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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?
The difference in tax treatment between an acquisition of stock in a company and the acquisition of business and liabilities concerns the registration fees regime applicable to these operations.
- The acquisition of shares of a Moroccan company is exempted from registration fees since the 1st January 2018 (before Financial Law for budgetary year 2018 it was subject to registration fees of 4 per cent).
- If the acquisition of business assets and liabilities are part of a transfer of a business, this transaction will be subject to registration fees of 6 per cent while the inventory acquired in connection with the transfer of a business is subject to a registration fee of 1 per cent.
Also, business assets and liabilities are not subject to VAT except for the acquisition of tangible assets, which is subject to VAT (VAT general rate is 20 per cent).
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?
Following the provision of the General Code for the Accounting Standards, a step-up basis in the business assets is mandatory at the end of each financial year.
Intangible assets may be impaired through a provision in the context of which the depreciation of their value can be justified regardless of the event that justified the depreciation. However, this provision is not deductible in Morocco.
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 buyer’s location has no importance as the tax consequences in terms of registration fees and VAT will be the same whatever the place of residence of the acquisition company.
However, with a view to avoid later capital gains it may be interesting to set up a holding company that will acquire the Moroccan target in a country exempting capital gains on shares (ie, Luxembourg).
Indeed, it could be interesting to locate the holding company in a state in which the tax law provides some exemption applicable to the capital gain related to the sale of shares.
Company mergers and share exchanges
Are company mergers or share exchanges common forms of acquisition?
The sale of shares is an option that is frequently used because it is simpler and quicker in its realisation. Moreover, for the entity that acquires it, it is more interesting for tax purposes because it is exempt from registration fees or subject to registration fees of 6 per cent (if the company is constituted with a majority of real estate assets) with no VAT applied.
Indeed, the transfer of business is subject to registration duties at the rate of 6 per cent and VAT for the tangible assets (goods) and triggers some operations, such as the transfer of commercial contracts to the purchaser for example.
The merger is used in the case of an intra-group transaction. But it involves a very significant tax control risk of the company being absorbed and therefore it is not a privileged option.
Tax benefits in issuing stock
Is there a tax benefit to the acquirer in issuing stock as consideration rather than cash?
To the extent that an exchange of shares is assimilated to a sale of shares in Moroccan law, there is no specific advantage in issuing stock for tax benefit.
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?
Where there is a disposal of fixed assets without any transfer of a business (ie, stocks) no stamp duties apply. However, Moroccan VAT is applicable.
Where the acquisition of business assets and liabilities are part of a transfer of a business, this transaction will be subject to registration fees of 6 per cent while the inventory acquired in connection with the transfer of a business is subject to a registration fee of 1 per cent.
The acquirer is accountable for the payment of the registration fees. In case VAT is applicable, it is also paid by the acquirer but the seller is required to remit the VAT to the Moroccan treasury.
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?
Tax losses may be carried forward for a period of four years from the end of the loss-making accounting period. However, losses may not be carried back.
According to article 232(I) of the Moroccan General Tax Code (GTC) the statute of limitation is four years following the end of the financial year concerned.
However, in application of article 232(III) of the Moroccan GTC, whether the Moroccan entity has registered some loss carry-forward which has been deducted from a tax year subject to tax audit, the Moroccan tax administration can extend its tax audit to the last four closed years. This extension of the statutes of limitation could also be applicable by the Moroccan tax administration in case of VAT credit.
The change of shareholder (ie, takeover) does not affect the possibility of deferring the deficits.
In case of merger, article 162-II, H of the GTC provides that the accumulated deficits shown in the tax return for the last financial year preceding the merger cannot be carried forward for the following financial years.
No special tax regime is applicable to the acquisitions or reorganisations of bankrupt or insolvent companies.
Does an acquisition company get interest relief for borrowings to acquire the target? Are there restrictions on deductibility where the lender is foreign, a related party, or both? Can withholding taxes on interest payments be easily avoided? Is debt pushdown easily achieved? In particular, are there capitalisation rules that prevent the pushdown of excessive debt?
Interests on borrowings are deductible provided that the debt is incurred for the needs and in the interest of the company. Thin capitalisation rules apply to reduce the deduction available where the taxpayer is a foreign entity operating in Morocco, a foreign controlled Moroccan entity or a Moroccan resident with foreign business investments. In each of these cases, the tax deduction for interests may be reduced if the taxpayer’s debt exceeds the levels permitted under the thin capitalisation provisions.
In case the loan is granted by a foreign shareholder, the tax deductibility of interests paid by the company should be granted within the following limits (thin capitalisation rules):
- the amount of the shareholder loan does not exceed the amount of the share equity capital (ratio 1:1); and
- the interest rate does not exceed the rate annually fixed by the Ministry of Finance during a tax year (ie, 2.22 per cent for 2018).
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?
In the case of a transfer of business, shares or stocks, the preferred form of guarantee is the guarantee of liabilities.
There is no specific documentation required, however, we recommend that the selling contract specifies in maximum detail the assets sold and the conditions for the buyer to assert its rights.
The guarantee of liabilities is a specific clause within the contract of assignment. The payment of an indemnity under such guarantee is considered from tax purpose as an income for the purchaser.
In this context, this indemnity is subject to corporate income tax under Moroccan tax regulation.
What post-acquisition restructuring, if any, is typically carried out and why?
There is no typical post-acquisition restructuring. However, the buyer might consider relocating its activity to within an Export Free Zone (EFZ).
Moroccan companies that operate in the EFZ benefit from the following on their export turnover:
- a total exemption during the five first successive tax years as from the date corresponding to the beginning of their activity;
- the application of a corporate income tax rate reduced to 8.75 per cent during the following 20 tax years; and
- the application of a corporate income tax rate reduced to 17.5 per cent beyond this period.
The installation in an EFZ is not automatic and requires a prior authorisation of the authorities in charge of the said area.
Please also note that services companies (financial institutions and professional services providers) and holding companies with the Casablanca Finance City (CFC) status shall benefit, in respect of their export revenues and net capital gains from the sale of foreign securities for the financial period from:
- a total exemption from corporate tax for a period of five consecutive years, starting the first year they have been granted Casablanca Finance City status; and
- a reduced corporate tax rate of 8.75 per cent beyond this period.
Export revenues eligible for exemption are those relating to the last service rendered on Moroccan territory for the direct and immediate purpose of exporting. Moreover, ‘service exports’ means operations used or consumed overseas for which revenues are generated in foreign currencies.
Entitlement to advantages granted to services companies with the CFC status takes effect from the financial period in which the CFC status is granted.
In terms of personal income tax: CFC entities’ employees can benefit from a special regime: application of a 20 per cent flat tax rate during a period of five years as from the beginning of their activity and the obtention of the CFC status by their employer.
However, in case of application of this special tax regime (flat rate of 20 per cent) the taxable basis for personal income tax will be the gross amount of the wage (including the employee part of social contribution) without any deduction.
Can tax neutral spin-offs of businesses be executed and, if so, can the net operating losses of the spun-off business be preserved? Is it possible to achieve a spin-off without triggering transfer taxes?
According to article 162 of the GTC, totally merged or totally spun-off companies are not taxed on the net capital gain realised as a result of the contribution of the fixed assets and equity, provided that the acquiring company, or the newly created entity issued from the operation, file to the tax administration, within 30 days following the date of the merger a written declaration that includes:
- a summary statement of the contributed assets containing all the details of the capital gains realised or the losses incurred and indicating the net capital gain that will not be imposed in the merged or spun-off company;
- a statement concerning, for each of these companies, the provision appearing on the liabilities side of the balance sheet, including those not subject to tax deductions;
- the act of merger or spin-off into which the absorbing company or the newly created entity commit to:
- record, for their full amount, the provisions for which the tax is deferred;
- reintegrate in the corporate results, the net capital gain realised by each of the companies merged or spun-off on their contribution:
- whether on the aggregate of the equity retained and of the assets where, among these items, the value of the lands is equal to or greater than 75 per cent of the aggregate value of the net assets of the company concerned. In this case the net capital gain is re-integrated with the result of the first financial ending after the merger or spin-off; and
- whether only on the depreciable assets when the proportion of 75 per cent referred above is not reached. In this case, the net capital gain realised on the contribution of the depreciable assets is reintegrated into the taxable results, in equal proportions, over the amortisation period of those assets. The value of those elements is taken into account for the calculation of the depreciation and subsequent capital gains; and
- add to the capital gains realised or realised at the time of the withdrawal or disposal of the assets not concerned by the reintegration provided for here above, the capital gains realised by the merged or spun-off company and whose taxation has been deferred.
The merged or spun-off premium realised by the absorbing company and corresponding to the capital gain on its shareholding in the merged or spun-off company is exempted.
Capital gains resulting from the exchange of securities of the company absorbed or spun-off, carried out in connection with the merger or spun-off transactions, are taxable only by the time of the sale or withdrawal of such securities.
Migration of residence
Is it possible to migrate the residence of the acquisition company or target company from your jurisdiction without tax consequences?
The transfer of the residence of a Moroccan company outside of the jurisdiction is not an operation provided for by the Moroccan law, nor is the transfer of the residence of a foreign company to Morocco possible.
In this context, the transfer of residence implies the liquidation of the existent company and the setting up of a new legal entity.
The liquidation of the existent company will have tax consequences notably regarding corporate income tax (ie, taxation of the unrealised capital gains).
Interest and dividend payments
Are interest and dividend payments made out of your jurisdiction subject to withholding taxes and, if so, at what rates? Are there domestic exemptions from these withholdings or are they treaty-dependent?
Dividends paid to a non-resident are subject to a 15 per cent withholding tax unless the rate is reduced under an applicable double tax treaty. Interest and royalties payments made out of Morocco are subject to a withholding tax of 10 per cent. There is an exemption in the withholding tax applicable to interest in case of loans contracted in foreign currencies for a period of 10 years.
Moreover, the rate of this withholding can be reduced by the application of a double tax treaty agreement entered into force between Morocco and a third country. Depending on the provision of the aforementioned double tax treaty agreement, the withholding might be deducted from the tax results of the foreign company which receive the payment.
Tax-efficient extraction of profits
What other tax-efficient means are adopted for extracting profits from your jurisdiction?
As most of our clients are established within the EU, we usually recommend they use the parent-subsidiary regime when possible. Using this parent-subsidiary regime, a French company that receives a dividend of its Moroccan subsidiary would bear the cost of the withholding tax of 10 per cent, the dividends would be exempted from corporate income tax in France on the condition that a reintegration of a portion of costs and expenses set at a fixed rate of 5 per cent takes place.
In addition to paying dividends, the payment of management fees, service fees and royalties are methods of repatriating profits to the parent company. However, the payments made by the Moroccan company must reflect the market value of the goods sold and the service rendered to the Moroccan company.
Indeed, article 213 (II) of the GTC provides that where a company has ties of dependence with companies located in Morocco or outside Morocco, the profits indirectly transferred, either by way of increase or decrease in the purchase or sale prices or by any other means, shall be included in the corporate results.
To this end, profits indirectly transferred shall be determined by comparison with those of similar companies or by direct assessment on the basis of information available to the administration.
In this order, article 7 of Finance Act 40-08 for the budgetary year 2009 introduced an obligation for businesses that are taxable in Morocco to supply the tax authority, at its express request, with documents and information relating to transactions undertaken with related entities established outside Morocco. This obligation is now contained in article 214 (III) of the Moroccan GTC.
Under article 214 (III) of the Moroccan GTC, documents relating to transfer prices must be sent at the request of the authority (in the form of a letter giving notice) within 30 days of receipt of that request.
Article 214 (III) of the Moroccan GTC stipulates that the authority may request all documents and information relating to the following matters:
- the nature of the relationship connecting the company that is taxable in Morocco with the one located abroad;
- the nature of the services provided or of the products sold;
- the method by which the price of transactions between the companies has been determined, and the documents supporting it; and
- the regimes and tax rates applicable to the businesses situated outside of Morocco.
Disposals (from the seller’s perspective)
How are disposals most commonly carried out - a disposal of the business assets, the stock in the local company or stock in the foreign holding company?
Disposals are most commonly carried out with the stock in the local company.
Disposals of stock
Where the disposal is of stock in the local company by a non-resident company, will gains on disposal be exempt from tax? Are there special rules dealing with the disposal of stock in real property, energy and natural resource companies?
The disposal of stock realised by a foreign company will be taxed in Morocco in accordance with the corporate income tax rates.
There are special incentives for the activities related to oil and gas production. These activities are taxed under the common Moroccan tax rules, subject to a certain number of advantages granted by the Moroccan state to oil and gas operators in order to promote their activities in Morocco.
Listed here are some tax incentives provided under the Hydrocarbon Code:
- the holder, or as the case may be, the co-holders of any exploitation concession benefit from a total exemption on corporate income tax during a 10-year period starting as from the date of the beginning of the regular production of any exploitation concession;
- all equipment, products and services necessary for the reconnaissance, exploration and exploitation works are exempted from value added tax (VAT) and custom rights; and
- the profits and dividends of the exploitation concessions holders (and those of the shareholders of the concession companies) are exempted from any taxes and may freely be repatriated outside Morocco without limitations for foreign entities.
The holder of an exploration permit or an exploration concession benefits from an exemption on Business Licence Tax.
Avoiding and deferring tax
If a gain is taxable on the disposal either of the shares in the local company or of the business assets by the local company, are there any methods for deferring or avoiding the tax?
There are no such arrangements within Moroccan tax law.