Acquisitions (from the buyer’s perspective)Tax treatment of different acquisitions
What are the differences in tax treatment between an acquisition of stock in a company and the acquisition of business assets and liabilities?
Upon the acquisition of stock, and where the acquisition company is a Dutch entity, the participation exemption may apply. Under the participation exemption, income (including dividends and capital gains) from a qualifying participation is exempt from Dutch corporate income tax. On the other hand, losses on a qualifying participation are in principle non-deductible. Acquisition and sales costs, earn-out payments, payments under (balance sheet) guarantees and indemnities are generally not taxable or tax-deductible under the participation exemption (see question 15 for the participation exemption conditions).
In the case of an acquisition of the legal and economic ownership of at least 95 per cent of the nominal and paid-up stock by the acquisition company, a fiscal unity (tax grouping) may be formed between the acquisition and acquired companies. Companies forming a fiscal unity can set off losses (eg, from interest costs on acquisition financing) and profits (eg, of the acquired company), albeit under certain conditions (see question 8).
Acquisition of stock in a real estate entity may be subject to 6 per cent Dutch real estate transfer tax (RETT). The purchase of stock in a Dutch company is generally not subject to Dutch VAT (see question 6). In the case of a purchase of stock, the book value of the assets reported by the company acquired remains unchanged.
In the case of a purchase of business assets and liabilities (asset transaction), the acquisition company should report the acquired assets at fair market value. The purchase of Dutch real estate is, in principle, subject to 6 per cent RETT. The asset transaction is, in principle, a taxable event for VAT purposes, but may be non-taxable in case of a purchase of ‘totality of goods’. For additional taxes, see question 6.Step-up in basis
In what circumstances does a purchaser get a step-up in basis in the business assets of the target company? Can goodwill and other intangibles be depreciated for tax purposes in the event of the purchase of those assets, and the purchase of stock in a company owning those assets?
Only in the event of an asset transaction does a step-up to fair market value apply to the acquired assets and liabilities. The depreciation of those assets (including acquired goodwill and other intangible assets) is tax deductible. However, the annual amount of tax-deductible depreciation is limited to 10 per cent of the cost price for acquired goodwill and 20 per cent of the cost price for other intangible assets.
For tax purposes, acquired stock in a company is booked at historical cost price. If the participation exemption applies, no tax-deductible depreciation of stock is possible. The book value of the assets reported by the company acquired remains unchanged.Domicile of acquisition company
Is it preferable for an acquisition to be executed by an acquisition company established in or out of your jurisdiction?
It is preferable to use a Dutch acquisition company to execute an acquisition for several reasons.
The main advantage of using a Dutch acquisition company for the acquisition of stock in a Dutch target company is the possibility to form a fiscal unity between the Dutch acquisition company and the company acquired. To form a fiscal unity, the Dutch acquisition company would (among other conditions) need to acquire the legal and economic ownership of at least 95 per cent of the nominal and paid-up shares in the company acquired. Subject to certain anti-abuse legislation, forming a fiscal unity would, for instance, allow the Dutch acquisition company to set off losses against the profits realised within the fiscal unity.
For acquisitions of stock in a non-Dutch company, it may be beneficial to use a Dutch acquisition company for the following reasons:
- tax-efficient repatriation of funds (eg, reduced withholding tax rates) by means of the numerous tax treaties concluded by the Netherlands for the avoidance of double taxation, in combination with the participation exemption;
- asset protection through one of the many bilateral investment treaties concluded by the Netherlands; and
- highly skilled professional advisers and support (banks, lawyers) and an efficient court resolution by a separate court for entrepreneurial disputes.
Are company mergers or share exchanges common forms of acquisition?
Legal mergers and share-for-share mergers (hereafter jointly referred to as mergers) are not that common as they are not the most straightforward method of acquisition. A possible advantage of a merger lies in the fact that, although subject to the terms of the transaction, it could be possible to minimise the need to attract funding by the acquisition company and limit the spending of cash.
Additionally, when contemplating an asset transaction by way of a business or legal merger, mergers are considered as beneficial, as these provide the opportunity to continue reporting the acquired assets and liabilities at historical cost price (instead of reporting at fair market value) and thus postpone taxation of unrealised profits for the seller.
The main disadvantage of such tax-neutral business or legal mergers is the possible inflexibility of on-selling the merged company within the respective clawback period (generally three years) imposed by anti-abuse measures. If applicable, the clawback rules stipulate that the postponed taxation of unrealised profit reserves is reversed, resulting in the taxation of the unrealised profit reserves with retroactive effect.Tax benefits in issuing stock
Is there a tax benefit to the acquirer in issuing stock as consideration rather than cash?
It may be beneficial for the buyer to issue stock in the event that cash funding cannot be obtained by the acquisition company, or in case interest costs on acquisition financing cannot be deducted (under anti-abuse legislation). See question 8 for more information on interest deduction limitations.
With reference to question 4, it is possible to postpone taxation when issuing stock as consideration for the acquisition.Transaction taxes
Are documentary taxes payable on the acquisition of stock or business assets and, if so, what are the rates and who is accountable? Are any other transaction taxes payable?
In the case of an acquisition of existing or newly issued stock, no stamp duty (or other documentary taxes) is due.
However, there is a possibility that, upon an acquisition of stock, 6 per cent RETT is due if the target company qualifies as a ‘real estate entity’. This is the case if all of the following requirements are met:
- the stock is acquired in an entity with an equity divided into shares, or an entity incorporated under the laws of another state that has the same characteristics of an entity with an equity divided into shares;
- the stock is acquired in an entity of which, at the time of the acquisition or at any time in the preceding year, the assets consist or consisted of 50 per cent or more of real estate, and at least 30 per cent of all assets consist of Dutch real estate;
- the activities pertaining to the real estate consist, at the time of the acquisition or at any time in the preceding year, of 70 per cent or more of the acquisition, disposal or exploitation of that real estate; and
- the buyer directly or indirectly acquires an interest of at least one-third in the entity, including any interest the buyer may already directly or indirectly hold.
For VAT purposes, the acquisition of stock should not be considered a taxable event.
In the case of an asset transaction, no stamp duty (or other documentary taxes) should be due. Upon the acquisition of Dutch real estate, 6 per cent RETT is normally due. However, the acquisition of Dutch real estate may be exempt from RETT if the transaction relates to certain types of mergers, split-offs or internal reorganisations.
The acquisition of assets is normally subject to 21 per cent VAT. The transfer of real estate is generally exempt from VAT, unless the transfer concerns newly developed real estate (ie, construction sites and (part of) buildings including the surrounding terrain, prior to, on or within a period of two years after the moment of first use of the buildings concerned). Should a transfer of real estate indeed be subject to VAT, an exemption generally applies for RETT.
Finally, in the case of an asset transaction where a totality of goods is acquired, the acquisition may be considered as a non-taxable transfer for VAT purposes.Net operating losses, other tax attributes and insolvency proceedings
Are net operating losses, tax credits or other types of deferred tax asset subject to any limitations after a change of control of the target or in any other circumstances? If not, are there techniques for preserving them? Are acquisitions or reorganisations of bankrupt or insolvent companies subject to any special rules or tax regimes?
In the case of an asset transaction, the losses remain with the seller and may be set off by the seller against the capital gains realised with the sale.
In the case of an acquisition of stock in a company (regardless of its status) with a tax-loss carry-forward, the company acquired may still utilise the losses post-acquisition, subject to specific restrictions in case the acquisition of that company results in a change of control. In this respect, a change of control is generally considered to be the case if the transferring shareholder directly or indirectly alienates an interest of 30 per cent or more in the transferred company.
Subject to certain exceptions, losses generally remain available after a change of control, provided that all of the following requirements are met:
- the losses did not occur in a year wherein the assets of the acquired company consisted mostly (50 per cent or more) of passive portfolio investments for a period of at least nine months;
- just prior to the acquisition, the activities of the target company have not been reduced to less than 30 per cent when compared to the activities of the company when it incurred the oldest losses available for compensation; and
- at the time of the acquisition, it is not intended to reduce the activities of the target company to less than 30 per cent (as described in the above point) within three years of the acquisition.
Does an acquisition company get interest relief for borrowings to acquire the target? Are there restrictions on deductibility generally or where the lender is foreign, a related party, or both? In particular, are there capitalisation rules that prevent the pushdown of excessive debt?
Interest expenses are, in principle, tax deductible. However, various anti-abuse measures may deny the deduction of interest expenses on loans due to related entities. Generally speaking, the acquisition company and a lender are considered related entities if:
- the lender directly or indirectly holds an interest of at least one-third in the acquisition company;
- the acquisition company directly or indirectly holds an interest of at least one-third in the lender; or
- an entity directly or indirectly holds an interest of at least one-third in both the acquisition company and the lender.
First, it is noted that interest costs on loans to related entities exceeding an arm’s-length rate are, in principle, requalified (for the part that is not at arm’s length) into non-deductible deemed dividends or informal capital contributions. In addition, loans between related parties may be provided under such conditions that, for Dutch tax purposes, these loans are requalified into equity. Consequently, interest payments on such requalified loans are treated as deemed dividends or informal capital contributions.
The following is a short elaboration of the most important interest deduction limitations for debt acquisition financing.Anti-abuse legislation for specific types of transactions
According to specific anti-abuse legislation, the deduction of interest (including foreign exchange results) may be denied if a Dutch-resident company finances one of the following transactions with a loan obtained from a related party:
- profit distribution or capital repayment to a related party;
- capital contribution in a related party; or
- the acquisition of an interest in a company, which after the acquisition, constitutes a related party.
The deduction of interest expenses will nevertheless be allowed if the company paying the interest can substantiate that:
- the loan, as well as the related transaction, are both mainly based on sound business reasons;
- the interest received by the lender is taxed at a rate that is considered to be reasonable for Dutch tax purposes (10 per cent or more); or
- the loan is ultimately provided by unrelated parties.
The Dutch tax authorities may nevertheless deny the deduction of interest expenses if they successfully demonstrate that the loan has been entered into in anticipation of loss compensation by the lender.Earnings stripping rule
The earnings stripping rule concerns a new general interest deduction limitation rule, on the basis of which excess net interest expenses (the balance of interest expenses and interest income) is only deductible up to 30 per cent of the adjusted Dutch taxable profit.
In addition, a limited threshold of €1 million applies. This means that interest expenses up to the threshold are always deductible under this rule and any excess interest expenses can be carried forward indefinitely. The earnings stripping rule is applicable to related and unrelated loans. The earnings stripping rule is also applicable to a fiscal unity. Although Anti-Tax Avoidance Directive 1 allows for a number of exceptions to the interest deduction limitation to be included in the legislation, such as a group ratio exception and grandfathering rules for existing loans, Dutch rules do not include any of these.Protections for acquisitions
What forms of protection are generally sought for stock and business asset acquisitions? How are they documented? How are any payments made following a claim under a warranty or indemnity treated from a tax perspective? Are they subject to withholding taxes or taxable in the hands of the recipient? Is tax indemnity insurance common in your jurisdiction?
It is not uncommon that the acquisition company and seller agree on a full indemnity by the buyer for tax costs (increased with interest and penalties) relating to the pre-acquisition (pre-effective date) period and that are not provided for in the acquisition balance sheet of the acquired company for the statutory limitations period. Often the maximum indemnity is limited to the value of the acquisition price.
The tax indemnities are often described in a separate tax schedule to the share-purchase agreement. If the acquired company formed part of a fiscal unity, specific warranties and indemnities are agreed with regard to liabilities relating to the period of such fiscal unity period.
In the case of a purchase of stock, and assuming the participation exemption applies, payments under an indemnification or warranty should generally be tax-neutral for both the acquisition company and the seller, as the payments would normally be considered a non-taxable correction of the initial purchase price or a reimbursement for (future) expenses or liabilities or both.
In case of an asset transaction, only limited tax warranties are provided by the seller as the tax liabilities generally do not pass to the acquisition company.
Tax indemnity insurance (warranty and indemnity insurance) is an insurance that has been gaining more traction in the Netherlands in the past couple of years. Although relatively unknown, it has become a common term among Dutch M&A attorneys. It is used in M&A transactions and utilised for insuring potential tax liabilities.