(P) Carrying out mergers and acquisitions in Western Europe: tax traps and structuring opportunities

In the context of global competition and integrated markets, many companies around the world are looking for growth opportunities outside of their home country. By opening up new markets and connecting with new customers, businesses can increase sales and profits while spreading risk by not having to depend on a single market.

Pursuing transactions in Western Europe presents interesting opportunities for many investors, but it is important to understand that the acquisition and integration processes respond to local specificities. Mazars published the report “Carrying out mergers and acquisitions in Western Europe: tax traps and structuring opportunities”, with the aim of highlighting what companies can expect from conducting operations in Western Europe and how they can avoid tax traps while making the most of structuring opportunities.

The report highlights the tax risks and opportunities associated with mergers and acquisitions in Western European countries, covering Belgium, Cyprus, Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. .

Thanks to Mazars’ study, companies can now navigate complex regulatory environments so they can choose where their investment would be most beneficial. In the report, Mazars offers insights based on its expertise that covers the tax due diligence structuring in the region and frequently encountered tax risks that may threaten the success of subsequent trading and integration processes in these fast growing markets. .

The main tax traps

  • Deduction for financial expenses

Switzerland – As in other countries, Switzerland has Swiss rules on thin capitalization. Unlike other countries, Switzerland’s thin capitalization rules have the following specific characteristics: The Swiss thin capitalization rules apply only to “related party debts” (including third party debts guaranteed by a related party). Swiss thin capitalization rules do not establish a fixed debt ratio; on the contrary, each Swiss company has its individual borrowing capacity, depending on the assets of the company. While interest charges – not permitted under Swiss thin capitalization rules – are not tax deductible; this is a deemed distribution of dividends from a Swiss company, which is subject to a Swiss withholding tax of 35%.

  • Transfer pricing documentation

Luxembourg – On the basis of Luxembourg tax legislation, each intercompany transaction must comply with the arm’s length principle. Although there is no documentation requirement, Luxembourg taxpayers should be able to demonstrate that the arm’s length principle is respected in the event of questions from the tax administration. Today, the tax administration places more emphasis on business-to-business financial transactions, with specific remuneration and capitalization requirements for businesses in back-to-back financing structures.

The best tax structuring opportunities

  • Depreciation of assets / goodwill

Spain – Intangible assets with a finite useful life are amortized according to their useful life. When this useful life cannot be reliably estimated, depreciation will be deductible up to the maximum annual limit of one twentieth of its amount. Compared to goodwill, from a tax point of view the depreciation rate considered as deductible for corporate tax is 5% (from an accounting point of view it is depreciated over 10%). In the event of goodwill resulting from restructuring (or merger) operations, if the operation is subject to the neutral regime applicable to restructuring operations, as a general rule this goodwill will not be tax deductible (there is a transitional provision for shares acquired before January 1, 2015).

Belgium – Capital gains realized by companies on assets are taxable at the normal corporate tax rate of 25% (corporate tax rate reduced by 20% on the first 100,000 EUR for SMEs) and a tax deferral is possible when certain conditions are met (but not applicable to business owners). The private seller is subject to personal income tax at the progressive rate on the professional assets sold. Capital gains realized on shares by taxable legal persons are exempt from tax provided that certain conditions are met (minimum participation obligation of 10% or 2.5 million euros; minimum holding condition of a an; tax liability condition). For individuals, a general exemption for capital gains on shares applies, but Belgian tax law provides that capital gains tax is due when the purchaser of a substantial holding is a non-company. Belgian resident outside the EEA. In addition, the sale of shares by Belgian natural persons is taxable as miscellaneous income at a tax rate of 33% (instead of the normal progressive rates) when the transaction can be considered as carried out outside the management of the private domain. This may be relevant in buy-out management structures but is also used by the Belgian tax authorities in situations deemed abusive (eg sales of companies with excessive cash flow).

Download the report now to learn more about the tax traps and incentives that will help you determine the right next step.

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