contents 2 getting the deal through – tax on inbound investment 2015 albania 5 alketa uruçi and...

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Tax on Inbound Investment

Tax on Inbound InvestmentIn 31 jurisdictions worldwide

Contributing editorsPeter Maher and Lew Steinberg

2015

Tax on Inbound Investment 2015

Contributing editorsPeter Maher and Lew Steinberg

A&L Goodbody and Credit Suisse

PublisherGideon [email protected]

SubscriptionsSophie [email protected]

Business development managers George [email protected]

Alan [email protected]

Dan [email protected]

Published by Law Business Research Ltd87 Lancaster Road London, W11 1QQ, UKTel: +44 20 7908 1188Fax: +44 20 7229 6910

© Law Business Research Ltd 2014No photocopying: copyright licences do not apply.First published 2006Ninth 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 2014, be advised that this is a developing area.

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CONTENTS

2 Getting the Deal Through – Tax on Inbound Investment 2015

Albania 5Alketa Uruçi and Jonida SkendajBoga & Associates

Australia 8Greg Reinhardt and Seema MishraHenry Davis York

China 13Ulrike Glueck and Charlie SunCMS, China

Costa Rica 17Alejandra Arguedas Ortega, Carolina Flores Bedoya and Sophia Murillo LópezArias & Muñoz

Croatia 21Aleksandra RaachKaranović & Nikolić

Curaçao 25Jeroen StarreveldSpigt Dutch Caribbean

Denmark 30Niclas Holst Sonne and Anne Becker-ChristensenHorten Law Firm

Dominican Republic 36Enmanuel MontásMS Consultores

El Salvador 40Luis Barahona and René García Arias & Muñoz

France 44Christel AlbertiScemla Loizon Veverka & de Fontmichel (SLV&F)

Germany 49Wolf-Georg von RechenbergCMS Hasche Sigle

Greece 54Theodoros SkouzosIason Skouzos & Partners Law Firm

Guatemala 60Eduardo A Mayora and Juan Carlos CasellasMayora & Mayora, SC

Hong Kong 63L Travis Benjamin and Stefano MarianiDeacons

India 68Mukesh Butani and Shefali GoradiaBMR Legal | BMR & Associates LLP

Indonesia 75Freddy Karyadi and Anastasia IrawatiAli Budiardjo, Nugroho, Reksodiputro

Ireland 80Peter Maher and Philip McQuestonA & L Goodbody

Lithuania 84Laimonas Marcinkevičius and Ingrida SteponavičienėJuridicon Law Firm

Luxembourg 90Frédéric Feyten and Michiel BoerenOPF Partners

Malaysia 94Barbara Voskamp, Yvette Gorter-Leeuwerik and Benny E ChweeVoskampLawyers

Mexico 100Manuel E Tron and Elías AdamManuel Tron SC and Ernst & Young

Netherlands 105Friggo Kraaijeveld and Ceriel CoppusKraaijeveld Coppus Legal

Nigeria 110Dayo Ayoola-Johnson and Bidemi Daniel OlumideAdepetun Caxton-Martins Agbor & Segun

Panama 115Ramón Anzola, Maricarmen Plata and Maria del Pilar DiezAnzola Robles & Associates

Portugal 122Tiago Marreiros Moreira, Conceição Gamito and Frederico AntasVieira de Almeida & Associados

Singapore 128Barbara Voskamp, Yvette Gorter-Leeuwerik and Benny E ChweeVoskampLawyers

Spain 133Guillermo Canalejo Lasarte and Alberto Artamendi GutiérrezUría Menéndez

Ukraine 138Pavlo Khodakovsky and Olga BaranovaArzinger

United Kingdom 142Graham Chase and Jacob GilkesOlswang LLP

United States 147Alden Sonander, Christian J Athanasoulas, Jason R Connery and Jennifer Blasdel-MarinescuKPMG LLP

Venezuela 152Jesús Sol Gil, Elina Pou Ruan and Nathalie RodríguezHoet Pelaez Castillo & Duque

www.gettingthedealthrough.com 3

PREFACE

Getting the Deal Through is delighted to publish the ninth 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 31 jurisdictions featured. Our coverage this year includes Denmark, Dominican Republic, El Salvador, Hong Kong, Indonesia and Spain.

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 Peter Maher of A&L Goodbody and Lew Steinberg of Credit Suisse, the contributing editors, for their continued assistance with this volume.

LondonOctober 2014

PrefaceTax on Inbound Investment 2015Ninth edition

Boga & Associates ALBANIA


AlbaniaAlketa Uruçi and Jonida SkendajBoga & Associates

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?

A foreign purchaser may acquire an Albanian company (the target com-pany) by purchasing either its assets or its stock.

A foreign company acquiring the (Albanian) assets of an Albanian company for carrying on business in Albania will normally be regarded as having a permanent establishment in Albania; thus, it will be taxable in Albania in accordance with domestic tax legislation and any double taxation treaty entered into with the country of residence of the foreign company.

The foreign company may also purchase the assets of the target com-pany through a third company newly established in Albania by the foreign company, or through an existing Albanian company, shares of which have been previously purchased by the foreign company.

Most tangible and intangible assets may be depreciated, except for land, securities and some other specific assets. On a decline basis, build-ings are depreciated at 5 per cent per annum, software at 25 per cent per annum, and all other assets at 20 per cent per annum. Trademarks and other intangibles are depreciated at 15 per cent per annum on a straight-line basis.

Under the Income Tax Law (No. 8438 of 1998), there are no imme-diate Albanian tax consequences for a foreign company when it acquires the stock of an Albanian company. Apart from the carry-forward of losses, as described below, the tax position of the acquired Albanian company remains unchanged.

With regard to the tax liability of the buyer towards the stock or busi-ness activity purchased, differences result due to the nature of the trans-action and the impact of other applicable legislation. Consequently, as a result of the acquisition of stock in a company, the buyer might be liable for latent tax liabilities affecting the company. (The Tax Procedures Law (No. 9920 of 2008) has the effect of piercing the corporate veil; therefore, even a shareholder of a company where the legal form imposes limitation of its liability up to its contribution into the company may become liable for the tax liabilities of the company.) As a result of the acquisition of busi-ness assets and liabilities (ie, activity) the buyer may also become liable for tax liabilities pertaining to the activity purchased before its acquisition (for details and exceptions, see question 9).

It is not possible to obtain assurances from the tax authorities that a potential target company has no tax liabilities or advice on whether the tar-get is involved in a tax dispute. Hence, the extent of indemnities or warran-ties is a matter of negotiation between the parties.

At the moment of disposal, any income resulting from a source in Albanian territory is taxable in Albania. Therefore, capital gains earned by a foreign company at the moment of disposal of the stock or business assets and liabilities will be subject to Albanian income tax (currently at 15 per-cent), except when double tax treaties, providing otherwise, are applicable.

For differences in VAT treatment, see question 6.

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?

As per the Albanian National Accounting Standards and International Financial Reporting Standards, applicable in Albania from 1 January 2008, goodwill is subject to impairment and not to depreciation.

In a purchase of stock in a company owning goodwill and other intan-gibles, no depreciation of such assets is allowed for tax purposes to the buyer.

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?

If the acquisition of business assets is made by an acquisition company established in Albania, the permanent establishment issue mentioned in question 1 will have no impact on the acquisition.

In terms of acquisition of stock, there are no tax incentives or differ-ences at the moment of acquisition. Tax differences arise in terms of taxa-tion of dividends distributed by the target company. In fact, if stocks are purchased by the foreign investors through a local company, dividends distributed by the target company to the local subsidiary of the foreign investor are exempt from taxation, provided that both the target company and the local subsidiary are Albanian tax residents and subject to corporate income tax.

4 Company mergers and share exchanges

Are company mergers or share exchanges common forms of acquisition?

In practice, company mergers (as defined under Albanian commercial leg-islation, ie, fusion-absorption or fusion-creation of a new entity) and share exchanges are not common forms of acquisition in Albania. This is because of the lengthy procedures for realisation of mergers under Albanian com-mercial legislation. The most common form of acquisition is the share or stock purchase transaction.

5 Tax benefits in issuing stock

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

There is no tax benefit to the acquirer in issuing stock as consideration rather than cash. The tax legislation does not expressly provide for the tax treatment of the vendor; in any case, it results in taxation of the entity receiving the shares in exchange for the in-kind contribution being deferred until future sale of the shares gained in exchange for the contribution.

ALBANIA Boga & Associates


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?

There are no payable documentary taxes on the acquisition of stock or business assets.

Under the VAT law, both transactions are exempt from Albanian VAT (currently at 20 per cent). Where such exemption benefits the acquisition of stock because of the nature of the transaction (ie, share or stock transac-tions), the exemption of acquisition of business assets is subject to fulfil-ment of economic and legal conditions.

Business assets transactions will be exempted from VAT if the trans-action falls under the category of ‘transfer of economic activity’, defined as a transaction where the taxable person transfers its activity entirely or partially to another person who is already or becomes a taxable person by continuing to conduct such activity, and when the following economic and legal conditions are fulfilled:• The transferred activity must have economic autonomy; that is, it

must continue to be conducted independently after the transfer. Economic autonomy requires the presence of all conditions necessary for the realisation of the activity (such as the premises, raw materials, equipment, etc). If the transfer consists only of one of these elements (eg, raw materials only), the transfer will be considered as supply of goods and thus be subject to VAT.

• The legal requirement consists of the conclusion of a written agree-ment before a notary public and verification of the balance sheet of the transferor, especially the identification of the assets used for the transferred activity and income realised from the said transfer. The same verifications will apply to the balance sheet of the transferee.

The acquisition of business assets (transfer of economic activity) will trig-ger application of national and local taxes depending on the nature of the assets acquired. If the assets constitute immoveable properties, a tax for transfer of ownership title over the immoveable properties shall apply (such tax is 2,000 leke per square metre for commercial buildings located in Tirana, the capital city (the tax is lower in other districts); furthermore, the tax is 2 per cent of the sale price for all immoveable properties other than buildings).

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?

Net operating losses do not survive where direct or indirect ownership of the share capital or voting rights of the target changes by more than 50 per cent in number or value.

According to the instruction of the minister of finance, net operating losses are strictly related only to the taxpayer.

No other special rules or tax regimes are applicable to acquisitions or reorganisations of bankrupt or insolvent companies.

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?

As a general rule, interest paid on loans stipulated for acquiring the tar-get is tax-deductible. The nationality of the lender does not imply any restrictions on the interest’s tax deductibility, while the fact that it might be a related party involves consideration of the transaction under transfer-pricing rules.

Albanian fiscal legislation restricts such deductibility to compliance with the following rules:• thin capitalisation: the loan for which the interest is paid is less than

four times the amount of the taxpayer’s net assets (this rule is not applicable to banks, insurance and leasing companies, or for loans that are granted from banks for a duration of less than one year);

• interest paid by the taxpayer during the financial year is less than the average of 12 months’ credit interest rate applied by Albanian second-tier banks; and

• transfer pricing: to be deductible, the interest amount should be quali-fied as determined pursuant to the arm’s-length principle.

As a general rule, the 10 per cent withholding tax applies to the interest payments made to the foreign lender by the Albanian taxpayer, unless a double tax treaty for avoidance of double taxation entered into between Albania and the country of residence of the foreign lender provides for a lower rate.

When provisions of double tax treaties are applicable, the foreign lender (or Albanian taxpayer) should file with the Albanian General Tax Directorate (the competent public body to implement and interpret the tax treaties) the application form for implementation of the tax treaty along with its certificate of tax residence.

Debt pushdown in the form of a merger may be achieved if the merger is approved by the shareholders representing 75 per cent of the share capi-tal (in a joint-stock company) and is not challenged by the creditors of the target. Albanian income tax legislation does not provide for special rules regarding mergers or debt pushdown. However, the tax deductibility of the interests, after the companies are merged, will be considered by the tax authorities under the general legal deductibility requirement, namely incurrence of expenses in the direct interest of the taxpayer and their quali-fication as a normal management act.

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?

The tax legislation does not indicate any specific rule with regard to the liability of the seller or acquirer over the debts affecting the stock or busi-ness assets and the protection of the acquirer in such cases. However, other legal provisions may be considered for determining such liability.

In the particular case of business activity acquisition, rights and liabili-ties of such activity are binding on the acquirer provided that the trade-mark or the registered name of the business activity are also acquired by the acquirer, except when the parties have agreed to restrict or exclude the liability of the acquirer over the acquired activity. Such agreement may not be opposed to third parties, even if disclosed to the public (ie, through filing with the Commercial Register), except when the third parties’ acknowledgement of the agreement is proved; or it is proved that, given the circumstances, the third party should have acknowledged such agreement.

In any case, the acquirer of stock and business assets may be protected by contractual warranties and representations of the seller as well as con-tractual indemnities and penalties binding on the seller. Normally, such warranties and representations are indicated in the stock or business asset agreement.

Payments made, following a claim under a warranty or indemnity are taxable in the hands of the recipient and non-deductible for the payer. No withholding taxes apply on such payments.

Post-acquisition planning

10 Restructuring

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

The post-acquisition restructuring would depend on the business and pur-pose of the acquisition or restructuring by the acquirer. There is no typical practice in Albania.

Boga & Associates ALBANIA


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?

No tax-neutral spin-offs of business may be executed. The previous losses of the spin-off business are lost (see question 7).

12 Migration of residence

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

Under commercial legislation, the migration of the residence (legal seat indicated in the by-laws or the real legal seat) of an Albanian company into another jurisdiction has some implications. In fact, the legislation provides that the territory where the legal seat of the company is located determines the law applicable to the company. Therefore, change of the jurisdiction of the legal seat implies change of legal jurisdiction; hence, dissolution of the company.

The dissolution of the company is preceded by its liquidation, which has tax consequences in terms of the taxation of income resulting from the liquidation process.

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?

Interest and dividend payments made by an Albanian tax resident to a for-eign entity are subject to a 10 per cent withholding tax.

Double tax treaties may provide for lower tax rates.No withholding tax applies to interest and dividend payments made

to an Albanian tax-registered entity. For the recipient, interest is subject to corporate income tax (as ordinary income) while dividends are free from it.

14 Tax-efficient extraction of profits

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

There are no other tax-efficient means for extracting profits from Albania.

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?

The most commonly carried out disposal in Albania is disposal of the stock in the local company.

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?

The gains on disposal will not be exempt from taxation (such gains will be considered as having an Albanian source under the Income Tax Law) unless a double taxation treaty provides otherwise.

Under national legislation, there are no special rules dealing with the disposal of stock in real property, energy and natural resource companies. Some double tax treaties entered into by Albania, however, provide for such rules if the stock represents the share capital of a real property company.

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?

The Income Tax Law does not provide for any possibility to defer or avoid taxation.

Alketa Uruçi [email protected] Jonida Skendaj [email protected]

Ibrahim Rugova StreetGreen Park, Tower ITiranaAlbania

Tel: +355 4 225 1050Fax: +355 4 225 1055www.bogalaw.com

Update and trends

The Albanian Ministry of Finance is drafting new laws on corporate income tax and personal income tax, which are expected to be effective from 1 January 2015. As a result, the tax treatment of acquisitions in Albania might be affected.

AUSTRALIA Henry Davis York


AustraliaGreg Reinhardt and Seema MishraHenry Davis York




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 and South Australia impose duty on transfers of shares in an unlisted company. The rate of duty imposed on the acquisition of shares in a company is considerably 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


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.

Henry Davis York AUSTRALIA




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.



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.



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


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 and South Australia impose 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.



Companies must satisfy stringent rules in Australia in order to carry- forward 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


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.



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.


10 Restructuring


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


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.



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.



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.

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.

Henry Davis York AUSTRALIA


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 un-taxed 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

withholding 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.



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.


15 Disposals


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

Australia has recently introduced a new transfer pricing regime. The new rules ensure that the application of the arm’s-length principle in Australia’s domestic laws is aligned with international transfer pricing standards regardless of whether the other country forms part of Australia’s tax treaty network.

In the 2014–2015 Budget, the government remained committed to the introduction of a new tax regime for managed investment trusts which is intended to commence from 1 July 2015. It will introduce legislation that allows foreign pension funds to access the managed investment trust withholding tax regime.

The government also announced that the final stage of reforms to the Investment Manager Regime (IMR) will be made. The purpose of the IMR regime to address uncertainty regarding the tax treatment of offshore transactions undertaken through Australia. The full IMR is intended to apply from 1 July 2011; however the final form of the legislation has not been introduced.

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

44 Martin Place Sydney NSW 2000 Australia

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





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).



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.

CMS, China CHINA


ChinaUlrike Glueck and Charlie SunCMS, 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 fair market value of the shares 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 enter-prise (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 double 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.

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 does not occur in the case of acquisition of shares. The acquisition costs of the shares cannot be

amortised or deducted for CIT purposes until the acquired shares are fur-ther 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) cannot use its registered capital to make acquisi-tions, but can only finance them from their profits and cashflow.

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 acqui-sition company is generally not tax-efficient, because the capital gains will be included in the overall taxable income of the Chinese acquisi-tion 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 most some tax treaties concluded by China with other tax jurisdictions (eg, Switzerland), China has may not have the taxation right over such capital gains from the share transfer, especially when the share transferor holds more than 25 per cent shares in the relevant Chinese company.

CHINA CMS, China




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 75 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; 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 75 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 intangible assets, VAT (standard rate is 17 per cent for tangible moveable assets and 6 per cent for intangible assets) 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. There are no techniques for preserving them. There are no special rules or tax regime for acquisitions or reorganisations of bankrupt or insolvent companies.

8 Interest relief


An acquisition company gets interest tax relief for borrowings to acquire the target, ie, 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. 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,

CMS, China CHINA


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.



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, provided 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 transaction).



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 to be PRC tax-resident even if its man-agement institution is moved outside China. In this case, it is possible that the foreign country where the company’s management institution is moved to also treats it as tax-resident. It is possible then under the relevant double taxation treaty, China makes a concession and no longer treats it as PRC tax -resident. A foreign company (with its management institution in

China) can cancel its PRC tax residence by moving the management insti-tution 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. In addition, interest payment is subject to 5 per cent business tax plus various surcharges at around 10 per cent of the business tax. Domestic exemptions from these withholdings are generally not avail-able. 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.



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. 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 (cred-itable by the Chinese company). Services are subject to either VAT (credit-able) 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

CHINA CMS, China


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

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.

Update and trends

Under Chinese tax law, CIT on capital gains derived from a share transfer may be exempted at the stage of the share transfer and postponed until future disposal of the acquired shares, if the current share transfer qualifies for the application of special tax rules as stipulated by the Tax Circular Caishui [2009] No. 59. However, in order to enjoy the benefits of these special tax rules, certain documentation must be filed with the competent tax authorities. The State Administration of Taxation (SAT) has issued various tax regulations to provide guidance regarding the recordal procedures. However, the previous regulations focused on share transfers made by tax resident enterprises. Since (intra-group) share transfers made by non-TREs may equally be eligible for special tax rules (subject to various conditions), on 12 December 2013, the SAT issued Announcement [2013] No. 72 to clarify the relevant recordal procedures for non-TREs.

Apart from the procedural stipulations, the Announcement mentioned two important points as follows: • as a result of offshore merger or split, the overseas shareholder

of a Chinese company may be changed. This shall be viewed as a share transfer from a PRC tax perspective, in other words the shares in the Chinese company are transferred to the new shareholder,

which survives the off-shore merger or is newly created during the offshore split. As such, if the share transfer does not fulfil the conditions for special tax rules, PRC withholding tax of 10 per cent must be paid on the capital gains (calculated based on the fair market value of the shares) from the share transfer; and

• where shares in a Chinese company are transferred from one non-TRE to another non-TRE (where the special tax rules are applied), it is possible that the Chinese company will later distribute dividends to the new shareholder out of its retained profits earned before the share transfer. However, in such case, the tax treaty concluded between China and the home country of the new shareholder shall not apply for such dividends, in other words withholding tax on the dividends shall be levied at 10 per cent as stipulated under PRC domestic tax law.

The stipulations are important to foreign investors making offshore restructurings or transferring shares in Chinese subsidiaries, because such actions may trigger PRC taxation on the capital gains or cause unfavourable tax treatment for dividends paid out of the retained profits of the Chinese subsidiaries.

Ulrike Glueck [email protected] Charlie Sun [email protected]

2801 Plaza 66, Tower 21266 Nanjing Road WestShanghai 200040China

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

Arias & Muñoz COSTA RICA


Costa RicaAlejandra Arguedas Ortega, Carolina Flores Bedoya and Sophia Murillo LópezArias & Muñoz




The tax scenarios arising from distinct acquisition structures can be very different from each other, and require a specific approach. Possible acquisi-tion structures involve: • transfer of shares;• transfer of assets; or • contribution of assets into new entities.

Acquisitions performed through the transfer of shares may involve cer-tain taxes, such as income tax. The buyer of shares will be jointly liable for tax obligations generated by the entity acquired, as would be the case if it acquires all the assets of the target. Where the transfer of shares represents a change of control of an entity that owns immoveable assets, a transfer tax will be generated. The transfer of immoveable assets is subject to a 1.5 per cent tax rate. The tax is computed based on either the assets’ transfer value or the value registered before the tax authorities; whichever is higher. The tax is computed based on either the transfer value or the value registered before the tax authorities, whichever is higher.

Costa Rica does not have a capital gains tax. Capital gains are defined as gains derived from the sale of a capital non-depreciable asset, when this is not the taxpayer’s regular trade or business. Therefore, any gain derived from the transfer of shares will be taxed only in the case it is considered the ordinary trade or business of the seller. If considered a taxable capital gain, it will be subject to the corporate income tax (at a 30 per cent rate). Expenses incurred in the acquisition of capital or a capital asset, such as shares, are not deductible. Financing obtained by the acquisitions is not deductible when the purpose of the loan is the acquisition of shares.

Transactions agreed as a sale of all or the majority of the business assets will transfer all tax liabilities to the buyer, including sales tax liabili-ties. If the sale of a going concern complies with the ‘bulk sale’ procedure established by the Code of Commerce, no sales tax is generated on the transfer of inventories. In addition, compliance with the latter procedure might exclude sales tax liabilities to be transferred to the acquisition com-pany. The Code of Commerce does not provide a specific definition for ‘bulk sale’. Nevertheless, it has been characterised by the tax authorities as the transmission of an ongoing commercial business, including the essen-tial rights and obligations of a business line, to a third person (the ‘bulk sale’ does not require the sale of the total assets of a company).

Contribution of assets into a new entity should not trigger any tax implication for the new entity, except in the case of liabilities related to the assets contributed, already determined by the tax authorities.

2 Step-up in basis


Step-up in basis in the business assets of the target company is possible under Costa Rican law. There are two viable alternatives to readjust the value of appreciated assets:• the adjusted value of the transaction is duly recorded at the public reg-

istry; and • the acquisition company performs a private appraisal of the assets.

The appraisal should be done in accordance with the pricing criteria estab-lished by the Ministry of Treasury of Costa Rica.

Revaluation is allowed within the parameters of International Financial Reporting Standard 16, paragraph 30. There is a specific provi-sion in the Income Tax Law Regulations for cases of land sale in urban lots, which allows developers to make an appraisal on the land. In this specific provision, taxpayers are allowed to request that the tax authorities per-form an appraisal on the land to be developed. This is the so-called ‘land in green valuation’. Through the abovementioned appraisal, taxpayers can revaluate the land book value. However, tax authorities have not been able to fulfill all the appraisal requests taxpayers have brought to them, due to their lack of human resources.

Alternatively, taxpayers can revaluate land following the exact same parameters and methodology that the tax authorities use for their own appraisals. It is important to mention that the ‘land in green’ methodology is intended for real estate developments that have not begun.

The essence of private appraisal lies in the fact that the appraiser has to be an independent party, with sufficient technical expertise on valuations. Additionally, the appraisal should be made using the exact same method-ology considered and applied by the tax authorities. In addition, for any appraisal it is necessary to have a master plan of the development for it to be used by the appraiser as part of its considerations for the valuation.

An alternative to obtaining a step-up on the land value would be to perform a real sale transaction, at market value, with a real funds transfer. Under this scenario, the buyer would register at acquisition cost the market value paid, and the seller would obtain a capital gain, which should not be considered taxable if it is a sole transaction, and has no previous real estate sales. However, there would be a cost associated to this, which is the pay-ment of transfer taxes in proportion to the sale price.

The benefit of performing a private appraisal (in accordance with the appraisal methodologies accepted by the tax authorities) to revaluate the land value, consists of having the possibility to update the book value of the asset, allowing a lower taxable income once the real estate development takes place, without having to pay the transfer costs of a sale (which is the usual mechanism to achieve the step-up). However, there is a risk associ-ated to this, which is the possibility of the tax authorities disregarding the revaluation made.

Under Costa Rican law, goodwill and other intangibles may not be depreciated for tax purposes.

COSTA RICA Arias & Muñoz




It is preferable for an acquisition to be executed by an acquisition company established in Costa Rica, rather than in other countries. Where the buyer is a company or individual not resident in Costa Rica, the deductibility of its acquisitions expenses is determined by the laws of its home jurisdic-tion. Where, the buyer is a Costa Rican taxpayer, acquisition expenses are deductible in Costa Rica. Deductibility is legally possible to the extent that the expenses are considered necessary for the generation of taxable income. Expenses incurred in the acquisition of capital or a capital asset, such as shares, are not deductible in either case.

Another advantage to having a Costa Rican acquiring company is that the latter company may become a holding company as a result of the trans-action. Deferral of income taxes on dividend distribution is possible when the distribution is made to Costa Rican companies.



Company mergers are a common form of acquisition, but share exchanges are not as common. Share exchange under Costa Rican law is not regu-lated, and does not provide specific benefits. Although company merg-ers are common, they are usually implemented as a consequence of an acquisition of shares. Financing obtained by the acquisition company is not deductible under Costa Rican law; nonetheless, if a merger occurs, the acquisition company transfers the debt to the prevailing entity, which will be able to consider the financing as a deductible expense.

Company mergers provide investors the possibility of acquiring ongo-ing businesses in Costa Rica. Nonetheless, company mergers have the dis-advantage that the liabilities pertaining to the companies subject to merger are transferred to the acquirer. The use of a stock purchase agreement to perform the transaction would mean that all of the contingent and hidden liabilities currently related to the target and its related companies would shift to the acquirer through the acquisition of the shares. This includes all tax, labour, accounting, commercial, real property, contractual and envi-ronmental contingencies. Please note that the statute of limitations for tax enforcement actions under Costa Rican law is four years, which could be extended to 10 years when the taxpayer is not duly registered at the Costa Rican tax authority or when the taxpayer does not file the tax return or when it is filed with fraudulent information.



The issuance of stock as consideration rather than cash does not have any tax benefits under Costa Rican law.

6 Transaction taxes


Documentary taxes are payable on the acquisition of stock or business assets. Fiscal stamp tax is applied upon the majority of private contracts signed in Costa Rica. Contracts signed abroad should comply with this stamp tax upon their execution in Costa Rica.

In accordance with section 272, paragraph 2, of the Costa Rican Fiscal Code, stamp tax would be due on almost all private agreements and the ones specifically described under section 273 of the Costa Rican Fiscal Code. Stamp taxes are levied based on either the monetary value stated in the document or a specific predetermined fixed amount per page. According to section 272 of the Tax Code, the applicable stamp tax rate would be 0.5 per cent levied on the nominal value of the contract. Technically, the tax has to be assessed and paid upon execution of the document.

Nevertheless, under section 280 of the Fiscal Code, if an otherwise taxable contract is executed outside Costa Rica, the payment of stamp tax would be deferred until said document has to be filed with a local public office (eg, in court, arbitration centre, government office or agency, etc).



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 in any other circumstance. A technique for preserving the operating losses is to incor-porate a new entity that is subsequently merged with an existing entity that has operating losses. Due to the merger, the prevailing company may bene-fit from the net-operating losses of the existing company for a period of five years. Net operating losses may be carried forward for a five year period, or a three year period if the company is an industrial or agricultural company.

Acquisitions or reorganisations of bankrupt or insolvent companies are not subject to any special rules or tax regimes under Costa Rican law.

8 Interest relief


Under Costa Rican law, an acquisition company does not get interest relief for borrowings to acquire the target. There are no restrictions on deduct-ibility where the lender is foreign; nonetheless, deductibility of interests paid to related parties may be restricted in so far as transactions between these types of parties should be in accordance with transfer pricing regula-tions. Withholding taxes on interest payments may be avoided when the interest is paid to a financial entity domiciled abroad, recognised by the Central Bank as a ‘first order bank’ or ‘financial entities usually engaged in financial operations’.

Debt pushdown may be achieved under certain circumstances. Financing obtained by the an acquisition company is not deductible under Costa Rican law; nonetheless, if a merger occurs, the acquisition company transfers the debt to the prevailing entity, which will be able to consider the financing as a deductible expense.

Costa Rican Tax Laws do not include thin capitalisation rules; nev-ertheless, administrative case law has indicated a reasonable proportion between equity and debt should be reflected on local entities. Financing from shareholders to a limited liability company has a special considera-tion, provided interests paid to the shareholders will be considered as divi-dends subject to withholding taxes if remitted abroad. Indirect financing is accepted as long as it is a substantial operation (back-to-back transactions have been disregarded in cases where no substance has been given to the operation).



Warranties, indemnities and representations are the general forms of pro-tection on acquisitions. They are usually documented in a private agree-ment signed between the buyer and the acquirer. In addition, they are usually supported by means of a promissory note or any other type of secu-rities. Payments made following a claim under a warranty or indemnity are not taxable under Costa Rican law.

Arias & Muñoz COSTA RICA



10 Restructuring


Typically, share acquisition implies the connection between the target company and the acquiring entity’s holding company. When the holding company is not domiciled in Costa Rica, the incorporation of a Costa Rican holding company is also a common practice. These restructuring methods allow funding between the companies, and deferral of taxes on dividend distribution (as explained above, deferral is possible when the dividend distribution is made to another Costa Rican company).

11 Spin-offs


Under Costa Rican law, it is possible to execute spin-offs of businesses, but these will not be tax-neutral. The net operating losses of the spun-off businesses may not be preserved, given that each line of business may only preserve its own losses. Spin-offs always trigger transfer taxes due to the change of the controlling entity.



The migration of residence of the acquisition company or target company raises tax consequences to the extent that such companies stop having economic activities in Costa Rica, or liquidation occurs. A company regis-tered as income tax taxpayer before the tax authorities, that ceases to have economic activities in the country, is obliged to inform the tax authorities of the latter termination within 10 labour days. In this case, the company must proceed to deregister as taxpayer with the tax authorities. If a tax-payer fails to comply with this obligation, the taxpayer may be subject to a penalty equivalent to 50 per cent of a base salary for every month or term within a month, with a maximum limit of three base salaries. The current base salary has been fixed at 399,400 Costa Rican colón.

In the event of liquidation, both the liquidator and the stockowners of the liquidated company are responsible for the company’s liabilities at the moment of liquidation. Hence, if prior to liquidation a company has been subject to a tax audit by the tax authorities, and a judge has confirmed the existence of amounts owed to the tax authorities, the liquidators and stock-owners will be jointly and severely liable for the outstanding amounts.



Interest and dividend payments made out of Costa Rica are subject to with-holding taxes at a 15 per cent tax rate. Under section 52 of the Income Tax Law, Costa Rican source income paid to non-domiciled persons or enti-ties is subject to withholding taxes. The withholding tax applies to the gross amount remitted with no deductions allowed. Even though the non- domiciled entity or individual receiving the remittance is the taxpayer, as they are the party receiving income, the local payor is considered the with-holding agent, and as such must withhold and pay the tax. Both parties are held jointly and severely liable for the withholding tax.

There is a domestic exemption on the payment of interests to financial entities recognised by the Central Bank of Costa Rica as ‘first order banks’ or ‘financial entities usually engaged in financial operations’.



There are several alternatives to extracting profits from Costa Rica. In gen-eral, the following are common mechanisms:• investments in other companies of the same economic group; • investment in bonds issued in low-taxation jurisdictions; and • utilisation of benefits provided by tax treaties.


15 Disposals


There are no established common practices regarding disposals. Currently, disposal of the business assets, the stock in the local company or stock in the foreign holding company are used. Disposal in the foreign hold-ing company is less frequently used, as it does not permit the deferral of income tax on dividend distribution. Transfer taxes are applicable in either type of disposal. An advantage of business asset deals is that they prevent the acquisition company from becoming responsible for the labour liabili-ties of the previous owner of the assets.

Update and trends

Although not a tax topic, an emerging trend regarding inbound investment is antitrust compliance.

Under Costa Rican law, the Antitrust Authority (COPROCOM) must be notified of all mergers and acquisitions that meet certain criteria prior to the execution of the merger or acquisition agreement, or within a maximum of five business days from the signing of it.

The two categories of mergers and acquisitions that require notification are:• transactions in which the sum of the productive assets of both the

economic agents and the headquarters involved in the transaction exceeds approximately $15 million. This obligation applies equally to successive transactions that run within two years of each other and together exceed this amount; or

• transactions in which the income generated in Costa Rica for all economic agents involved in the transaction during the last fiscal year exceeds approximately $15 million.

The abovementioned amount is adjusted every semester. In order to determine the potentially anticompetitive effects of a

transaction, the following factors will be taken into consideration:

• whether the objective of the transaction is to acquire or substantially increase the power of the acquiring company or corporate group and whether this will lead to a significant limitation of competition in the national market;

• whether the transaction will facilitate coordination between competitors or produce an adverse outcome for consumers; and

• whether the transaction will reduce, damage or obstruct competition for identical, similar or substantially related goods or services.

COPROCOM has the authority to impose financial penalties or order the total or partial nullification of the transaction, if it determines that the transaction was done improperly or without proper authorisation.

Once the notification has been made, COPROCOM will have up to 90 calendar days to determine whether or not to authorise the merger or acquisition of the economic agents. Once a transaction has been authorised by COPROCOM, it may only conduct additional review of transactions that were approved based on false information or when COPROCOM established conditions to the transactions that were not complied with.

COSTA RICA Arias & Muñoz




Disposal of stock in the local company by a non-resident company is not exempt from tax. Nonetheless, as previously indicated, Costa Rica does not have a capital gains tax. Capital gains are defined as gains derived from the sale of a capital non-depreciable asset, when this is not the taxpayer’s regular trade or business. Therefore, any gain derived from the disposal of stock will be taxed in so far as it is considered the ordinary trade or business

of the seller. If considered a taxable capital gain, it will be subject to the corporate income tax.

There are no special rules dealing with the disposal of stock in real property, energy and natural resources companies.



Distribution of a dividend to companies domiciled in Costa Rica is exempt from income tax.

Alejandra Arguedas Ortega [email protected] Carolina Flores Bedoya [email protected] Sophia Murillo López [email protected]

Centro Empresarial Forum 1 Edificio COficina 1C1 Santa Ana Apartado 12891-1000 San JoséCosta Rica

Tel: +506 2503 9800Fax: +506 2204 7580www.ariaslaw.com/language/en-us/home

Karanović & Nikolić CROATIA


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. If the assets are immoveables, an acqui-sition is generally subject to RETT, unless the immoveable (building) was built after 1 January 1998 (when VAT was introduced into the Croatian tax system). The purchase price in such cases is divided into land and building components and the land is subject to RETT, whereas the building build-ings are subject to VAT.

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.

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.

CROATIA Karanović & Nikolić




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 is 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 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 capi-tal or voting rights (determined in relation to the amount and duration of loans in the tax period), including loans from third parties guaranteed 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.

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.

Karanović & Nikolić CROATIA


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 is 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 which 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. 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.

Update and trends

The Croatian Constitutional Court has recently adopted a decision to retroactively tax dividends and profit participation regulated by the Income Tax Act.

The Income Tax Act, adopted in February 2012, regulates the taxation of dividends in Croatia at a rate of 12 per cent as of March 2012. By virtue of this Act, all dividends and profit participants dated after 1 March 2012 were subject to this taxation, apart from those dated prior to 31 December 2000, regardless of their payment date.

These regulations were highly disputed. Therefore, there was a request filed to the Croatian Constitutional Court for a review of the constitutionality of these Income Tax Act provisions. Following a detailed review, the Court has adopted a decision to rescind the retroactive taxation of dividends and profit participations in June 2014.

CROATIA Karanović & Nikolić




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 Zagreb Croatia

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

Spigt Dutch Caribbean CURAÇAO


CuraçaoJeroen StarreveldSpigt 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 2014) applies to deliveries of goods and the providing of services in case of the acquisition of stock or the acquisition of an enterprise or part of an enterprise no turno-ver 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.

Some profit tax incentives exist; certain assets qualify for accelerated depreciation. Under this rule one-third of the value is allowed to be taken in one year, next to the scheduled regular depreciation. Another tax incen-tive 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 permanent 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;

• it 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 acqui-sition 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. Please 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.

Please 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.

CURAÇAO Spigt Dutch Caribbean


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).

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. 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 with regard to 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 per-sons that are in majority (equal to or greater than 70 per cent shareholder)

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 con-tain 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.

A withholding tax on interest might be applicable based on the EU Saving and Interest Directive at a 35 per cent rate. This withholding tax only applies to interest paid on savings of a non-resident taxpayer resident in the EU or Saving Directive countries and thus has a limited scope. The



withholding tax is not applicable if the information is being exchanged to the country of residence 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 warranties relating to the tax position of the assets themselves are usually provided. 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 acquisition vehicle has been debt-funded to make the acquisition, the ability to con-solidate 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 target 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 deter-mined based on the terms therein, in connection with the actual facts and

CURAÇAO Spigt Dutch Caribbean


circumstances. The actual place of management of the business is the lead-ing factor.

In general upon migration there will be a profit tax exit charge applica-ble to the undisclosed reserves, which are valued based on the difference between the market value and the book value. These exit results are tax-able at 27.5 per cent profit tax (regular profit tax rate in 2013) 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.A withholding tax on interest is applicable to individual EU residents

receiving interest from Curaçao based on the EU Saving and Interest Directive, at a 35 per cent rate. This withholding tax is not applicable if information is being exchanged.

If there is a tax treaty in force, the interest withholding tax rate may be reduced based on the terms therein.



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 27.5 per cent (tax rate in 2013). Expenses incurred in connection with a qualifying participa-tion (including capital losses) are not deductible, unless it can be dem-onstrated 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 dividend distributions are received from a participation that earns more than 50 per cent of the core business through dividends, interest and royal-ties, 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 busi-ness 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 27.5 per cent (tax rate in 2014).

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 27.5 per cent (tax rate in 2014). 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 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 or profit rights 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.

Jeroen Starreveld [email protected]

Scharlooweg 33WillemstadCuraçao

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



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 exclu-sively real estate qualifies under the scope of the 100 per cent participation 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.

DENMARK Horten Law Firm


DenmarkNiclas Holst Sonne and Anne Becker-ChristensenHorten Law Firm




An investor may acquire a Danish company by purchasing either the assets or the stock in the company. Most transactions over Danish target compa-nies are structured as stock transactions because the seller in most cases will be exempt from Danish tax on any capital gains realised on shares at sale. However, depending on the circumstances, an asset acquisition may also be advantageous. Below is an outline of the main differences between a stock acquisition and an asset acquisition:• In a stock acquisition, the acquirer will inherit all tax liabilities of

the acquired company (however, provisions are generally made in the stock purchase agreement that pass liability back to the seller). Further, in a stock acquisition, the acquirer will inherit any tax losses realised by the acquired company. Such tax losses may be carried for-ward against future tax liabilities on future trade income derived by the acquired company. In contrast, the acquisition of business assets leaves all tax liabilities and tax assets (tax losses) with the seller.

• An acquirer of a target’s stock will also, indirectly, inherit the target company’s tax base cost in its assets and the tax book value of the assets and liabilities of the target company will remain unchanged for Danish income tax purposes. The purchase price paid by the buyer is thus allocated to the buyer’s acquisition cost of the shares in the target and not the assets of the target. The shares are not depreciable. In an asset transaction, the net purchase price is allocated proportionally to the acquired assets and the purchase price will serve as the basis for the acquirer’s tax depreciation of the acquired assets.

• A stock acquisition is exempt from Danish VAT and no transfer tax or stamp duty is levied on the acquisition of stock. An asset acquisi-tion may, in certain circumstances, be subject to VAT (depending on the assets in question), although qualifying transfers of businesses or parts of a business will normally be exempt from VAT. If the purchaser acquires land, stamp duty may be payable (see question 6).

2 Step-up in basis


A step-up in the tax basis of acquired business assets and liabilities is gen-erally only obtainable in an asset acquisition.

In a stock acquisition, the purchaser will in effect inherit the target company’s tax basis in its assets. Thus, in a stock acquisition, tax depre-ciation of the assets will be by reference to the tax cost basis of the target company, and not by reference to the price paid for the stock of the target. Further, goodwill and other intangibles created (rather than purchased) by the target company are not included in the target company’s tax balance sheet. Consequently, goodwill and other intangibles created by the target company cannot be depreciated for tax purposes in the event of a stock acquisition.

In an asset acquisition, the purchase price will ordinarily determine the purchaser’s tax basis for the acquired assets and liabilities, including goodwill and other acquired intangibles. A step-up in the tax basis is real-ised if the purchase price is higher than the tax book value of the assets (provided however that the purchase price and allocation thereof is fair). The purchaser and seller are obliged to make an allocation of the purchase price between the acquired assets. The agreed allocation will serve as the basis for tax depreciation for the purchaser – and as the basis for capital gains taxation for the seller.

Goodwill and other acquired intangibles may generally be depreci-ated by up to one-seventh annually. However, for certain types of intangi-bles, including patent rights and know-how, a purchaser is entitled (as an option) to deduct the full purchase price in the income year in which the asset is acquired.



Depending on the circumstances it may be deemed beneficial to have a Danish acquisition company.

Firstly a Danish company may be used as acquisition vehicle so as to allow funding cost in the acquisition vehicle to be deducted against tax-able income in the Danish target company. The offsetting of the funding cost against taxable income in the target company is effectively realised via the mechanisms in the Danish tax consolidation rules. According to these rules, a Danish acquisition company would become subject to mandatory tax consolidation with the Danish target company upon acquiring a con-trolling interest in the company, entailing, inter alia, that tax losses of the acquisition company resulting, for example, from financing expenses may be offset against taxable income in the acquired company

It would, in principle, be possible to form a Danish tax consolidation group between a Danish target company and a non-Danish acquisition company, but only on the condition that all companies belonging to the group, whether Danish or non-Danish, are included in the Danish tax con-solidation group. In most cases, this condition would effectively exclude the possibility of establishing a Danish tax group between a Danish target company and a non-Danish acquisition company.

Secondly a foreign acquirer may also consider using a Danish acqui-sition company to avoid Danish withholding tax on post-closing dividend distributions. This may be relevant if the profits distributed by the target company to the acquisition company are to be reinvested in one or more subsidiaries below the acquisition company. Where the acquisition com-pany is a Danish company, the exposure to Danish withholding tax is elimi-nated. For a description of the Danish dividend withholding tax rules, see question 13.



Mergers and share exchanges are commonly used in connection with intra-group reorganisations, but are not the most common forms of acquisitions by third-party buyers. An ordinary purchase of stock is generally more straightforward and is generally the preferred choice.

Horten Law Firm DENMARK


However, the issuance of stock as consideration rather than cash has the advantage that the acquirer avoids the need to decrease its cash bal-ances or raise funds for the acquisition. Therefore, occasionally stock in the acquirer is issued to the shareholders of the target as full or partial consid-eration for the acquisition.



Generally, the issuing of stock as consideration instead of cash does not create any tax benefits to the acquirer. However, the issuance of stock as consideration rather than cash has the advantage that the acquirer avoids the need to decrease its cash balances or raise funds for the acquisition.

6 Transaction taxes


Acquisition of stockNo transaction tax or documentary tax is charged on a sale or issue of shares.

Acquisition of assetsVAT may be payable on the acquisition of assets. However, the transfer of a business (or part of a business) as a going concern generally falls outside the scope of VAT, provided that the purchaser continues the transferred business. Further, the transfer of real estate is exempt from VAT unless the transfer concerns a commercial sale of new buildings (with or without land), a building site (whether developed or not) or a built-up site. Such transfers are subject to VAT. The Danish VAT rate is currently a flat 25 per cent.

A transfer of real estate is subject to a stamp duty of 1,660 Danish krone plus 0.6 per cent of the market value or the public valuation if such valuation is higher than the market value. The stamp duty does not apply if the real estate is acquired indirectly by way of a stock acquisition.

Non-Danish residents need permission from the Danish Ministry of Justice to acquire real property in Denmark.



In general, tax losses deriving from net operating losses or other tax rel-evant items may be carried forward indefinitely for use against future income from trade or investments (the modification being that certain assets are subject to ringfence restrictions entailing that a loss may only be used against gains on similar assets).

A change of control of the target company will, however, limit the utilisation of the target company’s carry-forward tax losses entailing that the target’s carry-forward tax losses may only be offset against ordinary business income (as opposed to passive income such as interest and capi-tal gains). Further, if the acquired company is inactive at the time of the change of ownership, the carry-forward losses cannot be used against any income.

For the purpose of this limitation rule, a change of control is generally considered to have occurred if more than 50 per cent of a Danish compa-ny’s share capital or votes at year end are held by shareholders other than those holding the shares or votes at the beginning of the income year in which the tax losses were realised. An exception from the change of control limitation applies to intra-group share transfers.

In the case of an asset transaction, the tax losses of a Danish target company will remain with the seller. The above limitation is therefore rel-evant only in relation to a stock acquisition.

Special tax rules apply to reorganisation schemes involving cancella-tion (forgiveness) of debt owed by a Danish company. Thus, a debt can-cellation may, depending on the circumstances, result in taxation of the

Danish debtor company or a reduction of tax losses carried forward by the Danish debtor company from earlier years.

However, an intra-group debt cancellation would, in most cases, be exempt from tax and would, in most cases, not affect the Danish debtor company’s carry-forward tax losses.

A cancellation of debt by non-related creditors may result in a reduc-tion of existing carry-forward losses if the debt is cancelled in connection with a debt restructuring involving more than 50 per cent of the Danish debtor company’s unsecured debt and the cancelled debt has value. In this context, a debt is considered to have value if the creditors would receive a full or partial repayment thereof in case of liquidation of the Danish debtor company. If the debt cancellation involves 50 per cent or less of the Danish debtor company’s unsecured debt, the debt cancellation would generally trigger taxation of the Danish debtor company. In this scenario, the debt cancellation would not affect the Danish debtor company’s carry-forward tax losses.

8 Interest relief


In general, interest payable by a Danish acquisition company under a loan to fund an acquisition is tax deductible. A debt pushdown is achieved via the mechanisms of the Danish tax consolidation rules as these rules allow the interest incurred by the Danish acquisition company to be offset against taxable income in the Danish target company.

However, the Danish Corporation Tax Act contains some significant anti-abuse rules which may limit the deductibility of interest expenses and other financial expenses. These rules are: • the thin capitalisation regime;• the assets and earnings before interest and taxes (EBIT) limitations

rules; and• the anti-check-the-box rules.

The thin capitalisation rules and the anti-check-the-box rules only apply to transactions with related parties, whereas the assets and EBIT limitations rules apply to transactions with both related parties and unrelated parties.

Below is a brief outline of the said rules.

Thin capitalisation rulesThe Danish rules on thin capitalisation apply to a Danish resident com-pany having incurred a debt to a controlling legal person (hereinafter the ‘Danish debtor’) if the Danish debtor’s debt-equity ratio exceeds 4:1 at the end of the tax year. The thin capitalisation restrictions will apply if the fol-lowing four conditions are met:• the Danish debtor has a debt to a group-related legal entity (‘controlled

debt’);• the controlled debt exceeds a threshold of 10 million Danish krone;• the Danish debtor’s debt-to-equity ratio exceeds 4:1 at the end of the

tax year; and• the Danish debtor cannot prove that a ‘matching debt’ would be avail-

able from an unrelated party.

Where these conditions are met, the deductibility of interest and capital losses incurred on controlled debt is generally restricted, entailing that the Danish debtor cannot deduct interest expenses and capital losses relating to the portion of the controlled debt which exceeds the 4:1 ratio. However, as an exception, the thin capitalisation restrictions will not apply to interest payments that are subject to Danish withholding tax (regardless of whether the above conditions are met).

For the purpose of the thin capitalisation rules, the term ‘controlled debt’ generally means debt owed by the Danish debtor to a Danish or for-eign legal entity, which:• is controlled by the Danish debtor;• controls the Danish debtor; or • is under common control with the Danish debtor. ‘Control’ generally

means that more than 50 per cent of the shares or voting rights are owned or controlled, directly or indirectly.



‘Controlled debt’ also means debt owed to a third party if a related legal entity, directly or indirectly, has provided security for such a loan. Indirect security includes back-to-back arrangements where an affiliated company agrees to provide security to a third party that has provided a loan to the Danish entity. This will further be the case if the related legal entity deposits an amount with a bank corresponding to a loan provided by such a bank to the Danish Debtor.

For the purpose of determining the debt-to-equity ratio, the definition of ‘debt’ includes all monetary claims and convertible bonds. The debt is assessed at market value at the end of the company’s tax year. The debt is computed as the aggregate sum of the controlled debt and all other debt. ‘Equity’ means assets less debt. The assets are assessed at market value at the end of the company’s tax year. Equity contributed by foreign share-holders is only included to the extent it remains in the company for at least two years. The debt-to-equity ratio is calculated on a consolidated basis for the Danish Debtor and other controlled Danish entities that can be consid-ered part of the same ‘group’.

Asset and EBIT limitation rulesThe deductibility of interest and other financial expenses may also be restricted under the asset limitation rule and EBIT limitation rule. Contrary to the thin capitalisation rules, the asset limitation rule and the EBIT limitation rule also apply to debt owed to unrelated parties (and not only controlled debt).

Further, the asset limitation rule and the EBIT limitation rule apply to the company’s net financial expenses, in other words, not only interest expenses and capital losses on debt.

For the purposes of the asset limitation and EBIT limitation rules, net financial expenses mean:• interest income and expenses (excluding interest income and

expenses deriving from trade creditors and debtors);• net loan commissions and similar expenses or income (excluding

commissions relating to trade accounts payable or receivable);• taxable capital gains and losses on certain receivables, debts and

financial instruments;• an estimated finance cost (if lessee) or an estimated finance income (if

lessor), relating to financial leasing arrangements (defined in accord-ance with IAS 17); and

• taxable capital gains and utilised losses on shares or other items taxed according to the Capital Gains Act, taxable dividends and taxable gains on sale to the issuing company. However, if such net amount is negative, it is not included in the calculation of the net financing expenses of the year in question. Instead such negative amount is car-ried forward. This rule does not apply to equities bought by a trader for trading purposes if taxed according to the market-to-market principle.

The asset limitation ruleAccording to the asset limitation rule, net financial expenses exceeding a ceiling determined as a standard rate of return (currently 4.2 per cent per annum) on the tax value of certain qualifying assets (mainly operating assets) are not deductible.

The ceiling applies, however, only to net financial expenses exceeding a threshold of 21.3 million Danish krone during an income year.

The net financial expenses and the tax value of qualifying assets are determined on a consolidated basis for Danish companies which are sub-ject to Danish tax consolidation. The limitation threshold of €2.86 million also applies on a consolidated basis to Danish companies which are subject to tax consolidation.

Interest expenses and other net financial expenses exceeding the interest ceiling (currently 4.2 per cent per annum) are lost permanently and cannot be carried forward with the exception that capital losses on debts and financial contracts may be offset against capital gains on debts and financial contracts in the following three years.

The EBIT limitation ruleOn top of any limitations triggered by the thin capitalisation rules or the asset limitation rule, the deductibility of net financial expenses may be restricted under the EBIT limitation rule. The EBIT limitation rule max-imises the deductibility of net financial expenses to 80 per cent of EBIT (earnings before interest and taxes). Thus, net financial expenses cannot reduce the taxable income of a Danish company by more than 80 per cent.

The EBIT limitation, however, only applies to net financial expenses exceeding a threshold of 21.3 million Danish krone during an income year.

The threshold applies on a consolidated basis to Danish companies which are subject to joint taxation.

Net financial expenses, which are restricted under the EBIT limitation rule, may be carried forward for tax deduction in the following years with-out time limitations.

Anti-check-the-box rulesThe Danish Corporation Tax Act contains, in section 2A, a special rule which may also limit the deductibility of payments made to foreign group-related entities. The primary aim of the rule is to counteract US–Danish check-the-box structures.

According to section 2A, a Danish company, or a foreign company with a permanent establishment in Denmark, is deemed transparent for Danish tax purposes if:• the Danish company is treated as a fiscally transparent entity under

the laws of a foreign state with the effect that the income of the Danish company is included in the taxable income of a controlling foreign legal entity (ie, generally an entity owning more than 50 per cent of the Danish company or holding more than 50 per cent of the voting rights); and

• the foreign state in question is an EU/EEA member state or a treaty state.

If these conditions are met, the Danish company is, for Danish tax pur-poses, classified as a transparent entity and is consequently treated as a branch of the controlling foreign entity.

Being treated as a branch, the Danish company is not entitled to make a deduction for payments made to the foreign parent company or to other group-related entities, which are (also) treated as fiscally transparent under laws of the domicile state of the foreign parent company (subject to the exception stated below). The payments are considered to be within the same legal entity. However, this also means that, irrespective of the usual tax exemption requirements, dividends paid to the foreign parent com-pany are not subject to Danish withholding tax.

As an exemption to the above general rule, payments made by a sec-tion 2A company to another group-related entity which is also treated as fiscally transparent under the laws of the domicile state of the parent com-pany remain tax deductible if the said entity is a tax resident of an EU/EEA or a treaty state, and that state is another state than the domicile state of the parent company.

It is notable that section 2A only applies if the Danish company and all intermediate holding companies above the Danish company are treated as fiscally transparent under the laws of the domicile state of the foreign par-ent company. The rule does not apply if the Danish company is owned by the foreign parent company through an intermediate holding company res-ident in a third state and the intermediate holding company is not treated as fiscally transparent under the laws of the domicile state of the foreign parent company.

The primary target of section 2A is Danish–US holding structures where a US parent company has made an election under the US check-the-box rules to treat a Danish subsidiary as a disregarded entity for US tax purposes. Unless the Danish subsidiary is held by the US parent com-pany through one or more intermediate holding companies which are not treated as fiscally transparent for US tax purposes, the Danish subsidiary is reclassified as a branch under section 2A.

A Danish company which has been reclassified as a branch under sec-tion 2A is not considered a Danish tax resident and is thus not entitled to the benefits of EU Directives and tax treaties concluded by Denmark.

Other limitationsIn addition to the above limitation rules, the deductibility of interest on related party debt may also be restricted under the Danish transfer pricing rules if the interest paid is deemed to exceed arm’s-length interest.

Further, the Danish Corporation Tax Act contains rules limiting the utilisation of carry-forward tax losses. According to these rules, the utilisa-tion of carry-forward tax losses is capped at 60 per cent for each fiscal year entailing that carry-forward tax losses can only reduce the taxable income in any income year by 60 per cent. However, tax losses up to an amount of €1 million can be offset without limitations. For example, a Danish company with a taxable income in 2014 of €10 million and carry-forward tax losses of €20 million may first reduce its taxable income by €1 million and then reduce the remaining taxable income of €9 million by 60 per cent, resulting in a taxable income in 2014 of €3.6 million. The remaining



portion of the carry-forward tax loss, €13.6 million, is carried forward to future income years.

Withholding tax may apply to interest payments made by a Danish company to a related party. See question 13.



Protections for acquisitions are found in most assets and share purchase agreements involving a Danish target company. However, in an asset acquisition, only limited tax warranties are provided by the seller as the tax liabilities under Danish law do not pass to the acquisition company.

In a stock acquisition, the acquirer will in effect inherit all historic tax liabilities of the target company and the seller is therefore usually requested to guarantee that all tax obligations have been fulfilled and that the current tax liabilities of the target company are as presented in the annual accounts and the documents provided during the due diligence process. Generally, the seller must commit himself to pay any taxes levied after the transaction by the Danish tax authorities, as far as the taxes relate to a pre-acquisition period. If the acquired company was part of a Danish tax consolidation group, specific warranties are agreed with regard to liabilities relating to the period of such tax consolidation.


10 Restructuring


There is no industry-standard type of post-acquisition restructuring in Denmark. Any restructuring would depend on the purpose of the acquisi-tion, the existing structure of the acquirer and the target company and the commercial requirements of the acquirer.

Tax consolidation is mandatory for Danish companies belonging to the same group. Upon the establishment of a group relation between two or more Danish resident companies, tax consolidation will thus apply automatically. Consequently, the establishment of a tax group between a Danish acquisition company and a Danish target company is not some-thing which requires any restructuring measures.

As for the establishment of a Danish tax group between a non-Danish acquisition company and a Danish target company, the situation is differ-ent. An election can be made to include a non-Danish acquisition company in the Danish tax consolidation group but only on the condition that all companies belonging to the group, whether Danish or non-Danish, are included in the tax consolidation group. For this reason, it is relatively rare that a non-Danish acquisition company is included in a Danish tax consoli-dation group.

11 Spin-offs


A spin-off can be structured as a tax-exempt spin-off if certain require-ments are met. However, the net operating losses of the spun-off business are generally lost if the spin-off is organised as a tax-exempt spin-off. An exception may apply if the net operating losses were realised during tax consolidation between the transferring company and the recipient of the spun-off business.

No transfer taxes are triggered by a spin-off.



A Danish company having the legal status of an SE company can, with legal effect, migrate to another EU jurisdiction. However, the migration is

considered a taxable event and will be treated as a liquidation of the com-pany for Danish tax purposes, entailing that the Danish company is taxed as if it had disposed of all its assets at fair market value. An exception applies, however, with respect to assets that remain liable to tax in Denmark, in other words, where the migrating Danish company retains a permanent establishment in Demark and this permanent establishment is subject to Danish corporation tax. Assets allocated to such permanent establishment in Denmark are not made subject to tax at migration. Further, shares held by a Danish company representing 10 per cent of more of the share capital of the issuing company (‘qualifying shareholdings’) are generally exempt from Danish tax. Thus, qualifying shareholdings would not give rise to liq-uidation taxation of the migrating Danish company.

The migrating company may, subject to certain conditions, obtain a deferral of payment of a tax charge triggered by the migration. The deferred tax must be paid when the concerned assets generate income or are disposed of. However, as a minimum, the deferred tax must be paid by one-seventh annually.

The shareholder of the migrating Danish company would also, for Danish tax purposes, be treated as if the Danish company was liquidated at the time of migration. Depending on the situation of the foreign share-holder, the foreign shareholder may or may not become subject to Danish tax at such event. If the foreign shareholder meets the conditions for divi-dend withholding tax exemption, the foreign shareholder would be fully exempt from Danish tax upon migration (deemed liquidation) of a Danish acquisition or Danish target company. If the foreign shareholder, however, does not meet the conditions for dividend withholding tax exemption, the foreign shareholder would be subject to Danish withholding tax on the liq-uidation proceeds. The deemed liquidation proceeds would be equal to the market value of the assets held by the Danish company. The Danish with-holding tax would apply at a rate of 27 per cent, subject, however, to reduc-tion by treaty. The conditions for dividend withholding tax exemptions are described in question 13.



Interest and dividend payments out of Denmark may be subject to Danish withholding tax as described below.

Dividend paymentsAs a point of departure, withholding tax applies to dividends distributed by a Danish company to its foreign shareholders, whether legal entities or individuals. The Danish dividend withholding tax is charged on a gross basis at the rate of 27 per cent.

However, the Danish corporation tax regime provides for an exemp-tion if the following conditions are met:• the exemption shareholder is a legal entity holding at least 10 per cent

of the shares of the dividend distributing Danish company; and• the shareholder qualifies for an or reduction of the Danish withhold-

ing tax pursuant to the EU Parent-Subsidiary Directive or a tax treaty between Denmark and the state where the shareholder resides.

The Danish tax authorities are seeking to narrow the scope of the Danish withholding tax exemption by claiming that the second condition above can only be considered to be met if the dividend recipient qualifies as the beneficial owner of the dividend received. A number of cases concern-ing the applicability of such requirement are currently pending before the Danish courts.

Additionally, in December 2012, the Danish tax authorities introduced an extra condition entailing that the dividend withholding tax exemption will not apply if the dividend distributed by the Danish company consti-tutes an ‘on-payment’ of dividend received by the Danish company from a foreign subsidiary and the Danish company does not qualify as the benefi-cial owner of such dividends.

This additional condition will, however, not apply to dividend recipients which are entitled to the benefits of the EU Parent–Subsidiary Directive. It is therefore only relevant for shareholders resident in a juris-diction which has a tax treaty with Denmark. If the Danish company is not recognised as the beneficial owner of the dividend passed on, such shareholders will not be entitled to a withholding tax exemption but will be



subject to Danish withholding tax at the rate provided for in the applicable treaty.

Interest paymentsNon-related foreign lenders are unconditionally exempt from Danish with-holding tax on interest payments received from a Danish company.

A foreign related lender is, as a point of departure, subject to Danish withholding tax on interest derived from a Danish company. The Danish withholding tax is charged on a gross basis at the rate of 25 per cent.

There are, however, a number of exceptions to this rule, the most important being the exemption that a related foreign lender will be exempt from Danish interest withholding tax if the foreign related lender qualifies for an exemption or reduction of the Danish withholding tax pursuant to the EU Interest–Royalty Directive or a tax treaty between Denmark and the state where the lender resides.

As is the case with the Danish dividend withholding tax exemption, the Danish tax authorities are seeking to narrow the scope of the said inter-est withholding tax exemption by claiming that the condition can only be considered to be met if the foreign related interest recipient qualifies as the beneficial owner of the interest received. A number of cases concern-ing the applicability of such requirement are currently pending with the Danish courts.

For purposes of the Danish interest withholding tax regime, the term ‘related’ generally means: • a legal entity that is controlled, directly or indirectly, by the foreign

lender; or • a legal entity that controls, directly or indirectly, the foreign lender; or • a legal entity that is under common control with the foreign lender.

In this context, ‘control’ means the possession of a 51 per cent ownership share of the capital or votes of a corporation. However, control may also be deemed to exist where an agreement has been entered into by two or more minority shareholders for purposes of exercising joint control.



The most common way to extract profits from a Danish company is by way of dividend. However, since dividend payments are not tax-deductible, it may be more efficient to extract profit by way of interest payments on shareholder debt. The deductibility of interest is, however, limited by

several anti-avoidance rules which may reduce the tax efficiency of such means (see question 8).


15 Disposals


As a general rule, it is more common to structure disposals as stock sales rather than asset sales.

The sale of stock in a Danish company would normally be the most beneficial disposal for a Danish corporate seller, as capital gains in most cases would be exempt from Danish tax pursuant to the participation exemption. The participation exemption would generally apply if the sale concerns unlisted shares. As for listed shares, the participation exemption would apply if the Danish seller owns at least 10 per cent of the share capi-tal of the target company.

Further, it may be commercially attractive to sell the stock rather than the assets of the target if the target has significant tax losses.

The structuring of the disposal as either a stock acquisition or asset acquisition will, however, depend on the circumstances. An asset purchase might be preferable if the target has unquantifiable liabilities or if the target has a (significant) goodwill value which would only become depreciable upon an asset sale.



The disposal of stock in a Danish company by a non-resident shareholder is generally exempt from Danish tax.

However, in 2013, the Danish Parliament introduced a new anti-avoid-ance provision which entails that consideration received for shares in a Danish company in certain situations may be re-characterised and taxed as dividend. This provision will apply to a disposal of shares in a Danish company by a non-resident shareholder if the following criteria are met:• the disposal entails a transfer by the non-resident shareholder (the

transferring shareholder) of shares in an affiliated company (the trans-ferred entity) to another affiliated company (the receiving entity) for consideration consisting of other values than shares in the receiving entity; and

• the non-resident transferring shareholder would not have qualified for exemption from Danish dividend withholding tax on dividends received from the transferred Danish entity prior to the transfer.

If the above criteria are met, the part of the consideration received by the non-resident shareholder in other values than shares is reclassified and taxed as dividend, entailing that withholding tax will apply at the rate of 27 per cent.

There are no special rules dealing with the disposal of stock in real property, energy and natural resource companies.

Update and trends

It is a high priority of the Danish Parliament and the Danish tax authorities to combat tax evasion, and the Danish Parliament is regularly adopting new tax provisions to target what they consider to be aggressive tax planning.

In recent years, the Danish Parliament has introduced a number of interest limitation rules aimed at leveraged acquisitions of Danish companies. Further, the Danish rules on dividend and withholding tax have been tightened significantly. Transfer pricing is also an area subject to intense scrutiny by the Danish tax authorities.

Niclas Holst Sonne [email protected] Anne Becker-Christensen [email protected]

Philip Heymans Allé 7DK-2900 HellerupDenmark

Tel: +45 3334 4000Fax: +45 3334 4001www.horten.dk





Disposal of sharesA disposal of shares in a Danish company by a foreign shareholder is gen-erally exempt from Danish tax and therefore does generally not require application of any special tax schemes.

If, however, the disposal involves an intra-group transfer of Danish shares, which could be reclassified as a taxable dividend distribution pur-suant to the anti-avoidance provision discussed in question 16, it may be considered (if commercially viable), to structure the transaction as a share exchange whereby the transferring foreign shareholder receives shares in the receiving company as consideration for the Danish shares. By doing so, the imposition of Danish dividend withholding tax pursuant to the said anti-avoidance provision may be avoided.

Disposal of assetsA disposal of assets is a taxable event and will trigger taxation of any capi-tal gains realised, or deemed to be realised, upon the disposal. Generally, no tax-free roll over relief is available, the exemption being the sale of real estate used for commercial purposes. Taxation of capital gains crystallised upon sale of a commercial property can be deferred if the taxable gain is used to purchase (or renovate) another commercial property. The taxable gain is carried over into the new property so that the taxable gain on the old property is not taxed until the new property is disposed of. It is a require-ment that both the old and the new property was and is utilised in the tax-payer’s own business (but it is not required that the businesses are similar). Certain time limits and reporting requirements must be observed in order to apply the Danish tax deferral regime.

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Dominican RepublicEnmanuel MontásMS Consultores




The main difference between both those transactions is connected to the ITBIS (Dominican Republic 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 reduction. No change is expected to occur under the current circumstances.

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, the corporate structure of most Dominican entities is highly concentrated in individuals and very close relatives or friends, and therefore the willingness 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 to formalise the transaction. For example, stock transfers must be registered

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before the Commercial Registry, and the rates vary depending on the authorised capital of the 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.



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 affect the possibility to deduct operating losses or tax credits, but again, and particularly in the case of operating losses, change of control may not be the result of a reorganisation process as men-tioned above.

The Dominican Republic does not currently have a structured and fea-sible reorganisation law to deal with bankrupt or insolvent companies. For a few years there were several discussions about the matter, but no consen-sus has been reached to fasten the implementation of this statute.

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 interests but despite that there are no capitalisation-spe-cific 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 management

has a joint and several liability arising from the compliance of tax laws. Although less relevant, asset acquisitions may subject to a similar bur-den 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. However, it is important to consider that capital gain applies in case of disposal 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 filings on a monthly and yearly basis (as applicable) even if it 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 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

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(although this could be an important issue where there are minority stockholders).

Only applicable low-income individuals, as provided by law, may file a tax claim in order to apply for devolution of the amounts withheld as a result of payment of interests. In addition, interest payments made to enti-ties 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:• dividend distribution to a non-resident stockholder located in a more

favourable jurisdiction;• 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;

• royalty payments provided that the criteria set forth by the tax admin-istration is 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 the foreign holding 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.

Update and trends

With the recent enactment of a trust law (Law 189-11), we should expect an important trend in the use of trust as a corporate mechanism to mitigate the impact of taxes, given the special regime that applies to such figure. It is too early to measure the impact of this figure from a tax perspective within the investment community, but it should be an important topic in the years to come considering the tax benefits that could be structured, particularly from the exploitation of trust assets.

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

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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.

EL SALVADOR Arias & Muñoz


El SalvadorLuis Barahona and René García Arias & Muñoz




There are differences in the tax treatment applicable to an acquisition of shares in a company, and that applicable to the acquisition of assets and liabilities of a company. One of them is that the acquisition of shares is not subject to the payment of the tax on transfer of moveable goods and services or value added tax (VAT), whereas the acquisition of assets of a corporation is generally subject to the payment of said tax, if the assets are tangible moveable property, unless they are part of fixed assets or capital and the transfer is complete, having passed at least four years since the goods were allocated to that asset.

Another difference is that, in the purchase of real estate assets, trans-fer is subject to the payment of tax on transfer of real estate.

2 Step-up in basis


Revaluation of the cost of assets is not admitted for purposes of tax deduc-tion. A buyer can perform the revaluation of the cost of the acquired assets, but this will not generate any tax benefit. So, it is the purchase price paid for the assets that determines the acquisition costs for the purpose of tax deduction. The revaluation of assets does not apply for such purposes.

The cost of acquiring goodwill, trademarks and similar intangible assets cannot be depreciated or amortised for tax purposes, nor in the purchase of assets, or the purchase of shares of the company owning the assets.



In case of a stock purchase, it is preferable that the acquisition be made by a company established out of El Salvador’s jurisdiction. On the other hand, if the acquisition is in respect of the assets, then it is preferable that the purchase of such assets be made by a company established in El Salvador’s jurisdiction.

There are often no particular advantages to using a resident in El Salvador compared to a non-resident. Nevertheless, a resident acquirer may be preferable compared to a non-resident if such is incorporated, domiciled or resident in a country, state or territory of low or no taxation or tax haven, according to the list annually published by the tax adminis-tration, because in that case the applicable tax rate of income tax on the distribution of dividends and other income is significantly higher.

In the acquisition of assets for economic activity purposes in El Salvador, it is preferable that it be done by a domiciled company or a branch of a foreign company in El Salvador, because it can make deductions that

are applicable in terms of income tax and VAT, and because its incomes would not be subject to income tax and VAT.



Mergers, whereby two or more companies integrate to form a new com-pany, or when an existing company absorbs another or others, are forms used for acquisition, but this mechanism has become less common as a prior audit by the tax authority is required in order to carry on a merger process. Such an audit may take a long time, resulting in delays and signifi-cant costs in acquiring companies.

The exchange of shares of a company for shares in another company set up a transaction that is allowed and is used less often as a form of acquisition.



The issuance of shares as consideration rather than cash is taxed, with the payment of income tax on the portion of the gain obtained.

6 Transaction taxes


The transfer of shares is essentially subject to the payment of income tax, for the portion of the profit generated by the transfer of the shares. The applicable tax rate is 10 per cent on net capital gain if the seller does not usually sell shares, 25 per cent (if the gross annual income is less or equal to US$150,000) or 30 per cent (if gross annual revenues exceed US$150,000) if the seller usually sells shares. The person responsible for the tax payment in this case is the seller of the shares.

In the case of the transfer of assets, applicable taxes are VATable where these are tangible moveable property, except when it comes to fixed assets and these are sold within four years of having been registered as an asset. The VAT tax rate applicable is 13 per cent. In these cases, the person responsible for payment of VAT to the Treasury is the seller; however, it is the buyer who bears the economic impact of the tax.

Also, the transfer of assets is subject to the payment of income tax for the gain obtained as an ordinary income when it comes to current assets, and as a capital gain in the case of fixed assets or assets that are the main line of the company’s business and are performed 12 months after pur-chase. In the case of ordinary income, the applicable tax rate is 25 per cent (if the gross annual income is less or equal to US$150,000) or 30 per cent (if the gross annual income exceeds US$150,000), and if the applicable capi-tal gain rate is 10 per cent on net capital gain. The person responsible for payment in this case is the seller.

Besides the income tax previously mentioned, the transfer of assets when they are real estate or property must also pay tax on transfer of real estate at a rate of 3 per cent of the property value in excess of US$28,571. The person responsible for payment of this tax is the buyer.

Arias & Muñoz EL SALVADOR


Transfers of shares are not taxed with VAT payment, and neither is intangible personal property that is not listed in the law as service render-ing and the transfer of real estate or property.



For income tax, operating losses are neither deductible nor transferable to future income tax clearings of the fiscal year in which they were generated, with or without change of control of the company. There are no preserva-tion techniques for such losses.

In the case of capital loss, it is deductible from capital gains from per-forming non-routine operations within up to the following five years, with or without any change in control of the company. There are no rules limit-ing the use of these capital losses within the period referred to above. To preserve the right to deductibility of capital losses within the above time frame, the loss must be declared when it is generated and in the following fiscal years, in the form provided for that purpose by the tax administration.

For VAT, the right to deduct the tax credit from the tax debit is held by each taxpayer, and may not be transferred to third parties except when a taxpayer is the successor of another by legal mandate or, in the case of company mergers, where the new company or the surviving company con-tinues the activity of the previous company. In this case, the new company will enjoy the remainder of the tax credit that corresponded to the merged companies. The contribution of all assets and liabilities of a company to another does not entitle the receiving company to use the contributor’s tax credit.

The change in control of the company does not result in the loss of the deduction of the tax credit.

There are no rules or special tax regimes for acquisition or reorganisa-tion of companies that are bankrupt or insolvent, but they must be solvent of domestic tax and customs duties in order to register the agreements and deeds of merger, transformation, modification, dissolution or liquidation of companies in the Registry of Commerce.

8 Interest relief


The acquiring company is entitled to deduct interest on loans that are nec-essary to acquire the shares or assets of another company, provided that such shares or assets generate taxable income for the acquiring company.

The deductibility of interests where the lender is a foreigner is subject, among other things, to the condition that the corresponding withholding income tax and VAT is applied on the interest paid.

When the lender is a related party, in addition to the application of the referred withholdings, additional restrictions apply such as the establish-ment of a maximum level of indebtedness, the application of transfer pric-ing rules in the applicable interest rate and verifying the actual existence of the operation, among others.

There are some cases in which the withholding for interest payments can be reduced or even not occur, as when the loan is granted by non- domiciled financial institutions that are qualified by the Central Reserve Bank of El Salvador.

The deduction of interest paid on a loan that is not invested in the tax-able income generating source is not accepted.

El Salvador does not have any undercapitalisation regime in particular. However, there are provisions related to this in the Income Tax Law such as a rule on non-deductibility and others that are incorporated within the rules of transfer pricing which make a reference to the guidelines of the

Organisation for Economic Co-operation and Development (OECD) as the source. Such guidelines are as follows:

Interests are not deductible if:• no withholding of income tax and VAT were made when such with-

holdings were applicable;• the lender is a domiciled related entity or individual who has not

declared them as taxable income;• the result of applying the average active rate of interests (the one

applied by the financial system on loans to companies, which is pub-lished by the Central Reserve Bank) to the loans is exceeded plus four additional points, and the lender were a related party, or if the lender is domiciled, incorporated or located in a country, state or territory of low or no taxation or tax haven; and

• the lender was a related party or it is domiciled, incorporated or located in a country, state or territory of low or no taxation or tax haven and the indebtedness for credit operations exceeds the result of mul-tiplying by three the value of the assets or average accounting capital of the borrower (the ratio is obtained by dividing by two the sum of the assets or accounting capital that existed at the beginning and at the end of the tax year). This rule does not apply to entities that are obli-gated to comply with rules of indebtedness contained in other regula-tions and that are subject to the supervision by the Superintendence of the Financial System, nor to savings and loans associations and their respective federations.

In addition, when financing is acquired and those funds are used to pro-vide full or partial loans, agreeing on a percentage of interest lower than the one assumed in the financing that is the source of those funds, only the interest assumed in such original financing will be deductible up to the amount of the percentage of the lowest interest agreed under the loan or loans granted.

On the other hand, the loans made by the company to the shareholders are taxable income, except where the lending company is a bank or entity that is used to granting loans.

In certain circumstances, the delivery of the loan is treated as a dis-tribution of profits by taxing the total amount borrowed with payment of income tax; for example, when the company makes loans to its sharehold-ers without meeting certain conditions.

The transfer of the debt can be achieved by giving the corresponding loan to the local subsidiary, but there are rules such as the ones mentioned above, aimed to prevent excessive transfer of that debt.



For acquisitions of shares and assets, there is a series of measures used which are aimed at the protection of acquisitions of shares or business assets comprising, among others, conducting due diligences, establishing guarantees or funds that are used to compensate the buyer, for any ongo-ing or outstanding tax contingency or tax obligation that the company from which the shares were purchased could have incurred prior to the acqui-sition. The indemnification clause may be incorporated into the purchase agreement or may be executed in a separate agreement.

It is also usual to require that the seller provide specific information on their operations prior to the acquisition, taking into account that, in a share purchase, the purchaser will acquire all the historical tax liabilities of the target company.

Payment received under a guarantee or indemnity is subject to income tax, because the law considers only as non-taxable income the compen-sations obtained in the form of capital or income for cause of death, dis-ability, accident or illness and that are granted by judicial proceeding or by private agreement. If the payment is received by a domicile, the com-pensation is subject to 10 per cent withholding tax, and if it is obtained by a non-domicile the general rule is a 20 per cent withholding tax, and 25 per cent if the non-domicile is domiciled, incorporated or is resident in a state, territory or country of low or no taxation or tax haven.

EL SALVADOR Arias & Muñoz



10 Restructuring


There is no standard type of post-acquisition restructuring. However, any restructuring will depend on the purpose of the pre-existing structure of the acquirer and the target company, as well as the projected future structure.

11 Spin-offs


Spin-offs are not expressly regulated in the Salvadorean legal system.



The target company’s address can be migrated, but then the company becomes a non-domiciled company for tax purposes, and the conse-quences are that the income obtained in El Salvador becomes subject to withholding at a rate of 20 per cent or 25 per cent, depending on whether or not the new domicile is set in a state, country or territory of low or no taxation or tax haven.

The target company must notify the tax administration about its change of domicile.

It is also possible to migrate the residence of the purchaser company when it is a company that is not domiciled in El Salvador. The change of domicile has no tax consequences, however the adopted place of domicile can generate tax consequences.

When the address is set to a state, country or territory of low or no taxation or tax haven, the applicable tax rates increase significantly with respect to the rates applicable to the addresses set out in states, countries or territories that are not low or have no taxation or tax havens.



Interest payments made to a non-domicile company for loans used in El Salvador by a domiciled company, even if paid out of our jurisdiction, are subject to withholding income tax of 20 per cent as a general rule, 25 per cent if the lender is domiciled, incorporated or resident in a country, state or territory of low or no taxation or tax haven, 10 per cent if the lender is not related to the borrower and has qualified by the Central Reserve Bank of El Salvador, or when the international convention to avoid double taxa-tion with Spain applies. However, they would be exempt and therefore not subject to withholding tax if the lender has the qualification of the Central Reserve Bank for meeting the criteria established in the national legislation.

Moreover, these interests are subject to a withholding tax of 13 per cent VAT, unless the lender has obtained the qualification from the Central Reserve Bank of El Salvador, meeting the requirements established for that purpose in the national legislation, in which case the interest is exempt from VAT and therefore such withholding tax is not applicable.

Dividend payments made within or outside our jurisdiction by com-panies domiciled in El Salvador to its shareholders are subject to a with-holding income tax of 5 per cent under a general rule or 25 per cent if the shareholder is domiciled, incorporated or resident in a country, state or ter-ritory considered of low or no taxation or tax haven. Withholding tax does not apply if the shareholder is a company resident in Spain and has at least 50 per cent of equity interest in the Salvadoran company, and the profits on which the dividends are paid have been subject to income tax payment in El Salvador.

Update and trends

Recently approved tax reformsA group of tax reforms was recently approved in El Salvador. They came into force on 9 August (the first two reforms) and 1 September 2014 (the third reform), and are contained in the Official Journal Volume 404 No. 142 of the same date. The tax reforms being carried in Legislative Decrees No. 762, 763 and 764, all dated 31 July 2014, are published as follows:• A Law of Income Tax, in which essentially a minimum payment

of income tax of 1 per cent on the net assets is established, which mainly affects businesses that generate losses or those with low levels of income and volume in assets and have annual revenues exceeding US$150,000.

• The Tax Code, in which the following provisions shall apply: acceptance of guidelines of the OECD transfer pricing; interruption of the expiration of the supervisory authority; control mechanisms of equipment used for processing credit and debit card payments (POS); solvency requirement tax and customs obligations; and disclosure of solutions of tax assessments.

• The Law on Tax on Financial Operations is established, which sets a new tax of 0.25 per cent on the amount paid in any type of check and through electronic transfers in any financial system institution within the country and abroad for amounts exceeding US$1,000, subject to the exemptions provided in the decree.

Moreover, in that new law a new tax-aimed liquidity control is set at 0.25 per cent on amounts surpassing US$5,000 or compounded monthly, applicable to deposit operations, payments and cash withdrawals in the Salvadorean financial system institutions. The tax for controlling liquidity is credited against other taxes, for a maximum period of two years.

Luis Barahona [email protected] René García [email protected]

Calle La Mascota No. 533Colonia San BenitoSan SalvadorEl Salvador

Tel: +503 2257 0900Fax: +503 2257 0901www.ariaslaw.com

Arias & Muñoz EL SALVADOR




The most common way to withdraw benefits from a Salvadorean company is as dividends.

Another common way to withdraw the benefits is through a way of interest payment of loans granted by shareholders.

Less efficient but also used are management fees and royalty payments.


15 Disposals


The structure of the disposal will depend on the circumstances of the transaction.

Both the assets disposals and the shares disposal of a local company or of a holding company are commonly used practices.



A non-resident company who sells shares in a Salvadorean company will be subject to the payment of income tax on the gain obtained.

There are no special rules applicable to the disposal of stock in real estate, energy and natural resource companies.



In general, the law does not establish methods to defer or avoid taxes on the gain obtained from the disposal of shares or assets of a company.

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 created by the 2014 Finance Bill provides that acquisition of stocks in 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 whether it will be considered by the European Commission as being compliant with the European state aid rules.



The French holding company regime is attractive, although it has been slightly weakened recently (95 per cent exemption for dividends and 88 per cent exemption for capital gains on substantial shareholdings).

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 member. Indirect ownership is possible via French or EU subsidiaries.

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 LBO structures situated in France but controlled and managed from abroad.

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,

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


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 prop-erty is used within the course of the company’s business. The tax applies to the value of the shares sold, which is based on the fair market value of the French real estate assets taking into account only the liabilities related to these assets, other liabilities being disregarded.



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 activity 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



depending on the tax consolidation agreement). Where the former mother company of a tax consolidation is 95 per cent acquired by, merged or demerged in, a company which is the parent company of another tax con-solidation, NOLs of the former tax consolidation may be transferred to the tax consolidation 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 2013), 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 test. 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.


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).

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


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 establish-ment. Any transfer of these assets outside France triggers CGT either immediately or, upon election, over a five-year period (recent guidelines rule out this option for the 12 per cent taxable portion of the participation exemption regime). The balance of the CGT becomes immediately pay-able 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 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.


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 since they will generally qualify as a distribution, distribu-tions from participations being 95 per cent exempt (ie, average effective taxation at 1.72 per cent – see ‘Update and trends’).



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 incompatible 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 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.

Update and trends

The 2014 Amended Finance Bill has increased the exceptional CIT contribution for large companies from 5 to 10.7 per cent until 31 December 2016. Hence, the maximum CIT rate for large companies is currently 38 per cent.

Following an ECJ decision on 20 June 2014, which has considered that the prohibition of tax consolidation for Dutch sister companies held through a common EU parent company constitutes a restriction to the freedom of establishment, the possibility of integrating French sister companies held through a common EU parent company should be validated and allow some groups to elect retroactively for the French tax consolidation within the time limit provided for in article L190 of the Book of Tax Procedures .

Following a decision of the French Constitutional Council on 20 June 2014, the tax regime of share buybacks may be modified in the 2015 Finance Bill. The deemed distribution qualification may be changed into capital gain qualification, which would create more of a tax burden for company shareholders.

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 provide 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. The purchase price only becomes tax-effective for the seller if it resells the target.

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 mar-ket value.



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 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.

GERMANY CMS Hasche Sigle




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 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 com-panies have been founded under the laws of a member 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 taxa-tion 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 manage-ment 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 company 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 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 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 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 other-wise taxable 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 transfer 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 in the

respective company. Nevertheless the new rule does not apply to reorgani-sations 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 isn’t 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 company’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 section 10(a)(X) of the Trade Tax Act (GewStG)). Shares bought by a group of acquir-ers with common interests are added. The loss-elimination clause covers not only direct transfers of shares, but any similar type of transaction, leav-ing 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 com-pany for several years or significant investments into the target company. 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 inapplicable. Simultaneously, a proceeding before the German Constitutional Court is currently looking into the compatibility of section 8(c)(I)(1) KStG with arti-cle 3(I) of the German Constitution. Should the court rule section 8(c)(I)(1) KStG to be unconstitutional, a revision of the loss limitation 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. If they remain unused until then, they become definite profits. Unused excess interest, on the other hand, can theoreti-cally 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 overriden 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 can at least realise a partial debt pushdown to take full advantage of the €3 million interest excess allowance per company 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 double taxation agreement provides for a withholding tax relief for divi-dends, 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 5.5 per cent 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).



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 liqui-dated (section (12)(III)(1) KStG), pursuant to the market value.

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.

GERMANY CMS Hasche Sigle




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 since 2009 (section 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 (section 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 section 32(5) of the German Corporate Tax Act entitles foreign enti-ties to reclaim withholding tax that has been paid to the German tax administration 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 doesn’t 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 doesn’t 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.



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.

Update and trends

There is a general trend in German tax policy to increase the exchange of information between tax administrations. Under the guidelines for the negotiations for new or revised text treaties, the German tax administration has introduced a more strict catalogue of measures to avoid treaty shopping abuse, and to allow an intense exchange of information. The same applies for the revised version of the parent-subsidiary directive, which only allows dividends to be tax-free at the level of the recipient company if the payments are not deductible at the level of the subsidiary paying the dividends.





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

transfer 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, namely:

• company shares not listed on the Athens stock exchange;• transfer of shares that are listed on the stock exchange; and• transfer of company ‘parts’ in other types of companies; and

• transfer of a business as a ‘going concern’.

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)According to the regime which is applicable to transfers of shares car-ried out from 1 January 2014 onwards, the tax burden amounts to 15 per cent on the capital gains realised from the sale if the seller or transferor is an individual (subject to a pertinent DTC currently in force). Otherwise, said capital gains are subject to corporate income tax under the standard tax regime. The capital gains are calculated by deducting the acquisi-tion from the purchase value (price) of the shares. Any expenses directly related to the purchase or sale of the shares are deemed to be included in the acquisition and the sale value (price) and thus they are neither added nor deducted. The sale value is either determined based on the company’s equity at the time of transfer or the consideration (purchase price) or the market value indicated in the share purchase agreement (SPA), depending on which of the three is the highest. Similarly, the acquisition value is either determined based on the company’s equity at the time of acquisition or the consideration (purchase price) indicated in the SPA at the time of acquisi-tion, depending on which of the two is the lowest. If the acquisition value cannot be determined, it is deemed to be zero provided that the acquisition was effected after 29 September 1999 (date of completion of demateriali-sation process for shares listed on the Athens Stock Exchange). If the calcu-lation of the capital gains as per above results in a negative amount (loss), said loss is carried forward in the next five years and is offset only against future capital gains from the transfer of shares and parts of corporate enti-ties or partnerships.

Company shares listed on a stock exchange (either domestic or non-domestic)According to the regime which is applicable to transfers of shares car-ried out from 1 January 2014 onwards, the tax burden amounts to 15 per cent on the capital gains realised from the sale if the seller is an individ-ual and is participating in the company’s share capital by at least 0.5 per cent and the shares to be transferred were acquired on 1 January 2009 onwards (subject to a pertinent DTC currently in force). Otherwise, if the seller or transferor is a legal person, said capital gains are subject to cor-porate income tax under the standard tax regime; whereas if the seller or transferor is an individual participating in the company’s share capital by less than 0.5 per cent or the shares to be transferred were acquired prior to 1 January 2009, said capital gains are exempted from income tax. The

capital gains are calculated by deducting the acquisition from the purchase value (price) of the shares. Any expenses directly related to the purchase or sale of the shares are deemed to be included in the acquisition and the purchase value (price) and thus they are neither added nor deducted. The acquisition and the sale value are determined according to the transaction documents issued by the intermediating brokerage firm or the credit insti-tution, or as notified to Hellenic Exchanges SA on the day of settlement of the transaction. If the acquisition value cannot be determined, it is deemed to be zero provided that the acquisition was effected after 29 September 1999 (the date of completion of dematerialisation process for shares listed on the Athens Stock Exchange). If the calculation of the capital gains as per above results in a negative amount (loss), said loss is carried forward over the next five years and is offset only against future capital gains from the transfer of shares and parts of corporate entities or partnerships. According to Law No. 2579/1998, article 9, paragraph 2, as amended by Law No. 3296/2004, article 12, Law No. 3943/2011, article 16 and Law No. 4110/2013, article 10, transfers of shares that are listed on the Athens stock exchange are taxed at 0.2 per cent (subject to a pertinent DTC currently in force). This tax is calculated on the value of the shares transferred as it appears on the tag issued by the intermediating brokerage firm. The tax burdens the of the shares, individual or corporate entity, unions or trusts, regardless of their residence, origin or place of residence or domicile and even if they are exempt from the payment of other taxes or duties by virtue of other provisions.

According to Law No. 2703/1999, article 27, paragraph 2, the same applies to transfers of shares listed on a recognised foreign stock exchange (according to lists compiled by the Ministry of Economics, all major stock exchanges are included) realised by individuals residing in Greece, Greek companies or companies that have a permanent establishment in Greece. The tax due is calculated at the value of the transfer appearing in the rel-evant transfer documents and is payable by the seller at the tax office to which the latter is registered.

Company ‘parts’ in other types of companiesA Greek limited company is not the equivalent of a common law limited company. Greek company types are copied originally from the French sys-tem. Essentially, this means that when we talk about shares under Greek law, we mean shares in a Greek SA company, the equivalent of a French société anonyme. All other companies and partnerships have company ‘parts’ or ‘equity stakes’, not shares. Greek SA companies, although more regulated than the limited companies of the Anglo-American type, play the most significant role in the Greek company world because they cover a wide range of business enterprises, from small, family owned SA compa-nies to the biggest Greek-listed companies. The above analysis regarding company shares not listed on a stock exchange is also applicable to most, if not all, companies except the SA.

Transfer of a business as a ‘going concern’The term ‘transfer of business’ refers to the transfer of a grid of rights and liabilities, governed by article 479 of the Greek Civil Code, as opposed to the individual transfer of specific assets of a business; the following do not apply to the latter. The above analyses regarding company shares listed or not listed on a stock exchange are also applicable hereto.

Iason Skouzos & Partners Law Firm GREECE


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 audi-tors. Goodwill and other intangible assets are subject to wide interpreta-tion 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 supervising 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 ‘arti-cle 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 Law No. 1297/1972, there is no room for appreciation of assets. Law No. 1297/1972 not only provides for the appreciation but also allows the postponement of its taxa-tion. Despite that advantage, the procedure of Law No. 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 division 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 4172/2013 as currently in force). Articles 52–55 thereof both transpose Directive 2009/133/EC in the Greek legislation and regulate domestic restructurings. In particular, although no official (ie, by the Ministry of Finance) guidance on the interpretation and implementation of these pro-visions 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.



In principle, the domicile or residence of the acquiring entity is irrelevant for tax purposes, especially following the adaptation of Greek law to EU Directive 2009/133/EC by virtue of Law No. 4172/2013. On the other hand, one should take into account Incentive Law 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 restruc-turing 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 Law No. 1297/1972 (which is applicable to domestic restructurings), where the transferred assets are appreciated but the taxation of any capital gains aris-ing 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 domes-tic ones) are now explicitly provided for by the new Income Tax Code. However, no official guidance on the interpretation and implementation of the provisions pertaining thereto has been issued yet.



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 busi-ness 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 busi-ness. The said contribution will however be subject to tax on the accumula-tion of capital (at 1 per cent), in the same way as an ordinary increase of share capital with cash would be. Such a tax would not be payable if cash was the consideration for the acquisition of those business assets.



Furthermore, as per the new Income Tax Code (Law 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 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 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 parties, except for bank loans, interbank loans and bond loans issued by Societes 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 borrowing date (currently 7.17 per cent).

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, if the net amount of interest payable does not annually exceed €5 million (from 1 January 2014 onwards) and €3 million (from 1 January 2016 onwards) respectively, it is fully deductible. In any case, the non-deductible amount of interest may be carried forward with no time limitation.

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 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 bur-den and increase the production capacity of the company. However, as per article 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 investment 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 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 4172/2013) – either a cross-border one (in this regard, as already stated elsewhere, the provision also transposes Directive 2009/133/EC as currently in force) or a domestic one. In particular, as per the aforementioned provision, any capital gains calculated by reference to the difference between the mar-ket 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 transfer-ring 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 word-ing 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 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 EC 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-avoid-ance rule was introduced for the first time into the Greek tax law through Law 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 acceptance 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.



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 submission of documents proving that they acquired the shares and proof that the rel-evant tax has been paid. Similarly, tax on the transfer of a going concern by virtue of article 13 of the Income Tax Code is payable before the transfer is concluded. Moreover, in the latter case, the law holds the contracting buyer co-liable for the payment of tax. Restructuring of businesses according to incentive Legislative Decree 1297/1972 is favoured by postponement of income taxation on capital appreciation. According to article 2 of Law No. 1297/1972, any capital appreciation that may occur on a merger or restruc-turing, subject to the conditions of this law, is not taxed upon restructuring

Update and trends

Following a series of new tax laws that have been introduced in recent years, it seems that the tax and legislative framework might be becoming more stable. This is a stabilisation which is very much needed for the attraction of foreign investments. Real estate remains the main source of foreign direct investment in Greece with some considerable, albeit small in number, acquisitions of public land for touristic exploitation. It is anticipated that the financial crisis that Greece has been experiencing since 2008 will soon come to an end, but there are no clear signs on how development will reach a satisfactory pace. Apart from the traditional fields of tourism and agriculture, the sectors of the economy that already attract a lot of attention are energy and transportation. In terms of the taxation framework, if no more changes take place soon what will remain is a relatively ‘lighter’ and more flexible tax system, which is becoming faster and more sophisticated in tackling tax avoidance schemes formerly outwith the reach of the Greek tax authorities.

Theodoros Skouzos [email protected]

43 Akadimias Street10672 AthensGreece

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



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 provisions 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.

GUATEMALA Mayora & Mayora, SC


GuatemalaEduardo A Mayora and Juan Carlos CasellasMayora & Mayora, SC




The acquisition of stock in a company is basically not subject to any specific tax treatment; however, article 30 of the Income Tax Act makes the trans-fer of the stock at a price higher than book value subject to a 10 per cent capital gains tax. The acquisition of business assets and liabilities would generally be subject to 12 per cent value added tax, with the exception of real estate that would have been the object of a previous transaction (trans-ferring title to it), in which case the applicable tax would be a stamp tax at 3 per cent. Additionally, where a capital gain (broadly defined as the differ-ence between the net book value and the transaction price) has been made, a 10 per cent capital gains tax would also be applicable (articles 89 and 92).

2 Step-up in basis


The general rule is that the purchaser shall register in its books the acquisi-tion cost of the assets. Should that cost be higher than the book value in the books of the transferor, a 10 per cent capital gains tax would generally be applicable to the transferor.

Assets such as goodwill and other intangibles can be depreciated for tax purposes but not in the case of the purchase of stock in a company own-ing those assets.

The law allows for the revaluation of assets by mere book entry with-out any charge, however, contrary to the step-up in basis rule, if the reval-ued assets were transferred after the revaluation, in order to determine any possible capital gain, the book value to be deducted from the transaction price would be the book value of the assets prior to the revaluation date.



As explained in question 1, the acquisition as such is not subject to any spe-cific charge, where a corporation’s stock is acquired. Thus, the jurisdiction where the acquisition company has been organised is not a relevant issue and should there be any capital gains tax payable this would be the trans-feror’s liability.

Where the acquisition is of the assets directly, the VAT or the stamp tax, or both, would be payable regardless of the jurisdiction where the acquisition company is established.



So far mergers and share exchanges have been common forms of acquisi-tion where a direct acquisition is not otherwise desirable. In other words, there are no tax biases that as a general rule make it preferable to struc-ture the transaction one way or another. The new income tax rules do not modify the fundamentals of this type of transaction. Again, the merger (or share exchange) as such is not subject to any specific tax and, if there is a capital gain for any of the parties to the transaction as a consequence of the exchange (not only cash transactions may give rise to a capital gain but exchanges of shares or other assets as well), capital gains tax would be applicable.



Not as a matter of general rule. There may be instances where the book value of the shares to exchange, as opposed to a cash consideration, would not give rise to a capital gain because the book value is less than the cash price that would have been disbursed, but otherwise, there are no benefits as a matter of general rule.

6 Transaction taxes


Since January 2013, dividends are characterised as income for income tax purposes. A 5 per cent withholding tax is levied on the dividends paid to both residents and non-resident shareholders, as well as on the remit-tances made to the parent company of local branches.

Concerning business assets directly, as mentioned above, their trans-fer is subject to a VAT general rate of 12 per cent (except for a reduced rate for minor taxpayers – approximately less than US$19,000 annual income – of 5 per cent).

The 12 per cent VAT charge applies on sales of moveable assets and real estate property; imports; leasing of moveable assets or of real estate; donations; inventory consumption, loss or destruction; and services ren-dered in Guatemala.

Nevertheless, with regard to sales of real estate, VAT applies only to the first transfer. The second and subsequent transfers are subject to a 3 per cent stamp tax charge.

The VAT taxable base is the price or value of the consideration paid for the goods or services. There are cases where certain items must be either included or excluded.

As a general rule, the taxpayer is entitled to a credit for the VAT paid to suppliers on purchases of goods and services, provided that they constitute a cost or expense of the taxpayer’s income-producing activity. The credit is used to offset the amount payable for the VAT charged by the taxpayer on sales to third parties. The VAT paid in the acquisition of goods that will become fixed assets for the buyer is creditable to a VAT account.

Mayora & Mayora, SC GUATEMALA




Guatemalan tax regulations do not have insolvency proceeding provisions or a special tax regime applicable to bankrupt or insolvent companies.

With regard to net operating losses, the new income tax rules have eliminated the provision which allowed taxpayers to use as a deduction operating losses up to 97 per cent. Therefore, as the new income tax law provides that to be deductible all costs and expenses should correspond to the tax period under liquidation, operating losses cannot be claimed as a deductible expense. In short, operating losses are no longer deductible for income tax purposes. Losses must be assumed by taxpayers.

8 Interest relief


The laws of Guatemala do not have regulations related to interest relief spe-cifically, but as a general rule, article 21.16 of the Income Tax Act requires that interest paid on any kind of financing be directly related to the gen-eration of taxable income. Based on this provision, the Tax Administration usually questions the deductibility of financing used for the acquisition of another company. Thus, the criterion of the Tax Administration has gener-ally been that the acquisition of another company cannot and will not be presumed to be directly connected with the generation of taxable income. This would have to be shown by the taxpayer should the Tax Administration question the deductibility of interest.

In general, it makes no difference whether the lender is a foreign party, a related party, or both. However, the Constitutional Court recently ruled that the interest paid to foreign banks or other financial institutions fully licensed to operate in their own jurisdiction are not subject to withholding taxes. In other cases, interest paid to foreign lenders can only be deducted where the withholding tax was made by the borrower; this obligation is not easily avoidable.

There are no limits on pushdown debt, although interest paid on it would, again, have to be directly connected with the generation of taxable income (rather than the mere financing of the acquisition) in order to be deductible, and article 24 sets a limit on the interest rate deductible (to be determined from time to time by the Monetary Board).



The usual forms of protection include warranties and representations that any known tax liability, any tax contingency or exposure to risk of any adjustment by the Tax Administration has been disclosed by the trans-feror. Indemnities are also common forms of protection where the due dili-gence reveals a contingency according to which the parties cannot agree on the probabilities of generating a tax charge.

Any payments made following a claim under a warranty or indemnity would be taxable in the hands of the recipient, if a resident of Guatemala, or subject to a withholding, if resident in a foreign jurisdiction.


10 Restructuring


Post-acquisition restructuring typically looks to the elimination of redun-dancies and to the assignment of sales, costs, expenses or benefits to the entity where the effective tax rate would be most efficient. There are no transfer pricing rules internally within the jurisdiction and where this reas-signment is not a simulation, but reflects an operational reality, it is con-sidered legitimate.

11 Spin-offs


There are no specific rules in the jurisdiction applicable to spin-offs and therefore the general rules on the transfer of assets would be applicable on a case-by-case basis.



The migration of the residence of the acquisition or the target company is very rare. The migration as such does not give rise to any tax liability, but the Commercial Registry will require the Tax Administration to certify that there are no pending tax liabilities in the jurisdiction before the cancella-tion of the company’s register is operated. In some instances, the required action (such as the migration) is taken only until the statute of limitations for any tax obligation would have expired in order to avoid any contingency in this connection. Naturally, this is not always feasible.



Interest paid to non-residents is subject to a 10 per cent withholding tax with only the exception of offshore facilities of local banks (registered with the Superintendent of Banks). However, as mentioned in question 8, the Constitutional Court has ruled that according to article 104 of income tax act, the payments of interest to a fully licensed foreign financial institu-tions, are exempt.

Dividends are subject to a 5 per cent withholding tax whether paid to resident or to non-resident shareholders.



Not applicable.


15 Disposals


Disposals are carried out in any manner described in the question: through the business assets, the stock in the local company or the stock in the for-eign holding company. However, all things being equal, the transfer of stock in the local company being free of any VAT or any stamp tax charge is usually preferable.

The disposal of stock in a local company and of business assets is basi-cally subject to the same rules explained in questions 1 and 2.

GUATEMALA Mayora & Mayora, SC


Concerning VAT, the seller or transferor of any business assets must charge VAT on the sale price, thus incurring a liability (in terms of VAT payable to the Tax Administration). This liability, however, can be offset against VAT paid to suppliers on purchases of goods and services (so long as they are directly connected with a source of revenue) (see question 6).

Concerning capital gains tax, the charge is applicable to the transfer-or’s gain, as mentioned in question 1.



The Income Tax Act does not provide for special rules concerning the dis-posal of stocks (or of stocks in real property, energy or natural resources)

and therefore the general rules apply as discussed in questions 1 and 2. Basically, the transfer of stocks at a price higher than book value is subject to a 10 per cent capital gains tax, which generally is payable by the seller or transferor.

That said, the provisions in article 85 of the Income Tax Act make the rules concerning capital gains tax applicable only to resident entities or individuals. Thus, the disposal of stock in a local company by a non- resident company would be exempt from tax for the non-resident company.



Strictly speaking, the laws of Guatemala do not have provisions allowing for deferring or avoiding the payment of the applicable tax.

Eduardo A Mayora [email protected] Juan Carlos Casellas [email protected]

15 Calle, 1-04 Zona 10, Of 30101010 Guatemala CityGuatemala

Tel: +502 2223 6868Fax: +502 2366 2541www.mayora-mayora.com

Deacons HONG KONG


Hong KongL Travis Benjamin and Stefano MarianiDeacons




In Hong Kong, acquisitions most typically take the form of a purchase of shares of a company as opposed to a purchase of its business and assets.

In a share acquisition, the target company’s historical tax attributes and exposures are preserved. It is not currently possible to obtain a clear-ance from the Inland Revenue Department (IRD) giving assurance that a target company has no arrears of tax or advising whether the company is involved in a tax dispute. As a result, it is usual to include tax indemni-ties or warranties in the sale and purchase agreement to address unknown tax exposures. The extent of the tax indemnities or warranties is subject to negotiation between the seller and the purchaser. Interest and financ-ing costs incurred on money borrowed to finance the acquisition of shares (which may generate tax-exempt dividends or capital gains or losses) are not deductible for profits tax purposes.

In an asset acquisition, provided certain formalities of the Transfer of Business (Protection of Creditors) Ordinance are complied with, no previ-ous tax liabilities of the target company are inherited and there is no acqui-sition of a tax liability on retained earnings arising from the business. Asset purchases typically enable the purchase price (or a part of it) to be available for outright deduction or capital allowances, depending on the type of asset involved. Asset purchases also offer greater flexibility in funding options, which can be important because interest incurred to fund the acquisition of business assets is generally deductible (subject to conditions).

2 Step-up in basis


The buyer would generally prefer to attribute higher values to inventory and depreciable assets in order to increase its subsequent tax benefits. Any tax-depreciation allowances arising from capital expenditure incurred on the acquisition of plant and machinery is generally computed with refer-ence to the amount actually paid by the purchaser to the seller. However, where an asset that qualifies for initial or annual allowances is sold and the buyer is a person over which the seller has control or vice versa, or both the seller and the buyer are persons over which some other person has control, the Commissioner of Inland Revenue (CIR) is authorised to determine the true market value of the asset sold if the CIR considers that the selling price is not representative of the asset’s true market value at the time of sale. The value so determined is used to compute the balancing allowance or balanc-ing charge for the seller, and the capital expenditure of the buyer on which initial and annual allowances may be claimed.

For commercial and industrial buildings and structures, the tax allow-ances are based on the ‘residue of expenditure’ immediately after the sale. The residue of expenditure is the amount of capital expenditure incurred in the construction of the building or structure reduced by any initial, annual or balancing allowances that have already been granted, or any notional

amounts written off and increased by any balancing charges made when the building or structure was previously used as an industrial or commer-cial building or structure.

The portion of the purchase price representing the cost of acquiring goodwill is not deductible for profits tax purposes. Where certain condi-tions are met, the Inland Revenue Ordinance (IRO) provides for the follow-ing specific deductions for payments giving rise to intangible assets: • sums expended for registering a trademark, design or patent used in

the trade, profession or business that produces chargeable profits;• payments for and expenditure incurred on research and development

(R&D); in particular, payments to an approved research institute for R&D that may be specific to the requirements of the trade, profession or business, or which may be merely within that class of trade, profes-sion or business; and expenditure on R&D, including capital expendi-ture, other than expenditure on the acquisition of land or buildings or alterations, additions or extensions to buildings;

• expenditure incurred on the purchase of patent rights or rights to any know-how for use in Hong Kong (except where purchased from an associate); and

• write-off of expenditure incurred on the purchase of copyrights, regis-tered designs or registered trademarks over five years.

The IRO grants initial and annual depreciation allowances on capital expenditure incurred in acquiring or constructing industrial buildings, commercial buildings and plant and machinery used in the production of assessable profits.

In addition, the IRO provides the following tax concessions:• write-off of certain expenditure incurred on the refurbishment or ren-

ovation of a building or structure in equal installments over five years;• write-off of certain expenditure incurred on the construction of an

environmental protection installation in equal installments over five years and a 100 per cent write-off of environmental protection machinery; and

• subject to certain provisions, 100 per cent write-off of computer software, computer systems and computer hardware that are not an integral part of any machinery or plant, and certain other qualifying machinery or plant used specifically and directly in the manufacturing process.

Balancing charges or allowances may be triggered on specified occasions related to the cessation of use by the claimant having the relevant inter-est in a building or structure (eg, when the building or structure has been demolished, destroyed or ceases to be used by the claimant). For qualify-ing plant and machinery, the sales proceeds (limited to cost) are deducted from the reducing value of the relevant pool. A balancing charge arises when, at the end of the basis period for a year of assessment, the reducing value of the pool is negative. Any excess of the sales proceeds above the original cost of the plant and machinery is not subject to profits tax. Such excess should be regarded as a profit arising from the sale of a capital asset.

The prudent approach is for the buyer and seller to agree on an appor-tionment of the purchase price between the different types of assets being transferred. Generally, the parties have a degree of discretion in nego-tiating such values although the IRD may seek a reallocation of value in respect of certain classes of assets if they view such allocation as aggres-sively tax-motivated.

HONG KONG Deacons




As Hong Kong operates a territorial system of taxation, the profits tax rules apply equally to Hong Kong incorporated companies carrying on a trade or business in Hong Kong and overseas incorporated companies carrying on a trade or business in Hong Kong through a branch. The main types of invest-ment vehicles used to carry on business in Hong Kong are a Hong Kong incorporated company, a branch of a foreign company, a partnership and an unincorporated joint venture. The local registration and administration requirements vary, depending on the entity used.

The tax rates that apply to a person’s assessable profits to determine their profits tax liability for the 2014–2015 year of assessment are as follows:• for corporations: 16.5 per cent; and • for unincorporated businesses: 15 per cent.

One advantage of establishing a local holding company is that dividends received from a company subject to profits tax are specifically exempt from profits tax under the IRO. However, there is no specific IRO provi-sion exempting dividends received from companies that are managed and controlled outside Hong Kong and carry on no business in Hong Kong. In practice, the IRD treats such dividends as exempt on the basis that they are not derived from Hong Kong. Accordingly, subject to controlled foreign company rules in other jurisdictions, dividends can be accumulated in a local holding company without further tax leakage.

Another advantage of setting up a local holding company is that any profit derived from the subsequent exit by sale or disposal of the local holding company should generally be treated as exempt from profits tax because Hong Kong does not tax profits derived from the sale of capital assets. Similarly, the disposal of any subsidiaries held by a local holding company is not taxed in Hong Kong unless the acquisition of these sub-sidiaries is regarded as speculative or as part of a trade carried on in Hong Kong such that the resulting profit would not fall within the scope of the capital profits exemption.

From a Hong Kong tax perspective, a foreign parent company may choose to make direct inbound investments into Hong Kong since divi-dends paid by a Hong Kong company to a non-resident shareholder are not subject to withholding tax in Hong Kong.

A foreign purchaser may decide to acquire business assets through a Hong Kong branch. For example, it is common for companies incor-porated in the British Virgin Islands to be used to carry on business in Hong Kong. Alternatively, it may be possible for non-Hong Kong-sourced income earned through the Hong Kong branch to benefit from relief under a tax treaty concluded between the jurisdiction in which the head office is located and the jurisdiction where the relevant income is sourced.

Hong Kong does not impose additional taxes on branch profits remit-ted to an overseas head office. Generally, Hong Kong’s profits tax rules apply to foreign persons carrying on business in Hong Kong through a branch in the same way that they apply to Hong Kong-incorporated enti-ties. There are special rules for ascertaining the assessable profits of a branch and those of certain types of businesses, including ship owners car-rying on business in Hong Kong and non-resident aircraft owners.

Partners in a general partnership are jointly and severally liable for the debts and obligations incurred by them or on their behalf. A partnership is treated as a chargeable person for profits tax and property tax purposes, such that tax is chargeable at the partnership level. Although a partnership is assessed as a separate legal entity for profits tax purposes, the amount of its liability to profits tax is determined by aggregating the tax liabilities of each partner with respect to their share of the assessable profits or losses of the partnership. Therefore, the amount of tax payable on the partner-ship profits is affected by the tax profiles of the individual partners, that is, whether the partners have losses and whether the partners are corporate entities (such that the profits tax rate of 16.5 per cent applies for the 2013–2014 year of assessment) or individuals (such that the standard salaries tax rate of 15 per cent applies for the 2013–2014 year of assessment).

By contrast, a joint venturer is not responsible in law for acts of its co-venturers. A joint venture is not a legal person and is not deemed to be a chargeable person for the purposes of the IRO. In practice, a profits tax return is often issued by the IRD under the name of the joint venture.

Provided that the IRD accepts that the joint venture should not be regarded as a partnership, it is usually sufficient for the profits tax return to

be completed and filed on a nil basis. The relevant income and expenses of the joint venture are reported in the joint venturers’ own profits tax returns.



Starting in the 2014–2015 year of assessment, the Companies Ordinance makes available a court-free regime for amalgamations of wholly owned companies within the same group. Two types of amalgamation are pro-vided for:• vertical amalgamation (of a holding company and its wholly owned

subsidiaries); and • horizontal amalgamation (of wholly owned subsidiaries of a company).



Generally, no.

6 Transaction taxes


The transfer of Hong Kong stock, including shares in a Hong Kong com-pany, and of Hong Kong immoveable property, give rise to a liability to stamp duty. Generally, the buyer and the seller are jointly and severally liable for stamp duty.

Hong Kong stockAd valorem stamp duty is levied on non-exempt transfers of Hong Kong stock. Hong Kong stock is defined to include shares in Hong Kong-incorporated companies as well as shares in overseas-incorporated Hong Kong-listed companies, which transfer of shares has to be registered in Hong Kong. No stamp duty is payable on allotments of shares. The current prevailing stamp duty rate is an aggregate amount equal to 0.2 per cent (0.1 per cent payable on both the buy note and the sell note) on the higher of the stated consideration in the relevant instrument or the value of the stock (typically, the consolidated net asset value of the company) as at the trans-fer date, plus a fixed duty of HK$5 for stamping the instrument of transfer.

Hong Kong immoveable propertyHong Kong immoveable property includes land, any estate, right, inter-est, or easement over land, and any things attached to the land (such as buildings and fixtures) situated in Hong Kong. The Hong Kong stamp duty regime on the transfer of immoveable property is complex, especially in respect of residential property.

Ad valorem stamp duty (AVSD) is chargeable on the sale and transfer of immoveable property in Hong Kong at progressive rates ranging from 1.5 per cent on consideration not exceeding HK$2 million to 8.5 per cent on consideration exceeding HK$21,739,130.

Special stamp duty (SSD) is chargeable on the transfer of residential properties acquired on or after 20 November 2010 and resold within 36 months. For property acquired on or after 27 October 2012, the rate of SSD ranges from 10 per cent for properties held for a period of more than 24 months but less than 36 months, to 20 per cent for properties held for six months or less. SSD is calculated by reference to the stated consideration or market value of the property; whichever is higher. It is chargeable in addition to AVSD.

Buyer’s stamp duty (BSD) is chargeable on the acquisition of Hong Kong residential property by any person other than a Hong Kong per-manent resident individual. BSD is charged at a flat rate of 15 per cent of the stated consideration or the market value of the property acquired; whichever is higher. The buyer or transferee alone is liable for BSD. BSD is chargeable in addition to both AVSD and SSD.

Stamp duty reliefThe Stamp Duty Ordinance provides that a transfer of shares from one associated corporate body to another is exempt from stamp duty, subject to the approval of the Collector of Stamp Revenue. Two companies are associated where one is the beneficial owner of not less than 90 per cent

Deacons HONG KONG


of the issued share capital of the other, or a third company owns not less than 90 per cent of the issued share capital of each company. In addition to the 90 per cent association test, a number of other conditions need to be satisfied to qualify for this exemption. A clawback rule applies where the 90 per cent association test ceases to be satisfied within two years from the date of the transfer.

OtherThere is no VAT or goods and services tax, and no capital duty in Hong Kong.



Broadly speaking, tax losses incurred by a Hong Kong company may be carried forward indefinitely. There are, however, no provisions for carry-back loss relief, nor are there provisions for group relief. Each company is treated as a discrete, taxable entity and unused tax losses cannot be trans-ferred intra-group.

The mere fact that there has been a change in control of the target company does not affect that company’s ability duly to set off unused losses against future profits. There is no requirement that the target com-pany carry on the same pre-acquisition trade in order for such losses to be utilised.

The carry forward of tax losses is subject to a wide anti-avoidance provision, which enables the IRD to disallow deductions where the sole or dominant purpose of the acquisition was to avoid liability to tax or to reduce the amount thereof.

In an asset purchase, the purchaser may, depending on the nature of the assets acquired, gain an entitlement to an initial capital allowance or subsequent depreciation allowances.

Any transfer of shares or disposition of a company subject to winding up proceedings is, unless sanctioned by the court or the liquidator, void. A company being wound up must cease to carry on its business, except so far as may be required for the beneficial winding up thereof.

8 Interest relief


In order for loan interest and related expenditure (such as legal fees, stamp duty and other resultant expenses) to be tax deductible in Hong Kong, three (or, in the case of lenders which are not financial institutions, four) cumulative tests must be satisfied:• the production of profits test;• the tax symmetry test (if the lender is not a financial institution or an

overseas financial institution); • the secured loan test; and • the flow-back test.

The production of profits testLoan interest and related expenditure must be incurred in the produc-tion of profits in respect of which the taxpayer is chargeable to tax in Hong Kong.

In practice, because dividends are generally not taxable in Hong Kong, interest payable on debt finance to acquire shares will not usually meet this initial production of profits condition and will not, therefore, be deduct-ible. Conversely, where assets are purchased with a view to carrying on a business in Hong Kong, this test should be satisfied.

The tax symmetry test This test only applies to loan interest payable to lenders which are not financial institutions or overseas financial institutions. Interest payable to such lenders will only be deductible if it is chargeable to Hong Kong tax in the hands of that lender.

The secured loan testUnder this test, loan interest is not deductible if the following three cumu-lative conditions are met: • the repayment of principal or interest is secured or guaranteed either

in whole or in part, directly or indirectly, by a deposit or loan; • the deposit or loan is made by the borrower or an associate of the

borrower with or to the lender, or to a financial institution (whether domestic or overseas), or an associate of an overseas financial institu-tion; and

• the interest payable on that deposit or loan is not chargeable to profits tax in Hong Kong.

The interest flow-back testThis test provides that interest will only be deductible where there is no arrangement between the borrower and the lender stipulating that the interest will ultimately be paid back to the borrower or a person connected with the borrower, and the recipient of that repayment is not chargeable to Hong Kong tax on that receipt.

Interest on debenturesDeductions for interest are also allowed in respect of payments on deben-tures listed on the Hong Kong stock exchange or on other recognised exchanges, or on debentures authorised to be marketed to the public by the Hong Kong Securities and Futures Commission. The deductibility of interest paid on such debentures is subject to a flow-back test analogous to that summarised above.

Thin capitalisation There is no thin capitalisation regime in Hong Kong, and no debt-to-equity rules.

Debt pushdownThere are structures to implement debt pushdown in Hong Kong. Notably, recent case law suggests this may be achieved by borrowing to replace equity funding with debt funding, where the equity is employed as working capital in a business, giving rise to profits taxable in Hong Kong.



It is customary to include tax indemnities or warranties in the sale and pur-chase agreement. The extent of the tax indemnities or warranties is subject to negotiation between the seller and the purchaser. It is commonplace for prospective purchasers to undertake a tax due diligence review to ascer-tain the tax position of the target company and to identify potential tax exposures.


10 Restructuring


The types of issues that would be on the agenda include costs relocation and recharge, operational model and refinancing strategies, disposal plan-ning for carve out or divestments, transfer pricing policy alignment and profit reparation planning.

HONG KONG Deacons


11 Spin-offs


Yes, there are strategies than may be implemented to achieve a tax-neutral spin-off of a business via the sale of assets or sale of shares. In an asset spin-off, the benefit of any tax losses incurred by the target company remains with the seller.



Hong Kong has a source based tax system. It follows that the domicile or residence of a company is generally irrelevant to the question of whether a profits tax liability arises to that company and the quantum of such liabil-ity. A non-Hong Kong incorporated company carrying on business in Hong Kong may remove itself from the taxing jurisdiction of Hong Kong by ceas-ing to carry on business in Hong Kong.



There is no domestic withholding tax in Hong Kong on distributions or on the payment of interest.



Profits extraction is commonly effected by way of distribution. Distributions are usually exempt from Hong Kong profits tax under statute and as a matter of IRD practice. They may only be paid out of distributable profits, which are accumulated realised profits, less accumulated realised losses. There is no tax deduction available to the company declaring the distribution in respect of that distribution.

Further, the disposal of capital that is not trading stock is not taxable in Hong Kong. Hong Kong has no capital gains taxation regime.

Alternative means of extracting profits include a reduction of capi-tal or a buyback of shares, which processes have now been simplified by recent corporate law reforms. All companies, save for listed companies, are now allowed to fund buybacks of shares from capital, subject to a solvency requirement. A reduction of capital no longer requires the sanction of the court, subject to approval by special resolution of the company’s members, supported by a solvency statement based on a uniform solvency test.

Finally, voluntary (or solvent) liquidation may be considered as a tax efficient option in the event the existence of the target company is no longer commercially required. Distributions by the liquidator will be tax exempt.

However, it should be noted that if a taxpayer ceases to carry on a trade, profession or business in Hong Kong, it will be deemed to have dis-posed of its trading stock (if any) at market value on the date of cessation, provided that it has not actually disposed of such trading stock to a per-son carrying on or intending to carry on a trade or business in Hong Kong. Taxable gains arising from such a deemed disposal will be subject to Hong Kong profits tax.


15 Disposals


Ultimately, this will depend on the commercial imperatives driving the acquisition. Market practice in Hong Kong tends to prefer share acquisitions.

As there is no capital gains tax regime in Hong Kong, a seller of shares may, in many circumstances, realise a capital gain upon disposal free from tax. Conversely, a sale of business assets may give rise to a balanc-ing charge in respect of capital allowances claimed and, where Hong Kong

Update and trends

Hong Kong is aggressively expanding its comprehensive double tax agreement network. As of September 2014, it has concluded comprehensive agreements with over 30 jurisdictions, including Austria, Belgium, Brunei, Canada, China, the Czech Republic, France, Guernsey, Hungary, Indonesia, Ireland, Italy, Japan, Jersey, Korea, Kuwait, Liechtenstein, Luxembourg, Malaysia, Malta, Mexico, the Netherlands, New Zealand, Portugal, Qatar, Spain, Switzerland, Thailand, the United Kingdom and Vietnam.

The Hong Kong Financial Services Development Council has been engaged to give recommendations on how the existing offshore funds tax exemption could be refined, subject to putting appropriate anti-avoidance measures in place. The proposal will, if passed, give Hong Kong a tax exemption for non-resident funds focused on private equity.

Subsequent to the judgment of the Court of Final Appeal in Nice Cheer Investment Limited v CIR, the IRD has been requested to accept financial statements, which will form part of the 2013–2014 profits tax return, prepared on a fair value basis for tax reporting. The IRD understands that substantial costs will be incurred if profits computed on a fair value basis are to be recomputed on a realisation basis. The IRD agreed to accept 2013–2014 profits tax returns in which the assessable profits are computed on a fair value basis. Taxpayers and their representatives should note that this is an interim administrative measure.

L Travis Benjamin [email protected] Stefano Mariani [email protected]

5th Floor, Alexandra House18 Chater RoadCentralHong Kong

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situate immoveable property is involved, a much higher rate of stamp duty. From a seller perspective, business disposals therefore tend to be less attractive than share disposals.

On a business sale, the default position is that that, notwithstanding any agreement to the contrary, the buyer becomes liable for the debts and obligations, including liability for any unpaid tax, of the transferred busi-ness. However, where liabilities are so transferred, the buyer will benefit from a statutory indemnity enforceable against the seller. The automatic transfer of liabilities may be avoided by complying with certain notifica-tion formalities.

Ad valorem stamp duty on the transfer of shares only applies to trans-fers of Hong Kong stock. Transfers of shares in a company incorporated outside Hong Kong and not listed on the Hong Kong stock exchange are not subject to Hong Kong stamp duty.



There is no capital gains tax in Hong Kong, irrespective of where the seller is resident. There are no special rules relating to the disposal of stock in real property, energy and natural resource companies.



Planning may be implemented to give the sale of shares in a private com-pany an offshore source, removing any resultant gains from the charge to profits tax.

Under the offshore funds exemption, non-Hong Kong incorporated companies that are managed and controlled from outside Hong Kong are exempt from profits tax on their Hong Kong sourced trading profits arising from most transactions arranged by a ‘specified person’ (banks, licenced fund managers, etc) involving common types of financial assets, including public company listed shares.

The disposal of business assets may be structured to give rise to gener-ally non-taxable capital gains.

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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 capi-tal gains will be treated as long-term only if the business has been car-ried on for more than 36 months. Similarly, in the case of sale of stock, the consideration is received directly by the shareholders, whereas in a

sale of business assets and liabilities, the consideration 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 good-will has been a subject matter of intense debate in India and there have been some recent rulings where depreciation has been allowed if the amount representing goodwill was actually on account of acquisition of certain intangibles such as customer lists, business rights, etc. However, in the most recent ruling given by the Indian Supreme Court, it has now been held that even goodwill simpliciter (ie, goodwill arising 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.

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.

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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 15 per cent (plus applicable surcharge and cess) in the hands of the company 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 purposes 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, recently, 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 recognised stock exchange in Singapore or if its total annual expenditure on opera-tions in Singapore is equal to or more than S$200,000 in the immediately preceding period of 24 months from the date that the gains arise. That aside, the Financial Services Commission, Mauritius, has also notified requirements to be complied with by a Mauritius Global Business License Company – Category 1 (GBL-1) (which is the kind of company primar-ily used for Indian acquisitions) to be eligible for obtaining a TRC. These requirements essentially necessitate GBL-1 companies to have economic substance in Mauritius. Cyprus has recently been identified by the Central Board for Direct Taxes as a ‘notified jurisdictional area’, which makes transacting with Cyprus entities onerous and imposes additional docu-mentation 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 2015. 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 investor 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 30 August 2010. Further, the revenue authorities will not be empow-ered to invoke GAAR in cases where the tax benefit in a year arising to all parties 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 also introduced a retrospective provision for Indian taxation of transfer of shares of an offshore company, where such shares derive their value substantially from underlying Indian assets. The term ‘substantial’ is not defined for this purpose and there is also ambiguity on how the computation of gains will be undertaken in such a scenario, how tax credits will work to avoid double taxation of the gain on account of the same underlying Indian asset, etc. The aforesaid committee was also asked to examine these retrospective provisions. The committee’s suggestion was that retrospective application of tax law should occur only in excep-tional or very rare cases, and with particular objectives, in other words, to correct apparent mistakes or anomalies in the statute, to apply to matters that are genuinely clarificatory in nature, or to ‘protect’ the tax base from highly abusive tax planning schemes that have tax avoidance as their main purpose, without economic substance, but not to ‘expand’ the tax base. The Finance Minister has recently proposed the setting up of a high level committee to pre-scrutinise cases involving retrospective application of tax law before tax audits are undertaken in such cases. The committee’s recommendations on the manner of applicability of the indirect transfer provisions on aspects such as defining the term ‘substantial’, providing exclusions for certain share transfers of low value or voting stake, etc, have not yet been accepted by the government.





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.

Recently, the price at which shares are issued by an Indian company to its associated enterprise outside India has been under detailed scrutiny by the revenue authorities. In this regard, if the revenue authorities are of a view that the issue price is less than the arm’s-length price, they may seek to regard the difference as a loan given to the non-resident associated enterprise and seek to attribute notional interest income in the hands of

the issuer company, thereby bringing such notional interest income to tax at the rate of 30 per cent (plus surcharge and cess) in the hands of the issuer company.

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 com-pany continue as shareholders of the resulting company. Tax credits (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 offset 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 case of monies borrowed in foreign currency before 1 July 2017, the rate of withholding tax would be 5 per cent (plus applicable surcharge and cess) on gross amount. Interest payments on monies borrowed in Indian currency would be sub-ject to withholding tax at the rate of 40 per cent (plus applicable surcharge 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-ten-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 entire control and management is situated in India.



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 15 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 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 com-pany 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 (there is no guidance on the meaning of the terms ‘substantially’ and ‘value’). Such taxability of transfers in offshore holding 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 ret-rospective amendment will nullify the ruling of the apex court and makes all indirect transfer of Indian assets liable to tax in India.

The government has set up an expert committee to provide recom-mendations on various issues relating to indirect transfer provisions and, as per its draft report, a threshold of 50 per cent should apply for construing value being derived from Indian assets ‘substantially’, and ‘value’ should be the fair market value of such assets computed as per the discounted cashflow methodology for the services sector and the net asset value method for the non-services sector. It has been specifically recommended that business restructuring or reorganisation within a group, subject to con-tinuity of 100 per cent ownership, should be excluded from the purview of indirect transfers. The suggestions of the expert committee are yet to be implemented by the Indian government. The draft Direct Taxes Code, which is proposed to replace the current Indian tax law and whose latest draft was placed in public domain recently before the general elections in May 2014, prescribed a lower threshold of 20 per cent.

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 arising on transfer of listed stock held for more than 12 months is characterised 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 characterising 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.

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 2015 (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.

Update and trends

Recently, India’s policy on foreign direct investment (FDI) has been amended on a number of counts, to provide a more conducive framework for non-resident acquirers of Indian stock. Some of these are discussed below.

Relaxation in pricing guidelines for issue or transfer of stockIssue or transfer of shares of an Indian company is subject to pricing guidelines prescribed under the FDI policy. The price prescribed as per these guidelines acts as the floor in case of a transaction of issue of new shares to a non-resident or transfer of existing shares from a resident to a non-resident, while it acts as the cap in case of transfer of shares from a non-resident to resident. Under the old guidelines, this price was to be calculated on the basis of the discounted free cashflow method. Under the revised guidelines, the issue or transfer of shares can be at a price determined as per any internationally accepted pricing methodology on arm’s-length basis, thereby providing a greater flexibility in the pricing of the instruments.

Optionality clauseLegality and validity of optionality clauses has been a matter of debate in India. From an inbound investment perspective, there was no specific

policy on the inclusion of optionality clauses in investment agreements and there was ambiguity whether such clauses in agreements were considered to be in breach of the FDI policy. Under the recent notification, such optionality clauses have been specifically recognised and permitted under the FDI policy subject to certain conditions. One of the conditions in this regard is that the investor exercising the option should be eligible to exit from the investment at fair value determined as per any internationally accepted pricing methodology, but such exit option should not provide an ‘assured return’ to the investor.

Warrants and partly paid sharesHitherto, Indian companies receiving foreign investments could only issue equity shares, compulsorily convertible debentures and compulsorily convertible preference shares to the foreign investors. This restriction has now been relaxed to allow Indian companies to issue partly paid equity shares and share warrants to foreign investors, subject to certain conditions.

Mukesh Butani [email protected] Shefali Goradia [email protected]

BMR Legal13A-B Hansalaya Building15 Barakhamba RoadNew Delhi 110 001IndiaTel: +91 11 6678 3000Fax: +91 11 6678 3001

BMR & Associates LLPBMR House36B Dr RK Shirodkar Marg, ParelMumbai 400 012IndiaTel: +91 22 6135 7000Fax: +91 22 6135 7070www.bmradvisors.com





The incidence of capital gains tax can be mitigated by investing in specified bonds. The gain arising on transfer of listed shares (after holding them for more than 12 months) or unlisted shares or business assets (after holding them for more than 36 months) is not taxable in India if the gain arising on

transfer of shares or assets is invested in the 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 and Jinesh Jobalia 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 assets Transfer 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 building Proceeds 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 installments 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 shares Sales 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 trans-action value. Once an IPO 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 taxa-ble 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 jewelry, 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.

Special purpose vehicle Based 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 shareholder which dilutes the share proportion of the previous shareholder in the target company. If the acquisition is achieved by the means as stipulated 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 issu-ance 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 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.

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 usu-ally includes a representations and warranties clause where the seller pro-vides 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.



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.

INDONESIA Ali Budiardjo, Nugroho, Reksodiputro




Yes, they are subject to income tax and withholding taxes. The rates are as follows:

Rate

Interest Dividend

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 tax facility

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.


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

Update and trends

On 1 April 2014, the Minister of Finance issued Regulation No. 60/PMK.03/2014 (PMK 60), which further regulates the exchange of information (EOI) procedure and is applicable for international tax agreements, such as:• the double taxation agreement;• the tax information exchange agreement; and• the Convention on Mutual Administrative Assistance in Tax

Matters, whether or not the Convention takes place before or after the effective date of PMK 60.

PMK 60 stipulates that EOI can be carried out through several channels. This may be initiated either by a relevant unit under the authority of the Director General of Tax or by a country or jurisdiction partner (foreign request). The scope of EOI includes:• EOI upon request. This EOI may be triggered by a suspicion of tax

avoidance or tax treaty shopping on cross border transactions. With regard to foreign requests, PMK 60 requires reciprocity where the country partner must also provide the information requested by Indonesia under similar circumstances. The Indonesian authority may reject such a request if the manner of gathering information requires administrative conduct that contradicts the prevailing regulations.

• Spontaneous EOI. The DGT may provide information spontaneously without any EOI request as a follow-up action from a tax audit, preliminary tax audit or tax investigation. This may lead to the following results:• an indication of significant tax loss in the country partner;• payments to a country partner that are suspected to not be

reported there;• a tax incentive available in Indonesia enjoyed by the foreign

taxpayer that can increase its tax obligation in the latter’s home country; or

• transactions between the domestic and foreign taxpayers structured to minimise tax due in Indonesia or the country partner.

• Automatic EOI. An automatic EOI is information maintained periodically by the DGT, such as changes in a taxpayer’s place of domicile, dividend, interest, royalty, capital gain, salary, and remuneration.

The issuance of this PMK 60 has given more tools to the DGT to combat tax avoidance. We believe that more regulations providing the government with the tools to combat tax avoidance will be issued in the near future. This is in line with the desire of the government to combat illegal tax avoidance in Indonesia.



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.



An Irish company may be merged with another company incorporated in the EU. A number of such mergers have been effected, but this is conse-quent 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.



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.

A & L Goodbody IRELAND


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 are two exceptions to this: • an Irish-incorporated company that is regarded as resident in a treaty

partner country of Ireland, and not resident in Ireland for the purposes of the tax treaty between that country and Ireland, will be regarded as not resident in Ireland; and

• 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 coun-try 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 per cent related to a company which carries on a trade in Ireland, will continue to be able to be non-resident 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

IRELAND A & L Goodbody


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.

Update and trends

2013 was a record year for foreign direct investment into Ireland. In addition, Ireland remains 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. Following US senators’ criticism of the use by multinationals (notably Apple Inc) of Irish-incorporated but non-Irish tax-resident companies, Irish law was amended to prevent, from 1 January 2015, a company being in effect tax-resident nowhere (ie, stateless) by reason of a mismatch be-tween Ireland’s company residence rules and those of a treaty partner country. Ireland is an active participant in the OECD-led BEPS initiative, and the Irish authorities are in consultation with interested parties regarding how Ireland should respond to the BEPS project.

Peter Maher [email protected] Philip McQueston [email protected]

International Financial Services CentreNorth Wall Quay Dublin 1 Ireland

Tel: +353 1 649 2000Fax: +353 1 649 2649www.algoodbody.com

A & L Goodbody IRELAND




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.

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.

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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 dif-fers 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, subject to the Law on Corporate Income Tax (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 (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 tax-able person who continues the acquired activity, is also not subject to VAT. According to the currently valid laws, the transfer of property during a reor-ganisation 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 sub-ject 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 does not need to be certified by a notary, but the transfer of a whole or a part of busi-ness as a complex unit of rights and obligations must 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.

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

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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 cer-tified 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 20,000 litas. The transfer of stock does not have to be certi-fied by a notary, although it 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 10 litas 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 5,000 litas, 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 for small companies) may not exceed 70 per cent of the taxpayer’s income of the tax period, calcu-lated as the income minus tax-exempt income, allowable deductions and limited allowable deductions, with the exception of tax losses of the pre-vious 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 ques-tion 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) are 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 com-pany, 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 activ-ity constituting an independent unit able to engage in commercial activ-ity, 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 as 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 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 contribu-tions of the shareholders. Otherwise the sums paid out to the sharehold-ers 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, therefore the tax advan-tage of bonuses will be 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.

Update and trends

Conventions for the avoidance of double taxationDuring 2013, Lithuania signed five conventions for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital with Cyprus, Turkmenistan, Kuwait, Morocco and the United Arab Emirates. At the beginning of 2014, these conventions were ratified by the Seimas (the Parliament of the Republic of Lithuania). Despite that, all these conventions are still pending because the other counties have to ratify them under the requirements prescribed in their national legal acts as well. However, it is expected that they will come into force in the near future and will increase the number of conventions in force to 55. It is also expected that the blacklist of target territories (tax havens) confirmed by the Minister of Finance will be revised, and countries like Kuwait and the Uinited Arab Emirates will be eliminated from it.

Carrying forward of lossesTaking into consideration that most of EU member states limit carrying forward of losses for a certain period of time (for example, Poland) or by a percentage of the taxable income (for example, France, Germany, Denmark, Italy, Austria, Portugal, Hungary, Slovenia), starting from the tax period of 2014, 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 as 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 already 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.

By setting a partial postponement of carrying forward of losses, it is expected in part to unify the conditions compared to the companies that do not accumulate any loses because from now on the companies that have accumulated the losses during the tax year shall have to pay taxes from the part of their taxable profits. Taking into account that there is no time limitation for carrying forward the losses set, the companies that accumulate them shall still have the right to transfer the losses in time only for a longer period.

Notary certificationAt the moment the transfer of stock does not have to be certified by a notary. However it was proposed to amend the Civil Code of the Republic of Lithuania and to set a requirement to get a notary certification when 25 per cent or more of the stocks are going to be sold or in cases where the price of the sale of the stocks is higher than 50,000 litas. At the moment, these amendments are being considered at the Seimas.

Towards euro adoptionIt is expected that Lithuania shall become the 19th member of the euro area on 1 January 2015. Taking into consideration the change of currency, a package of legal acts shall be adopted, including the Law on Companies that shall foresee the requirements for the equivalent of the authorised capital in euros and the change of the articles of association in connection with this change. These amendments are in the reading stage at the moment, but it is expected that they will be adopted soon and will come into force by 1 January 2015.

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, the acquisition thereof 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 personal) income tax and net wealth tax and indirect taxes (VAT). The acquisition of shares in a Luxembourg company does not necessarily result in a taxable presence in Luxembourg, however when acquiring a substan-tial 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 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.



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 estab-lishment. A permanent establishment in Luxembourg of a foreign com-pany is generally subject to the same income tax and net wealth tax as is the case for a Luxembourg company. However, where profit repatriations from Luxembourg permanent establishments or branches to the foreign head office are not subject to Luxembourg withholding tax, dividend distri-butions 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 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 tar-get company, for example, via a legal merger or via the establishment of a tax consolidation. A Luxembourg permanent establishment of a foreign company can act as the consolidating parent in a Luxembourg tax consoli-dation, provided the foreign company is a capital company (ie, joint stock company with a capital divided and represented by shares) which is sub-ject 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 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 of the Luxembourg acquisition company.



Mergers are common as a way to push down the acquisition debt to the level of the operating business. Interest expenses on debt taken up to acquire the target are, in principle, deductible within the limits of Luxembourg thin capitalisation. However, such expenses are, in any tax year, only deduct-ible to the extent they exceed the amount of exempt dividend received from the target in the same tax year, in other words, up to the amount of the exempt dividend, the expenses will not be tax deductible. Any excess expenses so deductible could result in the company producing tax losses for carry forward.

Furthermore, any such deductible interest remains subject to Luxembourg’s recapture rules: as and when shares in the target would be transferred at a (deemed) gain, such gain will, up to the amount of recap-ture, 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 capital gain exceeds the amount subject to recapture, the gain continues to be exempt from Luxembourg income tax (participation exemption). The amount of taxable gain can be offset by the losses available for carry-forward. Consequently, unless the amount of interest on acquisition debt has effectively been offset against other items of taxable income, the application of the recapture rule should not 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 15 per cent dividend withholding tax and 0.5 per cent annual net wealth tax (the tax basis of which equals the estimated

OPF Partners LUXEMBOURG


fair market value of the asset minus the liabilities). However, Luxembourg generally does not impose withholding tax on arm’s-length interest, unless the interest would fall within the scope of the EU Savings Directive 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 15 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 tran-scription 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 are not subject to any stamp duties or registration. Under very exceptional circumstances, the transfer of a Luxembourg real estate company could be considered the transfer of the underlying real estate 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 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 reorganisation ensures the loss making company to be the surviving entity. Alternatively, tax-neutral rollovers (which are available under certain conditions) are car-ried 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 authori-ties, 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 indicate 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) transferred company (no economic substance); a change of activity concomitantly with the transfer of the shares, etc.

Debt waivers made in the framework of reorganisation 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, considering 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 (sub-ject to recapture; see question 4).

Luxembourg tax law does not codify thin capitalisation rules, as such, and general transfer pricing rules apply. 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 can-not 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 interest 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.

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 EU Savings Directive (ie, interest which is paid to or secured for the benefit of individuals residing in the EU or to residual entities as defined in the EU Savings Directive).

Other than in view of the application of the EU Savings Directive, the residence of the lender is of no relevance for the above. Contrary to other jurisdictions, Luxembourg does not have special 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. The deduction is dependent on the ordinary Luxembourg tax rules, including the applica-tion of transfer pricing rules. Consequently, for a debt push down struc-ture, the same rules regarding deduction limitations and thin capitalisation rules, as mentioned above, apply. For debt pushdown techniques (‘reverse’ or ‘down-stream’ merger, tax consolidation, etc), reference is made to what is stated in question 4 above.



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.

LUXEMBOURG OPF Partners



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-neu-tral spin-off requires:• the transfer of a business or an autonomous part of a business;• a safeguarding of a later taxation of the capital gains deferred as a

result of the tax-neutral spin-off (ie, tax book value of the assets it has rolled over); 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 de-merger, 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 a business or an autonomous part thereof is split towards two Luxembourg companies, towards one or more EU resi-dent companies as well as a combination thereof.



Yes, this is possible. 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 car-ried out, for example, upon a transfer resulting from a contribution of a business or an independent part thereof, upon merger or upon 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

instruments and arrangements and interest that falls within the scope of the EU Savings Directive and related Luxembourg tax legislation (see 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 or EU 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 represent 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.



In the event that a dividend withholding tax exemption would not be avail-able 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 previous remarks regarding debt-equity ratios and on the interest being 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 to Luxembourg dividend withholding tax. A liquidation of a Luxembourg company or a repurchase of shares may, however, trigger non-resident capital gains tax (as explained in question 16).


15 Disposals


As mentioned, Luxembourg does not have a very large domestic mergers and acquisitions market. Mergers and acquisitions transactions generally encompass the acquisition, via Luxembourg companies, of target compa-nies in foreign jurisdictions by foreign investors. Consequently, the dispo-sition of the investment is either carried out by means of a disposition 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 meeting 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 taxation upon a sale of the shares in the Luxembourg company.

OPF Partners LUXEMBOURG




Only in a very limited number of cases. Non-resident shareholders of Luxembourg companies may become subject to Luxembourg non-resident capital 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 the non-resident shareholder (individual) has been a Luxembourg resident for more than 15 years before becoming a non-res-ident other rules may apply.

Moreover, depending on where the non-resident shareholder is a resi-dent, protection against Luxembourg non-resident capital gains tax may be available under a 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

MALAYSIA VoskampLawyers


MalaysiaBarbara Voskamp, Yvette Gorter-Leeuwerik and Benny E ChweeVoskampLawyers




Acquisition of stock (share deal)Upon acquiring the stock in the target company, the acquirer is deemed to undertake all of the company’s assets and liabilities. From a tax perspec-tive, all tax benefits and liabilities will be retained in the target company. Therefore, the acquirer is allowed to use the tax balances (see question 7 for details) or, where relevant, the tax incentives enjoyed by the company, subject to certain conditions and approval from the relevant authorities. The acquirer will also be accountable for any of the company’s (undis-closed) tax liabilities prior to the acquisition. It is therefore advisable to carry out a tax due diligence in case of an acquisition of stock. Such a thor-ough due diligence is typically not required if only the assets of the target are obtained, as the relevant tax benefits, incentives and liabilities would typically remain with the seller.

There are no ownership restrictions for the deduction of losses. A company with a substantial change in ownership will be allowed to bring forward its unutilised losses and capital allowances to be absorbed in the current year of assessment or in subsequent years of assessment except in the case of a dormant company. A company is defined as dormant if there are no significant transactions in the financial year and only mini-mum requisite compliance expenses (such as accounting and filing fees) are incurred.

Acquiring the stock in a target company that is currently in operation would also ease most of the administrative burdens and costs that would arise in setting up a new establishment. However, certain business licences and tax incentives provided to Malaysian companies are subject to equity control or other conditions, therefore it is crucial to assess if they would be withdrawn in the event of any change in control.

Generally, interest costs incurred for stock acquisitions are not deduct-ible. This is because the income derived from the stock (dividend income) of Malaysian companies is tax-exempt income.

Acquisition of business assets (asset deal)On the other hand, the acquisition of assets may be preferable where the acquirer is only interested in certain parts of the business of the target com-pany. Assuming that the acquirer will be carrying on a business activity in Malaysia via the acquired business assets, the acquirer will be regarded as carrying on a business activity in Malaysia through a permanent establish-ment. Alternatively, the asset acquisition may be executed through various channels, for example, through a foreign company, a foreign branch or a local company. The advantage of an acquisition of assets over the acquisi-tion of stock is that the acquirer is typically free from past tax liabilities of the target company.

In addition, a significant portion of its acquisition costs may be recov-ered by claiming capital allowances and tax deductions on the qualifying tangible assets and trading stock respectively. The potential drawback is that the acquirer will have no access to any tax balances or to any tax incen-tives that might be available in the target company.

In respect of funding considerations, interest costs incurred to fund the acquisition of qualifying assets used in the production of business

income are generally deductible, whereas the interest costs incurred for stock acquisitions are generally not deductible.

Share deals and asset dealsSince 2008, Malaysia has implemented a single-tier system of taxation to replace the imputation system of taxation. The income tax paid by the company is a final tax, and the dividend paid out to shareholders would be exempted from tax in the hands of shareholders. In the event that the shareholder is a company, any subsequent payments of dividend from this exempt income is also exempted from tax in the hands of the sharehold-ers. In light of the above, there is no difference in tax treatment on profit distribution from carrying on a business activity in Malaysia through a company (ie, stock acquisition) or through a permanent establishment (ie, asset acquisition).

Stamp duties are a major tax consideration to be taken into account in the acquisition of stock and the acquisition of business assets and lia-bilities. In practice, stamp duties on the acquisition of assets are generally higher than stamp duties on the acquisition of stock (see question 6).

Foreign investors acquiring property in Malaysia must seek approval from the Malaysia Economic Planning Unit unless they have been granted an exemption. For those that require approval, the acquiring company will be subject to equity and paid-up capital conditions.

When exiting Malaysia, there should generally be no tax implications on the disposal of capital investments (both stock and business assets) except for capital gains arising from the disposal of real property or stock in a real property company, which may be subject to real property gains tax (see question 15).

2 Step-up in basis


Upon acquisition of the assets of the target company, the acquirer will typi-cally get a step-up tax base for business assets if the sale consideration that denotes the market value is higher than the carrying value of the targeted assets. Typically, qualifying tangible assets which are used for business purposes would qualify for capital allowances as tax deductions.

Having said that, under Malaysia’s tax legislation, goodwill and other intangibles cannot qualify for tax deductions, with the exception of intel-lectual property. Intellectual property may qualify as qualifying tangible assets. The acquisition costs attributable to trade receivables would not qualify for tax deductions, as the trade receivables would be regarded as capital assets in the acquirer’s account. Being a capital asset, any write-downs of debts so acquired will not be given any tax deductions, and any subsequent recovery of such debts will not be taxable.

For the purpose of completeness, there is no tax deduction or depre-ciation allowance available for the acquisition price of stock, as this would qualify as a capital cost.

VoskampLawyers MALAYSIA




In terms of acquisition of stock, there should be no preference regard-ing the location of the acquisition company since profit distributions are exempted from tax in Malaysia. In addition, there is no difference in tax treatment on proceeds from disposal of capital investments between resi-dent and non-resident companies.

However, it may be considered favourable for the acquisition of assets to be executed by a resident company in Malaysia, as the tax treatments for a branch and a resident company are basically the same but tax incentives (if any) are usually provided to a resident company only.

Nevertheless, taking withholding tax imposed on payments made to non-residents into consideration, the factors that may influence the choice of the domicile of the acquisition company would depend on the antici-pated activities of the acquiring company, the way the acquisition is funded and the payments it will receive from the target company.

Please note that, subject to the satisfaction of certain conditions, group relief is available in Malaysia but is restricted to companies within a group of companies who are tax residents and incorporated in Malaysia.



There is no statutory concept of a merger in Malaysia. A merger and acqui-sition transaction is generally exercised through the acquisition of stock or business assets.



Generally, stamp duty applies to both stock acquisition and asset acqui-sition (see question 6 for the standard rates). However, the acquirer may benefit from an exemption from stamp duty if at least 90 per cent of the consideration comprises stock in the acquiring company. Nonetheless, the acquirer must be (i) undertaking the business, or (ii) acquiring at least 90 per cent of the issued share capital of the target company. For anti- avoidance purposes, this exemption will be withdrawn if:• the recipient of the shares ceases to be the beneficial owner of the new

shares of the acquiring company within two years;• the acquiring company ceases to be the beneficial owner of the

acquired shares within two years; or• the stamp duty exemption was based on untrue claims.

6 Transaction taxes


Stamp dutyStamp duty is imposed on the instruments used for the acquisition of stocks or business assets in Malaysia, regardless of the fact that the instruments may be executed outside of Malaysia. Stamp duty is generally payable by the acquirer. On the basis that the acquirer does not qualify for stamp duty relief, as discussed in question 5, the following would apply:• For acquisition of stock in unquoted companies, the stamp duty rate is

0.3 per cent on the value of the shares at the date of transfer. Valuation of the shares is the highest of:• price earning ratio (PER) (in the case of an acquisition of stock in a

company incurring losses, the PER will be substituted with the par value);

• net tangible assets; or• sales consideration.

• For acquisition of shares in quoted companies, the stamp duty rate is 0.1 per cent on the value of the shares. However, a remission is pro-vided to stamp duty payable in excess of 200 ringgit on all instruments of contract notes relating to the sale of any shares, stock or market-able securities which are listed on stock market of a stock exchange approved under subsection 8(2) of the Securities Industry Act 1983.

• In terms of an acquisition of business assets (such as real proper-ties, machinery and equipment, stock-in-trade and trade debtors), the stamp duty is charged at an ad valorem rate from 1 per cent to 3 per cent on the market value of the assets or the sales consideration, whichever is higher.

Indirect taxThe indirect tax framework in Malaysia consists of the following taxes/duties:• service tax (replaced with goods and services tax with effect from 1

April 2015);• sales tax (replaced with goods and services tax with effect from 1 April

2015);• import duty;• export duty; and• excise duty.

These indirect taxes are single-stage taxes where the taxable goods are only taxed once, at the point of sale by the local manufacturer or at the point of entry for imported goods; there will be no input tax claims.

A stock deal in Malaysia is exempt from indirect taxes. In contrast, there are substantial indirect tax considerations that may be applicable to an asset deal. The types of indirect taxes that may be involved in an asset deal are sales tax (up to 10 per cent) and import duty (up to 60 per cent). If the assets to be purchased comprise items (such as machinery, equip-ment and raw materials) that are subject to indirect taxes, the acquirer has to ascertain whether such items have been granted any exemptions from indirect taxes in the hand of the vendor. If there are exempted items, the acquirer is required to inform the relevant authorities on the transfer of ownership and make an application to extend the exemption to the acquir-ing company. Otherwise, the amount of exempted indirect taxes shall be due and payable by the acquirer upon the transfer of ownership. Generally, an extension will be granted if the acquirer could adhere to the same terms and conditions attached to the exemption that was applicable to the previ-ous vendor company.

With effect from 1 April 2015, goods and services tax will be imple-mented to replace the service tax and sales tax in Malaysia. Under the goods and services tax regime, where a supply of business assets is made as a transfer of going concern, such supply is treated as neither a supply of goods nor a supply of services, subject to certain conditions. Following the above, there would not be any taxes charged or payable. In all other circumstances, the goods and services tax would generally be levied on the transfer of assets. In contrast, the transfer of shares is typically exempted from goods and services tax under the goods and services tax regime in Malaysia.



The change of control has no implication on the tax balances (such as unu-tilised business losses and unutilised capital allowances) carried by the tar-get company provided that the target company is in operation at the time of takeover. The tax balances will only be forgone if there is more than a 50 per cent change of control of a dormant target company, or when the target company is liquidated. Notwithstanding the availability of tax bal-ances, please note that there are certain rules attached to the utilisation of tax balances.

The unutilised business losses could be carried forward indefinitely for set-off against future business income of any source. Unutilised capital allowances and unutilised tax allowances from incentive claims could also be carried forward indefinitely. However, they could only be used to set off future business income of the same source.

Accordingly, should the acquirer intend to cease the existing operation of the target company and replace it with a new operation, the unutilised capital allowances and unutilised tax allowances in relation to exist-ing operation will be disregarded but the unutilised business losses will remain.



Further to the above, there is no special rule on acquisitions or reor-ganisations of bankrupt or insolvent companies. As such, the general rules would apply as if the acquirer is acquiring or reorganising a normal com-pany, and the potential tax implications would be determined purely by the facts of the case.

8 Interest relief


Tax deductibilityTax deduction is provided for borrowing costs incurred wholly and exclu-sively in the production of business income. As such, interest expense on borrowings taken up for the purpose of acquiring business assets used in the business is allowed for deduction against gross business income. In the event that there is nil or insufficient business income to absorb the inter-est expense, the excess interest costs could be carried forward as business losses for set-off against future business income.

Restrictions on tax deductions are imposed where the borrowing made for business purposes is partly used for non-business purposes (eg, other investments). Under such circumstances, only the portion of inter-est attributable to the business is allowed for deduction against gross busi-ness income. Nevertheless, the portion of interest expense attributable to investment activities is allowed for deduction against gross investment income but any unabsorbed interest expense in an assessment year will be permanently lost.

Stock acquisition may be construed as business assets or investment depending on the nature of business of the acquisition company (domi-ciled in Malaysia). Nevertheless, under the single-tier dividend system in Malaysia, there is no tax on dividends distributed by a Malaysian company. Consequently, any expenses attributable to the costs of stock acquisition will be disregarded.

Withholding taxInterest payments made to non-residents are subject to a withholding tax rate of 15 per cent; this rate may be reduced under a tax treaty. There is no mandatory requirement to submit a certificate of residence when making a claim under the treaty but it must be made available upon request by the local authorities.

Depending on the circumstances, it may be beneficial to finance through equity as there is no tax on dividend payments and returns on capital – except for shares in a real property company (see question 16 for details).

Loans from related companiesBasically, interest expenses incurred for business purposes qualify for tax deductions. However, transfer pricing rules in Malaysia will apply if the loan is provided by related parties, regardless of whether the lender is a resident or non-resident. Under these rules, the deductible amount may be adjusted or disregarded if the transactions are not concluded on arm’s-length terms.

Foreign exchange controlsForeign exchange administration policies have been liberalised and sim-plified over the past few years.

Non-tax residents can make direct investments in Malaysia in either ringgits or foreign currency. There are no restrictions on the repatriation of capital, profits or income earned in Malaysia. The ringgit may not be traded overseas, so payments outside Malaysia should be made in foreign currency.

Non-tax-resident lenders may lend in foreign currency to tax residents of Malaysia as long as the total foreign currency borrowings of the tax resi-dent are within permitted limits. However, no limits are imposed on loans in foreign currency by non-tax-resident parent companies to tax-resident companies or on loans in foreign currency by non-tax-resident suppliers to tax-resident companies to finance purchases from the non-tax-resident suppliers.

The Foreign Exchange Regulation applies to resident companies as follows:

Foreign currency credit facilities

Any amount from:

• licensed onshore banks;• resident-related companies;• non-resident-related companies other than financial institutions or those

solely set up to obtain foreign currency credit facilities;• resident and non-resident direct shareholders who have at least a 10 per cent

shareholding in a resident entity; and• another resident through the issuance of foreign currency debt securities.

Up to 100 million ringgit equivalent in aggregate on a corporate group basis from other non-residents.

Ringgit currency credit facilities

Any amount to finance activities in the real sector in Malaysia by:

• a non-resident-related company (other than those that are a financial institu-tion or solely set up to obtain foreign currency credit facilities); or

• a non-resident direct shareholder (with at least a 10 per cent shareholding in a resident entity).

Up to 1 million ringgit in aggregate from any other non-resident (other than a non-resident financial institution) for use in Malaysia.

Where the amount of foreign credit facility exceeds the above thresholds, prior approval from Central Bank of Malaysia is required.

Debt pushdownDebt pushdown would be viable for the acquisition of a business and may be subject to stamp duty. The income tax implications rest on the proposed strategy.

Thin capitalisationMalaysia introduced thin capitalisation rules in 2009. However, the Honourable Minister of Finance of Malaysia has decided to defer its imple-mentation to 31 December 2015.

9 Protections for acquisitionsWhat 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?

In Malaysia, it is not uncommon for the acquirer to seek tax warranties and tax indemnities in a sale and purchase agreement against the acquired stock and business assets at the accordance of the seller. The agree-able terms usually form part of the sale and purchase agreements signed between both parties.

Ultimately, any payments made as a result of a claim under any war-ranties or indemnities given shall not be subject to taxation if the nature of the payment can be established as capital in nature or as damages for breach of contract. Otherwise, it shall be taxed as normal business income.


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

Principally, post-acquisition restructuring would be carried out when there is a commercial need or when it would result in tax efficiency. Common exercises are the restructuring of debts or the transfer of properties between related companies.

A post-restructuring exercise involving the transfer of qualifying tan-gible assets between related companies (with more than 50 per cent direct or indirect shareholding) is known as a ‘controlled transfer’. Under a con-trolled transfer, the disposal values at which the qualifying tangible assets are transferred are disregarded and the assets are deemed to be made at residual expenditure (ie, tax written down value). Therefore, capital allow-ance adjustments are not applicable to the disposing company. On the other hand, capital allowances will continue to be given to the acquiring company on the residual expenditure available to the disposing company



provided the assets taken over are in use for the purpose of the acquirer’s business.

Malaysia does provide substantial tax relief on group restructuring and the transfer of properties between related companies. Group relief (simi-lar to tax consolidation) is also available to companies within a group in Malaysia.

11 Spin-offs


As mentioned in question 1, tax assets and liabilities are attached to the company, not the business. Therefore, the vendor can retain the net oper-ating losses of the spun-off business. Unfortunately, any unused capital allowances and tax allowances will be sacrificed.

Upon disposal of the business, the disposing company may be sub-ject to income tax adjustments despite the fact that gains on the disposal of business assets are generally not taxable. If the disposal consists of real property, the real property gains tax will kick in (see question 15). Real property gains tax may be exempted if the buyer is a related company and the consideration made substantially consists of shares in the buyer’s com-pany and the balance is in cash.



Under Malaysia’s tax legislation, a company would be regarded as a tax resident in Malaysia if at any time during the year, the control and

management of the business is exercised in Malaysia by its directors or other controlling authority. In practice, if a single meeting of the board of directors of the company is held in Malaysia at any time of the year, that action would make the company a tax resident. Therefore, a company would cease to be resident in Malaysia only if the control and management of the business are entirely exercised outside Malaysia.

At present, it may be possible to migrate the residence of a Malaysia company without tax consequences since there is no specific rule that gov-erns this situation. It could possibly be achieved by a company that is not or has not been enjoying any tax incentives. That is because tax incentives are generally provided to a resident company only (as discussed in question 3).

In contrast to the above, if either the acquiring company or the target company has been granted tax incentives, such will be jeopardised by the migration. Consequently, there are potential tax clawbacks on the incen-tive allowances claimed by the company as a result of the withdrawal of the tax incentive.



Malaysian withholding tax is only imposed on payments made to a non-resident who derives income from Malaysia. Hence, there will be no with-holding tax on payments made to a resident.

Interest payments made to a non-resident are subject to a withholding tax rate of 15 per cent, whereas dividend payments made to any person are exempted from tax. The withholding tax rate may be reduced under a tax treaty based on the terms stipulated therein; a certificate of residence is required to support the claims. In addition, withholding tax exemptions on

Update and trends

Implementation of the Goods and Services Tax Malaysia currently levies sales tax and service tax on certain goods and services respectively. According to the Budget for 2014 presented by the Prime Minister (also the Finance Minister) of Malaysia on 25 October 2013, a Goods and Services Tax will be introduced to replace the above-mentioned taxes with effect from 1 April 2015.

Generally, the Goods and Services Tax is a broad-based domestic consumption tax where the burden of which is intended to fall on end consumers. It is charged on any taxable supply of goods and services made in the course or furtherance of any business by a taxable person in Malaysia. It is also charged on the importation of certain goods and services into Malaysia. Finally, the Goods and Services Tax is typically charged on the value or selling price of the goods or services. However, please note that the Goods and Services Tax can only be charged by a business if it is registered with the Customs Department for Goods and Services Tax purposes.

In connection with the above, Goods and Services Tax charged by businesses on the supply of goods and services is commonly referred to as the ‘output tax’, while Goods and Services Tax incurred by businesses is commonly referred to as the ‘input tax’. Under situations where the amount of output tax exceeds the amount of input tax, the difference is paid to the Customs Department. On the other hand, under situations where the amount of input tax exceeds the amount of output tax, the Customs Department would have to refund the excess taxes paid.

Under the Goods and Services Tax regime in Malaysia, a sale of shares would typically be regarded as an exempt supply. In other words, no output Goods and Services Tax is chargeable on the sale of shares. Correspondingly, no input tax credits are allowed for claim. On the other hand, a sale of assets is treated as neither a supply of goods nor a supply of services if the sale qualifies as a transfer of going concern, subject to certain conditions. Following the above, there would generally not be any taxes charged or payable. In all other circumstances, Goods and Services Tax would generally be levied on the transfer of assets at the prevailing rate of 6 per cent.

Change in rates of real property gains taxGenerally, gains arising from the disposal of real property and shares in real property companies are subject to real property gains tax. In connection with the above, ‘real property’ refers to any land situated in Malaysia and any interest, option or other right in or over such land.

A ‘real property company’ refers to any controlled company with more than 75 per cent of the value of its total tangible assets made up of real property and shares in another real property companies. The tax treatments and tax rates on the disposal of real property or shares in a real property company are the same.

The relevant real property gains tax rates for companies and individuals from 2010 to 2013 are summarised as follows:

Disposal With effect from 1 January 2010

With effect from 1 January 2012

With effect from 1 January 2013

Up to 2 years 5 per cent 10 per cent 15 per cent

Between 2 and 5 years

5 per cent 5 per cent 10 per cent

Exceeding 5 years


With effect from 1 January 2014, the relevant real property gains tax rates are revised as follows:

Disposals Companies Individuals (citizens or permanent residents)

Individuals (non-residents)

Within 3 years 30 per cent 30 per cent 30 per cent

In the 4th year 20 per cent 20 per cent 30 per cent


In the 6th and subsequent years


As could be seen from the above, gains arising from the disposal of real property and shares in real property companies would generally be taxable going forward, with the exception of those derived by individuals who are citizens or permanent residents of Malaysia.



certain interest payments made to a non-resident may be available, subject to certain conditions.



Since dividends paid by a Malaysian company are exempted from tax in the hands of the recipient, the distribution of dividends has become the most direct and effective means of extracting after tax profits from Malaysia. However, distribution of dividends is subject to the availability of distrib-utable retained earnings of the company.

If a Malaysian company disposes of stocks or assets in a company, typi-cally the capital gains from the disposal hereof are not liable to tax (except for real properties and stocks in a real property company) on the basis that the income is considered ‘capital in nature’. These profits can then be repatriated to non-resident shareholders without withholding tax provided that sufficient retained earnings are available.

Other tax effective means to extract profits from Malaysia would be by means of royalties, interests, technical fees and management charges. Although withholding tax (up to 15 per cent) is applicable to these pay-ments when made to non-residents, Malaysia does have a broad tax treaty network that could possibly reduce the relevant tax rates. Withholding taxes on royalties and interests may be exempted under certain conditions as agreed under the treaty. Payments for services rendered by a non-resi-dent outside Malaysia are not subject to withholding tax.

However, the level of effectiveness may be questioned after taking into consideration that payments made to a related party are strictly subject to compliance with the applicable transfer pricing rules and anti-avoidance rules.

Hybrid instruments may not be practical in Malaysia because they are usually treated as a form of equity by the local tax authorities. Therefore, distributions via hybrid instruments generally do not qualify for a tax deduction as interest.


15 Disposals


From a tax perspective, there is in general no preference between the disposal of the business assets or the stock in the local company, in view that there is no tax on gains arising from disposal of capital investment in Malaysia.

However, if the property disposed consists of real property in Malaysia or stock in a Real Property Company (RPC), then the capital gains arising in relation thereto will be liable to Real Property Gains Tax (RPGT).

In the above context, ‘real property’ refers to any land situated in Malaysia and any interest, option or other right in or over such land. RPC refers to any controlled company with more than 75 per cent of the value of its total tangible assets made up of real property and shares in another

RPC. The tax treatments and tax rates on the disposal of real property or shares in an RPC are the same.

Notwithstanding the above, there may be potential negative income tax implications for the local company subsequent to the disposal (through either option). This could be due to corresponding tax adjustments on the disposed assets or change of ownership. One example would be a clawback of capital allowances or withdrawal of tax incentives. Consequently, the capital distribution may be reduced by the tax adjustments.

Disposal of stock in a foreign holding company has no tax implication on the local company.

In terms of non-tax considerations, disposal of stock in a local com-pany would allow the company to avoid liquidation procedures, as com-pared to the disposal of assets.



Since there is no capital gains tax in Malaysia, the disposal of stock (which was held as capital investment) in the local company by any person will not be liable to taxation, unless it is stock in an RPC (as discussed in question 15).

Disposal of stock in an RPC will generally be liable to real property gains tax. The current tax rates with effect from 1 January 2014 are as follows:

Disposals Companies Individuals (citizens and permanent residents)

Individuals (non-residents)

Within 3 years 30 per cent 30 per cent 30 per cent



In the 6th and subsequent years

5 per cent zero per cent 5 per cent

Notwithstanding the above, real properties gains tax exemptions are avail-able in relation to the transfers between companies as follows:• transfers within the same group to bring about greater efficiency and

for a consideration consisting substantially of shares in the transferee company; or

• transfers between companies for the purpose of reorganisation, recon-struction or amalgamation where the transferee company is being restructured to comply with the government’s policy on capital partici-pation in industry.

There are other exemptions available for certain types of disposal other than the above but such are generally available to residents only.

Barbara Voskamp [email protected] Yvette Gorter-Leeuwerik [email protected] Benny E Chwee [email protected]

137 Market Street03-01 Grace Global RafflesSingapore 048943

Tel: +65 6463 0535Fax: +65 6664 0799www.voskamplawyers.com





As discussed above (questions 15 and 16), gains on disposal of capital investment (stock or business assets) are generally not taxable as there is no capital gains tax under the local tax regimes. However, there could be RPGT and income tax implications in certain scenarios.

Therefore, the acquirer may consider the following methods to mini-mise tax exposure:• if real property or shares in an RPC is to be disposed, consider dispos-

ing them after the sixth year from the date of acquisition to minimise the relevant tax exposure; and

• if business assets are to be disposed, the sales consideration to be allocated to the assets that qualify for tax deductions shall be at tax written-down value or market value; whereas the balance of the con-sideration should be allocated to non-tax-deductible items. As such, the income tax adjustments will be minimised.

MEXICO Manuel Tron SC and Ernst & Young


MexicoManuel E Tron and Elías AdamManuel Tron SC and Ernst & Young




Acquisition of stockAcquisition of stock is the most common way to transfer a business in the country. It involves the acquisition of the entire company (including tax attributes and past tax liabilities). This type of transaction may be more efficient than acquiring assets, because the sale of stock is not subject to value added tax (VAT) nor to local taxes on the acquisition of real estate as occurs in the sale of assets.

The acquisition of stock issued by a resident company may be subject to income tax in the hands of a non-resident acquirer when the market value of the stock exceeds the purchase price by more than 10 per cent.

The purchase price paid (cost) may be deducted at the time the non-resident transfers the stock acquired, noting that in certain cases, where applicable requirements are not met and no tax treaty is applicable, the income tax may be due at a tax rate of 25 per cent on the total amount of the transaction (not being possible to deduct the purchase price).

Acquisition of business assets and liabilitiesThe acquisition of business assets and liabilities is twofold. First, the mere purchase of some of the assets that constitute a business does not give rise to classifying the transaction as the acquisition of the whole business; sec-ond, the purchase of all of the assets such as fixed assets, inventory and accounts receivables may give rise to classifying the transaction as the acquisition of the whole business. In this case, the acquirer of the ongoing business (eg, whole business) is jointly liable for federal taxes (ie, income tax, VAT) incurred for activities carried out in the course of the business prior to the acquisition, but the tax liability for the acquirer may not exceed the value of the business acquired (see question 9).

If a non-resident acquires the assets and liabilities of a Mexican busi-ness directly and continues to operate such business, a permanent estab-lishment (eg, Mexican-based branch) would most probably be deemed to exist in Mexico.

Income attributable to a permanent establishment is subject to taxa-tion under the same rules as the income of resident companies (although with certain differences). Under domestic law, income from the sale of goods or real estate located in Mexico by the central office, by other estab-lishment of the non-resident or directly by the non-resident, will also be deemed as income attributable to the existing Mexican permanent estab-lishment (unless a tax treaty is applicable).

Generally speaking, resident companies (for cases of indirect acqui-sitions where the non-resident sets up and provides funds to a resident company that acquires the business assets and liabilities) and permanent establishments (for cases where the non-resident directly acquires and continues to operate the business in Mexico) are entitled to claim author-ised deductions on the business assets acquired in order to calculate the income tax. For income tax purposes, certain fixed assets and intangibles can only be deducted through the straight-line depreciation method; also, a cost of goods deduction system is applicable for the sale of goods and services.

As a general rule, the transfer of goods and assets is subject to VAT with certain exemptions, such as the transfer of land, shares and securi-ties (see question 6). When the acquisition of business assets includes real estate, local taxes on the acquisition of real estate may become payable (applicable rules and rates vary from state to state).

2 Step-up in basis


The basis for the acquirer of business assets of the target company will be for the amount actually paid for such assets. In the purchase of business assets, fixed assets and intangibles can be deducted through straight-line depreciation, even when they may have been fully depreciated by the seller at the time of the sale. In the case of an acquisition of stock no step-up in basis will exist for the buyer with respect to the business assets.

Goodwill is a non-deductible item under the Income Tax Law.Other types of intangibles may be depreciated for tax purposes when

applicable requirements are met, beginning from the tax year in which they are used for the first time or from the following one, applying a maxi-mum 5 per cent rate for deferred charges; a maximum 10 per cent rate for expenses incurred in a pre-operative period; and a maximum 15 per cent rate for royalties, technical assistance and other deferred expenses. The maximum depreciation rates on fixed assets range from 3 to 100 per cent depending on the asset in question.

Goodwill and other intangibles indirectly comprising the purchase price of stock acquired cannot be directly deducted; however, the purchase price will be considered as part of the tax basis of the stock for the acquirer (see question 1, ‘Acquisition of stock’).



Executing the acquisition of assets and liabilities of a Mexican business through a resident company may be convenient in cases where the non-resident acquirer desires to limit its corporate and tax liability exposure, among others, for the activities to be performed (corporate veil) in Mexico.

From a tax perspective, if the acquisition of assets and liabilities is executed through a resident company, the non-resident acquirer would not be deemed to have a permanent establishment in Mexico (provided that it does not fall within the scope of other assumptions under which one is deemed to exist), avoiding the often problematic application of rules regarding the attribution of profits.

While a resident company is entitled to use losses from the transfer of stock against future gains arising from such type of transfers, non- residents do not qualify for this tax treatment.

Under domestic law, non-residents whose income is deemed to be subject to a preferential tax regime (ie, domiciled in a tax haven or a low tax jurisdiction pursuant to Mexican tax standards) cannot elect to calculate and pay the income tax upon the net income obtained from the transfer of stock. Furthermore, a punitive 40 per cent income tax withholding rate on Mexican sourced income applies when payments are made by resident

Manuel Tron SC and Ernst & Young MEXICO


companies or permanent establishments in Mexico to non-residents with such characteristic, when the parties are deemed to be related and do not reside in a jurisdiction that has executed an exchange of tax information treaty with Mexico.

Consequently, considering the liability issues and that it is often inconvenient to have a permanent establishment in the country, using a resident company as special purpose vehicle for the purchase is usually the advisable implementation structure. Directly acquiring the stock of the tar-get company may also work, and tax treaty benefits (if any) could make this option more interesting.



There are cases where the seller remains involved in the business, or where a combination of businesses is desired in addition to the acquisition itself.

The main benefit of a merger is that it may be treated as a tax-free transaction. The transfers of assets between companies in a merger are not taxable if certain requirements are met, and the tax attributes of the dis-appearing company may be inherited by the merging entity. Thus, in such cases, no income tax or VAT would be due (see question 7).

In connection with share exchanges between two parties, two trans-fers would be subject to taxation (one per party). The gains (if any) would be subject to income tax; therefore, even when it may be a common acqui-sition scheme in joint venture transactions, tax implications could make a merger more attractive (depending, of course, on each case). In some cases, the exchange of shares may be implemented based on their tax-cost basis to the extent that such exchange qualifies as a ‘corporate reorganisa-tion’ for Mexican tax purposes. This favourable tax treatment minimises, or eliminates in some cases, the income tax arising from the transfer of shares.



Where the acquirer issues stock in its own company to the seller as con-sideration for the purchase of either the shares or the assets of the target company, the tax treatment is essentially the same as an in-kind payment or a capitalisation of debt. Consequently, this is not a specifically favoured structure to acquire businesses (if the decision is tax-driven); on the other hand, if cash flow is an issue for the acquirer, then it may work, without any particular tax benefit (as previously explained), but eliminating (or sub-stantially diminishing) cash flow requirements.

6 Transaction taxes


There are no documentary taxes on the acquisition of stock or business assets. However, there are cases where the transaction needs to be recorded in the Public Registry of Properties and Commerce or the Intellectual Property Institute to have legal effects on third parties; for instance, when the acquisition relates to real estate or certain intangibles. In this case, the registration of the transaction is subject to the payment of duties.

Individuals and companies are subject to VAT when they perform any of the following activities within Mexican territory: • sell goods; • provide independent services; • grant the temporary use of goods; and• import goods into Mexico.

Except for the import of goods into Mexico, in which case the tax shall be paid directly by the importer, the party performing a taxed activity shall charge the VAT to the party purchasing goods, receiving services or tem-porarily using goods, and such party may have the right to credit the tax so paid (totally or partially) against the tax that it charges to other parties in the performance of taxed activities subject to comply with additional requirements.

The generally applicable rate is 16 per cent. Derived from the 2014 tax reform, the 11 per cent rate that applied to activities that were performed

within a specific region along the borders of the country by residents of such region was homologated to the 16 per cent rate. Also, a zero per cent rate applies to the sale of certain goods (mainly medicines and some food products) and to the provision of certain services.

As has been mentioned, the transfer of land, stock and securities is expressly exempt from VAT.

When the acquisition of business assets includes real estate, local taxes on the acquisition of real estate may become payable. As they are local taxes, applicable rules and rates vary from state to state; in any case, they may be considered as part of the amount subject to depreciation for income tax purposes.



Income tax losses may be carried forward for a maximum period of 10 years; however, rules limiting the use of such losses could apply if changes of control of the taxpayer occur.

Specifically, income tax losses may only be used against gains aris-ing from the performance of the same type of activities that generated the losses when the shareholders or partners directly or indirectly holding more than 50 per cent of the voting shares of the company vary through one or more transactions executed within a three-year period (provided that tax losses pending to be applied are greater than the amount of income obtained during the three preceding tax years).

It is worth mentioning that taxpayers that fail to use income tax losses, while being entitled to, will lose the right to do so in subsequent tax years, up to the amount not adequately used or credited.

In the case of mergers, the losses of the merged company cannot be recognised and used by the surviving company, and the losses of the sur-viving company may only be used against profits generated in the perfor-mance of the same activities that generated the loss before the merger.

While certain beneficial tax provisions may apply to taxpayers that are subject to insolvency proceedings, including the partial remittance of taxes due, no special tax regime is applicable to the acquisition or reorganisation of insolvent or bankrupt resident companies.

8 Interest relief


Interest deriving from loans obtained by a resident company in order to acquire the target company will be deductible for purposes of income tax as long as the corporate purpose of the borrower includes acquiring, hold-ing and transferring stock of other companies.

Thin capitalisation rules limiting the deduction of interest deriving from debts with foreign-related parties apply. Resident companies may deduct such interest as long as the total amount of debt does not exceed three times the company’s net worth; if such ratio is exceeded, interest deriving from excessive debt will not be deductible for purposes of income tax.

There are some exceptions, such as debt contracted by members of the financial system for the performance of their activities and debt con-tracted for the construction, operation or maintenance of productive infra-structure related to strategic industries (ie, oil, electricity, etc). Taxpayers providing evidence that activities undertaken require further leverage may request tax authorities to authorise a higher debt-to-net equity ratio.

Taxpayers shall observe arm’s-length standards when determining amounts of includable income and authorised deductions on transactions with related parties.



The items of income that classify as interest derived by foreign taxpay-ers are subject to income tax in Mexico through withholding. The income tax will not become due in the meantime the Mexican source interest is not due and payable nor actually paid. Reduced withholding rates may apply to non-residents entitled to benefits deriving from a tax treaty (see ques-tion 13).

Certain debt pushdown schemes have been implemented; however, tax authorities are currently challenging such practice and rejecting the deduction of related interest. There is no case law yet in this respect.

Also, back-to-back rules and deduction limits must be observed in case of loans made between related parties.



On stock acquisitions, the acquirer shall bear in mind that any tax liability arisen prior to purchase will remain in the target company.

By the operation of law, the acquirer of an ongoing business is jointly liable for taxes not duly paid at the time the business was owned by the seller, up to the value of the business. While there is no provision establish-ing specific assumptions under which an ongoing business is deemed to be acquired, joint liability may exist, in our opinion, when the key assets of a company (fixed assets, inventory, accounts payables and receivables and intangibles) are transferred, enabling the acquirer to carry on with the busi-ness in the manner in which the seller did. Human resources employed and liabilities assumed are also important factors to be considered.

It is always advisable to conduct tax and accounting due diligence in cases of acquisitions of stock and acquisitions of business assets and liabili-ties where joint liability may exist for the acquirer. Due diligence should give the acquirer a clear idea of where the target company stands regarding tax compliance, and more importantly may reveal considerable tax liabili-ties. If tax liabilities are revealed in the course of due diligence, the acquirer should be in a good position to negotiate a reduction of the purchase price or to request collateral guaranteeing the liability.

In any case, the acquirer will seek indemnification from the seller should the tax authorities determine the payment of taxes due at the time the target company or the business was owned by the seller, noting that the audit powers of tax authorities generally expire in five years (statute of limitations).

In such terms, adequate tax representations and warranties, covenants and indemnities should be negotiated, and seller’s indemnities should ide-ally be backed up by collateral (ie, holdback or escrow).

Amounts received as indemnities or damages by resident companies or by permanent establishments in Mexico shall be accrued for purposes of income tax. When received by non-residents, the income tax shall be calculated over the total amount of indemnities or damages when paid by a resident company or by a permanent establishment in Mexico.


10 Restructuring


Debt refinancing is common. In certain cases, post-acquisition mergers and spin-offs provide tax and operative efficiencies.

In stock deals, employees of the target company (if any) are often transferred to a related-service company in order to mitigate labour-related contingencies and control employees’ profit-sharing. This practice, however, is currently being questioned by tax and labour authorities. In addition, there are labour court precedents stating the existence of single ‘centre of businesses’ regardless of the implementation of different service companies’ structures. In some cases, it is questionable if these precedents may be actually extended to the tax arena.

11 Spin-offs


Tax-neutral spin-offs can be executed provided that holders of at least 51 per cent of the voting stock of the existing and the new companies remain the same and their participation in the capital of the latter is proportional to the voting share they had or continue to have in the first, for a year before the transaction and two years afterwards.

In addition, substantial monetary assets shall not be transferred to the new companies (such assets shall not exceed 51 per cent of the total assets), nor shall the existing company retain substantial monetary assets (51 per cent or more of its total assets).

If the above-mentioned and other formal requirements are not met, the transfer of assets by virtue of the spin-off would be subject to income tax and VAT.

For purposes of income tax, losses of the existing company shall be divided among such company (if it subsists) and the new companies, in the proportion in which inventories and account receivables are allocated, and in cases of commercial businesses or in other types of businesses, in the proportion in which fixed assets are allocated.

Even when applicable requirements are met and the transfer of assets by virtue of a spin-off is not subject to income tax and VAT, local taxes on the acquisition of real estate may become payable if real estate properties are transferred.



No, the Income Tax Law establishes that whenever a company ceases to be resident in Mexico for tax purposes under domestic law or under a tax treaty, such company will be deemed to be liquidated for income tax purposes.

In such terms, gains derived from the deemed transfer of assets of the company and the deemed distribution of the product to the shareholders (if it exceeds their contributions and after-tax profits) would be subject to taxation at that time.



Dividends distributed by resident companies are not subject to corporate taxation if they are paid from the after-tax earnings and profits account; otherwise, the company making the distribution shall pay the tax on the distribution of untaxed profits.. However, starting from 2014, dividend distributions from income earned in 2014 and further years, will be taxed with an additional 10 per cent withholding tax when the recipient is a resi-dent abroad (either a legal entity or an individual) or a Mexican resident individual.

Yields on credits or debt claims of any type are considered as interest, and among other assumptions they are deemed to arise from a Mexican source of wealth, and therefore subject to taxation, when capital is invested in Mexico or when interest is paid by a resident or by a non-resident with a permanent establishment in the country.

Depending on the nature of the debt and the characteristics of the lender and the borrower, applicable withholding tax rates range from 4.9 to 40 per cent. As mentioned above, reduced withholding rates may apply to non-residents entitled to benefits deriving from a tax treaty.

Among others, certain exemptions exist under domestic law and tax treaties regarding interest deriving from credits with preferential condi-tions granted or guaranteed by foreign financial entities in order to pro-mote exports and interest arising from securities or bonds issued by the Mexican Federal Government or the Mexican Central Bank.

Manuel Tron SC and Ernst & Young MEXICO




Interest, royalties and services payments to foreign parent companies used to be common as companies took advantage of existing tax treaties

(around 50 as of today); however, more stringent thin capitalisation and transfer pricing rules have limited such practice.


15 Disposals


Depending on the specific circumstances of each case, a seller may be inclined towards selling stock of the target company or of a holding, or causing the target to sell its assets.

For instance, a seller that made considerable capital contributions to the target company may prefer to transfer stock as a high cost could be deducted from the sale price in order to calculate the income tax; whereas a seller with a low cost of shares may find an asset deal more convenient.

A non-resident seller may also prefer to sell stock of the target com-pany when entitled to a tax treaty limiting Mexican taxation on capital gains.



Income from the transfer of stock issued by a Mexican company is subject to taxation in the hands of a non-resident seller at a 25 per cent rate over the gross amount of the consideration; however, the non-resident may elect to

Update and trends

Regarding the application of tax treaties, a new article was included in the Income Tax Law in the 2014 tax reform. This article establishes that a foreign taxpayer is allowed to benefit from tax treaties executed by Mexico when certain requirements are met. These include evidence that the taxpayer resides in a country with which Mexico has executed a tax treaty, and compliance with the conditions of the respective treaty and with all other proceedings and obligations set forth in Mexican tax laws.

Regarding transactions between related parties, tax authorities could request that the resident abroad provide a statement declaring that the income subject to the benefit is actually taxed in the jurisdiction of the treaty resident.

The 2014 tax reform established a 10 per cent income tax rate due to upon gains obtained from the sale or transfer of stock issued by Mexican entities or instruments representing such shares, when their transfer is made within stock markets under concession, recognised derivatives markets or from shares issued by non-resident entities listed in such markets.

Also, as a consequence of the tax reform, the business flat tax was repealed, starting from 1 January 2014.

Elías Adam [email protected]

Avenue Ejército Nacional 843 B Piso 4Antara Polanco11520 Mexico DFMexico

Tel: +52 55 5283 1388Fax: +52 55 5283 1388www.ey.com

Manuel Tron [email protected]

Prado Norte 235–13Lomas de ChapultepecMexico 1100Mexico

www.metron.mx



calculate and pay the tax at a 35 per cent rate over the capital gain obtained (deducting the cost of shares), provided that applicable requirements are met (see question 3) and a representative in Mexico that remits the tax is appointed by the non-resident.

The transfer of stock listed on the Mexican Stock Exchange or other recognised markets is no longer exempt from income tax. A 10 per cent income tax rate was established due to the 2014 tax reform upon gains obtained from the sale or transfer of stock issued by Mexican entities or instruments representing such stock, when their transfer is made within stock markets under concession, recognised derivatives markets or from stock issued by non-resident entities listed in such markets.

Financial entities, authorised pursuant to the Stock Exchange Act to act as intermediaries in securities markets that participate in transactions described in the paragraph above, shall calculate the gain or loss for the year.

It is worth mentioning that under certain tax treaties in force, Mexico will not have the right to tax capital gains from the transfer of stock when the non-resident seller has a minority participation in the resident com-pany and if other requirements are met. In other cases, Mexico’s right to tax income from the transfer of stock may be limited.

Transfers of stock issued by non-Mexican resident companies whose value derives in more than 50 per cent from real estate located in Mexico are subject to taxation under domestic law; however, some tax treaties bring relief from taxation if properties are used by the company in the per-formance of its business activities.

No special rules address the disposal of stock of companies engaged in energy and natural resources activities.



There may be methods such as corporate reorganisations, mergers, spin-offs and real estate investment benefits that may achieve the deferral or, in some cases, the elimination of the applicable taxes, in connection with the disposal of shares or business assets. The main limitation under these methods is the continuation of interest and business within the corporate group. In other cases, it is sometimes possible to structure the transaction in a tax-efficient manner that is acceptable to both the seller and the acquirer through corporate transactions different to those mentioned above.

Kraaijeveld Coppus Legal NETHERLANDS


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 non-deductible. Acquisition and sales costs, earn-out payments, payments under (balance sheet) guarantees and indemnities are generally not taxable or tax-deduct-ible under the participation exemption (see question 15 for the participa-tion exemption conditions).

In the case of an acquisition of at least 95 per cent of the stock by the acquisition company, a fiscal unity (tax grouping) may be formed between the acquisition 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 an interest of at least 95 per cent of the shares in the company acquired. Subject to certain anti-abuse legisla-tion, 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.



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

NETHERLANDS Kraaijeveld Coppus Legal


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 for 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 documen-tary 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.

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

NETHERLANDS Kraaijeveld Coppus Legal


• 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).

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-resi-dent company should, in principle, not lead to Dutch taxation. If the stock

Update and trends

In recent years, financing and licensing companies have drawn a lot of attention from governments and other legislative authorities, due to the increasing public resistance to aggressive tax planning by multinational enterprises. To protect the tax treaty partners and to prevent misuse of tax treaties, substance requirements have been introduced for intercompany financing and licensing companies.

The substance requirements have been published in a Decree which entered into force on 1 January 2014. The Decree only applies to financing and licensing companies that are considered ‘service entities’. Not complying with the conditions as laid down in the Decree may result in the spontaneous exchange of information with the respective treaty partner, and a fine of up to €19,500.

Service entitiesService entities are Dutch resident companies whose activities at any moment in a given year consist primarily (70 per cent or more), directly or indirectly of financing (including leasing) or licensing activities from and to foreign group companies. Any activities that are related to holding participations are disregarded when assessing the activities of the service entity.

Substance requirementsThe substance requirements that should be fulfilled by these service entities emphasise the connection with the Netherlands by demanding not only a minimal amount of physical presence in the Netherlands but

also demanding an economic presence supporting the economic risks assumed by the service entity in performing the intercompany financing or licensing activities. The Decree includes an explicit list of substance requirements that must all be fulfilled by the Dutch resident companies that qualify as service entities.

The Decree states that service entities must confirm in their tax return whether or not they satisfy all the substance requirements during the entire year. If the service entity, at any time in the fiscal year, does not satisfy each of the requirements, and is therefore unable to confirm, it is obliged to provide, upon request, additional information to the Dutch tax authorities.

International exchange of informationIf not all substance requirements are met, the information not provided by the service entity to the Dutch tax authorities will, in any case, be spontaneously exchanged by the latter with the respective foreign (tax treaty) partner. This (tax treaty) partner may then consider this information and determine whether or not the provided treaty benefits should be revoked. In addition, an administrative fine of up to €19,500 may be imposed.

The service entity will not be required to provide information if it does not invoke, in the relevant tax year, the benefits of a tax treaty, the national implementation of the EU Interest and Royalty Directive or other regulation for the avoidance of double taxation.



qualifies as a substantial interest, however, the capital gains may be taxed with Dutch corporate income tax. For more information on substantial 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

NIGERIA Adepetun Caxton-Martins Agbor & Segun


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 lies with the company (target).

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 acquisition of a business asset by the purchasing company (purchaser) will naturally 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 allowance of 10 per cent 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 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.

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 will appear more 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 payable 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 shareholders from non-DTT countries are taxed at a 10 per cent rate.

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 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 stock in a Nigerian

Adepetun Caxton-Martins Agbor & Segun NIGERIA


company by a foreign shareholder will not be considered as carrying on business in Nigeria.



Yes; mergers and share exchanges are common forms of business acquisi-tion 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 are no element of cash payouts are exempt from CGT. Accordingly, the requirement of the CGT Act that makes it mandatory for there to be evidence of payment of CGT in order for change of ownership to be reflected in the name of a purchaser will not apply to the shareholders that emerge from such a transaction. The essence of this benefit to the share-holder can be appreciated from the viewpoint of the amount of time that it may ordinarily take a seller to obtain the relevant tax clearance certificate (TCC). It is immediately noteworthy that the Nigerian CGT Act continues to retain two conflicting provisions 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 pay-ment 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 generally

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 can now 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 the general 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. Interests on loans are generally allowable deductions in the computation of chargeable profits. Conversely, tax reliefs are avail-able for interests payable to a foreign lender in appropriate circumstances (see question 13).

Save for petroleum profits tax (PPT) purposes (see below), there are generally no restrictions on the deductibility of interests payable to a related party, provided the loan transaction and the interest payable 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 (ALP method) must be utilised in fixing the price or interest payable on the loan. Failure to appropriately fix the price of the loan will justify the RTA in disallowing, for tax purposes, the deduction of the interest paid or a part of it.

Interest on loans borrowed from a related party, regardless of the quantum of interests which the parties may retain in each other or held by a common shareholder, is a disallowable expense for PPT purposes. The RTA is required, however, to disregard the relationship of the parties in the event the interest they hold in each other or through a common share-holder is, in the RTA’s opinion, insignificant or remote or where the interest arose from a normal market investment and the parties have no other busi-ness connection with each other.



There are generally no restrictions on the deductibility of interests payable to a foreign lender, provided the loan transaction and the interest payable is not in the RTA’s opinion artificial or fictitious.

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 integ-rity of disclosed information on existing and prospective tax liabilities of target, while indemnity provisions are used to stipulate the bounds of com-pensation in the event of untrue warranties, undisclosed material informa-tion and negligent or intentional misrepresentations. These contractual protections are more often than not features of stock acquisitions and are documented in the share sale and purchase agreements (SPA). It is, how-ever, 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 a 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. Indeed the option to adopt is wholly dependent on the peculiarities of the target and the objectives of the share-holder or purchaser.

It is worth mentioning that to the extent that a shareholder contem-plates post-acquisition controlled transactions (see question 8) with the target, it becomes mandatory that the entities have a transfer pricing com-pliance 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 ques-tion 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 residential 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 tax rate.



Interests 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 interests 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 tax exemption;• with a repayment period of between five and seven years, including a

grace period of at least 18 months: 70 per cent tax exemption; and• with a repayment period of between two and four years, including a

grace period of at least 12 months: 40 per cent tax 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 will also appear to be the more tax-favourable

Adepetun Caxton-Martins Agbor & Segun NIGERIA


shareholders 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 cur-rently exempted from CGT, disposal of stock clearly holds a tax advan-tage. 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 may see an added advantage to agree to an acquisition of stock rather than the purchase of business assets. Please note that 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.

Update and trends

The FIRS TP DivisionIn January 2014, Nigeria’s Federal Inland Revenue Service (FIRS) announced the establishment of its Transfer Pricing (TP) Division and requested that all companies affected by Income Tax (Transfer Pricing) Regulations No. 1 of 2012 (TP Regulations) submit their company’s group TP Policies in readiness for the filing of their respective TP returns. In February 2014, the FIRS organised a TP stakeholders’ event to provide information on the requirements for filing TP returns. Since then, the TP Division, with its office in Lagos, reports that it has recorded good compliance with filing of TP returns. Today, TP returns are currently made by filing the following documents under the cover of TP returns as separate from the filing of income tax returns:• a duly completed TP declaration form;• a duly completed TP disclosure form;• a duly completed income tax self-assessment form (IR3C-4Coy); • audited accounts; and• detailed tax computations (income tax, capital allowances and

deferred tax).

TP documentations, which must be contemporaneously produced alongside the related-party transaction, are not required to be filed as part of the TP returns documents. They must, however, be provided within 21 days of the FIRS making a demand for them, except where an extension of the 21 days is given.

Directive on income tax returns by non-resident companiesIn July 2014, at a stakeholders event, the FIRS announced its intention to begin a strict enforcement of the statutory requirement for the filing of income tax returns, particularly by non-resident companies. The statutory requirement is that income tax returns must be made by the submission of the following documents:• a duly completed income tax self-assessment form (currently form

IR3Coy), which contains a declaration by the director and secretary of the company that the returns filed contain a true, correct and complete statement of the amount of its taxable profits and other particulars;

• audited accounts; and• detailed tax computations (income tax, capital allowances and

deferred tax).

The practice for the submission of returns by non-resident companies was by the filing of the form IR3C-4Coy, without the inclusion of the audited accounts as well as the tax and capital allowance computations. Income tax computations are normally reflected on the IR3C-4Coy on the basis of an estimated profit-to-expenses ratio of 20 per cent : 80 per cent of total turnover (gross receipts) from the Nigerian business operations of the non-resident company, with a tax rate of 30 per cent applied on the estimated profit, thereby giving an effective tax rate

of 6 per cent of the gross receipts. The FIRS validated this practice, otherwise known as the ‘turnover basis of assessment’, on the basis of the law that enables the FIRS to assess non-resident companies for tax based on estimated taxable profits, calculated as a percentage of turnover, if it appears to the FIRS that the business produces either no taxable profits or taxable profits which in its opinion are less than might be expected to arise from that trade or business, or if the true amount of the taxable profits cannot be readily ascertained. The practice was to use 20 per cent as the relevant percentage of gross receipts. The current FIRS directive is in compliance with the law, however not without forseeable administrative and compliance issues which will need to be resolved by the FIRS through its customary circulars, which are designed to assist the tax paying public on the modalities for compliance with statutorily laid-down obligations.

New pension reform lawWith effect from 1 July 2014, the Pension Reform Act, 2014 (the New Act) became the subsisting law on the administration of pensions and retirement benefits in Nigeria. The Pension Reform Act No. 2 of 2004 (the Old Act) (and by inference the Pension Reform (Amendment) Act, 2011), has been repealed by the New Act. Essentially, and in relation to employers, the New Act has increased the rate of their contribution under the Contributory Pension Scheme (the Scheme) in respect of each employee to 10 per cent of the total monthly emoluments of the employee. Unless they elect to undertake the additional contribution required from employees, the employer is obligated to deduct 8 per cent of the total monthly emoluments of the employee and, together with its contribution of 10 per cent, remit to the Pension Fund Administrator (through a Pension Fund Custodian) chosen by the employee. The new law effectively increases both the minimum rate and base for the Scheme from a former total rate of 15 per cent (private sector employees) to 18 per cent. While an employee has an increased marginal rate of 0.5 per cent (that is from the 7.5 per cent required of the Old Act to the 8 per cent required by the New Act), the employer has an increased marginal rate of 2.5 per cent (that is from the 7.5 per cent required of the Old Act to the 10 per cent required by the New Act). Curiously, the New Act sets a minimum rate of 20 per cent of the total monthly emoluments of the employee for an employer who elects to undertake to make all contributions on behalf of its employees. It would appear that this 20 per cent rate has been erroneously retained from the Legislative Bill (see the Pension Reform Bill 2013) where a rate of 12 per cent was proposed as the minimum contribution from employers. Otherwise, it is inconceivable that an employer will choose to make the elective contribution when the sum of the minimum employer and employee contributions would have been 18 per cent. Such parity between elective contribution and the sum of deduction and contribution was maintained in the Old Act.





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 utilised 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 & Associates PANAMA


PanamaRamón Anzola, Maricarmen Plata and Maria del Pilar DiezAnzola Robles & Associates




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 DTTs with Israel and Italy have 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.

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.

PANAMA Anzola Robles & Associates


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 business 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 cor-responding to 3 per cent of the higher value between the sale price stated in the purchase or sale document or agreement, or the official property value. Such amount is payable, together with the corresponding property 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 ratified DTTs. Under DTTs approved by Panama a permanent establish-ment includes business headquarters, branches, offices, factories and workshops, as well as mines, oil or gas wells, quarries or any other site for extraction of natural resources. Building sites and construction or instal-lation projects with a minimum duration of six months depending on applicable treaty provisions are also generally considered as permanent establishments 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 accommo-dation 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. In some cases, it is possible to structure the foreign loan in a manner 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

withholding of 10 per cent is applicable to most companies. A 5 per cent dividend 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 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; or • a group of persons participate directly or indirectly in the manage-

ment, control or capital of such parties.

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-con-suming. 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 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.

Update and trends

Panama continues to develop its network of DTTs and TIEAs, and the National Tax Authority (ANIP) is active in the implementation of processes and controls to meet its international commitments. The ANIP’s international taxation section currently manages Panama’s treaty system, including the process of requests for application of benefits under DTTs. As the treaty system grows and evolves, the International Taxation Section has paid special attention to developing processes that allow for expediency and transparency in handling treaty matters.

To date, Panama has successfully signed and ratified DTTs with Barbados, the Czech Republic, France, Ireland, Israel, Italy, Korea, Luxembourg, Mexico, Netherlands, Portugal, Qatar, Singapore, Spain, the United Arab Emirates and the United Kingdom. The DTTs subscribed and ratified with Italy and Israel are pending entry into force. Panama has also signed and ratified TIEAs with Canada, Denmark, the Faroe Islands, Finland, Germany, Greenland, Iceland, Norway and Sweden. The TIEA signed and ratified with Denmark is pending entry into force.

Compliance with transparency standards was also enhanced by the adoption of legislation that immobilises bearer shares. From

August 2015, bearer shares certificates will have to be surrendered to certified custodians. The certified custodian must retain the bearer share certificate and engage a thorough due diligence of the certificate’s beneficial owner.

In July 2014, Panama’s Supreme Court announced a decision relating to a constitutional challenge to the legislation that created the ANIP. The challenge considers that the powers to supervise and collect taxes are constitutionally reserved for the executive branch of government. The Court was called to review whether the ANIP’s conception as an autonomous government entity, and the appointment of the National Tax Administrator as the top hierarchical officer, are contrary to the Constitution. Although the Supreme Court has stated that its position favours the challenge, the extent of any changes that may apply to the ANIP’s structure and powers will depend on the final decision that has yet to be issued and published.

With a new government also in office from 1 July 2014, the ANIP is expected to undergo an internal update and restructuring process. Although this may present changes to the current structure and powers bestowed on the ANIP, it is likely that certain aspects of the administrative and judicial tax processes will remain unaltered.

Ramón Anzola [email protected] Maricarmen Plata [email protected] Maria del Pilar Diez [email protected]

Credicorp Bank Plaza, 26th FloorNicanor de Obarrio Avenue, 50th StreetPanama CityPanama

Tel: +507 263 0003Fax: +507 263 0006www.anzolaw.net

PORTUGAL Vieira de Almeida & Associados


PortugalTiago Marreiros Moreira, Conceição Gamito and Frederico AntasVieira de Almeida & Associados




The Portuguese tax system is composed of several taxes including:• corporate income tax (CIT);• value added tax (VAT);• stamp tax;• real estate municipal tax; and• real estate transfer tax.

Additionally, certain types of income payments (eg, dividends, interest and royalties) may be subject to withholding tax, which may be reduced or waived through the employment of certain domestic or foreign rules under EU tax directives, double tax treaties (DTT) provisions or both.

Our comments (unless specified otherwise) relate only to these gen-erally known tax rules; as such, our responses may not take all of the tax consequences applicable to a particular case into consideration.

From a tax perspective, several differences should be considered when comparing an acquisition of stock in a target company (a stock deal) or an acquisition of business assets and liabilities (an asset deal), and the pos-sible tax implications for both the shareholders and the target company should be evaluated during the planning of any transaction.

In a stock deal, the sale of the shareholders’ stocks in the target com-pany may generate the recognition of a capital gain or loss in an amount equal to the difference between the value of the consideration received and the cost of the acquisition accepted for tax purposes (including expenses incurred related to the deal).

Generally, any capital gains obtained from such transaction shall be included in the assessment of the shareholders’ taxable profit and will be fully taxed under the general terms, with the following exceptions:• if the shareholder is a resident entity subject to CIT in Portugal, no

taxation will arise from the sale of stocks as long as the requirements to apply the participation exemption regime are met, as follows:• the shareholder holds at least 5 per cent of the share capital or vot-

ing rights of the target company;• the participation has been continuously held for 24 months prior

to the sale;• the shareholder is not a tax transparent entity;• the target company is neither resident nor domiciled in a black-

listed territory as defined by a ministerial order approved by the minister of finance;

• the target company is subject and not exempt from CIT, any of the CIT referred to in the Parent Subsidiary Directive or a tax of a sim-ilar nature with a rate not lower than 60 per cent of the Portuguese CIT rate (ie, a rate not below to 13.8 per cent for 2014) – this condi-tion may be waived under certain circumstances; and

• the target company cannot be a local real estate property com-pany (more than 50 per cent of its assets are composed, directly or indirectly, by real estate located in Portugal not allocated to an agricultural, industrial or commercial activity) – this condition is only applicable to real estate located in Portugal purchased on or after 1 January 2014; and

• if the shareholder is a non-resident without a permanent establish-ment in Portugal, no taxation shall arise from the sale of stock pro-vided that:• not more than 25 per cent of the non-resident is owned, directly or

indirectly, by Portuguese tax residents; • the non-resident is not domiciled in a blacklisted territory as

defined by a ministerial order approved by the minister of finance; and

• the capital gains obtained by the non-resident do not derive from the direct or indirect (through an SGPS) disposal of shares in a local real estate property company (more than 50 per cent of whose assets are composed of real estate located in Portugal).

Capital losses obtained from the sale of shares and other equity instru-ments are also excluded from CIT, provided that the same requirements described above to qualify for the participation exemption regime are fulfilled.

Additionally, capital losses equal to the amount of the dividends received and the capital gains obtained from the sale of stock in the same company that benefited, in the past four years, from the participation exemption regime are not deductible for tax purposes either.

Under an asset deal, any capital gains or losses obtained by the target company will be fully included in its taxable profit assessment.

The tax may be reduced to 50 per cent if, among other conditions, the consideration received is reinvested in the acquisition of fixed tangible assets, intangible assets and non-consumable biological assets.

Potential gains on the disposal of stock or business assets can be deferred if the transaction is established as a tax-neutral reorganisation, provided that all the conditions that apply to a tax-neutral regime are appli-cable to the transaction, which may assume the following legal forms:• a merger (including upstream, downstream and sister mergers)

between the target company and the acquiring company;• a spin-off, in which the target company may be liquidated or not, and

its assets and liabilities are totally or partially transferred to one or more acquiring companies (which may be a parent, a sister or a sub-sidiary 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

• a stock-for-stock exchange between the target company’s sharehold-ers and the acquiring company.

Net operating losses (NOLs) may be carried forward for up to 12 years, but in each fiscal year the related deduction cannot exceed, currently, 70 per cent of the respective taxable profit. This right may be lost, however, if an event that implies the change of the ownership of 50 per cent of the target company’s stock or the majority of the voting rights (under a stock deal) occurs, with the following exceptions:• there is a change from direct to indirect ownership (and vice versa);• the special tax-neutrality regime is applicable to the transaction;• the change of the ownership occurs upon the death of the previous

shareholder;• the acquirer holds directly or indirectly 20 per cent of the share capital

or the majority of voting rights, at least from the beginning of the tax year in which the NOLs were incurred;

• the acquirer is an employee or a board member of the acquired com-pany, provided that such person holds that position, at least, from the beginning of the tax year in which the NOLs were incurred.

Vieira de Almeida & Associados PORTUGAL


In order to avoid the loss of such right, within 30 days after the occurrence of such modification the taxpayer must apply for and obtain an authorisa-tion from the Minister of Finance. In such application, the taxpayer must demonstrate the valid economic reasons underlying such change.

An asset deal may also be regarded as a transfer of a going concern. If that is the case, stamp tax may be triggered at a 5 per cent rate over the value of the deal. On the contrary, if the assets included in the deal are separately transferred, then stamp tax will not be triggered, but each indi-vidual transaction may fall under the scope of VAT at the applicable rates (currently varying between 6 and 23 per cent, in the majority of cases).

In an asset deal, if real estate property is transferred then real estate transfer tax and stamp tax will be due at a maximum rate of 6.5 per cent (10 per cent whenever the acquirer is resident for tax purposes in a black-listed territory as defined by a ministerial order approved by the minister of finance) and 0.8 per cent, respectively, over the real estate’s tax value or the value at which the assets were transferred to the acquiring company, whichever is higher.

In a stock deal, the direct acquisition of at least 75 per cent of the stock of a limited liability company and general or limited partnerships that own real estate property may also trigger real estate transfer tax at the rates mentioned above.

Whenever the term of loans transferred to the acquiring company is subject to modifications, this change may be regarded by the tax authorities as a new financing agreement subject to stamp tax at rates that vary from 0.04 per cent per month, or fractions thereof, up to 0.6 per cent (one-off ).

2 Step-up in basis


Under the current Portuguese GAAP, which adapted and transposed the International Financial Reporting Standards regulations into the internal law, the acquiring company may register the business assets purchased at their fair value. Therefore, a step-up (or even a stepdown) may occur in the assets’ tax basis.

All transferred business assets must be identified and evaluated in the book accounts of the acquiring company.

The purchase price must be allocated considering the fair value of the assets and liabilities received, and any residual amount (if any) will be qualified as goodwill. Goodwill is not depreciable for tax purposes and is subject to impairment tests on at least an annual basis.

For CIT purposes, any losses related to goodwill impairment are not deductible.



Generally, considering the implementation of a debt pushdown strategy after an acquisition, it is preferable to incorporate a special purpose vehicle (SPV) in Portugal in order to execute such acquisition rather than using a foreign company for such purpose. Nevertheless, if the transaction is struc-tured as tax-neutral, it may be possible to use either a resident company or a company resident in another EU country, provided certain conditions are met.

Acquiring a target company using an SPV resident in Portugal may be useful in order to entitle (provided that some conditions are met) the par-ent company to file a group tax return, which allows the offset of the taxable losses of one company against the taxable profits of others.

Additionally, considering the set of measures that has recently been enacted under the CIT reform in order to raise the competitiveness of the Portuguese tax system (eg, the participation exemption regime), the incorporation of an SPV in Portugal may be useful for those who are inter-ested in using Portugal as an international business platform, namely in Portuguese-speaking countries such as Brazil, Angola and Mozambique.

There are also other measures that have been recently enacted to foster the investment in Portuguese companies and to strengthen their capitalisation. Among others, it is worth mentioning the share capital remuneration benefit (which allows, under certain conditions, cash contri-butions made by the shareholders upon the incorporation or the increase

of share capital of a company to be remunerated at a rate of 5 per cent of its amount, which is a tax deductible expense for this company) and the reinvestment of retained profits benefit (which allows, under certain con-ditions, small and medium-sized companies to benefit from a 10 per cent CIT deduction – with a cap of 25 per cent of the CIT due – of the retained and reinvested profits used on the acquisition of certain eligible assets).



Both company mergers and stock exchanges are commonly used to acquire target companies. These types of operations (among others) may also be used in order to execute group reorganisation operations.

The CIT law foresees a tax-neutral regime (transposed from the EU Tax Merger Directive to the internal law regulations) for both operations. This regime may be applied provided that the operations are carried out by companies resident in Portugal or in other EU countries.



No. The benefits of issuing stock as consideration apply at the level of the target company and at the level of its shareholders, since the use of stock as consideration may qualify the transaction as a tax-neutral reorganisation.

6 Transaction taxes


Apart from the direct acquisition of at least 75 per cent of the stock of lim-ited liability companies and general or limited partnerships that own real estate property, which triggers real estate transfer tax (see question 1), the acquisition of stock does not trigger any other transaction taxes.

In an asset deal, if the operation is qualified as a transfer of a going con-cern, stamp tax may be due at a rate of 5 per cent over the value of the deal. If the operation cannot be regarded as a contribution of a totality of assets, or part thereof, where the acquirer is to be treated as the successor to the transferor, then stamp tax will not be triggered, but each individual item shall be subject to VAT at the applicable rates (currently varying between 6 per cent to 23 per cent, in the majority of cases).

Whenever real estate property is transferred, real estate transfer tax and stamp tax are due over the real estate’s tax value or the value at which the assets were transferred to the acquiring company (whichever is higher) at the following rates:• real estate transfer tax: 5 per cent for rural immoveable property; 6.5

per cent for urban immoveable property; and 10 per cent whenever the acquirer is resident for tax purposes in a blacklisted territory as defined by a ministerial order approved by the minister of finance; and

• stamp tax: 0.8 per cent.

Depending on the transaction, notarial charges may also be levied. With regard to coordination and concentration acts such as mergers,

Portugal has a tax benefit that allows companies to benefit from some exemptions (real estate transfer tax, stamp tax and notarial charges), provided some requirements are met. This benefit is dependent on the approval of the minister of finance and may also require a decision by the Competition Authority. Measures have recently been enacted in order to reduce the formalities associated to the approval of this tax benefit, with a view to increasing the cases in which taxpayers actually apply it.





The right to carry forward NOLs may be forfeited in certain cases of change of the ownership of 50 per cent of the target company’s stock or the majority of the voting rights (see question 1). Whenever there is a need to preserve such rights, an authorisation from the minister of finance must be obtained (see question 1).

In tax-neutral reorganisation operations such as mergers, spin-offs or transfers of permanent establishments, the right to carry forward the NOL, as well as certain tax attributes (tax benefits and the net financial costs yet to be deducted) of the target entity may also be transferred to the acquir-ing company provided certain conditions are met (these will depend on the specific circumstances of the operation).

Any deferred tax assets related to NOLs shall be forfeited if the right to carry forward is also lost.

Any VAT credits held by the target company shall not be lost in a change of ownership or in the sale of business assets.

In a merger of the target company into the acquiring company, the acquiring company may present an ad hoc request to the Portuguese tax authorities requesting authorisation to carry forward VAT credits previ-ously held by the target company. In this scenario (if applicable), the acquir-ing company may also request the refund of CIT special payments made on account by the target company within 90 days following the merger.

Note that the tax legislation does not have a specific tax regime appli-cable to the acquisition of insolvent or bankrupt companies. It may be very difficult to justify the economic reasons underlying such deals, and conse-quently the tax authorities may not authorise the carry-forward of the NOL eventually held by the insolvent or bankrupt target company. Additionally, any operations (eg, mergers, spin-offs) involving these kinds of entities have a higher risk of being subject to anti-avoidance rules if the tax authori-ties consider that they were solely or mainly implemented for tax purposes.

8 Interest relief


As a general rule, interest paid on debt to an independent party is deduct-ible by the borrower provided it is considered as a cost necessary for the borrower’s activity. Nevertheless, there are some exceptions and limita-tions that should be considered.

The net financial costs borne by a resident company or by a permanent establishment of a foreign company (with the exception of entities subject to the supervision of the Bank of Portugal or of the Portuguese Insurance Institute and branches of credit, financial or insurance companies with headquarters in another EU country) may be deductible up to the higher of the following limits:• €1 million; or• 60 per cent (this percentage will be reduced by 10 percentage points

on an annual basis, in order to set it at 30 per cent in 2017) of the ‘tax EBITDA’ (profit before depreciations, net financial costs and taxes, as amended in accordance with the tax provisions).

The net financial costs which are not deductible in a certain given fiscal year, as a result of the above limits, may be carried forward for a period of five fiscal years, as long as those limits are complied with.

When the amount of financial costs considered as tax deductible is lower than the percentage limit (60 per cent in 2014), the unused part of such limit may be carried forward for a period of five fiscal years (increas-ing the maximum deductible amount), until that remaining part is fully used.

Please note that transfer pricing rules need to be observed in any scenario and that Portuguese tax authorities may adjust the companies’

taxable profit if they understand that, due to a special relationship between the lender and the borrower, they have agreed specific terms that differ from the normal conditions that are usually established between non-related parties.

As a general rule, interest payments made by a resident company are subject to withholding tax at a rate of 25 per cent (applicable to both resi-dent and non-resident companies).

This rate may be reduced or waived through the use of certain inter-nal rules (eg, interest paid to financial institutions is not subject to with-holding tax), the EU Interest and Royalties Directive (since 1 July 2013, no withholding tax is due on interest payments made to parties resident in EU countries) or DTT provisions (depending on the applicable treaty, the with-holding tax may be reduced to 15, 12, 10 or 5 per cent). In order to benefit from these reduced or nil withholding tax rates, substantive and formal requirements must be met.

Investment income (eg, interest) paid or made available to master accounts (opened in name of one or more account holders acting on behalf of one or more unidentified third parties) is subject to a final withholding tax of 35 per cent (unless the beneficiary is disclosed, case in which the above-mentioned general rate will apply). A final withholding tax of 35 per cent will also be applied to interest payments made to a lender resident in a blacklisted territory as defined by a ministerial order approved by the minister of finance.

Tax grouping is allowed provided that the parent company holds, directly or indirectly, at least 75 per cent of the capital and more than 50 per cent of the voting rights of the subsidiaries. Other formal (evidence by the parent company of the compliance of all the requirements) and sub-stantive conditions should also be met by the parent company and or the subsidiaries in order to apply the tax grouping regime. Tax grouping allows the group companies to offset the NOLs incurred by one company against profits of other companies. Similarly to what is currently foreseen in the general regime, the NOL assessed within the tax grouping may only be deducted in each fiscal year up to 70 per cent of the group taxable profit.

Another alternative that may enable a debt pushdown strategy is through a merger process in order to allow the offset of the financial costs (initially charged to the acquiring company) against the operational profits obtained by the target company.

Note, however, that under the general anti-avoidance rule, any con-tract or legal act shall be ineffective for tax purposes when it is proven that it was solely or mainly undertaken to reduce, avoid or defer the payment of tax that otherwise would be due under an operation with an identical economic outcome.



The protections settled by the parties are usually found in the applicable asset or stock purchase agreement. Such protections depend greatly on whether the acquisition is structured as an asset or stock deal and also on the negotiation proceedings.

In order to identify, evaluate and, eventually, eliminate tax contin-gencies, it is increasingly common during the acquisition process for one or both parties to contract tax lawyers and advisers to undertake due dili-gence work in order to disclose any potential or effective liabilities related to the target company or to the business assets.

During the negotiation process, the purchaser is keen to ensure that it will, to the greatest extent possible, be free of any pre-closing tax liabilities or at least duly protected from them on a contractual basis.

On the purchase agreement, any eventual tax contingencies will be identified and allocated between the seller and the purchaser.

The most common forms of protection agreed between the parties include tax representations and warranties, gross-up clauses, indemnifica-tion clauses, deed of tax covenants, escrow accounts and dispute resolu-tion clauses.

Any payment eventually received by the acquiring company related to indemnities shall represent a taxable income for the recipient and will be subject to tax under the normal terms. As long as such indemnity does not represent a consideration related to the transaction, no VAT shall be due on such payment (otherwise, a 23 per cent rate may be applied).




10 Restructuring


A post-acquisition restructuring process may assume and include several different kinds of operations, such as mergers, spin-offs, stock-for-stock exchanges or contributions in kind. These kinds of operations may be per-formed under a tax-neutral regime, as discussed above, provided some for-mal and substantive requirements are met.

The principal objective of a restructuring process should be mainly related to valid commercial and economic reasons, such as the restruc-turing or rationalisation of the activities of the companies involved in the restructuring operation. Depending on the circumstances, other sec-ondary objectives (eg, debt pushdown) may also be accomplished from a restructuring process.

Under the general anti-avoidance rule, any contract or legal act shall be ineffective for tax purposes when it is proven that it was solely or mainly undertaken to reduce, avoid or defer the payment of tax that otherwise would be due under an operation with an identical economic outcome.

11 Spin-offs


It is possible to accomplish a tax-free spin-off under the tax-neutral regime provided the following conditions are met:• the intervening companies must have their head offices or places of

effective management in Portugal and have to be subject to (and not exempt from) Portuguese CIT, or they have to be resident in an EU country and comply with conditions established in article 3 of the Mergers Directive;

• the operation should not have tax fraud or tax evasion as its principal objective or one of its principal objectives (this condition may be veri-fied namely if the operation was not made for valid economic reasons);

• the target company’s shareholders may have to receive (depending on the kind of spin-off to be performed) in exchange new shares from the acquiring company and eventually a cash payment (not exceeding 10 per cent of the nominal value of those shares);

• assets and liabilities transferred must be kept in Portugal and con-tribute to the tax basis in Portugal. For this purpose, the creation of a Portuguese permanent establishment by the acquiring company, if the later is a non-resident entity, may be required;

• the acquiring company (or its permanent establishment) should keep, for tax purposes only, the assets and liabilities received at the same tax value they had, prior to transaction, in the target company;

• the transferred assets must maintain the depreciation and amortisa-tion regime that was previously adopted by the target company;

• any inventory adjustments, impairment losses and provisions must follow, for tax purposes, the same treatment they previously had in the target company; and

• the assessment of the tax results of the acquiring company (or its per-manent establishment) must be performed, concerning the received assets, as if no spin-off had occurred.

Additionally, some accessory obligations need to be fulfilled in order to apply the tax-neutral regime; for example, the acquiring company (or its permanent establishment) has to inform the Portuguese tax authorities about the exercise of the tax-neutral regime in its annual tax return for the fiscal year in which the spin-off has taken place.

In a tax-neutral spin-off, the carry-forward of the NOLs of the tar-get company can be transferred in a proportional basis to the acquiring company (or its permanent establishment) if the target company ceases to exist. The carry-forward of the NOLs may also be transferred, within certain limits, in certain spin-off operations which imply the transfer (and eventual extinction) of Portuguese permanent establishments of compa-nies located in other EU countries.

The triggering of transfer taxes (property transfer tax and stamp tax) and other legal costs may be avoided in spin-offs if certain conditions are met, thereby allowing the company to apply for the tax benefits provided for in the Portuguese Tax Benefits Code regarding companies’ restruc-turings. Measures have recently been enacted in order to reduce the

formalities associated to the approval of these tax benefits, with a view to increasing the cases in which taxpayers actually apply them.



Following a decision dated 6 September 2012 (Case C-38/10) of the EU Court of Justice, the Portuguese government has amended the domestic legislation regarding the migration of companies in order to be compliant with article 49 of the Treaty on the Functioning of the European Union.

Under this new regime, and in general terms, the migration of a resi-dent company to a foreign country shall be subject to CIT in Portugal. For this purpose, the taxable base of that fiscal year will include any unreal-ised capital gains or losses (assessed by the positive or negative differences between the market values and the accounting values relevant for tax pur-poses of the assets and liabilities) in respect of the company’s assets.

However, companies and permanent establishments which migrate to EU countries or EEA countries (in this case, depending on the existing administrative cooperation similar to that which is applicable between EU countries) may now opt between the immediate (or in annual instalments) payment of the tax computed over unrealised capital gains or the defer-ral of such tax payment until the year following that in which the relevant assets and liabilities are terminated, transmitted, discarded from the cor-porate activity or are transferred to outside the above referred EU or EEA countries. The option to defer the taxation, or to pay it in annual instal-ments, triggers the assessment and payment of interest and, if there is a serious concern about the collection of the tax credit, a bank guarantee in an amount equal to 125 per cent of the tax due may have to be presented. The above referred regime is not applicable to the assets and liabilities of the migrating company which are maintained in a Portuguese permanent establishment and keep contributing to the assessment of the Portuguese tax basis, as long as such Portuguese permanent establishment keeps, for tax purposes, those assets and liabilities at the same tax value they had in the migrating company prior to the migration and the operation does not have tax evasion as its principal objective or one of its principal objectives. In this scenario, in order to determine the taxable profit of such Portuguese permanent establishment:• the transferred assets must maintain the depreciation and amortisa-

tion regime that was previously adopted by the migrating company;• any inventory adjustments, impairment losses and provisions must

follow, for tax purposes, the same treatment they previously had in the migrating company; and

• the assessment of the permanent establishment tax results has to be performed, concerning the relevant assets, as if no migration had occurred.

NOLs prior to the migration may still be offset against the taxable profit of the Portuguese permanent establishment provided they correspond to the assets and liabilities kept in Portugal.



Under Portuguese domestic tax rules, interest or dividends paid by Portuguese resident companies to non-resident entities are subject to with-holding tax at a rate of 25 per cent. The tax must be withheld at the earliest of the time of the payment, the placement of the dividends at the disposal of the shareholders or the maturity date of the interest.

With respect to dividend payments, the withholding tax can be elimi-nated by the application of the recently introduced participation exemp-tion regime, which has a wider scope than the mere compliance of the EU Parent-Subsidiary Directive provisions. Therefore, outbound dividends are exempt from withholding tax at CIT level provided that the following conditions are met:• the beneficiary of the income is resident in:

• another EU country;• an EEA country bound to administrative cooperation similar to

the applicable between EU countries; or• a country with which Portugal has concluded a DTT foreseeing



administrative cooperation similar to those applicable between EU countries; or

• the beneficiary of the income:• holds at least 5 per cent of the share capital or voting rights of the

distributing company;• holds the participation continuously for 24 months prior to the dis-

tribution of the dividends; and• is subject to and not exempt from any of the CITs referred to in the

EU Parent Subsidiary Directive, or a tax of a similar nature with a rate not lower than 60 per cent of the Portuguese CIT rate (ie, a rate not below to 13.8 per cent for 2014).

If the beneficiary of the income is resident in Switzerland, a withholding tax exemption can also be applied on the dividend payments as long as:• the beneficiary holds at least 25 per cent of the share capital of the dis-

tributing company for at least two years;• none of both entities are considered to be resident in a third coun-

try under the provisions of the DTT signed between Portugal and Switzerland;

• both entities are subject and not exempt to CIT or a tax of similar nature; and

• both entities have been incorporated as limited liability companies.

To apply for the above referred withholding tax exemption, the beneficiary of the income must present, prior to the disposal of the dividends, a decla-ration, duly signed and certified by the recipient’s tax authorities, in order to evidence its tax residence and the applicable CIT regime.

Concerning interest payments, the withholding tax can be eliminated by the application of the EU Interest and Royalties Directive.

Under the EU Interest and Royalties Directive and since 1 July 2013, no withholding tax is due over interest payments made by Portuguese compa-nies, provided the following conditions are met:• the paying and beneficiary entities should be subject to (and not

exempt from) corporate tax and take one of the legal forms listed in the annex of this directive;

• both entities have to be considered as EU residents for DTT purposes;• a direct 25 per cent shareholding must be held by one of the companies

in the other’s capital, or both are sister companies (ie, both held, in at least 25 per cent, by the same direct shareholder), and in either case the shareholding must be held for at least a two-year period; and

• the entity receiving the interest payment should be its effective beneficiary.

Interest and royalty payments made to a company or a permanent estab-lishment resident in Switzerland may also benefit from the withholding tax exemption, as long as the above referred conditions (with the proper adjustments) are also met.

As mentioned above, investment income (which includes, among other forms of income, interest and dividends) paid or made available to master accounts (opened in the name of one or more account holders acting on behalf of one or more unidentified third parties) are subject to a final withholding tax of 35 per cent (unless the beneficiary is disclosed, in which case the above-mentioned general rate will apply). This withholding tax rate will also be applied in the investment income payments made to entities resident in a blacklisted territory as defined by a ministerial order approved by the minister of finance.

As a consequence of over 60 DTTs signed between Portugal and other countries (including EU countries, Brazil, Canada, China, Hong Kong, India, Japan, Koweit, Mozambique, Panama, Qatar, Russia, Singapore, the United Arab Emirates and the United States), the domestic withholding tax rates foreseen for interests and dividends payments can be reduced to rates ranging from 5 to 15 per cent.

To apply for the reduced or zero withholding tax rates foreseen in the DTTs or in the EU Interest and Royalties Directive, some formalities must be complied with no later than the tax due date (eg, the presentation of tax forms duly certified by the recipient’s tax authorities and/or a certificate of residence issued by the recipient’s tax authorities) in order to confirm that the requirements to apply such tax saving are met.

The waiver of the withholding tax on interest payments under the EU Interest and Royalties Directive or DTT provisions may not be applicable to the part of the interest that is not compliant with the arm’s-length principle.

From the perspective of Portuguese resident companies and under the new participation exemption regime, inbound dividends are excluded from the taxable income assessment, as long as the following requirements are met:

• the shareholder is a resident entity subject to CIT in Portugal;• the shareholders holds at least 5 per cent of the share capital or voting

rights of the target company;• the participation is continuously held for 24 months (the require-

ment of this minimum holding period may be met before or after the distribution);

• the shareholder is not a tax transparent entity;• the distributing company is not resident or domiciled in a blacklisted

territory as defined by a ministerial order approved by the minister of finance;

• the distributing company is subject and not exempt from:• CIT;• any of the CIT referred to in the Parent Subsidiary Directive; or • a tax of a similar nature with a rate not lower than 60 per cent of

the Portuguese CIT rate (ie, a rate not below to 13.8 per cent for 2014) – this condition may be waived under certain circumstances.

Portuguese companies may benefit, under certain conditions, from the new international economic double taxation tax credit, which enables the taxpayer, upon election, to deduct part of the tax levied on the profits earned abroad by its subsidiary, whenever the latter distributes dividends to which the participation exemption regime is not applicable.



Aside from interest and dividend payments, royalty payments may also benefit from tax-efficient regimes, either through the above referred EU Interest and Royalties Directive provisions (see question 13) or through the application of DTTs signed by Portugal (which allow the reduction of the withholding tax to rates ranging from 5 per cent to 15 per cent).

Other financial flows paid by the target company to its shareholders (for example, the reimbursement of supplementary capital) may benefit from low or zero taxation rates, depending on the nature of the financial flow and on the eventual application of a DTT. Nevertheless, this issue should be the object of further analysis according to the particular circum-stances of each individual case.


15 Disposals


There is no single answer to this question; any of these methods is possible, depending on the particular interests of the parties involved and on the cir-cumstances of each case.

In order to determine which solution will be chosen for a particular deal, the business structure of the target company or group must be ana-lysed and the relevant perimeter of the transaction determined. Some of the issues that should be evaluated by the parties involved when defining the terms of the deal include:• whether the buyer is interested in acquiring a branch of activity or the

business as a whole;• whether the seller is interested in selling a branch of activity or the

business as a whole;• whether the buyer is interested in international expansion or not;• the composition of assets and liabilities of the target company or

group; and• whether the target company or group have any relevant tax credits and

contingencies that should be duly considered.



According to the Portuguese Tax Benefits Code, the capital gains obtained by non-residents on the disposal of stock in a Portuguese company are exempt from taxation in Portugal unless:



• more than 25 per cent of the non-resident company is owned, directly or indirectly, by Portuguese tax residents;

• the non-resident company is domiciled in a blacklisted territory as defined by a ministerial order approved by the minister of finance; or

• the capital gains obtained by the non-resident refer to the direct or indirect (through an SGPS) disposal of shares in a resident company, more than 50 per cent of whose assets are comprised of real estate property located in Portugal.

Portuguese domestic tax legislation does not have any specific tax regime applicable to energy and natural resource companies for this purpose.



The gains arising from the disposal of shares in a local company may be exempt from taxation, under the participation exemption regime or under the tax-neutral regime, both established in the CIT Code, or under the pro-visions referred in the Portuguese Tax Benefits Code (see questions 1 and 16).

Any gains on the disposal of business assets may be partially deferred through the application of the tax reinvestment regime (subject to the compliance of certain conditions) or entirely deferred if the transaction (a reorganisation of operations) is made in accordance with the tax-neutral regime.

Update and trends

In May 2014, Portugal ended a three-year assistance programme of the European Financial Stabilization Mechanism and of the International Monetary Fund, with sounder public finances and a more competitive economy, thus allowing the country to regain the trust and recognition of other EU countries, the relevant international organisations and international markets.

Alongside this, with the approval of measures aimed at ensuring the country’s long term fiscal sustainability, the Portuguese government has been following a path destined to stimulate the economic growth, to reduce the unemployment and to attract new investment. For this purpose, Portugal has recently concluded with the European authorities the 2014–2020 partnership agreement which will give Portugal more than €25 billion which will be dedicated to stimulating:• the production of tradable goods and services and the

internationalisation of the economy;• the enhancement of the specialisation profile of the Portuguese

economy;• the investment in education and in measures and initiatives for

employability; • the integration of people at risk of poverty and the combat of social

exclusion;• the promotion of territorial cohesion and competitiveness,

particularly in the cities and in areas of low density; and • support for the state reform programme, through the

rationalisation, modernisation and increase of the public administration’s capacities.

Portugal has also been keeping its focus on attracting foreign high net worth individuals, either through the grant of a Golden Residence Permit (which gives access to a permanent residence permit and, eventually, to Portuguese citizenship to those who conduct investment activities in Portugal, as in the transfer of capital, the creation of jobs or the acquisition of real estate), or through the Non-Habitual Tax Residents regime (which provides tax benefits that range from a full exemption on certain types of income and a reduced flat tax rate of 23.5 per cent to other types of income).

From a tax point of view, it is crucial to highlight the approval of the CIT reform, one of the most ambitious tax initiatives undertaken by the Portuguese government, with the support of main opposition party, implementing a set of measures that aim at raising the competitiveness of the Portuguese tax system, fostering investment in the country and reinstating Portugal’s position in the European context. In this context, it is important to highlight, among others, the extension of:• the tax-neutral regime to a wider range of operations;• the NOL deduction term; and • the tax group regime.

It is also important to highlight the introduction of:• a worldwide participation exemption regime;• a patent box regime;• a tax ‘amortisation and depreciation’ regime applicable to

intangible assets, investment properties and non-consumable biological assets; and

• an indirect foreign tax credit.

On the other hand, the committees in charge of the personal income tax (PIT) and the environmental taxation reforms have recently presented their reports where several proposals have been put forward focused, respectively, on the simplification of PIT, promotion of the social mobility and the strengthening of family tax policies on the one side, and on the simplification of the taxation, promotion of economic competitiveness, environmental sustainability and the efficient use of resources on the other.

In the international relations area, Portugal has been keeping its long term strategy of extending its DTT and exchange of information relating to tax matters agreements networks, with a special focus on countries located in Latin America, Asia and Middle East, in order to enhance bilateral trade relations and to promote the opportunities of investment available in Portugal for foreign investors.

Tiago Marreiros Moreira [email protected] Conceição Gamito [email protected] Frederico Antas [email protected]

Avenida Duarte Pacheco, 261070-110 LisbonPortugal

Tel: +351 21 311 3400Fax: +351 21 311 3406www.vda.pt

SINGAPORE VoskampLawyers


SingaporeBarbara Voskamp, Yvette Gorter-Leeuwerik and Benny E ChweeVoskampLawyers




The difference in tax treatment can be seen by looking at the advantages and disadvantages of the different acquisition styles.

Share dealAdvantages• If a non-resident company structures the acquisition of a target com-

pany (target) through a Singapore acquisition company, the stock acquisition may qualify for allowances under the mergers and acquisi-tions (M&A) scheme, subject to certain conditions. This M&A allow-ance can amount to 5 per cent of the value of the acquisition with a maximum of S$5 million for each year of assessment (YA). The M&A allowance is given on a straight-line basis for a five-year period and is applicable to acquisitions made up to 31 March 2015. Any M&A allow-ance which is not utilised could be carried forward to offset the acquir-ing company’s future income, subject to the shareholding test being met (see question 7). However, this M&A allowance cannot be carried backwards or transferred under the group relief scheme (see questions 3 and 5).

• For acquisitions completed between 17 February 2012 and 31 March 2015, double deductions will be granted for transaction costs incurred on stock acquisitions, subject to an expenditure cap of S$100,000 per YA. These transaction costs include legal fees, accounting fees, tax adviser fees, valuation fees and other professional fees necessarily incurred in the stock acquisition, but do not include fees in relation to any loan arrangement.

• Generally, subject to certain conditions (eg, the shareholding test, the same trade test, etc) and the agreement of the relevant authorities, the acquiring company may continue to benefit from the target’s unuti-lised tax losses and capital allowances or tax incentives accorded to the target (if any).

• In general, the acquisition of stock is exempt from GST. In other words, no GST would be charged on the acquisition of stock. Correspondingly, no input tax credits would generally be available.

• The seller would generally have no clawbacks on capital allowances.

Disadvantages• If a non-resident company acquires stock in the target, all historic tax

or other risks and liabilities will remain with the target and thus be transferred to the acquiring company. Therefore, it is advisable for the acquiring company to conduct a (tax) due diligence.

• There is no step-up in the value of the underlying assets of the target. Consequently, any tax allowable deductions or allowances continue to be computed on the basis of the original cost as at acquisition date.

• Interest is typically deductible if it is incurred on capital employed in acquiring income. Therefore, interest expenses incurred by an inter-posed Singapore holding company for financing the acquisition may only be offset against future dividend income. As dividends are gener-ally exempt at the level of the Singapore holding company, the deduc-tion value of the interest expenses would typically be lost.

• Stamp duty is generally due upon the execution of documents in respect of the transaction of shares. If the target is a Singapore com-pany, the duties are typically owed by the acquiring company unless there is an agreement to the contrary. Stamp duty is calculated at 0.2 per cent based on either the consideration or the net asset value of the target company – whichever is higher. Stamp duty on the transfer of ordinary shares for qualifying acquisitions executed from 1 April 2010 to 31 March 2015 can be waived by way of relief under the M&A scheme. The stamp duty relief is limited to S$200,000 per year. Stamp duty relief may also be available under qualifying reconstructions or amalgamations whereby the shares are transferred to associated com-panies in Singapore, subject to conditions.

Asset dealAdvantages• If a non-resident company acquires the assets of a Singapore com-

pany, it does not inherit the tax and/or other risks and liabilities. These remain with the seller.

• An asset deal allows the non-resident company to acquire selected assets only. Depending on the assets acquired, there are various tax implications to be considered.

• The purchase of assets allows the acquiring company to increase the cost base of tax depreciable assets (step-up). For tax purposes, the total consideration needs to be apportioned among the assets acquired (a purchase price allocation). Depreciation and other capital expendi-tures are generally not deductible for tax purposes. However, capital allowances (and enhanced allowances) are given and can be claimed on qualifying expenditures incurred for the acquisition of certain ‘plant and machinery’ used in the acquirer’s trade or business.

• Under the Productivity and Innovation Credit (PIC) scheme, a 400 per cent allowance or deduction shall be allowed on qualifying capi-tal expenditures incurred – in respect of, for example, intellectual property rights – during the basis period for each year of assessment between YA 2011 and YA 2018. The amount of qualifying expenditure is capped at S$1.2 million for YA 2013 to YA 2015 and YA 2016 to 2018 (ie, S$400,000 per year). Under the new PIC+ scheme, qualifying businesses could enjoy 400 per cent tax deductions or allowances up to S$600,000 of qualifying expenditure per year, subject to certain conditions, from YA 2015 onwards. A new combined cap of S$1.4 mil-lion is available for YA 2013 to YA 2015, and a new combined cap of S$1.8 million is available for the YAs 2016 to 2018 under the new PIC+ scheme. Companies carrying on a trade or business that are eligible for the PIC+ scheme are those whose revenue does not exceed S$100 mil-lion or whose employment size does not exceed 200 employees. If the business in question is part of a corporate group, the above-mentioned criterion will be applied at the group level.

• In principle, interest and certain other borrowing costs incurred to acquire a Singapore business producing chargeable income are tax-deductible.

Disadvantages• Tax losses or allowances which are not utilised remain with the seller.

Furthermore, the seller might incur clawbacks on capital allowances and enhanced allowances (where applicable).

• For tax purposes, goodwill is considered as a capital asset. Therefore, it would neither be deductible for tax purposes nor eligible for capital allowance claims.

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• When a non-resident acquires (business) assets in Singapore, the assets may constitute a permanent establishment. Consequently, the non-resident company will become liable for tax in Singapore for the profits attributable to the permanent establishment. In addition, please note that the non-resident company should typically be regis-tered with the Accounting and Corporate Regulatory Authority if it intends to carry out business in Singapore.

• If the assets transferred include immoveable property in Singapore, the relevant transfer instrument is subject to stamp duty. The amount of stamp duty due is based on the higher of the purchase price or mar-ket value. The graduated rates are from 1 per cent to 3 per cent. If the assets are transferred between associated companies, it may be pos-sible to obtain relief from stamp duty, subject to certain conditions.

• If a business is transferred, GST would generally be applicable at the standard rate of 7 per cent on the purchase price of the acquired assets. However, if the transfer qualifies as a ‘transfer of a going concern’, the transfer might qualify as an excluded transaction. In other words, no GST would be charged on the acquisition of assets.

2 Step-up in basisIn 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?

Share dealWhen stock in the target company is acquired, there is no step-up in the value of the underlying assets of the target company. Consequently, any tax-allowable deductions or allowances would generally continue to be computed on the basis of the original cost as at acquisition date.

In addition, please note that the difference between the consideration and the value of the underlying assets is not deductible for tax purposes.

Asset dealBy purchasing the assets, the acquiring company will be allowed to increase the cost base of the tax depreciable assets (step-up). Therefore, for tax pur-poses, the total consideration needs to be apportioned among the assets acquired (a purchase price allocation). It is also advisable to obtain proper valuation of the assets transferred and maintain contemporaneous docu-mentation to support the stepped-up costs of the assets acquired.

Furthermore, depreciation and other capital expenditures are not deductible for tax purposes. Instead, capital allowances (and enhanced allowances) are given and can be claimed on expenditure incurred for the acquisition of certain ‘plant and machinery’ used in the trade or business of the acquirer.

For tax purposes, goodwill is considered as a capital asset. Therefore, it would neither be deductible for tax purposes nor eligible for capital allowance claims.

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

In certain cases, it can be beneficial to acquire the Singapore target com-pany or business through a Singapore resident company – for instance, if the acquisition would qualify for the M&A allowance scheme. This scheme is granted to a company that acquires ordinary shares of another company between 1 April 2010 and 31 March 2015. Among other conditions, the acquiring company (and its ultimate holding company) must be incor-porated and a tax resident in Singapore. In addition, it must be carrying on a trade or business in Singapore on the date of the share acquisition. However, the relevant authorities may waive this requirement. The M&A allowance amounts to 5 per cent of the value of the acquisition, capped at S$5 million, which is to be claimed on a straight-line basis over five years.

In addition to the above, group relief might be obtained, which allows qualifying group companies (which are incorporated in Singapore) to trans-fer current year unutilised losses, current year unutilised capital allowances and current year unutilised approved donations, subject to conditions.

Finally, the following should be taken into consideration as well when executing an acquisition in Singapore: • gains on the sale of Singapore or foreign assets or shares are not sub-

ject to Singapore corporate income tax if the gains could be considered capital in nature; and

• a debt pushdown might be favourable in the event of an asset deal.

On the other hand, when acquiring the target through a non-resident acquisition company, the following tax features should be considered:• Singapore generally does not tax the capital gains of a non-resident

company selling shares in a Singapore resident company. • Certain payments made by the resident target to the non-resi-

dent (acquisition) company might be subject to withholding tax in Singapore, for example, royalty, interest, management/technical assistance/service fees where services are performed in Singapore, rent and director’s fees.

• Singapore operates a one-tier corporate taxation regime whereby dividends are exempted in the hands of shareholders. In addition, Singapore does not levy withholding tax on dividend distributions made by a Singapore resident company to a non-resident shareholder.



Mergers and share acquisitions are common in Singapore. They can be achieved in different ways, considering the potential financing and tax implications and market conditions. The purchase price may be in cash and/or in kind, through an exchange of shares.

The Singapore Companies Act (SCA) provides for a mergers and amal-gamation process, which allows the mergers of two or more companies into one company, or a merger of a 100 per cent subsidiary into its holding company. The two amalgamating companies are merged into one surviv-ing company, and the non-surviving companies will be automatically dis-solved by operation of law. From an income tax perspective, amalgamating companies are generally treated as having ceased their business operations and disposed of their assets and liabilities. The amalgamated company is treated as having acquired the business.

For tax purposes, an amalgamation that is carried out in accordance with the SCA, and which satisfies certain conditions, will be treated as a continuation of the existing business in the amalgamated companies and, consequently, the tax effect will be as if there is no cessation of the business by the amalgamating companies.

All risks and benefits that exist prior to the merger are transferred and vested in the amalgamated company. Please note that the amalga-mated company must state in writing to the Inland Revenue Authority of Singapore, and within 90 days from the date of amalgamation, that it avails itself of the tax treatment for a qualifying amalgamation.



It may be considered beneficial from a tax perspective to carry out a stock issuance by an intermediate holding company incorporated in Singapore. This may protect the intermediate holding company from capital gains taxation on any proceeds from a future sale, as Singapore generally does not tax capital gains. Furthermore, in having established an intermediate holding company, it would be possible to leverage the company with debt.

Under the group relief scheme, qualifying companies may transfer their current year’s unutilised losses, capital allowances and approved donations to another company in the group, subject to certain conditions. The consolidation of losses of one company with profits from the other would effectively allow for an overall reduced tax charge at the group level.

6 Transaction taxes


Stamp dutyStamp duties are typically borne by the acquiring company and are gen-erally applicable to both acquisitions of stock and certain business assets.

For acquisition of stock, the stamp duty is charged at 0.2 per cent of the sales consideration or the total net asset value of the shares trans-ferred, whichever is higher. The stamp duty on acquisition of certain assets is charged at the graduated ad valorem rate from 1 per cent to 3 per cent



on the consideration or market price of the assets acquired, whichever is higher.

If certain conditions are met, the acquirer may be eligible for a relief of stamp duty. Otherwise, stamp duty relief may also be granted on the acquisition of shares under and as part of the M&A scheme. The maximum stamp duty relief under the latter is capped at S$200,000 for each financial year.

Goods and services taxSimilarly, goods and services tax (GST) is also borne by the acquirer but is applicable to business transfers (ie, asset deals) only. However, GST may not be charged if the transfer qualifies as a transfer of a going concern and is thus treated as an excluded transaction. A transfer of assets could generally be considered as a going concern if the transfer involves assets, employees and open contracts.

GST is not charged on the acquisition of stock as it is exempt from GST.



Carry-forward of losses and capital allowances in an asset dealTypically, in an asset deal, unutilised losses and capital allowances will remain with the seller.

Carry-forward of losses in a share dealIn a share deal, unutilised losses (and approved donations) of a company can be carried forward and be offset against future taxable profits pro-vided that the company can meet the ‘shareholders’ continuity test’. This test requires that there is no substantial change in the company’s ultimate shareholders and their respective shareholdings as at the relevant compari-son dates. A change is considered a ‘substantial change’ if more than 50 per cent of the nominal value of the allotted shares in the company is held by different persons as at the relevant comparison dates (see chart below for details on the relevant dates).

Carry-forward of capital allowances in a share dealGenerally, in order to be able to carry-forward unutilised capital allow-ances of a company the following tests must be passed:• Business continuity test: the company needs to carry on the same trade

or business activities as that for which the allowance arose.• Shareholders’ continuity test: the company needs to have substantially

the same ultimate shareholders as when the allowance arose; in case of a substantial change of ownership, different relevant comparison dates (see below) are to be considered.

Relevant dates for shareholders’ continuity test

Unutilised losses and approved donations

Unutilised capital allowances

Last day of the year in which the losses and/or approved donations were incurred, compared with the first day of the year of assessment in which the losses are to be deducted.

Last day of the year of assessment in which the capital allowances arose, compared with the first day of the year of assessment in which the capital allowances are to be deducted.

Under certain circumstances where a change in ultimate sharehold-ing has taken place, it is possible to appeal to the minister of finance (or to the comptroller of income tax as the person appointed) for a waiver of the shareholders’ continuity test. If the waiver is granted, the company is allowed to carry forward its unutilised losses (and approved donations) and capital allowances, but only for set-off against future taxable profits arising from the same trade or business that gave rise to the losses or allowances.

Further to the above, there is no special rule noted on acquisitions or reorganisations of bankrupt or insolvent companies.

8 Interest relief


When financing a Singapore company with debt, two tax-related issues should be considered: the deductibility of the interest and interest with-holding tax.

Deductibility of interestIn general, interest is deductible if the funds received are employed in the production of income. This generally implies that interest expenses incurred by a trading company will be deductible unless it is used for non-trading investments or interest free loans.

If a company can be regarded as an investment holding company and its only activity is to acquire and hold shares in operating companies, inter-est might not be deductible on loans granted to obtain these investments because expenses incurred before the investment commences to produce income are not deductible.

Furthermore, please note that when a Singapore company is used to acquire the target, interest expenses incurred from loans to fund the acquisition are only deductible against the dividends from the target. As Singapore dividends are exempted under the one-tier system, it would then not be possible to effectively deduct these. It is therefore advisable to rationalise such financing costs at the Singapore level or finance the acqui-sition at a level where a deduction could be claimed.

Singapore does not have thin capitalisation rules, so debt financing appears to be quite flexible. However, Singapore adopts transfer pricing rules and the arm’s-length principle should be adhered to. Interest restric-tions apply to related party loans or credit facilities that are not in compli-ance with this principle.

Debt pushdownDebt pushdown is most efficient when assets are acquired. The non-resi-dent acquirer incorporates a Singapore company and has the latter com-pany acquire the business of the target with a debt from its shareholders. The interest should be deductible, and it is advisable that the loan docu-mentation explicitly mentions the purpose of the borrowings.

Hybrid financingA commonly used hybrid financing method is the use of redeemable pref-erence shares. Such redeemable preference shares are generally treated as a form of equity for tax purposes in Singapore.

Interest withholding taxSingapore levies a 15 per cent withholding tax on interest payments made to non-resident companies. This rate can be reduced under Singapore’s tax treaties. Certain tax incentives are available that exempt companies from withholding tax on certain borrowings. In that case, the loans must enhance the economic and technological development of Singapore. An application should be made to the minister of finance.



It is not unusual for an acquiring company to obtain tax warranties and indemnities from the seller when acquiring assets or stock. The warranties and indemnities are subject to negotiations by the parties.

The warranties and indemnities are typically addressed in the (share) purchase agreement.

Ultimately, any compensation received under the protection scheme shall be exempted from tax if the nature of the payment is established as capital in nature with reference to the relevant facts and circumstances. Otherwise, it shall be brought to tax as normal business income.

VoskampLawyers SINGAPORE



10 Restructuring


Post-acquisition restructuring varies on a case-by-case basis and is often carried out in line with commercial needs or to improve tax efficiency. Factors for consideration include whether the structure is effective for divi-dend repatriation purposes, or for the payment of royalties, interest and management fees, among others. It may also be worthwhile to explore whether all local tax planning opportunities have been considered, for example, an application for group relief, or even the repositioning or col-lapse of a company in the corporate structure.

There should always be an assessment as to whether tax incentives are still applicable in the new structure.

11 Spin-offs


If specific conditions are met, (corporate income) tax-neutral transfers of fixed assets between related parties are possible.

Furthermore, a corporate income tax-neutral spin-off of a Singapore resident subsidiary is possible if the assets disposed are regarded as capi-tal in nature or regarded as offshore (non-Singapore-sourced) income. However, tax neutrality cannot be achieved in the event of a change of ownership of more than 50 per cent, in which case past years’ losses cannot be utilised for carry forward.

A spin-off without triggering transfer taxes might be possible if the particular stamp duty relief applies or the (capped) stamp duty remission under the M&A scheme applies.



The place of residence of a company for tax purposes is typically where its control and management take place. In this regard, a company is

considered a Singapore tax resident if the control and management of its business is exercised in Singapore. The term ‘control and management’ is not defined, but it is not necessarily the locale of the trading activities or physical operations. The determination of such is a question of fact.

As a general rule, a company is resident in Singapore if its directors hold its board meetings in Singapore, exercising the control and manage-ment of the company’s business.

A company may change its place of residence by exercising the con-trol and management of its business outside of Singapore. Whether this will trigger any tax consequences, and whether the migrated company will still be subject to Singapore corporate income tax, depends on whether it receives or accrues Singapore-sourced or deemed Singapore-sourced income as well as what kind of assets the company possesses.

If the company ceases its operations in Singapore, there might be claw-backs, deemed sales of stocks and forfeited capital allowances.



Singapore-resident companies do not have to apply a withholding tax on dividend distributions to their shareholders.

Interest paid by a company resident in Singapore to a non-resident company is typically subject to 15 per cent withholding tax unless the rate is reduced in an applicable tax treaty or exempted. The 15 per cent rate is a final tax and only applies if the interest received by the non-resident is not derived from a business carried on in Singapore and is not attribut-able to a permanent establishment in Singapore. Certain tax incentives are available that exempt companies from withholding tax on certain borrow-ings. In that case, the loans must enhance the economic and technological development of Singapore. An application should be made to the minister of finance.



If a local subsidiary is established, the after tax profits of the business can be extracted by means of a dividend distribution. Dividends paid by a Singapore company are exempted from withholding tax.

Update and trends

Productivity and innovation credit (PIC) and PIC+ schemeAs you may be aware, subject to the conditions of the PIC scheme, companies are able to enjoy tax deductions and capital allowances at 400 per cent of certain qualifying expenditure incurred on• acquisition and leasing of PIC information technology and

automation equipment;• training of employees;• acquisition and in-licensing of intellectual property rights;• registration of patents, trademarks, designs and plant varieties;• research and development activities; and • design projects approved by DesignSingapore Council.

In lieu of the above-mentioned tax deductions and capital allowances, companies can generally elect to convert part of their qualifying expenditure into non-taxable cash payouts, subject to certain conditions.

Pursuant to the 2014 Budget, there are more incentives given to companies who are investing in productivity and innovation. First and foremost, the PIC scheme has been extended for another three years up to YA 2018 (the PIC scheme would lapse in the YA 2015 but for the above-mentioned extension). In connection with the above, a combined qualifying capital expenditure cap of S$1.2 million is now available for YA 2016 to YA 2018 (ie, S$400,000 per YA). Going forward, businesses that incur qualifying expenditure on the above-mentioned qualifying activities up to the financial year ending 31 December 2017 would be able to enjoy the benefits accorded under the PIC scheme, subject to certain conditions.

Secondly, the PIC+ scheme was introduced to provide support to

small and medium enterprises that are making substantial investments to transform their businesses. Instead of the usual S$400,000 qualifying expenditure cap per year per qualifying activity under the PIC scheme, a S$600,000 qualifying expenditure cap per year per qualifying activity has been granted under the new PIC+ scheme. Following the above, a new combined qualifying expenditure cap of S$1.4 million is now available for the YA 2013 to YA 2015 and a new combined qualifying expenditure cap of S$1.8 million is now available for the YAs 2016 to 2018. However, businesses eligible for the PIC+ scheme are sole proprietorships, partnerships and companies carrying on a trade or business and whose revenue does not exceed S$100,000,000 or employment size does not exceed 200 employees. If the business in question is part of a corporate group, the above-mentioned criterion will be applied at the group level.

Waiver of requirement to withhold tax on payments made to branches in SingaporeWith effect from 21 February 2014, as part of Singapore’s efforts to reduce compliance costs for businesses, payers will no longer need to withhold tax on certain payments made to Singapore branches of non-resident companies. These payments include, among others, interests, royalties, payments for know-how and show-how, management fees, rent or other payments for the use of any movable property. Notwithstanding the above, these payments made to branches in Singapore will continue to be assessed to tax in Singapore by way of their annual return filing with the Inland Revenue Authority of Singapore.



Other tax-effective means to extract profits from Singapore would be through interest (through loans) and royalties (through licensing agree-ments) and management fees (through inter-company service level agree-ments), among others. Although withholding tax may apply for payments to non-residents, Singapore has an extensive tax treaty network that may reduce the withholding tax.

The alternative tax extraction methods (interest, royalties and man-agement fees) will be subject to transfer pricing rules and anti-avoidance rules in the event of related party transactions.


15 Disposals


In general, there is no capital gains tax in Singapore. Therefore, gains arising from the disposal of capital investments by way of sales of busi-ness assets or stock in a company are not subject to corporate income tax regardless of the residency of the seller. Thus, it is important that the gain qualifies as ‘capital in nature’ and not as ‘revenue in nature’. Whether the gain qualifies as capital in nature depends on the facts and circumstances of each case. The factors considered are commonly referred to as the badges of trade. They include, among others, motive of the seller, length of period of ownership, frequency of similar transactions, reasons for the disposal and means of financing.

Assuming that both the sale of business assets and stock in the local company would qualify as capital in nature, the disposal will not be taxable in Singapore.

A safe harbour rule was introduced to provide taxpayers with greater certainty upfront regarding non-taxation of gains derived from disposal of equity investments in the period of 1 June 2012 to 31 May 2017 (safe harbour

rule on capital gains). Under the rule, gains derived from the disposal of ordinary shares in a company are not taxable if, immediately prior to the date of share disposal, the selling company had held at least 20 per cent of the ordinary shares in the investee company for a continuous period of at least 24 months.

If the goal is to dispose the entire business activities of the company, in most cases a disposal of the stock in the local company or stock in the foreign company seems most tax-efficient for the seller as it provides mini-mum tax exposure (clawbacks), avoids the liquidation process and if the above mentioned conditions are met, provides certainty on the non-taxa-tion of the capital gain.



If the non-resident company sells shares in the target, the gains will not be taxable in Singapore, assuming that the seller is not a share dealer (trader, venture capitalist, private equity investor, etc), or the shares are not allo-cated to a permanent establishment of the non-resident in Singapore.



As mentioned, gains on disposal of stock or business assets are generally not taxable. However, there may be potential tax adjustments on asset dis-posal in the disposing company.

Barbara Voskamp [email protected] Yvette Gorter-Leeuwerik [email protected] Benny E Chwee [email protected]

137 Market Street03-01 Grace Global RafflesSingapore 048943

Tel: +65 6463 0535Fax: +65 6664 0799www.voskamplawyers.com

Uría Menéndez SPAIN


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 to a purchaser acquir-ing 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


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 applicable to mergers, divisions, transfer of assets and exchanges of shares concerning compa-nies 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 transac-tion 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 up-stream 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.



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

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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 perma-nent establishment may not deduct interest paid to its head office, although it may deduct interest paid to other related party companies (subject to the interest barrier rule limitations, as explained in question 8, 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. This possibility would not be available if the acquisition is carried out directly (absent a Spanish perma-nent establishment). Furthermore, as explained before, if the local acquir-ing company and the target company merge, then a step-up in basis would be possible. Therefore, under this structure and subject to the existence of well-founded business reasons backing up the transaction, some tax advantages similar to those in an asset transaction could be obtained.

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 opt for 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, 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 taxa-tion 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 trans-action. 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 protection

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.



In general terms, for tax periods 2014 and 2015, there is a general limita-tion 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 company’s taxable income prior to the use of net operat-ing losses if the company’s turnover exceeds €20 million. No limitation is imposed on companies with a lower turnover.

As it refers to anti-abuse rules on the acquisition of control over inac-tive (for the prior period of six months) target companies with net operat-ing 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.

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 operating profit (which is closely similar to earnings before interest, taxes, depreciation and amortisation). The first €1 million of interest expenses is always tax deductible. Excessive interest expense can be carried forward 18 years, subject to the same 30 per cent limitation. This ‘interest barrier’ rules replaced the former three to one thin capitalisa-tion 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.

The standard 21 per cent 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 establish-ment located either in Spain or outside the EU. In any other case, withhold-ing 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 target company (and its Spanish subsidiaries).

In such a way, interest expenses on the financing undertaken for the acqui-sition of target may be used to offset the latter’s taxable profits. Please note that in the context of CIT tax groups the interest barrier rule 30 per cent limitation is calculated at group level (and the €1 million interest deduct-ible 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.

As it refers to the tax-neutral total demerger of a company with existing net operating losses, net operating losses must be assigned to the acquiring companies, in proportion to the business that each acquiring company is assuming. On the contrary, on a partial demerger or spin-off, net operating losses remain with the transferring entity.

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 stand-ard rate of 30 per cent 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, as a general rule, sub-ject to 21 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

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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 parent company carries out a business activity directly related to

the business activity carried out by the subsidiary;• the parent company’s corporate purpose is the management and

administration of the subsidiary through the adequate organisation of material and human resources; or

• the parent company proves that it has been incorporated for valid eco-nomic reasons and not to unduly qualify for the dividend exemption.

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 dividends 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 21 per cent Spanish capital gains tax.



The disposal of Spanish stock by non-resident companies will, in principle, be subject to 21 per cent non-resident income tax. The non-resident com-pany 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; or• the selling shareholder 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.

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.

Update and trends

On 6 August 2014, the Spanish government submitted to parliament a draft bill that substantially amended the current CIT Tax Law, as well as the taxation on income earned by non-Spanish resident investors. As the current government controls both houses of parliament, the draft bills are likely to be passed into law. The new regulations will mainly enter into force in those tax periods starting on or after 1 January 2015.

A number of significant amendments to the CIT Law have been included. In particular: • the general CIT rate is reduced from 30 per cent to 28 per cent in

2015 and 25 per cent in 2016;• interest paid on intra-group profit sharing loans will be

characterised for tax purposes as non-deductible dividends; • interest paid to related parties through hybrid instruments will

no longer be tax deductible when the income earned by the non-Spanish resident recipient is not subject to tax in its jurisdiction of residence or is subject to a tax rate of less than 10 per cent;

• for transactions undertaken after 20 June 2014, in addition to the general 30 per cent interest barrier rule, interest paid on debt taken on to acquire shares in a target company will be deductible limited to 30 per cent of the operating profit of the acquiring company (excluding the operating profit of any company merged with or included in the tax group of the acquiring company in the four years following the acquisition of the target company). Excess interest expenses can be carried forward with no time limit, with the same limitations. This additional limitation will not apply if the acquisition is financed with at least 30 per cent equity, and if the debt is amortised by an annual 5 per cent, until it is reduced down to 30 per cent of the price paid for the shares in the target company;

• for tax periods starting on or after 1 January 2015, the use of net

operating losses will be limited to 60 per cent of the tax period’s profits, although the first €1 million of losses will always be available for use. The limitation will not apply to waivers as well as on the tax period of dissolution of the concerned entity, and on the first three years of operations of certain newly incorporated entities;

• the special tax-neutral regime provided for by the Merger Directive will, subject to certain requirements, automatically apply to qualifying mergers, demergers, spin-offs, exchange of shares and special contributions in kind; and

• the anti-abuse rule applicable to the acquisition of inactive companies with net operating losses (see question 7) is significantly strengthened.

As they refer to the taxation of non-Spanish residents, the following amendments are of relevance: • the general rate on dividends, interest and capital gains is reduced

from 21 per cent to 20 per cent in 2015 and 19 per cent in 2016;• the Parent-Subsidiaries Directive’s exemption on dividends,

described in question 13, will also apply to holdings with an acquisition value of €20 million;

• the Parent-Subsidiaries Directive’s anti-abuse rule, described in question 13, is simplified and replaced by the requirement that the parent company must have been incorporated and be operational for valid economic reasons and substantial business motives; and

• distributions of the share premium reserve and similar reserves funded by contributions made by the company shareholders may, in certain circumstances, be taxed as a distribution of retained earnings, subject to dividend withholding tax.



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

UKRAINE Arzinger


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 possibility of its being reduced or eliminated under the applicable double taxation avoid-ance 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.

Share transfers are VAT-neutral in both cross-border and international deals provided such transactions are made for cash consideration. In addi-tion, if the stocks (securities) are transferred this transaction is subject to excise tax, whose rate depends on whether the stocks are listed and sold within or off a stock 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.

It is worth mentioning that acquisition of particular assets such as land plots or real estate objects by a non-resident purchaser to be further used for commercial activity shall be recognised as forming a fixed place of busi-ness (permanent establishment) of such non-resident within the territory of Ukraine (its taxable presence), and the non-resident purchaser must reg-ister with the tax authorities as a taxpayer.

2 Step-up in basis


Ukrainian tax law recognises 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 dif-ference between the fair market 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 legislation allows a kind of step-up when fixed assets are acquired: 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 cases be preferable to be executed by a non-resident purchaser, first of all from the corporate governance and regulatory standpoint.

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 their being reduced or eliminated under the applicable DTT. However, simplified taxation foreseen by the Tax Code of Ukraine for small and medium-sized businesses is impossible for Ukrainian legal entities with 25 per cent or more of their shares owned by a non-resident legal entity.

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 is to be taxed by CPT, whereas a negative difference is to be recognised as its deductible expenses. If the real estate is further sold by a non-resident entity the capital gain recognised 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 cur-rent (or obtained under the acquisition and not offset at the date) tax credit.

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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 taxation the value of shares acquired shall be established equal to the value of shares cancelled in the course of share exchange reorganisation.

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.

Thus cash transactions are more common in Ukraine than issuing shares in the acquirer company to be paid as consideration to the seller.

From the acquirer’s perspective issuing shares to be transferred as consideration means a tax-neutral change in its shareholding structure; at this point the value of shares acquired shall be estimated in the value of shares issued.

From the seller’s perspective, two share transactions (sale and acquisi-tion) are to be considered separately for taxation purposes.

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.

At the same time, transfer of stocks (securities) is subject to excise tax. In accordance with the changes introduced into the Tax Code of Ukraine in 2013, listed securities sold within a stock exchange are to be taxed at a rate of zero per cent, listed securities sold off-exchange at a rate of 0.1 per cent, and unlisted at a rate of 1.5 per cent.

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 to 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 State Pension Fund duty 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 State Pension Fund duty 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, and 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.

However, special rules of taxation are set forth for interest accrued and paid by a taxpayer holding shares 50 per cent or more of which are owned or managed by a non-resident under a loan granted by such non-resident or its associated (affiliated) parties. Respective expenses incurred by the taxpayer are deductible in the reporting period (which is a calendar quarter) only in an amount not exceeding the amount of interest income received by such taxpayer in this reporting period, increased by an amount of 50 per cent of taxable profit of the reporting period (not including the amount of interest income received). The interest expenses not accounted as deductible in the reporting period due to said limitation can be carried forward, in other words, they are subject to appropriate deduction in subse-quent tax periods subject to the same deductibility limitation.

In addition, the amount of interest paid to a non-resident lender is sub-ject 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.

There are no direct thin capitalisation rules preventing pushdown; however, it should be taken into consideration that there is a prohibition on contributing the borrowed funds to the share capital of the target directly (acquire the shares from the target as an issuer).



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

UKRAINE Arzinger


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, with neither withholding at the target level of the entity making such compensation, nor the possibility of attributing the amount paid to deductible expenses.


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; or• tax liabilities fulfilment (debt clearance) before scheduled reorganisa-

tion; or• extension of the tax lien on the property of each entity.

Ukrainian legislation allows 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, transferring the negative value of a taxation object only in case of termination of the transferring entity. In case of spin-off, the transferring entity is not terminated. For the time being, it is unclear how tax authorities will approach the respective law pro-visions in case of reorganisation in the form of spin-off.



Neither regulatory nor tax legislation recognises the migration of a compa-ny’s residence, nor can cross-border mergers 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

transferred to the acquirer by means of a taxable purchase and the respec-tive business is stopped, the entity itself must be liquidated and the rele-vant 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 of Ukraine), this must 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 to pay dividends it shall pay the state budget an advance payment of CPT at a general rate, with the right to decrease the amount of CPT due in subsequent reporting periods. The amount of dividends received by a resident entity from the resident issuer shall not be attributed to its taxable income, whereas the same dividends received from the non-resident issuer are subject to taxation (with some exemptions stated in the Tax Code of Ukraine).

Both dividend and interest payments are recognised by Ukrainian legislation as non-resident income with the source of its origin in Ukraine subject to withholding with no exemptions.

A resident or permanent establishment transferring interest or divi-dends to a non-resident shall withhold from the amount calculated and pay the state budget tax at a rate of 15 per cent. There are no domestic exemptions from this 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, the Netherlands and Cyprus for interest payments (it depends on the DTT); 5 per cent rates are available for dividends. Zero per cent rate for dividends is available under the DTT between Ukraine and the Netherlands (provided that some con-ditions are met). To benefit from a DTT’s reduced or eliminated rates a non-resident shall provide its Ukrainian contractor transferring payments and performing the role of tax agent in relation to withholding tax with a certificate confirming its tax residency and shall be a beneficiary as regard the above payments.



Both dividend and interest payments appear as the most common and direct form of profit extraction in Ukraine. Considering the current absence of thin capitalisation rules in domestic legislation, an essential part of business financing is executed by means of borrowings instead of equity contributions to simplify further extraction.

Payment of royalties is used as an alternative way of fund extraction if the above-mentioned is not available. In common with interest and divi-dends, 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 standpoint: a Ukrainian entity may attribute to its deductible expenses in any one reporting period royalties paid to non-residents in an amount not exceeding 4 per cent of income (earnings) from the sale of goods (services) gained in preceding year. The following royalties are not deductible in whole: • those paid to a non-resident with offshore status or not being the ben-

eficial owner; or• those paid for IP objects first-time registered (protected) by a

Ukrainian resident.

In some circumstances, legal relations of the purchased target and acquirer entity (or the whole global group) are arranged in such a manner that cen-tralised provision of management and other advisory services are per-formed 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.

Arzinger UKRAINE


However, it is worth mentioning that supply of legal, consultancy, information, management or similar services of an advisory nature are defined as supplied in the place of the customer’s incorporation, and therefore subject to Ukrainian VAT to be paid to the state budget by the Ukrainian customer upon supply of the services using the ‘reverse-charge mechanism’. Supply of marketing services is defined as being performed at the place of the performer’s incorporation, and therefore exempt from VAT when rendered by a non-resident.

In addition, such kinds of payment are restrictedly deductible as well: payments to non-residents for consultancy, advertising and market-ing services in an amount not exceeding 4 per cent of income (earnings) from sale of goods (services) gained in preceding year may be attributed to deductible expenses of the taxpayer in a reporting year provided that the supplier of such services does not have offshore status (if those are paid to a non-resident with offshore status the above amounts of payments are not deductible in whole).

Moreover, services agreements and deductibility of allocated expenses are seriously challenged by the tax authorities even if duly con-firmed by the source accounting documents.


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 followed 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 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 has 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 is 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 for non-resident sellers from withholding of capital gains (or reduced rates to be applied) 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 is subject to local taxation (at the local withholding tax rate of 15 per cent) in accordance with the provisions of the DTT.



There are no methods or opportunities for deferring or avoiding tax under Ukrainian legislation; save for the possibility of reducing or eliminating taxation in share deals in accordance with respective DTTs, as described above.

Pavlo Khodakovsky [email protected] Olga Baranova [email protected]

Eurasia Business Centre75 Zhylyanska Street, 5th Floor01032 KievUkraine

Tel: +38 44 390 55 33Fax: +38 44 390 55 40www.arzinger.ua

Update and trends

The introduction of a dramatically new model for administration of VAT is one of the most recent aspects of Ukrainian tax legislation which may impact inbound investment. The new model is expected to become applicable from 1 January 2015; however, the respective legislative norms may experience amendments before their entering into force.

Additionally, a temporary defence duty (applicable until 1 January 2015) has been introduced. This will have certain influence on operational activity in Ukraine, and should also be considered for cashflow purposes.

UNITED KINGDOM Olswang LLP


United KingdomGraham Chase and Jacob GilkesOlswang LLP




The key difference is that an acquirer of shares will indirectly acquire assets complete with an existing tax history and status. The tax position of the tar-get company continues, and in this sense the acquirer inherits the target’s tax position. For example (assuming no exit charges arise):• tax losses continue to be available to the target company to set off

against future profits (subject to the anti-avoidance rules discussed below);

• assets retain their original cost; and• reliefs under the intangible fixed assets regime and under the capi-

tal allowances regime are unaffected by the transfer of the target company.

There is no disregard election regime in the UK. Each target company will have its own tax attributes, which will require consideration by the acquirer. The target company will continue to be liable for any historic tax liabilities. A seller usually assumes liability to the purchaser in respect of unexpected tax liabilities of the target company.

As a general rule, the purchaser will not inherit the tax attributes of the seller on the acquisition of business assets and liabilities. Exceptions to the rule may include: • PAYE practice and procedures;• additional stamp duty land tax (SDLT) in respect of a lease where

uncertain rents are subsequently ascertained;• adjustments under the capital goods scheme for VAT; and • where the acquisition is a transfer of a going concern for VAT and the

purchaser takes over the seller’s VAT registration.

The acquisition of shares in a company will be subject to stamp duty at 0.5 per cent, but no VAT or SDLT will normally arise for the purchaser. By con-trast, an asset acquisition may involve SDLT costs where UK real estate is included, as well as VAT if the transfer is not a transfer of a going concern.

2 Step-up in basis


Where the purchaser acquires business assets, the purchaser’s base cost in the assets will in most cases be the consideration paid for the assets together with incidental costs related to the acquisition. Where capital gains rules apply and the transaction is between connected parties, market value is normally imputed.

Where the business asset includes goodwill, intellectual property or other intangible fixed assets, corporation tax relief follows any accounting amortisation or impairment. Alternatively, a company may elect for a fixed annual tax deduction at the rate of 4 per cent.

Exit charges, and hence a step-up in basis, may arise where:

• the target company acquired goodwill, intellectual property or other intangible fixed assets from another group company (which itself cre-ated, or acquired the relevant asset from an unrelated party, on or after 31 March 2002) within six years prior to the sale of the target company; or

• the target company owns intangible fixed assets acquired or created by another group company prior to 31 March 2002, or other capital assets (such as real estate), which in each case it acquired from another group company within six years prior to the sale of the target company.



As a general rule, a company will be tax-resident in the UK if it is incorpo-rated in the UK or is centrally managed and controlled in the UK. Central management and control is exercised where the highest level of control of a business is found, in other words, where the key board level decisions of the company are taken. This is to be distinguished from the day-to-day implementation of business decisions.

The UK tax resident and non-resident companies are treated differently:• UK resident companies are subject to corporation tax on their world-

wide income profits and gains;• non-UK companies are subject to corporation tax to the extent they are

trading in the UK through a permanent establishment; and• non-UK companies are subject to income tax where a trade is carried

on in the UK in ways other than through a permanent establishment, and in respect of income which has a UK source (such as income from UK land), as well as capital gains tax on gains from high-value residen-tial property (subject to exemptions).

However, there are a number of key exemptions for a UK resident acquisi-tion company:• substantial shareholding exemption (SSE): exemption from corpora-

tion tax on chargeable gains on the disposal of shares in a target com-pany, provided that the acquisition company has owned 10 per cent or more of the shares in the target company for at least a year and trading company or group conditions are met;

• dividend exemption: exemption from corporation tax on the receipt of most dividends, even where that dividend is paid by an offshore com-pany; and

• foreign branch exemption: exemption from corporation tax for the profits of a UK resident company which it realises through a perma-nent establishment (ie, a branch) in another jurisdiction. Exemption is claimed by way of election.

The scope of the UK’s controlled foreign company (CFC) legislation has been reduced in recent years. The purpose of the CFC legislation is to attribute to a UK holding company the profits of subsidiaries established in other jurisdictions where such profits have been artificially diverted from the UK to that subsidiary. The changes have made it easier for UK companies to ensure that profits genuinely generated through overseas subsidiary companies do not fall within the scope of the change, includ-ing profits earned by a subsidiary company that finances a group’s overseas operations.

Olswang LLP UNITED KINGDOM


In practice, the UK tends to be an attractive jurisdiction for acquisi-tions because:• the UK has a low corporation tax rate (20 per cent from April 2015);• the UK has a wide treaty network;• participation exemptions and a narrow CFC regime mean the UK has

moved towards a territorial system of taxation; and• the acquisition company will be entitled to deduct the full amount of

interest payments on loans (subject to restrictions, including transfer pricing) and surrender the losses to a UK target company.

The UK is a less attractive jurisdiction in the context of real estate invest-ment, as any gain on disposal will be subject to UK corporation tax in full, unless the acquisition company enjoys real estate investment trust, pen-sion fund or life office status. In contrast, a non-UK resident company will not normally be subject to UK tax on real estate gains (excepting high value residential property).



A true merger where two companies are combined to form a single com-pany is only possible pursuant to the EU Cross-Border Mergers Directive. This has been implemented into UK law and allows a company from another country in the EEA to ‘absorb’ a UK company (and vice versa). Assets and liabilities are transferred in circumstances where the absorbed company is automatically dissolved without it being liquidated.

In the UK, a takeover will normally be structured as a share acquisi-tion. The acquisition company will acquire the shares in the target com-pany and issue shares, cash or loan notes to the shareholders of the target company.

The use of share consideration avoids (or reduces) the need for the acquirer to fund the acquisition using its cash reserves or obtain acquisi-tion finance. As noted below, there may be tax advantages for the seller to receive shares.



There is no immediate tax benefit to the acquirer issuing shares.However, it will often be advantageous to a seller to receive shares as

consideration. Assuming the relevant conditions are satisfied, the seller will be treated as if there had been no disposal of the shares in the target company for the purposes of tax on capital gain. The consideration shares inherit the base cost of the seller’s shares in the target company. There is therefore no realisation of inherent gains and hence no charge to tax.

6 Transaction taxes


Stamp dutyStamp duty is payable in relation to a document transferring shares. Stamp duty is payable by the purchaser at 0.5 per cent on the consideration (rounded up to the nearest £5 in respect of each stock transfer form). No stamp duty will be payable where the acquisition is structured as a scheme of arrangement as the shares in the target company are cancelled.

Stamp duty will not arise in respect of the acquisition of the shares in a non-UK incorporated company, provided that the stock transfer form is executed outside the UK and the payment of the consideration takes place outside the UK.

Stamp duty will not normally be relevant on the acquisition of business assets.

Stamp duty reserve tax (SDRT)SDRT will become payable by the purchaser where an agreement to trans-fer shares is entered into. The SDRT charge will be cancelled if stamp duty is paid in relation to the transfer.

SDLTWhere business assets include land, SDLT will be payable by the purchaser if the consideration for the land exceeds £150,000 (or £125,000 in the case of residential property). The rate of SDLT depends on consideration pay-able and whether the property is commercial property (rates up to 4 per cent) or residential property (normally rates up to 7 per cent). In certain cir-cumstances designed to prevent avoidance, residential property acquired for more than £500,000 by a company, a partnership which has a corpo-rate member or a collective investment scheme, may attract SDLT at 15 per cent.

VATNo VAT arises on the transfer of shares.

The transfer of business assets may give rise to VAT. It is the seller’s responsibility to pay the VAT to HM Revenue and Customs (HMRC). The contract normally requires the purchaser to pay VAT to the seller in addi-tion to the purchase price. A transfer of real estate will attract VAT if the seller has opted to tax or if the transfer relates to the freehold interest in a building constructed within three years of the transfer. Normally, the sale of business assets will qualify as the transfer of a business as a going con-cern, and so no VAT will arise.



A company may set off trading losses against profits in the same or the pre-vious accounting period. If losses are not used in this way they will be car-ried forward, but can only be used against the profits of the particular trade in which the losses arose. There is no time limit on carry-forward.

There are a number of restrictions to prevent ‘loss buying’. In particu-lar, the ability to use trading losses (including trading losses arising as a result of loan relationship debits) will be restricted if:• within a period of three years, there is both a change in the ownership

of the loss-making company and (either earlier or later in that period, or at the same time) a major change in the nature or conduct of a trade carried on by the loss-making company. The restriction will also apply if, following the acquisition of the loss-making company, the trade of the loss-making company is transferred to another group company and then there is a major change in the nature or conduct of a trade; or

• at any time after the scale of the activities in a trade carried on by the loss-making company has become small or negligible, and before any considerable revival of the trade, there is a change in the ownership of the loss-making company.

Similar restrictions apply to the use of capital losses.Restrictions also apply to the use of non-trading losses where there is a change of ownership and:• there is a significant increase in the company’s capital within three

years after the change of ownership;• there is a major change in the nature or conduct of a business or trade

carried on by the loss-making company to which the losses relate in the three years before or three years after the change of ownership; or

• at any time before the change of ownership the scale of the activi-ties in a trade or business carried on by the loss-making company to which the losses relate has become small or negligible (and there has not been any considerable revival of the trade or business prior to the change of ownership).

Where a company transfers its trade to another company in the same group, the transferee will inherit the tax losses of the transferor unless the transferor is in liquidation. A loss-making company may therefore trans-fer its trade into a newly incorporated group company with a view to this company being sold to a purchaser with the benefit of the losses. However, the losses passing to the transferee may be restricted by reference to any excess of liabilities over assets.



8 Interest relief


Interest payable by a company on a loan to fund an acquisition will nor-mally be deductible for corporation tax. However, there are a number of limitations which need to be considered, as outlined below.

Transfer pricing and thin capitalisationThe UK does not have a thin capitalisation regime as such. Instead, where a loan is between connected persons, the transfer pricing regime will limit interest relief to the amount of interest which would be payable had the loan been between unconnected parties acting on arm’s-length terms. The gearing of the borrower company will be taken into account when estab-lishing whether a third party would be prepared to make a loan to the bor-rower at all, as well as the interest rate which would apply.

Worldwide debt capThe deductibility of interest and finance costs may be limited by reference to the external interest and other finance costs of the overall group.

Unallowable purpose Interest will not be deductible if the loan has an unallowable purpose. This will be the case if the purposes for which the company was party to the loan include a purpose which is not within the business or other commercial purposes of the company or the main purpose, or one of the main purposes, for entering into the loan was the avoidance of tax.

Avoidance involving tax arbitrage rulesThese rules limit the deductibility of interest in certain circumstances where the recipient will not be taxed on the receipt of the interest.

Interest treated as a distributionWhere interest is treated as a distribution it will not be deductible. This will the case where, broadly, the interest exceeds a reasonable commercial return for the use of the principal, and in certain instances where the loan is convertible into shares or securities or the interest rate depends upon the performance of the borrower.

Withholding tax at 20 per cent will generally arise on interest pay-ments by a UK company unless one of the following applies:• the loan does not give rise to annual interest, very broadly the loan is

for less than one year and the parties do not intend that it will continue for more than one year;

• the interest is payable to a UK company or a UK bank or building society;

• a double tax treaty applies, or the EU Interest and Royalties Directive is applicable, subject to appropriate procedural formalities; and

• interest is payable in respect of a security which is listed on a recog-nised stock exchange (a quoted Eurobond).

Withholding tax obligations do not apply where the return on debt takes the form of a discount.

Debt pushdown can be achieved to some extent for tax purposes by using group relief to surrender losses arising in the acquisition company as a result of the interest payments, which losses are used by the target com-pany to set against profits.



Where the shares in a target company are acquired, the seller will nor-mally give a tax covenant in favour of the purchaser. Depending upon the

transaction and underlying transaction economies, this typically covers tax liabilities of the target company: • up to completion; • up to the last accounts date; or• up to a locked box date.

It provides the purchaser with a debt claim against the seller for pre-com-pletion taxes, giving ‘pound for pound’ compensation for liabilities.

The seller will normally also give tax warranties. A breach of a war-ranty will give the purchaser a right to contractual damages. A purchaser will have a duty to mitigate its loss following a breach of warranty. Also, warranties are subject to disclosure.

It is standard practice to include both a tax covenant and tax warran-ties in a sale and purchase agreement. The tax warranties are also an effec-tive method of eliciting information about the target company (provided in the form of disclosures against the tax warranties).

On a business asset acquisition, the seller will normally only give lim-ited tax warranties given that the purchaser will not generally inherit the tax liabilities of the seller.

Payments to the purchaser under the tax covenant or in respect of a breach of a tax warranty will not normally attract UK tax. Payments usually go to adjust the purchase price. If payments are instead made to the target company itself then the payment may be taxable. Withholding tax will not generally arise on tax covenant or warranty payments, with the possible exception of a payment of interest. It is common for a purchaser to insist upon a gross up obligation to ensure it is fully indemnified in the event any tax arises upon receipt.


10 Restructuring


The need for post-acquisition restructuring will depend on the relevant facts and circumstances, including the tax attributes of the acquirer and target, as well as finance considerations. Post acquisition restructuring might include separation on an ‘opco/propco’ basis, or the transfer of assets or businesses so as to merge operations in a single company. Real estate assets might be transferred upon acquisition so as to establish own-ership going forwards in new offshore companies. Tax and commercial considerations will both play a part.

11 Spin-offs


Procedures that are available include the direct distribution of assets, the indirect distribution of assets, typically to a newly incorporated com-pany owned by the shareholders (possibly as part of a liquidation) in consideration of an issue of shares, as well as court-approved schemes of arrangement.

The method used will depend on the circumstances of the company and its shareholders, including, in particular, whether the company has distributable reserves, whether the shareholders are companies or indi-viduals, whether they are UK or offshore resident and whether the shares in the company or the assets of the business are standing at a gain.

Operating losses may sometimes be preserved where another com-pany under common control effectively steps into the shoes of the target company.

Stamp duty will be payable if the spin-off involves the transfer of shares. Share cancellation as part of a scheme of arrangement might be beneficial in this respect. SDLT may arise where the spin-off involves a real estate transfer. Limitations on group relief, as well as clawback provisions where a group relationship is terminated in certain circumstances, make spin-offs on an SDLT-free basis difficult.

Olswang LLP UNITED KINGDOM




A company incorporated in the UK will be resident in the UK for tax pur-poses, even if the central management and control is located outside the UK. Accordingly, it is only possible to migrate a UK incorporated com-pany where there is suitable double tax treaty with the relevant jurisdic-tion, namely a treaty that contains a residence tiebreaker clause which will determine that the company is resident only in that jurisdiction once effec-tive management and control is established in that jurisdiction.

A non-UK incorporated company will be a tax resident in the UK if it is centrally managed and controlled in the UK. Such a company can be migrated by moving the central management and control of the company to another jurisdiction.

The UK has an exit charge regime which deems a company to dispose of and immediately reacquire assets for their market value when it leaves the UK. This will give rise to corporation tax on any gains on the assets unless a relief (such as SSE) is available.

Where the company migrates to an EU or EEA country, the company might enter into an ‘exit charge payment plan’ with HMRC to pay the cor-poration tax in instalments or defer it for 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 does not impose a withholding tax on dividends.Interest payments by a UK company which constitute annual interest

are subject to withholding tax at 20 per cent. There are a number of exemp-tions, for which see question 8.



The main methods of extracting profits from a UK company are dividends and interest payments.

Dividends are not deductible by the company declaring the dividend for the purposes of corporation tax.

Interest payments on loans made to a company by its shareholders are deductible for the company, but subject to the restrictions already outlined.


15 Disposals


Disposals of shares tend to be favoured. A share sale ensures that the busi-ness is carried out without disruption; for example, contracts with custom-ers and suppliers need not be assigned.

The most tax efficient way to structure a transaction depends on the specific circumstances of the particular transaction including, in particu-lar, the availability of SSE.



Any gain on the disposal of shares in the local company by a non-resident will generally be outside the scope of UK corporation tax.

Certain anti-avoidance rules may apply to a disposal of shares in a company which holds real estate. Where land is acquired or redeveloped with the sole or main objective of realising a gain from real estate, a charge to UK income tax may sometimes apply to any gain on the disposal of the shares in the real estate owning company.

Special rules also apply to disposals of shares in a company which holds exploration or exploitation rights in relation to oil and gas situated in the UK or the continental shelf.



To the extent that the consideration for the shares in the local company consists of qualifying corporate bonds in the purchaser (broadly, securities which are expressed in sterling and redeemable in sterling), the gain on the disposal of the shares in the local company will be deferred until the qualifying corporate bonds are redeemed or sold.

To the extent that the consideration for the shares in the local com-pany consists of shares or securities which do not constitute qualifying cor-porate bonds in the purchaser, the seller will be treated as if there had been no disposal of the relevant shares in the target company, and the consid-eration shares or securities will inherit the base cost of the seller’s shares. The gain on the shares in the local company will therefore only be triggered when the consideration shares or loan notes are sold or (in the case of secu-rities) redeemed (assuming the proceeds of the sale or redemption exceed

Update and trends

Extension of capital gains tax to non-residents disposing of residential propertyNon-residents are generally outside the scope of UK tax in relation to capital gains, with the exception of disposals of residential property worth more than £2 million (£1 million from April 2015) by non-resident companies, partnerships with one or more corporate partners and unit trusts (subject to a broad set of exceptions). The UK government has announced its intention to introduce capital gains tax for non-residents on the disposal of residential property of any value.

Base erosion and profit shiftingThe Organization for Economic Cooperation and Development project on Base Erosion and Profit Shifting (BEPS) has resulted in the BEPS Action Plan (Action Plan), which will be implemented in a number of phases concluding in December 2015. In contrast with other jurisdictions such as Canada and Australia which have already unilaterally introduced BEPS compliance measures ahead of the final adoption of the Action Plan, the UK government has confirmed it will only introduce measures which are in line with long established UK international tax principles and existing international obligations. The UK government’s paper implies a ‘ring-fence’ protection for the UK

banking sector due to a perceived threat of potentially unduly punitive BEPS compliance rules aimed at the banking sector.

HMRC powers to collect disputed taxHMRC have recently been given the power to issue ‘follower’ and ‘accelerated payment’ notices. The follower notice invites the taxpayer to take corrective action regarding disputed tax. In effect, disputed tax should be paid. Taxpayers who do not pay the tax will be subject to penalties – if they lose their appeal.

An accelerated payment notice requires payment of the dispute tax. It may be issued in circumstances where the arrangements are: • the subject of a follower notice; • the taxpayer has used tax arrangements required to be disclosed

under the Disclosure of Tax Avoidance Schemes; or• the taxpayer has used tax arrangements which the GAAR Advisory

Panel has decided are not a reasonable course of action.

This is a significant departure from the previous position that a taxpayer would not have to pay the disputed tax until the case had been heard by a court. There are limited appeal rights to the issue of notices.



the inherited base cost). This no-disposal treatment will not be available where the transaction is carried out for tax avoidance reasons. An advance clearance procedure is available from HMRC.

Where the local company disposes of certain types of business assets which are used for the purposes of a trade, and invests the proceeds within three years in qualifying assets, the gain on the assets can be ‘rolled over’ into the replacement assets. This rollover treatment will also apply where the local company acquired other assets for the purposes of an existing trade in the 12 months preceding the disposal. Broadly, the relief will only be available where the assets sold and acquired are land, fixed plant and

machinery or (in certain circumstances) goodwill. The effect of the rollo-ver depends upon whether the replacement assets are depreciating assets. Where the replacement assets are not depreciating assets, the base cost of the replacement assets is reduced by the gain on the old assets. Where the replacement assets are depreciating assets, the gain on the old assets is deferred until, broadly, the earlier of the disposal of the replacement assets and 10 years following the acquisition of the replacement assets

A similar regime applies to disposals and acquisitions of intangible fixed assets.

Graham Chase [email protected] Jacob Gilkes [email protected]

90 High HolbornLondon WC1V 6XXUnited Kingdom

Tel: +44 20 7067 3000Fax: +44 20 7067 3999www.olswang.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’ 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.

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 amortisation deductions depends upon how much of the purchase price is

UNITED STATES KPMG LLP


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 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 subsidiary company, the non-US shareholder can control the timing of the imposition of US with-holding tax on the repatriation of its US subsidiaries 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 United States’ 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 ownership 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 corpora-tion owned by one or more 5 per cent shareholders over the lowest owner-ship 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 continuity of business enter-prise (COBE) rule within two years of the ownership change, then the sec-tion 382 limitation becomes zero. The loss corporation satisfies the COBE rule if either there is a continued use of the loss corporation’s historic business or a significant portion of the loss corporation’s historic business 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 carryovers or carrybacks incurred by a group member in a year when it was not a mem-ber 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 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 corporations can vary greatly and may be documented in great detail as part of, eg, 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 liabili-ties, and substantial annual compliance costs. Specifically, if the non-US subsidiaries are left underneath the 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

UNITED STATES KPMG LLP


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.

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 USRPIs, any built-in gain in such assets may qualify for non-recognition treatment. Third, non-recognition treatment may be achieved where the assets dis-tributed by the corporation consist of stock representing at least 80 per cent of the vote and value of another US corporation, 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.

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 US 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

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 corpora-tion if the fair market value of its USRPIs represents 50 per cent or more of the fair market value of its assets.



As a general rule, a non-US company’s gain from the disposal of stock in a US corporation is not subject to US FIT. As discussed in question 15, an exception 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.

Update and trends

Recently, a number of US corporations have shown interest in mergers and acquisitions inversion transactions that involve a US multinational merging with a foreign multinational company. As mentioned above, in an inversion transaction, former owners of the US target collectively receive a significant ownership interest in the foreign multinational. President Obama, as well as various other high-ranking legislators, has introduced legislative proposals that are intended to address inversion transactions (in addition to section 7874).

KPMG LLPAlden Sonander [email protected] Christian J Athanasoulas [email protected] Jason R Connery [email protected] Jennifer Blasdel-Marinescu [email protected]

345 Park AvenueNew York NY 10154 United States

Tel: +1 212 758 9700Fax: +1 212 758 9819www.kpmg.com

VENEZUELA Hoet Pelaez Castillo & Duque


VenezuelaJesús Sol Gil, Elina Pou Ruan and Nathalie RodríguezHoet 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 withholding tax shall constitute a tax advance for the seller, which will be credited in its favour at the end of the fiscal period.

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 market value of the assets to be acquired. VAT is payable by the purchaser directly 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. 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 common because Venezuelan commercial laws require a lengthier 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 that the resulting company will assume 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 through the acquisition of business assets (including trans-fer benefits 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 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. Again, there would be no withholding of income tax.

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 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.

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There are no limitations affecting them after changes in control or other circumstances. However, there are temporary limitations for income tax, such as: • uncompensated operative net losses may be carried over only up to the

three fiscal periods following the period where 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, up to four years, without prejudice of the right to request restitution thereof before they elapse; and

• other types of deferred tax asset may be carried over only up to the three subsequent fiscal periods.

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 in advance.

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 interests derived from borrowings may occur, as long as such bor-rowings are invested in the production of income.

The Income Tax Law transfer-pricing rules 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 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 the debts with non-related parties, does not exceed the taxpayer’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 stock

purchase agreement. In principle, the payments made under a warranty or indemnities seek to repair damages; therefore, they are not taxable since they do not represent an increase of financial resources or net enrichment for the recipient.


10 Restructuring


The most common post-acquisition restructuring carried out in Venezuela is as follows:• labour restructuring – when the acquirer has its own staff, it is common

that some divisions of the target company disappear. In these cases, downsizing is necessary in order to carry on business. Sometimes, employer substitution may also be necessary when the controlling company may also be receiving personnel;

• by-laws amendments – when a company has been acquired, by-laws are usually 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.

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 distributed in

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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.

Non-residents are taxed at a proportional rate of 34 per cent of their gross income.



Usually, the provisions on dividends, technical assistance, royalties and other mechanisms established in an applicable tax treaty to avoid dou-ble 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 applicable

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 regime 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, 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

Jesús Sol Gil [email protected] Elina Pou Ruan [email protected] Nathalie Rodríguez [email protected]

Av Venezuela, Edificio AtriumPiso 3, Urb El RosalCaracas 1060Venezuela

Tel: +58 212 201 8611Fax: +58 212 263 7744www.hpcd.com

Update and trends

Recently, some sources have spread information about a possible amendment of the income tax law, but there is no information about the topics that it may contain or the changes that it may implement.

Another important issue to consider from a financial standpoint is the exchange control regime that is currently in force, due to the fact that it has a significant impact on inbound investments.

According to the Venezuelan exchange control regime In force, there is a multiple exchange system where there are three official exchange rates for different transactions: • the exchange rate set forth in Exchange Decision No. 14, applicable

to sales of currency executed in accordance with authorisations formerly granted by the Commission for the Administration of Currency Exchange (CADIVI) and now granted by the National Center for International Trade (CENCOEX) for operations regulated by the corresponding decisions;

• the exchange rate set forth in Exchange Decision No. 25, which establishes the application of the Supplementary Foreign Currency Administration System (SICAD I) exchange rate for the operations

listed in such exchange decision, which includes international investments; and

• the exchange rate resulting from the Alternative System for Foreign Currency Administration (SICAD II) as regulated in Exchange Decision No. 27, applicable to the sale and purchase of foreign currency by natural and legal persons.

As of July 2014, the three official exchange rates applied by these mechanisms are:• CADIVI/CENCOEX: 6.30 Venezuelan bolivars per US$1;• SICAD I: 10 Venezuelan bolivars per US$1; and• SICAD II: 49.10 Venezuelan bolivars per US$1.

There are rumours that foreign exchange authorities are analysing the possibility of executing a new devaluation and setting forth a unique exchange rate that may be fixed between 25–30 Venezuelan bolivars per US$1, but that is unofficial information that has not been confirmed by the relevant authorities.

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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 still 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.

NOTES


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