Deloitte 2021 M&A Tax Virtual Conference Break-out session France: Management investment's environment and trends in French deals
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Deloitte 2021 M&A Tax Virtual Conference Break-out session France: Management investment’s environment and trends in French deals 03 MARCH 2021
Day 3: Structuring of funds/MEP structures
Introduction and Contacts
Alexis Fillinger
Partner
Paris
E-Mail: afillinger@taj.fr
Alexis is a Tax Partner based in Paris specialised in
Share & incentive schemes, as well as investment
taxation for individual investors. Alexis provides advice
on design and review of Employee/Executive Share
schemes and Management Incentive Plans (“MIP”) in
the context of M&A and private equity transactions. He
has also developed strong skills on Carried Interest and
Co-Investments structuring for Private Equity funds.
MEP environment and trends in France
Day 3: Structuring of funds/MEP structures
Key Findings of Private Equity in France
Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 4
Day 3: Structuring of funds/MEP structures
Instruments used for MEP structuring
Ratchet Mecanism
Strip equity • Ratchet mechanism is an accretive
instrument which enables the Managers to
• Strip equity is commonly
benefit from a greater portion of capital
used for the Managers to
returns depending on the TRI reached at
invest pari passu with the
the exit by the Fund
fund
• Ratche mechanism is structured with
• Strip equity is often
preference shares or convertible bonds
structured with Ordinary
shares
Sweet equity
• Sweet equity mechanism is used in
Free shares order enable Managers to benefit from
a greater portion of capital returns
as they invest proportionally more in
equity than the Fund
• Sweet equity is often structed with
Debt instruments ordinary shares or preference shares
combined with debt instruments, the
• Debt / assimilated
envy ratio being favorable to the
instruments are also used in
Managers
order to achieve the pari
passu investment Free shares
• Debt instruments are
• Free shares are used in order to enable the
structured with bonds or
Managers to freely acquire their instruments in
fixed rate preference
the Management package
shares
• They can be combined with strip or sweet
Deloitte 2021 equity as well as ratchet mechanism although 5
it can be challenged by the French tax authorities
Day 3: Structuring of funds/MEP structures
Evolutions of MEP structuring within a tax and social framework
Facts
• A Recent case law lead to rethink the structuring of MEP
• Managers from the SAS Groupe Lucien Barrière had invested in share warrants (bons de souscription d’actions or « BSAs ») in 2004 in a context of LBO. The
French social authorities challenged the employer on the nature of the share warrants gain and reclassified the gain in employment income
Supreme Court decision
Preferential conditions
When the purchase of BSA is proposed to executives / employees in consideration of their professional activity and are acquired at
preferential conditions, they should be considered as a benefit subject to social security contributions
Links with employment status
2 Based on the investment agreement, the purchase and holding of BSA are subject to the existence of an employment contract / executive
office. On that basis, the supreme court considers that it should be viewed as a benefit subject to social security contributions.
Triggering event
3 The event triggering a taxable benefit should be its effective availability (e.g. when restrictions on exercise / sale of BSA are unveiled).
Key Points
• How to manage existing MEP?
• How to structure future MEP?
• How to manage leaver provisions?
Deloitte 2021
• Social security audit experience Deloitte 2021 M&A Tax Virtual Conference 6
Deloitte 2021 M&A Tax Virtual Conference Break-out session Germany: Dividend Withholding Tax: Draft Act for stricter anti-abuse tests backing the Anti Treaty Shopping Rules 03 MARCH 2021
Day 3: Structuring of funds/MEP structures
Introduction and Contacts
Nevin Borucu
Partner
Munich
E-Mail: nborucu@deloitte.de
Half of everything you know will be
obsolete in 18-24 months - Moore's
Law
Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 2
Contents Overview of Legislation in Germany 4 Current Anti-Treaty Shopping Rules 6 Potential Future Law 11 Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 3
Overview of Legislation in Germany Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 4
Overview of Legislation in Germany
Reform of withholding tax due to supposed tax avoidance - Overview
04.04.2018 20.01.2021
Circular by the Federal Federal Government
Ministry of Finance. issues draft act on the
WHT reform
WHT reform
24.01.2012 19.11.2020
Circular by the Federal Federal Ministry of Finance
Ministry of Finance. issues WHT reform draft bill
Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 5Current Anti-Treaty Shopping Rules Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 6
Current Anti-Treaty Shopping Rules
• German WHT on dividends 26.375%
• No WHT on plain vanilla interest
• No WHT damage between German companies -> either full credit or
CIT/TT fiscal unity
Fund
Disregard
Lux Master
ed for US
HoldCo
tax
Disregard
LuxHoldCo
ed for US Dividend distribution
tax
Disregard
German
ed for US
BidCo
tax
German
Target
Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 7Current Anti-Treaty Shopping Rules
General overview
Income from own economic
Disregarded for US tax
activity of the foreign company Yes
Start of the test at the next shareholder
No
non-tax (e.g. economic) shareholder has an
Both yes
reasons for the chosen
Disregarded adequately furnished
ORfor US tax
Structure? business concern?
No No
Harmful income
Yes+ shareholder Yes+ shareholder
is a corporation WHT relief of the (next) shareholder is an individual
Disregarded for US tax
Of the company
No
No WHT refund / Exemption WHT Refund / Exemption
Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 8Current Anti-Treaty Shopping Rules
General overview
Income from own economic activities
• E.g. dividends from a German company if actively managed
Income from own economic
Disregarded for US tax
activity of the foreign company Yes • (-) in case of a passive holding
Start of the test at the next shareholder
No • Required minimum:
• Holding of > 1 companies
non-tax (e.g. economic) shareholder has an
Both yes
reasons for the chosen
Disregarded adequately furnished
ORfor US tax • Real managing functions
Structure? business concern?
• Actual influence on the business
No No
• Long-term nature (not only short-term instructions)
• Fundamental importance of managerial activities
Harmful income
Yes+ shareholder Yes+ shareholder
is a corporation WHT relief of the (next) shareholder is an individual
Disregarded for US tax
Of the company
No
No WHT refund / Exemption WHT Refund / Exemption
Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 9Current Anti-Treaty Shopping Rules
General overview
Non-tax reasons for the choosen structure
• Real anti-abuse test
Income from own economic
Disregarded for US tax
activity of the foreign company Yes • Clarification by the 2018 circular of the Federal Ministry of Finance
Start of the test at the next shareholder
No • Overall economic view on the structure and business purpose
non-tax (e.g. economic) shareholder has an
Both yes
reasons for the chosen
OR
adequately furnished Adequately furnished business concern
Structure? business concern?
• Rather lower requirements
No No
• 2018 circular of the Federal Ministry of Finance: “non necessary to
constantly employ managing and non-managing personnel”
Harmful income
Yes+ shareholder Yes+ shareholder
is a corporation WHT relief of the (next) shareholder is an individual
Disregarded for US tax
Of the company
No
No WHT refund / Exemption WHT Refund / Exemption
Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 10Potential future law Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 11
Potential future law
Outlook
Economic correlation of business activities:
Economic correlation of
• Holding of the German shares must serve a economical function with
business activities between
Disregarded German
for US tax respect to the other activities of the foreign companies
Company and its foreign shareholder Yes
• (-) in particular if the economic activity of the foreign company
No
consists solely of providing support services to one or more
Start of the test at the next shareholder
subsidiaries (e.g. accounting or legal advice).
Main-benefit-test
Disregarded for US tax
Tax saving is • This correlation must be material in the sense that the economic
Tax saving is not main benefit function or origin of the source of income may not only play a
main benefit
completely subordinate role
Main-benefit-test?
Harmful income
• All non-tax reasons must be taken into consideration, including those
arising from a group relationship.
Yes+ shareholder
WHT relief of the (next) shareholder is an individual • Reversal of burden of proof with the foreign company
Disregarded for US tax
of the company
• Link to the definition of the main benefit test within DAC6
Yes+ shareholder
is a corporation
No
No WHT Refund / Exemption WHT Refund /Exemption
Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 12Deloitte 2021 M&A Tax Virtual Conference Break-out Session Germany: Reduction of ETR trough interest deduction: tightening of tax audit practice on interest rates and Germany TP practice 03 MARCH 2021
Day 3: Structuring of funds/MEP structures
Introduction and Contacts
Nik Nolden Ronny John
Director | CFA | Transfer Pricing Director | StB | Transfer Pricing
Deloitte GmbH Deloitte GmbH
Wirtschaftsprüfungsgesellschaft Wirtschaftsprüfungsgesellschaft
Düsseldorf Leipzig/ Berlin
Deutschland Deutschland
nnolden@deloitte.de rojohn@deloitte.de
+49 211 8772 2849 +49 341 9927093
Dr. Felix Ebeling
Senior Manager | CFA | Transfer Pricing
Deloitte GmbH
Wirtschaftsprüfungsgesellschaft
Düsseldorf/ Köln
Deutschland
febeling@deloitte.de
+49 211 8772 3191
Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 2Tightening of German tax audit practice on interest rates and Germany TP practice
Please let us
know your
experience in tax
audits of IC
loans!
Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 3Tightening of German tax audit practice on interest rates and Germany TP practice
German tax audit has several options when analyzing interest rates / estimating the credit rating of the borrower
OECD TPG – Chapter 10 on FT FG Münster Court Decision 7.12.2016
• OECD generally recommends the application of stand • Court decision strictly recommends application
alone credit rating (SACR) under consideration of of group rating
implicit group support
• Appeal against local court decision still pending
• Example in para 1.164 sqq of OECD TPG shows adjusted at highest German fiscal court (“BFH” – only
rating of A with group rating of AAA and stand-alone these decisions are officially binding to GTA),
rating of BBB but often cited by German tax audit
• In inbound cases, tax audits rarely use OECD guidance,
but BFH CourtOECD
recognize Decision 27.2.2019
guidance as interpretation aid “on § 1a AStG-E (from Dec. 2019)
request”
• Decision of highest fiscal, which was • In 12/2019 German ministry of finance published draft for
subsequently repeatedly confirmed novel section on IC Loans and arm’s length interests
• Court decision primarily concerns collateral of • Section probably will not become effective soon, but
loans for the tax recognition of impairments of administrative letter in same favor expected (i.e. Work in
loans by German companies to their foreign Progress)
subsidiaries, but only logical, if group support is
• Section suggests application of group rating, if tax payer
considered to be less relevant, i.e. SACR
cannot provide persuasive reasons that another credit rating
applicable
is applicable (unclear whether OECD concept of passive
association would be such reason)
Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 4Tightening of German tax audit practice on interest rates and Germany TP practice
Estimation of credit rating of a multinational group entity
Exercise:
• Let us assume we have
S&P Credit
o ….a multinational group with a BBB+ credit rating, Rating Scale
and
…
o …an entity of the group, which has a stand alone BBB+
credit rating of B (flat)
BBB
What do you think is the appropriate credit rating to
assume when deriving the interest rate for the entity,
BBB-
BB+
BB
?
BB-
when it borrows funds within the group?
B+
B
…
Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 5Tightening of German tax audit practice on interest rates and Germany TP practice
Estimation of credit rating of a multinational group entity
Answer:
S&P Credit Interest rate
Rating Scale (USD, 5 Y, Jan
… 21)
BBB+ § 1a AStG-E and FG Münster …
BBB
BBB- BBB: ~1%
BB+
BB
BB- OECD BB: ~3%
B+
B BFH 27.2.2019
… B: ~4%
…
Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 6Deloitte 2021 M&A Tax Virtual Conference Break-out Session Luxembourg: Debt pushdown under TP angle: debt capacity and yield pricing 03 MARCH 2021
Debt pushdown under TP angle: debt capacity and yield pricing
Why Testing of interest rates under TP angle is still important
01
Interest limitation rules (beyond TP) very often
limit deduction Fund 02
% S/H Loan
Why Rates shall still be tested/documented 03
under arms length principles Third-party Loan Master LuxCo
04
04
% S/H Loan
What if the source country considers the rate
on S/H Loan as higher than the arm’s length ? 05
Lux SPVs 04
06
What are potential tax consequences?
% Equity % S/H Loan
07
Investments
Solution 08
Continue testing the arms length character to the S/H loans
09
Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 2Debt pushdown under TP angle: debt capacity and yield pricing
Building interest rates in a post BEPS environment
01
Bottom-up approach is preferred to build
consistency in waterfall of S/H loans Fund 02
Top-Down approach is preferred to build % S/H Loan 03
consistency with respect to third party funding Third-party Loan
Master LuxCo
coming from the top 04
04
% S/H Loan
Mix of strategies creates tension and
potentially irrational situations for Financial Lux SPVs
Intermediaries
06
% Equity % S/H Loan
07
Investments
Solution 08
Segregation of flows + alignment of terms on the waterfalls
09
Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 3Debt pushdown under TP angle: debt capacity and yield pricing
Debt and equity funding – Debt capacity analysis
Topic Key Chart Jurisdictions notes 01
Many countries have Debt:Equity safe harbour ratios.
Some examples include:
Thin capitalisation rules 02
- Turkey: 3:1 Debt:Equity minimum requirement
- Switzerland: Minimum Debt:Equity requirement for
each asset class i.e. investments can be 70% debt 03
0%
funded
40%
- South Korea: 2:1 Debt:Equity minimum requirement
60% 04
- South Africa: Min 20% equity minimum requirement
No thin
Minimum equity
04
Thin capitalisation - Russian: 3:1 Debt:Net Asset minimum requirement
requirements/
capitalisation rules/ general - Mexico: 3:1 Debt:Equity minimum requirement
rules arm’s length
prescriptive asset 05
ratios - Japan: 3:1 Debt:Equity minimum requirement
principle
- Denmark: 4:1 Debt:Equity minimum requirement
- China: 2:1 Debt:Equity minimum requirement
- Canada: 1.5:1 Debt:Equity minimum requirement in
some cases
Minimum equity requirements- Brazil: 2:1 Debt:Equity minimum requirement
08be noted many countries also have EBITDA
It should
0% rather than Equity linked limitations.
46% 54% 09
Many countries have a legal minimum equity requirement
for example Switzerland, Sweden, Russia, Norway, Italy,
Germany, US, UK, Belgium and Argentina. This typically
relates to the equity on incorporation.
Minimum No minimum Minimum equity However, many countries also monitor equity levels and
equity equity requirements where for example a entity falls into a negative equity
requirements requirements. exist. position additional action is required. Such counties
include Finland, Denmark and Turkey.
Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 4
Some counties do not have set rules but a minimum level
of equity is expected for example Singapore and AustriaDebt pushdown under TP angle: debt capacity and yield pricing
Debt capacity analysis – Various Methods
01
Solution Industry OECD Compliance Economic Required data
rationale
Peer analysis / Loan to Value (LTV) Real Estate ●●● ●● ●
02
The method is based on the identification of comparable transactions to benchmark them
under the angle of Loan to Value (LTV) and determination of the maximum debt based on this
benchmark
03
Peer analysis / Covenants All ●●● ●●● ●●
The method is based on searching for comparable transactions to define financial/covenant
ratios. The financial covenants observed are used to determine the arm’s length debt-to-equity
ratio.
04
Peer analysis / Financial ratios All ●●● ●● ●● 04
The method is based on the identification of Peers and observation of financial ratios of the
Peers to build a benchmark.
Expected loss (EL) AI Debt ●●● ●● ●●● 05
It consists of checking the risk attached to an investment (credit risk) and based on its
probability of default, assessing the minimum equity that the entity making the investment
should have to face the said risk.
06
Cash Flow Forecasts (CFF) All ●●●● ●●●● ●●●●
The method consists of modelling expected cash flows from the specific investment and the
risks attached thereto to test the ability to serve the debt
07
Message 08
Test the amount of debt before the actual establishment of arm’s length rate
Safe harbor / Rules of thumb debt to equity ratios under pressure 09
Multiple approaches to economic analysis for the arm’s length debt to equity
Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 5Deloitte 2021 M&A Tax Virtual Conference Break-out Session Luxembourg: Holding companies and VAT: navigating the puzzle of CJEU Jurisprudence 03 MARCH 2021
Break out sessions – Holding companies and VAT–
Introduction and Contacts
Cédric Tussiot Tomas Papousek
Partner Director
Luxembourg Luxembourg
E-Mail: ctussiot@deloitte.lu E-Mail: topapousek@deloitte.lu
Marcus Sauer Bérenger Richard
Director Director
Düsseldorf Paris
E-Mail: msauer@deloitte.de E-Mail: brichard@taj.fr
Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 2Contents CJEU case-law on input tax deduction right 4 Luxembourg aspects 8 German aspects 10 French aspects 13 Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 3
CJEU case-law on input tax deduction right Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 4
Day 3: Holding companies and VAT
CJEU case-law on input tax deduction right on transaction costs – involvement in
management
Landmark Cases:
Polysar v Netherlands (C-60/90), 20 June 1991
Pure holding companies: no intervention in the management of subsidiaries except the exercise of shareholder rights not taxable persons
Cibo Participations SA v France (C-16/00), 27 September 2001
The involvement of a holding company in the management of companies in which it has acquired a shareholding constitutes an economic activity (…) , where it
entails carrying out transactions which are subject to value added tax (…), such as the supply by a holding company to its subsidiaries of administrative,
financial, commercial and technical services.
Larentia + Minerva and Marenave Schiffahrts (C-108/14) / Marle Participations (C-320/17)
Can a holding company recover VAT incurred in relation to input supplies connected with the purchase of shares in subsidiaries, if that holding company
subsequently provides various taxable services to those subsidiaries?
• Where the holding company will • Where the holding company will not • Clarification of the concept of
involve itself in the management involve itself in the management “involvement in the management”:
(active) of all of the subsidiaries it (passive) of all of the subsidiaries it extension to all economic
acquires, it is in principle entitled to acquires, only part of the input VAT transactions.
recover input VAT incurred on incurred on transaction costs may
transaction costs in full, unless it be recovered (i.e. an apportionment
makes exempt supplies (in which must be made to reflect economic
case appropriate partial deduction vs non-economic activity).
method must apply).
Ability to substantiate the active involvement in the management of the subsidiaries will remain a key element in practice;
Economic consistency between the amount of transaction costs and the annual aggregate fees charged by the holding
company is most likely to still be tested by number of tax authorities across EU.
Important remarks
Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 5Day 3: Holding companies and VAT
CJEU case-law on input tax deduction right on aborted deal costs – concept of exclusive
reason
Ryanair (C-249/17)
Ryanair made a formal takeover bid with the aim of acquiring the entire share capital of Aer Lingus, but acquired slightly less than 29% and had to abandon the
acquisition for competition reason. In connection with the takeover bid, Ryanair availed itself of services subject to VAT. Ryanair claimed that VAT as deductible
input tax.
Should a company be entitled to deduct A company, (…), which intends to acquire all the shares of another
input VAT incurred on the professional company in order to pursue an economic activity consisting in the
costs incurred in the context of a takeover provision of management services (…)” subject to VAT has “(…) the right
bid, even if the transaction is aborted and to deduct, in full, input VAT paid on expenditure relating to consultancy
ultimately the intended taxable supply of services provided in the context of a takeover bid, provided that the
management services is not carried out? exclusive reason for that expenditure is to be found in the intended
economic activity”.
C&D Foods (C-502/17)
C&D Foods provides management and IT services subject to VAT only to Arovit Petfood. C&D Foods supported costs in connection with the envisaged but
aborted sale of shares owned in Arovit Holding and Arovit Petfood. Danish authorities refused the deduction of the VAT because the services were not provided
to C&D Foods (?) and lack a sufficient link with the taxable activities of C&D Foods
Could a holding company deduct VAT on The exclusive reason of the disposal of the shares was to use the
costs in connection with the sale of an proceeds of that sale to settle the debts owed to the proprietor of the
envisaged but aborted sale of a (sub- Arovit group. The VAT on expenditures in connection with the sale
subsidiary) to which the holding company (auditors and lawyers fees) is not deductible.
supplies management and IT services that
are subject to VAT?
Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 6Day 3: Holding companies and VAT
CJEU case-law on input tax deduction right on aborted deal costs – addition of actual use
concept
Sonaecom (C-42/19)
Intending to invest in a new business segment, a holding company acquired consultancy services relating to market studies to potentially acquire shares in a
telecommunications provider. Also, the holding company paid a taxable commission to a bank that helped put together and guarantee the placement of a
private issuance of bonds. The VAT at stake was around €1 million. However, while the fundraising via the bond issuance was successful, the share acquisition
was not completed and the holding company made the capital obtained available by issuing the bonds to the group’s parent company via a loan.
Should a holding company be entitled to Reaffirming its past stance on this matter, the CJEU held that an active
deduct the input VAT incurred concerning holding company is entitled to deduct input VAT paid on consultancy
consultancy services in relation to an services incurred regarding the acquisition of shares in another
acquisition of shares that had not been company, even if the acquisition did not take place. Therefore, the Court
completed) confirms that a company can recover VAT on costs relating to a failed or
aborted acquisition of shares in another company—as long as, based on
objective elements and evidence, the former has or had the intention
to provide the latter with taxable management services.
The Court confirmed that, in these circumstances, whilst the intention
was to make taxable supplies of management services that, in principle,
would have been entitled to an input VAT deduction right on related
Should a holding company be entitled to
costs, here the company actually granted a loan to its parent company.
deduct the input VAT incurred concerning
Since the provision of a loan is an exempt supply under the VAT
the commission for organizing and putting
Directive, the company was not entitled to reclaim the input VAT
together a bond loan that was ultimately
incurred on the bank’s commission.
transferred to the parent company of the
group?
Therefore, the Court refused the company’s input deduction right
regarding the VAT incurred on the bank’s commission because the
actual use of the funds raised did not entitle to an input tax deduction
right. This ruling brings another consideration to be analyzed when
dealing with the input VAT deduction right of holding companies,
apparently enforcing an effective use over an intended use, according to
which the “exclusive reason” test is now paired with an “actual use”
test in tandem
Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 7Luxembourg aspects Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 8
Day 3: Holding companies and VAT
CJEU case-law on input tax deduction right on transaction costs – Luxembourg aspects
Per the current CJEU case-law, where Lux BidCo would post-acquisition start
providing management service, it should be entitled to recover the VAT it incurrs
on the costs relating to the acquisition of the shares of the Target.
The Luxembourg VAT authorities are currently challenging the input tax
deduction right in these cases arguing that taxpayers need to show the direct link
between the transaction costs and the management services (and that such
transaction costs do not related to the holding of shares or financing, if any).
A straight recharge of costs (if properly documented) may help in some cases.
Transaction costs in
relation to the acquisition
of shares Sale of shares of Target
Service
Lux BidCo Vendor
providers
Management services / Management services
recharges of transaction provided by Lux BidCo to
costs by Lux BidCo to Target post-acquisition
Target post-acquisition
Target (OpCo)
Attention should be paid whether the
management services provided / recharges of
transaction costs to Target do not attract
irrecoverable VAT locally, which could ultimately
lead to an increase of the final VAT cost of the
whole structure
Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 9German aspects Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 10
Day 3: Holding companies and VAT
Certain German VAT aspects
Consultancy agreement is concluded with investor
and the service provider is raising its invoice to the
investor.
Investor will then recharge the consultancy fee
directly to BidCo
Consultancy
Consultancy agreement
agreement
Service Service
Investor Investor
provider provider
Invoice for
consultancy
services
Invoice for New
consultancy consultancy
services agreement
Recharge of
consultancy fee
BidCo BidCo
Consultancy agreement is concluded with investor
given that BidCo is generally only established Alternatively, once BidCo is established, service
before the actual acquisition. provider enters into consultancy agreement with
The invoice is, however, raised to BidCo BidCo directly or investor novates the consultancy
agreement to BidCo.
The invoice would then be issued directly by
service provider to BidCo
Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 11Day 3: Holding companies and VAT
Certain German VAT aspects
Establishment of a VAT group
Transaction costs in
Sale of shares of
relation to the
Targets
Service acquisition of shares
BidCo Vendor
providers
Management services
provided by Lux BidCo
to Target post-
acquisition
Target 1 Target 2
Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 12French aspects Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 13
Day 3: Holding companies and VAT
Certain French VAT aspects
The French Administrative Court has transposed the Larentia + Minerva principles in its decision from 2016
According to guidelines published by the French tax authorities acquisition costs incurred by a mixed Holdco receiving dividends
(outside the scope of VAT) and VAT taxable revenues are considered as deductible general expenses – without consideration of the
dividends received – irrespective whether the HoldCo is involved or not in the management of the Target
Reminder: If HoldCo also receives incomes in the scope of VAT but VAT exempt (e.g. loan interests), the deduction of VAT on
acquisition costs must be limited in proportion to the ratio of VAT deduction (Coefficient de Taxation Forfaitaire or « prorata »)
Several situations in the structuring of the acquisition costs may lead to a challenge of the recovery of VAT on said costs
• The acquisition costs are not invoiced to BidCo, but to another entity of the Group (TopCo, Targets directly, etc.)
• The supporting engagements with the suppliers are not concluded with BidCo, but with other entities of the Group (generally
TopCo)
Practical recommendation
• If the agreements are concluded with TopCo, invoices must be raised to the attention of TopCo, and the costs
recharged by TopCo to BidCo with support of a dedicated agreement
• Point of attention: TopCo must be dully activated to avoid an adverse VAT cash impact
Specific situation of TopCo providing services to Targets
• A TopCo can deduct input VAT on expenses incurred for the preparation of a deal made by a sub-holding, provided that the
TopCo can demonstrate that it is the only company of the Group that provides taxable services to the Targets
• In this situation, the preparatory expenses are considered as deductible general expenses at the level of the TopCo
(deduction in proportion to the prorata of TopCo)
Direct and exclusive relationship between TopCo and the subsidiaries is difficult to demonstrate in practice
Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 14Deloitte 2021 M&A Tax Virtual Conference Break-out Session Luxembourg: Impact of the investment strategy on the income classification at the level of the platform 03 MARCH 2021
Day 3: Structuring of funds/MEP structures
Breakout on the investment strategy of debt funds and income classification
Philippe Lenges Jeremy Pages
Partner Senior-Manager (Lux)
Audit & Assurance Accounting & Reporting Advisory
plenges@deloitte.lu jpages@deloitte.lu
+352 621500078 +352 661250512
+352 451452414 +352 451453863
Ben Toussaint
Tax partner & (Lux) debt leader
Luxembourg
btoussaint@deloitte.lu
+352 621568027
+352 451452890
Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 2Contents Investment strategies of private debt funds and usual Luxembourg structures 4 Related tax implications 6 Challenges of capturing properly the investment strategies and translate them into the financial statements 9 Options available from an accounting perspective 11 Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 3
Investment strategies of private debt funds and usual Luxembourg structures Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 4
Day 3: breakout on the debt investment strategies and income classification
Investment strategies and Luxembourg structures
• The different investment strategies usually considered are the following: direct lending; mezzanine; venture debt; distressed
and special situation.
• These investment strategies would translate into different kind of structures in Luxembourg.
• There is a need to setup the right architecture and platform to allow for an appropriate tracking of the specific return on the
asset class at stake.
• Some examples below:
Investors Investors Investors
Lux Dutch Lux
Notes
AIF Stitching AIF
Debt Debt
Notes
funding funding
Master
Luxco
Debt Lux
Lux
funding SV Lux SPVs
SV
Lux SPVs
Equity kicker / options Loans
/ warrants
Borrowers
Discounted Distressed Enforced
or distressed assets assets
debt
Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 5Related tax implications Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 6
Day 3: breakout on the debt investment strategies and income classification
Typical tax considerations generally speaking
Purpose is to introduce a limitation
to the tax deductibility of any
“exceeding borrowing costs” to 30%
of the taxpayer’s tax-based EBITDA
subject to certain de minimis rules
(€3m) and certain carve-outs (AIFs,
certain SVs, etc.).
Purpose is to prohibit the
deductibility of expenses
Interest incurred within the context of
EU transactions/structures
limitation whereby the differences in the
legal characterization of a
financial instrument or entity
result in a double deduction or
a deduction without inclusion.
Purpose is to introduce a
rule according to which
non-genuine
arrangements put in place
for the main purpose (or
one of the main purposes) Anti-
of obtaining a tax
advantage that defeats
GAAR / hybrids
the object or purpose of
the applicable tax law
B.O
should be ignored.
B.O is about checking
whether the recipient of
the income has full
authority on the income
and is the economic
owner.
Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 7Day 3: breakout on the debt investment strategies and income classification
Typical tax considerations depending on the cash flows
Investors Investors
• The main
consideration at stake
is the interest
Lux
Dutch
limitation restrictions Notes
of the ATAD 1 AIF Stitching
Directive which
applies across the EU.
Debt
funding
Master • Back-to-back lending • The main consideration
Luxco position not impacted at stake is the interest
Debt by interest limitation Lux limitation restrictions::
funding rules. SV impacts would depend
on the types of income
• Considerations should
to be received (discount
Lux SPVs be given to the income
unwind or capital gains
not qualifying as
• Typical cash on NPLs).
interest or equivalent
income. flows: interest • Tax qualification of the
Equity kicker / options Loans and principal
• Typical cash flows: payments under the
interest and / warrants repayment. notes would also be
principal • Exception return relevant
repayment. Borrowers such as capital
• Exceptional return gains e.g. upon • Access to DTT or EU
such as dividend on enforcement. Directives would also be
Distressed
the equity kicker or a relevant in the light of
debt recent developments
gain on the option /
warrants. (PPT and ECJ case law).
An intermediate SPV
might be required.
• Acquisition of existing debt which could either be
discounted or distressed.
• Importance of the investment strategy: investment vs.
trading.
• Accounting methodology applying under local GAAP to
the discount unwind / capital gains should be discussed
beforehand.
• Tax treatment of the discount unwind could vary
depending on the jurisdiction of the structure but in all
cases subject to ATAD 1: in Luxembourg, accounting
approach & economic approach would be developed.
Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 8Challenges of capturing and translating Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 9
Day 3: breakout on the debt investment strategies and income classification
Accounting: financial fixed asset, investment or held for trading
INVESTMENTS
FINANCIAL FIXED ASSETS = all the other financial assets
A STRATEGY AFFECTING are considered as current
= Intend to serve the activity of
the company on a long-term
THE ACCOUNTING The classification HELD FOR
TRADING does not exist under
basis (i.e. more than 12 months)
TREATMENT LUX GAAP. It is embedded in the
INVESTMENTS classification
Cost less permanent value All assets first recognized at Then Lower of cost or market
Then
reduction (i.e. value acquisition cost, including Or
adjustments in case of a any direct attributable costs Fair Value Through Profit or Loss
durable depreciation) if held for trading purpose
Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 10Options available from an accounting perspective Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 11
Day 3: breakout on the debt investment strategies and income classification
Accounting: options available in Luxembourg
HOW TO ACCOUNT FOR THE CASH COLLECTED ON THE
PERFORMING OR NON-PERFORMING LOANS: COST REDUCTION,
INTEREST INCOME OR CAPITAL GAIN ?
New
Fund
‒ Loans purchased at a discount: cash
collection = interests + acquisition
cost + expected additional amount
based on the anticipated future cash
flows
Lux Sarl / SV PURE LUX SUBSTANCE
• Lux GAAP ‒ Expected additional amount based
accounting or
GAAP OVER FORM
on the anticipated future cash flows =
IFRS. PRINCIPLE
interest income or capital gain ?
‒ LUX GAAP
Debt ‒ After initial recognition, nothing in the General Accounting Law, but
assets more information provided in the Banking Accounting Law and Former
Investments at a discount “Banking Bible” published by the CSSF
price in: ‒ Alternative options = Substance over form principle
• Either performing As per CNC => Follow the IFRS or another EU national GAAPs
loans;
Different measurement approaches might be allowed: cost recovery
• Or Non-Performing
method, effective interest rate (EIR) method or fair value (for
loans that could be
investment entities) combined with EIR method
secured or unsecured.
‒ The Effective Interest Rate (EIR) method applies differently between performing
and non-performing loans as per the IFRS:
‒ EIR approach – Purchased performing loans
‒ Credit adjusted EIR approach – Purchased non-performing loans
Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 12Day 3: breakout on the debt investment strategies and income classification
Accounting: practical considerations
Any accounting policy change needs to Accounting policy changes – in practice
be duly justified and explained in the follow IAS 8 requirements
notes
LUX GAAP = Prudent principle that Attention to the accounting treatment of
might lead to different treatments changes in the expected cash flows
between performing loans and non-
Practical (especially for NPL) and/or changes in the
performing loans (secured or not) considerations contractual terms
Accounting policy needs to be applied on a Cherry-picking not allowed
consistent and permanent manner
Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 13Day 3: breakout on the debt investment strategies and income classification
Take away
01 03
Accounting policy needs to be
Taking into account the investment
applied on a consistent and
strategy when setting-up the
permanent manner with
structure
appropriate disclosures
02 04
Accounting policy needs to be
Consider both the accounting and applied on a consistent and
tax qualification of your cash flows permanent manner with
in a post ATAD environment appropriate disclosures
Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 14Day 3: breakout on the debt investment strategies and income classification
Take away
Do you think that an accounting policy change might help you to better reflect
the economic substance of cash collected on performing and non-performing
loans?
A. YES
B. NO
C. NEED TO INVESTIGATE MORE
Deloitte 2021 Deloitte 2021 M&A Tax Virtual Conference 15You can also read
