November 2016 international Client wts journal Information # 3.2016

M&A Insights – 2016 Tax Guide to International Stock Acquisitions Table of Contents Editorial Stefan Hölzemann | Partner / Head of M&A Tax | WTS Germany Francis J. Helverson | Managing Partner | WTS US

4 AUSTRIA Dear Reader, 5 BELGIUM We are pleased to present our 2013 Guide on such debt may not only reduce the 6 BRAZIL to International Stock Acquisitions. 2012 tax base of the target, it may also help saw a significant increase in M&A activ- ensure that sufficient cash flow is avail- 7 CHINA ity and 2013 promises to continue the able to the parent or other related-par- 8 CZECH REPUBLIC trend. Both large and small deals increas- ty lender. This can be very important ingly involve global target companies when a transaction is funded through 9 ESTONIA and multi-jurisdictional business issues. external debt financing. The ability to 10 FINLAND Indeed, much of the uptick in deal activity achieve a debt push-down or deduct is attributed to aggressive cross-border interest expense may be restricted or 11 FRANCE expansion. otherwise limited in many countries. 12 GERMANY → Step-Up. When a company is acquired, Stefan Hölzemann Francis J. Helverson Effective international tax structuring a step-up to fair market value in the 13 HONG KONG increasingly plays a key role in determin- tax basis of the target company’s assets 14 HUNGARY ing whether targeted results are achieved. can sometimes be achieved. A step-up Avoiding the tax pitfalls and capturing may offer the benefit of increased tax 15 INDIA the opportunities can be driving factors depreciation or amortization deduc- 16 ITALY in gauging the success of a deal. Many tions. Although an asset-basis step up countries facing fiscal crisis issues have in a stock acquisition is typically not the 17 LATVIA used tax reform as a tool to help address norm, in some countries certain step-up 18 LITHUANIA budget deficits. Some rules are intended benefits may be achieved. to encourage investment by reducing tax → Transaction Costs. External costs in- 19 LUXEMBOURG burdens, whereas others may have the op- curred in pursuing an acquisition, such 20 MEXICO posite effect. Navigating the tax implica- as investment banking and professional tions of a cross-border transaction can be advisory fees, can be substantial. The 21 NETHERLANDS challenging due to continually evolving ability to deduct these costs and timing 22 NORWAY rules. of such deductions should be consid- ered. 23 PHILIPPINES The Guide provides a summary of certain → Exit Scenario. The tax consequences of 24 POLAND key issues that a foreign acquirer may a disposition of target company shares consider when purchasing the shares of should also be considered. In some 25 RUSSIA a target company. The Guide does not cases, the sale of shares by a foreign 26 SINGAPORE address all issues associated with a stock shareholder may be entitled to pref- acquisition. The issues covered are de- erential tax treatment, or may be free 27 SOUTH AFRICA scribed below. of tax altogether. An understanding of 28 SPAIN such rules is helpful not only for nego- → Change of Ownership / Impact on tiating with the selling shareholder of 29 SWEDEN Tax Attributes. Many countries have a target company, but also for purposes 30 SWITZERLAND rules that restrict the utilization of tax of considering a future disposition by loss carryforwards or other attributes the acquirer. 31 TURKEY following a change in ownership. An 32 UNITED KINGDOM understanding of the impact of these In addition to the five categories above, rules is critical in projecting the future we also highlight certain other issues that 33 USA after-tax cash flow of an affected target are particular to a country’s tax regime. company. → Debt Push-Down. An acquirer may We hope that you find our Guide useful wish to capitalize a target company and we thank our authors for their valu- with intercompany debt. The deduct- able contributions. Feel free to reach out ibility of the interest paid or accrued to us or any of our local-country authors.

international wts journal | # 3 | November 2016 2 3 international wts journal | # 3 | November 2016 AUSTRIA Corporate Share Deals by Non-Residents in Austria Corporate Share Deals by Non-Residents in Belgium BELGIUM WTS TAX SERVICE STEUER­ TIBERGHIEN BERATUNGSGESELLSCHAFT MBH

Change of ownership rules Step-up for target company Change of ownership rules We have recently noticed the Belgian tax authorities actively challenging leveraged In general, pre-existing business tax The domestic holding company must book As a general rule, tax losses and excess transactions. Several cases are pending losses can be utilized by an Austrian target the acquired shares of the Austrian target investment deduction can be carried before the courts. In one case, the court of company following a change of owner- at cost. Goodwill may not be amortized in forward indefinitely. There are howev- first instance confirmed that the general ship. However, where there has been a a share deal. er some specific time-limitation rules anti-abuse provision may apply. considerable change in ownership (i.e., applicable to the carry forward of notional more than 75 percent) connected with a Transaction costs interest deductions. Step-up for target company substantial change in the organizational and economic structures of the Austrian Costs associated with concluding the sales A specific anti-abuse rule shall apply The shares of an acquired Belgian target target, the losses may be disallowed. & purchase contracts (e.g., attorney and upon the change of the (direct or indirect) are reported at acquisition cost in the The organizational structure is deemed notary fees, commission fees, broker’s control over a company. Tax losses carried books of the domestic holding company. to have substantially changed if there fees, etc.) are considered part of the forward, investment deductions and unap- No step-up is recorded at the level of the has been a change in the majority of the acquisition cost. Pre-acquisition costs (e.g., plied notional interest deductions will be target company if the transaction is a share managing board members. The economic valuation, due diligence, advisory, etc) are forfeited unless it can be demonstrated deal. structure is deemed to have substantially generally immediately tax-deductible. that the change of control is not mainly changed if there is a substantive quan- tax-driven. Transaction costs titative or qualitative expansion of the Exit scenario: taxation of capital gains existing business or a new business unit is on the sale of shares by a non-resident Debt push-down Costs associated with the transaction (e.g. started which is significantly larger (i.e., by due diligence, attorney and broker’s fees, 75 percent) than the old activity. Capital gains from the sale of a one per- Belgian tax law does not provide rules for etc.) are tax deductible expenses if the cent or greater ownership interest in an fiscal consolidation (no “tax group” for general conditions for the deduction of Debt push-down Austrian target by a non-resident company corporate income tax purposes). We notice business expenses are met. are subject to corporate income tax. There several structures (equity stripping of the A non-resident acquirer can establish a is no withholding tax on capital gains. If target followed by refinancing, merger Exit scenario: taxation of capital gains domestic holding company to acquire the a double tax treaty applies, however, the transactions etc.) are utilized to push on the sale of shares by a non-resident shares of an Austrian target. Interest on the country of the seller’s residence typically acquisition debt to the level of operating acquisition debt is generally deductible, has the exclusive right to tax capital gains equity. As a general rule, capital gains on shares provided that the Austrian target is not ac- (unless the Austrian target is a real-estate are subject to a special tax of 0.412 quired from a related party. If the domes- company and the double tax treaty has As a general rule, interest charges are tax percent if (i) the shares represent capital tic holding company acquires more than a so-called “real estate clause”). In such deductible if they meet the conditions to in a company subject to an income tax 50 percent of the capital and voting rights cases, no capital gains taxation occurs in qualify as deductible business expenses. regime (taxation condition) and (ii) the of the Austrian target, the companies can Austria, even if the ownership interest is For example, it must be demonstrated that shares have been held for an uninter- form a tax group under Austrian tax law. one percent or greater. these expenses are made in view of main- rupted period of at least one year. No A tax group requires that the domestic taining or increasing taxable income and minimum shareholding is required. Where holding company holds a financial interest Other special taxes or issues to be that they relate to the company’s business the shares are sold before the minimum of more than 50 percent in the capital and ­considered activities. A 5/1 debt/equity ratio applies one year holding period is lapsed, capital voting rights of the Austrian target. The for intercompany debt (or bank debt guar- gains (if any) will be taxed at a separate interest expenses of the domestic holding If the Austrian target owns real estate, the anteed by related companies). rate of 25.75 percent. Where the taxation company can then be offset against the transaction (unification of at least 95 per- condition is not met (e.g. the target is not Austrian target’s operating profits. The cent of the shares in a company holding A new general anti-abuse rule was enact- subject to corporate income tax), capital Contact Person tax group must exist for at least three full real estate) may be subject to Austrian real ed in 2012. We have noticed several cases gains (if any) will be taxed at 33.99 per- business years or a recapture rule will estate transfer tax. The real estate transfer where debt push-down structures are cent (irrespective of whether the holding Nico Demeyere Contact Person apply. An alternative structure for a debt tax rate in Austria is 0.5 percent of the considered tax avoidance structures that period condition is met). [email protected] push-down is to merge the Austrian target asset value, depending on the location of can be disregarded by the tax authorities. +32 2 77340-00 Kerstin Weber with and into the domestic holding com- the real estate. A specific anti-abuse provision (based on Other special taxes or issues to be [email protected] pany. Generally, transferred assets may the EU Merger directive) applies where ­considered Havenlaan 86C / 419 +43 1 24266 17 be carried over at their book value only if debt push-down is achieved by using a tax 1000 Brussels Austria retains the right to tax them after exempt merger transaction. Said merger Belgium does not impose a stamp duty or Belgium Am Modenapark 10 the merger. A business purpose other than transaction may be a taxed transaction specific tax on share transactions. www.tiberghien.com A 1030 Wien tax avoidance must exist and the trans- (triggering taxable dividend distribution Austria action may require the approval of the and taxation of latent capital gains and www.wts.at Austrian tax authorities. tax exempt reserves) if the transaction is mainly tax-driven.

international wts journal | # 3 | November 2016 4 5 international wts journal | # 3 | November 2016 BRAZIL Corporate Share Deals by Non-Residents in Brazil Corporate Share Deals by Non-Residents in China CHINA MACHADO ASSOCIADOS WTS CHINA CO., LTD

Change of ownership rules deductible at the level of the Brazilian Change of ownership rules acquisition costs of shares. However the holding company provided they are neces- costs associated with the conclusion of The mere change of ownership in a Brazil- sary, effective and usual to the taxpayer’s For certain industries in China, foreign the share deal (valuation, due diligence, ian company does not prevent the offset- activities. investment is prohibited or restricted to advisory, and other fees) are immediately ting of its tax losses. However, such offset- enter into and the ownership of the target tax-deductible for the domestic holding ting is not allowed where the change in Exit scenario: taxation of capital gains company cannot be changed. company. control of the Brazilian company coincides on the sale of shares by a non-resident with a change in its business activities. In general, pre-existing business tax losses Exit scenario: taxation of capital gains Any capital gain realized by (individual or can be utilized by a Chinese target com- on the sale of shares by a non-resident Debt push-down corporate) non-residents from the sale of pany following a change of ownership. an equity stake in a Brazilian company is During a share transfer, the tax position In general, capital gains realized by a Debt push-down may be implemented subject to the same tax rules applicable of the acquired Chinese target company non-resident company on the sale of the by means of a merger of the acquisition to Brazilian individuals. Disputes exist as would not change and the pre-existing shares of a Chinese target will be subject vehicle and the target. Other possibilities to whether the calculation of the capital losses would remain in the target com­ to withholding tax at a rate of 20 percent to allow for debt push-down may be gain realized by non-residents should be pany. (currently reduced to 10 percent). Under analyzed on a case-by-case basis. There computed in foreign currency or in BRL. an applicable double tax treaty, a lower are no rules on the non-tax deductibility of Debt push-down withholding tax rate may apply. In cases of interest expenses recorded by the target Currently, a withholding tax rate of 15 special tax treatment (where several pre- after debt push-down. However, the tax percent (or 25 percent if the non-resident A debt push-down in an inbound share conditions are satisfied), no capital gains authorities may question the tax deduc- is located in a tax haven) applies. As of 1 deal is generally not feasible in China. should be recognized and, consequently, tion of said expenses where they are not January 2017, capital gains realized by Nevertheless, a non-resident acquirer can no withholding taxes should apply. necessary, effective and usual. Further, Brazilian individuals are subject to pro- establish a domestic holding company financial expenses incurred with foreign gressive rates ranging from 15 percent (for to acquire the shares of a Chinese target. A transfer of an overseas company holding related parties or parties domiciled in capital gains not exceeding BRL 5 million After the acquisition, the holding company the equity interest in a Chinese subsidi- a tax haven or subject to privileged tax – approx. € 1.25 million1) to 22.5 percent and the Chinese target can be merged so ary company may be subject to Chinese regimes, are subject to transfer pricing and (for capital gains exceeding BRL 30 million that the interest on the acquisition debt withholding tax, if the arrangement is thin capitalization rules. – approx. € 7.5 million). Controversies may may be deducted from the total profits of considered as an abusive structure without arise on the application of such progres- the merged entities. reasonable commercial purpose. In this Step-up for target company sive rates to the capital gains realized by respect, it requires both the non-resident non-residents. However, the deductibility of the interest seller and buyer of the offshore indirect The acquisition cost of an equity stake in on the acquisition debt is still subject to transfer to make a self-assessment on a Brazilian target by a Brazilian holding Other special taxes or issues to be con- foreign exchange control limitations and a whether the transaction should be subject company must be split into: (i) proportion- sidered debt/equity ratio. to Chinese withholding tax and to file the al net equity of the target company; (ii) the tax accordingly. surplus or deficit arising from the differ- Income received from the sale of an equity Step-up for target company ence between the fair value of the net as- stake recorded as a current asset (less costs Other special taxes or issues to be sets and item (i); and (iii) goodwill, which associated with the acquisition of said A domestic holding company will general- ­considered corresponds to the remaining balance stake) are mandatorily subject to 4.65 per- ly book the acquired shares of the Chinese between items (i) and (ii), or gain from a cent Social Contribution on Revenues (PIS/ target at the purchase price. The value of Currently, a transfer of shares is not subject Contact Persons bargain purchase, which results from the COFINS). Foreign exchange transactions on the equity investment cannot be depre- to Chinese turnover tax. Each party to positive difference between the fair value the inflow or outflow of funds may be sub- ciated/amortized. The Chinese target a share transfer agreement must pay a Martin Ng of the net assets and the acquisition cost. ject to Tax on Financial Transactions (IOF). cannot increase its book value of assets stamp duty of 0.05 percent on the total [email protected] The amounts paid corresponding to the and shares to the fair market value for tax contract amount. If a domestic holding +86 21 5047 8665 surplus or deficit of net assets and/ or If a transfer of shares occurs by death or purpose. company is formed, there may be an addi- Janny Song goodwill shall only be tax deductible/ donation, Donation and Inheritance Tax tional 0.05 percent stamp duty levied on [email protected] taxable (and the bargain purchase amount (ITCMD) is levied on the fair market value Transaction costs the holding company’s registered capital +86 10 6590 6338 Contact Person shall only be taxable) in the following cas- or the value of the relevant donation or value. es: (i) sale, disposal, or liquidation of the inheritance. Applicable rates vary from In the case of a cash payment, the pur- Unit 031,29F,1000Lujiazui Ring Road Luis Rogerio Farinelli relevant equity stake (the premium is de- state to state, and the maximum rate is 8 chase price will be the acquisition cost Furthermore, in a share deal the Chinese Pudong New Area +55 11381 94855 ducted as cost of the relevant investment); percent. In the State of São Paulo, ITCMD is of the shares. In the case of a non-cash target company’s retained earnings cannot 200120 Shanghai [email protected] and (ii) merger of the Brazilian investor currently levied at a rate of 4 percent. payment, the market value of the assets, be deducted in computing the non-resi- China into the target company, or vice-versa. Pursuant to Brazilian tax law, transfer pric- as well as the related taxes, will be the dent seller’s capital gain. www.wts.cn Av. Brigadeiro Faria Lima 1656 - 11º andar ing rules apply to transactions involving Sao Paulo Transaction costs equity stakes with related parties, related 01451-918 or unrelated parties domiciled in tax ha- Brazil Transaction costs (i.e. attorneys’ fees, vens or non-residents subject to privileged www.machadoassociados.com.br/en valuation expenses, broker’s fees) are tax tax regimes.

international wts journal | # 3 | November 2016 6 1 Exchange rate of € 1 = BRL 4. 7 international wts journal | # 3 | November 2016 CZECH REPUBLIC Corporate Share Deals by Non-Residents in Czech Republic Corporate Share Deals by Non-Residents in Estonia ESTONIA WTS ALFERY S.R.O. SORAINEN

Change of ownership rules Transaction costs Change of Ownership rules Transaction Costs

In general, the pre-existing business tax Costs associated with the conclusion of Corporate tax is levied at the moment External transaction costs incurred in losses of a Czech target company remain the stock purchase agreement (attorney’s profits are distributed, and not at the connection with an acquisition (e.g. notary available to an acquirer in a share deal. fees, notary, commissions, broker’s fees, moment profits are realized. The accu- fees, fees for professional advice, due However, where there is a considerable etc.) are considered part of the acquisition mulated deferred tax liability on undis- diligence etc.) are tax deductible. change in ownership (i.e., generally > 25 cost. Pre-acquisition costs (e.g., valuation, tributed profits in the company’s equity is percent) along with a substantial change due diligence, advisory, etc.) are deduct- transferred upon a change of ownership. Exit Scenario: taxation of capital gains in the business activities of the Czech ible only if there is taxable income directly Capital contributions that can be distribut- on the sale of shares by a non-resident target, the losses may be disallowed. related to such costs. ed tax-free are transferred upon a change The Czech target’s business structure is of ownership, but only if said contributions Capital gains (if any) realized by a non-res- deemed to have substantially changed Exit scenario: taxation of capital gains are declared to so transfer upon a change ident upon the sale of shares in a resident if the post-acquisition income-deriving on the sale of shares by a non-resident of ownership. Due to the aforementioned company are generally not taxable in activities are significantly larger (i.e., by 20 corporate tax system, tax loss carry for- Estonia. Exemptions apply to real estate percent) than the old activities. Moreover, Under Czech tax law, capital gains from wards to be transferred do not exist. companies (i.e. companies the assets of certain post-acquisition tax loss deduction the sale of the shares in a Czech target by which are composed of more than 50 limitations may apply. a non-resident shareholder are subject to Debt Push-Down percent of real estate). corporate income tax. There is a 10 percent Debt push-down tax holdback from the purchase price Debt push-down into an Estonian target Other special taxes or issues to be of the shares if the acquirer resides in a company is possible under certain condi- ­considered A non-resident can establish a domestic non EU/EAA country that does not have a tions. In particular, economic substance Estonia does not impose a stamp duty on Contact Person acquisition holding company to acquire double tax treaty with the Czech Republic. and reasons must exist and be evidenced the transfer of shares. the shares of a Czech Target. Interest The tax provision can be offset against the to the tax authorities upon request. Paolo Burlando on the acquisition debt is generally not corporate or income tax on capital gains. [email protected] tax-deductible. There is no group taxa- However, if a double tax treaty applies, Step-up for Target Company +372 6 400 900 tion in the Czech Republic. A commonly the country in which the seller is resident used method for pushing down debt is to typically has the exclusive right to tax the Shares acquired are booked at acquisition Pärnu mnt 15 merge the Czech target with the domestic capital gains, so that no taxation occurs in cost. A “step-up” can be obtained if the 10141 Tallinn holding company, in which case the inter- the Czech Republic, with the exception of fair market value is higher than the initial Estonia est expenses can generally be deducted. Germany and certain other jurisdictions. acquisition cost. www.sorainen.com An upstream or downstream merger will On the other hand, capital gains on the not cause any hidden gain taxation in the sale of shares by a company resident in the Czech Republic. However, a downstream EU are tax-exempt in the Czech Republic if merger may trigger a risk of negative eq- the parent company holds more than 10 uity with respect to the merged company, percent of the shares of the Czech subsid- which may have a substantial tax impact iary for a period of 12 months prior to the under the thin capitalization rules and acquisition. This does not apply to partner- the interest limitation rules. Generally, ships or limited partnerships. transferred assets may be carried over at the value determined by a court-appoint- Other special taxes or issues to be ed evaluator. Tax depreciation is generally ­considered allowed only to the extent of the previous tax residual value of the assets. There is no real estate transfer tax levied upon a sale of shares, unless the real Contact Person Step-up for target company estate was contributed to the share capital of a company and the share deal occurs Jana Alfery The domestic holding company must book within five years after such contribution. It [email protected] the shares of an acquired Czech target is possible to avoid the real estate transfer +420 221 111 777 at cost. Goodwill may not be amortized tax if the share deal occurs within five in a share deal. Goodwill amortization years after the contribution, provided Václavské nám. 40 is generally available only in an asset that the previous shareholder retains at 110 00 Praha 1 acquisition, in which case the annual cost least one percent of the shares for the Czech Republic is tax-deductible and amortized over a remainder of the five-year holding period www.alferypartner.com period of 180 months (15 years). (so-called time test).

international wts journal | # 3 | November 2016 8 9 international wts journal | # 3 | November 2016 FINLAND Corporate Share Deals by Non-Residents in Finland Corporate Share Deals by Non-Residents in France FRANCE CASTRÉN & SNELLMAN WTS SELARL ATTORNEYS LTD.

Change of ownership rules 1) Interest expenses of the company do Change of ownership rules the consolidated group, and that new en- not exceed its interest income by more tity joins the consolidated group, a portion In general, tax losses are carried forward than € 500 k. In general, pre-existing business tax losses of the interest paid by the consolidated tax and set off against income from the same 2) The company is taxed in accordance can be utilized by a French company fol- group may not be deductible for nine years. source in the subsequent ten tax years. with the Finnish Income Tax Act (e.g. lowing a change of ownership. However, The right to carry forward tax losses may be real estate companies). the losses may be disallowed in several Lastly, all companies with a net yearly forfeited due to direct or indirect change of 3) The company is e.g. a bank, an insur- cases including: a change in the actual busi- interest expense that is greater than or ownership, unless exemption is granted by ance company or a pension company. ness activity or corporate purpose; an elec- equal to € 3 million must add back 25 the Tax Administration. A Finnish company’s 4) The so-called “safe haven rule”: where tion is made for an alternate tax treatment; percent of the interest expense to their right to carry forward tax losses is forfeit- the company’s equity ratio (equity di- and in certain entity conversions, material taxable income. ed if more than 50 percent of the shares vided by total assets) equals or exceeds divestments, and some other situations. in the company have changed hands for the equity ratio of an adapted group Step-up for target company reasons other than inheritance or bequest balance sheet. Debt push-down during the year in which a loss is recorded In general, companies may freely reeva- or thereafter (direct ownership change). If Step-up for target company A debt push-down is generally permit- lu- ate their fixed assets. Any capital gain a majority share transfer has taken place in ted under French tax law. In the case of generated by the reevaluation is generally a company which owns at least 20 percent There are no structures available under third-party acquisition debt, interest is taxable income. of the shares in the loss-making company, Finnish tax law whereby an acquirer may generally deductible if the debt instrument such shares in the loss-making company are obtain a step-up in basis of the shares in has a valid business purpose and was con- Transaction costs deemed to have been transferred (indirect the acquired Finnish target. tracted by the acquirer in the acquirer’s own ownership change). The change of owner- interest. However, where the acquiring Transaction costs are generally deduct- ship rules do not apply to shares quoted on Transaction costs company has no autonomy to manage the ible from the calculation of capital gains/ a stock exchange. The Tax Administration acquired shares constitut- ing a controlling losses. Pre-acquisition costs are generally may, upon request by the company, grant As a main rule, transaction costs (e.g. advi- interest and does not have the ability to considered operating expenses. exemptions to the forfeiture of tax losses sory expenses) relating to the acquisition of participate in the deci- sion process, the due to ownership change, provided that shares are non-tax deductible as accrued, financial expenses attrib- utable to the Exit scenario: taxation of capital gains the losses are not deemed as the object of but should be added to the acquisition cost acquisition are generally not deductible. on the sale of shares by a non-resident the sale, and that the losses are necessary of the shares. However, transaction costs This restriction does not apply to controlling for the company’s activities. relating to financing and structuring of the interests below € 1 million, when interest Non-Residents are not subject to French acquisition should be tax deductible and is paid by an unrelated third-party, or when income tax on gain from the sale of shares. Debt push-down the timing of the deductions should follow the company group’s debt-to-equity ratio is However, and subject to an applicable the accounting treatment. greater than or equal to that of the acquirer. double tax treaty, capital gains on the sale Debt push-down into a Finnish target of the shares of a company headquartered company is generally possible, and the cor- Exit scenario: taxation of capital gains The deductibility of interest to related per- in France and subject to corporate income responding interest expense is generally on the sale of shares by a non-resident sons is subject to several limitations. tax, by a company domiciled abroad is tax- deductible for tax purposes, provided that First, the maximum rate of deductible able in France when the seller holds more the parties utilize an arm’s-length interest Provided that the shares are held by a interest is a specific rate published by the than 25 percent of the financial rights in rate. However, Finland applies certain non-resident corporate entity, and that the tax authorities every quarter or, if higher, the company at any given time during the restrictions on the deductibility of inter- shares are not attributable to a permanent the market rate. five year period preceding the transfer. est expenses between affiliated parties. establishment in Finland, capital gains on Capital gains are generally taxable at a Interest expenses are fully deductible up the sale of shares should not be subject to Second, the deduction is allowed only if rate of 45 or 75 percent when the share- to the amount of interest income. Out of Finnish taxation. the lending company is, for the pending holder is a resident of a non-cooperative the amount exceeding interest income, the fiscal year, subject to a minimum taxation state or territory. maximum deductible amount corresponds Other special taxes or issues to be on the interest, equal to one quarter of the to 25 percent of the company’s profit tax- ­considered French tax. Other special taxes or issues to be able in accordance with the Finnish Busi- ­considered ness Tax Act (incl. e.g. group contributions), Finland levies a transfer tax of 1.6 percent Third, the deductibility of interest may be Contact Person plus interest expenses and depreciations or 2 percent on certain share transfers. No limited if the buyer is under-capitalized The transfer of shares in French companies Contact Person deducted in taxation. All interest expenses Finnish withholding tax is generally levied according to one of the following three ra- is subject to stamp duty. The tax rate de- Sari Laaksonen related to third party loans are howev- on interest payments to non-residents. tios: the debt ratio; the interest coverage pends on the company’s form. The transfer Dr. Christoph Seseke +358 20 7765-418 er fully deductible. Non-tax deductible Out of dividends paid to non-residents, the ratio; and the related company’s interests of shares in non-listed companies (such as +33 142 2705-38 [email protected] interest expenses may be deducted in the payer is required to withhold tax at 20 per- served ratio. S.A., S.C.A. or S.A.S.) is subject to stamp duty [email protected] following years within the maximum limits cent (corporate shareholder) or 30 percent at a flat rate of 0.1 percent. The tax rate is 3 PO Box 233 (Eteläesplanadi 14) for deductibility, without any time limit. (individual), unless EU/EEA rules and/or a Fourth, when a domestic entity within a percent for other companies (like S.A.R.L.), 57 avenue de Villiers FI-00131 Helsinki The above restrictions do not apply, i.e. double tax treaty provides for an exemp- French consolidated group acquires shares and 5 percent for real estate companies. No 75017 Paris Finland interest expenses are fully tax deductible, tion or a lower rate or unless the income is in an entity that is controlled by sharehold- stamp duty is applicable in case of a dispos- France www.castren.fi in the following situations: tax-exempt for other reasons. ers who also control directly or indirectly al within a tax group or a group. www.wtsf.fr

international wts journal | # 3 | November 2016 10 11 international wts journal | # 3 | November 2016 GERMANY Corporate Share Deals by Non-Residents in Germany Corporate Share Deals by Non-Residents in Hong Kong HONG KONG WTS STEUERBERATUNGS­ WTS CONSULTING (HONG KONG) GESELLSCHAFT MBH LIMITED

Change of ownership rules assets may be possible in an upstream Change of ownership rules Transaction costs merger. However, this would create a In general, tax losses (incl. tax losses car- corresponding gain in the target. No other In general, pre-existing business tax losses As a general deduction rule, any expenses ried forward) of a German target company structures or elections are available for a of a Hong Kong target company can be (other than capital expenditure) which are proportionally forfeited if, within a step-up. carried forward indefinitely for set-off are incurred in the production of the five-year period, more than 25 percent of against the assessable profits earned in company’s Hong Kong assessable profits the target’s shares are directly or indirectly Transaction costs subsequent years. Tax losses are normally are deductible. Hence, transaction costs transferred to a new sole shareholder or a allowed to be carried forward following incurred by a domestic holding company group of shareholders with aligned inter- Costs associated with the transaction (e.g. a change of ownership unless the sole or are deductible if the Hong Kong target est. If more than 50 percent of the shares due diligence, attorney, and broker’s fees, dominant purpose of the change in share- investment is held for trading purposes are transferred within a five-year period, etc.) are considered part of the acquisition holding was for the utilization of those and any subsequent gain resulted from tax losses may be disallowed entirely. A costs if the principal decision to effect the losses to obtain a tax benefit. the disposal of the target investment is built-in gains exception may apply, where- acquisition was made at the time that such taxable. by a tax loss is permitted up to the amount costs were incurred. Only costs incurred in Debt push-down of the built-in gains to the extent that such advance of such decision (e.g., market sur- On the other hand, if the Hong Kong target gains are taxable in Germany. Further, an vey, feasibility study) are tax-deductible. A debt push-down structure may be investment is held for long term invest- intra-group exception may apply, accord- From the seller’s perspective, transaction possible by borrowing to replace equity ment purposes, the relevant transaction ing to which tax losses are not forfeited costs that are directly related to the sale funding with debt funding. For example, costs would be considered as capital in if transferor and transferee are both 100 must be subtracted from the consideration. interest incurred on funds borrowed for nature and not deductible. percent direct/indirect subsidiaries of the the payment of dividends may be al- same shareholder; this also applies if the Exit scenario: taxation of capital gains lowed for deduction where the equity is Exit scenario: taxation of capital gains group’s top holding entity (as the case on the sale of shares by a non-resident employed as capital or working capital in on the sale of shares by a non-resident may be a corporation, individual or part- a business carried on for the purpose of nership) is involved in the share transfer 60 percent of capital gains from the sale earning assessable profits. There is no capital gains tax in Hong Kong. as transferor or transferee. In any event, of 1 percent or more of the shares in a Ger- Profits derived from the disposal of shares however, the general German minimum man target by a non-resident are subject Step-up for target company which are held for long term investment taxation rules also apply post-acquisition. to German income tax. If the non-resident purposes are generally considered as cap- is a corporate entity, however, 95 percent The domestic holding company would ital in nature and not taxable under Hong Debt push-down of any capital gains are generally exempt generally book the acquisition of a Hong Kong profits tax. from corporate income tax. Germany does Kong target company at cost (i.e. the ac- In order to push down debt on an acquisi- not impose a withholding tax on capital tual purchase price). No special structures Other special taxes or issues to be tion, a domestic German holding company gains. If a double tax treaty applies, typi- are available to obtain a step-up in the ­considered is often utilized as acquisition vehicle to cally the seller’s country of residence has basis of the shares of the Hong Kong target Contact Person offset related interest against the German the exclusive right to tax the capital gains company. Any goodwill is not deductible Stamp duty is levied on the transfer of target’s profits. However, this requires the (unless the German target is a real-estate for profits tax purposes. shares in Hong Kong, which is calculated Connie Lee domestic holding company and the target company). In this case the transaction at 0.2 percent (i.e. 0.1 percent payable [email protected] to form a consolidated tax group. For this would not be subject to German tax at both on the buy note and the sold note) +852 2380 2311 purpose, both companies must execute a all, even in case of a 1 percent or more of the consideration or the market value, profit and loss transfer agreement with a shareholding. whichever is higher. Stamp duty relief is Unit 1911, 19/F The Centre minimum duration of five calendar years. available for transfer of shares in Hong 99 Queen’s Road Central Alternatively, the domestic holding com- Other special taxes or issues to be Kong between associated corporate bod- Hong Kong pany and the target may merge, either considered ies under specified conditions. www.wts.com.hk upstream or downstream (both forms are possible in a tax-neutral manner). In any Germany does not impose a stamp duty. debt push-down scenario, however, the The transfer of shares is exempt from Contact Person parties must also consider the general re- German VAT unless the seller opts for it. strictions of the German interest limitation However, If the German target owns real Stefan Hölzemann rules. estate, the transaction may be subject to [email protected] German real estate transfer tax (RETT). +49 89 286 46 1200 Step-up for target company German RETT rates generally range from 3.5 to 6.5 percent, depending on the Thomas-Wimmer Ring 1 – 3 The shares of an acquired German target location. The tax base for RETT is a spe- D 80539 Munich are reported at the acquisition cost in the cific value usually lower than the market Germany books of the domestic holding company. value, i.e. the purchase price in case of an www.wts.de A step-up in basis of the acquired target’s asset deal.

international wts journal | # 3 | November 2016 12 13 international wts journal | # 3 | November 2016 HUNGARY Corporate Share Deals by Non-Residents in Hungary Corporate Share Deals by Non-Residents in India INDIA WTS KLIENT ADÓTANÁCSADÓ KFT. DHRUVA ADVISORS LLP

Change of ownership rules if the purchase price exceeds the fair mar- Change of ownership rules on the floor of the stock exchange after ket value of the target’s assets. Goodwill is payment of securities transaction tax (STT), If the majority of the shares of a Hungarian still allowed to be created in asset deals. In case of change in ownership of a are exempt from income tax. In the event target company are directly or indirect- Goodwill must be revalued each year, and non-publicly-traded Indian target compa- such listed shares have been held for less ly acquired by an unrelated company, can be amortized if its value decreases. The ny, existing business losses are lost unless than 12 months and STT has been paid on pre-existing corporate income tax losses amortized goodwill expense is generally 51 percent of the shares are beneficially the sale, profits on such sale will attract can be carried forward by the target if not deductible for tax purposes (however, owned by shareholders who owned the capital gains tax at the rate of 15 percent the target does not substantially change 10 percent of the goodwill is tax deduct- company on the last day of the year(s) (excluding any surcharge and cess). the nature of its operations (in terms of ible, if the taxpayer declares in its corporate during which the loss occurred. However, services, products, markets, etc.) and income tax return that the goodwill was this limitation will not apply to ownership If the shares are not listed, the minimum generates revenue from such operations created in accordance with general busi- changes of an Indian target that is a sub- period of holding for qualifying as a long for at least two consecutive tax years. The ness and legal rules). sidiary of a foreign company on account of term capital asset is 24 months. In case of two-year limitation may be disregard- amalgamation /demerger of the foreign a non-resident, if shares are sold after a ed in certain cases. Loss carry-forwards Transaction costs company subject to prescribed continuity period of 24 months from the date they assumed in the course of restructuring or of ownership conditions. were acquired, the gains are taxed at acquisitions can only be used in each tax Costs associated with the acquisition of a 10 percent. No benefit of indexation or year up to the proportion of the tax year’s Hungarian target (e.g., attorney, valua- Debt push-down exchange rate fluctuation is allowed while sales revenue or revenue from the contin- tion, due diligence, advisory expenses, computing the taxable profits. In any other ued activity relative to the average sales etc.) are generally tax-deductible by the Typically, interest on debt is deductible case, gains are taxed as normal income revenue or revenue of the predecessor in domestic holding company. only if the debt is taken for business at the applicable rate of tax, generally the three years preceding the restructuring purposes. No deduction is available for 40 percent (excluding any surcharge and / acquisition. Exit scenario: taxation of capital gains expenses incurred in earning exempt cess). on the sale of shares by a non-resident income. Dividends received from an Indian Debt push-down company is exempt under Indian law (a Other special taxes or issues to be Under Hungarian tax law, capital gains Dividend Distribution Tax is payable by the ­considered Interest on acquisition debt is generally arising from the sale of a domestic target company declaring dividends) and deduct- tax-deductible. For non-bank financing, (other than a company owning real ibility of interest on borrowings for share Indirect transfer: Indian tax laws pro- the 3:1 debt to equity ratio and the arm’s property) by a nonresident company is not acquisition is debatable. vide that a share or interest in a foreign length requirements must be met. In order subject to withholding tax. In the case of a company or entity will be deemed to be to offset a holding company’s interest Hungarian real estate company, where the Step-up for target company situated in India, if the share or interest expense (and realized tax losses) against fair market value of the assets of the com- derives its value, directly or indirectly, the target’s operating profits, the holding pany exceeds 75 percent (computed on In a share acquisition, the cost base of assets substantially from assets located in India. company and the target may merge. The either a stand-alone or consolidated basis) of the company does not change. Any pre- A share or interest is deemed to derive its Hungarian tax authority reviews transac- of the total assets, a withholding tax of 10 mium paid by the buyer for acquisition of value substantially from assets located tions based on the general substance over percent (up to a capital gain of HUF 500 the shares is not incorporated in the value in India, if the value of Indian assets is 50 form and anti abuse rules i.e. mergers million) and 19 percent (on the amount of the block of assets of the company whose percent or more of the value of all the have to be supported with real economic exceeding HUF 500 million), respectively, shares are acquired. The premium is avail- assets owned by the foreign company or or commercial reasons, which the taxpay- may apply in the absence of a favorable able to the buyer as a cost of acquisition of entity. Rules have been prescribed for the er must prove. double tax treaty. the shares and is deductible only at the time valuation to be adopted for valuing Indian of transfer of the shares by the buyer. and foreign assets. Transfer of shares of a Step-up for target company Other special taxes or issues to be con- foreign company or entity whose shares sidered Transaction costs are deemed to be situated in India will be In the case of an upstream merger, the taxable in India. Certain exceptions have target may revalue its assets at fair market Where at least 75 percent of the shares Costs associated with the acquisition of been provided under the law, primarily to value thereby improving its equity position. of a domestic real estate company (i.e., a the shares of an Indian target company exclude transactions where the sharehold- Contact Person Upon revaluation, the positive difference company whose main activities include are added to the purchase price. Such costs er does not have a significant stake in the between the tax book value of the assets e.g. construction, renting or operating real include brokerage, stamp duty, among foreign entity. Rakesh Dharawat Contact Person and their market values is taxable. How- estate sales) are transferred, a transfer others. In the case of a share deal, the [email protected] ever, the companies may opt for a merger tax may be imposed on the nonresident seller can generally deduct all expenses Stamp duty: Share transfer attracts a +919820154684 Tamás Gyányi under the Merger Directive (i.e., a so-called acquirer. The transfer tax rate is 4 percent relating to the transaction from the consid- stamp duty at the rate of 0.25 percent of +36 188 73736 “preferential merger”). In such case, the and is imposed on the fair market value eration received. the deal value. The responsibility to pay 1101 & 1102, One Indiabulls Centre, Tower 2B [email protected] taxation of gain may be deferred over the of the property (up to HUF 1 billion and 2 stamp duty, though commercially negoti- 841 Senapati Bapat Marg, Elphinstone Rd useful life of the acquired assets. In the percent above but not more than HUF 200 Exit scenario: taxation of capital gains ated, usually lies with the buyer. However, Mumbai 400013 Stefánia út 101-103 case of a downstream merger, revaluation million per property). Sales between re- on the sale of shares by a non-resident stamp duty does not apply if the shares are India 1143 Budapest would only be possible for the holding lated companies are exempt from transfer held in dematerialized form. www.dhruvaadvisors.com Hungary company. As of 2016, the holding company tax. In most cases, transfer taxes may be Gains from sale of listed shares, held for www.klient.hu cannot account for goodwill in a share deal, eliminated by proper planning. a period exceeding 12 months and sold

international wts journal | # 3 | November 2016 14 15 international wts journal | # 3 | November 2016 ITALY Corporate Share Deals by Non-Residents in Italy Corporate Share Deals by Non-Residents in Latvia LATVIA WTS R&A STUDIO TRIBUTARIO SORAINEN ASSOCIATO

Change of ownership rules Transaction costs Change of ownership rules Merger surpluses or losses are irrelevant for corporate income tax purposes. Thus, In general, pre-existing business tax losses From the perspective of the acquiring com- In general, the pre-existing business tax no step-up in the value of the target com- may be utilized by an Italian company pany, costs that are directly related to the losses of a Latvian target company remain pany’s assets is ordinarily available in the following a change of ownership so long acquisition of the target company’s shares available after acquisition in a share deal. case of a merger. In special cases step up as the losses do not exceed 80 percent of are generally capitalized in the value of in the tax value of assets can be achieved taxable income for the fiscal year during the acquired shares. From the seller’s However, where there is a considerable by liquidation of the target company, how- which they are utilized. No limitation perspective, if the participation exemp- change in direct and indirect ownership ever, a gain from liquidation (if any) at the applies to losses incurred during the first tion regime applies, transaction costs that (i.e., generally > 50 percent) along with a level of the holding company is taxable. three years of a new business. Pre-existing are directly related to the sale must be substantial change in the business activ- business tax losses are generally denied if subtracted from the consideration. Only ities of the Latvian target, the losses may Transaction costs a majority of voting shares is transferred five percent of expenses that are specif- be disallowed. and the main business activity carried out ically inherent to the sale would thus be Costs associated with the conclusion of in the years when the losses were incurred deductible. Tax losses are not disallowed where there the stock purchase agreement (attorney’s is modified (either in the two years pre- is no change in the nature of the princi- fees, notary, commissions, broker’s fees, ceding or following the transfer of shares). Exit scenario: taxation of capital gains pal business activity (as carried on by the etc.) are considered part of the acquisition However, the losses are generally allowed on the sale of shares by a non-resident company during the two tax years imme- cost. If the company has incurred some if the target company did not have less diately preceding the change of control) pre-acquisition expenses (such as expen- than 10 employees in the two years pre- Under most double tax treaties, no taxa- for at least 5 tax years after the change of ditures relating to due diligence, evalua- ceding the transfer and revenue from the tion would occur in Italy in the case of the control. tion and advisory services) but eventually main business activity and employment sale by a treaty country resident of the decides not to complete the acquisition, costs in the year of the transfer were not shares of an Italian resident company. In all Debt push-down such costs should immediately be de- lower than 40 percent of the average other cases, Italy would tax gains arising ductible. However, there is a risk that this amount over the two preceding years. Tax from the sale of shares to Italian resident A non-resident can establish a domestic position may be challenged by the tax au- losses may also be (disallowed or) limited entities. Some exceptions may apply, pro- acquisition holding company to acquire thorities, which would require the holding in the event of a merger, under certain vided that the transferred share is lower the shares of a Latvian target. Interest on company to defend its position. conditions (e.g., regarding the equity of than below certain thresholds (between 2 the acquisition debt is generally non-tax the merging companies, reduction of reve- percent and 25 percent), for listed shares deductible. There is no group taxation Exit scenario: taxation of capital gains nue and employment costs). and other shares by sellers resident in in Latvia. A commonly used method for on the sale of shares by a non-resident States with full exchange of information. pushing down debt is to merge the Latvian Debt push-down target with the domestic holding compa- Capital gains arising from the sale of Other special taxes or issues to be ny, in which case the interest expenses can shares in a Latvian target by a non-resident If the share deal is funded by debt, it is ­considered generally be deducted. company are subject to the Latvian with- possible (subject to anti-abuse scrutiny) holding tax only if more than 50 percent to deduct interest on such acquisition VAT does not apply to the transfer of An upstream or downstream merger of the assets of a Latvian target consist of debt from the target’s profits if the debt shares. Unlike the acquisition of a going normally will not cause any hidden gain immovable property located in Latvia. Oth- is owned by an Italian company that is concern, which triggers substantial regis- taxation in Latvia. However, a downstream erwise the capital gains are not taxable in either merged with the target or joins the tration duties, a fixed registration duty of € merger may trigger a risk of negative eq- Latvia. The domestic withholding tax rate target in making an election for a fiscal 200 applies to the transfer of shares. uity with respect to the merged company, for a sale of shares in immovable property Contact Persons unit regime. which may have a substantial tax impact companies is 2 percent. However, it may Since March 1, 2013 a “financial transaction under the thin capitalization rules and be reduced to zero pursuant to certain tax Contact Person Paolo Burlando Step-up for target company tax” applies to the net daily balance result- the interest limitation rules. Generally, treaties. Income from a sale of shares at [email protected] ing from transactions involving the transfer transferred assets may be carried over at the level of a Latvian holding company is Aija Lasmane, senior associate Giovanni Rolle Merger surpluses and merger deficits between unrelated parties of property the value determined by an independent not taxable. [email protected] [email protected] are irrelevant for corporate income tax rights on a variety of financial instruments, evaluator. Tax depreciation is generally +371 67 365 000 02 36751145 purposes. Thus, no step-up in the value including shares (but not participations allowed only to the extent of the previous Other special taxes or issues to be of the target company assets is ordinarily in limited liability companies) issued by tax residual value of the assets. ­considered Kr.Valdemara str.21 Piazza Sant’Angelo, 1 available in the case of a merger. A taxable Italian resident companies with a capital- LV-1010 Riga 20121 – Milan basis step–up can however be requested ization exceeding € 500 million, regardless Step-up for target company There is no real estate transfer tax levied Latvia Italy against the payment of a substitute tax at of the residence of the transacting parties. upon a sale of shares. www.sorainen.com www.taxworks.it a marginal rate up to 16 percent. Unless the transaction takes place on a The domestic holding company must book regulated market (which would lead to a the shares of an acquired Latvian target at reduced rate of 0.1 percent), the generally cost. Goodwill may not be amortized in a applicable rate would be 0.2 percent. share deal.

international wts journal | # 3 | November 2016 16 17 international wts journal | # 3 | November 2016 LITHUANIA Corporate Share Deals by Non-Residents in Lithuania Corporate Share Deals by Non-Residents in Luxembourg LUXEMBOURG SORAINEN TIBERGHIEN LUXEMBOURG S.À R.L.

Change of ownership rules Transaction costs Change of ownership rules Exit scenario: taxation of capital gains on the sale of shares by a non-resident In general, pre-existing business tax Costs relating to a share deal, such as legal In general, the pre-existing business tax losses, as well as losses of a Lithuanian advisory, notary, registration fees etc., losses of a Luxembourg target company According to most of the double tax target company can be utilized (carried are treated as part of the acquisition cost may be disallowed in a share deal. This is treaties concluded by Luxembourg, capital forward) following a change of ownership and are thus not immediately deductible. likely to happen if the tax authorities con- gains generated by a sale of shares by a of the target’s shares, subject to several Pre-acquisition expenses are deductible in clude from the circumstances that the share non-resident are taxable in the country limitations. First, the losses can be carried the tax period when incurred. deal was achieved for the sole purpose of of residence of the non-resident sell- forward by the target for an unlimited tax avoidance. Such circumstances general- er-shareholder. However, some treaties period of time, provided that the activities Exit scenario: taxation of capital gains ly include the cessation of the activity that provide that capital gains remain taxable that generated the loss are continued. on the sale of shares by a non-resident generated the losses, a lack of assets with in the country where the target compa- Furthermore, a reduction of the taxable real economic value, or a share deal occur- ny is established (e.g., India, China). In profit by accumulated tax losses is limited There is no withholding tax on capital ring contemporaneously with a change in the absence of an applicable double tax to 70 percent of the taxable profit for the gains realized upon the sale of shares of the target’s primary business activity. treaty, only capital gains realized upon current taxable year (except for small a Lithuanian target company, provided the disposal of qualifying interests (i.e., enterprises that are subject to the reduced that the shares are not attributable to a Debt push-down greater than 10 percent) remain taxable in corporate income tax rate of 5 percent). Lithuanian permanent establishment of Luxembourg if the shares are sold within the seller. A non-resident can utilize a domestic 6 months of the acquisition, resulting in Losses from the trade in securities can only holding company to acquire the shares taxation of the gain at the headline rate of be offset against the profit from the trade Other special taxes or issues to be of a Luxembourg target company. The 29.22 percent for companies located in the in securities and the carry-forward of such considered debt in the domestic holding company municipality of Luxembourg. losses is limited to five years. may be pushed down until the maximum Since 1 January 2015, agreements for sale debt-to-equity ratio (85:15) is reached. Other special taxes or issues to be Debt push-down and purchase of shares in private limited considered liability companies (UAB) must be certified If the ownership interest in the Luxem- A non-Lithuanian acquirer may establish a by a notary public if (i) 25 percent or more bourg target is at least 95 percent, and a. Recapture rules: Expenses directly domestic acquisition holding company to of the total shares in the company are provided that certain other conditions are connected to dividends and liquidation acquire the shares of a Lithuanian target sold, or (ii) the shares are sold at a price met, a tax consolidation may be possible, proceeds received in a given year are company. Interest on the acquisition debt higher than € 14,500. An exemption from allowing losses realized by the holding generally tax-deductible only to the extent is generally tax deductible. However, ac- the requirement of notarial certification company to be offset against the Luxem- that such expenses exceed the dividends cording to the recent courts’ practice debt applies if personal securities accounts of bourg target’s profits. received in a given year. Thus, interest on push-down through the merger of the tar- shareholders are managed according to acquisition debt for a qualifying ownership get company and the holding company is procedures laid down in legal acts regu- In the event of the sale of shares by the interest (greater than 10 percent or greater only possible under certain conditions. In lating the securities market. The notary holding company after a 1-year period, cap- than € 1.2 million, held for at least 1 year), particular, debt push-down is only possi- fee ranges between 0.4 percent and 0.5 ital gains generated from the disposition or a write down of the ownership interest, ble if it can be proven that the merger and percent of the shares’ price, and is capped would generally be tax-exempt but may is generally disallowed up to the amount take-over of the debt results in economic at € 5,800. still remain taxable up to the amount of the of the dividends received in a given year. benefit for the target that continues the previously deducted interest expense. However, the amount of interest expense activities after the merger. No withholding tax is levied in Lithuania in excess of the dividends received in a giv- on interest payments to an EEA-resident In the case of a merger between the hold- en year will generally remain deductible. Contact Person Step-up for target company beneficiary and countries with which ing company and its subsidiary, the sale of Special recapture rules apply to income Lithuania has concluded effective double the shares of the resulting company would generated from the disposal of a qualifying Saule Dagilyte The acquired shares are booked at acqui- tax treaties. Outbound dividends paid to not trigger the recapture mechanism. percentage ownership interest (greater +370 52 639-803 sition cost. Goodwill created as a result Lithuanian and foreign recipients holding than 10 percent or € 6 million, held for at [email protected] of the acquisition of shares is subject to at least 10 percent of the share capital for Step-up for target company least 1 year). Capital gains realized on such depreciation for corporate income tax no less than 12 months are exempt from dispositions are generally tax-exempt, but Contact Person Jogailos 4 purposes only after the subsequent reor- withholding tax in Lithuania. The holding company generally cannot remain taxable up to the sum of the ex- 01116 Vilnius ganisation of the entities in the form of a book the acquired shares of a Luxembourg penses directly connected to the participa- Jean-Luc Dascotte Lithuania merger or a transfer of assets. The depreci- target at a value exceeding its acquisition tion that were deducted in a prior tax year [email protected] www.sorainen.com ation period of such goodwill is 15 years. cost. or during the current year. Jonathan Norman [email protected] Transaction costs b. Registration duties: Sales of fiscally +352 27 47 51 11 transparent entities that own real estate Transaction costs incurred in connection are subject to a registration duty at a rate 2 rue Albert Borschette with the acquisition of a domestic target’s of 7 percent (10 percent, if located in the L-1246 Luxembourg stock must be included in the acquisition municipality of Luxembourg and used for Grand-Duchy of Luxembourg cost and capitalized. business purposes). www.tiberghien.com

international wts journal | # 3 | November 2016 18 19 international wts journal | # 3 | November 2016 MEXICO Corporate Share Deals by Non-Residents in Mexico Corporate Share Deals by Non-Residents in Netherlands NETHERLANDS TURANZAS, BRAVO & AMBROSI WTS WORLD TAX SERVICE B.V.

Change of ownership rules Step-up for target company Change of ownership rules a merger (not a fiscal unity) between a domestic holding company and the Dutch As a general rule, pre-existing tax losses Corporate law allows reevaluation of In general, pre-existing business tax target company can generate goodwill on (for income tax purposes) can be fully fixed assets, provided certain formalities losses can be utilized by a Dutch company the surviving entity’s balance sheet. Such deducted by a Mexican company following are duly complied with. No capital gain is following a change of ownership subject goodwill may generally be amortized a change of ownership. deemed to exist for such reevaluation for to certain limitations. A substantial change but the deduction is generally limited to tax purposes. of (direct or indirect) ownership in a Dutch a maximum of 10 percent of the initial Nevertheless, there are some special rules company can result in a limitation on the amount per year. This is, of course, only that should be taken into account: (i) Transaction costs utilization of loss carry-forwards or car- relevant if the merger is not carried out in a merger, tax losses cannot be trans- ry-backs and can restrict the formation and in a tax-neutral manner (e.g., the merger ferred from the absorbed company to the In general transaction costs are deductible utilization of fiscal reinvestment reserves. lacks a valid business purpose). surviving company; (ii) in a de-merger, for income tax purposes, provided they Tax losses that originate in years during tax losses may be divided among the new are related to the company’s corporate which the company had an active business Transaction costs companies subject to conditions; (iii) in a purpose. Else, they should be considered are usually not affected in the case of a merger, the surviving company may only non-tax deductible. “going concern” situation. Similar rules ap- Acquisition costs incurred by a domestic offset tax losses against profits obtained ply to the utilization of tax losses incurred acquisition vehicle (assuming the partic- in the same line of activities for which the Exit scenario: taxation of capital gains after an ownership change to offset profits ipation exemption applies to the target losses were incurred. on the sale of shares by a non-resident realized before the ownership change. company) are generally not deductible. Expenses that are linked to the acquisition, Debt push-down Non-residents that do not have a perma- Debt push-down but which are not real acquisition costs, nent establishment in Mexico are subject can generally be deducted (e.g., expenses Debt push-down structures were a to Mexican income tax from the transfer of A debt push-down can be achieved by incurred for initial structuring advisory ser- common feature some years ago. Whilst shares issued by Mexican resident com- using a debt-financed domestic holding vices). However, the Dutch tax authorities the domestic income tax law does not panies or non-resident companies where company as an acquisition vehicle. The tend to cast a wide net when determining specifically regulate debt push-down more than 50 percent of the accounting holding company can be merged into the which costs are non-deductible acquisition transactions, a number of transactions value of those companies derives from target company or the two companies costs. were structured in this way. real estate property located in Mexico. may be joined in fiscal unity, resulting in a netting of target’s profits against the acqui- Exit scenario: taxation of capital gains However, the Mexican tax authorities The general tax rate is 25 percent on sition financing costs. The deductibility of on the sale of shares by a non-resident audited a number of transactions, and the gross amount of the transaction (no interest in a debt push-down is generally denied the deduction of interest pay- deductions allowed) or 35 percent on the limited, but any non-deductible interest A non-resident company can be liable for ments on the basis they did not satisfy the gain realized (if any), provided certain expense may be carried forward to the Dutch corporate income tax on capital general requirement of deductions being formalities are duly complied with (e.g. next year. If the amount of interest remains gains realized on the sale of shares of a “strictly indispensable” for the business’ having a tax representative in Mexico). below € 1 million, or the amount of the Dutch target (that is not a fiscal investment corporate purposes. On such grounds, tax acquisition debt is not excessive, the in- fund). Such percentage ownership interest litigation cases arose and as of today the Mexico has a wide network of double terest is generally deductible unless other must be at least 5 percent, and must not tax courts have in some instances con- tax treaties for income tax matters that restrictions apply. A deduction is permitted be part of the non-resident shareholder’s firmed the non-deductibility of interest. provide tax reductions or even tax reliefs for acquisition debt up to 60 percent of the business activity. In general, this only These cases however do not presently on revenue derived from the transfer of acquisition price for the first year following applies in cases where the main purpose constitute mandatory jurisprudence. shares (as outlined above). the share deal. This safe harbor percentage of the structure is to avoid Dutch income or decreases by 5 percent points per year until dividend withholding taxes. Contact Person Accordingly, whilst debt push-down Other special taxes or issues to be the 25 percent threshold is reached. transactions are acceptable under Mexican ­considered Where an applicable double tax treaty Mauricio Bravo corporate law, they have lost their attrac- If the acquisition debt is an intercom- grants the exclusive right to tax capital [email protected] tiveness from an income tax perspective Mexico does not impose a stamp duty. pany or related party loan, the interest gains to the shareholder’s country of (52 55) 5081 4590 given the potential challenges on the Nevertheless, Mexico’s states provide is generally not deductible unless the residence, these taxes will generally not Contact Person deductibility of interest payments. Such transfer taxes in case of real estate prop- taxpayer establishes that the acquisition be an issue. Bosque de Tamarindos No. 100, 3th Floor transactions may still be implemented erties which are generally levied from the and financing structure was based on Denis Pouw Bosques de las Lomas, Mexico City, 05120 but close attention should be paid to the acquirer (share of stock acquisition is not valid business purposes or that the lender Other special taxes or issues to be [email protected] Mexico business reasons justifying the interest subject to these transfer taxes). Transfer is sufficiently taxed on the interest in its ­considered +31 10 217 91 73 www. turanzas.com.mx payments. tax, including registration costs and public resident country. notary fees, generally ranges from 4 to 7 No capital stamp duty exists on equity P.O. Box 19201 percent of the asset value depending on Step-up for target company investments in Dutch companies. 3001 BE Rotterdam its location. Dutch real estate transfer taxes may be Conradstraat 18 For Dutch tax purposes, a merger is viewed due if the Dutch target company directly 3013 AP Rotterdam as a transfer of assets and liabilities be- and/or indirectly owns substantial Dutch The Netherlands tween the merging entities. Accordingly, real estate. www.wtsnl.com

international wts journal | # 3 | November 2016 20 21 international wts journal | # 3 | November 2016 NORWAY Corporate Share Deals by Non-Residents in Norway Corporate Share Deals by Non-Residents in Philippines PHILIPPINES LAW FIRM BDB LAW STEENSTRUP STORDRANGE DA

Change of ownership rules may be possible in a merger of a sub- Change of ownership rules Exit scenario: taxation of capital gains sidiary into its parent, which is a rather on the sale of shares by a non-resident In Norway, pre-existing business tax losses non-complex procedure under Norwegian The Bureau of Internal Revenue has generally remain available in a share deal. tax law. consistently ruled in previous rulings that Capital gains from the sale of shares by a There are no specific regulations applica- pre-existing business tax losses can be non-resident shareholder may be exempt ble to a change of ownership. However, an Transaction costs utilized following a change of ownership. from capital gains taxation or subject to anti-abuse rule states that if the acquisi- However, the latest ruling issued by the a preferential rate under the relevant tion is “mainly” performed due to tax rea- Normally, all of the acquirer’s transaction Tax Bureau on this matter dated Febru- provisions of the applicable tax treaty. sons, the tax position may be disregarded. costs are linked to the acquisition price ary 28, 2012, the Bureau declared that However, the exemption or preferential For example, a takeover of a passive entity of the shares. However, exceptions may pre-existing business losses cannot be rate is not automatic. In order to take with tax losses from previous business apply to pre- and post-restructuring costs, transferred and absorbed by the acquiring advantage of the same, a tax treaty relief activities will not be accepted if the losses assessments related to valuation, strate- corporation as this privilege can be availed application must be timely filed before the are the entity’s “main assets”. This an- gic plans, etc., as long as such costs are of merely by the absorbed corporation. Tax Bureau. Such confirmatory ruling of ti-abuse rule was introduced in 2004. relevant to operations, regardless of a the Tax Bureau shall then be the support- stock purchase agreement. These costs are Debt Push Down ing document in claiming the preferential Debt push-down subject to scrutiny by the Norwegian tax rate or tax exemption. authority, as the participation exemption A non-resident acquirer can establish a It is possible to structure an inbound share regime in Norway creates a 25 percent holding company to acquire the shares Other special taxes or issues to be deal in Norway using group taxation as step difference. Note that also the refund of a Philippine target. Interest paid or ­considered long as the domestic holding company of VAT on such acquisitions can be denied if accrued on intercompany debt is tax (acquisition vehicle) holds more than the share transaction is not relevant for the deductible provided that the necessary The assignment of properties pursuant to 90 percent of the target’s shares. Group VAT business activity. withholding taxes are paid. There are no a merger or consolidation may be exempt taxation enables the target to offset its specific regulations of the Tax Bureau or from income tax if the exchange is made profits with the domestic holding compa- Exit scenario: taxation of capital gains the Securities and Exchange Commission solely for shares of stock in a corporation ny’s losses. on the sale of shares by a non-resident in respect of excessive thin capitalization. that is a party to the merger or consolida- However, the central bank implemented tion provided that certain requirements Norway has introduced limitations on the Non-residents are not subject to any cap- a 75:25 long term debt-to-equity ratio for are met. The assignment is also exempt deductibility of interest in its tax regime ital gains tax. The gain will not be subject those entities covered by it. from documentary stamp tax. with effect from fiscal year 2014. The spe- to Norwegian taxation regardless of the cific limitation on a group’s ability to de- application of a double tax treaty. Step-Up for Target Company However, if the transfer of property is not duct interest on acquisition debt, or third pursuant to a merger or consolidation party loans guaranteed by the group, is set Note, however, that exit limitations may If along with the shares exchanged, (including transfer to gain control of the to 25 percent of the EBITDA if the amount apply if the target or the target’s assets money or property is received, any gain is transferee), the following documentary exceeds NOK 5 million. The calculation are moved outside of Norway. These recognized up to the fair market value of stamp tax rates apply: will be based on tax deductions / amor- limitations may be further reduced or the property received. If in the exchange, tizations, not financial reporting figures eliminated by EEC and double tax treaty the party assumes liabilities in excess of → In case of transfer of shares: if there is a difference. Note also that the considerations. the cost of assets transferred, gains should 0.375 percent of the par value. deduction amount denied can be carried be recognized. However, losses cannot be → In case of transfer of real property: forward for a maximum of 10 years. Other special taxes or issues to be deducted. 1.5 percent of the selling price or fair ­considered market value, whichever is higher, Contact Person Acquisitions utilizing domestic holding In case of the acquisition of assets struc- minimum PHP 15. company structures must in addition to the Norway does not impose a stamp duty, nor tured as a tax-free exchange, the trans- → In case of receipt/subscription of shares Filamer D. Miguel above generally conform to arms-length are there any other special taxes or issues feror alone or no more than four others as consideration for the transfer of [email protected] principles. to be considered in an inbound share must obtain control over the corporation. shares or real property: +63 2 403-2001 local 360 Contact Person deal. It is however noteworthy that the The cost basis would be the same as the 0.5 percent of the par value. Step-up for target company Ministry of Finance is about to introduce a original acquisition cost to the transferor 20/F Chatham House, Ulf H. Sørdal new withholding tax regime with effect of the property exchanged. Likewise, the There may be VAT considerations to be Rufino corner Valero Streets, [email protected] For tax years after 2006, a step-up in the from fiscal year 2017, expected to be cost basis to the transferee of the property taken into account, if the transfer includes Salcedo Village, Makati City +47 41 91 67 17 basis of the target company is no longer announced in fall 2016. Among other new exchanged for the shares is the same as it goods sold in the ordinary course of busi- Philippines 1227 available for a non-resident acquirer. Any introductions a withholding tax on inter- would be to the transferor. ness or properties used in business. www.bdblaw.com.ph Pob 1511 Sentrum step-up must follow the full fair market est, leasing and license payments may be 5811 Bergen value and create a similar gain in the Nor- put in place for the first time in the history Transaction Costs Norway wegian target as in the holding company. of taxation in Norway. www.steenstrup.no However, a step-up with full continuity Costs associated with the transaction (valuation, tax, legal and financial due diligence, advisory and opinion, etc.) are considered part of the acquisition cost.

international wts journal | # 3 | November 2016 22 23 international wts journal | # 3 | November 2016 POLAND Corporate Share Deals by Non-Residents in Poland Corporate Share Deals by Non-Residents in Russia RUSSIA DORADZTWO PODATKOWE ALTHAUS CONSULTING WTS & SAJA

Change of ownership rules capital, if the assets that are acquired and, Change of ownership rules guaranteed) by a foreign company that for carve-outs, also the assets remaining owns directly or indirectly more than Pre-existing tax losses may be utilized by in the original entity, continue to form a In general, pre-existing business tax losses 20 percent of the borrower’s capital. a Polish target company after a change of going-concern business. In addition to can be utilized by a Russian company The Russian thin capitalization rules are ownership by way of a share deal. A loss various other requirements, Polish law following a change of ownership. Thus, expected to be amended with effect may be carried forward for five consecu- prohibits deducting depreciation on assets irrespective of the amount of acquired from January 01, 2017. tive tax years; however no more than 50 contributed to the company in exchange shares in a Russian target company, the tax percent of the loss is available for de- for its shares to the extent the value of losses will generally remain available to Step-up for target company duction in any of those years. In general, such assets is not recognised as share capi- the Russian target. The general rule is that Polish law forbids utilization of pre-exist- tal. As a result, step-ups are currently quite such losses can be carried forward over the The acquired shares are booked at acqui- ing tax losses in the event of a corporate rare as a tax planning tool, because they 10-year period following the year during sition cost. No special structures are avail- merger, division or conversion (change involve a number of legal transactions which the loss was incurred. able to obtain a step-up in basis of the of status), except for the conversion of a with tax risks. shares or assets of the acquired Russian company into another type of company. Debt push-down target company. Transaction costs Debt push-down A non-resident may wish to establish Transaction costs Expenses necessarily incurred to acquire a domestic holding company to make The acquisition of a Polish target by way of shares in a Polish company, including the an acquisition. Generally the amount of All costs directly connected with the pur- a share deal may be carried out through a purchase price of the shares, transaction deductible interest expenses are based on chase of shares are considered acquisition newly incorporated Polish holding compa- tax, notarial and court fees and stamp the following rules: costs. Legal and advisory services, due ny with which the target will either merge duty, cannot be deducted when incurred. diligence, evaluation charges, and fees of or form a tax group. There are a number of They become deductible only upon the 1. In principle, the amount of deductible agents, brokers, registrars and notaries, restrictions on- and requirements for- cre- sale of the shares for consideration. interest expenses is based on the actual are generally regarded as directly con- ating and operating tax groups, including Other transaction costs, which were not agreed interest rate of the loan if the nected with the acquisition of shares and a requirement that tax profit must amount necessary for the transaction to be duly deal is not considered controlled by a as a result are included in the acquisition to at least 3 percent of revenue. Therefore, completed (such as business, legal and tax related party. costs. If the company has incurred pre-ac- tax groups are not as popular as in other consulting, financial analysis, etc.) can be 2. If a non-resident has issued a loan quisition expenses (such as expenditures countries. recognized as indirect tax costs that are to a domestic holding company and relating to due diligence, evaluation and deductible on the date they are incurred. this transaction was recognized as a advisory services) but eventually decides As regards mergers, the main require- In this respect, controversies exist as to the controlled transaction (i.e. transaction not to complete the acquisition, such costs ment to achieve a tax neutral treatment exact date on which costs are incurred. between related parties), the amount should be deducted from the income of is that the operation must be carried out The tax authorities maintain that this is of deductible interest expenses is limit- the same fiscal year. for valid commercial reasons and that tax generally the date on which the cost be- ed by Russian tax law. In particular, the evasion or tax avoidance is not (one of) comes an accounting expense (a charge to limitations refer to whether the actual Exit scenario: taxation of capital gains its principal objective(s). When planning revenue accounts); meanwhile, the courts interest rate on the loan complies with on the sale of shares by a non-resident the financing structures for the acquisition hold that it is the date on which the cost is the appropriate rate interval: of a Polish target by way of a share deal recorded in the accounts. a) for a loan issued in RUR: 75-125 Capital gains arising from the sale of it should be borne in mind that restrictive percent of the key rate of the Russian shares in a Russian target by a non-res- GAAR (general anti-avoidance rules) have Exit scenario: taxation of capital gains Central Bank; ident company are subject to Russian been in force in Poland since 15 July 2016. on the sale of shares by a non-resident b) for a loan issued in a foreign cur- withholding tax only if more than 50 rency: the LIBOR, EURIBOR, SHIBOR percent of the assets of a Russian target Where a deal is financed using intercom- Capital gains on the sale of shares are is applied based on an appropriate consist of immovable property located in pany loans or credit facilities, thin capi- treated as corporate income and taxed at formula. Russia. Otherwise, the capital gains are not talization restrictions and transfer pricing the standard corporate income tax rate 3. If the aforementioned requirements taxable in Russia. If the shares of a Russian regulations will apply. of 19 percent. However, for non-resident are satisfied, the actual interest in- target are listed on a stock exchange, the sellers, most double tax treaties allow curred is deductible. Otherwise, Russian capital gains are non-taxable in Russia. Contact Person Step-up for target company such gains to be taxed in the seller’s transfer pricing rules apply to estimate The domestic withholding tax rate is 20 Contact Person country of residence (except for the sale of the amount of deductible interest percent. However, it may be reduced to Magdalena Saja In share deals, Polish law does not allow shares in real estate companies). expenses. In other words, the amount zero if a double tax treaty applies. Sergey Gerasimov +48 61 64345-50 for a step-up in tax basis of the target’s of deductible interest expenses is based [email protected] [email protected] assets. Other special taxes or issues to be on the relevant limits set by the Russian Other special taxes or issues to be +7 (499) 678-22-98 ­considered transfer pricing rules. ­considered ul. Towarowa 35 According to Polish law, tax depreciation 4. Additionally, thin capitalization rules 4 Floor Budynek Delta IV pietro deductions must generally continue to be A purchase of shares in a Polish target is for loan arrangements between Russia imposes a stamp duty for the Ul. Samotechnaya, 7 bld. 2 61-896 Poznan made in the original amounts also in the subject to a transaction tax of 1 percent of related parties have been introduced issuance of additional shares (in joint stock 127473, Moscow Poland event of mergers, divisions and contribu- the market value of the shares. The tax is into Russian tax law: a maximum 3/1 companies) of 0.2 percent of the nominal Russia www.wtssaja.pl tions of going-concern business as equity to be paid by the purchaser. debt/equity ratio for loans granted (or share value, but capped at RUR 200,000. www.althausgroup.ru

international wts journal | # 3 | November 2016 24 25 international wts journal | # 3 | November 2016 SINGAPORE Corporate Share Deals by Non-Residents in Singapore Corporate Share Deals by Non-Residents in South Africa SOUTH AFRICA IYER PRACTICE ADVISERS WTS SOUTH AFRICA (PTY) LTD.

Change of ownership rules Step-up for Target Company Change of ownership rules Transaction costs

For Singapore income tax purposes, the The company is not allowed to step-up the A company is taxed as a separate taxpayer In general, transaction costs will be cap- unutilized capital allowances, trade losses cost base of shares of the Target Company. from its shareholders in South Africa. The italized and added to the tax cost of the and donations can only be deducted The cost base should be booked as the tax status of the company would generally shares. against future income if companies satisfy acquisition cost. not change if there is a change in share- the Shareholding Test. If this test is not holding. In some situations the tax status Exit scenario: taxation of capital gains satisfied, the unabsorbed capital allow- Transaction costs of the company may however depend on on the sale of shares by a non-resident ances, trade losses and donations would the characteristics of its shareholders, for be disregarded permanently unless a Expenditure which is connected to the example, headquarter companies, which Non-residents are only subject to capital waiver of the test has been obtained. In acquisition of capital assets is capital in na- could be affected by a change in owner- gains tax on the disposal of immovable general, the waiver will be granted where ture and not tax deductible in Singapore. ship. property (including an interest in such the company can prove to the satisfaction Therefore, the transaction cost (i.e. advi- immovable property) or business assets of the tax authorities that the change sory fees) associated with the transfer of The use of a company’s tax loss carried attributable to a permanent establishment of shareholdings was due to genuine shares (capital assets) is capital in nature forward may be disallowed following a situated in South Africa. A shareholding of commercial reason and not tax driven. and not tax deductible in Singapore. If the change in shareholding if the revenue at least 20 percent in a company where Deduction of unutilized capital allowances company carries out share transactions fre- authorities are satisfied that the sole or at least 80 percent of the market value is subject to an additional condition that quently with the purpose to earn profits, main reason for the acquisition was the of the company’s shares is attributable to there is no change in the company’s princi- the shares transferred could possibly be utilization of such loss. The acquisition of immovable property (other than immov- pal activities during the relevant dates. deemed as trading stocks instead of capi- a direct or indirect controlling interest in a able property held as trading stock) would tal assets and the profits derived from the company that has, or is likely to have, an constitute an “interest in immovable The company is said to have satisfied selling of shares will be subject to tax in assessed loss exceeding ZAR 50 million, property”. The disposal of any shares in the Shareholding Test when there is no Singapore. In this case, the transaction cost should be reported to the tax authorities. South African companies by non-residents substantial change in its shareholders will be deductible for tax purposes by the in circumstances other than the above and their shareholdings as at the relevant company against the investment profits. Debt push-down would generally not be subject to tax in dates. The percentage of shares owned by South Africa. the same shareholders collectively over Exit scenario: taxation of capital gains A number of interest deduction limitations the total number of shares issued by the on the sale of shares by a non-resident exist that may prevent interest deductions company on each relevant date should in the case of debt push-downs. These Other special taxes or issues to be be at least 50 percent. Shareholders refer If shares are deemed as capital assets, any include interest on debt used to fund ac- ­considered to shareholders of the ultimate holding gains derived therefrom will not be tax- quisitions of assets acquired from related company (where applicable). Note that able in Singapore. On the contrary, if they persons using corporate roll-over relief. Value extracted or realized in the form of any part of a share of a shareholder that is are treated as trading stocks, gains derived Further interest deduction limitations exist dividends (including share buy-backs) may not fully paid up is disregarded. will be deemed as revenue rather than in the form of thin capitalization provisions be subject to dividend withholding tax at capital gain and will be subject to Singa- and limitations on the deductibility of a rate of 15 percent unless the relevant Debt push-down pore income tax at a tax rate up to 17 per- interest paid to related persons in whose double tax treaty reduces the rate. cent. This could be restricted by applicable hands the interest would not be subject to Contact Person Expenditure which is connected to the double tax treaties. In Singapore, income tax in South Africa. The thin capitalization Securities transfer tax applies to the trans- acquisition of capital assets is capital in na- will be subject to tax depending on wheth- limitations are based on arm’s length prin- fer (but not the issue) of shares. This tax is Pieter van der Zwan ture and not tax deductible in Singapore. er the income is sourced or received in ciples while other limitations are based on levied on the purchaser at a rate of 0.25 [email protected] Therefore, interest incurred from debt Singapore. Whether the income recipient is an interest to profit ratio limitation. percent. +27 83 417 5904 used to finance the acquisition of shares a Singapore resident or not, generally has (capital assets) cannot be deducted for tax no effect on the taxability of the income. Step-up for target company Corporate migration of South African 119 Adrian Street purposes in Singapore. ­resident companies to become foreign Linmeyer Other special taxes or issues to be The acquired shares are booked at the tax residents may trigger a number of 2190 Gauteng If the company carries out share transac- ­considered acquisition cost. No special structures are exit tax consequences in the hands of the South Africa Contact Person tions frequently with the purpose to earn available to obtain a step-up in the basis company. www.wts-southafrica.com profits, the shares transferred could possi- Transfer of shares is subject to Singapore of the shares or assets of the acquired Shanker Iyer bly be deemed as trading stocks instead of stamp duties at a rate of 0.2 percent on target company. +65 6532 5746 capital assets and the profits derived from the purchase price or market value of [email protected] the selling of shares will be subject to tax the shares, whichever is higher. Stamp in Singapore. In this case, interest ex- duties can be remitted on the transfer of 160 Robinson Road #17-01 penses will only be tax deductible by the shares under certain scenarios subject to SBF Center company against the income derived from prescribed conditions, such as the transfer Singapore 068914 its investment activities and cannot be of shares between associated permitted Singapore used to set off against the trading income entities or as part of the reconstruction or www.iyerpractice.com of other companies in the same group. amalgamation scheme.

international wts journal | # 3 | November 2016 26 27 international wts journal | # 3 | November 2016 SPAIN Corporate Share Deals by Non-Residents in Spain Corporate Share Deals by Non-Residents in Sweden SWEDEN ARCO ABOGADOS Y ASESORES SVALNER SKATT & TRANSAKTION TRIBUTARIOS

Change of ownership rules Goodwill amortization can be recorded Change of control rules ness reason test also requires the interest in an asset acquisition, in which case recipient to be resident within the EEA or a In general, pre-existing corporate tax the annual cost can be amortized for tax In general, tax losses carried forward jurisdiction covered by a Swedish double losses of a Spanish target company can be purposes over a period of 20 years (for can be utilized by a Swedish company tax treaty. Particular consideration shall utilized following a change of ownership. accounting purposes over a period of 10 following a change of ownership, subject be given to whether the financing could However, in case of a substantial change years). However, goodwill impairment to certain limitations. Such losses may have been made through a shareholder’s of ownership tax losses will no longer be losses are non-tax deductible. generally be carried forward indefinitely contribution instead of a loan. available in any of the following circum- and may be offset against future profits or stances: Transaction costs group contributions. However, losses may The current Swedish rules on deductibility not be carried back. In case of a change of interest expenses are under review. → The acquired entity has been inactive Costs associated with the transaction (due of ownership whereby the new owner New rules are expected to be implement- during a period of three months prior diligence, valuation and advisory fees etc.) obtains direct/indirect decisive control ed as of 2018. to the acquisition, or becomes inactive are considered part of the acquisition cost. over the company (i.e. generally more after the acquisition; or than 50 percent of the voting capital), Step-up for target company → the acquired company significantly Exit scenario: taxation of capital gains there are two limitations on the utilization changes its business activity within on the sale of shares by a non-resident of prior tax year’s losses: (i) the capital There are no structures available under the two years following the change of restriction; and (ii) the group contribution Swedish tax law whereby an acquirer may ownership; or In general, capital gains from the sale restriction. In brief, the capital restriction obtain a step-up in its basis of the acquired → the acquired company can be consid- of shares in a Spanish company by a results in the definite disallowance of Swedish target company’s shares. ered an asset-holding company. non-resident are subject to taxation in losses exceeding 200 percent of the total Spain. Where the transferor is a resident consideration paid. The group contribution Transaction costs Debt push-down of another EU Member State, the capital restriction applies to any tax losses surviv- gain realized will be tax exempt provided ing the capital restriction and results in the Costs connected with share deals, such as Debt push-down structures which involve that the participation in the Spanish target disallowance of utilizing the losses against costs for legal advisory etc. are considered the establishment of a domestic holding has been at least 5 percent - or with an group contributions during a five-year part of the acquisition cost and, as such, company to acquire the shares of a Span- acquisition price exceeding € 20 million - period following the change of control. generally not deductible. Such costs are ish target are restricted when financed for a minimum period of one year prior to Further, company mergers may affect prior instead capitalized and included in the with intercompany debt. the transaction. tax losses in both the transferring com- acquisition cost for the shares. However, if pany and the surviving company during a a share deal is planned but not fully exe- In practical terms, interest accrued on However, where the main assets of the six-year period. Tax losses incurred in the cuted, the transaction costs are generally intercompany debt – regardless of the Spanish target consist of real estate locat- same year as a change of control are gen- deductible. Transaction costs relating to tax residence of the lender – destined to ed in Spain, the sale of the shares will be erally not subject to any limitations. acquisition financing may be deductible acquire the shares in another entity from subject to taxation in Spain at a rate of 19 during the lifetime of the acquisition debt. a related party are generally non-tax percent. Debt push-down deductible unless the transaction is based Exit scenario: taxation of capital gains on valid business purposes. Notwithstanding the above, in any case, Debt push down structuring is generally on the sale of shares by a non-resident the tax treatment will be determined by possible in Sweden and interest expenses Step-up for target company the corresponding double tax treaty. are generally deductible for tax purposes, Provided that the shares are held by a provided arm’s-length interest rate. How- non-resident corporate entity, and that the The domestic holding company must book Other special taxes or issues to be ever, as of January 1, 2013, the Swedish shares are not attributable to a permanent the acquired shares of the Spanish target ­considered interest deduction limitation rules have establishment in Sweden, capital gains on at cost. In case of a share deal, goodwill been extended to cover interest on all the sale of shares should not be subject to cannot be amortized as a deductible In general, the sale of shares in a Spanish intra-group debt. Exceptions to these Swedish taxation. acquisition cost. However, if both entities target by a non-resident can benefit from limitations may apply if: (i) the receiver merge after the share deal, goodwill may VAT and property transfer tax exemptions (beneficial owner) of the interest income Other special taxes or issues to be Contact Person arise and its tax treatment will depend provided that some requirements are met. is subject to a minimum of 10 percent ­considered on the tax year in which the shares were taxation and the debt arrangement has Marina Esquerrà acquired: However, the transfer of the shares will not been established to obtain a signifi- Sweden does not levy stamp duty on the Contact Person +34 934 8710-20 be subject to VAT or property transfer tax cant tax benefit (the “10 percent rule”); transfer of shares. No Swedish WHT is lev- [email protected] → If the shares were acquired before where over 50 percent of the assets (at or (ii) if the debt relationship is predomi- ied on interest payments. Further, WHT on Robert Tranquilli 2015, goodwill amortization is tax market value) of the Spanish target are nantly motivated by business reasons (the dividend payments made to non-resident [email protected] C. Roger de Llúria, 119 4 2a deductible provided some general not related to its business activity. Property “business reason test”). Even if the interest corporate shareholders is normally not +46 (0)8-528 01 250 08037 requirements are met. transfer tax rates depend on the munic- income is taxable to the beneficial owner levied, provided that the shareholder is an Barcelona → If the shares were acquired in or after ipality in which the main assets of the at a minimum of 10 percent, an interest EU resident and owns at least 10 percent Smålandsgatan 16 Spain 2015, goodwill amortization is non-tax company are located. deduction will be disallowed if the debt of the share capital, or is a limited liability 111 46 Stockholm www.arcoabogados.es deductible. relationship is predominantly motivated company covered by a Swedish double tax Sweden by tax reasons. The application of the busi- treaty. www.svalner.se

international wts journal | # 3 | November 2016 28 29 international wts journal | # 3 | November 2016 SWITZERLAND Corporate Share Deals by Non-Residents in Switzerland Corporate Share Deals by Non-Residents in Turkey TURKEY WENGER & VIELI AG WTS & CELEN SMMM LTD. STI

Change of ownership rules Exit scenario: taxation of capital gains Change of ownership rules available for Turkish companies entering on the sale of shares by a non-resident into asset deals with other Turkish resident In Switzerland, no change of ownership In general, pre-existing business tax losses companies for which the acquirer would rules apply. In particular, a change in the In general, capital gains from the sale can be utilized by a Turkish company fol- be paying an amount higher than the net ownership of a Swiss company does not of shares of a Swiss target company by lowing a change of ownership, whereas book value of the tangible assets that are affect the ability of such company to utilize non-resident shareholders are not subject utilization of the losses may be subject to being sold. its tax loss carry-forwards within the gen- to tax in Switzerland. An exception applies certain limitations in other types of merg- erally applicable seven year period from when the Swiss target owns real estate in ers, acquisitions and split-ups. Pre-exist- Transaction costs the date such losses were generated. Switzerland and tax-wise qualifies as a real ing business tax losses generated over estate company. The respective qualifica- the last five years that do not exceed the The acquirer is required to capitalize Debt push-down tion depends on whether the company equity calculated on the date of mergers & expenses incurred during the acquisition holds real estate for operating or for invest- acquisition are not forfeited provided that of the assets of a Turkish target compa- The typical acquisition structure for a debt ment purposes. Only a company that holds the acquired organization continues to op- ny. Among such allowable expenses are push-down is as follows: An investor incor- real estate for sole investment purposes erate for a period of five years following finance expenses relating to the purchase porates a Swiss acquisition vehicle that is (i.e. no operating business activity attached the fiscal year of the merger or acquisition. of the assets, transportation, storage, financed with equity and debt to acquire to it) can qualify as real estate company. In split-ups, the same rules generally apply and installation fees attributable to these the target company. After the acquisition, In case more than 50 percent of the shares unless the losses do not exceed the equity assets, and attorney, notary, commission a merger is intended to ensure that the of a real estate company are transferred, attributed to the new entity and that the fees, broker’s fees, inter alia. The acquir- operating target’s cash-flow can be used capital gains in connection with such sale amounts of such losses correspond to the er would amortize the assets over their for interest payments and repayments of are subject to real estate gains tax in Swit- transferred pushed-down asset value. capitalized value. the acquisition vehicle’s funding. Howev- zerland. It has to be noted that the transfer er, according to Swiss tax administrative of a majority shareholding of a real estate Debt push-down Exit scenario: taxation of capital gains practice, the deduction of such interest company can also be assumed where sev- on the sale of shares by a non-resident payments after a merger is not admitted eral shareholders jointly transfer shares of Turkish tax law allows Turkish corporate tax-wise. This even applies if the merger more than 50 percent altogether. taxpayers to merge in a tax-free manner Although Turkish tax rules provide oppor- is carried out years after the acquisition. under certain conditions. Accordingly, Turk- tunities for foreign entities to be outside It is therefore recommendable to effect Other special taxes or issues to be ish companies may accomplish a tax-free the scope of Turkish capital gains taxation the repayment of the acquisition vehicle’s ­considered merger if all of the items of the balance arising from the sale of joint stock compa- funding before the merger. sheet of the merged entity are transferred nies, most of the double tax treaties which Where a Swiss resident sells shares of a to the acquiring entity. Typically, if one of Turkey has concluded with other countries Step-up for target company Swiss company, the assessment of the tax the companies has an outstanding debt, restrict the right of the source country (i.e. consequences depends on whether these there is no restriction on the transfer of Turkey) to tax capital gains derived from In a share-deal, the purchaser acquires shares are private or business assets of the the loan to the acquiring entity. Interest sale of Turkish company shares where the the target company with all tax attributes. seller. The sale qualifies as tax-free if the on this loan can generally be deducted holding period exceeds one year. A step-up in basis, i.e. the appreciable shares are held as private property. If the by the acquiring entity. However, in the revaluation of the target’s assets, is not shares are held as business property, the implementation of merger transactions, Other special taxes or issues to be possible. The same applies in case of a sale is subject to income or profit tax to the special consideration should be given as to ­considered merger; the assets and liabilities have to extent the sales price exceeds the book whether the merger transaction possess- be transferred at tax book values. value of the shares. Under certain condi- es economic substance. In other words, Capital increases trigger a 0.04 percent tions, however, even the sale of shares merger transactions accomplished solely fund for limited liability and joint stock Contact Person Transaction costs that are held as private property is subject for tax motivation purposes are subject companies in Turkey. In addition, a Stamp Contact Persons to tax. This is the case when a so-called to scrutiny by the Turkish tax authorities duty is imposed on signed contracts and Arif Çelen Transaction costs are – inter alia – expenses indirect partial liquidation applies. under the substance-over-form rules. agreements either executed in Turkey or, [email protected] Barbara Brauchli Rohrer for financing, due diligence, professional if concluded abroad, the contracts provide +90.212.347 4125 [email protected] advice as well as transfer taxes. They are Equity contributions to Swiss companies Step-up for target company a benefit within Turkey. The general stamp Marc Gerber generally considered as deductible ex- made by shareholders that exceed CHF 1 duty rate is 0.948 percent for 2016, and is Cumhuriyet Caddesi 38/3 Erk Apartman [email protected] penses. However, in the course of a trans- million trigger stamp tax of 1 percent. Fur- In a share deal, the Turkish acquisition imposed on the stated contract amount. Harbiye +41 58 958 58 58 action it has to be differentiated between thermore, the transfer of Swiss or foreign company must book the acquisition cost With regard to the stamp tax, there is an 34367, Istanbul costs of the acquisition vehicle and costs securities triggers securities transfer tax in of the Turkish target at fair market value, upper limit threshold that is determined Turkey Dufourstrasse 56, Postfach of the target company. In this regard, each case Swiss security dealers (banks, actual which prevents the amortization of and revalued annually. www.wts-turkey.com 8034 Zürich entity has to bear its own costs meaning dealers or companies that hold securities goodwill. Goodwill amortization is only Switzerland that only strictly transaction-related costs with a tax book value of more than CHF 10 www.wengervieli.ch can be charged to the acquisition vehicle. million) participate as contracting parties or as intermediaries. The ordinary tax rate of Swiss securities transfer tax is 0.15 percent for securities issued by a Swiss tax resident and 0.3 percent for securities issued by a foreign tax resident. international wts journal | # 3 | November 2016 30 31 international wts journal | # 3 | November 2016 UNITED KINGDOM Corporate Share Deals by Non-Residents in United Kingdom Corporate Share Deals by Non-Residents in the USA USA FTI CONSULTING WTS LLC

Change of ownership rules Introduction of further limitations on Change of ownership rules Step-up for target company interest deduction is anticipated in 2017, Pre-existing losses can generally be reflecting the UK’s implementation of the If a corporation with tax loss carry-for- A purchase of shares in a US target utilized by a UK company following a OECD’s BEPS recommendations. wards undergoes an ownership change corporation ordinarily does not result in change of ownership (subject to some (more than 50 percent within a three a step-up in the tax basis of the corpora- “same activity”, “same entity” type-re- Step-up for target company year window), its ability to use the loss tion’s assets. A notable exception involves strictions). However, where there is also carry-forwards is generally limited. The transactions in which an Internal Revenue a major change in the nature or conduct There is no general ability to step up the “in- annual limitation is based on the fair Code Section 338 Election is made – in of the trade or business within the three side basis” of an acquired company’s assets market value of the corporation at the which case the transaction is treated as a year periods preceding and/or following in the course of a share acquisition. Howev- time of the ownership change multiplied taxable asset purchase with a correspond- the ownership change, the losses may be er, “de-grouping charges” triggered where by a published interest rate. Relief from ing asset basis step-up. This often results in disallowed. Further rules may in some capital or intangible assets are hived-down the limitation may be available to the the creation of goodwill for tax purposes, cases deny subsequent tax relief for an pre-sale and the recipient company then extent there is built-in gain in the corpora- which is amortizable (deductible) over 15 acquired company’s pre-existing deferred sold, can have this side-effect. tion’s assets at the time of the ownership years. Special requirements must be met tax attributes. change. in order for the transaction to be eligible Transaction costs for an election. Depending on the par- A company’s pre-existing capital losses Debt push-down ticular facts, there may or may not be an survive its acquisition, however if the Transactions costs may fall into one of the additional tax cost in making the election. acquisition is by a group, the losses may following categories: Due in part to the relatively high US cor- thereafter generally only be set against porate income tax rates (e.g., 40 percent), Transaction costs gains on other assets owned by the com- i. Costs related to debt finance are gener- foreign acquirers often seek to push debt pany at the time it joined the group. ally deductible subject to the points in into a US target company and thereby cre- In general, costs paid to “facilitate” a section 2. ate tax-deductible interest expense. There transaction must be capitalized. In a share Forthcoming changes may reduce the ii. Revenue costs which are generally only are various techniques for achieving a deal, this means that they would be added “same activity”, “same entity” type-restric- deductible when incurred “wholly and debt push-down. For example, the foreign to the tax basis in the shares and thus tions on offset of brought forward losses, exclusively” for the purposes of the acquirer could form a new US acquisition would not be deductible. In a share deal but introduce limits on the proportion of company’s business. Generally, trans- subsidiary and capitalize it with a mix of treated as an asset deal (see above), the taxable profit which can be sheltered by action costs will only be deductible for debt and equity. This acquisition company capitalization of transaction costs may brought forward losses. investment holding companies. Trans- could either purchase the shares of the US lead to future deductions (e.g., increase in action costs will generally be revenue target (and form a tax consolidation with tax-deductible goodwill). Debt push-down when incurred before the “decision the target) or could merge with the target. phase” of the potential transaction has In establishing the debt structure, the Exit Scenario: taxation of capital gains In principle, interest on borrowing by a UK been completed. foreign acquirer should take into account on the sale of shares by a non-resident acquisition company to acquire another iii. Capital costs (incurred in the execution general debt versus equity principles UK company is tax-deductible, and the phase, i.e. “post decision phase”) and as well as the so-called “earnings-strip- The sale of shares in a US corporation by acquisition company’s resultant tax losses so contributing to the base cost of the ping” rules (which may defer the interest a foreign shareholder is generally not can offset the acquired company’s same shares. expense deduction if certain cash-flow subject to US tax. An exception applies in year taxable profits under the group relief thresholds are not met). Under many US the case of a sale of shares in a so-called provisions (subject to a 75 percent group The recoverability of VAT on transaction double tax treaties, the payment of inter- “United States Real Property Holding Cor- relationship existing). A number of provi- costs can be complex. est to a foreign person is subject to a lower poration” (a domestic corporation which sions can limit or deny interest deductibil- rate of withholding tax (or no withholding has US real estate assets constituting 50 ity, including: Exit scenario: taxation of capital gains tax) than is the payment of dividends. This percent or more of the value of its total on the sale of shares by a non-resident potentially offers an additional benefit of business assets). → related party transfer pricing rules (ap- the debt push-down. There are proposed Contact Persons plicable both cross-border and domes- In general, a nonresident seller should regulations which would re-characterize Other special taxes or issues to be Contact Person tically) not be subject to UK tax on capital gains certain related party debt transactions ­considered F. Jay Helverson → thin capitalization rules/distribution arising from the disposal of shares in a UK as equity if they exceed a certain vol- [email protected] Andrew Ponting rules characterizing certain interest company (exceptions exist in some real ume. Certain common debt push-down Despite their many corporate-like charac- +1 (973) 401-1141 [email protected] flows as non-deductible distributions estate and oil & gas cases). structures would be impacted by these teristics, domestic (e.g., Delaware) Limited Dylan Jeannotte +44 20 3727 1052 → a worldwide debt cap, applying where proposed regulations if they come into Liability Companies (LLCs) are generally [email protected] a group’s UK operations are higher Other special taxes or issues to be force. In addition, the proposed regula- treated as pass-through entities for US tax +1 (973) 401-1145 200 Aldersgate leveraged than the worldwide group ­considered tions would apply strict documentation purposes. Accordingly, the purchase of LLC London, EC1A 4HD → unallowable purpose rules (which and substantiation requirements designed shares typically results in asset purchase 1776 on the Green, 6th Floor UK should not generally apply to borrow- The UK imposes a stamp duty payable at to ensure that parties to a loan transaction treatment to the acquirer for tax purpos- 67 East Park Place www.fticonsulting.com ings to finance commercial acquisitions) a rate of 0.5 percent of the consideration behave as if they were unrelated. es – and hence a potential step up in asset Morristown, New Jersey 07960 paid in a share deal. Relief may be avail- basis. LLCs can also elect to be treated as U.S.A. able where shares are transferred within a taxable corporations. www.wtsus.com 75 percent ownership group.

international wts journal | # 3 | November 2016 32 33 international wts journal | # 3 | November 2016 About the WTS Global M&A Practice

WTS fields a dedicated global team of experienced M&A tax advisors. Our profes- sionals work closely together to develop and deliver integrated cross-border M&A solutions, including due diligence, transac- tion structuring, tax modeling and quan- titative studies. Our work product meets the quality standards of a premiere global firm, yet is delivered in an efficient and user-friendly manner - which often comes as a pleasant surprise to those who work with us for the first time. We encourage you to reach out to us and experience this for yourself!

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WTS Alliance | P.O. Box 19201 Typography, Layout 3001 BE Rotterdam | The Netherlands hartmann brand consulting, Munich [email protected] | www.wts-alliance.com © Cover illustration: vege – Fotolia Editorial Team Stefan Hölzemann +49 89 286 46 1200 This issue of International WTS Journal [email protected] is published by WTS Alliance. The infor- mation is intended to provide general Francis J. Helverson guidance with respect to the subject +1 973 401 1141 matter. This general guidance should not [email protected] be relied on as a basis for undertaking any transaction or business decision, but rather Authors the advice of a qualified tax consultant Jana Alfery, Barbara Brauchli Rohrer, should be obtained based on a taxpayer’s Mauricio Bravo, Paolo Burlando, Arif Çelen, individual circumstances. Although our Saule Dagilyte, Jean-Luc Dascotte, Nico articles are carefully reviewed, we accept Demeyere, Rakesh Dharawat, Marina no responsibility in the event of any inac- Esquerrà, Luis Rogerio Farinelli, Sergey curacy or omission. For further information Gerasimov, Tamás Gyányi, F. Jay Helverson, please refer to the authors. Stefan Hölzemann, Shanker Iyer, Dylan Jeannotte, Sari Laaksonen, Aija Lasmane, ISSN: 2214-0476 Connie Lee, Filamer D. Miguel, Martin Ng, Jonathan Norman, Andrew Ponting, Denis Pouw, Magdalena Saja, Dr. Christoph Seseke, Janny Song, Ulf H. Sørdal, Robert Tranquilli, Pieter van der Zwan, Kerstin Weber

international wts journal | # 3 | November 2016 34 35 international wts journal | # 3 | November 2016 International Real Estate Tax Guide 2016 Survey on Europe, North America, Australia and BRIC countries

Das wts-Fachbuch „International Taxation of Real ­Estate Investments“ bietet in der aktualisierten Ausgabe einen umfassenden Überblick über die steuerlichen Regelungen in 47 Ländern, die insbesondere im Bereich von Immobilieninvesti- tionen relevant sind.

Format: 14 x 21 cm Umfang: 484 Seiten Sprache: Englisch Aktualisierte Ausgabe Bestellung über: WTS Group AG Gitta Mannke-Asanatucu Telefon +49 (0) 89 286 46-2462 [email protected]