M&A Transactions in the Current Tax and Business Environment May 8 th Christian Bednarczyk Greg Kernek

Transcription

1 Luxembourg s How to Address choices M&A Transactions in the Current Tax and Business Environment May 8 th 2018 Christian Bednarczyk Greg Kernek 1

2 Contents With you today 1.M&A US Politics & Tax Reform from an EU perspective 3 1.M&A Update: Europe: Luxembourg 5 2.M&A Update: Due Diligence 17 3.M&A: Luxembourg Fund Solution 24 Christian Bednarczyk Partner International M&A Taxation cbednarczyk@deloitte.lu Tel:

3 M&A US Politics & Tax Reform from an EU perspective: What do we think? 3

4 The US Politics & Tax Reform from an EU perspective Different countries have different thougths General Policies America First what do the Europeans think about it? How does it impact M&A transactions? US Tax Reform How is US tax reform perceived by EU governments? How is US tax reform perceived by EU companies? 4

5 M&A - Update Europe: Luxembourg 5

6 Luxembourg (as an Example) of Tax Law changes Overview of the 2017 & 2018 changes Tax losses Losses incurred as from 2017 are restricted to a period of 17 years. CIT & NWT Reduction of CIT to 19% in 2017 (CIT/MBT 27,08%). Increase of the minimum NWT from EUR 3,210 to EUR 4,815. TP Tax returns Increase of the penalty for the late submission of the tax returns from EUR 1, to EUR 25,000. Reduction of the CIT rate down to 18% in 2018 (CIT/MBT 26,01%) and new IP box regime. Signature of the MLI on June Implementation of the Anti tax avoidance Directive 1 in Luxembourg before 31 Dec

7 Luxembourg (as an Example) within an international context Avalanche of foreign tax reforms at different levels: tax mapping Luxembourg is by nature an intermediate jurisdiction. There is an avalanche of tax reforms impacting the business model of the AIF industry, the vast majority of which are EU or OECD-related. High impact expected MLI Whilst most of them are non-domestic, Luxembourg upgraded its legislation and adopted these new standards to stay a jurisdiction of choice for the industry. EU-wide FTT Non-CIV paper EU ATAD 2 EU ATAD 1 EU CCTB Tax intermediaries TP financing EU CRS Near Exchange rulings New EUPSD CbC Reporting Low impact expected 7

8 The evolution of the business model for M&A transaction? The pitfalls or risk arears of holding/financing structures Use of tax transparent vehicle to rely on the tax profile of investors. Is it located in the future black/white list (if implemented at EU level)? Foreign IM EU & non-eu investors Foreign GP Treaty benefit should generally be available for foreign parent companies Corporation LP Non-EU The absence of its own substance could create a risk of WHT or local taxation of cash flows. Purpose of the interposing the LuxCos: need a pooling regional platform? Risk of treaty abuse (Action 6)? Consider whether the funding structure could jeopardize the B.O of the SPVs from a source country perspective. Risk of excessive returns in the light of current TP rules. LuxCo 1 LuxCo 2 LuxCo 3 EU entities EU entities EU entities Risk of hybrid mismatch or imported hybrid mismatch to be considered (action 2). Discussion on timing differences. Interest deductibility restrictions not necessarily an issue in Luxembourg. Interest deductibility rules to be considered (action 4). PPT / GAAR test to be discussed which would allow source countries to deny EU Directives or DTT benefit, hence impacting cash flows for the investors. Impact of the MLI to be investigated on a source country by source country basis. Under extended definition (action 7), a PE may now arise based on activities of deal teams when it comes to negotiating and concluding SPAs. 8

9 The evolution of the business model for M&A transaction? The trend is for substance, sophistication and maturity We witnessed a change in the way AIFs are operating over the last decade in reaction to the avalanche of EU/OECD tax reforms. This has a direct impact on how Luxembourg is used within acquisition structures. The below is an example for both corporate and private equity structures. 9

10 Treaty abuse and access to EU Directives The next big challenge for M&A activities! Base Erosion and Profit Shifting (BEPS) Action 6 addresses treaty shopping by recommending at a minimum the use of either (i) a Principal purpose test ( PPT ) alone, (ii) a PPT and a simplified or detailed limitation on benefits provision ( LOB ), or (iii) a detailed LOB, supplemented by a mechanism (treaty-based or otherwise) that would deal with conduit arrangements not already dealt with in the tax treaty. Multilateral Instrument (MLI) On 24 Nov. 2016, the OECD published the new MLI aiming at stopping treaty shopping. All Covered Tax Agreement s ( CTA ) falling under the MLI shall include a PPT clause, preventing the unintended granting of treaty benefits. The MLI will override and complement certain provisions in existing DTT: the intention is that it should result in either a PPT or a LOB being included in all treaties to which it is applied. 78 jurisdictions have signed the MLI, 4 jurisdictions, including Austria, Isla of Man, Jersey, and Poland of which have deposited their instrument of ratification of the MLI with the OECD as of 14 March Slovenia signed a law ratifying the MLI, but has not deposited its instrument of ratification yet. EU anti-abuse rules in EU Directives The Parent Subsidiary Directive (PSD) requires EU Member States to implement a general anti-abuse rule ( PSD GAAR ) per 1 January The PSD GAAR aims to prevent abuse of the PSD, i.e. for profit distributions only. In addition, the Anti-Tax Avoidance Directive (ATAD) requires EU Member States to implement a general anti-abuse rule ( ATAD GAAR ) per 1 January The ATAD GAAR targets all non-genuine arrangements domestically and in cross border situations, irrespective of the nature of the income. Major jurisdictions chose to rely on the PPT. This should be pushing the industry to switch to a platform model with a non-tax rationale to justify the use of an intermediate jurisdiction. 10

11 Treaty abuse and access to EU Directives Possible non-tax reasons justifying the use a holding jurisdiction The PPT will have to be met when claiming a tax benefits under a DTT or EU Directives: WHT on dividends or interest or capital gain exemption. The PPT is introducing a greater level of uncertainty for the industry. There is no visibility yet on the application of the PPT test in each jurisdictions: purpose and/or substance and/or a BO test? Each country will interpret the PPT in the light of its own rules and case law. Distinction between purpose of the HoldCo and purpose of the HoldCo in that location. What could be valid reasons to interpose a holding jurisdiction? 1 Credibility and reputation of the jurisdiction for potential investors or customer perception Political stability Efficient regulatory and legal systems 2 Syndication of investors Pooling of investments Fund distribution across the EU Banking requirements (pledge) Access to the local regulator or authorities Access to common market/currency 3 Facilitate debt financing (including from third-party lenders) and the making, management and disposal of investments Protect the fund from the liabilities of potential claims against the fund s assets Logistics for management and board Access to appropriately qualified personnel Administrate and ease the DTT WHT relief claims Lenders and investor familiarity with the jurisdiction 11

12 Treaty abuse and access to EU Directives 2018 substance requirements from a source country perspective to benefit from a DTT lowered WHT rate Preliminary take away: Most of the countries shown have anti-abuse rules with the exception of Albania, Belarus, the Republic of Macedonia, and Moldova. Germany, Austria and Croatia require Limited or Operating substance as defined. A large group of countries, including Italy and Russia require a combination of varying substance requirements and business purpose. The largest group of countries which imposes WHT, being 16 in total, only require adequate holding substance in the Simplified Case, or no substance requirements in the Simplified Case. 12

13 Treaty abuse and access to EU Directives 2019 anticipated impacted countries Preliminary take away: It is anticipated that the MLI will have a limited impact on holding structures in the Simplified Case in the greater European region due to the already existing anti-abuse rules that continue to apply. For EU countries (Sweden, Finland, Belgium, Luxembourg, Slovenia), an impact is only anticipated for holding structures where the ultimate parent company is not in the EU. Norway and Poland have indicated that the PPT is temporary. It is anticipated that DTT s will be renegotiated to include a detailed LOB. None of the countries have indicated that the MLI will result in more efficient application of current domestic anti-abuse rules under the Simplified Case. 13

14 Treaty abuse and access to EU Directives Possibility to obtain a local ruling Preliminary take away: In most of the countries for which an impact is anticipated (depicted in dark grey) with respect to the Simplified Case a ruling may be obtained. Slovenia anticipates an impact in 2019 under the Simplified Case without the option of obtaining a ruling. 14

15 Upgrade of our TP rules to the OECD standards TP financing Overview Flexibility Indirect TP approach could still be followed (i.e. current level of equity might be already sufficient for existing structures). Master / cascading approach whereby one global margin is reported in the same fund structure is possible (the other entities being agents). Master TP financing documentation and standardization of the approach is possible. Risk of non compliance No adjustments of the taxable basis expected by the LTA as long as an existing TP documentation is in place (e.g. Luxcos complying with the old TP circulars). Risk is that the LTA notifies the nonalignment to foreign tax authorities (exact form and content not known yet). Potential adverse tax implications plus collateral damages from a source country perspective to be investigated. Net vs. gross spread The spread includes an equity at risk component. No service fee anymore. Arm s length margin is net (gross-up of the costs required). Timeline LTA indicated flexibility to become compliant. Need to show willingness to become compliant through the implementation of the required org. substance (tax basis would then be reported through adjustment to the tax returns). 15

16 Upgrade of our TP rules to the OECD standards TP financing Substance is key in the new regime The new Circular requires the company to have control of key decisions related to the financing activity through qualified personnel in Luxembourg. The control should be exercised through the functions and decisions made at 2 levels 1. MUST: key Decisions taken by the Board; AND 2. POTENTIALLY: (some) related finance functions performed by the employee(s); AND/OR 3. LIKELY: (most of the) related finance functions delegated by and always under the oversight of the Board to related parties. Role of the BoM Deciding the financing policy: permissible objectives of loans to be granted, permissible type of financing instruments to be used, standard terms of loan agreements, etc. Deciding how to operate internally with respect to the financing activity: who does what, when, how. Deciding the financial plan: setting target profitability levels (the margin to be realized in Luxembourg). Deciding for yourself the creditworthiness of an entity requesting funding and whether to approve or reject its request. Deciding how to address other risks arising in the funding structure (FX risk, interest rate risk, tax risk, etc.). Deciding the main terms of loans provided and debt issued, and to execute the relevant contracts. Deciding measures to address increased risks or cost inefficiencies resulting from the funding structure. The level of substance required by the Luxembourg TP Circular does not go above what source countries are generally requiring for EU Directives or DTT purposes. It simply goes in the same direction of travel. 16

17 M&A - Update (Vendor) Due Diligence: Focus on the future? 17

18 Forward looking DD BEPS three key questions Relevant BEPS actions Past Future 1 Are taxable profits being recognized in the right place? Action 1 Digital economy Action 3 CFC rules Action 4 Interest expense limitations Action 5 Harmful tax practices Action 7 Artificial avoidance of PE Action 8 to 10 Transfer Pricing 2 Do taxable deductions/profits disappear? Action 2 Hybrid mismatch arrangements 3 Are tax reliefs abused? Action 6 Tax treaties EU State Aid risk EU Commission challenges Is there an exposure to EU State Aid liability? Monitor EU commission challenges 18

19 Forward looking DD Need to direct the diligence effort on FUTURE profits Assessment of Enterprise Value Tax on future profits: Assess robustness of existing business model Assess robustness of holding structure Consider the acquisition financing structure Assess any retained financing structure in the target group Integrate existing TP methodology and transaction flows within the wider group Assess implications of conforming target business model and TP policies to those of the wider group 19

20 Tax Model Important developments Historic position: Banks/Client prepared the model Advisors confirmed reasonableness of tax assumptions Developing position: Banks unwilling to prepare tax calculations as they are now too complex and uncertain. Advisors sometimes prepare tax sheets to add to client models. Need to build in sensitivity around interest deductibility, WHT, CGT on exit etc. Focus is not just on the tax calculations but also on the top line profit allocations post BEPS 20

21 Tax Insurance Managing historic exposures 21

22 Tax Insurance Specific Risk Insurance Focus on Known risks: Can be a good way to take a disputed issue off the table Focus on low risk high value items (e.g. tax free reorgs, residence, TP) Covers tax, interest, penalties and costs of evaluating, defending and mitigating the exposure Common exclusions: aggressive planning, already challenged, 50:50 chance of challenge. Can be offered by Seller to address an issue flagged in the VDD or bought by the buyer to back out a pricing risk (or because lenders require) Commonly costs 3-8% of cost insured Can be a standalone policy or just increase the premium on W&I insurance 22

23 Tax Insurance W&I Insurance Focus on unknown risks: Helpful when there is no-one to stand behind an indemnity (eg Financial Seller) or to allow a seller a clean exit Follows the SPA indemnity so requires different approach to SPA mark ups Will contain additional exclusions that which can limit the benefits: TP risks, known/high risks Commonly costs % of cost insured (who bears the cost?) Brings an additional party to the DD discussions 23

24 M&A - Overview: Luxembourg Ideal Fund Location Not only for Private Equity 24

25 A Fund Solution for Multinational Companies Reserved Alternative Investment Fund (RAIF) Private Equity and other investors are using fund structures on a regular basis to invest and hold their investment. However, some multinational companies are heavily diverse and own different assets. As such, the fund solution for internal investments is getting more and more popular. What is it about? A multinational company is setting up its own fund (as the sole investor) to invest either their excess cash into different products (e.g. stock and bonds). In this scenario, the multinational company is using the fund as their own investment vehicle instead of investing the cash through classic investment companies. The other alternative and more interesting one is to use the fund for alternative investments. This could include owing all the real estate of the multinational company through the structure. Other investments could be a strategic acquisition or holding non performing loans, etc. Why is it attractive? It provides the possibility to segregate certain assets and make it easy to dispose and acquire new assets. In addition, attracting strategic investors for only certain assets or group of assets are possible. Thus, keeping the investors outside the organization and reduced involvement in decisions. The price is the expected return of the investor. The tax regimes for funds are quite appealing and could provide a low / competitive effective tax rate. What vehicle? The Reserved Alternative Investment Fund (RAIF) is an ideal vehicle for such a structure. The RAIF is not regulated or supervised, but benefits from the flexibility of the existing investment vehicles regimes. The RAIF is managed by an AIFM in charge of portfolio and risk management that can be located in any other State of the EU or, shortly, outside the EU. The AIFM is subject to the AIFM law that allows the RAIF to benefit from the AIFM passport for distribution of its units in the EU/EAA (if needed). The RAIF can adopt varied forms: mutual fund or investment company (e.g., public limited company, private limited company, partnership -limited by shares, common or special) and have a fixed or variable capital. 25

26 A Fund Solution for Multinational Companies Reserved Alternative Investment Fund (RAIF) Background Strategic Investors Parent Parent sets up the RAIF to hold a Target The RAIF provides financing to Target. Only if needed, the RIAF can be set up with different legal compartments that provide complete legal protection. As such, strategic investors could invest only in those keeping legal protection to the Parent. Luxembourg Tax Consideration AIFM RAIF Group Companies The RAIF can be set up under the SIF or SICAR regime. The taxation would be: SIF Regime Financing LuxCo Full CIT/MBT/NWT exemption or full tax transparency for FIAR FCP/SCS/SCSp; No WHT on any distributions 1bps subscription tax is applicable (with exemptions available similarly to SIFs) No tax on speculative capital gains for investors Target SICAR Regime Subject to CIT/MBT but any income from transferable securities and income from temporary investments (<12 months) is exempt; or alternatively full tax transparency for RAIFs set-up as partnerships No subscription tax No WHT on any distributions No tax on speculative capital gains for investors => Depending on the legal form, double taxation treaties can be applied 26

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