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?
For a corporate buyer with no presence in Romania, the acquisition of stock in a Romanian company does not have fiscal implications. Tax implications will arise only in cases where there are transactions between the buyer and the company acquired.
If business assets and liabilities are to be acquired, the buyer must fiscally register in Romania before such an acquisition takes place. The business acquired will generate a permanent establishment in Romania for the buyer, which will become a Romanian taxable entity for the activity acquired.Step-up in basis
In what circumstances does a purchaser get a step-up in basis in the business assets of the target company? Can goodwill and other intangibles be depreciated for tax purposes in the event of the purchase of those assets, and the purchase of stock in a company owning those assets?
A step-up in basis in the business assets is only permitted by using the tax depreciation of the assets scenario.
However, goodwill and similar intangibles are not recognised for tax purposes. Also, in the event of the purchase of stock in a company owning those assets, it is not permitted to alter the value of the assets for tax purposes (ie, no step-up in basis of the assets).Domicile of acquisition company
Is it preferable for an acquisition to be executed by an acquisition company established in or out of your jurisdiction?
The acquisition of a business’s assets and liabilities by a non-Romanian entity will generate a permanent establishment in Romania for that entity. Therefore, for business assets and liabilities transfers, it does not matter if the acquisition company is a foreign one or not; it will become a Romanian entity by virtue of law.
In consideration of shares purchase transactions, it is preferable that the buyer is established in Romania owing to numerous exemptions provided to corporate income tax computation. According to Romanian fiscal legislation, the following types of income are non-taxable:
- dividends received from a Romanian company and from foreign subsidiaries, provided that the subsidiary meets the following criteria:
- it is subject to corporate income tax or a similar tax;
- it is located in a state with which Romania has concluded a double taxation treaty; and
- the minimum holding is 10 per cent for an uninterrupted period of at least one year;
- income from the valuation, revaluation, sale, transfer of shares and liquidation proceeds of a Romanian or foreign entity located in states with which Romania has concluded double taxation treaties; the minimum holding must be 10 per cent for an uninterrupted period of at least one year; and
- income registered through a permanent establishment in a foreign state when the double taxation treaty provides the method of exemption for avoiding double taxation.
Are company mergers or share exchanges common forms of acquisition?
Yes, both forms of acquisition are used in Romania. However, mergers and demergers are more likely to be used in Romania than share exchanges.
From the tax point of view, mergers are tax-neutral. Therefore, the assets depreciation, interest expenses, net foreign exchange losses, net operating loss and fiscal losses subject to mergers are fully transferred to the taxpayer arising out of the merger.Tax benefits in issuing stock
Is there a tax benefit to the acquirer in issuing stock as consideration rather than cash?
According to Romanian legislation, there is no tax benefit in issuing stock as consideration rather than cash.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?
For the acquisition of shares, only Trade Registry taxes are applicable, which are not dependent on the value of the shares transferred. The cost of Trade Registry taxes is insignificant.
In cases of a business assets acquisition where real estate assets are involved, notary fees and Land Registry office taxes are applicable. Notary taxes and tariffs are usually calculated as a percentage of the actual sale value of the transferred real estate. This sale value cannot be smaller than that indicated in a notary table of real-estate value for different real-estate categories, that being approximately 0.5 per cent of the asset’s value.
In addition, land book registration of real-estate transfers is subject to a tariff of roughly 0.5 per cent of the asset’s value.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?
Changing control of the target will not affect the net operating losses, tax credits or other types of deferred tax assets of the company.Interest relief
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?
Romanian legislation does not provide interest relief for borrowings to acquire a target.
The restriction on interest deductibility is generally applied to all companies and is related to the implementation of the Anti-Tax Avoidance Directive (ATAD). There is only one exception, which is applied to independent taxpayers permitting the full deductibility of interest and net foreign exchange losses. An independent taxpayer is an entity that is not part of a consolidated group for financial accounting purposes, has no associated companies and no permanent establishment.
For non-independent taxpayers, an unlimited deductibility for interest and net foreign exchange losses is applied up to a maximum amount of €1 million.
In addition to the above threshold, a limited deductibility is applied to a limit of 30 per cent from the base, calculated as follows: gross profit plus corporate income tax payable, plus excess debt-related costs and tax depreciation, minus non-taxable income. If the above base computation is zero or negative, then the value of the interest and net foreign exchange losses that are over the above threshold is non-deductible. However, an amount that is considered non-deductible in the current year can be carried forward until it can be deductible in the fiscal year when the above criteria are met.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?
The most usual protection requested by buyers is a price withholding until the risk of tax liabilities diminishes because of the statute of limitation. Price withholdings are considered as conditional payments that will be released at an agreed date.
Payments made following a claim under a warranty or indemnity represent an adjustment of the price of acquisition and will follow the tax treatment of the original payment.