the Luxembourg non-resident capital gains tax rules when transferring shares in a Luxembourg company (as mentioned below in question 16).



In the event that a dividend withholding tax exemption would not be available under Luxembourg domestic tax law (as summarised in question 13), profits can be extracted from a Luxembourg company tax efficiently by means of the (full or partial) liquidation of a Luxembourg company. Alternatively, profits can be repatriated by means of interest payments being made under convertible or income-sharing type of debt, bearing in mind the previous remarks regarding debt-equity ratios and pro-vided the interest is considered at arm’s length.

As is the case with a liquidation of a Luxembourg company, a repur-chase and cancellation by a Luxembourg company of part of its own shares forming the entire participation of a shareholder (referred to as ‘partial liquidation’), who thereby ceases to be a shareholder, is equally treated as a capital (gain) transaction and is therefore equally not subject


OPF Partners LUXEMBOURG


to Luxembourg dividend withholding tax. A liquidation of a Luxembourg company or a repurchase of shares may in very limited cases (and subject to treaty protection) be subject to Luxembourg non-resident capital gains tax (as explained in question 16).


15 Disposals


As mentioned, Luxembourg does not have a very large domestic merg-ers and acquisitions market. Mergers and acquisitions transactions gen-erally encompass the acquisition, via Luxembourg companies, of target companies in foreign jurisdictions by foreign investors. Consequently,

the disposition of the investment is either carried out by means of a dis-position of the shares in the target company itself (eg, by the Luxembourg company) or via the disposition of the shares in the Luxembourg company (by the investor, ie, an indirect sale of the target company). Subject to meet-ing the conditions of the Luxembourg participation exemption, the capital gains should not be subject to Luxembourg income tax. Similarly, subject to the non-resident capital gains tax rules (as mentioned in question 16), the non-resident shareholder should not be subject to Luxembourg taxa-tion upon a sale of the shares in the Luxembourg company.

Update and trends

Codification of Luxembourg ruling practiceAs from 1 January 2015, Luxembourg has codified its tax ruling practice. The new ruling procedure is open to all taxpayers (ie, corporate and individual taxpayers).

Under the new rules, advance tax agreements (ATAs) will be valid for a period of maximum five years, subject to an earlier expiry of the ATA if:• there appears to be an incorrect description of the relevant facts and

circumstances (based on which the ATA has been concluded);• a change in the (relevant) facts and circumstances (directly or

indirectly impacting the outcome of the ATA concluded); or• the decision laid down in the ATA would no longer be in line with

national or international (eg, European Union) law or legislation.

The rules further dictate that an ATA cannot foresee in an exemption of tax or a reduction of tax. And finally, the review of requests for ATA will be subject to the payment of a fee ranging between €3,000 and €10,000, depending on their nature and their complexity. The level of the fee is determined by the tax authorities on a case-by-case basis upon a high level review of the ATA request. Following the payment thereof, the request for ATA will be formally accepted by the tax authorities for review. The fee remains at all times non-refundable (ie, irrespective of the outcome of the decision by the tax authorities). The main underlying aim for charging the fee is to achieve a reduction in the number of ATA requests to be submitted to the Luxembourg tax authorities.

As regards corporate taxpayers, in order to ensure a uniform and equal treatment of taxpayers, requests for an ATA have to be addressed to the competent tax inspector, who will in turn submit the request to a newly established ruling committee. After review, the ruling committee will advise the competent tax inspector on how to decide on the request for ATA.

ATA requests should contain:• a precise description of the applicant of the ATA request as well as

any other (related or non-related) parties involved;• a detailed description of the activities (or contemplated activities)

that are covered by the ATA and have not yet produced their effect;• a detailed analysis of the applicable legal provisions as well as the

legal position taken by the applicant in respect thereto; and• a written confirmation by (or on behalf ) of the taxpayer that all

relevant facts and circumstances included in the ATA request are accurate.

With the exception of the fee, the new rules also apply to pending requests for ATA submitted prior to 1 January 2015.

Codification of the arm’s-length principleWith effect from 1 January 2015, Luxembourg formally introduced transfer pricing rules in its domestic tax legislation, thereby formally codifying the internationally applied at arm’s length principle. Whereas Luxembourg already had implicit transfer pricing law in place on the basis of which not at arm’s length transactions between parties having a special economic relationship, could be challenged by the tax authorities and be (partly or fully) characterised as hidden (capital) contributions or hidden (dividend) distributions, the introduction of the at arm’s length principle in article 56 of the Luxembourg tax law, constitutes a clear principle.

The new text of article 56 of the Luxembourg tax law, outlining the at arm’s length principle, is aligned with article 9 of the OECD

Model Tax Convention, containing a more specific definition of related parties, reads as follows ‘when an enterprise participates, directly or indirectly, in the management, control or capital of another enterprise, or where the same individuals participate, directly or indirectly, in the management, control or capital of two enterprises and where, in either instance, the two enterprises are, within their commercial or financial relations subject to conditions made or imposed which differ from those which would be made between independent enterprises, the profits of these enterprises are to be determined under conditions prevailing between independent enterprises and taxed in consequence’.

This definition applies to cross-border and Luxembourg domestic transactions, and the wording applies to both upward and downward pricing adjustments. In addition, taxpayers will be required to have information and documentation available in their administration to support the terms and conditions applied in any transaction between related parties.

Luxembourg proposes new tax measures to parliamentOn 5 August 2015, the Luxembourg Minister of Finance presented a bill of law to the Luxembourg parliament. The bill of law includes, inter alia, a proposal to expand the rules on the Luxembourg tax unity regime (highlighted under question 3 of this article). At present, a tax unity is possible provided at least 95 per cent of the shares in a Luxembourg-resident capital company is owned (directly or indirectly) by another Luxembourg resident fully taxable capital company or allocable to a Luxembourg permanent establishment maintained by a foreign capital company provided such foreign capital company is fully subject to income taxation that corresponds to Luxembourg income taxation. According to the proposal, the tax unity regime will now be expanded to enable Luxembourg-resident companies that neither have a (joint) Luxembourg parent (capital) company nor a (joint) non-resident parent company with a Luxembourg permanent establishment to which the shares in the Luxembourg resident companies can be allocated, to still form a tax unity, provided such Luxembourg resident companies have a (joint) foreign parent (capital) company established in another EEA country or their shares can be allocated to a permanent establishment of such a foreign parent (capital) company. Such foreign parent (capital) company of permanent establishment must be fully subject to income tax that corresponds to Luxembourg income taxation. A similar expansion is proposed for Luxembourg permanent establishments of foreign (capital) companies that are fully subject to income tax that corresponds to Luxembourg taxation. If adopted, these rules will become applicable as from the beginning of the 2015 tax year and can apply provided a request is submitted no later than on the last day of the 2015 tax year.

In addition, the bill of law expands the scope of the tax deferral system in the event of a migration of resident of a Luxembourg company abroad (as highlighted in question 12 of this article). At present, the deferral is available, upon satisfaction of certain conditions, when the residence of the Luxembourg company is migrated from Luxembourg to another EEA country. The bill of law now proposes to allow the tax deferral when the residence of the Luxembourg company is migrated from Luxembourg to a country with which Luxembourg has concluded a tax treaty for the avoidance of double taxation when such treaty provides for an exchange of information clause that is substantially similar to article 26, paragraph 1 of the OECD Model Tax Convention.






Only in a very limited number of cases may non-resident shareholders of Luxembourg companies become subject to Luxembourg non-resident cap-ital gains tax upon a transfer of shares in a Luxembourg company.

Gains realised by non-resident shareholders on the alienation of a substantial shareholding interest in a Luxembourg company, including dis-tributions received upon the (full or partial) liquidation of a Luxembourg company, are taxable if the gain is realised within a period of six months following the acquisition of such shares. A shareholding is considered ‘sub-stantial’ where it represents more than 10 per cent of the shares held in a Luxembourg company.

Where a non-resident individual, having a substantial shareholding in a Luxembourg company, has been a tax resident of Luxembourg for more than 15 years before becoming a non-resident of Luxembourg, such non-resident Individual may be subject to Luxembourg non-resident capital

gains taxation if he or she transfers Luxembourg shares within a period of five years following his or her migration from Luxembourg.

Moreover, depending on where the non-resident shareholder is a tax resident, protection against Luxembourg non-resident capital gains tax may be available under an applicable tax treaty.



As mentioned, the disposition of shares in a Luxembourg company should only exceptionally result in non-resident capital gains tax (see question 16).

The disposition of business assets by a Luxembourg company gen-erally results in taxation on the unrealised profits. Luxembourg tax law provides for some rollover relief, for example, when a Luxembourg com-pany converts a receivable into shares issued by the debtor or for share-for-share mergers. Similarly, under certain conditions, business assets of a Luxembourg company can be transferred tax-neutrally to another legal owner by means of a legal merger or a demerger (see question 11).

Frédéric Feyten [email protected] Michiel Boeren [email protected]

291 Route d’ArlonBP 603L-2016 Luxembourg

Tel: +352 46 83 83Fax: +352 46 84 84www.opf-partners.com


SMPS Legal MEXICO


MexicoAna Paula Pardo Lelo de Larrea, Jorge San Martin and Sebastian AyzaSMPS Legal




On a day-to-day basis, the acquisition of stock is one of the most frequently used alternatives to gain control of a target company. From a tax perspec-tive, the acquisition of stock has many virtues; amongst them, the fact that the sale of stock in a company is generally not subject to value added tax or that tax attributes of the target company are included in the acquisition thereof.

As mentioned above, the acquisition of stock includes tax attributes. However, it should be noted that tax liabilities prior to the transfer of the business are also included therein, thus outlining the paramount impor-tance of conducting thorough accounting, legal and tax due diligence. (For further details, see question 9.)

Notwithstanding the foregoing, certain aspects must be taken into account when opting for this alternative. For instance, in some cases where certain tax requirements are not met, tax consequences for a non-resident purchaser could be triggered. Income tax could be triggered in operations in which non-residents acquire stock issued by a Mexican resident when tax authorities determine that the market value thereof exceeds the pur-chase price by more than 10 per cent.

A common alternative to the acquisition of a target company via stock purchase is the acquisition of the business assets thereof. In general terms, this option consists in the purchase of the assets that are essential for the operation of the target company. In a sense, this alternative enables the acquirer to handpick the assets that are considered valuable and discard other items deemed as a burden for the business in question.

Moreover, tax authorities may permit certain authorised deductions in connection with the calculation of income tax due for the acquisition of the business assets. Nevertheless, it is important to point out that pursuant to applicable Mexican tax laws, goodwill may not be deducted.

Unlike acquisition of stock, the general rule is for acquisitions of busi-ness assets to be subject to value added tax, and, whenever real estate is involved in the operation at hand, federal and local taxes thereupon could be triggered.

Furthermore, in an asset deal, in terms of article 26(iv) of the Federal Tax Code, the acquirer could be jointly liable for contributions generated prior to the acquisition of the ongoing business for up to the value of the business itself (the full price paid for all the assets).

2 Step-up in basis


In connection with the acquisition of stock, no step-up in basis is consid-ered regarding assets of the target company; in general terms, the step-up in basis only occurs concerning the price paid for the purchased stock. (The tax basis of the assets remains the same, thus, no step-up in basis could be deemed to exist.)

With reference to the acquisition of business assets, the basis for the acquisition will be the amount effectively paid therefor and allocated to each asset; hence, a step-up in the basis thereof could be considered.

Additionally, in the latter, both fixed assets and intangibles may be deducted through the straight-line method, bearing in mind that goodwill, among other items may not be deducted for income tax purposes.

Other items, such as investments in fixed assets, cost and deferred charges, preoperative expenses, technical assistance and royalties may be deducted in the percentage set forth in the corresponding provisions for each item.



There are numerous aspects that must be carefully analysed in order to decide whether to acquire a target company directly (as a non-resident) or indirectly by means of a (Mexican) resident company.

In a stock deal, in cases where the purchase of the target company is made by the non-resident by means of a Mexican entity, the cost of the acquisition will be generated at the level of the first (ie, due to a capital increase in the resident company used for the purchase) and, indirectly, at the target company’s level. From a tax standpoint, tax consequences deriv-ing therefrom could be either adverse or beneficial depending on several factors (such as the target company’s financial position in the relevant tax year).

Should the non-resident decide to perform the acquisition of the target company on its own, tax treaties executed by Mexico ought to be kept in mind given that certain benefits pertaining to the distribution of profits, capital gains, payments on interests, etc, from the target company to the purchaser could apply depending on the applicable tax treaty.

In an asset deal, if the acquiring entity resides abroad, a permanent establishment could be deemed to exist in cases where a non-resident acquires the essential assets directly and continues the operation thereof. Accordingly, the non-resident could be taxed over Mexican-sourced income and, in cases where a permanent establishment is deemed to exist, over income attributable thereto as well.

Regardless of the foregoing, other options such as special purpose vehicles could be considered in order to perform a tax-efficient acquisition, reducing exposure to liabilities.



From a tax perspective, mergers (provided that both of the parties involved are Mexican residents for tax purposes) tend to be more efficient than share exchanges. The foregoing is the case, given that mergers may be treated as tax-free transactions, provided that certain requirements be met. In that sense, it is common that mergers do not cause income tax or value added tax. (Exceptions may apply.)

Likewise, tax attributes of the merged company may be passed down to the surviving company. (Certain exceptions such as net operating losses may apply).

Pursuant to applicable Mexican tax laws, share exchanges are a tax-efficient alternative only to corporate restructures of entities of the same


MEXICO SMPS Legal


group, since any share exchanges could be considered as a double sale with the corresponding tax consequences (a taxable transaction for both parties).



From a corporate standpoint, the issuance of stock by the acquirer as con-sideration could prove to be a convenient strategy. Likewise, the conveni-ence thereof could lie in cases where the acquirer has a cash shortage or cash flow-related complications.

Nonetheless, in general terms no tax benefit is included in the appli-cable Mexican tax laws with regard to this alternative. Thus, even in cases where the purchaser issuing the stock might not trigger tax consequences, the recipient thereof could in fact have to face tax repercussions similar to a cash deal.

6 Transaction taxes


Mexican tax laws do not contain documentary taxes such as stamp duties in connection with the acquisition of stock or business assets. However, value added tax is due in the performance, either by individuals or legal entities, of certain activities. In this regard, and as mentioned in question 1, value added tax could be payable concerning asset operations (ie, asset purchase agreements) in which business assets are acquired (cer-tain exceptions, such as account receivables may apply).

According to the Mexican value added tax law, the general tax rate is of 16 per cent. The sale of certain goods may be subject to a rate of zero per cent or even exempted from the tax at hand.

In connection with operations and transactions carried out after the acquisition of a target company by means of an asset purchase agreement, distinguishing between activities subject to a zero per cent value added tax rate and those that are exempted thereof is vital given that, while the first may allow the crediting of paid value added tax, the latter do not give rise to such benefit.

In recent years, tax authorities have assumed an aggressive position towards value added tax refund claims, slowing down refund procedures, whereby legal action is often necessary in order to obtain a favourable reso-lution. The foregoing should be kept in mind due to the cash flow implica-tions that could derive therefrom.

It is important to point out that even though the transfer of land (not including the transfer of other properties contained therein, that is, only the value of the soil) might be deemed as a value added tax-free operation, whenever real estate is involved in the acquisition of business assets, local taxes may be due (ie, transfer tax).



Whenever the amount of authorised deductions exceeds the amount of taxable income, tax losses will be deemed to exist. Such losses may be used to reduce the taxable profit for the subsequent 10 tax years, until fully amortised. However, when in a given year a taxpayer fails to carry forward tax loss carry-forwards, even though such taxpayer could have done so, said taxpayer shall forfeit the right to do so in subsequent years, for up to the amount that could have been carried forward.

When there is a change in the partners or shareholders that control a company with pending tax loss carry-forwards and the sum of the compa-ny’s income in the preceding three years is less than the amount, updated for inflation, of those losses at the end of the last year before the change of partners or shareholders, such company may carry forward losses only to offset tax profits corresponding to the same type of business activities in which the losses were sustained.

Lastly, it should be noted that concerning mergers, the surviving com-panies are not entitled to use the losses generated by the merged compa-nies and that losses of the surviving companies may only be used against gains generated as a result of the same type of business activities that gave rise to the losses prior to the merger.

According to Mexican tax laws, no special rules or preferential tax regimes apply for the acquisition of target companies subject to insolvency or bankruptcy procedures. However, taxpayers subject to such procedures may reduce debts remitted by their creditors (following the procedure set forth by the applicable laws) from pending losses in the relevant tax year in which the debt remittance took place. In cases where the amount cor-responding to the remitted debts is greater than the pending losses, the dif-ferences therefrom should not be considered as accruable income unless the debts in question were originated by transactions between related parties.

8 Interest relief


Mexican tax authorities and laws have assumed an aggressive position towards items related to or classified as interest payments. In that sense, in order for such payments to be deductible, certain requirements must be complied with. Therefore, thin capitalisation, transfer pricing and back-to-back rules, among other requisites, ought to be observed for such purposes. As outlined hereunder, the deductibility thereof is heavily conditioned.

Bearing the foregoing in mind, interest payments on borrowings obtained by a Mexican resident in order to acquire a target company could be deductible for income tax purposes provided that the lender’s corpo-rate purpose includes acquiring, holding and transferring stock of other companies.

Concerning the deduction of interest payments between resident companies and foreign related parties, certain thin capitalisation rules ought to be abided by. Resident companies may only be entitled to deduct such payments for as long as the total amount of debt contracted does not exceed three times the company’s net worth. In cases where such debt-to-net equity ratio is not complied with, interest payments would not be deductible for income tax purposes.

In connection with the above-mentioned, it is important to point out that companies engaged in specific industries (ie, the financial system and certain activities related to the country’s strategic sectors) may be permit-ted to have higher debt-to-net equity ratios provided that the tax authori-ties grant them an authorisation therefor.

Moreover, with regard to the applicable transfer pricing rules, corpo-rate entities entering into transactions with non-resident related parties must determine their accruable income and authorised deductions bear-ing in mind that the price and other compensation for such transactions are equal to the amount that would have been paid to independent parties on an arm’s-length basis.

Concerning back-to-back rules, yields on credits between related par-ties could receive the same treatment as if they were dividends.

Interest derived from foreign taxpayers is subject to income tax via withholding; nonetheless, non-resident parties should keep in mind that tax treaties entered into by Mexico could provide them with reduced with-holding rates applicable thereto.

According to Mexican tax laws, debt pushdown is not an allowed prac-tice. That being said, some operations between related parties could be deemed as debt pushdown operations. In this regard, tax authorities, con-sidering that no business motives are involved in such transactions, have denied the deduction of interest.


SMPS Legal MEXICO




As outlined in question 1, any tax liability prior to the acquisition of stock in the target company remains therewith after the transaction takes place.

Consequently, adequate representations and warranties in the nego-tiation proceedings are of paramount importance in order to minimise or avoid any potential tax liabilities or contingencies, to enable the acquirer (and in some cases even the target company) to seek indemnity, as well as to ensure that the seller’s indemnities are backed up by collateral.

Likewise, regarding the acquisition of business assets, the purchaser could be jointly liable for taxes due by the seller of the ongoing business prior to the transaction, for up to the value of the business. In addition, other liabilities must be taken into account, for example, labour liabilities.

Based on the foregoing, it is essential to conduct exhaustive account-ing, corporate and tax due diligence in order to verify the target’s tax com-pliance, identify potential liabilities and, consequently, establish strategic vantage points in the negotiation proceedings.

The purchaser (or the target company) could be entitled to seek indemnity from the seller in cases where tax authorities determine the existence of liabilities or that tax due was not duly paid prior to the acquisi-tion. In this respect, it should be noted that pursuant to the Federal Tax Code the statute of limitations regarding tax authorities’ auditing powers is five years, although certain exceptions may apply, in which the statute of limitations is 10 years.

In general terms, resident companies or permanent establishments that receive indemnity-related payments ought to accrue such items for income tax purposes. Concerning non-residents, income tax due should be determined over the total amount of indemnities or damages paid by resi-dent companies or permanent establishments located in Mexican territory.


10 Restructuring


Evidently, and due to a multiplicity of factors, companies have different needs. As a result, post-acquisition restructuring should be treated as custom-made operations in order to implement the most tax-efficient structures and to address the relevant company’s needs and interests.

In consideration of the foregoing, some of the most common means of post-acquisition restructuring consist in mergers or spin-offs (which could

be treated as tax-neutral operations, under certain circumstances) or debt refinancing.

In some cases, Mexican entities involved in complex structures could opt to migrate foreign holding companies into the country as a means of restructuring.

11 Spin-offs


Tax-neutral spin-offs may be executed in Mexico, provided that holders of at least 51 per cent of the voting stock in the existing and new companies remain the same (that is, their participation in the capital stock of the exist-ing and new companies must be proportional to the voting share they had or have in the existing and new companies, for a year before the transac-tion and two years thereafter).

Concerning monetary spin-offs, more than 51 per cent of the substan-tial monetary assets may neither be transferred to the new companies nor retained by the existing one in order for the operation to be deemed as tax-neutral. Failing to comply with the preceding requisite could give rise to a tax treatment in which a capital reduction and the transfer of property over such assets would be deemed to have taken place and, as a result, both income and value added tax could be payable.

Regarding tax loss, if the original company primarily conducted com-mercial activities, the tax loss carry-forwards pending for offsetting tax profits shall be divided between the original company and the companies spun-off in proportion to the division of the total value of inventories and accounts receivable related to the commercial activities of the original company. Other tax attributes are also divided between the entities.

Notwithstanding the above, local taxes may still be payable in cases where real estate is transferred, varying on the state in which the operation takes place.



Pursuant to applicable Mexican tax laws, the migration of residence of a target company in Mexico is not possible without triggering tax con-sequences. Should a resident corporate entity change its tax residence to another country, a liquidation for tax purposes would be deemed to exist and income tax could be due as if an arm’s-length sale of assets had occurred. Therefore, the deemed transfer of assets (and the corresponding

Update and trends

Mexico has been actively increasing the number of tax treaties (including exchange of information agreements) executed with other jurisdictions. As of 2015, around 80 tax treaties had been executed or were being negotiated. As of April 2015, the following countries have entered into tax agreements with Mexico:• United Arab Emirates;• Peru;• Malta; and• Italy (amendment agreement).

On a different subject, progress made in connection with the OECD’s base erosion and profit shifting action plan (the action plan) should be closely followed given that the impact thereof on both domestic and international tax laws could establish a new paradigm regarding the means through which tax-efficient acquisition structures are planned.

Tax authorities throughout the globe, in cooperation with the OECD, intend to confront practices by means of which taxpayers minimise or avoid taxation regarding income deriving from foreign sources or operations in foreign countries. In general terms, the action plan seeks to confront such practices with the following measures:• addressing tax challenges concerning the digital economy, such as

the ability to have a digital presence without being liable for tax or guaranteeing the effective collection of value added tax;

• actions in order to prevent parties from unduly obtaining tax treaty benefits through hybrid entities (eg, entities with dual tax residences, double-exemption or deduction mechanisms);

• fortifying provisions regarding foreign-controlled companies with income subject to preferential or low-imposition regimes;

• establishing limits to the base erosion via interest deductions and other financial payments (eg, setting forth clear transfer pricing rules pertaining to financial transactions between related parties);

• preventing treaty abuse on the basis that tax treaties are not executed with the purpose of avoiding taxation in both jurisdictions (eg, establishing a principal purpose test rule to assess operations benefiting from treaties);

• preventing the artificial avoidance of a permanent establishment status by establishing rigorous definitions and analysing the mechanisms frequently used to avoid the setting up of a permanent establishment;

• ensuring that transfer pricing outcomes are in line with value creation, in connection with intangibles, risks and capital, and high-risk transactions (eg, broader and clearly delineated definitions and rigorous transfer pricing rules);

• requiring taxpayers to disclose their (aggressive) tax planning to the competent authorities; and

• providing more effective amicable dispute resolution mechanisms.


MEXICO SMPS Legal


deemed distribution in favour of the shareholders) could be subject to taxation.



Dividends paid by resident companies are not subject to corporate taxation as long as they are paid out of the after-tax earnings and profits account that already has been subject to taxation. Should that not be the case, the entity paying dividends will be required to pay tax on the distribution of untaxed profits.

In addition, dividends paid to non-residents, whether individuals or legal entities, as well as to resident individuals, would be subject to an additional 10 per cent withholding tax. In some cases, Mexican individuals receiving dividends could have an additional tax burden of up to 5 per cent.

Yields on credits as well as debt claims could be classified as interests in accordance with Mexican tax laws; and as such, taxed when capital is invested in Mexico or when a resident or a non-resident with a permanent establishment in Mexico makes such payments.

In accordance to the foregoing, and in consideration of the debt’s nature, the corresponding withholding rate could range from 4.9 per cent up to 40 per cent.

Non-resident parties should always bear in mind that tax treaties entered into by Mexico could provide them with relief regarding tax pay-able on interest and dividend payments made out of the country, such as lower withholding rates or the possibility to credit or deduct in their juris-diction Mexican tax effectively paid.



Until recently, interest, royalty and service-related payments were com-monly used by taxpayers to erode the taxable base of their operations.

Therefore, in order to address certain practices through which tax-payers were abusively extracting profits from the country (for instance, by way of abuse of tax treaties), tax authorities established more rigorous thin capitalisation and transfer pricing rules. It is worth mentioning that the Organisation for Economic Co-operation and Development (OECD) has recently been developing base erosion and profit shifting programmes to address such matters. (This is further outlined in ‘Update and trends’.)

As a result of the foregoing, the Mexican income tax law establishes limitations to the deductibility of interest deriving from excessive indebt-edness of taxpayers with non-resident related parties in order to control operating debt margins. In that sense, debt arising from credits subject to distribution of dividends, sale of business assets, transfer of control and reduction of capital, among others, should be taken into account in order to determine the debt-to-net equity ratio referred to in question 8.

Concerning transactions between related parties, transfer-pricing provisions ought to be abided by. Consequently, regarding transactions between a resident taxpayer and a non-resident related party, the first should determine its accruable income and authorised deductions bear-ing in mind that the price and compensation for such transactions must be equal to that which would have been paid to an independent party (arm’s-length principle).


15 Disposals


Concerning disposals, non-residents may prefer disposing of the target’s stock since tax treaties entered into by Mexico could provide them with certain benefits.

In addition, from the seller’s perspective, it is essential to consider the cost of acquisition of the shares in the target company. In cases where the cost of shares is deemed high, it could be convenient to dispose of the tar-get’s stock given that such cost could be deducted from the sale price in order to calculate income tax due.

Alternatively, in cases where the cost of shares is low, the seller could prefer to dispose of the target’s assets.

Concerning transactions in which a company that holds stock in a tar-get company whose assets are then sold to a third party, tax consequences triggered when the assets are transferred and when profits deriving there-from are later distributed to the seller should be kept in mind.



Income deriving from the disposal of stock issued by a resident company could be subject to taxation at a rate of 25 per cent over the gross amount of the consideration corresponding thereto, when in the hands of a non-resident seller. Nevertheless, provided that certain requirements are met, non-residents could opt to calculate income tax due at a rate of 35 per cent over the capital gain in question (with the possibility to deduct the cost of the shares). However, in order for the latter alternative to be available, non-residents must designate a representative in the country in charge of com-plying with several obligations, such as remitting the corresponding tax.

While the disposal of stock listed on the Mexican Stock Exchange, as well as other recognised markets, may be subject to a 10 per cent tax rate, no special rules are included in Mexican tax laws concerning the disposal of stock in companies related to the energy and natural resources industries.

In pursuance of some of the tax treaties entered into by Mexico, taxa-tion on capital gains deriving from the transfer of stock could be limited

Ana Paula Pardo Lelo de Larrea [email protected] Jorge San Martin [email protected] Sebastian Ayza [email protected]

Andres Bello 10-402Col. PolancoMexico DF 11560Mexico

Tel: +52 55 5282 9063Fax: +52 55 5281 4952www.smpslegal.com


SMPS Legal MEXICO


or avoided (such as in cases where the non-resident seller has a minority participation in the Mexican entity, or simply due to the non-resident’s jurisdiction).

Moreover, the disposal of stock issued by non-resident companies, 50 per cent or more of whose value derives from real estate located within the country, could be subject to taxation. In such cases, tax treaties may provide relief from taxation, assuming that certain conditions are met (eg, that real estate properties located in the country are used in the perfor-mance of its activities).



Mergers, spin-offs and corporate reorganisation in connection with the disposal of stock or business assets may result in tax-neutral (or at least

tax-efficient (deferral)) operations that may manage to change or even avoid taxation, as mentioned throughout this chapter.

In this regard, tax authorities may authorise the deferral of income tax payable over profits deriving from the disposal, by a non-resident of stock in a Mexican company, between companies belonging to the same corporate group (concerning stock-for-stock transactions). Income tax corresponding to the profits obtained from such a disposal of stock would be payable within 15 days of a second transaction or disposal by means of which the stock in question ceases to belong to any of the companies from the corporate group takes place.

* The authors would like to thank Christian Solis, Federico Scheffler, Paloma Armella, Leonardo Gonzalez, Brenda Cueva and Natalia Cardona for their assistance in the preparation of this chapter.


NETHERLANDS Kraaijeveld Coppus Legal


NetherlandsFriggo Kraaijeveld and Ceriel CoppusKraaijeveld Coppus Legal




Upon the acquisition of stock, and where the acquisition company is a Dutch entity, the participation exemption may apply. Under the partici-pation exemption, income (including dividends and capital gains) from a qualifying participation is exempt from Dutch corporate income tax. On the other hand, losses on a qualifying participation are in principle non-deductible. Acquisition and sales costs, earn-out payments, payments under (balance sheet) guarantees and indemnities are generally not tax-able or tax-deductible under the participation exemption (see question 15 for the participation exemption conditions).

In the case of an acquisition of the legal and economic ownership of at least 95 per cent of the nominal and paid-up stock by the acquisition company, a fiscal unity (tax grouping) may be formed between the acquisi-tion and acquired companies. Companies forming a fiscal unity can set off losses (eg, from interest costs on acquisition financing) and profits (eg, of the acquired company), albeit under certain conditions (see question 8).

Acquisition of stock in a real estate entity may be subject to 6 per cent Dutch real estate transfer tax (RETT). The purchase of stock in a Dutch company is generally not subject to Dutch VAT (see question 6). In the case of a purchase of stock, the book value of the assets reported by the com-pany acquired remains unchanged.

In the case of a purchase of business assets and liabilities (asset trans-action), the acquisition company should report the acquired assets at fair market value. The purchase of Dutch real estate is, in principle, subject to 6 per cent RETT. The asset transaction is, in principle, a taxable event for VAT purposes, but may be non-taxable in case of a purchase of ‘totality of goods’. For additional taxes, see question 6.

2 Step-up in basis


Only in the event of an asset transaction does a step-up to fair market value apply to the acquired assets and liabilities. The depreciation of those assets (including acquired goodwill and other intangible assets) is tax deductible. However, the annual amount of tax-deductible depreciation is limited to 10 per cent of the cost price for acquired goodwill and 20 per cent of the cost price for other intangible assets.

For tax purposes, acquired stock in a company is booked at historical cost price. If the participation exemption applies, no tax-deductible depre-ciation of stock is possible. The book value of the assets reported by the company acquired remains unchanged.



It is preferable to use a Dutch acquisition company to execute an acquisi-tion for several reasons.

The main advantage of using a Dutch acquisition company for the acquisition of stock in a Dutch target company is the possibility to form a fiscal unity between the Dutch acquisition company and the company acquired. To form a fiscal unity, the Dutch acquisition company would (among other conditions) need to acquire the legal and economic owner-ship of at least 95 per cent of the nominal and paid-up shares in the com-pany acquired. Subject to certain anti-abuse legislation, forming a fiscal unity would, for instance, allow the Dutch acquisition company to set off the interest expenses on the loan taken up to finance the acquisition against the profits of the acquired company.

For acquisitions of stock in a non-Dutch company, it may be beneficial to use a Dutch acquisition company for the following reasons:• tax-efficient repatriation of funds (eg, reduced withholding tax rates)

by means of the numerous tax treaties concluded by the Netherlands for the avoidance of double taxation, in combination with the partici-pation exemption;

• asset protection through one of the many bilateral investment treaties concluded by the Netherlands; and

• highly skilled professional advisers and support (banks, lawyers) and an efficient court resolution by a separate court for entrepreneurial disputes.



Legal mergers and share-for-share mergers (hereafter jointly referred to as ‘mergers’) are not that common as they are not the most straightforward method of acquisition. A possible advantage of a merger lies in the fact that, although subject to the terms of the transaction, it could be possible to minimise the need to attract funding by the acquisition company and limit the spending of cash.

Additionally, when contemplating an asset transaction by way of a business or legal merger, mergers are considered as beneficial since these provide the opportunity to continue reporting the ‘acquired’ assets and liabilities at historical cost price (instead of reporting at fair market value) and thus postpone taxation of unrealised profits for the ‘seller’.

The main disadvantage of such tax-neutral business or legal mergers is the possible inflexibility of on-selling the merged company within the respective clawback period (generally three years) imposed by anti-abuse measures. If applicable, the clawback rules stipulate that the postponed taxation of unrealised profit reserves is reversed, resulting in the taxation of the unrealised profit reserves with retroactive effect.


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It may be beneficial for the buyer to issue stock in the event that cash fund-ing cannot be obtained by the acquisition company, or in case interest costs on acquisition financing cannot be deducted (under anti-abuse legislation). See question 8 for more information on interest deduction limitations.

With reference to question 4, it is possible to postpone taxation when issuing stock as consideration for the acquisition.

6 Transaction taxes


In the case of an acquisition of existing or newly issued stock, no stamp duty (or other documentary taxes) is due.

However, there is a possibility that, upon an acquisition of stock, 6 per cent RETT is due if the target company qualifies as a ‘real estate entity’. This is the case if all of the following requirements are met:• the stock is acquired in an entity with an equity divided into shares, or

an entity incorporated under the laws of another state which has the same characteristics of an entity with an equity divided into shares;

• the stock is acquired in an entity of which, at the time of the acquisition or at any time in the preceding year, the assets consist or consisted of 50 per cent or more of real estate, and at least 30 per cent of all assets consist of Dutch real estate;

• the activities pertaining to the real estate consist, at the time of the acquisition or at any time in the preceding year, of 70 per cent or more of the acquisition, disposal or exploitation of that real estate; and

• the buyer directly or indirectly acquires an interest of at least one-third in the entity, including any interest the buyer may already directly or indirectly hold.

For VAT purposes, the acquisition of stock should not be considered a tax-able event.

In the case of an asset transaction, no stamp duty (or other docu-mentary taxes) should be due. Upon the acquisition of Dutch real estate, 6 per cent RETT is normally due. However, the acquisition of Dutch real estate may be exempt from RETT if the transaction relates to certain types of mergers, split-offs or internal reorganisations.

The acquisition of assets is normally subject to 21 per cent VAT. The transfer of real estate is generally exempt from VAT, unless the transfer concerns newly developed real estate (ie, construction sites and (part of ) buildings including the surrounding terrain, prior to, on or within a period of two years after the moment of first use of the buildings concerned). Should a transfer of real estate indeed be subject to VAT, an exemption generally applies for RETT.

Finally, in the case of an asset transaction where a ‘totality of goods’ is acquired, the acquisition may be considered as a non-taxable transfer for VAT purposes.



In the case of an asset transaction, the losses remain with the seller and may be set off by the seller against the capital gains realised with the sale.

In the case of an acquisition of stock in a company (regardless of its status) with a tax-loss carry-forward, the company acquired may still uti-lise the losses post-acquisition, subject to specific restrictions in case the acquisition of that company results in a ‘change of control’. In this respect, a change of control is generally considered to be the case if the transfer-ring shareholder directly or indirectly alienates an interest of 30 per cent or more in the transferred company.

Subject to certain exceptions, losses generally remain available after a change of control, provided that all of the following requirements are met:• the losses did not occur in a year wherein the assets of the acquired

company consisted mostly (50 per cent or more) of passive portfolio investments for a period of at least nine months;

• just prior to the acquisition, the activities of the target company have not been reduced to less than 30 per cent when compared to the activi-ties of the company when it incurred the oldest losses available for compensation; and

• at the time of the acquisition, it is not intended to reduce the activi-ties of the target company to less than 30 per cent (as described in the above point) within three years after the acquisition.

8 Interest relief


Interest expenses are, in principle, tax deductible. However, various anti-abuse measures may deny the deduction of interest expenses on loans due to related entities. Generally speaking, the acquisition company and a lender are considered related entities if:• the lender directly or indirectly holds an interest of at least one-third in

the acquisition company;• the acquisition company directly or indirectly holds an interest of at

least one-third in the lender; or• an entity directly or indirectly holds an interest of at least one-third in

both the acquisition company and the lender.

Firstly, it is noted that interest costs on loans to related entities exceeding an arm’s-length rate are in principle requalified (for the part that is not at arm’s length) into non-deductible deemed dividends or informal capital contributions. In addition, loans between related parties may be provided under such conditions that, for Dutch tax purposes, these loans are requali-fied into equity. Consequently, interest payments on such requalified loans are treated as deemed dividends or informal capital contributions.

Below is a short elaboration of the most important interest deduction limitations for debt acquisition financing.

Anti-abuse legislation for specific types of transactionsAccording to specific anti-abuse legislation, the deduction of interest (including foreign exchange results) may be denied if a Dutch-resident company finances one of the following transactions with a loan obtained from a related party:• profit distribution or capital repayment to a related party;• capital contribution in a related party; or• the acquisition of an interest in a company, which after the acquisition,

constitutes a related party.

The deduction of interest expenses will nevertheless be allowed if the com-pany paying the interest can substantiate that:• the loan, as well as the related transaction, are both mainly based on

sound business reasons;• the interest received by the lender is taxed at a rate that is considered

to be reasonable for Dutch tax purposes (10 per cent or more); or• the loan is ultimately provided by unrelated parties.

The Dutch tax authorities may nevertheless deny the deduction of interest expenses if it successfully demonstrates that the loan has been entered into in anticipation of loss compensation by the lender.

Anti-abuse legislation applicable to related and non-related loansAnti-abuse legislation is applicable to related and non-related loans by way of limitation of excessive interest deduction rules and specific fiscal unity rules.




Limitation of excessive interest deductionThe amount of non-deductible ‘excessive interest’ is the proportionate total amount of interest expenses (including related costs) set off against the average total amount of debt deemed used to finance the target com-pany and the average total amount of debt outstanding.

Subject to certain exceptions, debt is deemed to be used to finance the acquisition of a target company if the amount of the combined historic cost price of all the taxpayers participations exceeds the taxpayer’s equity.

A threshold of €750,000 (per annum) applies based on which the deduction of excessive interest expenses up to this amount will not be limited.

Fiscal unityPursuant to other anti-abuse legislation, the deduction of interest expenses may be limited where the acquiring company has obtained a loan (whether from a related party or not) used for the purchase of the acquired company (acquisition loan), and mentioned companies form a fiscal unity directly after the acquisition.

The above-described limitation of interest deductibility only applies to the extent that the annual interest on the acquisition loan amounts to more than €1 million, and only to the extent the interest expenses relate ‘excessive’ acquisition loans. Subject to certain provisions, the initial acqui-sition loan is considered excessive if the nominal value of the obtained acquisition loan is more than 60 per cent of the acquisition price of the acquired company.



It is not uncommon that the acquisition company and seller agree on a full indemnity by the buyer for tax costs (increased with interest and penalties) relating to the pre-acquisition (pre-effective date) period and that are not provided for in the acquisition balance sheet of the acquired company for the statutory limitations period. Often the maximum indemnity is limited to the value of the acquisition price.

The tax indemnities are often described in a separate tax schedule to the share-purchase agreement. If the acquired company formed part of a fiscal unity, specific warranties and indemnities are agreed with regard to liabilities relating to the period of such fiscal unity period.

In the case of a purchase of stock, and assuming the participation exemption applies, payments under an indemnification or warranty should generally be tax-neutral for both the acquisition company and the seller, as the payments would normally be considered a non-taxable correction of the initial purchase price or a reimbursement for (future) expenses or liabilities or both.

In case of an asset transaction, only limited tax warrantees are pro-vided by the seller as the tax liabilities generally do not pass to the acquisi-tion company.


10 Restructuring


The most typical post-acquisition restructuring is the formation of a fiscal unity between the acquisition company and the target company. See ques-tion 3 for more details on fiscal unity.

11 Spin-offs


For Dutch corporate income tax purposes, a spin-off can be executed tax-neutrally if the splitting company and the receiving company meet cer-tain requirements. One of these requirements is that neither the splitting company nor the receiving company may have any net operational losses.

In case not all the requirements are met, unrealised profit reserves of the transferred assets are fully taxed unless the spin-off is performed in line with the conditions laid down in a ministerial decree. For transfer taxes, see question 6.



In principle, the migration of a company that is resident in the Netherlands for Dutch tax purposes leads to taxation of all unrealised gains and losses, as all assets and liabilities are deemed sold just prior to migration. The migrating company, however, may opt for a deferral of payment of the taxation, subject to certain conditions.

Two different options exist for a deferral of payment upon migration. The first option provides for a deferral of payment of the tax due until the moment the gains and losses have been effectively realised, taking into account the following:• the deferral only applies insofar the company migrates to and remains

resident of an EU member state or a jurisdiction within the EEA;• the deferral only includes taxation of unrealised gains and losses,

which is annually assessed by information provided by the migrating company (ie, the annual filing of the fiscal balance sheet, profit and loss account and additional information based on which the Dutch tax authorities can determine whether the gains and losses of the underly-ing assets have effectively been realised);

• the deferred payable amount will be increased with (levy) interest cal-culated over the amount of tax due as per the migration date; and

• the migrating company has to provide sufficient assurance to the Dutch tax authorities (in most cases a bank guarantee) for the post-poned tax liability.

The second option provides for the opportunity to pay the tax due upon migration (to jurisdiction within the EU or EEA) in 10 equal annual instal-ments. These 10 instalments are payable, regardless of whether the gains and losses of the underlying assets have been effectively realised. Although (levy) interest will be calculated and sufficient assurance must be also pro-vided to the Dutch tax authorities, no further administrative requirements are imposed to the taxpayer opting for payment in 10 instalments.

A migration of a pure Dutch holding company only owning shares in (foreign) subsidiaries would normally not lead to a Dutch corporate income tax liability, since any gains (or losses) on those shares should be exempt under the application of the participation exemption. (See question 15 for more information on the application of the participation exemption.)

Should the migrating company continue to (partially) remain a Dutch resident for Dutch corporate income tax purposes – for instance, as a result of a Dutch permanent establishment – the unrealised gains and losses of the assets attributable to the Dutch permanent establishment would not be taxed as a result of the migration.

In addition to the above, should the migration of the company not only result in the migration of the effective place of management but also realise the migration of the corporate seat, the migration may also trigger Dutch dividend withholding tax. The migration of the corporate seat can (effec-tively) be realised by a cross-border conversion and a cross-border merger.



Dividend distributionsDividends distributed by a Dutch BV (private limited company) or NV (public limited liability company) to a foreign shareholder are generally subject to 15 per cent Dutch dividend withholding tax. However (except for abusive situations), an exemption of dividend withholding tax applies if:• the shareholder is considered tax resident of a member state of the

European Union or a state of the EEA; and• the shareholder owns an interest to which the Dutch participation

exemption would be applicable if the foreign shareholder were resi-dent of the Netherlands.


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Furthermore, if the shareholding is attributable to a Dutch permanent establishment, dividend distributions would not be subject to dividend withholding tax insofar as the derived income from the shareholding is exempt from Dutch corporate income tax under the application of the par-ticipation exemption.

Historically, profit distributions made by a Dutch cooperative com-pany (coop) were not subject to Dutch dividend withholding tax. Based on recent anti-abuse legislation, however, profit distributions made by a coop are now subject to Dutch dividend withholding tax if:• the main purpose (or one of the main purposes) of the coop is the

avoidance of Dutch dividend withholding tax or the avoidance of for-eign taxation of another entity or individual; and

• the owner of the membership rights in the coop cannot attribute the membership rights to an enterprise carried on by the owner of the membership rights.

Most tax treaties allow for a reduced dividend withholding tax rate of 5 per cent, or in some occasions zero per cent if the required conditions are met.

Interest paymentsInterest payments are, in principle, not subject to (withholding) tax unless, and in as far as, the interest costs on related-entity loans exceed an arm’s-length rate or in case the loan is requalified into equity for Dutch tax pur-poses. Interest distributions which have been reclassified as dividends are taxed as regular dividend distributions.

Substantial interest taxationIncome (including dividend, capital gains and interest payments) derived by a non-resident may also be subject to Dutch corporate income tax in the case where the income is derived from a ‘substantial interest’ in a Dutch company. As a general rule, a foreign company is considered to have a sub-stantial interest if such entity is entitled to at least 5 per cent of the value or voting rights in a Dutch company. Income derived from a substantial interest is subject to Dutch corporate income tax if:• the substantial interest is held with the main purpose (or one of the

main purposes) to avoid Dutch individual tax or Dutch dividend with-holding tax of another entity or individual, or both; and

• the substantial interest cannot be attributed to an enterprise carried on by the foreign company.

Foreign companies with a substantial interest in a Dutch company are, in principle, subject to Dutch corporate income tax. If, however, the sub-stantial interest is held only to avoid Dutch dividend withholding tax (ie, not to avoid Dutch individual income tax), the corporate income tax rate is effectively limited to the 15 per cent rate over dividend distributions.

As mentioned above, tax treaties may further reduce the applicable rate of dividend withholding tax if required conditions are met.



The Netherlands has an elaborate tax treaty network, providing respec-tive residents with heavily reduced withholding tax rates. In addition, Dutch companies can benefit from EU directives (such as the EU Parent-Subsidiary Directive). The most common method to reduce (or often even avoid) withholding taxes on the repatriation of profits is to organise the corporate structure in such way that these tax treaty benefits (or European directives) are made use of in an optimal manner.


15 Disposals


The sale of stock in either a local or foreign company would normally be the most beneficial disposal for a Dutch corporate seller, as capital gains are exempt from Dutch corporate taxation if the participation exemption applies. The participation exemption applies if the following requirements are met:• the Dutch parent company holds at least 5 per cent of the nominal

issued and paid-up capital of a (local or foreign) company of which the capital is partially or wholly divided into shares; and

• the subsidiary company is not considered to be held as ‘portfolio investment’ (the ‘motive test’).

Generally, a participation is held as portfolio investment if it is held with the intention to realise a yield that might be expected in case of regular asset management.

In cases where the motive test is not met, the participation exemption nevertheless applies when the ‘tax rate test’ or the ‘asset test’ (or both) is met. These tests are satisfied when:• the participation is subject to a (foreign) tax rate of at least 10 per cent

with a tax base roughly similar to the Dutch tax base (tax rate test); and• the fair market value assets of the direct and indirect subsidiary con-

sist of less than 50 per cent of ‘low-taxed free portfolio investments’ (asset test).

Update and trends

OECDLately, there have been significant developments, partly triggered by developments related to the Organisation for Economic Co-operation and Development’s (OECD) base erosion and profit shifting (BEPS) project. The OECD has been publishing its recommendations at rapid speed, including proposals for increasing tax transparency, changing the transfer pricing principles, extending the permanent establishment concept and methods preventing tax treaty abuse. In respect of the latter, a Principal Purpose Test has been proposed, which allows states to disallow tax residents treaty benefits if the main reason (or one of the main reasons) to put in place an arrangement is to benefit from the reduced treaty (withholding) tax rates.

European UnionAt the same time, the European Commission and individual European member states have been launching BEPS comparable measures. These measures include:• the automatic exchange of tax rulings;• the introduction of a central shareholders register; and• the introduction of two anti-abuse measures in the EU Parent-

Subsidiary Directive.

Automatic Exchange of Tax RulingsAnticipating the OECD BEPS and European measures on the automatic exchange of information on tax rulings, the Netherlands has recently concluded a memorandum of understanding with Germany, based on which both countries will spontaneously exchange tax rulings.

Central Shareholder RegisterThe central shareholders’ register is introduced through an amendment of the EU Anti-Money Laundering Directive. Under the amendment, a central shareholders’ register is introduced under which any individual who ultimately owns or controls at least 25 per cent in a legal entity will have to be disclosed to any person who claims to have a legitimate interest.

EU Parent-Subsidiary DirectiveAs a result of the changes to the EU Parent-Subsidiary Directive, European member states are required to deny the dividend withholding tax exemption under the EU Parent-Subsidiary Directive if they are of the view that one of the main reasons for the shareholding structure is to obtain the benefits of the EU Parent-Subsidiary Directive (the General Anti-Abuse Rule). Another change to the EU Parent-Subsidiary Directive aims to combat hybrid financing instruments by obliging European member states to tax income from financing instruments to the extent that such profits are deductible by the subsidiary.




In essence, low-taxed portfolio investments are those assets which do not have a function in the business enterprise of the entity holding the asset, and the income related to the assets is not subject to a tax rate of at least 10 per cent.



The gain derived by a disposal of stock in a Dutch company by a non- resident company should, in principle, not lead to Dutch taxation. If the stock qualifies as a substantial interest, however, the capital gains may be taxed with Dutch corporate income tax. For more information on substan-tial interest taxation, see question 13.

Under most tax treaties concluded by the Netherlands, the levy of cap-ital gains is allocated to the country of residence of the shareholder and is exempt from taxation in the source state (ie, the Netherlands). Thus, if the non-resident may apply for the application of such tax treaty, the disposal

of stock should not be subject to Dutch taxation, regardless of whether or not the income is derived from a substantial interest.



A disposal of shares is generally exempt under the application of the par-ticipation exemption. See question 15 for more information on the partici-pation exemption.

A disposal of business assets is, in principle, taxable with Dutch corpo-rate income tax unless the tax payer appeals to a special tax incentive, such as the tax-neutral mergers described in question 4. Additionally, a com-pany selling an asset may also apply for the reinvestment reserve.

The selling company may apply for the reinvestment reserve provided that the taxpayer has a clear intention of replacing the sold assets with assets that perform a similar function within the enterprise. Additionally, the reinvestment reserve only applies for qualifying business assets used in an enterprise (ie, no shares).

Friggo Kraaijeveld [email protected] Ceriel Coppus [email protected]

Zuidplein 881077 XV AmsterdamThe Netherlands

Tel: +31 20 333 0130www.kclegal.nl


Adepetun Caxton-Martins Agbor & Segun NIGERIA


NigeriaDayo Ayoola-Johnson and Bidemi Daniel OlumideAdepetun Caxton-Martins Agbor & Segun




An acquirer of stock in a company (shareholder) indirectly suffers the con-sequence of the tax liabilities of the company, to the extent of the reduced profit-after-tax of the company or the dividends payable by the company. The extent of such tax liabilities is often reflected in the purchase price of the stock; with the former shareholder (seller) being financially liable to the shareholder for undisclosed tax liabilities, by way of contractual indemnity obligations. Legal liability for unpaid taxes, however, lies with the com-pany (target) and neither the shareholder nor seller, save in cases of fraud or criminal negligence.

Tax liabilities will ordinarily not attach to the assets of the target, save where a relevant tax authority (RTA) distrains a particular asset on account of failure to satisfy established tax obligations. Accordingly, the acquisi-tion of a business asset by the purchasing company (purchaser) will often exclude the possibility of the unpaid taxes of the business attaching to the asset.

Still related to business assets and unpaid taxes, insolvency law stipu-lates a preference period threshold of three months before the commence-ment of insolvency proceedings. Thus the sale and acquisitions of business assets made during this period may be caught by the relevant provisions, which recognise the taxes due and payable within 12 months of a winding-up proceeding as a preferred debt. Insolvency proceedings are said to com-mence in the case of a winding-up by the court, on the date of presentation of the petition for winding-up; and in the case of a voluntary winding-up or a winding-up under the supervision of the court, on the date that the resolution for winding-up was passed.

The acquisition of certain business assets will qualify the purchaser for capital allowances at varied rates and an additional investment allow-ance of 10 per cent of the acquisition cost in the event of expenditure on plant and equipment. The acquisition of stock by a shareholder, however, attracts no such incentives as expenditure on stock acquisition does not qualify as capital expenditure for capital allowance purposes.

Although the payment of capital gains tax (CGT) where chargeable gains arise from the acquisition of business assets is that of the selling company (also seller), the recordation of the new ownership of the busi-ness assets, by way of a change of ownership in favour of the purchaser, can however not be reflected unless the applicable CGT is paid. Chargeable gains arising from the disposal of stock are exempt from CGT.

The acquisition of certain business assets will attract value added tax (VAT) at 5 per cent of the invoiced value of the asset. The VAT when paid may not be recoverable by the purchaser as input VAT under the VAT refund system, but will be capitalised as part of the cost of the assets. The setting off of output VAT from input VAT is available only where the business assets are raw materials used in the production of other vatable goods, or where the business assets were purchased for purposes of a fur-ther resale.

VAT is not chargeable on the value of stock, but will be charged on the service component of the acquisition, for example by the stockbroker or other professional that facilitated the acquisition.

Transaction documents evidencing the acquisition of an asset, that is by way of a true sale and not as a security interest, will attract stamp duty at an ad valorem rate of 1.5 per cent of the value of the sale as indicated on the transaction documents. The obligation for the payment of stamp duty is on the purchaser.

Transaction documents evidencing the transfer of stocks and shares are exempt from stamp duty.

2 Step-up in basis


The basis of a purchaser in the acquisition of the assets of a target from a seller is the consideration paid by purchaser to seller for the assets. Thus, in the case of assets which appreciate in value, the recognition of the increased consideration to seller will reflect a step-up in basis for pur-chaser. This consideration shall be deemed to include the costs incidental to the acquisition such as professional fees paid by the purchaser for effect-ing the transfer or conveyance of the business assets to itself. Where the acquisition is deemed to be a bargain which is not at arm’s length, the basis of the purchaser shall be the market value of the assets.

For company income tax (CIT) purposes, capital allowances are granted instead of depreciation or amortisation. Capital allowances are not claimable on expenditure on goodwill and other intangible assets, except for expenditure on research and development. It is, however, not unknown that expenditures on intangibles such as software to be categorised as office equipment and enjoy capital allowance as a qualifying expenditure on plant or research and development.

Chargeable gains made on the disposal of goodwill and other intan-gible assets are, however, subject to CGT, for which a rollover relief exists in the case of goodwill. The rollover relief exists in transactions where the proceeds of the sale of goodwill are utilised for the purchase of another goodwill. The later goodwill must be purchased within 12 months before or 12 months after the sale of the former goodwill.



It is tax-efficient for the acquirer of stock (shareholder) to be a non- Nigerian company that is a resident of a country with which Nigeria has a double taxation treaty (DTT). This is owing to the fact that dividends pay-able to such a shareholder are subject to withholding tax (WHT) at a rate of 7.5 per cent of the dividends payable. Nigerian shareholders or sharehold-ers from non-DTT countries are taxed at a 10 per cent WHT rate. WHT, when deducted and remitted, on dividends payable to a non-resident, con-stitutes final income tax on the dividends to such non-residents.

The following are the countries with which Nigeria has DTTs: Belgium, Canada, China, Czech Republic, France, the Netherlands, Pakistan, Philippines, Romania, Slovakia, South Africa and the United Kingdom. There is a double taxation agreement, which is restricted to shipping and aviation business, with Italy. DTTs that have been negotiated but yet to


NIGERIA Adepetun Caxton-Martins Agbor & Segun


be ratified by the Nigerian legislature are with Mauritius, Poland, South Korea, Spain and Sweden.

Acquisition of business assets, to the extent that the assets are to be utilised by the purchaser in Nigeria to carry on business, will require that the purchaser incorporate a Nigerian company. It is unlawful (punishable with fines) for a non-Nigerian company to carry on business in Nigeria as such business must be carried on by or through a duly incorporated Nigerian company. Conversely, the ownership of the shares or stock in a Nigerian company by a non-resident shareholder will not be considered as carrying on business in Nigeria.



Yes; company mergers and share exchanges are common forms of busi-ness acquisition or combination in Nigeria. The reasons for this include the following.

For CGT purposes, gains made as a result of share exchanges in which there is no element of cash payouts are exempt from CGT. It is notewor-thy that the Nigerian CGT Act continues to retain two conflicting provi-sions on the requirement for the provision of evidence of CGT payment in order to effect a recordation of change of ownership. While an earlier provision exempts gains arising from share exchanges with no element of cash payouts in business combinations from the payment of CGT, the other requires the production of evidence of payment of tax in order to effect change of ownership of all property including shares and stocks. In practice, however, no evidence of payment of CGT is required to reflect the name of a shareholder in the private and public register of the shareholders of a target, following acquisition of stock from a typical seller.

For CIT purposes, the commencement and cessation of business rules, which in practice often give rise to the double taxation of same profits or overlapping profits of the company (especially in the two succeeding basis periods after the first basis period in the case of commencement), may be excluded by the RTA, being the Federal Inland Revenue Service of Nigeria (FIRS), in circumstances where the resulting combined businesses remain under the same control or where a Nigerian company acquires the business formerly run by its foreign parent company.

Still for CIT purposes and where a Nigerian company acquires the business formerly run by its foreign parent company, the acquiring com-pany may be able to utilise the unabsorbed net operating losses (NOLs) of the foreign parent in the acquired business. In practice, this privilege is extended by the FIRS to business combinations between related Nigerian companies.



Save as stated in question 4, no other tax benefit can be immediately identified. However, to the extent that it is conceivable that stock may be exchanged by a purchaser for the business assets of a seller, it becomes important that the valuation of the stock and the business assets must be at par or relatively so. Failure to ensure this, particularly where the transaction is considered to be artificial, fictitious or not to be on an arm’s-length basis, may result in the RTA assessing the value of the business assets which is above the value of the stock, as income in the hands of the purchaser.

6 Transaction taxes


As stated in question 1, transaction documents evidencing the acquisition of an asset, that is by way of a true sale and not as a security interest, will attract stamp duty at an ad valorem rate of 1.5 per cent of the value of the sale as indicated on the transaction documents. The statutory obligation to pay stamp duty is on the purchaser. Transaction documents evidencing the transfer of stocks or shares, whether the stocks and shares are being acquired with cash or by a stock or share exchange, are exempt from stamp duty.

Also as stated in question 1, VAT at the rate of 5 per cent of the invoiced value of the asset may apply in the case of the acquisition of business assets and not for the acquisition of shares. Sales tax, which is ordinarily imposed by state law, for example, the Lagos State Sales Tax Law, is gener-ally inapplicable to typical business assets or shares sale and purchase. It is noteworthy, however, that a subsisting judgment of the Nigerian Court of Appeal is to the effect that the subsistence of the VAT Act invalidates the Lagos State Sales Tax Law.



The NOLs, tax credits and deferred tax assets of a target will continue to remain future tax-offsetting assets of the target, regardless of a change of control. Accordingly, a change of control of target by acquisition of stock has no impact on all of these tax-offsetting assets. It is notable that since 2007, NOLs may be carried forward indefinitely and no longer limited to four years.

The acquiring parent company (shareholder) or any other of its sub-sidiaries will be unable to utilise the tax-offsetting assets of target for their own tax purposes, except in the case of a business combination as explained in question 4. Group relief or consolidated tax position of a group of companies is not recognised by the tax laws, unlike at company law and accounting rules.

As stated in question 1, taxes that are due and payable within 12 months of the commencement of insolvency proceedings against a target are pre-ferred debt and take priority over other insolvency claims. Additionally, the sale or other disposal of the business assets of target which occur within three months of the commencement of insolvency proceedings will be deemed to occur within the preference period and could suffer the risk of being adjudged a fraudulent preference. The implication of this will be to give the RTA a basis to apply for the unwinding of the sale and purchase of the affected business assets.

8 Interest relief


Other than the deductibility of interest payments, no special relief is avail-able to an acquirer (purchaser/shareholder) who finances the acquisition of target with debt. Interest on loans is generally allowable deductions in the computation of chargeable profits. Conversely, tax reliefs are available for interest payable to a foreign lender in appropriate circumstances (see question 13).

There are generally no restrictions on the deductibility of interest pay-able to a related party, provided the loan transaction and the interest pay-able is not in the RTA’s opinion artificial, fictitious or not on an arm’s length basis. Transactions where a loan is advanced by a related party, in respect of which either the lender or borrower have control over each other or both have a common controlling shareholder, is by default regarded as a con-trolled transaction and for which an approved arm’s-length pricing method must be utilised in fixing the price or interest payable on the loan. Failure to appropriately price the transaction will justify the RTA in disallowing, for tax purposes, the deduction of the interest paid or a part of it.

There are generally no restrictions on the deductibility of interest pay-able to a foreign lender, provided the loan transaction and the interest pay-able is not in the RTA’s opinion artificial or fictitious.


Adepetun Caxton-Martins Agbor & Segun NIGERIA


The deduction of WHT on interest payment and its remittance to the RTA is a statutory obligation of the payer/debtor. While it is conceivable that parties may contractually shift this obligation, the liability for non-remittance of the applicable WHT will lie with the payer/debtor.

Debt pushdowns are not conceptually possible under the tax laws save where a debt obligation is acquired on terms available at market, in other words on an arm’s-length basis. Regardless of this, the transaction carries the risk of being adjudged artificial or fictitious by the RTA.

There are no thin capitalisation rules or any tax rules that generally regulate the debt-equity ratio of companies.



The forms of contractual protections against unfavourable tax exposure in stock or business asset acquisitions are not closed. For the shareholder in a stock acquisition, warranties are suitable to qualify the extent and integrity of disclosed information on existing and prospective tax liabili-ties of target, while indemnity provisions are used to stipulate the bounds of compensation in the event of untrue warranties, undisclosed material information and negligent or intentional misrepresentations. These con-tractual protections are more often than not features of stock acquisitions and are documented in the share sale and purchase agreements (SPA). It is advisable to extend the threshold or long-stop date of tax warranties and indemnities to the six-year period allowed by law for back duty or other unpaid tax claims by an RTA.

The typical warranties in the acquisition of business assets relate to title and the absence of any adverse security interest on the asset and hardly relate to potential tax claims. This is understandable in light of the fact that tax liabilities are unlikely to attach to property, as explained in question 1 (paragraph 2).

Where there is a refund of expenses incurred by shareholder or pur-chaser for example in the case of indemnification, and which expenses had earlier been deducted for tax purposes, such refund shall be taxed as part of the profits of the shareholder or purchaser. Such payments are not captured by the WHT system and will accordingly be taxed directly in the hands of the recipient shareholder or purchaser.


10 Restructuring


Post-acquisition restructuring could include mergers, demergers, spin-offs of business divisions, etc. The categories are not closed as there may be a hybrid of the mentioned possibilities. The option to adopt is wholly dependent on the peculiarities of the target and the objectives of the share-holder or purchaser.

To the extent that a shareholder contemplates post-acquisition con-trolled transactions (see question 8) with the target, it is advisable that the entities have a transfer pricing compliance process.

11 Spin-offs


It is possible to spin off a part of the business or trade of the target, post-acquisition. Where the RTA is satisfied that the spun-off business or trade is retained in an entity over which the target or shareholder has control and the RTA (where it so requires) obtains an appropriate guarantee or security as to the payment of all taxes due from the target, the RTA may in its discre-tion direct that:• the business commencement and cessation rules will not apply to the

new entity (spin-off ); this is a tax advantage in the circumstance that these rules, in practice, often ensure that the profits of a basis period may be taxed as the profits of two consecutive basis periods (see question 4); and

• where business assets that currently enjoy capital allowances are part of the spun-off business, the assets shall be deemed to have been transferred at their tax written-down value (TWDV) to spin-off, thus obviating the possibility of a balancing charge (taxable profits) in the books of the target.

To the extent that business assets are, subject to the sanction of the RTA, transferred to spin-off at their TWDV, there is no possibility of gains arising and for which CGT will be applicable. Additionally, there might be a pos-sibility that the 5 per cent VAT that may be imposed on the invoiced value of the business assets (see question 1) may be discountenanced as part of the spin-off process, particularly in circumstance where taxable invoices are not raised to effect the transfer of the business assets.



The residence of a company is determined by the place of its incorporation. Thus, a Nigerian-incorporated company will throughout its existence be recognised as resident in Nigeria. There is the possibility that a Nigerian company becomes a resident of another country due to the corporate resi-dency rule of the other country, in which case the Nigerian company will have a dual residence status.

Nigerian companies are taxed on their global income, however:• for countries with which Nigeria has DTTs, the tie-breaker rule in the

DTTs will be used in determining the tax residence of the company for the purpose of determining the residency of the company in respect of the taxation of income arising from the operation of the company in the DTT country; and

• a commonwealth tax relief is available in respect of profits earned from a commonwealth country which has a similar tax relief to that obtainable in Nigeria. The relief available in Nigeria is 50 per cent of the tax rate of the commonwealth country, subject to a limit of 50 per cent of the Nigerian corporate income tax rate.

Update and trends

Interest on related party loans is tax deductibleIn February 2015, the Tax Appeal Tribunal (TAT) sitting in Lagos held that the conflicts occasioned by section 10(1)(g) and section 13(2) of the Petroleum Profits Tax Act, 1979 (PPTA), be resolved in favour of the former and held that interests paid on related party loans that are priced on an arm’s-length basis are tax-deductible expenses of a company engaged in crude oil production in the Nigerian oil industry. While section 10(1)(g) had provided that interest on inter-company loans obtained on terms of the London Inter-Bank Offered Rate are tax-deductible, section 13(2) had provided, as a proviso to section 10(1)(d) (which relates to the tax deductibility of interest generally) that interest on loans borrowed from a related party, regardless of the quantum of

interest which the parties may retain in each other or held by a common shareholder, is a disallowable expense for PPT purposes. Although the section went further to require the RTA to disregard the relationship of the parties in the event the interests they hold in each other or through a common shareholder is insignificant or remote or where the interests arose from a normal market investment and the parties have no other business connection with each other, the RTA in practice generally does not allow the deduction of interest on inter-company loans.

The TAT based its decision on the relative newness of section 10(1)(g) of the PPTA which was a 1999 amendment to the PPTA, compared with the provisions of sections 10(1)(d) and 13(2) which were part of the PPTA prior to the amendment.


NIGERIA Adepetun Caxton-Martins Agbor & Segun




Interest and dividend payments made out of Nigeria are subject to WHT at a rate of 10 per cent. Where the recipient is resident in a country with which Nigeria has a DTT, the rate is currently 7.5 per cent (see question 3).

Graduated exemptions exist for interest on foreign loans made out to a Nigerian company. Such loans must not be in Nigerian currency and its repayment period, including its moratorium, must be above a two-year period. The graduated exemptions are in respect of foreign loans with a repayment period:• in excess of seven years, including a grace period of at least two

years: 100 per cent exemption;• of between five and seven years, including a grace period of at least

18 months: 70 per cent exemption; and• of between two and four years, including a grace period of at least

12 months: 40 per cent exemption.



As evident from question 13, interest on loans granted by a foreign share-holder resident in a country with which Nigeria has a DTT, provided the rate of interest is priced on an arm’s-length basis, will appear to be a more tax-efficient indirect means of extracting profits.

Additionally, foreign shareholders resident in a country with which Nigeria has a DTT are also tax-favoured to the extent of the reduced WHT of 7.5 per cent deductible from their dividends.


15 Disposals


To the extent that gains made from stock and share disposals are currently exempted from CGT, disposal of stock holds a tax advantage. Additionally,

since the purchaser will not be liable to the payment of stamp duty on the documentations of the stock disposal as well as VAT on the value of the stock, parties see an added advantage to agree to an acquisition of stock rather than the purchase of business assets. Gains made from the sale of stock in a foreign entity are also not chargeable to CGT in Nigeria.



As stated in question 15, gains from the disposal of stock are generally exempt from CGT, regardless that the disposal is by a non-resident com-pany of stock in a local company.

There are no general rules relating to the disposal of stock in real property and other natural resource companies. However, and in light of a Federal High Court of Nigeria decision handed down in May 2012, dis-posal of controlling stocks and shares in a company with an oil mining lease will be inchoate until the approval of the Nigerian Minister of Petroleum and Resources is sought and obtained in line with the provisions of the Petroleum Act and its regulations.



As stated in questions 15 and 16, gains from the disposal of stock are gener-ally exempt from CGT, whereas gains from the disposal of business assets will be chargeable to CGT. Such gains, where they are derived from the sale of assets that qualify under the classifications of building, land, plant and machinery, aircraft, ships and goodwill, can be rolled over to enjoy exemp-tion from CGT. To be eligible for rollover relief, the proceeds of the sale of the business asset that falls into any of these classifications must be uti-lised for the purchase of other assets that fall into the same category within 12 months before or 12 months after the sale of the former business asset (see question 2 on goodwill).

Dayo Ayoola-Johnson [email protected] Bidemi Daniel Olumide [email protected]

9th Floor, St Nicholas HouseCatholic Mission StreetLagosNigeria

Tel: +234 1 462 2094Fax: +234 1 461 3140www.acas-law.com


Anzola Robles & Asociados PANAMA


PanamaRamón Anzola, Maricarmen Plata and Andrés EscobarAnzola Robles & Asociados




Transfer of property under Panamanian tax laws may be subject to:• income tax over capital gains;• transfer taxes, depending on the type of property or assets, as further

described in question 6; and• stamp taxes on agreements signed in connection with the transaction.

An important difference between the tax treatment of an acquisition of stock and an acquisition of business assets and liabilities is that the transfer of stock involves a single tax assessment for income tax relating to capital gains. An acquisition of assets and liabilities will involve both a capital gains assessment and transfer taxes relating to the property being transferred.

Income tax from capital gains is applicable to a transfer of property including chattels, real property, and stock and securities issued by com-panies with taxable or local source income. Capital gains tax is set at 10 per cent. However, the criteria for assessing and collecting capital gain income tax are contingent on the type of property being transferred, as described below.

Direct or indirect transfer of securities issued by companies with underlying economic investments in PanamaA 10 per cent capital gains tax is applicable to income deriving from a direct or indirect sale of stock or any type of securities issued by companies with economic investments within Panamanian territory. Companies that keep economic investments within and without Panamanian territory will only be taxed in Panama over the value of the investment portion located in Panama.

The capital gains tax is applicable when the stock or securities trans-ferred are issued by a non-resident foreign company or held by non- resident individuals or companies and when the transfer takes place out-side Panama.

The taxable gain is the difference between the book and sale or trans-fer value of the stock or securities.

Under an acquisition of stock or securities, Panamanian tax law requires buyers to retain 5 per cent of the total transfer value as an advance payment of capital gains tax. The buyer has the responsibility of forward-ing the 5 per cent retention within 10 days from the date when a payment obligation arises. A target entity or issuer of transferred stock or securities is jointly liable for any unpaid taxes.

Once capital gains tax is withheld and paid, the seller has the option to:• consider the retained amount as the definitive income tax paid over

the transaction, and take no further action; or• request a tax credit over any amount paid in excess of the 10 per cent

rate of the gains arising from the transaction. The taxpayer may elect to use any resulting tax credit to settle other tax obligations or request a tax refund within three years of the year when the transaction and payment took place. Tax credits thus obtained cannot be assigned.

The Panamanian taxable basis of a company that maintains economic investments within and without Panamanian territory is the greater of:• the transfer value of the portion of the equity of the legal entities that

generate Panamanian source income out of the total equity subject to the transaction; or

• the transfer value of the portion of the assets economically invested in Panama from the total assets subject to the transaction.

The transfer of securities issued by a Panamanian company or through the acceptance of a public offer for the acquisition of shares pursuant to Panamanian securities law is subject to capital gains tax. However, Panamanian securities legislation creates an exemption from capital gains tax in the event of a transfer of securities registered at the Panamanian Securities Commission (the CNV), provided such transfer:• is made through an organised securities market or stock exchange; or• results from a merger, consolidation or corporate reorganisation,

and the transferring shareholder receives only stock of the subsisting entity, or an affiliate of the same, as consideration. Nevertheless, the subsisting entity may pay up to 1 per cent of the value of stock issued to the receiving shareholder in cash or other assets to prevent dividing the stock into fractions.

The following transfers of securities are exempted from capital gains tax:• transfers where the government is the acquirer;• transfers between parents and children and between spouses; and• court-ordered transfers.

Transfers of stock or securities that do not generate gains are not subject to capital gains tax. Where a transfer does not yield a gain, the taxpayer must file an application with the tax authority. The application will require the taxpayer to submit evidence of the tax-neutral transfer. The tax author-ity will review the taxpayer’s application and supporting evidence and may order an audit.

Under double taxation treaties (DTTs) approved and ratified by Panama, a foreign transferor of stock or securities of a company with underlying economic investments in Panama may be taxed in Panama for capital gains stemming from the transfer. To levy Panamanian capi-tal gains tax over a transfer of securities, DTTs generally require that the foreign transferor meet threshold participations and a minimum holding period of the target entity. A minimum capital gains tax rate of 5 per cent of the gross transfer price or 10 per cent of the capital gains is also included in certain DTTs signed by Panama.

The current position in relation to DTTs is as follows:• Panama has subscribed to and ratified DTTs with Barbados, the Czech

Republic, France, Ireland, Israel, Italy, Korea, Luxembourg, Mexico, the Netherlands, Portugal, Qatar, Singapore, Spain, the United Arab Emirates and the United Kingdom (the DTT with Italy has not yet come into force);

• Panama has negotiated DTTs with Austria, Bahrain, Belgium and Vietnam; and

• Georgia, Greece, Poland and Switzerland have all expressed interest in negotiating DTTs with Panama.


PANAMA Anzola Robles & Asociados


Transfers of stock and securities of Panamanian companies are also sub-ject to stamp taxes. Please see question 6 for a discussion of the applicable rates.

Transfer of real propertyIn real property transfers, the taxable capital gain is the difference between the amount or value of the transfer and the sum of the ‘basic cost’ of the property plus the value of any improvements and any disbursements or expenses required to complete the transaction. In a transfer of real prop-erty, the ‘basic cost’ is the lower of the official property value or its book value.

When the transfer is within the ordinary course of business of the taxpayer, revenue will be treated as regular income and must be reported within the annual income tax return for the corresponding tax period. From 1 January 2012, first time transfers of residential properties by profes-sional transferors will be subject to a capital gains income tax rate ranging from 0.5 per cent to 2.5 per cent, depending on the value of the property. First-time transfers of commercial or business properties by professional transferors will be subject to a 4.5 per cent tax rate.

If a transfer of real estate is not within the ordinary course of busi-ness of the taxpayer, the applicable capital gain income tax rate is fixed at 10 per cent. In such cases, the taxpayer must make an advance payment corresponding to 3 per cent of the higher value between the sale price stated in the purchase or sale document or agreement, or the official prop-erty value. Such amount is payable, together with the corresponding prop-erty transfer tax, prior to and as a requirement for the filing of the transfer deed at the Public Registry. Further, the seller has the option to:• consider the 3 per cent as the definitive income tax of the transaction,

and take no further action; or• request a tax credit over any amount paid in excess of the 10 per cent

rate of the gains arising from the transaction.

Under this second option, the taxpayer may elect to use the credit to settle other taxes or request a tax refund in cash. Tax credits thus obtained may be assigned to other taxpayers.

Under approved and ratified DTTs, a foreign transferor of real estate located in Panamanian territory may be taxed for capital gains in Panama. DTTs generally refer to the definition of real estate under the applicable laws of the jurisdiction where the property is located. However, DTTs gen-erally provide that real estate includes property affixed permanently to the land, livestock and equipment used in agriculture and forestry.

Transfers of Panamanian real estate are also subject to a 2 per cent transfer tax. Please see question 6 for a discussion of the real estate trans-fer tax.

Transfer of chattelsThe taxable capital gain for the transfer of chattels is 10 per cent over the difference between the amount or value of the transfer and the original cost of acquisition, plus depreciation. The original cost of acquisition includes:• the initial invoice value for the asset;• any expenses relating to its acquisition, installation, assembly and

delivery, including sales commissions, insurance and the cost of ship-ping and handling;

• import taxes; and• any other expenses or disbursements related to the original acquisi-

tion of the asset.

Chattels that are categorised as fixed assets and that are permanently con-nected to an income-generating business activity may be depreciated on an annual basis. Depreciation is calculated based on the economic lifes-pan of each asset, which is contingent on the particular use of the asset, maintenance requirements, prospective asset obsolescence and generally accepted depreciation tables. For depreciation purposes, the lifespan of the asset may not be less than three years.

If the transfer of chattels is within the ordinary course of business for the taxpayer, income must be included and taxes paid within the annual income return for the corresponding tax period.

Transfers of chattels belonging to a permanent establishment in Panama may be levied with local capital gains tax under approved and rati-fied DTTs. Under DTTs approved by Panama a permanent establishment includes business headquarters, branches, offices, factories and work-shops, as well as mines, oil or gas wells, quarries or any other site for extrac-tion of natural resources. Building sites and construction or installation

projects with a minimum duration of six months depending on applicable treaty provisions are also generally considered as permanent establish-ments under DTTs approved by Panama.

Transfers of chattels and personal property are also subject to value added tax, domestically known as ITBMS. Please see question 6 for a dis-cussion of this.

2 Step-up in basis


In acquisitions of stock, the capital gains basis is the book value of the stock as reflected in the most recent audited financial statements of the target company. There is no room for a step-up in basis in the acquisition of stock.

For personal property, the capital gains are assessed on the basis of the cost of acquisition of the property, therefore there is no step-up in basis available.

The transfer of real property, however, does leave room for a step-up. In the sale of real property, the capital gains basis is the ‘basic cost’ of the property. The ‘basic cost’ is defined as the lower of the official value of the property and its book value. When the official value of the property is lower than the book value, there is no step-up in basis since capital gains are assessed at such official value. However, tax legislation provides the option of submitting voluntary appraisals of real estate to increase their official value. Under the tax reform adopted through Law No. 8 of 15 March 2010, voluntary appraisals may be submitted to reflect an increase in the official property value. Owners may consider the new official value as the ‘basic cost’ of the property if one year has elapsed from the date when the volun-tary appraisal is approved by the tax authority. Such updated ‘basic cost’ may be considered by the property owner in order to calculate the appli-cable capital gains on transfers made after the new value is approved and recorded by the tax authority.

The tax authority is also performing ex officio appraisals. Property values determined by an ex officio appraisal will apply immediately to the property. However, if the taxpayer had previously submitted a voluntary appraisal the value of the ex officio appraisal will become effective five years after the submission of the voluntary appraisal.

Transferors of goodwill and other intangibles at a fixed price payable in a single instalment may deduct as expenses any disbursements paid in connection with acquiring the respective assets, or any filings, registrations or similar operations related to such acquisition. If the acquisition price of goodwill or intangibles is payable in separate instalments, the transferor may prorate the expense amounts so that proportional costs are deducted for each instalment received during the fiscal year. In such case, the follow-ing rules will apply:• if the value of each instalment that comprises the purchase price can

be ascertained, deductible expenses for the fiscal period will be deter-mined by apportioning the total acquisition value to the total cost; or

• if the value per instalment cannot be determined, the law assigns a 10 per cent cost to each instalment received within a fiscal year until the transferor fully recovers the capital investment.

Panamanian tax law allows for depreciation of fixed or tangible assets. Intangibles cannot be depreciated for tax purposes.

In a sale or merger of businesses at a fixed total price, the seller or transferor may determine the remaining economic lifespan of each fixed asset included in the transfer, and establish the annual depreciation that will apply based on the market value of each asset. In this case, the total value of the transaction will be distributed among the fixed assets for depreciation purposes based on the valuation methods applicable to each asset.



The Panamanian tax system is based on the principle of territoriality. Consequently, taxes are levied on operations within the territorial bound-aries of Panama conducted by any person or corporation regardless of their citizenship, residence or domicile. This principle applies even when




agreements are negotiated, signed and completed and payments are made abroad.

Under the general territorial taxation principle prevalent in Panama, and the foregoing capital gains and dividend tax considerations, there is no tax benefit if the acquisition is executed by a company established abroad.

Moreover, treatment of capital gains and dividend withholdings does not favour the use of local over foreign companies because:• capital gains taxes are applicable to income deriving from the sale of

chattels and real estate located in Panama, or from stock, securities or the transfer of any economic investment within Panamanian terri-tory, irrespective of whether the transfer takes place within or outside Panama; and

• dividend tax withholding is not applicable to shareholders of Panamanian or foreign companies that serve as holdings of Panamanian companies that are licensed to do business in Panama by the Ministry of Commerce and Industry and are generating local source income. Pursuant to Panamanian tax law, Panamanian and foreign companies are exempted from withholding dividend taxes over any income deriving from a dividend payment, provided that the underlying company declaring such dividends has already withheld and paid the 5 or 10 per cent applicable dividend tax.

However, in the case of a transfer of assets and liabilities that may include a change in ownership of real property or chattels that require registra-tion, a foreign transferee company will need to be registered with the Panamanian Public Registry. A slightly less cumbersome approach would be to work through a local subsidiary.



Company mergers are common forms of acquisition in Panama, and the merger process is expedient and straightforward. Panamanian laws afford a preferential tax treatment to mergers that meet certain cri-teria. Accordingly, mergers are often considered for structuring local acquisitions.

Moreover, the flexibility of Panamanian corporate legislation and its merger process, plus a favourable tax treatment, make Panamanian corpo-rations attractive as holding and acquiring entities, and it is commonplace to structure merger transactions that may not necessarily be connected to a local asset or operation.

Under applicable legislation, a merger can be structured between two or more Panamanian companies or with foreign entities as long as, prior to the merger, such foreign entity is registered in Panama or the foreign entity migrates to Panama through the process described in question 12.

Mergers enjoy the following tax privileges:• exemption from capital gains income tax for companies registered

with the CNV. Shareholders of companies that are extinguished as a consequence of a merger are exempt from income tax over capital gains, as long as:• share transfers are made through an organised securities market

or stock exchange; or• shareholders only receive shares of the surviving entity as consid-

eration. Additional cash or valuables that a shareholder receives from the merger to avoid fractioning shares will also be exempt, as long as they do not exceed 1 per cent of the total value of the shares of the surviving company; and

• exemption from income tax, property transfer tax, dividend withhold-ing tax and ITBMS. Merged companies will be exonerated from the foregoing taxes provided that:• accounts receivable and reserves are transferred to the surviving

entity at book value;• accounts receivable between the merging companies are set-off;• inventory accounts and reserves for losses from obsolete inven-

tory are transferred separately and at book value;• assets that can be depreciated and any accumulated depreciation

values are transferred separately and at book value (the surviving entity must maintain the same depreciation method and period);

• paid-up capital, reserve capital and surplus and deficit accounts must be integrated within the surviving entity to reflect the net value of each;

• income, costs and expenses of the merged companies are inte-grated on the income tax return of the period when the merger was completed;

• real property transfers are registered at book value. However, the base value of such property for property transfer and capital gains tax purposes will not be affected by the merger; and

• the tax authority is notified in writing within 30 calendar days from the date when the merger is filed at the Panamanian Public Registry. Such written notice must be submitted together with copies of the documents pertaining to the merger, and an affida-vit signed by a Panamanian CPA certifying compliance with the applicable tax and accounting procedures.

Mergers should be preferred over share exchanges because acquisitions through share exchanges are not expressly exempted from capital gains or other applicable taxes. In the case of share exchanges, the transfer of stock by the acquirer to the seller as consideration for the sale of shares in the target company may be taxable over any gains that may be realised if the value of the shares of the acquirer is higher than the value of the shares of the target company.

While transfers involving direct share exchanges are not always favoured, acquisitions through three-cornered mergers or amalgamations where the transferor receives shares of the acquiring group are common-place. In such cases, the acquirer may elect to merge with the target com-pany, either directly if it is a Panamanian company or through a subsidiary if it is not, thus benefiting from the special tax regime for mergers. As Panamanian company law does not restrict the form of payment between shareholders as a consequence of mergers, the parties may elect to issue shares in the acquiring company to the seller as consideration.



Capital gain tax provisions do not afford any preferences or benefits to straight cash or share exchanges.

However, in the case of a merger of companies registered with the CNV, applicable securities legislation does favour share exchanges over cash payments. As discussed in question 4, shareholders of merging com-panies that are registered with the CNV are exempt from income tax over capital gains if shareholders only receive shares of the surviving entity as consideration. Additional cash or valuables that a shareholder receives from the merger to avoid fractioning shares will also be exempt, as long as it does not exceed 1 per cent of the total value of the shares of the surviving company.

6 Transaction taxes


In addition to capital gains, the following taxes are relevant to the acquisi-tion or transfer of stock or business assets.

Transfer taxesAcquisition or transfer of chattelsITBMS is charged on transfers of chattels or personal property by sale or otherwise. It is also applicable to all imports. The taxable value is the price paid plus ancillary charges, or in the case of imports, the customs value plus customs charges. All transactions involving the transfer or transmis-sion of tangible personal property, goods or the supply of any services or personal or real property rentals are subject to ITBMS at a rate of 7 per cent of the value of the sale, service or rental fee. ITBMS applies at a rate of 10 per cent in sales of alcoholic beverages, hotel and other public accom-modation services. Sales of cigarettes, cigars and other tobacco products are levied with ITBMS at a rate of 15 per cent.

ITBMS is not applicable to transfers of intangible rights under an acquisition of assets and liabilities or to the transfer of securities.

Sellers of goods, rentals and services, including state-owned indus-trial and commercial enterprises, and all individuals and corporations are responsible for the collection of ITBMS. ITBMS must be reported and paid to the tax authority within the first 15 calendar days of each month.




Taxpayers with an average monthly gross income not exceeding US$3,000, and an annual gross income of less than US$36,000 are exempt from ITBMS.

Acquisition or transfer of real estateA 2 per cent real estate transfer tax is levied on the transfer of real estate, including donations and non-lucrative transfers. This 2 per cent tax is charged to the sale price stated in the official purchase or sale agreement or contract, or the official property value (whichever is higher).

The 2 per cent transfer tax is payable to the tax authority prior to regis-tration of the transfer deed at the Public Registry, together with the appli-cable capital gains tax. The corresponding tax receipts issued by the tax authority must be incorporated into the property deed before the deed is filed with the Property Registry.

Stamp taxesA stamp tax at the rate of US$0.10 for each US$100 of the face value of the corresponding obligations may be levied over certain documents or trans-actions. Any business transaction that involves documents not subject to filing fees or that are not levied with other transfer taxes, such as ITBMS, is subject to stamp tax.

Stamp tax may be paid either by an imprinted stamp on the transac-tion document with a value reflecting the tax amount or by filing a stamp tax return with the tax authority. Taxpayers whose line of business requires them to deal with recurrent stamp tax payments must submit a monthly stamp tax return. Agreements that are subject to stamp tax must bear either the stamp mark or the stamp tax return, evidencing payment. Thus, it is customary for stamp tax to be paid when the agreement is executed or immediately thereafter, to ensure compliance.

Documents relating to matters that are not connected to taxable income in Panama are exempted from stamp tax unless they have to be submitted to a court or administrative authority in Panama.



Operating losses are non-transferable from a target company to an acquir-ing or resulting entity, even when the acquisition is through a merger or consolidation. However, this principle does not extend to a change in control of a target company in the case of stock acquisitions. Net operat-ing losses and tax attributes of the target are not limited or affected by a change of control of the target through the acquisition of its stock or by its insolvency. Therefore, the target company will retain the right to carry forward losses or benefit from tax attributes pursuant to the applicable tax provisions.

Under Panamanian tax law, losses suffered by a taxpayer during the fis-cal year may be carried forward for the next five years. During such period, the taxpayer may deduct up to 20 per cent of the total loss carried forward each year. However, tax deductions relating to carried-forward losses may not exceed 50 per cent of annual net income. Any portion of the 20 per cent loss allowance that is carried forward and that is not deducted during the corresponding year may not be deducted in other fiscal periods and will not give rise to any tax credit in favour of the corresponding taxpayer.

Further to the above, accounts receivable that are time-barred from collection or that cannot be recovered due to the insolvency of the debtor may be deducted from a taxpayers annual profits and losses as long as the respective accounts are connected to a taxable source of income for said taxpayer and are duly reflected as gross income in the taxpayer’s books and records. From 1 January 2014, corporate income tax rate is fixed at 25 per cent.

Corporate income tax rate is assessed over the income generated by taxable activities in Panama less cost and expenses incurred exclusively in the production of such income or the conservation of its source and deductible allowances.

Companies with an annual taxable income of more than US$1.5 mil-lion are subject to an alternate minimum tax (AMT). The AMT criteria

require companies that exceed the foregoing income threshold to pay the higher of:• net taxable income calculated by the traditional method or the stand-

ard income tax formula that discounts deductible expenses and deductible allowances from gross income; or

• net taxable income resulting from applying 4.67 per cent to the total taxable income.

Income tax returns are due 90 days after the close of the fiscal year. However, the tax regulations provide for a single 30-day extension to file the income tax return.

Along with the income tax return, companies must submit an income estimate for the following tax period. The income estimate must be equal or higher than the taxable income for the last reported period. Estimated income tax is paid in three instalments that are due on 30 June, 30 September and 31 December. Adjustments between the tax assessment for the last reported period and the income estimate is made in the annual income tax return of the extant period.

A company that yields net operating losses after being forced to file its income tax return due to the AMT rules may request the non-applicability of the AMT. If the request is approved, the company will be allowed to cal-culate and file its income tax return in accordance with standard income tax rules.

8 Interest relief


Pursuant to Panamanian tax legislation, all expenses connected with the generation or preservation of taxable or local source income within a fis-cal period may be deducted from that period’s income for income tax purposes.

Interest payments made to local or foreign creditors may be deducted for income tax purposes, as long as the financing arrangement under which interest is disbursed relates to the production or conservation of local source income.

There is no interest relief for borrowings to acquire the target. However, interest payments over borrowings are deductible expenses for the buyer of the acquired assets or stocks.

The foregoing principles apply, without distinction, to local, foreign or related lenders. There are no restrictions on deductibility if the lender is local, foreign or related. However, interest, commission, other charges over foreign loans and any other type of financing arrangement are sub-ject to withholding at a rate calculated by applying the respective standard income tax rate set forth in question 7 over 50 per cent of the correspond-ing payment to the foreign creditor.

The standard income tax rate is 25 per cent, so the withholding tax will be assessed at an effective tax rate of 12.5 per cent of the total payment to the foreign creditor. Such interest withholding must be made by the local borrowing entity regardless of the type of financing arrangement in place with the foreign lender. The foreign lender is not liable to any further income or any other tax payment or tax return with respect to said interest payments. In some cases, it is possible to structure the foreign loan in a manner that will mitigate the interest withholding tax.

Interest payments by a Panamanian borrower to a creditor with resi-dence in a jurisdiction that has an approved and ratified DTT with Panama may be subject to a maximum withholding ranging from 5 to 15 per cent over the gross interest amount. The withholding will depend on applicable treaty provisions classifying the type of creditor and interest payment.

Financing arrangements with Panamanian-based lenders are not subject to interest withholding. Payments to local lenders are the respon-sibility of those local lenders, and must be treated as local source income in accordance with regular and applicable income tax principles and regulations.

There are no restrictions on debt pushdown under Panamanian tax law. Debt pushdown is usually achieved through mergers or the assign-ment of debt from parent to subsidiary companies, though depending on




the type of lender, other restructuring and pushdown methods may also be available.



Protection in the case of stock and business asset acquisitions is commonly sought through the insertion of appropriate warranties, covenants and indemnities in the respective sales agreements or acquisition documents. Similarly, it is also customary to conduct tax, accounting and financial due diligence of target companies.

Sellers ordinarily indemnify acquiring parties from tax obligations arising in connection with the target’s activities. Such indemnities may include income tax liabilities and liability for ITBMS, property and other taxes relating to the target’s assets or operations.

When crafting acquisition or merger agreements, acquiring and merg-ing parties should take into account various statutes of limitations. Chief among those is the statute of limitations for income tax, which is seven years. The tax authority has seven years to collect income tax, calculated from the last day of the fiscal year when such income tax was payable. However, the statute of limitations is reduced to three years if collection is sought after a tax audit has detected improper tax returns or missing payments. Taxpayers have three years to request credits or reimbursement for payment of undue taxes from the date when such undue payment was made.

For payments relating to withheld tax amounts, the statute of limita-tions is 15 years. As described in question 1, buyers acquiring stock and securities are required to withhold the respective capital gains tax and pay the same within 10 calendar days from the date when payment to the seller was made. Although the target company becomes jointly liable for due pay-ment of capital gains taxes, sellers may also require further assurances and confirmation of remittance to prevent liability.

It is generally recommended that acquisitions include the use of trusts or escrow agreements. This allows completion of any impending require-ments for closing and also for a thorough due diligence of real property and other assets in transactions where time is of the essence.

Indemnity or warranty payments connected to a source of taxable income in Panama are also subject to income tax. Such payments must be considered as part of the taxpayers’ gross taxable income for the fiscal year when they are received and eventually taxed at the applicable tax rates set forth in question 7.


10 Restructuring


Post-acquisition restructuring in Panama is usually undertaken to simplify the corporate structure of the target entity in order to reduce tax, labour and potential operational liabilities that may arise in connection with the resulting group entities.

The capital gain income tax outlined in question 1 is applicable to transfers of securities when the seller transfers the shares of the target company directly or when the seller transfers the shares of the target com-pany by transferring the shares of another holding company. Therefore, maintaining cumbersome indirect holding structures does not necessarily provide tax benefits for the acquiring party’s operations, or for future trans-fers of the target or its assets.

Therefore, corporate consolidation is the most relevant restructuring that usually takes place post-acquisition. It is common for intermediate subsidiaries used exclusively for holding purposes to merge with affiliates or subsidiaries to promote efficient control of the acquired entity and to correct tax inefficiencies.

In addition to changes in the corporate structure, post-acquisition tasks usually include a review of staff, management, executive and direc-tor removals and appointments, as well as all related labour issues. When the acquiring party is an economic group involved in the same business as the target this is a very important aspect, as appropriate restructuring will

reduce the labour, social security and tax liabilities arising from redundant or duplicate posts and offices.

If the acquiring company or group is from overseas, immigration and labour permit-planning is also pivotal.

It is also common to review the situation with target group loans and other financing structures to reduce financing costs, release mortgaged or encumbered assets and procure favourable tax arrangements. Such restructuring may address, for example, any possible withholding taxes on interest payments abroad, as described in question 8.

11 Spin-offs


Recently adopted legislation regulates corporate spin-offs. Under the new legislation, a spin-off can be structured by divesting the assets and liabili-ties owned by a Panamanian corporation in exchange for the equity of one or more Panamanian companies. Operating losses may not be transferred through a spin-off.

The transferee may also be a foreign company if the foreign company was previously registered in Panama, or if the foreign company migrates to Panama through the process described in question 12.

The transfer of assets and liabilities through a corporate spin-off will not be subject to taxes, provided the assets and liabilities are transferred at the book value. However, parties to the spin-off are required to provide prior written notification to the tax authority of the corporate spin-off.



It is possible for Panamanian companies to migrate to or continue their existence in other jurisdictions. There are no specific taxes in Panama relating exclusively to the migration of a company. To migrate into another jurisdiction, a Panamanian company must approve and file the respective corporate authorisations with the Panamanian Public Registry. The com-pany must then comply with the continuation requirements of the foreign jurisdiction and obtain its local deregistration.

Although the migration process itself is straightforward, steps must be taken locally to ensure that any assets or operations that require local reg-istration are dealt with in due course. Hence, if the migrating Panamanian company holds any real property, such real property will need to be transferred to a Panamanian entity or to a foreign company registered in Panama.

If the migrating company continues to do business in Panama as a foreign corporation, it is important to ensure that the business activities the migrating company is licensed for may continue to be carried out by a foreign entity.

If the migrating company ceases its operations in Panama, it will need to wind up its local business and cancel its taxpayer registration. Within 30 days from the date when the company ended all business operations, the company must file a final balance and income tax return, notify the tax authority and pay income tax for any remaining or leftover income. The company must pay the corresponding income tax due at closing. If the company is subject to payment of ITBMS, a final ITBMS return must be filed to complete payment of collected taxes for the period immediately prior to termination of business operations.

Finally, the company must complete payment of any outstand-ing municipal taxes for which it may be liable and inform the municipal authorities regarding the termination of its business operations.



Interest, commission, other charges over foreign loans and any other type of financing arrangement associated with the production or conservation




of local sources of income are subject to income tax withholding by the local borrower.

The borrowing entity is required to apply a withholding over 50 per cent of the payment to the foreign lender at the standard income tax rate set forth in question 7. Hence, a 12.5 per cent effective withholding tax rate is currently applicable over interest payments from foreign financing arrangements. Such interest withholding must be made by the local bor-rowing entity, regardless of the type of financing arrangement in place with the foreign lender. The foreign lender is not liable to any further income or any other tax payment or tax return with respect to said interest payments. If the foreign lender is an income tax payer, this interest withholding is not required. In some cases, it is possible to structure the foreign loan in a man-ner that will mitigate the interest withholding tax.

Financing arrangements with Panamanian-based lenders are not subject to interest withholding. Payments to local lenders are the respon-sibility of those local lenders, and must be treated as local source income in accordance with regular and applicable income tax principles and regulations.

As mentioned in question 8, interest payments by a Panamanian bor-rower to a creditor with residence in a DTT jurisdiction are subject to a maximum withholding ranging from 5 to 15 per cent over the gross interest amount. The withholding rates are contingent on applicable DTT provi-sions that may classify the type of creditor and interest payment.

A dividend tax is levied on the distribution of dividends to share-holders of Panamanian companies that are licensed for business by the Panamanian Ministry of Commerce and Industry or generate taxable income in Panama. If the company has issued:• registered shares, the applicable dividend withholding is 10 per cent

over dividends distributed from local source income, and 5 per cent over dividends distributed from foreign source income, income from free-zone operations or exports. Distribution of local source dividends must be completed before foreign source dividends may be distrib-uted; and

• bearer shares, the applicable dividend withholding is 20 per cent.

The company paying dividends is responsible for withholding the tax from distributions to the shareholders and remitting the withheld dividend payment to the tax authority. In the event that there are no dividend dis-tributions for a specific fiscal year, or if the company distributes less than 40 per cent of its net earnings for the fiscal year, the company must remit to the tax authority an advance payment of 10 per cent of the difference between the amount distributed and the total net earnings. Panamanian tax law calls the advance dividend payment a complimentary tax. In the case of companies that operate from a free zone, an advance payment or

complimentary tax of 10 per cent is applicable over the difference between the amount distributed and the total net earnings, if less than 20 per cent of the net earnings are distributed. Dividend taxes must be paid to the tax authority within 10 days from the respective withholding, whereas com-plimentary taxes are payable during the three months following the legal term to submit the applicable income tax returns for the respective period.

Dividend tax withholding is not applicable to shareholders of Panamanian companies that do not require a licence from the Ministry of Commerce and Industry, operate within Panama under special investment statutes, or serve as holdings of other Panamanian or foreign companies that do not generate taxable income in Panama. Panamanian companies are exempted from withholding dividend taxes over any income deriving from a dividend payment, provided that the company declaring such divi-dends has already withheld and paid the 5 or 10 per cent applicable divi-dend withholding.

DTTs approved by Panama generally provide that dividend tax is with-held at rates ranging from 5 to 15 per cent over the gross amount of the divi-dends. The withholding will depend on applicable treaty provisions.

Panamanian tax law confers pre-eminence over local law to dividend tax provisions adopted by DTTs. In the absence of a tax treaty, the appli-cable dividend withholding is 10 per cent over dividends distributed from local source income, and 5 per cent over dividends distributed from foreign source income, income from free-zone operations or exports.



Profits can be extracted from a Panamanian operating company through dividends, interest payments or payments to a foreign parent or affiliate in connection with services rendered abroad.

Dividend distributions and interest payments to foreign creditors are subject to withholding taxes. As outlined in question 13, a dividend with-holding of 10 per cent is applicable to most companies. A 5 per cent divi-dend withholding is applicable to companies that operate from a free zone and to foreign source income.

Interest and other payments to foreign creditors are subject to a with-holding rate that is calculated by applying the respective income tax rates set forth in question 7 over 50 per cent of the corresponding interest pay-ment. The applicable tax rate over the total payment to a foreign creditor is currently 12.5 per cent.

Payments to foreign entities in connection with services rendered abroad are considered local source income and are thus taxable under Panamanian law, provided that such services relate directly or indirectly

Update and trends

In August 2014, the Supreme Court resolved a constitutionality claim against Law 24 of 2013 that created the National Revenue Authority (ANIP) as an autonomous government entity. The challenge considers that the powers to supervise and collect taxes are constitutionally reserved for the executive branch of government. The Supreme Court was called to review whether ANIP’s conception as an autonomous government entity, and the appointment of the National Tax Administrator as the top hierarchical officer level, are contrary to the Panamanian Constitution. The Supreme Court ruled in favour of the claim and ordered the reinstatement of the former General Revenue Bureau (DGI) under the Economy and Finance Ministry (MEF).

Law Decree 435 of 19 September 2014 immediately followed to formally bestow upon the DGI and MEF all powers and prerogatives necessary to take over all administrative activities to the classify, collect, investigate, supervise and ensure compliance with tax obligations that are under the active direction of the National Treasury and not allocated to other government institutions.

A tax reform was enacted during early 2015 in efforts to increase tax collections by the Panamanian government, directing additional funds to assist with the current deficit of the national social security system. Among others, amendments were approved to the income tax withholding regime over service and dividend payments.

Income tax rules establish that any payments from a local taxpayer to a foreign service provider are subject to a withholding of the applicable tax rate over 50 per cent of the paid sum, as long as:• rendered services relate to the production of taxable income in

Panama;

• the payment is considered as an expense by the local taxpayer; and• the service provider is not registered as a taxpayer in Panama.

Amendments to these rules include a mandatory withholding of income tax over payments made by government entities to service providers located abroad. A general provision was also included in dividend tax rules, to clarify that all payments made by government entities to recipients abroad is also subject to applicable withholdings.

Exemptions to certain preferred share structures that were adopted in 2012 were also eliminated, reinstating the general dividend tax treatment for such preferred shares.

Panama continues talks with countries that are amicable to negotiating double tax treaties (DTT). To date, Panama has executed 16 double tax treaties and nine information exchange agreements. A full list of tax agreements approved by Panama can be found at www.dgi.mef.gob.pa. Together with the development of Panama’s DTT framework, the DGI is focused on its enforcement tools and capacity. In line with these efforts, in September 2015 the DGI issued a resolution that regulates the process and formalities to apply locally for DTT benefits, including penalties for parties that submit such applications unlawfully.




to the generation or preservation of local source income, and that the local company benefiting from the services declares payments made to the for-eign entity as a deductible expense for income tax purposes. The local company receiving the services must withhold at the corporate income tax rate over 50 per cent of the payment amount to the foreign service provider, or an effective withholding rate (currently 12.5 per cent) only if it elects to declare payments to the foreign entity as deductible expenses. In these cases, the foreign entity is not liable for any further income tax for these payments.

Transactions between Panamanian taxpayers and related parties that are tax residents in foreign jurisdictions are subject to transfer pricing regu-lations when the following conditions are met:• a Panamanian taxpayer conducts an income-producing operation with

a related party; and• such operation has an impact in the assessment of income tax in

Panama with respect to taxable income, costs, deductible expenses or determination of the applicable tax basis.

Panamanian transfer pricing regulations provide that two or more persons are considered related parties when:• one of such parties participates directly or indirectly in the manage-

ment, control or capital of the other party;• a group of persons participate directly or indirectly in the manage-

ment, control or capital of such parties; or• the headquarters or permanent establishments are abroad of an entity

with a permanent establishment in Panama.

Any related party operations will be subject to a comparability analysis through the application of approved valuation methods to review arm’s-length standards.

Panamanian taxpayers are required to keep sufficient information and supporting documents in connection with any foreign-related party transaction, and to file annual reports regarding the operations with any foreign-related party. Transfer pricing annual reports must be filed within six months of the close of a taxpayer’s fiscal period.


15 Disposals


Disposals are most commonly carried out through a disposal of stock in the local company or the local or foreign holding company. In both cases, the applicable capital gains treatment will be the same, inasmuch as both transactions involve a transfer of an underlying economic interest in Panama (see question 1).

Since asset deals will also involve transfer taxes over personal and real property, these transactions may become more complex and time- consuming. However, they are often preferred by sellers seeking to

mitigate potential liabilities such as prospective civil or labour litigation; incomplete or unclear corporate records; and risky assets.



Disposal of stock from a Panamanian operating company is subject to capi-tal gains taxes regardless of whether the selling, buying and target entities are foreign companies operating abroad.

As discussed in question 1, applicable tax legislation makes capi-tal gains applicable to the transfer of any economic investment within Panamanian territory, irrespective of whether the transfer takes place within or outside Panama. Accordingly, capital gains taxes are applica-ble to the disposal of stock on any foreign company directly or indirectly owning stock in a company that operates in Panama and generates local source income. Foreign transferors may benefit from the tax treatment afforded to capital gains in disposals of stock under DTTs approved and ratified by Panama. As such, a foreign transferor may elect to pay capital gains in Panama subject to applicable treaty provisions and avoid a double taxation in its country of residence. For additional discussion of treatment, see question 1.

To prevent indirect transfers of stock through foreign holding compa-nies, Panamanian tax legislation makes the local operating entity jointly responsible for any unpaid capital gains taxes.

There are no special rules dealing with the disposal of stock in real estate companies. However, prospective buyers of energy companies must ensure compliance with antitrust regulations, vertical integration restric-tions and capital composition requirements. Buyers must also ensure they gain the approval of the Antitrust and Consumer Protection Authority and the corresponding energy sector regulator, the National Authority of Public Services, or the Energy Secretariat to continue the operation of the applica-ble concession or licence.

Natural resource company buyers must meet antitrust and capital composition requirements and must gain the approval of the Ministry of Commerce and Industry, the Secretary of Energy and the Antitrust and Consumer Protection Authority to continue the operation of the applicable concession or licence.



Capital gains and stamp taxes connected to acquisitions of stock are due when payment for the respective transaction is made. An option for defer-ring a portion of the applicable taxes in stock acquisitions is available in transactions that require payments in instalments or over a period of time. If structured appropriately, acquisition of chattels may also provide

Ramón Anzola [email protected] Maricarmen Plata [email protected] Andrés Escobar [email protected]

Credicorp Bank Plaza, 26th FloorNicanor de Obarrio Avenue, 50th StreetPanama CityPanama

Tel: +507 263 0003Fax: +507 263 0006www.anzolaw.net




the same opportunity for deferring the payment of capital gains tax and ITBMS. Property capital gains and transfer taxes are due prior to registra-tion of the property transfer, so there is little chance for deferral in real estate transactions.

However, capital gains provisions in connection with the transfer of stock, chattels and real property provide the option of requesting tax

credits when withholding values that are higher than the applicable capi-tal gains at the rate of 10 per cent (see question 1). If the withholding is higher, the seller may request a tax credit for the difference. The seller has up to three years to offset the credit against other taxes or to request a cash return. Although the tax credit does not help the seller in reducing or defer-ring capital gains, it does allow the seller room for limited tax planning.


GESSEL Law Office POLAND


PolandJanusz FiszerGESSEL Law Office




There are significant differences in tax treatment between an acquisition of stock in a company and the acquisition of business assets and liabili-ties. The acquisition of stock triggers a 1 per cent tax (called tax on civil law actions (CLAT)), payable by the acquirer. The purchase price of stock cannot be depreciated after the acquisition, but becomes deductible in the event of the disposition of stock. The acquisition of business assets and liabilities in form of an ‘enterprise’ (a going concern or a running business) triggers a 1 per cent CLAT (2 per cent CLAT in the case of real estate), while an acquisition of individual assets, including fixed assets, as a rule, triggers a 23 per cent VAT. Such assets may be depreciated. In the case the acquisi-tion of business assets and liabilities takes the form of an ‘enterprise’, as defined above, the resulting goodwill may be depreciated over a period of five consecutive years.

2 Step-up in basis


The purchaser gets a step-up only in the event of acquisition of individual assets. In the event of stock purchase there is no-step or depreciation for tax purposes available for the buyer. The purchase price of stock cannot be depreciated after the acquisition, but becomes deductible upon the disposition of stock. No goodwill is recognised for stock acquisition. For the acquisition of business assets and liabilities, which takes the form of an ‘enterprise’, the resulting goodwill may be depreciated over a period of five consecutive years.



It is preferable for an acquisition to be executed by a special-purpose acqui-sition company established outside of Poland, preferably in a jurisdiction with which Poland has concluded a double tax treaty. In the case of sale of such company, the resulting capital gain would be (as a general rule) subject to tax only in such jurisdiction (based upon the relevant double tax treaty), and not in Poland. Absent such structure, the capital gain on dis-position of shares in a Polish company might be subject to 19 per cent tax in Poland.



Company mergers or share exchanges became common forms of acqui-sition in Poland after the accession to the EU (1 May 2004), due to the

application of the EU Merger Directive, which makes such acquisition, in general, tax-neutral.



There is a tax benefit to the acquirer in issuing stock as consideration rather than cash due to the fact that a cash acquisition triggers a 1 per cent tax (CLAT), payable by the acquirer while new stock issue triggers only a 0.5 per cent CLAT, payable by the target company. In order to eliminate the CLAT entirely the seller may contribute, in a tax-free share-for-share exchange transaction, the shares or stock of the target company to a com-pany located in a tax-friendly jurisdiction, and subsequently sell such hold-ing company to a third-party buyer.

6 Transaction taxes


The acquisition of stock triggers a 1 per cent tax (CLAT), payable by the acquirer. The acquisition of business assets and liabilities in the form of an ‘enterprise’ (going concern) triggers a 1 per cent CLAT (2 per cent CLAT in the case of real estate), while an acquisition of individual assets, including fixed assets, as a rule, triggers a 23 per cent VAT. Such purchased assets may be depreciated.



The net operating losses, tax credits or other types of deferred tax asset are, in general, not subject to any limitations after a change of control of the target. Acquisitions or reorganisations of bankrupt or insolvent companies are not subject to any special rules or tax regimes.

8 Interest relief


Although it is not directly provided for in the tax laws, there are tax rulings based upon which an acquisition company gets interest relief for borrow-ings to acquire the target. The most popular method of achieving a relief


POLAND GESSEL Law Office


for borrowings to acquire the target is debt pushdown (ie, the merger of the acquiring company into the acquired target). There are detailed thin- capitalisation rules limiting the tax-deductibility of interest payable between the related companies. The withholding taxes on interest could be avoided if the interest payments qualify for the exemption based upon the EU Interest and Royalty Directive or, alternatively, in certain jurisdictions, if such interest payments are made on a bank loan or credit. Some double tax treaties provide for exemption from the withholding tax for interest payable on a bank loan or credit.



Standard representations and warranties are generally sought and given for stock and business asset acquisitions, in particular in a cross-border context. Such representations and warranties are documented in great detail in the share purchase agreements. Binding tax-clearance certificates may be obtained from local tax authorities in the case of an acquisition of an ‘enterprise’ or asset. From a tax perspective, in general, any payments made following a claim under a warranty or indemnity are treated as tax-deductible for the seller and as taxable income for the buyer.


10 Restructuring


Typically, a post-acquisition restructuring would involve a debt pushdown, or a merger of a profit-making company from the acquirer’s group into the loss-making company in order to utilise the loss-carry-forward mechanism provided for in the 1992 Corporate Income Tax Law. A loss-carry-forward is available for five consecutive fiscal years, with the only limitation that in any given fiscal year a loss deduction may not exceed 50 per cent of the total loss amount.

11 Spin-offs


Tax-neutral spin-offs of businesses can be executed; however, the net oper-ating losses of the spun-off business cannot be preserved. It is possible to achieve a spin-off without triggering transfer taxes (eg, without the CLAT tax) as such an action does not fall under the CLAT obligation. No other transfer tax would apply to such spin-off.



It is possible to migrate the residence of the acquisition company or target company from Poland without tax consequences, as there is no exit tax in force in Poland for companies or individuals.



Dividend, interest and royalty payments made out of Poland are subject to withholding taxes: dividends are subject to 19 per cent tax, while cross- border interest and royalty payments are subject to 20 per cent tax. There are exemptions or significant reductions available based upon double tax treaties (DTTs), the EU Parent-Subsidiary Directive and the EU Interest and Royalty Directive. The exemption from withholding tax on dividends under the EU Parent-Subsidiary Directive is also applicable with respect to domestic dividend payments taking place between two Polish companies. With respect to the withholding tax on cross-border interest payments, a few of the older DTTs still provide for full exemption of such payments in the source country, for example, treaties with the United States (1974), Spain (1979), France (1975) and Sweden (2004).



The most efficient means for profit repatriation from Poland is the applica-tion of the EU Parent-Subsidiary Directive and the EU Interest and Royalty Directive. Therefore it is advisable that the acquisition of a Polish target company is made in such a manner that the acquiring company may enjoy the full benefits of the above-mentioned two EU Directives, thus making a future dividend, interest and royalty payment free from withholding tax. Partial redemption of the stock or shares is also available and qualifies for tax exemption under the EU Parent-Subsidiary Directive.


15 Disposals


All three methods are applied, the most common being a disposal of the stock in the local company by an offshore holding company, located in a jurisdiction with which Poland has concluded a double tax treaty. In the case of sale of such company, the resulting capital gain would be (as a

Update and trends

The interesting trends are to be seen in an international context. Poland has currently 89 double tax treaties (DTTs) effectively in force. The Polish DTTs are generally based upon the OECD Model Convention, with some important modifications, including:• a wide, pre-1992 definition of royalties to include payments for ‘the

use or the right to use, of an industrial, commercial or scientific equipment’ (thus applicable to cross-border leasing payments);

• withholding tax on cross-border payment of royalties;• increased use of a ‘switch-over clause’;• consistent use of the aforementioned ‘real estate-rich company

clause’ (article 13.4);• consistent use of the very broad ‘exchange of tax information

clause’;• increased extension of the credit method instead of exemption

method for avoidance of double taxation to include business profits, capital gains and directors’ fees; and

• increased use of an anti-avoidance clause.

In addition to the DTTs, Poland has expanded its network of tax information exchange treaties. These currently comprise 14 such agreements (Andorra, Bahamas, Belize, Bermuda, British Virgin Islands, Cayman Islands, Dominica, Gibraltar, Grenada, Guernsey, Isle of Man, Jersey, Liberia and San Marino).

Spółka komandytowo-akcyjna (SKA) entities (partnership limited by stock), previously tax-transparent and previously frequently used as a tax-planning vehicle, became taxable as a corporation, effective from 1 January 2014.

Furthermore, Controlled Foreign Corporation (CFC) regulations have been adopted by Poland, effective 1 January 2015. The CFC regulations have been introduced as amendments to the 1991 Personal Income Tax Law and the 1992 Corporate Income Tax Law, respectively. The CFC relations provide for taxation of passive income obtained by foreign subsidiaries of Polish residents, both individuals and corporate bodies, which hold 25 per cent or more in such foreign subsidiaries, even if such income is not distributed to the Polish shareholders.


GESSEL Law Office POLAND


general rule) subject to tax in such jurisdiction (based upon the relevant double tax treaty), and not in Poland. The least common method is a dis-posal of the business assets.



A disposal is of stock in the local company by a non-resident company will be exempt from income tax under the applicable DTTs concluded by Poland. There are special tax rules dealing with the disposal of stock in real property companies, but only resulting from the wording of arti-cle 13.4 of certain recently concluded DTTs concluded by Poland, and not directly from the Polish tax law. The ‘real estate-rich company clause’ in article 13.4 of a typical double tax treaty provides that the capital gains resulting from the alienation of shares deriving more than 50 per cent of their value directly or indirectly from immoveable property

situated in the given state may be taxed in that state. Some older DTTs with, for example, Cyprus (1992) or the Netherlands (2002), do not include such ‘real estate-rich company clause’.



There are no particular methods for deferring or avoiding the income tax due on the disposal either of the shares in the local company or of the busi-ness assets by the local company. As mentioned above, the most popular way of avoiding the income tax due on the disposal of the shares in the local company is to make the disposal not by a local shareholder but by a hold-ing company, located in a jurisdiction with which Poland has concluded a DTT, as in the event of the sale of such company, the resulting capital gain would be (as a general rule) subject to tax in such jurisdiction (based upon the relevant DTT), and not in Poland.

Janusz Fiszer [email protected]

Sienna Street No. 3900-121 WarsawPoland

Tel: +48 22 318 69 23Mob: +48 660 450 842Fax: +48 22 318 69 31www.gessel.pl/en/


PORTUGAL RFF & Associados – Tax & Business Law Firm


PortugalRogério M Fernandes Ferreira, Mónica Respício Gonçalves and Rita Arcanjo MedalhoRFF & Associados – Tax & Business Law Firm




From a buyer’s perspective, the main taxes comprised in the Portuguese tax framework which should be considered by a foreign investor prior to the acquisition of a target company are corporate income tax (CIT), value added tax (VAT), stamp tax, real estate transfer tax and the real estate municipal tax.

The tax treatment of the acquisition of the shares of a target company (a stock deal) or the acquisition of a company’s business assets and liabili-ties (an asset deal) entail a number of differences that should be thoroughly analysed both from a shareholders’ and a target company’s perspective before the execution of the relevant transaction.

Through a stock deal, the sale of the shareholders’ participation in the target company may generate a capital gain or capital loss which is gener-ally calculated as the difference between the transfer value, deducted of transfer expenses, and the acquisition value accepted for tax purposes.

Any capital gains obtained from the transfer of shares should be con-sidered as ordinary income in the assessment of the shareholders’ taxable income and should be taxed at the standard CIT rate (21 per cent for 2015) and applicable surcharges (of up to 8.5 per cent).

This notwithstanding, there is a participation exemption regime in force to avoid such CIT liability. Accordingly, if the shareholder is a com-pany resident in Portugal for tax purposes, the general rules may not apply, that is the income arising from the transfer of stocks may be exempt from CIT, provided that the following requirements to apply the participation exemption regime are met:• the shareholder holds, directly or indirectly, at least 5 per cent of the

share capital or voting rights of the company whose stocks generated the capital gain;

• the shareholder held the participation for at least an uninterrupted period of 24 months;

• the company whose stocks were transferred is subject to and not exempt from CIT or a similar tax, at a rate not lower than 60 per cent of the applicable CIT rate (ie, 12.6 per cent in 2015). If this subject requirement is not met, the participation exemption regime may also apply if at least 75 per cent of the company’s income derives from a commercial, industrial or agricultural activity or from rendering ser-vices, as long as such activities are not mainly aimed at the Portuguese market;

• the main activity of the subsidiary does not consist in banking, insur-ance activities or lease of goods (except with regards to real estate located in its residence jurisdiction); and

• the company whose shares were transferred is not resident or domiciled in a blacklisted country, territory or region as defined in Ministerial Order 150/2004 of 13 February.

Please note that this regime is not applicable to gains or losses arising from the transfer of shareholdings in companies 50 per cent or more of whose assets are represented by real estate located in Portugal, except when the real estate in question is deemed to be used in a commercial, industrial or

agricultural activity that does not correspond to the lease or purchase and sale of real estate.

Should the shareholdings fulfil the requirements to qualify for the above-mentioned exemption, any capital losses arising from the transfer of shares should also be excluded from the assessment of the company’s taxable income.

Furthermore, capital losses arising from the transfer of shares benefit-ing from the participation exemption regime applicable to either dividends or capital gains are not accepted as deductible for CIT purposes up to the amount of exempt dividends or capital gains obtained from the transfer of shares in that same company during the past four years.

Through an asset deal, any capital gains or losses arising to the tar-get company should be fully considered in the assessment of its taxable income.

However, capital gains may be subject to 50 per cent tax provided that, inter alia, the amount received as consideration for the transfer is rein-vested in the acquisition of fixed tangible assets, intangible assets or non-consumable biological assets.

Additionally, gains obtained by non-resident companies, without a permanent establishment in Portugal to which the gains might be allo-cated, may be exempt from CIT or personal income tax, provided certain requirements are met.

Non-realised gains on the transfer of shares or business assets may be deferred if the transaction is executed under the special tax-neutral regime applicable to corporate reorganisations, provided that the relevant trans-action meets the requirements to apply the tax-neutral regime. A neutral reorganisation may assume the following general forms:• a merger (upstream, downstream or sister mergers) between the target

company and the acquiring company;• a spin-off, whereby the target company is liquidated or not, and its

assets and liabilities are wholly or partially transferred to one or more acquiring companies (which may be a parent, a sister or a subsidiary company);

• a contribution in kind of a branch of activity or a universal transfer of assets of the target company to the acquiring company; and

• an exchange of shares between the target company’s shareholders and the acquiring company.

With regard to net operating losses (NOLs), a company resident in Portugal for tax purposes has the right to carry forward the losses to offset its tax-able income of the following 12 years. The deduction of NOLs is limited to 70 per cent of the taxable income assessed in the relevant tax year. The right to carry forward such losses may be forfeited if, at the end of a tax year, at least 50 per cent of the relevant company’s shares or voting rights (under a stock deal) were transferred, except where:• the ownership was converted from direct to indirect (and vice versa),

as well as when the ownership was converted among companies with the majority of the shareholding or voting rights held, directly or indi-rectly by the same entity;

• a tax-neutral reorganisation was carried out;• the change of the ownership results from the death of the previous

shareholder;• the acquirer previously held, directly or indirectly, at least 20 per cent

of the share capital or the voting rights, since the beginning of the tax year in which the NOLs were generated;


RFF & Associados – Tax & Business Law Firm PORTUGAL


• the acquirer is an employee or a board member of the relevant com-pany since, at least, the beginning of the tax year in which the NOLs were generated.

Notwithstanding the above, where at least 50 per cent of the share or vot-ing rights of a company are transferred and no exception is applicable, the relevant company may request an authorisation to the Minister of Finance to maintain the NOLs generated in previous tax years. The request should be submitted within 30 days of the change of ownership and should also evidence valid economic reasons underlying the transaction.

As to asset deals, it should be pointed out that such transactions may be qualified as a transfer of a business as a going concern. In this case, stamp tax may be levied at a 5 per cent rate on the value of the deal. Should the assets comprised in the deal be independently transferred, then stamp tax should not be due, since each transfer may be subject to VAT at the applicable rates, which currently range between 6 and 23 per cent.

Through an asset deal, the acquisition of real estate is subject to real estate transfer tax a rate of 6.5 per cent for urban property or 5 per cent for rural land and of 10 per cent if the acquirer is a company resident in a blacklisted country, territory or region as defined in Ministerial Order 150/2004 of 13 February. Stamp tax may also be due at a rate of 0.8 per cent, on the higher of the following amounts: the real estate’s tax value or the real estate’s transfer value.

Through a stock deal, the acquisition of a shareholding of at least 75 per cent in a limited liability company and general or limited partnership which owns real estate located in Portuguese territory may also trigger real estate transfer tax at the aforementioned rates.

Finally, and taking into consideration that after an acquisition, the acquiring company may assume the target company’s loans, it is important to highlight that should an amendment of the term of a loan agreement be carried out, the tax authorities may consider that a new financing subject to stamp tax was granted. The stamp tax rate applicable on loans depends on the term of the loan. Should the term of the loan be less than one year, the tax rate is 0.04 per cent per month, or fractions thereof. If the term of the loan ranges from one to five years, the tax rate is 0.5 per cent, and if the term of the loan is of five years or longer, the tax rate is 0.6 per cent.

However certain loans, such as loans made by shareholders to the company under the terms of the Portuguese Companies Code, are exempt.

2 Step-up in basis


According to Portuguese Generally Accepted Accounting Principles, which transposed the International Financial Reporting Standards regulations into the internal law, it is possible for the acquiring company to register the business assets acquired at their fair value. Hence, a step-up (or even a stepdown) may take place in the assets’ tax basis.

Every asset transferred must be identified, valued and recorded in the accounting records of the acquiring company. The acquisition value should be allocated considering the fair value of the assets and liabilities obtained, and any residual amount should be qualified as goodwill. Goodwill is not depreciable for tax purposes, unless an authorisation of the tax authorities was granted) and is subject to impairment tests on at least an annual basis.



As a general rule, and in order to carry out a debt pushdown upon an acqui-sition, a special purpose vehicle (SPV) may be incorporated in Portugal to perform the acquisition and subsequently, provided the requirements are met, apply the tax consolidation regime.

Under the tax consolidation regime, the parent company may file a CIT return for the whole group of companies (ensuring that the NOLs gen-erated in certain companies may offset the taxable income of other com-panies) and may also assess the limits on the deductibility of net financing expenses taking into consideration the tax group’s results.

In any case, provided that the special tax-neutral regime is applica-ble to the transaction, it may be possible to use either an SPV resident in Portugal for tax purposes or a company resident in another EU member state. Additionally, since 2015 there is also the possibility of opting for the tax consolidation regime and having a company resident in another EU member state as a parent company, provided additional requirements are met. Therefore, the decision on whether to incorporate an SPV or not should be specifically adapted to each transaction.

Furthermore, a foreign corporate investor may also wish to consider whether the incorporation of an SPV in Portugal would be able to be used as an investment gateway to other jurisdictions, such as Brazil, Angola, Mozambique, East Timor or any other country with which Portugal has entered into a double tax treaty (DTT). The company would then be enti-tled to benefit from the Portuguese participation exemption regime in its shareholdings abroad, provided the necessary requirements are met.

Other features set forth in the Portuguese tax framework may also be considered by foreign corporate investors, such as the share capital remuneration benefit (which, provided certain requirements are met, allows cash contributions made by shareholders after the incorporation or the increase of a company’s share capital to be remunerated at a rate of 5 per cent, which is also considered as a tax-deductible expense for this company) and the reinvestment of retained profits benefit (which, provided certain requirements are met, allows for small and medium-sized compa-nies to deduct from their CIT assessment 10 per cent of their retained and reinvested profits used in the acquisition of certain eligible assets used in their business activities, with a ceiling of 25 per cent of the CIT due).

Furthermore, we also highlight the tax regime applicable to compa-nies authorised to operate in the Madeira Free Trade Zone which may be considered one of the most beneficial tax regimes in force within the European Union (a CIT rate of 5 per cent on the taxable income), provided that the taxable income of the company established therein does not refer to transactions carried out with companies established in the Portuguese mainland.



Company mergers and share exchanges are both common operations used either to acquire target companies or to perform group reorganisations.

The CIT Code provides for a tax-neutral regime (as transposed from the EU Tax Merger Directive to domestic law) for both operations. The spe-cial tax-neutral regime may be applied to these operations provided that they are executed by companies resident in Portugal or companies resident in another EU member state.



Portuguese tax law does not provide benefits to an acquiring company issu-ing stock as consideration rather than cash. In such a transaction, benefits may arise to the target company or its shareholders, since the use of stock as consideration may enable the application of the tax-neutral reorganisa-tion regime.

6 Transaction taxes


A share deal does not trigger stamp tax or any other transaction tax, except for the acquisition of a shareholding of at least 75 per cent in a limited liabil-ity company and general or limited partnerships that own real estate (see question 1).

Conversely and as previously mentioned, through an asset deal quali-fied as a transfer of a going concern, stamp tax may be levied at a rate of 5 per cent on the value of the deal. If the asset deal cannot be considered as a branch of activity, stamp tax should not be triggered, but the transfer of the assets should be subject to VAT at the applicable rates, which currently range between 6 per cent and 23 per cent.




The transfer of real estate is generally subject to real estate transfer tax and stamp tax on the higher of the following amounts: the real estate’s tax value or the real estate’s transfer value.

Accordingly, real estate transfer tax is levied at 5 per cent for rural land, a maximum rate of 6.5 per cent for urban immoveable properties and a rate of 10 per cent when the acquirer is a company resident in a blacklisted country, territory or region as defined in Ministerial Order 150/2004 of 13 February. Simultaneously, stamp tax is, as a general rule, levied at a rate of 0.8 per cent.

Please note that the transactions may also be subject to notarial charges.

As to corporate reorganisation operations such as mergers, the Portuguese tax framework also provides for certain benefits in the form of exemptions on real estate transfer tax, stamp tax and notarial charges, pro-vided certain requirements are met. In order to benefit from these exemp-tions, the company has to submit a request to the Minister of Finance, accompanied with certain elements (eg, an economic study on the advan-tages of the operation) and, in certain cases, may also have to be accompa-nied by a decision of the Competition Authority.



The right to carry-forwards NOLs may be forfeited if, at the end of a tax year, at least 50 per cent of the target company’s shares or voting rights are transferred. In order to avoid said forfeiture, the Minister of Finance has to authorise the maintenance of the NOLs generated in previous tax years, after the target company submits a requirement for this purpose (see question 1).

The tax-neutral regime applicable to corporate reorganisations allows for the maintenance of the NOLs generated in previous tax years, along-side with other tax benefits and the net financial costs thresholds yet to be deducted by the target entity, to be transferred to the acquiring company, provided certain conditions are met. However, if the right to carry forward NOLs is forfeited, any related deferred tax assets should also be lost.

If the target company holds any VAT credits, said credits should not be forfeited upon a change of ownership or the transfer of business assets.

Within a merger of the target company into the acquiring company, a request to the Portuguese tax authorities may be presented in order to carry forward VAT credits previously held by the target company. Should this be the case, the acquiring company is also entitled to pursue a request for the refund of the target company’s advanced CIT payments within 90 days following the merger.

8 Interest relief


Interest borne by an acquiring company may be considered as tax- deductible for tax purposes provided that said interest refers to a loan incurred that was deemed necessary for obtaining income subject to CIT. However, interest expenses are only deductible up to the highest of the fol-lowing amounts:• €1 million; or• 30 per cent (there is a transitory period whereby the limit in force is

50 per cent for 2015, 40 per cent for 2016 and 30 per cent for 2017 and subsequent years) of the ‘tax EBITDA’ (ie, the accounting EBITDA minus, inter alia, gains and losses arising from changes in the fair value of assets that are not considered for tax purposes, impair-ments and investment reversals that cannot be depreciated, income and expenses related to equity that benefited from the participation exemption regime).

These limits are not applicable to entities subject to supervision of the Bank of Portugal and the Portuguese Insurance Institute, and branches of financial, credit or insurance companies whose head office is in another EU member state.

The amount of financial expenses not deductible as a consequence of exceeding the aforementioned limits may be carried forward and deducted in the following five years (within the applicable limits in each year).

Conversely, when the amount of financial expenses does not exceed the same limits referred to above, the amount of the limit that was not deducted may be available in the following year for deduction, according to the first-in first-out method, within the following five years.

The Portuguese transfer pricing rules establish that the interest rates applicable to loans granted between related parties should comply with the arm’s-length principle. Otherwise, the Portuguese tax authorities may issue an additional tax assessment.

Interest payments made by a company resident in Portugal for tax purposes either to a resident or a non-resident company are, according to the general rules, subject to withholding tax at a rate of, as a general rule, 25 per cent.

However, said interest payments may benefit from a reduced with-holding tax rate of between 5 and 15 per cent, through the application of a DTT entered into between Portugal and the jurisdiction where the benefi-ciary of the interest payments is established. The interest payments may also be exempt from withholding tax provided that the requirements to apply the EU Interest and Royalties Directive are met. In their cases, the company has to comply with certain ancillary obligations.

As an anti-abuse rule, interest income is subject to a withholding tax rate of 35 per cent if paid or made available in an account opened in the name of one or more holders, on behalf of one or more unidentified third parties, and the beneficial owner is not identified, or when such beneficiary is resident in a blacklisted country, territory or region.

An acquiring corporation may also consider the application of the tax consolidation regime. Among others, the main requirements for the appli-cation are that the parent company holds, directly or indirectly, at least 75 per cent of the share capital and more than 50 per cent of the voting rights of the participating companies and all companies are subject to CIT at the highest rate in force (currently 21 per cent). As referred to in question 3, under the tax consolidation regime the parent company will be able to use the NOLs generated in group companies to offset the taxable income of other companies within the same tax group. The 70 per cent limitation on the deduction of NOLs is also applicable to the tax groups’ taxable income.

In any case, please be advised that there is a general anti-avoidance clause that qualifies as invalid for tax purposes any act or transaction car-ried out with the sole purpose of obtaining a reduction, elimination or deferral of the tax which would otherwise be due in respect of similar acts or transactions, or even a tax advantage that would not be obtained using a similar structure. Furthermore, apart from such general anti-avoidance clause, there is also a regime to avoid aggressive special tax planning, under which certain reporting obligations may apply.



Either on a stock deal or an asset deal and both from an acquiring and a target company’s perspective, the acquisition process usually starts with a due diligence procedure in order to identify, analyse, quantify and, possi-bly, reduce or exclude any tax contingencies.

Based on the eventual findings, the acquiring company may ensure that the liabilities previously identified will be duly covered with the con-tractual basis being the protection clauses usually inserted in the asset or share purchase agreement.

It is the market practice to include the tax contingencies within the rep-resentations and warranties, gross-up clauses, specific indemnities, deed of tax covenants, escrow accounts and dispute resolution clauses. In the event an indemnity received is regarded as consideration resulting from the acquisition, VAT should be due on said amount at a 23 per cent rate.





10 Restructuring


A post-acquisition restructuring may be carried out through the com-mon corporate reorganisation operations, namely, mergers, spin-offs and exchanges of shares or contributions in kind. As referred to in question 4, these transactions may be executed under the special tax- neutrality regime.

Please note corporate any reorganisation should always be sustained by valid economic reasons and not merely a tax reason.

11 Spin-offs


Spin-offs may be executed according to the special tax-neutral regime applicable to corporate reorganisations, provided that the following requirements are met:• the companies to be subject to a spin-off must be resident in Portugal

for tax purposes being subject to and not exempt from CIT, or resident in another EU member state, fulfilling the requirements set forth in article 3 of the EU Mergers Directive;

• the spin-off should evidence valid economic reasons and not be exe-cuted having as a main or sole purpose tax reasons;

• whenever the shareholders of the target company receive shares of the acquiring company as consideration for the transaction, and even-tually an additional payment in cash, said payment cannot exceed 10 per cent of the nominal shares received;

• the acquiring company should maintain the assets and liabilities trans-ferred in Portugal and at the same tax value registered in the target company;

• the depreciation and amortisation methods, as well as the inventory adjustments, impairment losses and provision regime previously used by the target company should be maintained for tax purposes; and

• the acquiring company’s taxable income should be assessed as if no spin-off were executed.

Certain formal requirements should also be met in order to apply the spe-cial tax-neutral regime to a spin-off.

A spin-off may also be executed without triggering transfer taxes (real estate transfer tax, stamp tax and notarial charges), provided certain requirements are met. In order to benefit from these exemptions the com-pany has to submit a request to the Minister of Finance, accompanied by certain documents such as an economic study on the advantages of the operation (see question 6).



The migration of residence of a Portuguese company should trigger Portuguese CIT liability. The taxable income is assessed in the year in which the company migrates out of Portugal, and includes all positive and negative differences between the market value and the tax value of the company’s assets, even if not accounted for.

Should the company opt for the migration to another EU member state or to a country within the EEA (provided said country is subject to exchange of information obligations with Portugal similar to those estab-lished in the EU), the CIT assessed by the positive balance of the market value and the tax value of the company’s assets may be paid as follows:• immediately, for the whole amount or through instalments;• in the year following the one in which the company migrated; or• in five annual instalments, each corresponding to one-fifth of the

tax assessed: payments begin in the year following the migration of residence.

If the company opts for one of the deferred payments possibilities, interest should be due as of the date from which the immediate payment should have been carried out until effective settlement. The tax authorities may request a bank guarantee corresponding to 125 per cent of the tax due.

The above-mentioned regime is not applicable to assets and liabilities kept in Portuguese territory and allocated to a permanent establishment of the migrated company in Portugal. In this regard, it is important to note the following:• the assets and liabilities maintained should have the same tax value

registered in the migrated company before the migration;• the depreciation and amortisation methods, as well as the inventory

adjustments, impairment losses and provision regime previously used by the migrated company should be maintained for tax purposes;

• the permanent establishment’s taxable income should be assessed as if there were no migration; and

• the operation has valid economic reasons and its (or one of its) main objective or objectives is not tax evasion.



As a general rule, interest and dividend payments made by Portuguese resident companies to non-resident companies without a permanent establishment in Portugal are subject to final withholding tax at a rate of 25 per cent. With reference to dividends, the withholding should be per-formed either at the moment at which the payment is executed or at the moment at which the dividends are made available to the shareholders. In the case of interest, the withholding should be performed at the moment at which the interest is paid or at the interest maturity date.

Notwithstanding, the withholding tax rates applicable to interest and dividend payments may be reduced through the application of a DTT if, prior to the payment, the non-resident beneficiary of the payments pro-vides the Portuguese company with an official form duly certified by the tax authorities of the beneficiary’s residence jurisdiction. The DTT tax treaty rates for interest and dividend payments usually range between 5 and 15 per cent.

In the specific case of interest payments and pursuant to the EU Interest and Royalties Directive, an exemption of withholding tax is applied provided that:• the non-resident company is subject to and not exempt from one of the

taxes on income listed in the Annex to the EU Interest and Royalties Directive;

• the non-resident company takes one of the corporate forms listed in the Annex to the EU Interest and Royalties Directive;

• the non-resident company is considered as resident for tax purposes in another EU member state according to the application of a DTT;

• the non-resident company qualifies as an associated corporation by holding at least 25 per cent of the share capital in the paying company, or by being at least 25 per cent held by the paying company, or by both being at least 25 per cent held by a third company;

• the non-resident company is the beneficial owner of the income; and• the shareholding is held for a minimum period of two years.

With certain adjustments to these requirements, such exemption may also apply to interest payments made to Swiss entities.

Interest payments made to non-resident companies complying with these requirements, but whose share capital is mostly held, directly or indi-rectly, by entities resident in non-EU countries should not be exempt from withholding tax, except where evidence is provided that the structure was not designed with the main objective of benefiting from a reduced rate.

If an interest payment does not comply with the arm’s-length princi-ple, the excess amount is excluded from the exemption on withholding tax.




In order to benefit from the withholding tax exemption under the EU Interest and Royalties Directive, the non-resident beneficiary of the pay-ments provides the Portuguese company with an official form duly certi-fied by the tax authorities of the beneficiary’s residence jurisdiction.

With reference to dividend payments and pursuant to the EU Parent-Subsidiary Directive, dividend payments made by a Portuguese company to a non-resident company may be exempt from withholding tax provided that:• the non-resident company is resident in another EU member state or

an EEA country (provided said country is subject to exchange of infor-mation obligations with Portugal similar to those established in the EU) or in a country that has a DTT in force with Portugal that foresees exchange of information procedures;

• the non-resident company holds at least 5 per cent of the Portuguese company for an uninterrupted period of 24 months;

• the non-resident company is subject to and not exempt from one of the taxes on income mentioned in the EU Parent-Subsidiary Directive or, in the case of companies resident in an EEA country or a country with a DTT in force with Portugal, a similar income tax not lower than 60 per cent of the Portuguese CIT rate in force (ie, 12.6 per cent for 2015);

• the non-resident company takes one of the corporate forms listed in the Annex to the EU Interest and Royalties Directive; and

• the non-resident company provides evidence prior to the dividend pay-ments that it qualifies for the application of the EU Parent-Subsidiary Directive through a declaration issued and authenticated by its juris-diction’s tax authorities.

Such exemption of withholding tax may apply to interest payments made to Swiss entities.

Additionally, it is important to highlight the participation exemption regime applicable to dividends paid by non-resident companies to compa-nies resident in Portugal for tax purposes, as referred to in question 1.

Interest and dividend payments are subject to a final withholding tax of 35 per cent whenever paid or made available in an account opened in the name of one or more holders, on behalf of one or more unidentified third parties, and the beneficial owner is not identified, or when the beneficiary is resident in a blacklisted country, territory or region.



In addition to the tax treatment of interest and dividend payments men-tioned in question 13, royalties may also be an alternative to extract prof-its which may benefit from the EU Interest and Royalties Directive or the reduced rates established in the DTTs entered into by Portugal and the relevant jurisdiction.

An acquiring company may also consider, subject to analysis on a case-by-case basis, the reimbursement of supplementary capital contributions, which may be exempt from taxation.


15 Disposals


From a seller’s perspective, the disposal of a Portuguese target company may be carried out through the disposal of its business assets, the stock in the target company or the stock held in a foreign holding company.

The most appropriate way to carry out a disposal should be analysed on a case-by-case basis, depending largely on the intentions of both the buyer and the seller, as well as on the tax attributes of the assets or stocks to be transferred.



The Portuguese Statute of Tax Benefits establishes that capital gains aris-ing from the sale of stock in a Portuguese company obtained by a non- resident company, without a permanent establishment in Portugal to which the gains may be allocated, are exempt from CIT, except if:• more than 25 per cent of the share capital of the non-resident entity is

held, directly or indirectly, by Portuguese resident entities;• the non-resident company is not resident or domiciled in a blacklisted

country, territory; or• the capital gains arise from to the sale of stock in a Portuguese com-

pany 50 per cent or more of whose assets derive from real estate located in Portugal or from the sale of stock in a Portuguese holding company (SGPS) which controls a Portuguese company 50 per cent or more of whose assets are real estate located in Portugal.

Additionally, please note that most of Portugal’s DTTs provide that the capital gains arising from the disposal of shares should be taxed at the juris-diction where the transferor is resident, with exceptions to the disposal of shares in companies whose assets are mainly composed by real estate in Portugal.

There are no specific tax rules applicable to energy and natural resources companies.

Update and trends

Portugal has a Golden Visa regime in force, which grants temporary residence permits to foreign individuals who invest in Portugal. In order to be eligible, a foreign individual would have to invest in Portugal, directly or indirectly (through a company) through the transfer of at least €1 million capital; the creation of at least 10 jobs in Portugal or the acquisition of real estate with a value of at least €500,000.

The investment activities to qualify for a Golden Visa have been enhanced and now also include:• the acquisition or refurbishment of real estate in Portugal in an

amount of at least €350,000 (provided the property is located in an urban rehabilitation area or is at least 30 years old);

• the transfer of at least €350,000 capital to be invested in research activities;

• at least €250,000 to be invested in artistic production, recovery or maintenance of national cultural heritage; and

• €500,000 for the purchase of investment units in venture capital funds used to capitalise small and medium-sized enterprises.

Should the Golden Visa be granted, the individual may also apply for the family reunification visa, allowing family members to benefit from the Golden Visa regime.

Furthermore, the European Union has recently approved the extension of the special tax regime applicable to corporations authorised to operate in the Madeira Free Trade Zone, which has already entered into force.

Accordingly, companies that obtain an authorisation to operate in the Madeira Free Trade Zone between 2015 and 2020 may benefit from the special tax regime until 2027. The newly introduced extension also has new features such as a personal income tax and a corporate income tax exemption granted to shareholders on income arising from dividends to which the 5 per cent CIT rate was applied and income arising from, inter alia, shareholder loans or capital allowances.

Companies authorised to operate in the Madeira Free Trade Zone before 2015 may also benefit from the new tax regime applicable to those authorised as of 2015, provided the requirements to apply the new regime are also met.






Gains arising from the disposal of shares in a Portuguese company may be exempt from taxation provided that the requirements to apply the participation exemption regime or the special tax-neutral regime applica-ble to corporate reorganisations are met. Gains arising to a non-resident

company from the disposal of shares in a Portuguese company may also be exempt provided that no exception to the rule set forth in the Portuguese Tax Statute of Tax Benefits applies (see questions 1 and 16).

A deferral of tax on gains arising from the disposal of business assets may also be achieved provided that the reinvestment regime is applica-ble following the relevant transaction (allowing for the deferral of at least 50 per cent of the gains) or provided that the special tax-neutrality regime is applicable to a corporate reorganisation.

Rogério M Fernandes Ferreira [email protected] Mónica Respício Gonçalves [email protected] Rita Arcanjo Medalho [email protected]

Praça Marquês de Pombal No. 16, Floor 5 (reception)1250-163 LisbonPortugal

Tel: +351 21 5 915 220Fax: +351 21 5 915 244www.rfflawyers.com


RUSSIA Pepeliaev Group


RussiaPetr Popov and Alexander KovalevPepeliaev Group




Russian law recognises an acquisition of stock or of another ownership interest (a share deal) as well as an acquisition of the assets and liabilities of a business.

The latter type takes the form of the acquisition of what Russian law terms ‘an enterprise as a property complex’ (further referred to as an ‘enterprise’). However, it is poorly regulated both in civil law and in tax law, and is extremely rarely used in practice, so it cannot be recommended. One example of the rules applicable to the acquisition of an ‘enterprise’ is that, if the contractual purchase price of the ‘enterprise’ is less than the book value of its net assets, the difference is recognised as income on the part of the buyer, regardless of the circumstances that led to such difference. In other words, this rule applies even if the losses could reasonably have been anticipated, which is a valid commercial reason for the contractual price to be lower than the net assets. This rule effectively makes buyers pay tax for acquiring an ‘enterprise’ with an anticipated loss, which is contrary to the underlying economic essence of such transaction.

If a share deal is not viable, businesses choose, as an alternative, to dis-pose of certain types of assets (not as a property complex). In such a case, the existing contractual arrangements that relate to the enterprise need to be concluded anew.

For tax purposes, there are two types of share deal, depending on its legal form. An acquisition of stock is regulated within the framework of stock trading, together with trading in other securities (Tax Code, article 280). An acquisition of other types of ownership interest (mainly membership shares in limited liability companies) is regulated together with the trading of property rights. In both cases, expenses may be rec-ognised only when the stock or shares are disposed of, or, alternatively, if and when the company in which the stock is held goes into liquidation. The expenses cannot be recognised upon purchase or by way of depreciation. The main difference between securities trading treatment and property rights treatment is in pricing limitations for tax purposes. These are gener-ally viewed as more stringent in the case of securities trading.

It is also uncommon for a partnership without the status of a legal entity to be established, despite Russian law now providing for two dif-ferent types of partnerships – a ‘common’ partnership and an investment partnership. The lack of enthusiasm for transactions involving ‘common’ partnerships is largely explained by the prohibition on partners recognising a tax loss in a ‘common’ partnership. Meanwhile, the scope for applying investment partnerships is limited (they are encountered mainly in stock trading).

There are various common means of restructuring a legal entity (split-up, spin-off, legal merger and amalgamation among them) and these do not usually result in any tax being levied, while the expenses and the tax losses may be transferred to the legal successor. At the same time, such a restructuring may prompt a field tax audit, which explains why share deals or asset sales tend to be chosen instead of such a restructuring.

2 Step-up in basis


There is no depreciation of either shares or an ownership interest, and nor is there any possibility to recognise underlying assets of an entity in which stock or shares are acquired, without liquidating such entity or otherwise transferring its assets. This means that a purchaser cannot obtain a step-up in basis in the event of a share deal. Russian tax law nowadays strictly relates to historical acquisition cost, not exceeding fair value, as the basis on which investment expenses are recognised. Previously there was a pos-sibility to step up acquisition cost by way of a revaluation when a capital contribution was made, but this loophole has now been closed.

There is a possibility to depreciate goodwill when an ‘enterprise’ is acquired. If the contractual purchase price of an ‘enterprise’ exceeds the book value of its net assets, the difference represents a surplus expense on acquiring goodwill, which is recognised by being depreciated over a period of five years. However, such possibility is largely theoretical, given that deals of this type are very rare for the reasons stated above.

Depreciation of tangibles or intangibles is allowed if they are bought as such, not within an ‘enterprise’ and not packed in a legal entity in which stock or shares are acquired.



A foreign company that has a permanent establishment in Russia, as well as a foreign entity that is managed from Russia and therefore deemed to be a Russian tax resident, is in principle treated for tax purposes on an equal footing with a Russian entity. A permanent establishment is understood in Russia broadly within internationally recognised guidelines set out by the OECD, with the criteria of permanent base and dependent agent being used. The criteria of management are tied to day-to-day management (Tax Code, article 246(2)) rather than to strategic management and control stated in the OECD guidelines. For purposes of this chapter, a foreign com-pany is meant in a narrow sense as a foreign company without a permanent establishment in Russia, and not being a Russian tax resident.

If an acquisition is undertaken by a foreign entity established in a jurisdiction with which Russia has a double tax treaty, then such acquiring entity may use treaty benefits for certain types of income, depending on the treaty and provided that the foreign entity in question is the beneficial owner of the income. Such benefits may in some cases mean that the tax rate on the relevant type of income is lower than the general tax rate of 20 per cent applicable to a Russian entity, or that certain income is exempted from tax.


Pepeliaev Group RUSSIA


At the same time, a Russian acquiring entity can apply a participation exemption – that is a zero per cent rate on dividends – subject to certain conditions (having held ownership for a year or more and having a share of more than 50 per cent in both the capital and in dividends; other conditions for this exemption apply only to dividends from abroad).

It should be noted that legal mergers and amalgamations are possible in Russia only between Russian entities, which means that a foreign acqui-sition vehicle cannot take part in such a restructuring. In any case, when a typical leveraged buyout takes place (the cost of the capital raised for acquisition purposes being transferred to the acquired entity), there can be no realistic expectation of emerging unscathed from a tax audit. After all, the Russian tax authorities are likely to view the recognition of interest by the acquired entity in such a case as economically unjustified, citing that an acquired entity could have no business purpose to acquire itself.

Also, Russian transfer pricing rules apply to most transactions between Russian and foreign-related entities (a rather low threshold of 60 million roubles applies to some of these), while between Russian enti-ties the threshold is generally at the level of 1 billion roubles. Thin capitali-sation rules apply to transactions that involve foreign entities as creditors or guarantors.

For these reasons, the choice of acquisition vehicle should be deter-mined on a case-by-case basis.



Share deals are much more common in Russia than legal mergers (when several companies merge, ceasing to exist and with a new company being established) and amalgamations (when one or more entities merge into another entity that keeps its legal existence), despite mergers being tax-free transactions. Amalgamations are more common than legal mergers, as under an amalgamation one entity may remain legally in existence. Share exchanges, which are treated as capital contributions in the form of shares or as share sales depending on the circumstances, are also not very common. The reason for this is not that such transactions are poorly regulated, as is the case with the acquisition of an ‘enterprise’, but rather because there is a widespread view that these transactions are complex from a practical standpoint. Efforts have been made to simplify the regula-tion of mergers, and the measures taken are expected to make them more usable in practical terms.



Issuing stock rather than cash as consideration affords the acquirer no tax benefit that would be universally recognised in the Russian business or legal community. The selling party that receives newly issued stock or shares instead of cash may, however, treat such transaction as capital contribution, which is tax free, instead of a taxable sale for cash. Such tax treatment may be beneficial for the selling party. If the selling party itself also issues stock or cash that is paid for with the acquirer’s stock or cash, neither party recognises a taxable sale. At the same time, under Russian civil law, a capital contribution in the form of stock or shares is restricted in some cases, usually specified in the articles of incorporation (referred to in Russian as the ‘charter’) of an entity.

6 Transaction taxes


Stamp duty is applied when new stock is issued. Such duty is payable by the issuer before the regulator allows the issue to take place. The amount of such duty is several dozen thousand or hundred thousand roubles depend-ing on circumstances, which is less than a thousand or several thousand US dollars. Such duty replaced the securities tax that previously existed. There are also registration duties if changes are made to the registry of legal enti-ties, and notary’s fees are payable when an ownership interest in a limited liability company is transferred, though the amount of this is generally viewed as fairly negligible.



Net operating losses, tax credits or other types of deferred tax asset are not subject to limitations after a change of control of the target or after changes in shareholdings. There is no special tax treatment of transactions with insolvent entities, the only exception being that contractual interest on claims against such entities is replaced under Russian insolvency law with statutory interest. For tax purposes, this is recognised only if and when such amounts are actually received, which is a rare occurrence. However, in Russia acquisitions of insolvent entities are uncommon, and they happen primarily in the banking sector (under special legislation and supervision).

8 Interest relief


As noted above, in the case of a debt pushdown, the Russian tax authorities are likely to disallow interest. The thin capitalisation rules (Tax Code, arti-cle 269(2)), based on a 3:1 leverage limit (12.5:1 for banks and leasing com-panies), disallow excessive interest and treat it as dividends. Such rules apply to cases where foreign related entities act as creditors or guarantors. These rules were rarely applied before 2012, but the case law has since undergone a complete about-turn and currently such cases are resolved mainly in favour of the tax authorities. Legislative changes are anticipated to soften the tax treatment of arm’s-length loans guaranteed by related for-eign entities, but no other relief is expected in the near future.

Update and trends

Several key trends are to be noted in the field of taxing inbound investments.

Russian tax law is becoming much more ‘internationalised’. Several new legislative blocs (eg, on transfer pricing and beneficial ownership of income) have been introduced that are clearly influenced by OECD standards. Russian tax authorities have declared that treaty shopping, transfer pricing manipulations and other abusive means of international tax planning will not be tolerated. Rather unfortunately, some of these new rules and practical concepts do have drawbacks and are applied in the harshest possible forms.

Also, various special ‘anti-crisis’ tax schemes are being introduced for inbound investment. These special schemes, however, are applied by the regional authorities and mainly relate to the taxation of day-to-day operations rather than the taxation of investment itself and of financing.

The Civil Code of Russia has recently been systematically overhauled, which is not yet reflected in corresponding tax treatment. An example of this was mentioned above – termination fees and indemnities were recently introduced in the Civil Code – but as yet, there is no clear tax treatment of these.


RUSSIA Pepeliaev Group




There are several forms of protection available for the acquirer under Russian civil law: damages, reduction of the price, penalties, refusal to per-form and termination when the other party commits a serious breach, and the right to demand specific performance.

Recent amendments to the Russian Civil Code, which came into force on 1 June 2015, provide for ‘representations as to circumstances’, which, in general, are similar to the concept of representations under English law. If such representations are made and breached, the non-breaching party may recover losses (or penalties) or terminate the contract, or both. If the contract is cancelled or invalidated, this does not in itself prevent losses or penalties from being recovered, while recovery of losses and penalties is no barrier to specific performance.

The same amendments to the Civil Code contain provisions regarding ‘recovery of losses’, which are in essence similar to indemnities in English law. It may be agreed that one party is to compensate monetary losses of the other party that arose when certain conditions occurred and that do not relate to the breach of its obligations. There are also similar new provisions on termination fees in a case where a contract is cancelled.

Under double tax treaties, monetary damages and penalties are, as a rule, not taxable. At the same time, if there is no treaty exemption, pen-alties paid to a foreign entity may be subject to withholding tax under the Russian Tax Code at a rate of 20 per cent. Between Russian entities, monetary damages and penalties are taxed when these are admitted by the debtor or awarded by a court of law, while indemnities and termina-tion fees are taxable, but the taxable event is not yet clearly stated. At the same time, due to the difference in the civil law status of indemnities and termination fees compared with damages or penalties, these new types of protective payments may in practice be taxed in the same way as pay-ments that they substitute from an economic point of view, that is not only as damages or penalties but also as a regular income that might have been but was not received, depending on the circumstances. The exact tax treat-ment of these new protective payments currently remains unknown.


10 Restructuring


There is no known post-acquisition restructuring that is typical in Russia.

11 Spin-offs


Under Russian tax law, any spin-off is tax-neutral. At the same time, while, under other types of restructuring, losses can be carried forward by the legal successor within a 10-year limit applicable to the restructured entity, the Russian Ministry of Finance took the view that in a spin-off no carry-forward to a newly established entity is possible. Only the previously exist-ing entity can carry its losses forward. Moreover, all accounting documents must be preserved to confirm these losses.

Also, if a restructured company did not conduct any active business and was mainly a vehicle for assets, there is emerging case law accord-ing to which a restructuring is reclassified as an asset sale, subject to VAT. To carry loss forward for tax purposes, to obtain another tax benefit or to evade regulatory restrictions cannot stand as the principal business pur-pose of a restructuring. The losses incurred from activity that is exempted from tax may not be carried forward in any case.



Russian law does not provide for the possibility that a legal entity regis-tered in Russia may migrate to another jurisdiction (corporate emigration), or that a foreign legal entity may migrate to Russia (corporate immigra-tion). This leaves liquidation or another transfer of assets as the available options. The sole exception for corporate immigration applies in cases where there has been a particular territorial change not recognised by the international community.



Under domestic Russian rules, dividends paid to foreign entities are sub-ject to withholding tax at source at a rate of 15 per cent, while interest is taxed at 20 per cent. As noted above, double tax treaty relief may be appli-cable, subject to conditions (mainly the beneficial ownership of income requirement, but other requirements may also apply, relating in the case of dividends mainly to the proportion of ownership and to amounts invested).

Petr Popov [email protected] Alexander Kovalev [email protected]

Floor 15 Entrance 7, World Trade Centre-II12 Krasnopresnenskaya nabMoscow, 123610Russia

Tel: +7 495 967 0007Fax: +7 495 967 [email protected]


Pepeliaev Group RUSSIA




There are no Russian-specific tax-efficient means of extracting profits from Russia. As with many other jurisdictions, dividends are not deductible and are nearly always taxable at source; interest is deductible subject to restric-tions that arise from business purpose, arm’s-length nature and the thin capitalisation rules; royalties are deductible subject to business purpose and arm’s-length restrictions; and treaty benefits may apply subject to con-ditions, of which the main one is beneficial ownership of income.


15 Disposals


An asset deal is rarely used as a form of selling a business, as it is usually subject to VAT, and, as noted above, the sale of an ‘enterprise’ is regulated very poorly. The sale of business assets (not as a complex) is usually con-sidered when the risks of a share deal are too high or cannot be evaluated.

A sale of shares in a foreign company is more widely used than in a Russian company, mainly because this allows foreign contract law, usually English law, to be used and also because it does not automatically trigger tax liability that would otherwise arise in the case of a sale of shares in an entity whose assets primarily comprise Russian real estate. However, thanks to recent changes, Russian civil law has become more competitive, and Russian tax law currently states that the tax is payable on sale of share

in any entity, Russian or foreign, whose assets directly or indirectly consist primarily of Russian real estate. For this reason, sales of shares in Russian entities may become more common.



As noted above, a non-resident company is liable to tax if it sells its shares in any entity whose assets directly or indirectly consist primarily of Russian real estate.



There is an exemption – or, more precisely, a tax rate of zero per cent – for income generated from a sale of stock or shares, provided that the stock or shares that are sold were acquired after the beginning of 2011 and held by the seller for at least five years. For stock there are additional conditions, each of which is sufficient:• the stock was and is not publically traded;• the entity in which stock is sold belongs to the high-tech (innovations)

sector; or• the entity’s assets do not directly or indirectly consist primarily of

Russian real estate.


SPAIN Uría Menéndez


SpainGuillermo Canalejo Lasarte and Alberto Artamendi GutiérrezUría Menéndez




The answers will focus on the Spanish tax treatment applicable to acqui-sitions carried out in the Spanish territory other than the Spanish regions comprising the Spanish Basque Country and Navarre. Please note that the local governments of the latter regions have enacted specific tax laws, including corporate income tax laws which, although usually similar, may include certain relevant differences from the general tax laws applicable in Spain.

On an asset deal which does not fall within a special tax regime:• the purchaser benefits from a step-up in basis in the acquired assets,

for tax and accounting purposes;• any embedded financial goodwill resulting from the acquisition will be

tax deductible; and• generally, interest paid on debt undertaken to finance the acquisition

will be directly offset against profits generated by the acquired assets.

The above features will not be immediately available, or may not be avail-able at all, to a purchaser acquiring stock in a company.

Other differences may be noted. When acquiring the stock in a com-pany, all tax credits and liabilities are transferred with the acquired com-pany (although an anti-abuse provision may apply to net operating losses if the acquired company is inactive; see question 7). On the contrary, on the transfer of a business concern such net operating losses and generic tax credits and liabilities will remain with the transferring company.

Although, on the transfer of a business concern, a joint liability with the seller of any tax liabilities related to the transferred business will fall on the purchaser, such liability may be limited by law by requesting a cer-tificate of tax debts related to the acquired business from the Spanish tax authorities.

Also, one of the main differences in the tax treatment between the acquisition of stock in a company and the acquisition of business assets and liabilities is indirect transaction.

Under article 108 of Law 24/1988 of 28 July on the Securities Market, the transfer of stock is generally subject to but exempt from value added tax (VAT), transfer tax and stamp duty.

In spite of this, article 108 contains an anti-avoidance provision on the indirect acquisition of Spanish real estate assets pursuant to which the transfer of shares outside regulated markets is subject to indirect tax (VAT plus stamp duty or transfer tax) if the acquisition of shares is deemed to have been carried out for the purposes of unduly avoiding the indirect tax due on the direct acquisition of the underlying Spanish real estate assets owned by the target company. It will be presumed that an avoidance of tax exists when acquiring control (ie, more than 50 per cent of the share capi-tal) of a ‘real estate company’ or a holding company that holds a share in ‘real estate companies’ or by increasing its share in such a controlled com-pany, when the underlying real estate assets are not being used in a trade or business. A company is deemed a ‘real estate company’ when more than 50 per cent of the company’s assets are made up of real estate assets located in Spain.

On the contrary, the transfer of business assets is typically subject to 21 per cent Spanish VAT, which may be refundable if the assets are used in a VATable trade or business. Exceptionally, the transfer of a business concern, when the relevant assets and liabilities constitute an autonomous economic unit, will be exempt from VAT but subject to non-refundable transfer tax on the value of any acquired Spanish real estate assets. In this context, it would then be preferable to acquire the shares in the company holding the Spanish real estate assets, assuming the transaction can be structured in such a way that it would not be viewed as tax avoidance in the context of the above-mentioned article 108.

2 Step-up in basis


Generally, the purchaser is entitled to a step-up in tax basis in an asset deal, when it has acquired all or part of the business’ assets and liabilities. Exceptionally, no step-up will exist if the acquisition has been carried out as a corporate restructuring benefiting from the tax-neutral treatment of the EU Directive 90/434/EEC, on the common system of taxation appli-cable to mergers, divisions, transfer of assets and exchanges of shares con-cerning companies of different member states (Merger Directive). This tax regime is laid down in Chapter VIII of Title VII of Legislative Royal Decree 4/2004 of 5 March, approving the consolidated Corporate Income Tax Law (CIT Law). In such a case, the tax basis of the seller of the assets subject to the transaction will be rolled over into the purchaser.

No step-up on the underlying asset will exist for tax purposes on the acquisition of shares of the target company. However, a step-up in basis of the target company’s assets may be achieved through the upstream merger of the target company into the Spanish company’s purchaser, to the extent that the merger falls within the protection of the Merger Directive and is subject to fulfilment of additional requirements. Such merger must be based on valid business reasons, which existence would likely be chal-lenged by the Spanish tax authorities if the Spanish acquiring company is a special purpose vehicle incorporated for the purpose of acquiring (and merging with) the target company.

Goodwill resulting from the acquisition of assets forming a business concern, or a result of a merger (subject to further requirements) may be depreciated for tax purposes at an annual rate of 5 per cent (1 per cent for tax years 2014 and 2015), while other intangible assets can also be tax depreciated. In addition, accounting losses resulting from an impairment test on the assets would be tax deductible.

Spanish tax regulations no longer allow the tax depreciation of stock.However, as a consequence of recent reform, the deductibility of

goodwill and the step-up will only apply to mergers undertaken in tax peri-ods starting before 1 January 2015 or when the shares in the acquired com-pany to be merged were acquired from an acquirer whose tax period had not started after 1 January 2015.


Uría Menéndez SPAIN




When acquiring from within Spain, a Spanish acquisition company or a Spanish permanent establishment may be used.

Assuming the acquired assets and liabilities are to be used in a trade or business which gives rise to a Spanish permanent establishment of the purchaser, in general terms the tax treatment of such permanent establish-ment will be similar to that applicable to a Spanish resident acquisition company. This is especially true when the acquisition company is resident in an EU member state or in a jurisdiction that has entered into a tax treaty with Spain.

In particular, a Spanish permanent establishment may take on third party tax-deductible debt to finance the acquisition and may form a Spanish CIT group with the target company. However, the Spanish per-manent establishment may not deduct interest paid to its head office, although it may deduct interest paid to other related party companies (sub-ject to the interest barrier rule limitations, as explained in question 8, the new limits on leverage buyouts, as explained below, and compliance with transfer pricing rules).

However, experience states that acquisitions of Spanish businesses by non-Spanish resident purchasers are generally acquired through the incor-poration of Spanish resident acquisition companies (local acquiring com-pany). This may result from common business practice, as it is expected that a local company would be incorporated to either acquire or start a new business in the local jurisdiction.

In addition, the use of a local acquiring company will always be more tax efficient when the transaction does not give rise to a Spanish permanent establishment, which would typically be the case when acquiring stock in a target company or assets which do not constitute an ongoing concern.

The local acquiring company can be funded with intra-group and third-party debt to make the acquisition. Thus, once the acquisition has taken place, the buyer and the target company can form a tax group, allow-ing the target company to deduct the buyer’s interest charges on the debt, subject to interest barrier rule limitations. However, leveraged buyouts have been severely hindered due to a new limit on the tax deductibility of interest paid in consideration for debt incurred to acquire shares in another company. In particular, the interest is only tax deductible by up to a maximum of 30 per cent of the tax operating profit (tax EBITDA, which is closely similar to earnings before interest, taxes, depreciation and amortisation) of the acquiring company or existing tax group (the general €1 million franchise does not apply in this case). The tax EBITDA of any company that is merged with the acquiring company or that joins the same tax group as the acquiring company within four years following the acqui-sition must be disregarded for the purpose of calculating the acquiring company or tax group’s tax EBITDA. This new limit does not apply when at least 30 per cent of the transaction is financed with capital and the debt incurred to finance the deal is reduced every year by at least the propor-tional part needed to make the debt fall below 30 per cent of the acquisition price in the eighth year.

On a divestment, the transfer of the Spanish assets or the Spanish per-manent establishment may be subject to tax both in Spain as well as in the jurisdiction of residence of the acquiring company (although in the latter a tax credit or an exemption mechanism would typically apply). The transfer of the shares in the Spanish acquiring company may benefit in Spain from a tax treaty exemption, as well as to a participation exemption in the jurisdic-tion of residence of the non-Spanish company holding the Spanish stock.

From an indirect tax perspective, in certain cases the direct acquisition of a company’s Spanish real estate assets may result in the possible applica-tion of non-refundable transfer tax (see question 1).

The acquisition may be preferably executed by an acquisition com-pany established outside of Spain when acquiring stock in a transaction which is not debt leveraged or, alternatively, where the tax deductibility of the interest may not be efficiently used in Spain.



Company reorganisations, including share exchanges and mergers, are fairly common in Spain, to the extent that the companies involved are enti-tled, under certain conditions, to benefit from a special tax regime based on the Merger Directive, as implemented in the CIT Law.

If the transaction is undertaken under the protection of this regime (which would automatically apply unless the relevant taxpayer opts out of the regime), no direct taxation would be triggered for both the companies involved and their shareholders. A roll over of the tax basis will take place, so that the embedded gains at the time of the restructuring may be taxed at a later disposal of the relevant assets or shares. In addition, any indirect taxation resulting from the transfer of the acquired assets and liabilities will be avoided. The application of this regime is subject to the requirement that, besides the tax considerations, sound business reasons exist for the transaction. The tax authorities can confirm this through a binding ruling.

Please note that this special tax regime will not be available should any cash payment to the selling shareholders exceed 10 per cent of the face value of the issued shares.



There is no direct tax benefit to the acquirer in issuing stock as considera-tion. However, if the transaction can be implemented within the protec-tion of the Merger Directive (for example, in the context of a merger or of a share exchange; see question 4), then the shareholders in the target com-pany may benefit from a deferral of the tax due on the embedded capital gain on the shares being transferred to the acquirer, which may make the transaction more tax attractive for the sellers and, as a result, facilitate the acquirer’s purchase.

6 Transaction taxes


As mentioned in question 1, in general terms, the transfer of stock would not be subject to indirect tax unless the acquiring company holds Spanish real estate and the anti-abuse rule of article 108 of Law 24/1988 is triggered.

On the acquisition of business assets, either VAT or transfer tax will apply.

The transfer of business assets will typically be subject to 21 per cent VAT and will not be subject to transfer tax. VAT will be refundable to the acquirer to the extent that the assets are used in a VATable trade or business.

However, the transfer of non-developable land and the second and successive transfers of buildings are, in principle, subject to but exempt from VAT and, therefore, subject to transfer tax. Nevertheless, under cer-tain conditions, the acquirer is entitled to waive the VAT exemption, and thus to avoid transfer tax.

Exceptionally, the transfer of a business concern, when the relevant assets and liabilities constitute an autonomous economic unit for VAT pur-poses, will be exempt from VAT but subject to non-refundable transfer tax on the value of any acquired Spanish real estate assets.

Spanish stamp duty is only imposed on the granting of notarial deeds that have access to a public registry, and only if the asset transferred is sub-ject to and not exempt from VAT and not subject to transfer tax.

In practice, stamp duty is limited to the first transfer of buildings, developable land, real estate in construction and certain moveable prop-erty (eg, vehicles, aircrafts and watercrafts), when the seller is a VAT tax-payer. In that case, stamp duty would also apply. The applicable stamp duty would generally range from 0.5 per cent to 2.5 per cent, depending on the autonomous region where the transaction takes place.

If the seller is not a VAT taxpayer, then the purchaser will be liable to non-deductible transfer tax, at rates ranging from 6 per cent to 11 per cent for real estate assets, and from 4 per cent to 8 per cent for other assets, depending on the Spanish region where the transaction is deemed to take place.






There are no time limits on the use of net operating losses. However, for tax periods starting in 2015, there is a general limitation on the use of net operating losses, which cannot exceed 25 per cent of the company’s taxable income prior to the use of net operating losses if the company’s turnover exceeds €60 million. This limitation is reduced to 50 per cent of the com-pany’s taxable income prior to the use of net operating losses if the compa-ny’s turnover exceeds €20 million. No limitation is imposed on companies with a lower turnover.

In addition, for tax periods starting in 2016 and for tax periods start-ing after 1 January 2017, only 60 per cent and 70 per cent, respectively, of the annual taxable profits may be offset with net operating losses. The first €1 million of net operating losses will always be offsetable.

As it refers to anti-abuse rules on the acquisition of control over inac-tive (for the prior period of three months) target companies with net oper-ating losses, the latter must be reduced by the positive difference between the (former) shareholders’ contribution to the acquired company and the amount paid by the acquirer, when the controlling acquirer did not have a 25 per cent or higher stake of the target company’s share capital prior to the generation of the net operating losses. In addition, under recently enacted rules, the same limitation would apply when the controlling acquirer pur-chases a passive company, a company that has been deregistered or during the two-year period following the acquisition the acquirer company carries out a new trade or business accounting for more than 50 per cent of the average turnover of the company of the prior two years.

Company reorganisations, including mergers and spin-offs, benefiting from the special tax regime based on the Merger Directive, will allow for the transfer of the net operating losses, as explained in question 9.

No specific tax rules apply, in this regard, to the acquisition of insol-vent companies. On the other hand, a special tax treatment applies with respect to the forgiveness of debt owed by such insolvent entities, where the recognition of income resulting from the write-off is deferred, and the limitations on the use of carry-forward losses are waived.

8 Interest relief


As a general restriction, net financial expenses (ie, interest paid minus interest earned) are tax deductible in Spain, as long as they do not exceed 30 per cent of the tax EBITDA. The first €1 million of interest expenses is always tax deductible. Excessive interest expense can be carried forward, subject to the same 30 per cent limitation. This ‘interest barrier’ rules replaced the former three to one thin capitalisation rule.

In addition, and in the form of an anti-abuse rule, interest paid on a loan granted by a group company, when the principal of that loan is used to either acquire shares from a group company or to capitalise a group com-pany, is deemed non-deductible, unless the company provides sufficient evidence that there are valid economic reasons for the transaction, other than tax considerations.

Finally, as explained, on leveraged buyouts a new limit applies on the tax deductibility of interest paid in consideration for debt incurred to acquire shares in another company. The interest is only tax-deductible by up to a maximum of 30 per cent of the tax EBITDA of the acquiring company or existing tax group (the general €1 million franchise does not apply in this case). The tax EBITDA of any company that is merged with the acquiring company or that joins the same tax group as the acquiring company within four years following the acquisition must be disregarded for the purpose of calculating the acquiring company or tax group’s tax

EBITDA. This new limit does not apply when at least 30 per cent of the transaction is financed with capital and the debt incurred to finance the deal is reduced every year by at least the proportional part needed to make the debt fall below 30 per cent of the acquisition price in the eighth year.

The interest withholding tax does not apply when the lender is resident in an EU member state and is not acting through a tax haven (as defined under Spanish law) or through a permanent establishment located either in Spain or outside the EU. In any other case, withholding tax cannot be avoided unless otherwise provided in the relevant double taxation treaty entered into between Spain and the country of residence of the lender.

Debt pushdown transactions are permissible and legally achievable if supported by sound business reasons in the context of an acquisition or a group restructuring. Otherwise, tax-driven debt pushdown transactions will be aggressively contested by the Spanish tax authorities.



Spanish law-based share or asset purchase agreements include the stand-ard representations and warranties clauses, as well as indemnity obliga-tions. A deed of tax covenant is, on the contrary, seldom used and only when the contractual documents are subject to English law.

Payments resulting from indemnity obligations are typically articu-lated as contractual adjustments to the purchase price, seeking in that way to avoid taxable income on the recipient of the payment. Gross-up clauses are also frequently negotiated.


10 Restructuring


As discussed, if the acquisition has been undertaken through a Spanish acquisition company, a merger between the acquirer and the target com-pany may be carried out in order to obtain a step-up in basis and the rec-ognition of tax deductible goodwill, or to achieve a debt pushdown. In the latter case, the merger may be effected as a reverse merger, which typically will not need to rely on the protection of the special regime provided for by the Merger Directive.

Similarly, it would be quite standard for the Spanish acquiring com-pany (of the Spanish acquiring permanent establishment) to form a tax group for CIT purposes with the target company (and its Spanish sub-sidiaries). In such a way, interest expenses on the financing undertaken for the acquisition of the target may be used to offset the latter’s taxable profits, but subject to the new limits on the tax deductibility of the interest explained in question 8 on leverage buyouts transactions. Please note that in the context of CIT tax groups the interest barrier rule 30 per cent limi-tation is calculated at group level (and the €1 million interest deductible threshold also applies at group level).

11 Spin-offs


Spain has transposed the Merger Directive into its CIT Law, and mergers, demergers, spin-offs, contributions of branches of activity effected in the context of a corporate restructuring or reorganisation may be undertaken in a tax-neutral way, both for direct and indirect purposes. Also, certain in-kind capital contributions may benefit from a deferral from direct taxation.

Net operating losses are preserved after a tax-neutral corporate reorganisation, although the transferred losses may, in certain cases, be reduced to the extent the transferring shareholders have benefited from a tax deductible depreciation on the transferred shares which is linked to such losses.


Uría Menéndez SPAIN


As it refers to the tax-neutral total demerger of a company with exist-ing net operating losses, net operating losses must be assigned to the acquiring companies, in proportion to the business that each acquiring company is assuming. For tax periods starting after 1 January 2015, on a partial demerger or spin-off of a branch of activity, net operating losses of the demerged branch of activity are transferred with the latter.

Outside of the scope of the Merger Directive, net operating losses can-not be transferred to the acquiring entity (either in the context of a merger, demerger or partial spin-off ).



The migration of a Spanish resident company to another country will end the company’s ongoing tax period, and will trigger an exit tax at the standard rate of 28 per cent (25 per cent for tax periods starting after 1 January 2016) on the difference between the market value and the tax basis of the company’s assets, except for those assets that remain allocated to a permanent establishment located in Spain. Also, following a recent amendment to the CIT Law, if the company is migrated to another EU member state, the payment of the CIT can be deferred until the assets are subsequently transferred to an unrelated party.



Spanish source interest and dividends payments are generally subject to 19 per cent withholding tax.

On domestic exemptions, as stated in question 8, interest payments are exempt from tax when paid to a lender resident in an EU member which is not acting through a tax haven (as defined under Spanish law) or through a permanent establishment located either in Spain or outside the EU.

Outside the scope of this main domestic exemption, a limited number of exemptions may apply on interest payments, as it may be the case of interest on certain publicly listed bonds issued by banks or listed entities.

As it refers to domestic exemptions on dividend payments, as provided for under the Parent-Subsidiary Directive, as implemented by Spanish law, no Spanish withholding taxes are levied on dividends distributed by a Spanish subsidiary to its EU or European Economic Area (EEA) resident parent company, to the extent that the following requirements are met:• the parent company maintains a direct holding in the capital of the

Spanish subsidiary of at least 5 per cent. The holding must have been maintained uninterruptedly during the year prior to the date on which the distributed profit is due or, failing that, be maintained for the time required to complete such period;

• the parent company is incorporated under the laws of an EU member state, under one of the corporate forms listed in Annexe I, Part A, of the EU Parent-Subsidiary Directive, and subject to a member state corporate income tax (as listed in Annex I, Part B, of the EU Parent-Subsidiary Directive), without the possibility of being exempt. If the parent company is resident in an EEA member state, the parent com-pany must have a legal form and must be subject to a CIT which is similar to those found in the EU; and

• the dividends distributed must not derive from the subsidiary’s liquidation.

However, the Spanish implementation of the Parent-Subsidiary Directive includes an anti-abuse provision, by virtue of which the withholding tax exemption will not be applicable where the majority of the voting rights of the parent company are held directly or indirectly by individuals or entities not resident in the EU or the EEA, except where the taxpayer evidences that the parent company has been incorporated and operates for valid eco-nomic purposes and relevant business reasons.

Otherwise, the Spanish withholding tax will be reduced as provided for in the relevant double taxation treaty entered into between Spain and the country of residence of the lender or shareholder. It is seldom the case

that the tax treaty will provide for an exemption on Spanish source divi-dends or interest income.



The distribution of the share premium reserve or equivalent reserves funded through contributions made by the shareholders are not subject to tax, but will reduce the tax basis in the shares held by the non-Spanish resi-dent shareholder. In such a way, the tax due on the distribution of retained earnings will be deferred until the dividends are distributed or, alterna-tively, may be transformed into capital gains at the time of the disposal of the Spanish shares. Under many of the tax treaties entered into by Spain, capital gain may be exempt from Spanish capital gains tax.


15 Disposals


Disposals of a foreign holding company’s stock are tax efficient from a Spanish perspective as, generally speaking, a disposal of the stock in the foreign holding company would not trigger any Spanish direct or indirect tax (unless the foreign holding company’s assets mainly consist, directly or indirectly, of Spanish real estate).

Otherwise, the disposal of the stock in the local company will typically be more tax efficient than the disposal of the business assets, as the latter option will always trigger 19 per cent Spanish capital gains tax.



The disposal of Spanish stock by non-resident companies will, in principle, be subject to 19 per cent withholding tax. The non-resident company must file the corresponding form and self-assess the tax to be paid.

In the form of a domestic exemption, capital gains arising from the sale of stock will be exempt from Spanish tax when the seller is resident in another EU member state (and it is not operating through a Spanish perma-nent establishment), unless:• the Spanish company is mainly holding, directly or indirectly, Spanish

real estate assets;• the selling shareholder, if an individual, has held 25 per cent or more

of the Spanish subsidiary’s share capital at any moment during the 12-month period preceding the sale; or

• the selling shareholder, if a legal entity, does not meet the require-ments for the participation exemption of article 21 of the CIT Law to apply.

Update and trends

Both the Spanish Corporate Income Tax Law as well as the rules applicable to non-Spanish resident taxpayers were substantially amended for tax periods starting after 1 January 2015, as discussed in this chapter. In general terms, tax deductibility of interest expenses is subject to hardened rules. Additionally, EU-based investors will have easier access to tax-free divestments of Spanish stock. The combination of such factors is likely to result in investments which are mainly equity financed.




In the context of energy and natural resource companies, no specialities apply other than the fact that, typically, those entities may own significant Spanish real estate assets. In this context, installations such as windmills, solar panels or pipelines may qualify in certain cases as real estate assets.

As it refers to the tax treaty network, generally Spanish source capital gains will be exempt from Spanish capital gains tax. However, in a substan-tial number of tax treaties Spain has negotiated exceptions to such rule, primarily when the transferred company is mainly, directly or indirectly, holding Spanish real estate assets, or when the transferor has held at any time during the 12 months prior to disposal a substantial interest (typically 25 per cent) in the share capital of the Spanish company.



As discussed in questions 4 and 11, mergers and spin-offs of branches of activities carried out under the protection of the Merger Directive, as implemented in the CIT Law, may be effected in a tax-neutral way, in the form of a tax-free rollover regime. A number of requirements must be met, the most relevant of which, in this context, is that the consideration to be received in exchange for the shares or assets being transferred must con-sist of shares in the acquiring entity.

Guillermo Canalejo Lasarte [email protected] Alberto Artamendi Gutiérrez [email protected]

Calle Príncipe de Vergara 187Plaza de Rodrigo Uría28002 MadridSpain

Tel: +34 915 870 942Fax: +34 915 860 403www.uria.com/en/index.html


ADMD Law Office TURKEY


TurkeyOrhan Yavuz MaviogluADMD Law Office




Fundamentally there is no difference in taxation for the purchaser between acquisition of stock in a company and acquisition of business assets and liabilities of a company registered in Turkey. As for the seller, transferring shares or assets may be subject to corporate tax or income tax depend-ing on whether the seller is a natural or legal person. Accordingly, share acquisitions in Turkey are subject to corporate income tax and value added tax (VAT), and the share transfer agreement is subject to stamp tax at the rate of 0.948 per cent from the highest value indicated in that agreement. However, the acquisition of shares by a foreign entity has no immediate Turkish income tax consequences except for potential stamp tax on the share transfer agreement. Whereas an asset acquisition can only be done via a Turkish company or a Turkish branch of a foreign company. In princi-ple, asset acquisitions are subject to corporate income tax, VAT, stamp tax and other applicable fees.

According to the Corporate Tax Law (CTL), acquisitions and capital appreciations resulting from mergers are also subject to tax. With mergers, the actual resulting profit rather than the liquidation profit is used as the taxable base. Nevertheless, there are conditions noted in the CTL provid-ing tax exemption for such mergers in some circumstances. Although asset sales and share purchases result in similar direct taxation and exemptions, applicable indirect transaction taxes may make sale of assets less tax- efficient unless additional exemptions are applied, such as exemptions for real estate investment partnership companies.

2 Step-up in basis


In the case of acquisition of shares, a step-up in basis will not be applicable. However, step-up in basis will be applicable to acquired assets. The value of the business assets of the target company is readjusted by the purchaser while it makes their entries in its fixed assets account by way of allocating the aggregate amount of the purchase price paid for them and the total of liabilities of the target company as of the transfer date. However, there are certain limitations to this procedure. According to article 298 of the Tax Procedure Law No. 213, a revaluation (which is actually called inflation adjustment) shall only be possible if the relevant company’s increase in its price index is more than 100 per cent for the last three accounting periods and is more than 10 per cent within the current accounting period.

Furthermore, in the case of an asset acquisition, the goodwill amount (the positive difference between the purchase price and the fair value of the assets subject to the transfer) can be capitalised by the buyer and depre-ciated for tax purposes over a period of five years. The goodwill can also be written off, provided that its value does not exceed a certain amount

stipulated by the relevant legislation. Whereas other intangibles may only be depreciated if they have a limited use life (such as intellectual property).



As noted at the above questions, there are certain tax exemptions avail-able for different kinds of acquisitions. In the case of acquisition of assets of a Turkish company, a local company should be preferred since an asset acquisition can only be done via a Turkish company or a Turkish branch of a foreign company. Whereas for share acquisitions, a foreign company may be more preferable since the acquisition of shares by a foreign entity has no immediate Turkish income tax consequences except for potential stamp tax on the share transfer agreement. However, there are alternative transaction structures that could be used to minimise the tax burden.

Partial spin-off, full spin-off, merger and share exchange are the most commonly used vehicles to minimise the tax burden on the transfer of real estate and participation shares. However, the Turkish Commercial Code does not contain any provisions regarding company spin-offs and share exchanges. A brief definition and tax incentives for those transac-tions were created under articles 38 and 39 of the CTL. Following those articles, the Communiqué Regarding Principles and Procedures for Partial Spin-off Transaction of Joint Stock Companies and Limited Liability Companies was published in the Legislative Journal No. 25,231 dated 16 September 2003. The Corporate Tax Law was abolished by Corporate Tax Law No. 5,520, and it is not clear whether the Communiqué is still in effect. However, in practice, the provisions of the Communiqué are applied to company spin-offs. Therefore, if the transfer of real estate and participa-tion shares is executed by way of spin-off or tax-free merger, the transfers can be exempt from corporate income tax, VAT, stamp tax and other appli-cable fees.



Company mergers are becoming more and more popular based on mar-ket demand, and Turkish law has various incentives to make transactions easier and more tax-efficient. Share exchanges remain rare in Turkey as the valuation of stocks (especially out of the capital market) is not very easy and there are no additional tax breaks provided to encourage such partnerships.



No. Issuing stock as consideration rather than cash does not provide any tax benefit to the acquirer.


TURKEY ADMD Law Office


6 Transaction taxes


Stamp TaxDocuments that include monetary commitments such as agreements and undertakings are subject to stamp tax. The documents are subject to stamp tax independently from the transactions that the documents cover. The triggering event for stamp tax on documents executed in Turkey is the signing of the document. For documents executed outside of Turkey, stamp tax will arise when those documents are either submitted to the rel-evant governmental bodies or used in Turkey and a benefit is derived as a result. The tax is levied either as a fixed tax or a proportional rate over the quantifiable tax base, depending on the nature of the documents. The applicable proportional and fixed taxes are set out in Table 1 attached to the Stamp Tax Law (Law No. 488, Official Gazette No. 11,751, dated 11 July 1964). Although the rate differs depending on the nature of the doc-uments, the standard rate is 0.948 per cent and the maximum amount is 1,487,397.70 lira.

Accordingly, the full value of the transaction is subject to a stamp duty rate of 0.948 per cent from the highest value indicated in that rele-vant agreement. In most cases, however, if the transaction benefits from income or corporate tax exemptions set forth in the CTL, it will attract no stamp tax. The same transactional exemptions are also relevant for stock transfers regarding VAT. For asset sales, however, if they do not fall within the CTL exemptions these indirect transactional taxes are applicable.

VATAll goods and services that are supplied or rendered in Turkey within the scope of commercial, industrial, agricultural and professional activities are subject to VAT. Each person or entity can set off (and neutralise) input VAT (VAT payable on sales) from output VAT (VAT receivable on purchases and expenses) on the monthly VAT returns.

Accordingly, share acquisitions shall be subject to VAT. Share trans-fers realised by corporations shall be subject to an 18 per cent VAT In this case, transfer of shares (in joint stock companies) are exempted from VAT; however, sale of participation shares (participation shares are shares other than share certificates such as partnership interests in limited liability com-panies and ordinary partnerships and the shares of joint stock companies attached to share certificates or temporary share certificates) by a Turkish entity shall attract Turkish VAT at 18 per cent unless the participation shares are held for a period of more than two years.

The ordinary rate of VAT on the transfer of assets through an asset purchase agreement is 18 per cent, depending on the type of assets being transferred. Real estate properties that are included in the asset purchase agreement could potentially be exempt from VAT if held for a period of more than two years. The buyer has the right to deduct VAT incurred on the asset deal from VAT generated from its sales. However, the full recovery of VAT can take time, depending on the VAT generation of the acquiring entity, which may lead to an additional cash flow problem on asset pur-chase transactions.

Although the 18 per cent rate applies to the purchase or sale of real estate bigger than 150 square metres, only 1 per cent VAT applies to real estate smaller than 150 square metres in size.

Real property transferred through a partial spin-off, full spin-off or merger transaction is exempt from VAT. In the case of asset acquisition, the tax attributes are not transferred to the purchaser and the seller retains the right to offset its existing tax losses and VAT credits against its taxable profits and VAT obligations stemming from the asset sale.



According to article 9 of the CTL, net operating losses may be carried for-ward for a period of five years. However, such losses must be covered by the first available year’s income and such losses cannot be carried back.

Furthermore, net operating losses of companies merging via a tax-free merger (ie, a structuring model where two or more companies merge into one of the companies, and the other companies cease to exist without liq-uidating; the assets of transferor corporations are transferred at their book values, and new shares are issued by the merged company to be distrib-uted to the shareholders of both companies in return for their share capital) as per article 20 of the CTL, that do not exceed the equity capital of the acquired company as of the date of merger may be carried forward for a duration of five years provided that:• corporate tax returns for the past five years were submitted within due

time; and• the acquired company continues to operate for at least five years as of

the date of merger or acquisition.

As for insolvency proceedings, when a company goes bankrupt and enters into a liquidation procedure, the financial period is replaced by the liqui-dation period. The period between this date and the end of the calendar year, as well as every calendar year following this date, shall be considered as liquidation periods. When liquidation is finalised, the final liquidation profit or loss is computed and the liquidation returns, which were previ-ously filed, are corrected and, if necessary, overpaid taxes are refunded. The company will be subject to the usual taxation rules during the liqui-dation period and must maintain all legal bookkeeping and filing obliga-tions as for a normal company, including filing tax returns to the relevant tax office, and paying taxes accrued over the income derived through liq-uidation transactions. If, at the end of the whole liquidation period, the company has accrued a profit, the company pays corporate income tax at 20 per cent on the taxable base.

8 Interest relief


Amortisation may be applied to the borrowing costs of loans of real assets obtained from abroad in foreign currency. In that case, the exchange differ-ence at the date of import, and the capitalisation of the costs, will consti-tute the cost of the imported asset. The costs will be treated as an asset on the balance sheet and can be subject to amortisation.

Borrowing costs can be treated as a tax-allowable expense and deduct-ible for the purposes of calculating for corporate income tax. There is a potential limitation on expenses incurred on loans by a company. From 1 January 2013, a percentage of financial expenses (such as interest or commission) incurred on borrowings from external sources that exceeds the shareholder’s equity of a Turkish company may be regarded as a dis-allowable expense. The Council of Ministers has authority to determine what percentage of these expenses will be treated as disallowable, up to a percentage of 10 per cent, per business sector, although the Council of Ministers has not exercised this authority as yet. This does not apply to credit institutions, financial institutions, leasing, factoring and finance companies.

Furthermore, interest on loans payable to foreign states, international institutions, foreign banks and foreign corporations that qualify as finan-cial entities in their country of residence and that provide loans to the public shall be exempt from withholding tax, whereas a 10 per cent with-holding tax shall be applicable to interest paid on loans from non-resident companies that are not qualified as such.



In most cases warranties, indemnities and covenants are provided within the agreement or with a self-executing financial collateral subject to a clos-ing or deadline. The payments that may arise from such protection meas-ures are not subject to any exemption and will be subject to income tax for


ADMD Law Office TURKEY


the receiving party. The withholding tax application may become relevant if the recipient is non-resident (ie, a limited taxpayer).


10 Restructuring


Such determinations are fully dependent on the case at hand. The restruc-turing of financial tables mostly becomes an issue based on the reorganisa-tion of receivables, debts or cash in hand of the target company acquired. However, it should be noted that any restructuring procedure may be chal-lenged by the Turkish tax authorities through the substance-over-form principle which is outlined in article 3(b) of the Taw Procedure Law.

11 Spin-offs


There are two separate procedures available for these purposes: partial spin-off and full spin-off:

Partial spin-offA partial spin-off concerns the transfer from a company of real property or shares that are (article 19(3)(b), CTL):• held in another entity for at least two years; and• included in the balance sheet or production or service business of a

full-fledged taxpayer company.

The transfer must be made to an existing or to-be-incorporated taxpayer company as capital-in-kind in return for the acquisition of the trans-feree company’s shares, either by the transferor company or its existing shareholders.

Partial spin-off transactions are exempt from corporate income tax, VAT, stamp tax and other applicable fees.

Full spin-offA full spin-off is where all the assets, receivables and debts of a Turkish-resident company are transferred into two or more companies on their book values, and the transferor company dissolves without liquidation fol-lowing the full spin-off (article 19(3)(a), CTL). The shares of the transferee companies are transferred to the shareholders of the transferor company, either proportionally or disproportionately, on the basis of the equity held by the shareholders.

Full spin-off transactions are exempt from corporate income tax, VAT, stamp tax and other applicable fees.

Therefore, tax-neutral spin-offs could be achieved and the losses may be preserved. If the spin-off is realised subject to conditions noted in the CTL under the division of companies, most could be achieved without trig-gering taxation.



Prior to the implementation of the new Commercial Code No. 6,102, which entered into effect as from 1 July 2012, the migration of the tax residence of the acquisition company or target company outside Turkey was only pos-sible through liquidation, and therefore all the tax consequences of the liq-uidation process would be applicable without exemptions and any profits would have been taxed.

However, with the implementation of the new Commercial Code No. 6,102 and as per article 12 of the Law on the Implementation and Procedures of the Turkish Commercial Code No. 6,103, a Turkish com-pany may migrate to a foreign company without entering into liquidation if it proves that:• the conditions set forth in the Turkish legislation are fulfilled;• it will continue to operate within the migrated country as per the laws

of that country; and

• the change in company structure has been notified to creditors, that the creditors have been invited to declare their receivables and that such debts have been paid or collateralised.

However, tax consequences of such migration transactions are yet to be defined.



As noted at question 8, interest on loans payable to foreign states, interna-tional institutions, foreign banks and foreign corporations that qualify as financial entities in their country of residence and that provide loans to the public shall be exempt from withholding tax, whereas a 10 per cent with-holding tax shall be applicable to interest paid on loans from non-resident companies that are not qualified as such.

As for dividend payments, Dividend distributions to resident entities and branches of non-resident entities are not subject to withholding tax. A share capital increase by the company using retained earnings is not consid-ered to be a dividend distribution, and dividend withholding tax does not apply. For non-resident entities operating in Turkey (branches, and other type of permanent establishments such as permanent representatives and agents) withholding tax only applies to the portion of the profit that is trans-ferred to the headquarters or the principal that is repatriated from Turkey. However, dividend distributions by resident companies within Turkey shall be subject to a 15 per cent withholding tax. Furthermore, dividends of real estate investment companies, venture capital trusts and invest-ment trusts are exempt from withholding tax. If the dividends received are reinvested into company capital, they are fully exempt from tax. Income of branches of foreign companies established in Turkey is subject to 15 per cent withholding tax if it is remitted to the foreign parents.



Methods include structuring of transactions or creating allowable expendi-tures within group companies.


15 Disposals


Transfer of shares is generally the preferred method to effect disposals. Spin-offs and tax-free transfers are also commonly used.



Corporate income tax is charged on corporate income generated by com-mercial entities. The last date to submit a corporate income tax return is the 25th of the fourth month following the fiscal year end. The corporate income generated by commercial entities is calculated based on the com-mercial income provisions of the Income Tax Code (Law No. 193, Official Gazette No. 10,700, dated 1 June 1961) regardless of the source of that income. The provision of services and the sale of goods are subject to cor-porate income tax in the financial year in which the income is accrued.

The current corporate income tax rate is 20 per cent. All resident and non-resident companies that earn commercial or professional income and that therefore must file an annual corporate income tax return, must also file an advance corporate income tax return at 20 per cent on the basis of the actual quarterly profits paid during the year. This is offset against the final taxes calculated on the annual corporate income tax return.


TURKEY ADMD Law Office


Any excess payment can be offset against other tax liabilities, and in the absence of those liabilities is refundable within one year.

Accordingly, share acquisitions and therefore share disposal are subject to corporate income tax and VAT. As noted above, capital gains derived from share acquisitions by resident companies in Turkey shall be subject to corporate income tax, whereas if such shares are acquired by a non-resident company, the share disposal transaction will be exempt from tax. However, this does not necessarily apply to disposals of non-resident companies, as the acquiring company’s residence is the important factor in determining the tax exemptions. Therefore, if a non-resident company is disposing shares to another non-resident company, then such transac-tion will be exempt from tax (except for possible stamp tax application as noted in question 6). However, if the non-resident company is disposing such shares to a resident company, then such tax exemptions will not be applicable.

It should also be noted that income derived from the sale of participa-tion shares that have been held for at least two years within the company’s

assets is exempt from corporate income tax, provided that the amounts obtained from the sales of those shares are deposited within the company capital within two calendar years following the transaction. This exemp-tion does not apply to companies whose main field of activity is real estate commerce.



Nothing other than those exemptions applicable for local transactions as set forth at question 11 is available. Therefore, there are no tax-free rollover or similar regimes available; however, it is possible to use one of the struc-turing methods set forth at the above sections.

Orhan Yavuz Mavioglu [email protected]

Ebulula Mardin Caddesi No.4534330 1.LeventIstanbulTurkey

Tel: +90 212 269 56 61Fax: +90 212 269 56 69www.admdlaw.com


Arzinger UKRAINE


UkrainePavlo Khodakovsky and Olga BaranovaArzinger




Acquisition of a company as an entire business in one deal is more advis-able by means of purchase of its shares (stocks (securities) or participa-tory interest). Such acquisition is tax-neutral for a purchaser at the date of acquisition. If the target is acquired by a foreign entity the capital gain obtained upon further sale and calculated as a positive difference between the sale price and expenses incurred upon the acquisition is subject to Ukrainian withholding tax at a rate of 15 per cent with the pos-sibility of it being reduced or eliminated under the applicable double taxa-tion treaty (DTT). If the shares are acquired by Ukrainian purchaser the capital gain is to be taxed by corporate profit tax (CPT) at a current rate of 18 per cent. Currently the capital gain obtained from both listed and non-listed stocks (securities) transactions is also to be taxed at 18 per cent. Starting from 1 January 2015, taxable profits are net profits before tax, determined in accordance with the National Accounting Regulations (Standards) of Ukraine or the International Financial Reporting Standards, subject to a limited number of tax adjustments set out in Section III of the Tax Code of Ukraine. If a company has prior year annual income no greater than 20 million hryvnias (excluding VAT and excise duty), it can choose not to apply the tax adjustments, and may instead pay CPT based on its financial accounting records.

There are certain rules applicable to transactions involving transfer of shares in a form of stocks (securities). Specifically, the financial result received from such transactions is calculated separately. If upon the end of the reporting (tax) period, a taxpayer receives profit from the total num-ber of transactions with stocks (securities), such profit increases the finan-cial result (net profits) before tax adjustments of a taxpayer. However, if a taxpayer receives losses from transactions with stocks (securities), such losses are transferred to the following reporting (tax) period or periods and reduce the financial result received from transactions involving transfer of stocks (securities).

Share transfers are VAT-neutral in both cross-border and international deals provided such transactions are made for cash consideration or share-for-share exchange.

Ukrainian tax legislation does not recognise the transfer of business via acquisition of all a company’s assets and liabilities in one integrated transaction; therefore, particular assets can be transferred and taxed in accordance with the rules depending on the type of asset. The fixed assets acquired are to be recorded in a purchaser’s books; thus where the pur-chaser is a Ukrainian entity the value of fixed assets together with related transaction costs is subject to depreciation. Where the purchaser is a non-resident entity, the income received by this company from the further real estate sale is subject to withholding tax for the whole amount.

Unlike the sale of shares, asset deals are usually subject to VAT at the current rate of 20 per cent. VAT paid on the price of assets by a purchaser who is a registered VAT-payer is to be attributed to its tax credit and further offset against current VAT liabilities or refunded from the state budget.

The system of electronic VAT administration started its full operation on 1 July 2015. Consequently, all tax invoices and adjustment calculations to them are subject to registration in the Unified Register of Tax Invoices (URTI) no later than 15 calendar days following issuance thereof. Fines are imposed for untimely registration and non-registration of tax invoices and adjustment calculations to them with the URTI. The fines range from 10 to 50 per cent of the VAT amount specified in such documents depend-ing on the length of the period during which tax invoices or adjustment calculations are not registered with the URTI. Tax invoice and adjustment calculation technically could be registered with URTI provided that the VAT amount therein does not exceed the amount calculated according to a special formula. In particular, if such amount (result of the formula) is less than VAT amount in a tax invoice or adjustment calculation, the taxpayer shall credit additional funds into its VAT account. Ukrainian tax authori-ties assert that despite the electronic VAT system having just started its full operation, a positive effect resulting in transparent VAT obligations and refunds will appear soon.

It is worth mentioning that acquisition of particular assets such as land plots or real estate objects by a non-resident purchaser for the further use in commercial activities could result in recognition of a fixed place of busi-ness (permanent establishment) of such a non-resident within the territory of Ukraine (its taxable presence), which in turn will entail obligatory reg-istration of such non-resident purchaser with the tax authorities as a tax-payer for corporate profit tax purposes.

2 Step-up in basis


Ukrainian tax laws recognise no step-up in basis in the business assets of an acquired company or goodwill (as excess of a purchase price over the book value) depreciation in share-deal scenarios. Expenses actually borne are to be accounted for the purpose of subsequent taxation of capital gains.

No step-up in tax basis is usually possible for a purchaser in asset deals as well. In accordance with the Tax Code of Ukraine, goodwill as the differ-ence between the fair-market price and book value of an integrated assets complex cannot be depreciated. However, the acquired fixed assets of the target company are to be reflected in the purchaser’s books (if the latter is a resident company) with their primary value equal to the purchase price irrespective whether it exceeds or is below the fair market or book value.

At the same time, Ukrainian tax laws allow a kind of a step-up when fixed assets are acquired: namely, it is possible to reflect the change in the fair market value of the purchased assets for the purpose of its further depreciation.



In the case of an acquisition of a company via purchase of its shares it may in some instances be preferable to be executed by a non-resident purchaser, first of all from the corporate governance and regulatory standpoint.


UKRAINE Arzinger


In particular, use of a special purpose vehicle (SPV) to acquire and hold the shares of the target allows the acquirer:• to regulate shareholders’ relationships related to the target (in rela-

tion to issuance of new shares, principles of voting and waiver of vot-ing rights, distribution of profit, business performance, management appointment, etc) in shareholders’ agreements that are not currently recognised by Ukrainian legislation and court practice; and

• to benefit from Ukrainian treaties on promotion and mutual protection of investments.

As mentioned above, the purchase of shares itself is a tax-neutral transac-tion whereas the capital gain received upon the date of sale is subject to taxation. If the purchaser is a Ukrainian entity, CPT at the current rate of 18 per cent shall apply.

Withholding tax of 15 per cent rate shall be charged on non-resident capital gains, with the possibility of them being reduced or eliminated under the applicable DTT.

Acquisition and further alienation of moveable property (different from shares and securities) by a non-resident made without its taxable presence is not subject to CPT taxation in Ukraine. On the contrary, the purchase of fixed assets such as real estate or land is preferably executed by a Ukrainian entity, as such a cross-border deal is likely to create a per-manent establishment for a non-resident. If real estate is further sold by a resident entity, the capital gain calculated as a positive difference between the sale price and book value will be taxable for CPT purposes, whereas a negative difference will be recognised as its deductible expenses. If the real estate is further sold by a non-resident entity, the capital gain recog-nised in the whole amount of the sale price (income received) is subject to withholding tax. Moreover, the sale within the territory of Ukraine usually appears as a VAT-able transaction. Thus, a Ukrainian company VAT-payer may use the ‘reverse-charge mechanism’ and decrease its VAT liabilities with its current (or obtained under the acquisition and not offset at the date) tax credit.



Company mergers and share exchanges are rarely used in Ukraine as forms of acquisition. From the regulatory standpoint, as merger presumes corpo-rate restructuring resulting in wind-up of a target company, with its assets and liabilities to be further accounted for in the books of the merging (sur-viving) company, it cannot be effected at a cross-border level, regardless of the absence of direct prohibition.

For the purpose of CPT the value of shares acquired shall be estab-lished equal to the value of shares cancelled in the course of share exchange reorganisation. VAT does not apply to share-for-share exchanges.

Company mergers are recognised as a tax-neutral way of business reorganisation; therefore they may be used on a domestic level as a way to increase gross equity without increase in tax liabilities or benefit from losses of the target entity. At the same time, the tax liabilities or debt of the target entity shall remain to be paid in full by the merged body corporate.



There is no tax benefit to the acquirer in issuing stock as consideration rather than cash.

Cash transactions are more common in Ukraine than issuing shares in the acquirer company to be paid as consideration to the seller.

Issuing stock as a consideration for goods, services and works received could generally be tax-neutral. However, multiple tax risks may arise as Ukrainian tax authorities tend to question such transactions as performed with a purpose of tax avoidance. Each case of debt-to-equity swap shall be considered separately.

Share-for-share exchanges are VAT neutral. If the fair-market values of shares are equal then such exchange shall not trigger CPT liabilities.

6 Transaction taxes


In general, there is no stamp duty to be paid in Ukraine upon the acquisi-tion of shares or business assets of different types. Share deals are VAT-exempt if made for funds or share-for-share exchange. Starting from 1 January 2015, transfer of stocks is not an object of excise tax in Ukraine.

In general, asset deals are subject to VAT if performed within the terri-tory of Ukraine by a seller who is a VAT-payer. Land plot deals are exempt from VAT, except if a land plot is to be sold with a real estate object located thereon, and the value of such land plot is included in a real estate (as inte-gral fixed asset unit) value in accordance with the law.

In real estate transfers the following transaction fees (costs) and duties are applicable:• the state fee for notarisation of a real estate sale–purchase agreement

(including for a land plot) in the amount of 1 per cent of the contract price, but not less than its balance value with price index coefficient (if sold by Ukrainian entity) and not less than the fair value of the real estate established by expert valuation (if sold by individuals or non-residents);

• the duty on obligatory state pension insurance applicable to the sale of real estate (except for a land plot when sold as a separate real estate property) in the amount of 1 per cent of a contract price; and

• state fee for registration of the title change in the State Register of Property Rights on Real Estate and obtaining of the respective extract in negligible amount.

The duty on obligatory state pension insurance payment is an obligation of the acquirer to be fulfilled before notarisation of a real estate sale–purchase agreement. The fee for title change registration is borne by the acquirer as well. Parties to a real estate deal usually share notary expenses equally, which are payable upon the sale–purchase agreement notarisation.



There are no specific limitations as to net operating losses carry-forward after a change of control of the target company itself via share deal or trans-fer of its assets in the asset-deal scenario. VAT credit accumulated by a tar-get entity remains available as well.

Ukrainian tax legislation sets forth no specific rules or regimes for acquisition or reorganisation of insolvent entities.

8 Interest relief


Interest accrued on the borrowing attracted to acquire the target is gener-ally deductible under the same rules applicable for interest on any other borrowings.

With effect from 1 January 2015, the following rules apply to the deductibility of interest paid to non-resident related parties by Ukrainian entities whose debt-to-equity ratio in respect of those related parties is greater than 3.5:1 (10:1 for financial and leasing institutions):• the deduction of interest is restricted to 50 per cent of income before

interest, tax, depreciation and amortisation; and


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• the non-deductible portion of the interest can be carried forward indefinitely, subject to an annual 5 per cent reduction of the residual amount.

In addition, the amount of interest paid to a non-resident lender is subject to withholding tax at a rate of 15 per cent, unless otherwise foreseen by the respective DTT.

Debt pushdown can be achieved on a domestic level by means of merger performed between the acquirer company and target entity follow-ing acquisition financed through borrowing. At this, the borrowing inter-est incurred by the acquirer (usually an SPV) can be further financed and deducted from the taxable profit of the target.



Ukrainian law does not stipulate directly particular forms of protection to be sought for shares or business asset acquisitions and does not recognise deeds of tax covenants. Therefore, it is at the parties’ discretion to add indemnity or warranty clauses of any kind into share or asset agreements.

In practice both seller and the target in share deals issue the general and tax warranty and guarantee to the acquirer that the business activity of the target has been performed in due and lawful manner, all the lia-bilities (including tax) are duly calculated and reflected in books and tax statements, and there are no circumstances that may result in increase of such liabilities or decrease the value of its assets, etc, after completion of the transaction, and therefore influence the value of the shares acquired. Therewith the seller undertakes to hold the acquirer harmless from losses that may arise as a result of breach of any warranty and compensate such loss or damage (pay penalties). In some cases renegotiation of the acqui-sition price of the shares or even obligation for the seller to enter into a reverse share deal (to ensure the possibility for the acquirer to transfer the shares back in the case of essential breach in running business or disclosure of information in course of pre-acquisition due diligence) are practised.

In an asset-deal scenario when the seller is the company (asset holder) and the assets are transferred separately from the business as a whole, war-ranties with regard to circumstances that may influence the value of the assets or the possibility of their further utilisation, or third-person rights (encumbrances) thereon are usually given.

Compensation for damage (loss) or payment of a fine is usually taxed at the level of non-operational income without withholding at the target level of the entity making such compensation. Fines constitute other oper-ational expenses and hence are deductible (starting 1 January 2015).


10 Restructuring


There is no post-acquisition restructuring typically carried out in Ukraine. The expediency of restructuring and its possible means are decided on a case-by-case basis depending on the type of business or assets acquired.

11 Spin-offs


For the purpose of taxation the value of shares (stock) distributed between entities in the course of spin-off to be reflected in the books of shareholders shall be calculated pro rata to the net asset value attributed to the respec-tive entity. This value is to be estimated in accordance with the distribution balance at the date of its approval.

In general, tax obligations or tax debts are not subject to distribution where a reorganisation is performed by means of spin-off without liquida-tion or via contribution of the part of the assets to the share capital of the newly established entity. However, if there is under-assessment by the tax authorities, such spin-off (reorganisation) may result in under-payment of tax obligations and, provided that there is a tax lien imposed on the assets of a taxpayer, the tax authorities are entitled to decide on:• distribution of the tax liabilities (debt) between both (existing and

newly formed) entities;• tax liabilities fulfilment (debt clearance) before scheduled reorganisa-

tion; or• extension of the tax lien on the property of each entity.

Ukrainian laws allow corporate reorganisation of businesses to be tax-neutral. However, with regard to corporate profits tax implications upon reorganisation, the law allows businesses to benefit from tax-free transfer of tangible and intangible assets, while transferring tax losses only in case of termination of the transferring entity. In case of a spin-off, the transfer-ring entity is not terminated.



Neither regulatory nor tax legislation recognises the migration of a compa-ny’s residence (redomiciliation of a company), nor can cross-border merg-ers and spin-offs be carried out.

Currently, a legal entity incorporated within and under the laws of Ukraine only is recognised as a Ukrainian tax resident (body corporate). A newly incorporated entity shall pass the process of its state registra-tion at first and then be registered with the tax authorities as a taxpayer. In the same manner, it shall cease to exist as a taxpayer and be wound up, liquidated and struck off the State Register of Enterprises and Private Entrepreneurs of Ukraine. Therefore, if all the assets of an entity are trans-ferred to the acquirer by means of a taxable purchase and the respective business is stopped, the entity itself must be liquidated and the relevant information entered in the register.

If real estate objects or land plots are purchased by a non-resident as part of business assets (considering the limitations stipulated by current legislation in Ukraine), this could be recognised as a non-resident tax pres-ence in Ukraine in the form of a permanent establishment; therefore, the tax residence will not ‘migrate’ or be changed with regard to these assets.



Generally, if a taxpayer decides on distribution of dividends, it is obliged to pay an advance CPT instalment at a general rate (18 per cent) with the right to credit such amount against CPT liabilities at the end of the report-ing (tax) period. The amounts received by a resident shareholder upon dis-tribution of dividends (or in other form due to holding of shares by such shareholder) by a (company) CPT payer shall not be attributed to its tax-able income, whereas the same amounts received from a non-CPT payer (including non-resident) are subject to taxation.

Both dividend and interest payments are recognised by Ukrainian laws as non-resident income with the source of its origin in Ukraine subject to withholding with no exemptions.


UKRAINE Arzinger


A resident or a permanent establishment transferring interest or divi-dends to a non-resident shall withhold and pay a withholding tax at the rate of 15 per cent to the state budget of Ukraine. There are no domestic exemptions from withholding tax; however, withholding tax can be either reduced or eliminated under the appropriate DTT to which Ukraine is a party. In particular, zero, 2, 5 and 10 per cent rates are available under Ukrainian DTTs with Switzerland, Austria, Germany and the Netherlands for interest payments (depending on the DTT); moreover, the DTT with Cyprus prescribes application of a 2 per cent rate regarding the total amount of interest in all cases without need to comply with additional conditions. 5 per cent rates are available for dividends and a zero per cent rate is avail-able for dividends under the DTT between Ukraine and the Netherlands (provided that certain conditions are met). To benefit from a DTT’s reduced or eliminated rates a non-resident shall provide its Ukrainian con-tractor transferring payment with a certificate confirming its tax residency and shall constitute a beneficiary with regard to such payments, because the Ukrainian contractor is performing the role of withholding tax agent.



Both dividend and interest payments appear as the most common and direct form of profit extraction in Ukraine.

Payment of royalties is used as an alternative way of fund extraction if the above-mentioned is not available. In common with interest and dividends, royalty payments are recognised as non-resident income with the source of its origin in Ukraine subject to withholding tax at a rate of 15 per cent. Reduced rates are available in accordance with DTTs.

At the same time royalties are restrictedly deductible from the CPT perspective, namely, it is allowed to deduct royalties paid to non-residents only in the amount of income from royalties, increased on 4 per cent of the net income for the previous year received from supply of goods, execution of works and provision of services. It is prohibited to fully deduct royalties paid to:• non-beneficial recipients;• non-residents from low tax jurisdictions (the list of such jurisdictions

is established by the Cabinet of Ministers of Ukraine);• non-residents, being residents of states where such royalties are not

taxable;• non-residents for IP objects first-time registered (protected) by a

Ukrainian resident;• legal persons that are not CPT payers or pay CPT at other rates than

18 per cent rate; and• persons paying CPT as a part of other taxes (excluding individuals –

personal income taxpayers).

However, the above rules may not be applicable if the amount of paid roy-alties is confirmed under transfer-pricing rules of Ukraine.

In some circumstances, legal relations of the purchased target and acquirer entity (or the whole global group) are arranged in such a manner that centralised provision of management and other advisory services are performed with respective expenses to be borne by head office and further compensated by each local company in an allocated amount. Thus, consid-eration paid for such provision of services may be used and to some extent treated in the same way as the extraction of profits.

However, it is worth mentioning that supply of legal, consultancy, information, management and certain other services of an advisory nature are defined as supplied in the place of the customer’s incorporation or loca-tion, and therefore (if rendered from non-resident to Ukrainian resident) are subject to Ukrainian VAT payable to the state budget by the Ukrainian customer upon supply of the services under the ‘reverse-charge mecha-nism’. Marketing services and other services not expressly indicated as provided at the place of customer’s incorporation or location are deemed provided at the place of incorporation or location of provider and, there-fore, (if rendered from non-resident to Ukrainian resident) are exempt from VAT.

As a general rule, fees payable for such services to a non-resident are deductible in full. However, fees payable for such services are restrictedly deductible if such services are rendered by non-residents from low tax jurisdictions; in these cases 70 per cent of such expenses are deductible (the list of such jurisdictions is established by the Cabinet of Ministers of Ukraine).

Moreover, services agreements and deductibility of allocated expenses are seriously challenged by the tax authorities even if duly con-firmed by the primary documents and substantiated as needed for the pur-pose of business activities.


15 Disposals


At present, disposals of businesses in Ukraine are most commonly carried out by a sale of shares (stocks). If a foreign holding company is used only to operate the local target, disposal can be easily carried out by sale of such holding company shares to avoid registration procedures and other formal-ities to be complied with in Ukraine.

The principles of taxation for local and cross-border disposals of shares differ slightly: capital gains are taxed with CPT at a rate of 18 per cent or are subject to withholding tax at a rate of 15 per cent unless otherwise is foreseen by the respective DTT.

In addition, while performing disposal via sale of the foreign holding shares the parties may benefit additionally from the relevant DTT (if avail-able) or the holding company’s jurisdiction taxation principles.

If the seller is incorporated in particular jurisdictions (as an SPV for target acquisition and further sale), the local business share sale can be preferable to the seller as well. In practice, Cyprus SPVs are widely used as acquirer and holding companies. If the seller is a Cyprus SPV direct dis-posal of Ukrainian company shares are preferable and allows it to benefit from:• eliminated withholding tax under DTT for capital gains taxation in

Ukraine (safe for the shares deriving their value from the real estate assets as well); and

• the Cyprus tax regime for share transactions.



Exemptions or reductions of rates for non-resident sellers from withhold-ing of capital gains are available under DTTs exclusively.

There are no special domestic tax rules dealing with the disposal of stock in real property, energy and natural resource companies. At the same time, when the company’s shares derive their value from the real estate owned by such company the capital gain obtained from such a share sale usually is subject to local taxation (at the local withholding tax rate) in accordance with the provisions of the DTT.

Update and trends

Ukrainian tax laws are in a process of constant amendment. Many of them are aimed at creating new, attractive rules for investors. It is worth mentioning that Parliament supported the exemption from taxation in Ukraine of the income of foreign investors received from government bonds. In addition, the Cabinet of Ministers of Ukraine plans to significantly reduce the rate of tax on gas production. Thereby authorities plan to raise investment in this sector. With respect to deregulation procedures, the term of foreign companies’ representative office registration has been reduced by half: from 60 to 30 working days. We also note that on 15 July 2015, Parliament ratified a new DTT with Ireland providing attractive tax rates.


Arzinger UKRAINE




Deferring or avoiding tax could usually be achieved in accordance with respective DTTs, as described above.

Please note, that the Tax Code of Ukraine provides a possibility for small and medium-sized businesses to pay a ‘unified tax’ under a simpli-fied taxation system. Legal entities – residents of Ukraine – could register

as unified tax payers if their income does not exceed 20 million hryvnias (approximately €846,000 as of August 2015) during a calendar year (except for taxpayers conducting certain business activities). Unified tax payers are exempt from paying corporate profit tax. Applicable rates constitute: 2 per cent tax rate if a unified tax payer is also a VAT payer; and 4 per cent tax rate if VAT is included into this unified tax rate. Unified tax is assessed and paid on the income of a legal entity without of a right to deduction of expenses.

However, the above simplified taxation is impossible for Ukrainian legal entities with 25 per cent or more of their shares owned by a non- resident legal entity.

Pavlo Khodakovsky [email protected] Olga Baranova [email protected]

Eurasia Business Centre75 Zhylyanska St, 5th Floor01032 KievUkraine

Tel: +380 44 390 55 33Fax: +380 44 390 55 40www.arzinger.ua


UNITED KINGDOM Slaughter and May


United KingdomJeanette Zaman and Zoe AndrewsSlaughter and May




Whether a purchaser prefers a share acquisition or a business acquisi-tion from a tax perspective will depend on the facts, taking into account the nature of the relevant assets and liabilities of the business and what the purchaser intends to do with the business following its acquisition (eg, whether or not it intends to seek to sell on the assets or shares to a third party shortly after the acquisition) to determine what reliefs or benefits would be available.

Tax liabilities stay with the target on a share acquisition and, as a consequence, a purchaser will seek protection from the seller for pre- completion tax liabilities of the target, both known and unknown (see question 9). The target’s historic base cost in its assets is unaffected by the transaction in its shares. Given that this is likely to be lower than the base cost the purchaser would acquire if it had instead purchased the assets from the target (rather than the shares), if the purchaser intends to strip out and sell on the assets it would be preferable to purchase the assets themselves rather than shares in the target. Other tax attributes of the target also remain, in particular any tax losses continue to be available to set off against future profits (subject to anti-avoidance rules, see further question 7).

A key attraction for a purchaser of acquiring business assets rather than shares is the ability to claim capital allowances (assuming the assets of the business include plant and machinery or other assets for which capital allowances may be claimed) and obtain tax relief for expenditure on intan-gible assets (but see question 2), rather than being confined to an inherited tax position.

2 Step-up in basis


Where a purchaser acquires business assets, the amount paid for such assets (plus the incidental costs of acquisition) will generally constitute the purchaser’s new base cost in such assets for the purpose of calculating its chargeable gain on any future disposal. This is subject to a market value override which applies to transactions between connected parties.

There used to be a favourable regime for the acquisition of goodwill and other intangible assets enabling a purchaser to benefit from corpo-ration tax deductions when expenditure on these assets was recognised in the accounts. This provided a significant incentive for a purchaser to acquire business assets from a target company rather than shares. However, it was announced at the Summer Budget 2015 that this relief is to be removed for expenditure on goodwill, and certain other intangible assets linked to customers and customer relationships, acquired on or after 8 July 2015. Investment in intellectual property and certain other intangi-ble assets will continue to benefit from relief in line with the purchaser’s accounting treatment.

Where a purchaser acquires shares in a target company, there is gen-erally no step-up in basis available in respect of the assets of that target company. However, a step-up in basis can occur in circumstances where a degrouping charge is triggered. So if another company in the seller’s group had transferred capital assets or certain intangible fixed assets to the target within the six years before the purchaser acquires the target, a degrouping charge will be triggered and the target will be deemed to have disposed of, and re-acquired, the relevant assets at market value at the time of the degrouping.



The UK is a favourable holding company jurisdiction (for non-banking groups):• with a corporation tax rate of 20 per cent, decreasing to 18 per cent by

2020, it has one of the lowest corporate tax rates in the G20;• the dividend exemption should generally be available, irrespective of

whether the holding company’s shareholder is resident in the UK or elsewhere;

• a UK acquisition company should generally be able to benefit from deductions for the finance costs of acquiring the target (subject to the restrictions explained in response to question 8); and

• the substantial shareholding exemption (SSE) would enable a UK acquisition company to dispose of the target without triggering a chargeable gain if the conditions are satisfied (see further question 15).



Since the EC Mergers Directive was implemented in the UK in December 2007, it has been possible to effect a ‘true’ merger in which all the assets and liabilities of a transferor company are transferred to a transferee com-pany and the transferor company thereupon ceases to exist without need-ing to be put into liquidation.

The UK regulations implementing the Directive require at least two companies from different EU member states to be merged, and allow for three types of cross-border mergers: merger by absorption, merger by absorption of a wholly-owned subsidiary or merger by formation of a new company. The procedure as implemented in the UK involves a number of court hearings, which has implications for the timetable of the proposed acquisition. The procedure is not commonly used.

There are no other means of achieving a ‘true’ merger in the UK.Share exchanges are, however, common forms of acquisition and can

enable the seller to rollover any chargeable gain into shares or loan notes issued by the purchaser.



The purchaser does not obtain a tax benefit from the issuing of shares as consideration.


Slaughter and May UNITED KINGDOM


6 Transaction taxes


Share acquisitionStamp duty at the rate of 0.5 per cent of the consideration is payable on the acquisition of shares in a UK company. Stamp duty reserve tax (SDRT) is charged on an agreement to transfer shares in a UK company at the rate of 0.5 per cent of the consideration. Where an agreement to transfer such shares is completed by a duly stamped instrument of transfer within six years of the date when the SDRT charge arose, there is provision in many cases for the repayment of any SDRT already paid, or cancellation of the SDRT charge.

Prior to March 2015, takeovers of UK companies were frequently implemented by way of a cancellation scheme (the target’s shares were cancelled and shares were issued by the acquirer to the target sharehold-ers). As there is no stamp duty on a cancellation of shares (as there is no instrument of transfer), this enabled the transfer of ownership of a UK tar-get without needing to pay any stamp duty. However, it was announced by the government in the Autumn Statement 2014 that companies would in future be required to use a ‘transfer’ scheme of arrangement or a contrac-tual offer, on which stamp duty or SDRT is payable. UK company law has since been changed so as to prevent the use of a cancellation scheme to effect a takeover.

The acquisition of shares is not a supply for VAT purposes.

Acquisition of business assetsIf business assets are acquired, stamp duty land tax (SDLT) will be pay-able on transactions in UK land (although land in Scotland is now subject to a separate land and buildings transaction tax rather than SDLT). Where the consideration exceeds £500,000 the rate of SDLT on transactions in non-residential property will be 4 per cent. If the business assets include an interest in a partnership that holds stock or marketable securities, stamp duty at 0.5 per cent will apply to the transfer of the partnership interest.

Most supplies of land are exempt from VAT, unless the seller has opted to tax the land. If the transfer of assets meets the conditions for being a transfer of a business as a going concern, there will be no taxable supply for VAT purposes.



Trading losses may be set off against profits in the same or the previous accounting period, or (subject to satisfaction of various conditions) be sur-rendered by way of group or consortium relief. To the extent that trading losses remain unused, they will be carried forward and set against profits of the same trade in subsequent accounting periods. No time limits apply to the carry-forward of losses. Furthermore, if a company transfers its trade to another member of its group, the transferee will, subject to anti- avoidance rules, inherit the tax losses of the transferor, unless the trans-feror is in liquidation.

The Finance Act 2015 introduced a new restriction on the carry- forward of trading losses, non-trading loan relationship deficits and man-agement expenses for banks and building societies. From 1 April 2015 (with anti-forestalling provisions applying from 3 December 2014), only 50 per cent of their taxable profits in any accounting period can be offset by these carried-forward amounts (subject to a £25 million allowance for groups headed by building societies or, as proposed by the Summer Budget 2015, savings banks).

There are various anti-avoidance rules aimed at preventing ‘loss buy-ing’ and ‘loss refreshing’.

The carry-forward of trading losses may be denied if:• within any period of three years there is both a change in the owner-

ship of a company and a major change in the nature or conduct of a

trade carried on by the company (which may occur before, at the same time as, or after the change in ownership); or

• there is a change in ownership of a company at any time after the scale of its trading activities has become small or negligible but before any considerable revival of the trade.

The insertion of a new holding company at the top of a group of companies does not of itself constitute a change in ownership.

Similarly, there are restrictions on the carry-forward of non-trading losses following a change of ownership where there is:• a major change in the nature or conduct of the trade or business of the

loss-making company within three years of the change in ownership;• a significant revival of a trade or business that has become small or

negligible; or• a significant increase in the capital of the business.

In addition, there are also restrictions on the use of capital losses.The Finance Act 2015 introduced provisions that prevent a company

from entering into arrangements to seek to convert carried-forward tax reliefs into current year losses, namely refreshing its losses. If the company enters into arrangements caught by the new rules it will not be able to use the carried-forward reliefs (which may be trading losses, non-trading loan relationship deficits or management expenses) against taxable profits that arise from the arrangements. The rules, which include a main purpose test and have regard to the anticipated value of the tax advantage, apply to arrangements entered into at any time, but only have effect for accounting periods beginning on or after 18 March 2015.

8 Interest relief


In principle, a UK resident acquisition company would benefit from relief from UK corporation tax for borrowings incurred to acquire the target, but this is subject to various restrictions:• the UK has a thin capitalisation regime that applies to domestic as well

as cross-border transactions – if the lender is a related party or the bor-rowing is guaranteed by a related party, these rules will be applied to determine the amount that the borrower could have borrowed from an independent lender and this can result in part of the borrowing costs being non-deductible;

• there is also a ‘worldwide debt cap’ which further restricts tax relief on finance expenses of groups of companies in certain circumstances to prevent non-UK multinationals from reducing the tax paid by their UK subsidiaries by ‘dumping’ an excessive proportion of the debt in the UK;

• interest will not be deductible where it is treated as a distribution – this will include situations where the interest exceeds a reasonable com-mercial return, the rate depends upon the performance of the bor-rower or the loan is convertible into shares; and

• interest relief may also be restricted where the loan has an unallowable purpose, namely where a main purpose of being party to the loan in the relevant accounting period is to obtain a tax advantage.

Withholding tax on interest may be reduced or eliminated under a rele-vant double tax treaty, or benefit from one of the various domestic excep-tions (see question 13). In any event, there is no requirement to withhold tax from interest payable on borrowings where the loan is only capable of being outstanding for less than one year.






On an acquisition of shares, a purchaser would expect to receive the ben-efit of both a tax covenant and tax warranties. The tax warranties will seek to elicit information about the target, and potentially form the basis of a claim for breach of contract if they prove to be incorrect, subject to the purchaser being able to evidence causation and loss. The tax covenant will give pound-for-pound protection (ie, the purchaser will not have to show loss to bring a claim) in respect of historic tax liabilities of the target; this protection may be sought up to the last accounts date, a specified ‘locked box’ date or the date of completion, depending on the commercial agree-ment between the parties as to the basis on which the purchase price has been calculated and the allocation of risk. The tax covenant is often drafted as a deed but it can also be included with the warranties in the share pur-chase agreement.

Payments under a tax covenant claim or tax warranty claim should always be made ‘across the top’ between the seller and the purchaser as an adjustment to the purchase price (rather than being made directly to the target company); the purchaser should not then be subject to UK tax on receipt (nor should there be any requirement to withhold tax from the payment). If any payment exceeds the purchase price (which is most likely to occur following the sale of a distressed company), these payments (to the extent of the excess) are likely to constitute taxable receipts for the pur-chaser. In this situation, the purchaser should seek to negotiate a gross-up obligation in the sale documentation.

There are fewer tax warranties given in a typical business purchase agreement because in general the tax liabilities remain with the company and do not attach to the assets.


10 Restructuring


The nature of any post-acquisition restructuring will be specific to each transaction; however, the objectives will often be similar. These include the desire to ensure that the newly acquired assets are fitted into the buy-er’s group in the most efficient manner, as influenced by tax and financ-ing considerations, and that interest relief obtained in respect of any debt funding incurred to finance the acquisition can be set off against taxable profits generated by the business.

Restructuring will often involve steps such as hiving down the target or its business into existing subsidiaries, sale and leaseback arrangements with property investment subsidiaries, the sale and licensing of intellectual property, or the insertion of new holding companies.

11 Spin-offs


There are various corporate actions available to achieve a spin-off, includ-ing direct-dividend demergers, indirect (or ‘three-cornered’) demergers, capital-reduction demergers or liquidation schemes. Effecting a tax- efficient demerger involves ensuring that shareholders do not receive tax-able income, rollover relief is available, no chargeable gain is realised by the demerging company and transfer taxes are minimised.

These structures rely on different reliefs and exemptions from a shareholder perspective – direct-dividend demergers will often seek to fall within the exempt distribution legislation, whereas capital-reduction schemes will seek to ensure shareholders benefit from reorganisation treatment (and thus, effectively, a rollover of any chargeable gain).

The choice will depend upon commercial factors, as well as the distrib-utable reserves position, whether shares or business assets are to be spun

out, the residence of the companies involved and the residence and other characteristics of the shareholders of the demerging company.

Trading losses may be capable of being preserved, although the pleth-ora of anti-avoidance rules (see question 7) will need careful consideration in this context.

Whilst stamp duty or SDRT would be payable if the spin-off involves the transfer of shares in a UK company, in practice it is usually possible to rely on available reliefs (notably acquisition relief ), or ensuring that there is no transfer for consideration (ie, by implementing a cancellation scheme rather than a transfer scheme, or relying on a distribution being for no con-sideration). No stamp duty or SDRT should therefore be payable. Where a spin-off involves transactions in UK land, it is likely that SDLT would need to be paid.



A UK-incorporated company will be resident in the UK for tax purposes regardless of whether or not its central management and control is located in the UK. The only way to migrate a UK-incorporated company such that it is no longer treated as UK resident is to ensure that its place of effective management and control is in a jurisdiction with a suitable double tax treaty. Such a treaty would need to contain a residence tiebreaker clause (providing that the company is resident solely in its place of effective man-agement and control) or provide for a mutual agreement procedure to determine residence (which may resolve the question in favour of the place of effective management and control, but carries with it the risk of uncer-tainty of outcome).

A non-UK-incorporated company will only be tax resident in the UK if it is centrally managed and controlled in the UK. Such a company can lose its UK tax residence by becoming centrally managed and controlled in another jurisdiction.

The UK imposes an exit charge on companies which cease to be UK tax resident; the company is deemed to have disposed of and immediately reacquired all of its capital assets at their market value when it leaves the UK, thus creating a charge to corporation tax on any latent capital gains (unless a relief such as the SSE applies).

Companies migrating to an EU or EEA country can take seek to agree an exit charge payment plan with HMRC, which allows the resulting cor-poration tax to be paid in instalments, or deferred for a period of up to 10 years until the relevant asset has been sold.

The migrating company must inform HMRC that it is going to migrate.



The UK imposes withholding tax at the rate of 20 per cent on ‘yearly inter-est’, namely interest paid on loans capable of being outstanding for one year or more. This rate may be reduced by an applicable double tax treaty, and can be eliminated altogether if the UK legislation implementing the EU Interest and Royalties Directive applies.

In addition, there are various domestic exceptions that may be avail-able. There is no obligation to withhold if:• the interest is paid by a bank in the ordinary course of its business;• the person beneficially entitled to the interest is a UK resident com-

pany, or is non-UK resident but carries on a trade in the UK through a permanent establishment and is subject to UK tax on the interest; or

• the interest is paid on a quoted Eurobond, namely an interest-bearing security issued by a company listed on a recognised stock exchange.

In order to promote the development of an active UK private placement market, the Finance Act 2015 provides for a new exemption from withhold-ing tax on interest paid on private placements from a date to be determined.

There is no obligation to withhold tax on ‘short interest’ (broadly where the loan will be outstanding for less than one year) or on returns that constitute discount (rather than interest).


Slaughter and May UNITED KINGDOM


The UK does not generally impose a withholding tax on dividends. However, ‘property income dividends’ paid by UK real estate investment trusts are subject to withholding tax at a rate of 20 per cent if paid to non-resident shareholders (or to certain categories of UK resident sharehold-ers), although this may be reduced by an applicable double tax treaty.



Profits may be extracted from a UK company either by way of declaring dividends or by interest payments on loans made to the company by its shareholders. Dividends are not deductible for corporation tax purposes. Interest payments are, however, deductible for the borrower (even where loans are advanced by a shareholder), subject to the restrictions outlined in question 8.


15 Disposals


While this will depend on the particular facts, sellers typically prefer to sell shares in the target where the disposal would be expected to result in a gain. The SSE will exempt any chargeable gain from corporation tax where the relevant conditions are satisfied. There are three exemptions within the SSE, the main one applying where:• the seller holds a ‘substantial shareholding’ in the target (broadly

10 per cent);

• the target is a sole trading company or a member of a trading group;• the seller is a trading company or a holding company of a trading group

or subgroup; and• the seller has held the substantial shareholding for a continuous

12 month period beginning not more than two years before the date on which the disposal takes place.

The availability of the SSE is not restricted to the disposal of shares in UK companies; the conditions are equally capable of applying to disposals of shares in foreign holding companies.

If the disposal would result in an economic loss for the seller and the conditions for the SSE would apply to the sale of shares, no capital loss will be crystallised by the disposal of such shares. The seller may consider dis-posing of the business assets in this scenario.



Gains arising from the disposal of shares in a UK company by a non- resident are generally not subject to UK corporation tax, subject to certain anti-avoidance rules.

There are anti-avoidance rules applying to the disposal of shares in a company that owns UK real estate. Where a non-resident acquires UK real estate through a UK company, such that the main purpose of the acquisi-tion is to realise a gain, an income tax charge may arise in respect of gains made on the disposal of shares in the UK company holding the real estate.

Update and trends

Paying a ‘fair’ shareIn recent years there has been an ever-increasing pressure on companies to pay a ‘fair’ amount of tax. This pressure has been compounded in 2015 with new proposals for large businesses:• to enter into a voluntary ‘Code of Practice on Taxation for Large

Business’, as part of which businesses will be expected to avoid structuring transactions in a way that will have tax results that are inconsistent with the underlying economic tax consequences unless there exists specific legislation designed to give that result. In all cases, the business should reasonably believe that transactions are structured in a way which is not contrary to the intentions of Parliament;

• to publish their tax strategy as it relates to UK tax, enabling public scrutiny of their approach towards tax planning and tax compliance; and

• potentially to become subject to narrowly targeted ‘special measures’ – a new regime intended to address both aggressive tax planning and a lack of transparency and collaboration with HMRC.

These proposals reinforce the (already familiar) message that companies doing business in the UK must not only comply with their legal obligations as regards their tax liabilities but also be prepared to be scrutinised by reference to their approach to more nebulous concepts (including the spirit of the law and the intentions of Parliament).

Returning value to shareholdersCompanies proposing a sizeable return to shareholders have to deal with competing preferences as to the form of that return from different categories of shareholders; UK corporates would typically prefer exempt dividend income, whereas UK individuals would often prefer a capital return (to benefit from lower rates and to use their annual exempt allowance). Accordingly, it used to be common practice for UK companies to implement arrangements, commonly known as ‘B’ share schemes, to offer shareholders a choice as to whether to receive their share of the return of value as capital or income for UK tax purposes. The Finance Act 2015 put a stop to this, providing that where shareholders are offered a choice in this way, both forms of return will essentially be taxable as income.

While it does remain possible to implement a ‘capital only’ B share scheme, we expect that in future companies will come under significant pressure from their institutional shareholder base to return value by means of a special dividend.

Not content with this measure alone, the government announced at the Summer Budget 2015 that there will be a consultation in autumn 2015 on the taxation of company distributions. Further changes may be made which, although expected to focus on preventing individuals obtaining distributions in capital form rather than income, may impact on corporate investors too and will certainly have implications for the company making the distribution.

A new tax on diverted profitsThe controversial diverted profits tax, rushed in with the pre-election Finance Bill and pre-empting the final outcome of the BEPS project, illustrates the political pressure to protect the UK tax base and prevent the diversion of profits overseas.

Patent box developmentsThe UK has a patent box regime which allows an arm’s-length IP return in the UK to qualify for a low rate of corporation tax (of effectively 10 per cent by 2017) even if all the associated research and development (R&D) were done outside the UK. The OECD has examined the UK’s patent box regime as part of BEPS Action 5 (Countering Harmful Tax Practices) and criticised the ‘transfer pricing’ approach for encouraging patent profits to be shifted to the UK. Consequently, the UK has agreed to cut back its regime and move to a ‘modified nexus’ approach; this will continue to give preferential treatment to income from patents that are brought into the UK or that are generated from R&D carried on by an affiliate, although such income will only qualify for 30 per cent of the previous patent box benefits.

The detail of the revised UK patent box and proposals for tracking good and bad R&D expenditure are eagerly awaited.

An increasing tax burden for banks2015 has not been a good year for banks. New rules introduced by the Finance Act 2015 restrict (to 50 per cent of taxable profits arising after 1 April 2015) the extent to which carried-forward losses can be utilised by banks and building societies. It was announced in the Summer Budget that the bank levy (set at 0.21 per cent for 2015/2016) will decrease each year until a rate of 0.10 per cent in 2021 and there will be a review of the scope of the levy in 2021; however, little joy has been expressed at this news as the rate decrease is more than offset by a corporation tax ‘surcharge’ of 8 per cent on bank profits from 1 January 2016.




Separately, special rules apply to disposals by non-residents of shares in companies that hold petroleum production licences for the exploration or exploitation of oil and gas in the UK or the UK’s continental shelf.



Where a UK company is disposing of shares and would otherwise realise a chargeable gain on such disposal (ie, the conditions for the SSE to apply are not satisfied), the seller may still be able to defer payment of any tax liabil-ity if the consideration for the sale comprises shares or loan notes:• if the consideration comprises qualifying corporate bonds (QCBs)

in the purchaser (broadly, securities expressed and redeemable in sterling), the chargeable gain will be held over until the QCBs are redeemed or sold; and

• if the consideration consists of shares issued by the purchaser or secu-rities that do not constitute QCBs, any gain will be rolled over into those shares or non-QCBs and will be triggered when such shares or securities are sold or redeemed.

Where a UK company disposes of business assets, tax on any chargeable gains arising from the sale of land, buildings and fixed plant and machinery can be deferred by claiming business asset rollover relief, provided the pro-ceeds of the sale are reinvested in qualifying assets. The gain is effectively rolled over into the new asset and becomes payable when the replacement asset is sold (unless a further claim for rollover relief is made at that time) or, if the new asset is a depreciating asset, on the earlier of the disposal of that asset and 10 years following its acquisition.

A similar rollover regime applies to the disposal of intangible assets.

Jeanette Zaman [email protected] Zoe Andrews [email protected]

One Bunhill RowLondonEC1Y 8YYUnited Kingdom

Tel: +44 20 7600 1200Fax: +44 20 7090 5000www.slaughterandmay.com


KPMG LLP UNITED STATES


United StatesAlden Sonander, Christian J Athanasoulas, Jason R Connery and Jennifer Blasdel-MarinescuKPMG LLP




The US federal income tax (FIT) implications for a buyer of the stock or assets of a US target vary depending upon whether the acquisition is struc-tured as a taxable or tax-free asset or stock acquisition. Where a buyer is paying a premium, it may be beneficial for a buyer to acquire a target’s assets because the premium will effectively be allocated to goodwill and be recoverable through amortisation deductions. That is not the case if a buyer pays a premium to acquire the stock of a target. The following discus-sion focuses on the US FIT tax treatment of an acquisition. Although the state and local income tax treatment may be similar, this may not always be the case.

In general, when a buyer purchases the assets of a target, the target will recognise any built-in gain or loss on its assets and the buyer will take a new adjusted cost basis in the assets equal to the purchase price (plus assumed liabilities and incurred acquisition expenses). There are detailed rules for allocating the purchase price to different ‘classes’ of assets, with any resid-ual amount allocated to goodwill and/or going concern value. The buyer then depreciates or amortises the newly acquired assets. These points are discussed further in question 2. Finally, in an ‘actual’ asset acquisition, the target’s prior tax liabilities typically remain with the target.

The parties can structure an asset acquisition as an ‘actual’ purchase of the target’s assets or as a stock acquisition from a legal perspective but as a deemed asset sale for US FIT purposes by virtue of an election under Internal Revenue Code (IRC) section 338. The availability of this election depends on a number of factors.

Structuring an acquisition as a taxable asset transaction generally trig-gers an upfront US FIT liability for the target and/or its shareholders. The US FIT system follows the classic ‘double’ corporate tax system where the target corporation would be subject to tax on the net gain resulting from its sale of assets, and then the target’s shareholders would also be subject to tax upon a future disposition of their target stock or receiving dividends from the target. The seller’s sensitivity to recognising gain on the sale will depend on the particular circumstances, such as the extent of the overall gain the target would recognise and whether it has any net operating loss carry-forwards (NOLs) or credits that it can use to offset such gains.

The target’s unused tax attributes (eg, NOLs, earnings and profits (E&P) and tax credit carry-forwards) are generally retained by the seller in a taxable asset acquisition. From a buyer’s perspective, avoiding the tax attributes of the target along with the ‘marking up’ of the target’s assets is generally desirable as these adjustments create a window of opportunity to engage in post-acquisition integration with minimal US FIT impact.

Often a seller will insist on selling the stock of a target for various reasons, both tax and non-tax-related. For example, individual sharehold-ers may benefit from a reduced income tax rate for capital gains. From a buyer’s perspective, it may find a stock acquisition attractive because the target has NOL carry-overs and/or other desirable tax attributes that the buyer wishes to attempt to utilise post-acquisition. For the buyer to have access to such attributes, the structure of the acquisition must take the form of either a stock acquisition or a tax-free asset reorganisation. There are, however, anti-abuse rules that may minimise a buyer’s ability to use

such pre-acquisition attributes. The limitations on the post-acquisition use of surviving NOLs and other tax attributes of a target are discussed in ques-tion 7.

A taxable stock acquisition generally results in an upfront US FIT lia-bility to the target’s shareholders. At the target level, however, there is no corporate-level gain recognition unless a section 338 election is made.

Under certain circumstances, the parties may attempt to structure the acquisition as a tax-free reorganisation. If certain conditions are met, there are opportunities to structure an acquisition as a tax-free transaction for both the target and its shareholders. Examples of acquisition transactions that qualify for tax-free treatment include:• state law mergers and consolidations in which the target sharehold-

ers receive, in whole or significant part, shares of the acquiring corporation;

• stock-for-stock acquisitions in which the acquiring corporation acquires 80 per cent or more of the stock of a corporation solely in exchange for the voting stock; and

• stock-for-asset acquisitions in which the acquiring corporation acquires substantially all the assets of another corporation in exchange solely for voting stock of the acquiring corporation or its parent or in exchange for such voting stock and a limited amount of money or other property (‘boot’).

Where boot is received in a tax-free transaction, US FIT generally is imposed on the lesser of the gain realised by the seller or the amount of boot received. This gain limitation rule often provides significant planning opportunities from an acquisition structuring perspective.

If a buyer wants to acquire a US target through a tax-free transaction, it should consider using a US corporate acquisition vehicle. This is because the ‘toll charge’ provision (section 367(a), discussed below) can negate the tax-free treatment when a non-US acquiring corporation in an otherwise tax-free reorganisation is used. In addition, the anti-inversion rules of sec-tion 7874 may result in a non-US company being treated as a US corpo-ration for tax purposes or overriding the domestic non-recognition rules thereby resulting in the recognition of built-in gain.

2 Step-up in basis


A buyer generally obtains a fair market value tax basis in assets when either:• the buyer acquires the assets in a taxable transaction; or• the buyer permissibly makes a section 338 election to treat the pur-

chase of stock in a target company as a deemed asset acquisition.

Somewhat recently promulgated regulations also provide a mechanism to obtain a step-up in basis in certain share transactions that do not qualify under section 338. In the case of built-in gain assets, a fair market value tax basis reflects a step-up in adjusted basis.

Acquired goodwill and other acquired intangibles generally may be amortised after an actual or deemed asset acquisition. The amount of the


UNITED STATES KPMG LLP


amortisation deductions depends upon how much of the purchase price is allocated to such acquired goodwill and other intangibles. This amortisa-tion occurs over a 15-year straight-line recovery period.

The parties must apply the ‘residual method’ to allocate considera-tion paid by the buyer for a collection of trade or business assets in those cases where the buyer’s basis in such assets is determined by reference to the amount of consideration paid. Under the residual method, the consid-eration in an applicable asset acquisition is allocated to various classes of assets, such as liquid items/cash equivalents, inventory, intangible assets; the residual amount after all of the specifically identified assets is generally allocated to goodwill or going concern value.

The section 338 election is generally available to corporate buyers that acquire at least 80 per cent of the vote and value of a target’s stock from unrelated persons in a taxable transaction (or transactions that occur within a 12-month period). There are two versions of the 338 election. The general version (the section 338(g) election) produces a series of deemed transac-tions for US FIT purposes: the target is deemed to sell all of its assets and its liabilities are deemed to be assumed by a new version of itself, with gain or loss recognised, and the buyer is then considered to have acquired that ‘new’ target, free of the actual target’s tax attributes or history and with a fair-market value adjusted basis in its inside assets. The election thus pro-duces two levels of potential US FIT – one at the target level on the deemed asset sale, and the other at the target shareholder level on the actual legal sale of the target stock. The section 338(g) election is made unilaterally by the buyer; the parties would typically negotiate who would bear any US tax liability arising from the target’s deemed asset sale.

The second version, which is mainly available where the target is a subsidiary in a US consolidated group (a section 338(h)(10) election) and will join the buyer’s consolidated group, is treated as a single deemed asset sale for US FIT purposes by both the buyer and seller (both parties must consent to this version). A section 338(h)(10) election can also be made for a target that is not part of a US consolidated group if the target is a ‘Subchapter S Corporation’, which, very generally, is a corporation that has elected to be treated as a pass-through entity for most US FIT purposes.



It generally is preferable to use a US acquisition company for the follow-ing reasons. First, a non-US company engaged in a US trade or business (USTB) must allocate and apportion expenses against its gross ‘effectively connected income’ (ECI), including interest expense. The treasury regu-lations provide a complex, three-step formula for allocating and appor-tioning interest expense against ECI. Also, a non-US company engaged in a USTB may be subject to a branch profits tax (BPT) when its effectively connected E&P is repatriated (or deemed repatriated) at a statutory rate of 30 per cent (or lower treaty rate). The regulations require a non-US cor-poration to use a mechanical formula to determine its BPT liability. This mechanical formula can result in the deemed reparation of effectively con-nected E&P. If instead a non-US company operates in the United States through a US subsidiary, it will not be subject to US withholding tax on that subsidiary’s E&P until the US subsidiary repatriates its E&P. Thus, by con-ducting operations in the United States through a US subsidiary company, the non-US shareholder can control the timing of the imposition of US withholding tax on the repatriation of its US subsidiary’s E&P.

Second, the use of a US acquisition corporation can facilitate the tax-efficient use of leverage. Specifically, a buyer can capitalise a US acquisi-tion corporation with a combination of debt and equity. Future interest expense paid by such US corporation may be deductible in computing the US consolidated group’s US FIT liability. In general, only US corporations are eligible to join in a consolidated group (the US version of group-wide tax combination/fiscal unity).

Third, the use of a US acquisition corporation may facilitate the tax-free post-acquisition integration of a target. The US FIT laws contain com-plex ‘toll charge’ provisions (generally under section 367(a)) that require gain recognition for what would otherwise be tax-free corporate reorgani-sations and contributions when the transferee corporation is foreign.

Fourth, the use of a US acquisition corporation may result in the ability to deduct certain acquisition costs on a US tax return. Often foreign acquir-ers are unable to obtain any US tax benefit for costs related to the acquisi-tion of a US target company.



Mergers and share exchanges involving US acquisition corporations can be common transactions. Mergers, depending on the form, can qualify as acquisitions of assets (where the acquirer survives) or as acquisitions of shares (where the target survives). These transactions can be taxable or tax-free reorganisations, depending on a number of variables including the type of consideration used. In many instances, mergers are used as com-pared to legal asset or share acquisitions, as they provide mechanisms for removing the target’s shareholders.

One prominent reason taxpayers structure their deal according to these rules is that they generally permit the share and asset exchanges to occur on a non-recognition or tax-deferred basis; thus, for example, the shareholders of the target may not be required to recognise any built-in gain on the exchange of their shares in the target for shares in the acquiring company. If the merger is structured as an asset reorganisation, then gen-erally the acquiring entity also will inherit the adjusted tax basis of the tar-get’s ‘inside’ assets, along with the target’s holding period in those assets and the target’s tax attributes (see further below).

As previously noted, when the transferee/acquiring corporation in a non-recognition merger or share exchange is non-US, then the ‘toll charge’ provisions under section 367 can apply. These generally operate to deny non-recognition treatment to any appreciated assets that are transferred (while still deferring loss) unless the non-US acquirer will use the assets in the active conduct of a trade or business outside the United States. Certain assets do not qualify for this exception, however (for example, accounts receivable and some foreign currency items). There are special rules for other assets (eg, assets to be leased) and there are also specific rules that apply when the assets were used in a foreign branch that previously gener-ated losses (a clawback mechanism is used to reclaim the losses) or rep-resent intangible property (potentially recast as a deemed licence/royalty transaction that is subject to the US’ transfer-pricing rules).



A corporation does not recognise any gain on the issuance of its own stock to acquire property. Therefore there is no benefit in and of itself to using stock as consideration rather than cash. Using a sufficient amount of ‘quali-fying’ stock is generally necessary, however, to qualify an acquisition as a tax-free reorganisation. If, however, the buyer wants to make a section 338 election the consideration used cannot result in a tax-free exchange.

6 Transaction taxes


For US FIT purposes there are no documentary taxes, value added taxes or sales taxes payable on the acquisition of stock or business assets of the stock or assets of the target. Such transaction taxes, however, may apply at the state and local level.



Limitations on utilisation of net operating lossesNOLs can generally be carried back two years and carried forward 20 years. To prevent trafficking in NOLs, there are limitations on the utilisa-tion of a target’s NOLs and certain other tax attributes (eg, capital loss carry-overs, net unrealised built-in losses, and tax credit carry-forwards) when there is a change of control with respect to the target. Specifically, following an ‘ownership change’ the pre-change NOLs and capital loss




carry-overs of the target can only be used up to specified limits (the section 382 limitation) if the target is a ‘loss corporation’ for a year (or period). An ‘ownership change’ occurs if, at any time during a rolling three-year testing period, there has been a change in corporate stock owner-ship or a shift in equity structure that results in a greater than 50 per cent increase in the percentage ownership (determined by value) of stock of the loss corporation owned by one or more 5 per cent shareholders over the lowest ownership percentage of such shareholders at any time during the testing period.

The section 382 limitation equals the product of the loss corporation’s pre-ownership change equity value (subject to adjustments) and the long-term tax-exempt rate. There are stringent anti-stuffing rules limiting the ability of pre-acquisition capital contributions to increase the equity value of the target for this purpose.

Also, if the loss corporation fails to satisfy a continuity of business enterprise (COBE) rule within two years of the ownership change, then the section 382 limitation becomes zero. The loss corporation satisfies the COBE rule if either there is a continued use of the loss corporation’s his-toric business or a significant portion of the loss corporation’s historic busi-ness assets are used in the new business.

The section 382 limitation rules can also take into account, and be affected by, the built-in gains and losses in the loss corporation’s assets at the time of an ownership change. For example, if a loss corporation has ‘substantial’ net unrealised built-in gain assets at the time of the owner-ship change, the recognition of certain built-in gains within the five-year period following the ownership change may result in an increase in the section 382 limitation. The section 382 rules also limit deduction of certain built-in losses that are recognised during the five-year period following an ownership change in a manner similar to that imposed on pre-change NOL carry-overs.

Limitations on the use of other deferred tax attributesThe section 382 limitations can also apply to limit the use of general business credits, alternative minimum tax credits, foreign tax credits and capital losses following an ownership change of a loss corporation. The limitation for these tax attributes is based, in part, on the amount of the section 382 limitation that was not used up by NOL and capital loss carry-overs.

SRLY limitationThe US consolidated return rules have their own anti-loss trafficking rules, which limit the ability of a consolidated group to deduct NOL carryo-vers or carrybacks incurred by a group member in a year when it was not a member of the group (a separate return limitation year, or SRLY). The section 382 rules take precedence over the SRLY rules.

Techniques for preserving deferred tax attributesOne technique may be to structure the acquisition so that it does not give rise to an ‘ownership change’ and trigger section 382. In practice this may be difficult to achieve.

Acquisitions and reorganisations of bankrupt and or insolvent companiesAcquisitions or reorganisations of bankrupt or insolvent corporations gen-erally are subject to the same rules as corporations that are not bankrupt or insolvent. Some special rules (including the application of section 382), however, do apply to a corporation in bankruptcy proceedings.

8 Interest relief


Subject to limitations, a US acquisition corporation can obtain interest relief for borrowings incurred to acquire a target. In respect of related party debt, there is a provision that precludes an accrual method corporate tax-payer from deducting accrued interest (or original issue discount (OID))

owed to a related foreign person until there is an actual payment of the interest or OID.

There are a number of provisions that limit interest deductibility both in the unrelated and related party context, such as the ‘earnings stripping’, the dual consolidated loss (DCL), the US transfer pricing rules and certain other rules.

Under the current earnings stripping rules, a US corporation’s inter-est expense deduction may be deferred where such interest is paid to, or accrued on a loan guaranteed by, a related foreign person if:• the US corporation’s debt to equity ratio exceeds 1.5 to 1;• the interest paid is not actually subject to a 30 per cent US withholding

tax rate; and• the US corporation’s net interest expense exceeds 50 per cent of the

corporation’s ‘adjusted taxable income’ (eg, the US corporation’s taxable income before interest, depreciation, and amortisation deductions).

The DCL rules may limit interest deductibility where, for example, a US corporation borrows through a non-US disregarded entity or a partnership. The policy underlying the DCL rules is to discourage ‘double dip’ struc-tures that duplicate deductions in one or more jurisdictions.

In cases involving related party debt, the US transfer pricing rules must be considered. These rules authorise the tax authorities to make transfer pricing adjustments in transactions involving commonly controlled enti-ties if the terms of the transaction do not satisfy the ‘arm’s length standard’. Thus, for example, the tax authorities may reduce a US corporation’s inter-est expense deduction if they determine the interest rate does not satisfy the arm’s length standard.

Other rules that may limit a US corporation’s interest expense deduc-tion include where a US corporation issues a debt instrument that is pay-able in equity of the issuer or a related party or equity held by the issuer (or any related party) in any other person. Under the Applicable High-Yield Discount Obligation rules, the issuer’s interest expense deduction may be limited if the interest rate on the debt instrument is greater than 6 per cent above the US government borrowing rate and provides for significant OID or payment-in-kind provisions.



The specific warranties, indemnities, representations, covenants, and the like that often arise in deals involving the acquisition of US corpora-tions can vary greatly and may be documented in great detail as part of, for example, the stock purchase agreement. For example, on the seller side in a stock deal, there will often be an indemnification that will cover any taxes that accrue up until the closing date. In an asset deal, taxes are less of a concern because the liability generally attaches to the selling company and not to the assets themselves. More generally, there can often be break-up fees for the deal not moving forward or for breaches of representations and warranties. The parties may also seek protection or grossing-up for any withholding taxes for which they might become responsible as a result of the deal.

In general, payments pursuant to these items are treated as purchase price adjustments and not as discrete transactions. If treated as purchase price adjustments, then the payments would not, in and of themselves, result in withholding tax or represent taxable income in the hands of the recipient. The price adjustments could, of course, alter the amount of gain or loss previously reported.


10 Restructuring


It is common for a US target to have non-US subsidiaries. For non-US buy-ers it is especially important to move such non-US subsidiaries out from under a US target. Failure to do so often results in future US FIT liabilities,




and substantial annual compliance costs. Specifically, if the non-US sub-sidiaries are left underneath the US target, the United States will eventu-ally impose tax on the future growth of such non-US subsidiaries (US FIT imposed when the non-US subs pay future dividends or when the US target eventually sells the non-US subsidiaries). It is especially important to move non-US subsidiaries that hold high growth assets (ie, IP) out from under the US target as soon as possible. In general, the United States imposes tax on the gain realised when a US target sells (or is deemed to have sold) the stock of the non-US subsidiaries. A US target may be entitled to claim for-eign tax credits and utilise other tax attributes (eg, NOLs) to minimise the actual cash tax imposed on such gain.

Out-from-under planning is also important as it ensures the US anti-deferral rules do not apply to certain non-US subsidiaries on a prospective basis. By engaging in so-called ‘out-from-under’ tax planning, the foreign acquirer can prevent such anti-deferral rules from triggering deemed income inclusions that are subject to US FIT and protect the future profits of such non-US subsidiaries from US FIT.

By unravelling the non-US subsidiaries out from under a US target, the buyer can also bypass the US chain of ownership when it repatriates profits from a non-US subsidiary. By doing so, the buyer reduces the US FIT cost of repatriating or redeploying the non-US subsidiaries’ earnings.

It is common for non-US buyers to acquire a number of US corpora-tions, some of which are members of separate US consolidated groups. Often a buyer can generate significant US FIT efficiencies by integrating these US corporations into one US consolidated group. The tax costs for integrating separate consolidated groups can vary greatly. Depending on the facts and circumstances, it may be possible to structure the integration of consolidated groups as a tax-free reorganisation.

From a planning perspective, debt pushdowns can generate significant efficiencies that contribute to lowering the buyer’s global effective tax rate. As discussed in question 8, there are a number of restrictions on interest deductibility on cross-border intercompany debt. When structuring a debt pushdown special care must be taken not to trigger restrictions on interest deductions under these rules. Also, debt pushdown transactions can result in deemed cross-border distributions that may be subject to US withhold-ing tax.

11 Spin-offs


Spin-offs are often times very important to post-acquisition restructur-ing. It may be possible to achieve a tax-neutral spin-off if such transaction occurs more than five years after the acquisition of a target. Taxpayers that engage in a spin-off transaction may seek confirmation on certain issues related to the transaction’s qualification as tax free by obtaining a private letter ruling from the US tax authority.

Very generally, to achieve a tax-neutral spin-off:• the spin-off transaction must not be used as a device for the tax-free

distribution of E&P;• the distributing corporation and the controlled corporation must

each be engaged immediately after the spin-off transaction in the active conduct of a trade or business, and meet certain five-year requirements regarding the active conduct of the business before the transaction;

• there must be a distribution of all the controlled corporation’s stock, or at least 80 per cent is distributed and the balance retained does not have the principal purpose of US FIT avoidance;

• the spin-off must satisfy corporate business purpose requirements; and

• the shareholders must have continuity of proprietary interest after the spin-off transaction.

Furthermore, if immediately after the distribution a shareholder holds a 50 per cent or greater interest in the distributing corporation or a distrib-uted subsidiary that is attributable to stock that was acquired by ‘purchase’ within the preceding five-year period, there is corporate-level gain recogni-tion on the distribution of the controlled subsidiary stock. Corporate-level gain recognition also results if there is an acquisition of 50 per cent or more of either the distributing or controlled corporation pursuant to a plan dur-ing a two-year period before and after the spin-off. There are various safe harbours under which a post-spin-off transaction will not be considered part of a plan.

Providing there is no ‘ownership change,’ there will generally be no limitation on the utilisation of NOLs of either the distributing corporation or the controlled corporation. For a discussion of limitations on the use of NOLs following an ownership change, see question 7.

Update and trends

The United States continues to play an active role in working with other Organisation for Economic Co-operation and Development (OECD) member countries on the development of a coordinated global approach for addressing base erosion and profit shifting (the OECD BEPS Initiative).

In September 2014, the OECD released a report titled ‘Action 2: Neutralising the Effects of Hybrid Mismatch Arrangements’ (the Action 2 Report). This report generally sets out recommendations for OECD members to enact domestic laws addressing hybrid mismatch structures that result in stateless income or achieve very low effective tax rates. Though it is not yet clear when the US legislature will enact into law the BEPS proposals covered in the Action 2 Report, foreign acquirers of US targets should carefully consider this report when structuring debt pushdowns into the United States. This is especially the case if the foreign lender is located in a jurisdiction that adopts the recommendations in the Action 2 Report. Often a debt pushdown of US target acquisition financing involves tax advantaged financings and, thus, may be within the scope of the Action 2 Report. If certain conditions are met, the Action 2 Report proposes that the lender jurisdiction impute a phantom income inclusion or, alternatively, the United States disallow a US target from taking an interest deduction in determining its net taxable income. In most cases, imputed taxable income in the lender jurisdiction or denial of the US interest deduction would negatively impact the foreign acquirer’s global effective tax rate to some degree.

Another development to consider includes the US Treasury Department’s planned adoption of the OECD’s country-by-country (CbyC) reporting template. As proposed by the OECD, the CbyC reporting template generally requires disclosure of certain entity data (ie, revenue numbers, taxes paid and number of employees) on a country-by-country basis if a €750 million filing threshold is met. Based on information provided by a US Treasury Department official back in February 2015, the first CbyC reports will likely be due to the US government by 31 December 2017. Some members of the US Congress have raised questions as to whether the US Treasury Department has the authority to adopt and implement on behalf of the United States CbyC reporting requirements. This is a hot topic in the United States that is currently undergoing some level of debate.

Finally, in May 2015, the US government released proposed changes to the US model income tax treaty that take into account certain OECD BEPS Initiative proposals. For example, one proposal would significantly tighten the base erosion prong of the ‘Ownership/Base Erosion Test’ that appears in the US Model’s Limitation on Benefits (LOB) provision. The LOB provision generally seeks to prevent tax treaty shopping. When a foreign acquirer structures an acquisition of a US target, it is important that the foreign acquirer considers whether the tax efficiency of such structure would stand the test of time if any of the US tax treaties relevant to the structure were modified to include such proposed changes.




US FIT law generally does not impose transfer taxes, although US state and local jurisdictions may.



It is difficult to migrate the residence of a US corporation from the United States completely free of US FIT. Examples of migration transactions include reincorporating the corporation outside the United States or liqui-dating the US corporation. Sections 367, 4985, and 7874 address the US FIT consequences of these alternatives.

As discussed, section 367(a) imposes a toll charge that requires a migrating US corporation to recognise built-in gain, but not built-in loss on the assets it is deemed to transfer to the new non-US corporation. In addition, to the extent the migrating US corporation owns intangible prop-erty, the section 367(d) rules may apply to impose US FIT on a deemed roy-alty stream. Also, consideration must be given to regulations issued under the BPT rules in respect of the E&P that carries over to the new non-US company.

If an outbound liquidation of a US corporation qualifies for tax-free treatment, section 367(e)(2) treats such outbound liquidation as a taxable asset sale at the level of the distributing US corporation. There are excep-tions to this general rule. First, if the non-US parent agrees to use the assets distributed by the liquidating corporation in a USTB for 10 years immedi-ately after the liquidation, the transaction may be tax free. However, this exception may not apply to certain intangible property that is distributed in the liquidation. Second, if the distributing corporation distributes US real property interests (USRPIs), any built-in gain in such assets may qualify for non-recognition treatment. Third, non-recognition treatment may be achieved where the assets distributed by the corporation consist of stock representing at least 80 per cent of the vote and value of another US cor-poration, unless the liquidating US corporation has not been in existence for at least five years (and can instead be classified as a deemed dividend distribution).

Section 7874 imposes certain US FIT if a foreign acquirer directly or indirectly acquires substantially all of the property of a US target, and the historic shareholders of the US target own more than a certain threshold of foreign acquirer’s stock. If certain conditions are met, section 7874 even goes as far as to treat the foreign acquirer as a US corporation for US FIT purposes. In 2014, the US government issued a notice outlining several rules it intends to adopt through the issuance of future regulations. The purpose of these new rules is to prevent US multinational companies from participating in section 7874 transactions.

Also important to consider is section 4985. This provision imposes an excise tax on equity-based compensation of US target officers and directors upon the occurrence of certain corporate migration transactions.



Passive, US-source interest and dividends received by a non-US payee are subject to US withholding tax at a flat rate of 30 per cent or lower treaty rate. There are limited exemptions from this 30 per cent tax for interest, includ-ing for ‘portfolio interest’ and interest on a debt obligation that matures within 183 days of its original issue date. Interest generally is treated as ‘portfolio interest’ if the debt instrument is issued in registered form, the interest is paid to an unrelated (less than 10 per cent) shareholder, the interest amount is not contingent on, eg, the profits of the issuer or the value of property owned by the issuer, and the non-US payee has provided the payor with a properly completed Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding (or its suc-cessor, eg, Form W-8-BEN-E).



A US corporation may deduct amounts incurred for services provided by an offshore affiliate on its behalf and for outbound royalty payments. Such payments must, however, satisfy the transfer pricing rules’ arm’s-length standard. Furthermore, US-source royalties are subject to withholding tax in the absence of treaty relief (although services performed outside the United States would not generally be subject to withholding tax). Most US tax treaties provide for reduced US withholding tax rates on US-source industrial and copyright royalties. Royalties are sourced based on where the underlying intangible property is used.


15 Disposals


Because an asset sale may result in two levels of US FIT (one level at the corporate level and one at the shareholder level when the sales proceeds are distributed to the shareholder), a seller typically prefers to sell the stock of a company. Typically, the stock of a US company will be sold.

Disposals of stock in a non-US company that owns the desired US tar-get are not as common. One instance where such a structure may be used is if the US target is a US real property holding corporation (USRPHC) and is being sold to a non-US buyer. In that case, the non-US shareholder would be subject to US FIT on any gain (or loss) arising from the sale of

KPMG LLPAlden Sonander [email protected] Christian J Athanasoulas [email protected] Jason R Connery [email protected] Jennifer Blasdel-Marinescu [email protected]

345 Park AvenueNew YorkNY 10154United States

Tel: +1 212 758 9700Fax: +1 212 758 9819www.kpmg.com




the target stock. By selling the stock of a non-US company that owns the USRPHC stock, the seller can defer the taxation of the built-in gain in the target stock; furthermore, the buyer would not be required to withhold 10 per cent of the purchase price, as would be the case if the actual stock of the USRPHC had been sold. A USRPHC generally is defined as any corpo-ration if the fair market value of its USRPIs represents 50 per cent or more of the fair market value of its assets.



A non-US company’s gain from the disposal of stock in a US corporation is generally not subject to US FIT. As discussed in question 15, an excep-tion to this general rule applies in cases where a US corporation is (or was within the five years preceding the date of the sale) a USRPHC. The gain

realised on the sale of stock of a USRPHC (or former USRPHC) is treated as effectively connected with a USTB and, consequently, subject to US FIT (and possibly state and local income tax) at the graduated income tax rates applicable to US taxpayers.



As discussed in question 1, US FIT law provides that certain transfers of shares in a US corporation and/or assets held by a US corporation may qualify for tax-free treatment if certain conditions are met.

Again, there are rules under section 367 that make it difficult to qualify for tax-free treatment where the acquirer is a non-US resident. Also, it may be difficult to qualify for complete tax-free treatment where the target is a non-US company that owns USRPIs, including the stock of a USRPHC.


Hoet Pelaez Castillo & Duque VENEZUELA


VenezuelaJesús Sol-Gil, Elina Pou-Ruan, Nathalie Rodríguez-Paris and Rodrigo Lepervanche-RiveroHoet Pelaez Castillo & Duque




Regarding acquisition of stock in a Venezuelan company, the purchaser must withhold and pay 5 per cent of the selling price directly to the tax authorities. Such percentage shall constitute a tax advance for the seller, which will be credited in its favour at the end of the fiscal year.

On the other hand, certain assets in a business asset acquisition are subject to value added tax (VAT), which is currently 12 per cent of the mar-ket value of the assets to be acquired. VAT is directly payable by the pur-chaser to the seller, and both parties are liable to account for it.

The acquisition of a going concern entailing the purchase of busi-ness assets and liabilities is subject to a 5 per cent income tax withholding over the price of the acquisition to be paid directly to the tax authorities, and a stamp tax ranging from 2 per cent to 20 per cent, depending on the Commercial Registry Office where the selling entity was registered.

2 Step-up in basis


The Income Tax Law provides an instrument similar to the ‘step-up in basis’ called inflation adjustment, which consists of a yearly update of an asset’s fair inflation value. All commercial entities must apply the inflation adjustment to their assets with the exception of the taxpayers involved in banking, financial, insurance and reinsurance businesses, which are excluded from the inflation adjustment system. Consequently, at the time of the purchase, the value of the asset will be adjusted for inflation.

According to Venezuelan law, goodwill and intangible assets are not depreciated, they are amortised. Amortisation entails the loss of value of an intangible asset with respect to the costs of the investment over time.

The income tax regulations allow the deduction of a reasonable amount from the income tax, corresponding to a portion necessary to offset the cost of such assets through time. Income amortisation is recom-mended by the Venezuelan International Financial Reporting Standards.



The general principle in income tax laws and regulations is that companies established in Venezuela and companies established in foreign jurisdic-tions have the same conditions for acquisitions.

However, if the purchaser is established in a foreign jurisdiction that has executed a treaty with Venezuela to avoid double taxation, such pro-visions will apply and, in some cases, it would be more favourable if the purchaser is a foreign company.



No, mergers and share exchanges are not common forms of acquisition in Venezuela.

However, both are perfectly legal according to Venezuelan commer-cial laws and regulations. These forms of acquisition are not very com-mon because Venezuelan commercial laws require a longer process, since the merger may only take place three months after the publication of the merger approval by both of the entities involved. Mergers may have the advantage of the resulting company assuming the same tax situation of the merged companies, including benefits and liabilities.

The most common forms of acquisition in Venezuela are the acquisi-tion of stock or the acquisition of business assets (including transfer ben-efits of tax loss).



If the acquirer issues stock as consideration for the acquisition of business assets rather than cash, such acquisition will not be subject to withholding tax. The Income Tax Law explicitly establishes that such withholding of taxes applies to payments made in cash.

In regard to the acquisition of shares in a company where the acquirer uses stock as consideration, it makes no difference since the purchase of shares is not subject to VAT. There would be no withholding of income tax either.

VAT is only applicable over the market price of movables; therefore, intangible assets (stock, trademarks, patents, goodwill, clients, contractual rights) are explicitly excluded from such tax.

6 Transaction taxes


If the acquisition of business assets entails the sale of a going concern, such acquisition must be registered before a commercial registry office and, consequently, the stamp tax customarily applies. Unless otherwise agreed, the purchaser is the one who pays this duty. The rate for said stamp tax is 2 per cent of the price. In addition, the sale of a going concern is subject to withholding tax of 5 per cent of the sale price, which is in fact an advance payment of the final tax to be paid by the seller at the end of the fiscal year; therefore, the taxes withheld become a credit against the final income tax.

The acquisition of tangible business assets is subject to VAT. The taxa-ble basis will be the market value and the rate of 12 per cent of such taxable basis. Both parties are liable to account for it; nevertheless, the tax is borne by the purchaser. This tax (VAT) is also a tax credit to the buyer.


VENEZUELA Hoet Pelaez Castillo & Duque




None of the above are subject to limitations after changes in control or other circumstances. However, there are temporary limitations for income tax, such as:• uncompensated net operating losses may be carried over only up to

the three fiscal periods following the period when they were produced;• tax credits arising from paid taxes or taxes withheld in excess may be

discounted from the payable tax in subsequent tax returns, but limited to 25 per cent of the taxable net income, up to four years, without preju-dice of the right to request restitution thereof before they elapse;

• other types of deferred tax assets may be carried over only up to the three subsequent fiscal periods; and

• losses adjusted by inflation can only be deducted in the year of occur-rence and cannot be carried over.

The net operating losses and other tax attributes are transferred to the merged company only in case of a merger; otherwise, they are not transferable.

There are no rules or special regimes in cases of acquisition or reor-ganisation of insolvent companies or in cases of bankruptcy, unless they decide the liquidation thereof. In such case, it is necessary to present a final statement of income beforehand.

8 Interest relief


No explicit provision in the income tax laws and regulations establishes interest relief for borrowings to acquire a target company. However, deduc-tion of interest derived from borrowings may occur, as long as such bor-rowings are invested in the production of income.

The Income Tax Law transfer-pricing regulations currently in force provide that taxpayers who execute transactions with related parties are obliged to establish the same conditions (income, deductibility and costs) as if such transactions were executed with a non-related party.

The withholding tax on the interest payments from a local company to a foreign company may not be avoided, but it may be substantially reduced if a loan is granted by a foreign financial institution.

Debt pushdown may not be achieved according to Venezuelan law. The debt may be delegated to the target company, but there would be no interest relief for the target company in this case. As mentioned above, in order to deduct interest, the borrowing that generated such interest must be invested in the production of income, and it must be a necessary expense made in Venezuela for such purpose.

Transfer-pricing and thin-capitalisation rules will also apply.In general, thin capitalisation rules provide that any interest paid,

directly or indirectly, to an entity considered as a related party, will only be deductible to the extent that the sum of the debts with related parties, plus the amount of debts with non-related parties, does not exceed the tax-payer’s financial resources. The portion exceeding this 1:1 ratio will not be deductible.



The most common protections in acquisitions are warranties and indem-nities. In both cases, they are documented in the business asset or in the stock purchase agreement. In principle, the payments made under a war-ranty or indemnity seek to repair damages; therefore, they are not taxable since they do not represent an increase of financial resources or net enrich-ment for the recipient.


10 Restructuring


The most common post-acquisition restructurings carried out in Venezuela are the following:• labour restructuring – when the acquirer has its own staff, it is com-

mon that some divisions of the target company disappear. In these cases, downsizing is necessary in order to carry on with the business. Sometimes, employer substitution may also be necessary when the controlling company is also receiving personnel;

• by-laws amendments – when a company is acquired, by-laws are usu-ally modified to fit the acquirer’s standards; and

• board and management restructuring – it is very common to replace members of the board of directors and senior management.

11 Spin-offs


Yes, tax-neutral spin-offs can be executed in Venezuela, although they may not be tax-neutral in all circumstances and the process requires planning. If the spin-off is executed through a stock disposal, the operating losses could be preserved.



Yes, it is possible to move the residence of the target company without tax consequences. Nevertheless, it is very important to comply with any pend-ing tax obligations before such migration. If the migration of the company implies its liquidation in Venezuela, the shareholders will be jointly and severally liable for any pending tax obligations within the jurisdiction.



In regard to interest payments, the Income Tax Law provides that a local company must include the income obtained from any interest accrued from an inter-company loan in its annual income tax return. The maxi-mum applicable rate is 34 per cent over the net taxable profit derived from foreign sources, which would include interest earned from an inter-company loan. Unless the interest is paid to a beneficial owner impeached or resident of a state with which Venezuela has signed a double taxation treaty, retention will be as required under the treaty.

Interest paid to foreign financial institutions is subject to a 4.95 per cent proportional tax to be withheld on each payment.


Hoet Pelaez Castillo & Duque VENEZUELA


Dividends are also taxable according to the following rules: the Income Tax Law defines dividends as the quota that corresponds to each share in the profits of companies and other assimilated taxpayers, includ-ing those resulting from participation quotas in limited liability companies.

Dividends are subject to a proportional tax applied only if they cor-respond to profits that have not been taxed at the level of the dividend distributing company. The net income is declared by the taxpayer through financial statements prepared in accordance with the Generally Accepted Accounting Principles. The net income is the basis for the calculation of taxes. The proportional tax rate on dividends, when applicable, is 34 per cent and it is subject to withholding. If the dividends are paid in shares, a withholding tax of 1 per cent of the value of the dividend distrib-uted in shares is applicable. Such tax withholding shall constitute a tax

advance for the seller, which will be credited in its favour at the end of the fiscal period.

If a double taxation treaty is applicable, the taxation on dividends may vary, and it will generally be subject to tax at a rate ranging from 5 per cent to 10 per cent, depending on the capital participation of the dividends’ beneficiary.

Venezuela has entered into double taxation treaties with Austria, Barbados, Belgium, Brazil, Canada, China, Cuba, the Czech Republic, Denmark, France, Germany, Indonesia, Iran, Italy, Korea, Kuwait, Malaysia, the Netherlands, Norway, Portugal, Qatar, Russia, Spain, Sweden, Switzerland, Trinidad and Tobago, the United Kingdom and the United States. When there are no treaties signed with a given country, the Income Tax Law provides the application of all mechanisms.

Update and trends

In November 2014 a tax reform was enacted, including the Organic Tax Code, the Income Tax Law and the Value Added Tax Law. The most relevant changes were the following:• extension of the statute of limitations from four to six years and

from six to ten years, depending on the specific circumstances of each case;

• non-suspension of the effects of an appealed act in an administrative proceeding;

• the Tax Administration Office (SENIAT) can exercise the corresponding criminal action for criminal tax penalties, without prejudice to the powers of the Public Prosecutor’s Office;

• the tax administration can establish precautionary measures without a court order and execute those acts that are considered enforceable according to Venezuelan law, without the authorisation of the judicial branch and without a judicial proceeding;

• the SENIAT may promote, initiate and terminate the executive tax levy of those taxes that are considered enforceable according to Venezuelan law, thus, the actions that determine liquid and payable amounts, without the intervention of the judicial branch;

• the SENIAT may impose an electronic address for tax purposes in order to send communications or administrative acts concerning the taxpayer;

• there is a 250 per cent increase in fine sanctions, including the indefinite closure of establishments for violating the law. Furthermore, the legal de facto assumptions regarding tax penalties have increased;

• elimination of exemption of the cooperative societies regarding the payment of income taxes when they operate under the general conditions established by the President;

• elimination of the exemptions established for religious, artistic, scientific, environmental, technological, sports, professional and defence institutions from paying income taxes;

• increase of the taxable base of employees;• diminishing and conditioning the carry-forward of operative losses;• diminishing and conditioning the deduction of VAT credits; and• transferring the power to fix the tax rates to the executive branch of

the government.

Foreign exchange control systemIn Venezuela, there is an exchange control system that has been in force since 2003. Said system regulates the sale and acquisition of foreign currency, which involves accounting effects for the registration, collection and payment of operations in foreign currency, and their fiscal effects must be analysed according to the systems and the exchange rates that are available and valid at the moment the operations are carried out at the end of the fiscal year.

The current exchange system has several official exchange rates, which are simultaneously valid. We consider that any of the exchange rates derived from the foreign currency exchange decisions issued by Banco Central de Venezuela (BCV), either the permanent rate of 6.30 fuertes per US$ 1, or the implicit and changeable SICAD or SIMADI rates, could be used to determine the registration of the operations made in foreign currency depending on each case. Thus, those expecting to obtain foreign currency at the permanent exchange rate or at SICAD’s could use one of these rates in any case; and in the event there are no expectations regarding the aforementioned rates, the operations must be made using SIMADI’s exchange rate.

Exchange Decision No. 14, published in Official Gazette No. 40,108 on 8 February 2013, established the exchange rate at 6.30 fuertes per US$ 1 for the foreign currency sold by BCV and at 6.28 fuertes per

US$ 1 for its acquisition. According to the regulations currently in force, the acquisition of foreign currency at said exchange rate is allocated to public sector expenses and basic services, such as housing, education, culture, health, medications and food.

Exchange Decision No. 25, published in Official Gazette No. 6,122 on 23 January 2014, establishes that the sale of foreign currency will be carried out through auctions of foreign currency and foreign currency securities, and that the BCV will publish the exchange rate resulting from the last foreign currency sale made through SICAD I on its website, which has been 10.70 fuertes to 11.80 fuertes per US$ 1 on average.

SICAD is currently administered and directed by the National Centre for Foreign Trade (CENCOEX) according to Exchange Decision No. 25, published in the Official Gazette No. 6,125 on 10 February 2014, and may be used for the following exchange operations:• cash for international travel;• remittances to family members living abroad;• paying for the operations of the National Civil Aviation;• lease and services agreements; use and exploitation of patents,

trademarks, licences and franchises; as well as importation of intangible assets; payment of network leases; installation, repair and maintenance of imported machinery, equipment or software related to the telecommunications sector;

• public international air transportation of passengers, cargo and mail duly allowed by the presidency; and

• international investments and payment of royalties; use and exploitation of patents, trademarks, licences and franchises; as well as technology importation and technical assistance agreements.

Furthermore, Exchange Decision No. 29 extends the application of SICAD I’s exchange rate to the importation of certain products of the automotive sector.

On the other hand, on Exchange Decision No. 33 published in the Special Official Gazette No. 6,171 on 10 February 2015, SIMADI was created and was set as the official alternative and residual exchange rate for natural and legal persons in the private sector, living and domiciled in the country, to acquire foreign currency that is offered according to the existing supply and demand of the market, upon request or quote submitted to the corresponding institutions. Said exchange rate has been 190 fuertes per US$ 1 on average.

From a fiscal point of view, none of the existing regulations determine the exchange rate with which the operations and transactions made in foreign currency should be valued and registered, which is why the Generally Accepted Accounting Principles are applied. According to the clarification issued by the Federation of Associations of Public Accountants on 25 January 2014, made to IAS No. 21, which is part of the international standards of financial information valid in Venezuela as part of the Generally Accepted Accounting Principles, the operations and transactions made in foreign currency must be registered:• at the official exchange rates deriving from the application of

Exchange Decisions No. 14, 25 and 27 when there are expectations of obtaining foreign currency through said decisions, or in the event the requests submitted before CENCOEX were expressly denied or the period of time legally established to consider said requests as inadmissible has passed; or

• at the best estimate of the expected future flows in VEF that to the date of the transaction or of the financial statements would be disbursed or received, as the case may be, to pay obligations or carry out the assets in foreign currency using exchange mechanisms or payments legally established or authorised by the State or the legislation of the Bolivarian Republic of Venezuela.


VENEZUELA Hoet Pelaez Castillo & Duque


Non-residents are taxed at a proportional rate of 34 per cent of their gross income.



Generally, the provisions on dividends, technical assistance, royalties and other mechanisms established in an applicable tax treaty to avoid double taxation are the most tax-efficient means to transfer profits from Venezuela.

If a treaty is not applicable, the provisions on technical assistance ser-vices contracts of the Income Tax Law constitute a tax-efficient instrument to receive compensation on transferred technical assistance. Technical assistance services provided abroad are subject to a tax equivalent to 15 per cent, and up to a maximum of 34 per cent, over 30 per cent of the gross income produced by such services. Consequently, the effective appli-cable income tax rate would be approximately 10.2 per cent over payments made. If a double taxation treaty is not applicable, royalties will be taxed on the basis of 90 per cent of the total amount paid.

Nevertheless, it is important to take into consideration that there is an exchange control system currently in force in Venezuela, and there are cer-tain restrictions to obtain foreign currency for that kind of payment.


15 Disposals


Disposal of the business assets, stock in the local company and stock in the foreign company are common ways of carrying out disposals in Venezuela but, when applicable, the most common method would probably be the transfer of stock in a foreign holding company.



Gains on the disposal of stock of a local company by a non-resident com-pany are subject to income tax, just like ordinary income.

Non-residents are taxed at a proportional rate of 34 per cent of their gross income.

At the time of disposal, the price of acquisition is subject to a 5 per cent withholding by the purchaser, which must be paid directly to the tax authorities. Such withholding will represent an advance payment of the seller’s income tax for its gains on the disposal. When the disposal does not represent a taxable profit for the seller, the tax authorities will issue a tax credit equivalent to the 5 per cent withholding in favour of the seller at the end of the fiscal period. Sale of stock of a listed company through the stock exchange market is subject only to 1 per cent proportional tax.

If a treaty to avoid double taxation was executed between Venezuela and the jurisdiction of the non-resident company, such rules will apply.



There is no method for deferring or avoiding tax. If the seller of either shares in the local company or business assets obtains a taxable gain from such operation, as a general rule, the seller must comply with all tax obliga-tions by the end of the fiscal year. In certain circumstances, there may be alternative ways to complete the transaction that may allow a tax defer-ral; for instance, asset contribution to the capital stock of another company may in some cases allow a deferral of the tax until the disposal of the shares received.

Such provisions will still apply if a double taxation treaty between Venezuela and the seller’s jurisdiction is in force.

Jesús Sol-Gil [email protected] Elina Pou-Ruan [email protected] Nathalie Rodríguez-Paris [email protected] Rodrigo Lepervanche-Rivero [email protected]

Av Venezuela, Edificio AtriumPiso 3, Urb El RosalCaracas 1060Venezuela

Tel: +58 212 201 8611Fax: +58 212 263 7744www.hpcd.com


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