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Mergers &Acquisitions

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3 ChinaKey tax challenges and opportunities facing China outbound investorsWith increased in Chinese investment to all parts of the world, KPMG China’s John Gu, part-ner, Michael Wong, partner, Alan O’Connor, director, and Karen Lin, director, take a look atthe tax challenges for businesses and best practices to ensure Chinese investors’ offshore struc-tures are efficient.

9 IrelandIreland: Domestic dependability, international variabilityLittle has changed in Irish domestic tax law to affect M&A transactions in 2016. Nevertheless,international developments, both political and fiscal, have made for a very different landscape,impacting the type of deals being done and indeed the appetite for dealmaking, write AislingBurke and Caroline Devlin of Arthur Cox.

14 NetherlandsTax clauses in a share purchase agreement under Dutch lawFrank Buitenwerf and Roos Jongeneel of Taxand Netherlands explore the main considerationsof the tax clauses in a share purchase agreement that are governed by Dutch law.

19 SwitzerlandSwiss rules on withholding tax securities – discrimination of foreign investors?Switzerland has been known for a long time as a popular location for international trading compa-nies. Due to its business-friendly environment it has hosted all types of trading companies, fromheadquarters of multinationals to small trading offices with only one employee, for decades.Such companies may face a serious withholding tax risk, write Rolf Wüthrich and Noëmi Kunz-Schenk of burckhardt.

24 UkraineM&A environment and trends in Ukraine Asters’ Constantin Solyar, partner, Alexey Khomyakov, partner, and Pavlo Shovak, associate,provide a breakdown of the tax work included in structuring Ukraine transactions and the influ-ence of external regulations on deals.

28 UKWill the shifting tectonic plates of international politics move the UK into the Atlantic?Steve Edge and James Hume of Slaughter and May face down the biggest issues facing UKtaxpayers. Since the article they wrote last year was published, two things have loomed large onthe UK M&A horizon.

32 USUS international M&A tax developmentsThere has been a large number of US developments in the M&A area, particularly due to aseries of regulations and other guidance issued by the Obama Administration in its final twomonths in office. Jim Fuller and David Forst of Fenwick & West explore what these develop-ments mean for taxpayers.

Mergers & Acquisitions

E D I T O R I A L

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W elcome to International Tax Review’sM&A guide 2017. Transactional workis the bread and butter for many tax

practices, and the market has bounced backstrongly to near its pre-financial crisis levels,with 2016 being the third consecutive year inwhich overall transactional volume surpassed$2.5 billion.However, 2016 was quieter than the

record-breaking year of 2015. The overallnumber of deals worth more than $10 billionwas around 35% lower than 2015, with theaverage deal size also lower at $115.4 million,

but ‘mega deals’ such as the purchase of Time Warner by AT&T, Bayer’s$66 billion purchase of Monsanto and the $52 billion merger betweenSunoco Logistics Partners and Energy Transfer Partners. Qualcomm’spurchase of NXP Semiconductors for around $47 billion became thelargest semiconductor deal on record.Moving into 2017, British American Tobacco’s $49 billion deal to

acquire the 57.8% of Reynolds Tobacco which it did not already own gotthe year off to a strong start when the deal was finally closed in January.The transaction made BAT the world’s largest listed tobacco company.But while the market has picked up in recent years, the OECD’s Action

Plan on Base Erosion and Profit Shifting (BEPS) project has brought newlayers of complexity for taxpayers and their advisers to consider.Permanent establishment (PE) is a key consideration in many of the

jurisdictions covered in the M&A guide, as is the concept of state aid inthe EU and surrounding countries. The UK’s exit from the EuropeanUnion has created shockwaves around the world, particularly in the UKitself and the EU, and the election of Donald Trump has thrown thelong-awaited US tax reform into uncertainty, as companies are left tospeculate on what form the new system will take.There are also a multitude of domestic tax law changes, some influ-

enced by BEPS, which are examined in the pages of this guide. I hopethat you will find it informative to your decision-making when carryingout deals in the coming year.

Editorial

Joe Stanley-SmithDeputy editorInternational Tax Review

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Key tax challenges andopportunities facing Chinaoutbound investorsWith increased inChinese investment toall parts of the world,KPMG China’s JohnGu, partner, MichaelWong, partner, AlanO’Connor, director,and Karen Lin,director, take a look atthe tax challenges forbusinesses and bestpractices to ensureChinese investors’offshore structures areefficient.

C hinese outbound investment had another record year in 2016, withannounced deals by Chinese outbound investors increasing 118.7%to $206.6 billion compared to 2015’s previous high of $94.4 bil-

lion. This stellar growth could see near-term moderation in the face ofrecent changes, such as stricter regulatory scrutiny of certain transactionsand a tightening of controls on foreign exchange purchases and crossborder payments. However, these regulatory changes are not viewed asentailing a shift in China’s national ‘going-out’ strategy and are notexpected to stop China actively engaging in outbound investment. Withgrowth continuing in Chinese investment to all parts of the world, wetake a closer look at the key tax considerations, and in particular, the taxissues, for Chinese investors when structuring their overseas investments.

Tax can have a significant impact on the after-tax profits thatChinese investors derive from investing overseas. Managing the totaltax cost on overseas investments, therefore, needs to be a key consider-ation for Chinese investors to help maximise their after-tax return fromsuch investments.

Impact that tax can have on investment returnsChinese tax resident companies are subject to worldwide taxation at astandard People’s Republic of China’s (PRC) corporate income tax rate of25%. This rate is generally lower than the effective corporate income taxcost for most of the countries that ranked among the top destinations forChinese outbound direct investment (ODI) in 2016, particularly whenthe effect of withholding taxes is taken into account – see Figure 1.

Therefore, one common focal point for outbound Chinese investorsis managing the level of withholding taxes imposed on the repatriation ofoverseas investment earnings (seen in blue on Figure 1), either throughChina’s double tax treaties (where a direct investment has been madefrom China) or under the treaties of the jurisdiction of an offshore inter-mediate holding company, where it is commercially justifiable to do so.The ability of Chinese investors to establish and maintain the necessarycommercial substance for such structures to be effective may becomemore challenging, as China and source countries continue to strengthentheir treaty anti-abuse mechanisms in line with the OECD’s BEPS Action6 measures.

However, it is also important for Chinese investors to minimiseinstances of possible double taxation in China on the earnings of theoverseas investment. There are three key features of the Chinese interna-

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tional tax system that are relevant for Chinese outboundinvestors in this regard – tax residence, taxation of foreignsourced income and controlled foreign company rules. Wewill look at each of these areas in more detail and the chal-lenges that they present.

Tax residency of offshore entitiesUnder PRC tax law, an entity that is established outside ofthe PRC can be subject to PRC corporate income tax on itsworldwide income if its “place of effective management” islocated in the PRC. Chinese authorities adopt a “substanceover form” approach when assessing whether an entity’s“place of effective management” is located in the PRC.

Chinese companies must therefore be mindful to imple-ment protocols to ensure their foreign subsidiaries do nothave their place of effective management in China and inad-vertently become tax resident in China. Some of the busi-ness protocols which could be considered include: • Senior management responsible for daily production,

operation and management of the enterprise should notperform their duties mainly in the PRC;

• Strategic, financial and human resources decisions shouldnot be made or approved in the PRC;

• Major properties, accounting records, company stamps,board/shareholders’ meeting minutes, etc. should not bekept in the PRC;

• The majority of directors (or equivalent) with votingrights or senior management should not habitually residein the PRC. These protocols are important because a change in resi-

dence of the foreign subsidiary could have a number of neg-ative implications, such as triggering exit taxes under the taxlaws of the overseas country, the foreign subsidiary’s profitsbecoming subject to PRC corporate tax at 25%, and/or theforeign subsidiary no longer being able to access double tax-ation agreements (DTAs) in its country of incorporation.

However, there may also be certain situations where it isbeneficial for a non-PRC company to apply to be deemed aPRC-resident company, which is possible under Guoshuifa(2009) No. 82 or Notice 82. One such situation could beunder a PRC ‘sandwich’ structure as shown in Figure 2.

A PRC ‘sandwich’ arises where one Chinese operatingcompany (PRC Sub) is held by another Chinese parentcompany (PRC Parent) through one or more overseas sub-sidiaries. The profits of the PRC Sub will be fully subject totax again when they are received by the PRC Parent ‘via’ the

Figure 1: Effective corporate income tax rates for top Chinese ODI destination countries in 2016

50%

CorporateIncome Tax(2016)

45%40%35%30%25%20%15%10%5%0%

United States

Switzerland

Brazil

Israel

Germany

Finland

United Kingdom

Australia

Canada WithholdingTax

PRC Corporate Income Tax

Sources: Mergermarket, KPMG analysis

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offshore company(s) because the Chinese tax paid by thePRC Sub is not a foreign tax for tax credit purposes. Makingthe non-Chinese intermediate holding company(s) tax resi-dent in the PRC can help to avoid double PRC taxation onthe PRC Sub’s earnings when they are repatriated back tothe PRC Parent, because dividends paid from one Chineseresident company to another are tax exempt.

A second situation might be where, for non-tax rea-sons, a Chinese investor has incorporated an offshorecompany to make its overseas investments. We see HongKong commonly used in this way as it helps the Chineseinvestor to recycle funds from the initial investment foruse in other offshore acquisitions and to facilitate futurelistings. As the funds are outside of China, they will notbe subject to PRC foreign exchange and investmentapprovals. Deeming the foreign holding company as aPRC tax resident may be a way to avoid an offshore com-pany adding an additional tier to the corporate structurefor the purposes of claiming foreign tax credits (discussedin more detail below), and should not adversely impactthe offshore company’s ability to claim benefits underChina’s double tax treaties.

PRC foreign tax creditsThe second key area is China’s system for relieving doubletax on foreign sourced income. Although many capitalexporting countries use the exemption method for taxationof foreign sourced dividends and capital gains, China stilloperates a credit system. This can lead to potential doubletaxation if the Chinese investor is unable to claim a credit forforeign taxes paid on foreign sourced earnings.

Dividends received by a PRC entity from its overseasinvestments are generally subject to PRC corporate tax at25%. However, a PRC entity will be entitled to credit theforeign taxes paid, which are attributable to such dividends(e.g., withholding tax on the dividend and income taxespaid on the underlying profits of the foreign entity payingthe dividend), provided certain conditions are satisfied.

It is important to ensure that foreign tax credits can beclaimed when profits are repatriated to the PRC to avoidpotential double taxation on such profits. For example,profits derived from a PRC entity’s Australian subsidiarywould be subject to 30% Australian income tax but no addi-tional PRC income tax would be incurred where a foreigntax credit can be claimed i.e., the profits would be effectivelytaxed at 30%. Whereas, if no foreign tax credit were allowed,the profits would be subject to tax in both Australia and thePRC, effectively taxing them at 47.5%.

One of the key constraints for claiming foreign tax creditsis the limitation on the number of ‘layers’ of foreign sub-sidiaries, with an indirect credit only able to be claimeddown to the third tier of foreign subsidiaries (certain groupsof specified enterprises are able to claim indirect credits up

to five tiers). This limitation means that Chinese investorsneed to pay close attention to both the legal structure ofoverseas companies, which they are looking to acquire, andthe benefits vs costs of using an offshore investment plat-form to acquire such targets. Where an offshore holdingstructure pushes the tax-paying operating companies of theforeign target beneath the third tier of offshore subsidiaries,the benefits from accessing a more favourable tax treaty willneed to be balanced with the potential additional tax costthat may arise due to the inability to claim a credit for for-eign taxes paid for PRC tax purposes on profit repatriations.Alternatively, a restructure of the overseas target group to“flatten” the number of tiers of foreign subsidiaries may berequired, which might trigger upfront tax and non-tax costsfor the investor.

Controlled foreign companiesArticle 45 of the PRC Corporate Income Tax law is thePRC’s controlled foreign company regime. Where an off-shore entity is considered a controlled foreign companyunder article 45, the PRC resident shareholder will berequired to include an amount equal to its effective inter-est in the foreign enterprises’ undistributed profits as adeemed dividend when computing their own PRC taxableincome. In other words, the profits derived by its foreignsubsidiaries which are kept outside of the PRC will still betaxable in the PRC notwithstanding that they have not yetbeen repatriated.

Figure 2: PRC “sandwich” for PRC FTC purposes

Dividend

Dividend

PRC Investor

PRC Sub Non-PRC Subs

Non-PRC HoldCo

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Broadly, article 45 will apply if a foreign entity iscontrolled by PRC tax residents; if the effective foreigntax burden on the profits of the foreign entity is less thanhalf of the PRC corporate tax rate (i.e., less than 12.5%);and if the foreign entity fails to distribute its profitswithout a legitimate commercial reason or reasonableoperational need.

Managing the application of article 45 to foreign sub-sidiary entities is crucial to managing PRC tax paymentsand overall cash flow concerns, particularly where the off-shore operations are structured through entities located injurisdictions which effectively tax the profits at a ratelower than the PRC. Typically, PRC entities with sub-sidiaries in such jurisdictions would need to demonstratelegitimate commercial reasons or some reasonable opera-tional need for retaining funds and not distributing profitsback to the PRC, for example, reinvestment of the fundsinto underlying business or business expansion.

China issued, in draft form, certain revisions to its con-trolled foreign companies (CFC) rules in 2015, whichwould see some tightening around the determination of‘control’ for CFC purposes. It also proposed the removalor amendments to certain exclusions provisions from theapplication of the CFC rules. The Chinese authoritieshave not yet finalised these new rules, but these are antic-ipated to be issued sometime in 2017.

We have seen the Chinese authorities invoke the CFCrules on a limited number of enforcement cases in the lastfew years. However, we expect this issue will become more

closely scruitinised once revised rules are finalised andpublished.

New tax reporting obligationsIn addition to managing the overseas and PRC tax costs onits overseas investments, Chinese investors should takenotice of new tax reporting obligations, which could poten-tially cover their overseas investments. Last year, the StateAdministration of Taxation issued an announcement thatupdated China’s transfer pricing documentation require-ments and introduced new country-by-country reporting(CbCR) requirements for Chinese groups and their consol-idated subsidiaries (Announcement 42: The Enhancementof the Reporting of Related Party Transactions andAdministration of Contemporaneous Documentation).

The new Chinese CbCR obligations will be triggeredwhere the Chinese investor is the ultimate holding companyfor a multinational group, which has a consolidated revenueof CNY 5.5 billion ($800 million) in its previous fiscal yearexceeds, roughly equal to the €750 million threshold underBEPS Action 13. The new CbCR requirements will applyfrom the 2016 fiscal year onwards and the CBC report willneed to be submitted annually together with the Chineseinvestor’s income tax return (due in May of the followingyear). As such, Chinese investors who have completed or areconsidering making overseas investments that will result inthe group exceeding the CBC reporting threshold shouldtake appropriate steps to compile and report the requireddata.

John GuPartner, taxKPMG China

8th Floor, Tower E2, Oriental PlazaBeijing 100738, ChinaTel: +86 10 8508 [email protected]

John Gu is a partner and head of deal advisory, M&A tax andhead of private equity for KPMG China. He is based in Beijingand leads the national tax practice serving private equityclients. John focuses on regulatory and tax structuring ofinbound M&A transactions and foreign direct investments inthe People’s Republic of China (PRC). He has assisted many off-shore funds and Renminibi (RMB) fund formations in the PRCand has advised on tax issues concerning a wide range ofinbound M&A transactions in the PRC in the areas of realestate, infrastructure, sales and distribution, manufacturing, andfinancial services.

Michael WongPartner, taxKPMG China


Michael Wong is a partner and head of the outbound tax prac-tice for KPMG China. He is based in Beijing and leads thenational outbound tax practice serving state owned and pri-vately owned PRC companies in relation to their outboundinvestments. Michael has extensive experience leading globalteams to assist Chinese state-owned and privately-ownedcompanies conduct large-scale overseas M&A transactions invarious sectors including energy and power, mining, financialservices, manufacturing, infrastructure and real estate.

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Closing remarks Managing PRC tax issues can be just as important as foreigntax considerations when implementing an effective holdingstructure for overseas investment. Chinese investors should

be careful in observing the relevant PRC tax rules to ensurethat their offshore structures are effective and can thereforeachieve their intended result of maximising the after-taxreturns from such investments.

Alan O’ConnorDirector, taxKPMG China


Alan O’Connor joined KPMG Hong Kong from Australia in 2000and became a director in 2013. He worked in Hong Kong formore than 10 years before relocating to Beijing in 2011, wherehe continues to provide tax services to Chinese outboundinvestors. He has extensive experience providing due diligenceand transaction related tax advisory services to major HongKong and Chinese based clients, and has been involved ininternational tax planning projects, merger and acquisitiontransactions and due diligence exercises involving Asia, Europeand North America.

Karen LinDirector, TaxKPMG China

50th Floor, Plaza 661266 Nenjing West RoadShanghai 200040, ChinaTel: +86 21 2212 [email protected]

Karen joined KPMG Hong Kong in 2005 and KPMG Beijing in2011. Since 2011, Karen has been specializing in internationaltaxation and assisting Chinese multinational corporations withoutbound M&A transactions, including international tax structur-ing, tax due diligence and transaction related tax advisory serv-ices. During 2014 and 2015, Karen joined a NASDAQ listed multinational media group focusing in managing the group’s taxa-tion matters covering the Asia Pacific region.

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Ireland: Domestic dependability,international variability

Little has changed inIrish domestic tax lawto affect M&Atransactions in 2016.Nevertheless,internationaldevelopments, bothpolitical and fiscal,have made for a verydifferent landscape,impacting the type ofdeals being done andindeed the appetite fordealmaking, writeAisling Burke andCaroline Devlin ofArthur Cox.

I n an annual update on Ireland’s international tax strategy, Ireland’sMinister for Finance confirmed the government’s “rock solid commit-ment to the 12.5% corporation tax rate”. So, while there is no inten-

tion to change the domestic tax offering, Ireland must still conform withthe EU, US and OECD tax reform. The question is how competitive itcan remain in the course of doing so?

US inversionsIreland has been a favoured jurisdiction in recent years for multinationalgroups seeking the optimal location for operational and tax purposes.While the key reasons for Ireland’s popularity remain unchanged (lowcorporation tax rate, comprehensive network of double tax treaties,straightforward, certain and efficient tax system, EU membership, com-mon law jurisdiction, English speaking), the tightening of US Treasuryrules aimed at curbing corporate inversions slowed down activity in2016. The new rules in particular targeted, and succeeded in terminat-ing, the proposed $160 billion merger of Pfizer and Allergan. Howeverinversions continue to be viable for deals with a different fact pattern, asevidenced by the completion of the Johnson Controls merger with Irish-based Tyco in September 2016.

European M&AEuropean groups choosing Ireland as a parent company location isincreasingly becoming a feature of the Irish corporate and tax law land-scape. In particular, pharmaceutical companies such as Cortendo/Strongbridge and Flamel/Avadel are relocating their parent companiesto Ireland by way of cross-border mergers or other methods. While someof the same tax features that appeal to US multinationals are also relevantin an EU context, Ireland’s access to US and international capital marketsis proving a strong draw. Shares in Irish-incorporated parent companiesthat are listed on a stock exchange in the US or Canada can be treated asequivalent to American depositary receipts (ADRs) so that transferscleared through the depository trust company (DTC) are not subject tostamp duty.

Increased European M&A activity is expected in Ireland in the wakeof Brexit. For example, in a 50:50 EU-US merger with a dual listing inthe EU and the US, a third jurisdiction is often sought to locate domicileof the merged entity. While to date, the UK may have been competitivein terms of its offering, Ireland is now the only country ticking all the

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boxes as an EU/EEA member state, which is English speak-ing, and which is a common law jurisdiction offering afavourable corporate tax regime.

BrexitOn the subject of Brexit, midmarket M&A activity inIreland slowed down in 2016 as a result of the uncertaintysurrounding the UK’s exit from the EU. However, thisshould pick up again in 2017 as UK companies seek suit-able Irish acquisition targets to allow access to the EU sin-gle market. In particular, such UK companies may wish tocomplete mergers under the Cross-Border MergerDirective before the UK’s exit from the EU. Irish-indige-nous companies may also take advantage of the relativelyweak sterling to make value acquisitions in the UK, whichcould have the added benefit of avoiding potential customsduties and tariffs when selling into the UK in the future.However, the principal area of Brexit-related activity inIreland will be the financial services industry, with UKfinancial service providers that require continued access tothe EU/EEA markets looking to relocate to an EU mem-ber state such as Ireland.

Ireland has extensive domestic law exemptions frominterest withholding tax which apply without recourse to a

treaty and without the need to complete any procedural for-malities. In addition, Ireland continues to benefit from theprovisions of the EU Parent-Subsidiary Directive and theEU Interest and Royalties Directive, as well as from its widenetwork of tax treaties. Ireland’s securitisation vehicle, theSection 110 company, was made BEPS-compliant in 2011by providing that no deduction is available for profit partic-ipating interest unless the interest is subject to tax in anEU/treaty partner country.

Politically speaking, Ireland and the UK were often alliesin the area of tax policy at EU level, for example in opposingproposals for a common consolidated corporate tax base(CCCTB) when mooted in 2011. Now that such proposalshave been revived, Ireland finds itself lacking a friend in theEU with the political influence and power of the UK.

US treaty negotiationsThe US published its updated model tax treaty (MTT) inFebruary 2016 and Ireland’s Department of Financeannounced in August 2016 that it was entering into a rene-gotiation of the Ireland-US tax treaty. Ireland’s existingtreaty with the US dates back to 1997 and differs signifi-cantly from the provisions of the updated US MTT. Theupdated US MTT is not drafted with a small, open-econo-my treaty partner in mind. In particular, there is concernthat the limitation on benefits (LOB) clause could reducethe ability of Irish companies to qualify for treaty benefits incircumstances where there is no tax policy justification forsuch a restriction and no tax avoidance.

However, since the announcement of the renegotiation anew administration has entered into power in the US andthe OECD has published its multilateral instrument (MLI)as part of the BEPS Project. The MLI aims to implementthe tax treaty-related measures of the BEPS Project and will,once ratified, simultaneously amend multiple bilateraltreaties. Therefore, the appetite for negotiating a new bilat-eral treaty between Ireland and the US may have waned andit is hoped that cross-border investment in Ireland will con-tinue under the more certain and appropriate provisions ofthe MLI.

BEPS The OECD BEPS outputs are, by the OECD’s own admis-sion, ‘soft law’ legal instruments. However, while thereports, in themselves, do not have direct legal effect, thepace at which various measures have been implemented byparticipating countries into domestic laws has made theproject a resounding success.

Ireland has been a consistent supporter of the BEPS Projectand early adopter of BEPS measures. Ireland has a substance-based system of taxation which has meant that foreign directinvestment has always translated to job creation. As a resultIreland has a highly skilled cluster of support services for the

Aisling BurkePartner, tax groupArthur Cox

Tel: +353 (0)1 618 [email protected]

Aisling Burke is a partner in the tax group of Arthur Cox andadvises multinationals and corporate clients on tax structuring,inward investment, cross-border tax planning and the taxaspects of a wide variety of transactions including M&A (bothpublic and private), migrations, reorganisations and financingarrangements. Aisling has particular expertise in advising onthe tax consequences of doing business in and from Ireland.Aisling also advises banks, insurance companies, investment

funds and asset management companies on financial servicestaxation including advice on debt issuance programmes, struc-tured finance, derivatives and securitisation transactions. Shehas frequently advised on the structuring of property relatedtransactions in recent years.Aisling has extensive experience of dealing with the Irish

Revenue Commissioners in contentious and non-contentiousmatters.

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pharmaceutical, medical devices, technology, financial servic-es and aircraft leasing industries. It is anticipated that thefocus of the BEPS Project on substance will attract furtherforeign direct investment and jobs to Ireland.

In terms of the implementation of BEPS measures todate, Ireland introduced country-by-country reporting obli-gations with effect from fiscal year beginning January 12016, and we understand that Ireland will sign up to theMLI in Paris in June 2017 following its recent submissionof a list of qualifications to the MLI.

While other measures have not yet been introduced intoIrish law, buyers in the Irish M&A market will want toensure that any potential acquisition is BEPS-proofed forthe future. In particular it will be essential that sufficientsubstance is located in Ireland to support the business ofIrish target companies. It is important that employees inIreland undertake the activities purported to be undertakenby their employer. If Irish companies outsource certainactivities, it is important that their Irish-based employeesactively oversee the performance of those activities.Furthermore if Irish companies have employees who fulfilemployment duties outside Ireland, the nature and extent ofthose duties must be assessed in order to determine whethercompanies have a permanent establishment (PE) in anotherjurisdiction.

Documentation of Irish target companies relating to IParrangements and intra-group financing arrangements mustbe reviewed to ensure compliance with updated OECDtransfer pricing guidelines. Tax-efficient intra-group financ-ing must also be examined with a view to identifyingarrangements that might fall foul of interest limitation rules(discussed further in the context of EU ATAD below).

Finally, Irish Revenue tax opinions/confirmations issuedto Irish companies must obviously be examined by anypotential buyer. While in Ireland these are viewed as non-binding opinions that merely interpret and apply the law, theEuropean Commission may take a different view of suchopinions. Irish Revenue has recently confirmed its policythat all of its opinions/confirmations are subject to a maxi-mum validity period of five years, or such shorter period asmay have been specified when providing the opinion/con-firmation, so the expiry date of opinions/confirmationsshould also be checked in due diligence.

EU Anti-Tax Avoidance Directive (ATAD)The EU plans for the ATAD to be the vehicle by which itco-ordinates implementation of BEPS measures across itsmember states. The ATAD was proposed in January 2016and adopted at the EU Council in July 2016. Unlike soft-law BEPS outputs, ATAD minimum standards must betransposed into domestic law by specific deadlines:• interest limitation rules (January 1 2019 unless a member

state has existing national-targeted rules preventing

BEPS risks which are equally effective to the ATAD rules,in which case the interest limitation rules must be imple-mented by January 1 2024);

• controlled foreign company (CFC) rules (January 12019);

• hybrid mismatch rules (January 1 2019);• exit tax (January 1 2020); and• general anti-abuse rule (GAAR) (January 1 2019).

As alluded to above in the context of BEPS measures, thefinancing of acquisitions and the viability of existing intra-group financing arrangements will be impacted by the intro-duction of fixed-ratio interest limitation rules in Ireland,which hitherto did not apply. Net interest costs (being grossdeductible borrowing costs less taxable interest income) areonly deductible up to 30% of the taxpayer’s earnings beforeinterest, taxes, deductions and amortisation (EBITDA).Member states may opt, inter alia, for a group exclusionprovision that allows taxpayers to deduct net interestexceeding the 30% threshold if their net interest to EBITDAratio is no higher than the consolidated group’s net interestto EBITDA ratio. Ireland has indicated it intends to avail ofthe deferred implementation date for interest limitation

Caroline DevlinPartner, co-chair tax groupArthur Cox

Tel: +353 (0)1 618 [email protected]

Caroline Devlin is co-chair of the tax group at Arthur Cox. Shehas extensive experience in advising both domestic and inter-national companies on structuring their tax affairs for varioustypes of transactions. Her experience covers a wide variety oftransactions including M&A, reorganisations, tax planninginvolving maximising IP assets and advising on efficient cashextraction methods.Caroline is very experienced in advising international clients

on doing business in and through Ireland. She acts for a broadrange of international clients including multinational corpora-tions, private equity houses, hedge funds and financial institu-tions as well as growth and emerging companies.Caroline is a member of the Irish Tax Institute’s Tax

Administration Liaison Committees, which deal with various taxissues including the implementation of BEPS and the ATAD inIreland. Caroline is particularly experienced in advising onfinancing structures, including aircraft and equipment leasing.Caroline also leads Arthur Cox’s Asia Pacific group.

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rules of January 1 2024 although it is unclear whetherIreland’s existing interest deductibility rules would satisfythe conditions of the derogation, without further guidanceon the interpretation of those conditions.

While interest limitation rules will represent a new Irishtax measure, their impact may be limited due to the fact thatIrish companies that form part of a worldwide group do notgenerally carry a lot of debt. Interest deductions are oftenavailed of in jurisdictions which have a higher tax rate than12.5%.

The introduction of anti-hybrid rules could make Irelanda more attractive location for treasury companies within agroup. With double deduction or deduction/non-inclusionstructures in other jurisdictions no longer viable, tax at 12.5%on the profits of financing activities is a competitive proposal.

While the introduction of CFC rules will be a new depar-ture for Ireland, locating a holding company in a low-taxjurisdiction such as Ireland may be efficient under the newEU-wide CFC regime. The CFC rules re-attribute certaintypes of income earned by low-taxed controlled subsidiaries(or PEs) to the parent holding company. In summary, aCFC is a more than 50% controlled subsidiary where theactual corporate tax paid by that subsidiary is lower than the

difference between the corporate tax that would have beencharged in the parent holding company jurisdiction and theactual corporate tax paid by the subsidiary. If a subsidiary isclassified as a CFC, its undistributed passive income can beattributed to its parent company unless it carries on substan-tive economic activity supported by staff, equipment, assetsand premises. Therefore while the new CFC rules may notgreatly impact Irish holding companies, where groups haveIrish subsidiaries that avail of the 12.5% rate, those Irish sub-sidiaries should carry on substantive economic activity inIreland. Irish Revenue places particular emphasis on thelevel of activity being carried on in Ireland by employeeswith the requisite skills and experience when consideringwhether the 12.5% rate of corporation tax on tradingincome applies and therefore Irish trading subsidiariesshould meet the substantive economic activity test.

ConclusionWhile constancy is at the core of Irish domestic tax policy,Ireland must adapt to conform to international tax reform.Ireland’s focus will be on availing of the opportunities aris-ing from uncertainty overseas and remaining a competitivelocation for inward investment and M&A activity.

N E T H E R L A N D S


Tax clauses in a sharepurchase agreement underDutch lawFrank Buitenwerf andRoos Jongeneel ofTaxand Netherlandsexplore the mainconsiderations of thetax clauses in a sharepurchase agreementthat are governed byDutch law.

I n our daily M&A tax practice it is common that a share purchaseagreement for the acquisition of Dutch taxpaying corporates is con-cluded under Dutch law, whereas the parties involved are not all famil-

iar with Dutch civil law or Dutch tax law. As a result, the parties can haveopposing ideas on the required content and meaning of the tax clauses.It can, in such a situation, be a challenge to explain the necessity and theimpact of the wording in the process of negotiations and it shows thatworking with a standard share purchase agreement (SPA) template is nei-ther sufficient nor efficient.In this article we will first highlight the aspects of interpretation of a

SPA under Dutch law. We will continue by exploring the main consider-ations for tax clauses in a SPA that is drafted for the acquisition of Dutchtaxpaying corporates (regardless of whether the SPA is governed byDutch law).

SPA governed by Dutch lawIn the process of drafting, it should already be taken into accountwhether any risk lies in the interpretation of the specific tax clause in caseof a dispute between the parties. In this regard it is important to notethat, under Dutch law, it will not always be the wording of the SPA thatprevails. Below, we will describe certain highlights with regard to the interpre-

tation of the SPA and the tax indemnities or tax warranties included,without trying to be exhaustive.

General interpretation Under the so-called Haviltex criterion that was introduced by theDutch Supreme Court, the interpretation of an agreement that is gov-erned by Dutch law will highly depend on the meaning that partiesunder the applicable circumstances reasonably could have granted tothe wording and on what both parties reasonably could expect fromeach other. In order to explore the underlying meaning of the parties, inter alia,

the correspondence shared between the parties in the process of negoti-ations and drafting of the SPA will be of importance. It can therefore bethat the interpretation ultimately granted to a specific tax clause in a SPAby a Dutch Court can deviate from the literal wording. Over the years various nuances to this criterion have been made in case

law. Important circumstances that impact the interpretation of a SPA are,



inter alia, whether professional counsel has been involved indrafting the wording in a specific manner and the languagein which the agreement has been drafted. The interpretationof terminology used, for example, in English language andlaw practice can impact the interpretation of such clauseunder Dutch law. In order to mitigate the risks for either party involved,

various items should be considered during the process ofdrafting and negotiations:• To carefully discuss the key tax clauses, such as the taxindemnity, tax warranties and the tax charge at the effec-tive date, to ensure that both parties have sufficientlyreviewed whether their understanding of the wording isin line;

• To explain in writing the meaning of any mark-up made,as we often see that material mark-ups are made to thetax clauses during the final stages of the negotiations,whereby the final amendment is the result of commercialnegotiations; and

• For SPAs drafted in English, it is advisable to include aspecific reference in Dutch to the definition included inDutch tax law.

Tax indemnities v tax warrantiesThe allocation of historic tax liabilities of the target to theseller can be done via either the inclusion of a tax indemnityor a tax warranty in the SPA. The main difference between the two possibilities is

that the purchaser in principle cannot rely on a tax war-ranty, in case information on a breach was disclosed dur-ing, for example, the tax due diligence process. UnderDutch law, the seller will have the obligation to providethe purchaser with sufficient information but in its turn,the purchaser will have the obligation to carefully reviewthe tax position of the target company and the informa-tion provided. A full description of the thin line betweenthe obligation to investigate and the obligation to provideinformation is outside the scope of this contribution, butcertain concise guidelines can be provided based on caselaw by the Dutch Supreme Court. The purchaser may inprinciple rely on the information provided by the seller,but should raise additional questions if doubt arises. Incase it is clear to the seller that the purchaser does nothave a correct understanding of the tax position of the tar-get company, the purchaser should be informed. If it failsto do so on key items, compensation can be claimed or, asan ultimate remedy, the SPA may be cancelled based onmisrepresentation.Furthermore, in cross-border transactions the scope of

the tax indemnity often varies based on what both partiesare accustomed to. It is possible that the tax indemnity isincluded as an obligation to reimburse the purchaser for anydamage relating to the breach (in which case the amount of

damages should first be determined), or as a covenant to paythe historic tax liability including, for example, penalties andinterest charged.

Specific tax clauses to be included Regardless of whether the SPA is governed by Dutch law, itshould include specific tax clauses in case Dutch taxpayingentities are included in the target. Below, we will continueby exploring the main considerations for the tax clauses insuch a SPA. These items should be taken into account whennegotiating the SPA, regardless of whether you representthe purchaser or the seller.

Definition of taxesThe definition of taxes in the SPA should, as a general rule,cover all taxes payable by the target company, includingpenalties, interest charges and other costs for late paymentor filing. The taxes should not only include direct corporatetaxes, but also VAT and customs duties, wage tax and socialsecurity contributions, real estate transfer tax, and variousmunicipal taxes. An important item to consider is the qualification of any

amount payable as a recharge of unlawful state aid (resultingfrom a tax benefit obtained). There is no consensus onwhether such recharge falls under the scope of the definitionof taxes and it is therefore advisable to include this with spe-cific wording in the SPA.

Fiscal unity regimeDutch taxpaying entities can be included in a fiscal unity (atax group) for Dutch corporate tax and VAT purposes. Entities included in a fiscal unity for corporate tax are

considered as one taxpayer and the parent company is thedesignated taxpayer for the fiscal unity. In cases where a fis-cal unity exists, at least the following items should bedescribed in the SPA. • One of the requirements for forming a fiscal unity is thatthe parent company holds at least 95% of the shares in thesubsidiaries. The acquisition of a subsidiary within a fiscalunity will therefore result in an exit of that company fromthe fiscal unity. However, the timing of the exit may vary(e.g. at signing, closing, or the moment when the condi-tions precedent are fulfilled). In the SPA it can be includ-ed that certainty in advance is requested from the Dutchtax authorities;

• All taxable results are by law allocated to the designatedtaxpayer until the fiscal unity ceases to exist with regardto the target company. The calculation of the tax chargeat the effective date should therefore be in line with thetax charge at the date of exit from the fiscal unity;

• Often, the fiscal unity will cease to exist at closing. In caseof a ‘locked box’ transaction, the taxable results of theperiod between the effective date and closing should be



for the account of the purchaser. Should the target com-pany be included in a fiscal unity, the tax charge for thisperiod is, by law, borne by the seller’s group and a mech-anism for a correction should be included in the SPA.The tax charge for the locked box period is furthermoreaffected by the tax treatment of leakage (e.g. non-deductible transaction costs). The description of leakageshould therefore also include wording to cover the cor-porate tax on non-tax deductible leakage and non-recov-erable VAT;

• Should the target company report losses available forcarry forward at closing, a specific request should be filedwith the Dutch tax authorities to allocate these losses tothe target company post-closing. It is advisable to includethe obligation to file such a joint request in the SPA; and

• Following the exit from the fiscal unity of the seller, thetarget company will be a stand-alone taxpayer or may beincluded in the fiscal unity of the purchaser’s group. Inboth cases a stand-alone balance sheet for tax purposes ofthe target company upon exit should be drafted and it ismarket practice that the purchaser is provided with thisbalance sheet including explanatory notes. It is advisableto include this obligation and a dispute resolution in theSPA.The tax regime for fiscal unities include various anti-

avoidance provisions that may result in corporate taxbeing payable by the fiscal unity upon an exit. The corpo-rate tax payable is in principle allocated to the parent com-pany but the target company can claim a step-up for taxpurposes and can depreciate in the following years. If thissituation arises, the seller’s group may require a remuner-ation for the tax charge.

Secondary tax liabilities Although the parent company within a fiscal unity for cor-porate tax purposes is primarily liable for the corporate taxpayable, subsidiaries remain jointly and severally liable for allcorporate tax liabilities for the period in which they wereincluded in the fiscal unity if the parent company does notpay the corporate tax due. This secondary liability should becovered by a tax indemnity in the SPA.A fiscal unity for VAT purposes will also have the result

that the companies are considered a single taxable entity forVAT purposes. Similarly to a corporate tax fiscal unity, theVAT due for a VAT fiscal unity is normally paid by a desig-nated company (e.g. the parent company). In case a writtendecision on the existence of the fiscal unity is issued by theDutch tax authorities and VAT would be underpaid, allgrouped companies remain jointly and severally liable for allVAT liabilities for the period in which they were consideredto be included in the fiscal unity. This secondary liabilityshould be covered by a tax indemnity in the SPA. Althoughthe VAT fiscal unity will likely end at closing due to a breachof the linkage requirements, the secondary liability will con-tinue to build up until the Dutch tax authorities areinformed in writing of the change to the fiscal unity. TheDutch tax authorities should therefore be notified of thechange in a VAT group immediately following closing.Notwithstanding that parties generally send such notifica-tions at their own initiative, it is also advisable to include thisobligation in the SPA.In addition, a secondary liability may by law arise for

VAT and wage tax liabilities for hired personnel and con-tractors. These liabilities should be covered by the taxindemnity in the SPA.

Frank BuitenwerfTaxand Netherlands

Tel: +31 20 435 [email protected]

Frank Buitenwerf is a partner in the M&A team and corporatetax department of Taxand Netherlands. Frank has extensiveexperience in the tax structuring of domestic and cross-borderacquisitions and reorganisations. He advises private equityfunds, hedge funds and corporations on the tax impacts of awide range of areas, including M&A deal structuring and taxdue diligence. He has been admitted to the Dutch Bar and isalso a member of the Dutch Association of Tax Advisers.

Roos JongeneelTaxand Netherlands


Roos Jongeneel is a senior associate at Taxand Netherlands,where she specialises in M&A and international corporate taxa-tion. She is an experienced adviser in the field of M&A andcorporate restructuring. Her clients are private equity funds,multinational enterprises and innovative start-ups. Roos isadmitted to the Dutch Bar and a member of the DutchAssociation of Tax Advisers.



Tax exposures as a result of the transaction The Netherlands does not levy any stamp duty or capitaltaxes upon the transfer of shares in a Dutch company. Theacquisition may, however, lead to Dutch real estate trans-fer tax of up to 6% in cases where companies qualify as a“real estate company” under Dutch tax law. This itemshould be covered during the due diligence and the SPAshould clearly state which party will ultimately bear thecosts of the real estate transfer tax. By law, the real estatetransfer tax will be levied from the purchaser. In caseswhere the commercial negotiations result in the real estatetransfer tax being borne by either the seller of the targetcompany, the SPA should include specific wording on thismatter.The existence of an option plan may furthermore lead to

a wage tax liability for the target company in cases where theoption rights of its employees can be exercised at closing.Dutch wage tax may be due on the difference between the

current value of the shares and the exercise price. Should thewage tax due be borne by the target company and not bythe employee, the wage tax liability will further increasefollowing a gross up. The existence and tax consequences ofan option plan should be reviewed during tax due diligenceand the SPA should clearly state which party will bear thecosts of this exposure.

Closing remarks In international transactions, parties may be accustomed todifferent market practices regarding tax clauses in a SPA. ASPA drafted for the acquisition of Dutch taxpaying entitiesrequires, however, specific considerations and it will there-fore not be sufficient or efficient to use a standard SPA tem-plate. In cases where the SPA is governed by Dutch civil law,the due diligence performed and the understanding of allparties involved will furthermore impact the explanation ofthe wording of the SPA.

S W I T Z E R L A N D


Swiss rules on withholding taxsecurities – discrimination offoreign investors?Switzerland has beenknown for a long timeas a popular location forinternational tradingcompanies. Due to itsbusiness-friendlyenvironment it hashosted all types oftrading companies,from headquarters ofmultinationals to smalltrading offices withonly one employee, fordecades. Suchcompanies may face aserious withholding taxrisk, write Rolf Wüthrichand Noëmi Kunz-Schenk of burckhardt.

O ften, the origin, the purchaser as well as the transporter of goodstraded by Swiss companies are outside of Switzerland. In such sit-uations, the inventory of Swiss trading companies is normally not

stored in Swiss warehouses, but anywhere in the world, and the receiv-ables from the sales by the Swiss trading company are to a large extentreceivables against non-Swiss domiciled parties. One might intentionally establish a Swiss trading company or one

might take over such a company in the course of an acquisition. Variousarticles described the advantages of Swiss trading companies, be it fortaxes, employment, legal certainty, living standard for the employees,etc., but also all kind of pitfalls (partial liquidation, transposition, etc.) tobe avoided not to trigger Swiss income taxes, withholding tax or stampduties. Not often described, however, was a Swiss measure under whicha Swiss company may be forced to provide a security for possible futurewithholding taxes by means of a cash payment to or a guarantee onbehalf of the Swiss Federal Tax Administration (SFTA). This articledescribes the situation in which a non-Swiss controlled Swiss companycan be forced to grant a security for Swiss withholding taxes due in thefuture. We are of the opinion that – in a non-Swiss parent – Swiss sub-sidiary situation – a decision of the SFTA to provide a withholding taxsecurity results in a breach of the non-discrimination clause similar toArt. 24 para. 5 OECD Model Convention (OECD MC) as contained inthe Swiss tax treaties. The SFTA should therefore consider its treaty obli-gations when applying the domestic legislation on providing withholdingtax securities not to breach the applicable non-discrimination clauses andrefrain from requesting a withholding tax security.Let’s assume the following example: A Swiss trading company

(SwissCo) has assets of $1,000: Cash at Swiss bank of $100, receivablesagainst non-Swiss resident clients of $600 and goods at warehouses out-side of Switzerland of $300. On the liabilities side it has a formal capitalof $100 and profits carried forward of $900. SwissCo does not distributeany dividends as it needs its cash to finance its ongoing business activity.SwissCo is now sold from SwissHoldCo, a Swiss holding company to

USHoldCo, a US holding company.

Swiss dividend withholding tax of 35%In Switzerland, dividend distributions are, in principle, subject to divi-dend withholding tax of 35%. To domestic intragroup dividend distribu-tions the reporting procedure can be applied and the Swiss withholding



tax is not levied. Furthermore, if a non-Swiss parent compa-ny holding a qualifying participation in a Swiss subsidiary islocated in a state with which Switzerland has concluded atax treaty, then the Swiss subsidiary may be allowed to applydirectly the reduced treaty tax rate (normally 0% or 5% fordividends from qualifying participations) if the reportingprocedure is approved by or at least the request to apply thereporting procedure is filed with the SFTA within 30 daysfollowing the shareholder meeting deciding the dividend.Thus, as a principle, Switzerland still knows a dividend with-holding tax of 35% and the reporting procedure, which (par-tially) releases a company from the levy of the withholdingtax in a parent – subsidiary situation, must still be consid-ered the exemption from the levy of the withholding tax.If said withholding tax principles are applied to our exam-

ple then the following results: In principle, SwissCo hasretained earnings of $900 and must pay Swiss withholding taxof $315 (35% of $900) in case of distribution of the retainedearnings or in case of liquidation of SwissCo. As USHoldCocan apply the tax treaty with Switzerland, the Swiss withhold-ing tax is reduced from 35% to 5% and SwissCo must pay awithholding tax of $45 if the reporting procedure is approvedin advance by the SFTA. If the reporting procedure does notapply (e.g. because no request was filed in advance or becausethe US parent does not qualify for the reporting procedure asit is treated as an S corporation for US tax purposes), the fullwithholding tax of 35% will be levied.

Obligation to provide withholding tax security Art. 47 of the Swiss federal law on withholding taxes(WHTL) states that the SFTA can ask a corporate taxpayerto provide a security for withholding taxes, interest and fur-ther expenses, even if such withholding taxes, interest orexpenses are neither assessed nor due but solely as the col-lection of the future withholding tax seems to be at risk.Irrespective of the possibility of appealing against a decisionof the SFTA to provide a withholding tax security, such adecision of the SFTA is immediately enforceable and theamount to be secured can be enforced by the SFTA againstthe Swiss company. By application of Art. 47 WHTL theSFTA may therefore request from SwissCo a security of$315 (35% of $900). As the US-Swiss tax treaty previews areduced dividend withholding tax of 5% SwissCo may, inpractice, request that the security shall be reduced to $45(5% of $900) instead of $315. Such a reduction of the secu-rity will only be granted if SwissCo disposes of a permissionissued by the SFTA to apply directly the reduced dividendwithholding tax under the tax treaty. If such permission isnot issued, then no reduction will be granted and the secu-rity equal to 35% of the distributable retained earnings willbe due. The amount of the security to be provided will bereviewed and adopted on an annual basis by the SFTA basedon the effective facts and circumstances.

For withholding tax security purposes Art. 9 of the ordi-nance to the WHTL (WHTO) contains a special provisionapplicable to non-Swiss controlled entities. The provisionstates that the collection of the withholding tax may bedeemed to be at risk if: • More than 80% of the capital in a Swiss company isdirectly or indirectly held by persons with residence out-side of Switzerland,

• More than 50% of the assets of the company are locatedoutside of Switzerland, and

• The Swiss company does not distribute on an annualbasis an adequate dividend.For the purpose of Art. 9 WHTO receivables or rights

against non-Swiss resident persons are considered assetslocated outside of Switzerland. A dividend distribution isdeemed to be adequate if at least 6% of the distributableprofits of the Swiss company are distributed every year.If the three abovementioned conditions are met, the col-

lection of the Swiss withholding tax may be deemed to be atrisk by the SFTA and the SFTA may assess the provision ofa security by the Swiss company. This security must be paidimmediately and can be provided either by cash payment orby bank, insurance or third party guarantee on behalf of theSFTA. It should be noted that board members of a companymay, under certain circumstances, be kept personally liablefor withholding taxes, including the providing of a security.Art. 9 WHTO is drafted as a ‘can’, and not as a ‘must’

provision. If the requirements of Art. 9 WHTO are fulfilledthe SFTA can, but does not absolutely have to ask for a secu-rity. There is room for discretion for the SFTA when takinga decision. As there is room for discretion the effective situ-ation of a company must be considered taking into accountall facts and circumstances when deciding whether or not asecurity is justified. It must especially be judged whether ornot there is a real danger that the future collection of thewithholding tax is at risk. Therefore, even if the before citedthree conditions of Art. 9 WHTO are met, the necessity ofproviding a security should not automatically be deemed tobe fulfilled. This is, also according to Swiss literature, thereason why the legislator drafted Art. 9 WHTO as a ‘can’provision. In practice, however, it looks like tax inspectors in

charge do not often make use of their freedom of discre-tion, when the three requirements are met, but ratherthreaten taxpayers with the obligation to either provide asecurity or to distribute an adequate dividend. Normally,the concerned group will solve the problem by deciding adividend distribution of at least 6% of the distributableequity. Especially if the 0% withholding tax rate under atax treaty is applicable, dividends can be distributed with-out any Swiss withholding tax consequences. There are,however, also situations, under which the Swiss dividendwithholding tax is not reduced to 0%, as it is, as mentioned



here before, the case under the US-Swiss tax treaty.Furthermore, such forced dividends are normally contraryto the business plan of a company. Instead of having thepossibility to build up a solid equity basis the SFTA forcescompanies to reduce their Swiss equity basis by dividenddistributions and to lend debt capital resulting in a lowerSwiss profit due to deductible interest paid and in a lowertaxable equity. One might think that it should also be inthe interest of the SFTA to build up Swiss equity invest-ments by non-Swiss investors. However, practice shows adifferent face and an implementation of Art. 9 WHTOwithout considering the freedom of discretion as well aswithout taking into account collateral damages caused bythe SFTA for the business location Switzerland.

Art. 9 WHTO breaching non-discrimination according toArt. 24 para. 5 OECD MCArt. 47 WHTL is applicable to SwissCo owned byUSHoldCo as the 3 requirements of Art. 9 WHTO are ful-filled. As a consequence, SwissCo must either distribute anadequate dividend or must provide a security. Let’s assume that SwissHoldCo did not sell SwissCo.

Under this assumption, more than 50% of the assets of thecompany are still located outside of Switzerland (which isthe justification to request a security due to the fact that theSwiss withholding tax might be in danger). Differently from

our basic example is the fact that the shareholder,SwissHoldCo, is still a Swiss resident, i.e. there is Swiss con-trol, and not a non-Swiss resident person, i.e. non-Swisscontrol. As a consequence of the Swiss control Art. 9WHTO does not apply, opposite to the non-Swiss con-trolled situation to which Art. 9 WHTO applies. Thus, Art.9 WHTO states an obligation which distinguishes betweenSwiss controlled and non-Swiss controlled and which onlyapplies to the non-Swiss controlled Swiss company, and notto Swiss controlled Swiss companies. The obligation to provide a security to the SFTA accord-

ing to Art. 9 WHTO results in a financial obligation for theSwiss company as either the Swiss withholding tax securitymust be paid to the SFTA or (bank, insurance or other) feesfor a guarantee will be due and other disadvantages mayresult from granting a guarantee (impact on credit liabilityof a company) or making a cash payment. The granting of asecurity results in a cash drain and, as a consequence, in acompetitive disadvantage for the non-Swiss controlled com-pany.

Non-discrimination under tax treatiesArt. 24 para. 5 of the OECD MC states that enterprises ofa contracting state, the capital of which is wholly or partlyowned or controlled, directly or indirectly, by one or moreresidents of the other contracting state, shall not be subjected

Rolf Wüthrichburckhardt Ltd.

Mühlenberg 74010 Basel, SwitzerlandTel: +41 61 204 01 [email protected]

Rolf Wüthrich is an international tax lawyer with particularexpertise in domestic and international tax planning andin-bound and outbound transactions, especially between the USAand Switzerland. He also has strong experience in corporaterestructuring and acquisitions as well as general corporate sec-retarial services.

Noëmi Kunz-Schenkburckhardt Ltd.

Mühlenberg 74010 Basel, SwitzerlandTel: +41 61 204 01 [email protected]

Noëmi Kunz-Schenk’s areas of expertise are domestic andinternational tax issues and tax planning, particularly in corpo-rate reorganisations, restructurings, structured finance, financialproducts, acquisitions and divestments andhigh net wealthindividuals.

burckhardt Ltd. provides its clients and their businesses withcomprehensive, tailored advice on national and internationaltax planning issues and structuring, offers corporate secretarialand notary service, supports clients with professional expertiseand broad international experience on restructurings, mergersand acquisitions as well as joint ventures, corporate financing,advises on inbound and outbound investments and in all mat-ters related to employment, trade and transport law as well asto private clients.



in the first-mentioned state to any taxation or any require-ment connected therewith which is other or more burden-some than the taxation and connected requirements towhich other similar enterprises of the first-mentioned stateare or may be subjected.In its tax treaties Switzerland normally includes a provi-

sion similar to Art. 24 para. 5 OECD MC. From a Swiss per-spective Art. 24 para. 5 OECD MC therefore reads: “Swiss enterprises, the capital of which is wholly or partly

owned or controlled, directly or indirectly, by one or moreresidents of the other contracting state, shall not be subject-ed in Switzerland to any taxation or any requirement con-nected therewith which is other or more burdensome thanthe taxation and connected requirements to which othersimilar enterprises of Switzerland are or may be subject.”The non-discrimination clause of Art. 24 para. 5 OECD

MC shall, notwithstanding the provisions of Art. 2 of theOECD MC, apply to taxes of every kind and description(Art. 24 para. 6 OECD MC). The object of Art. 24 para. 5 OECD MC is to ensure the

equal treatment for taxpayers residing in the same state, i.e.to ensure that all resident companies are treated equallyregardless of who owns or controls their capital. The non-discrimination provision according to Art. 24. para. 5OECD MC is also applicable to the Swiss withholding taxregulations and, as a consequence, to the rules regarding theprovision of a security according to Art. 47 WHTL in con-nection with Art. 9 WHTO.

Tax treaty law overrules domestic lawWhen applying domestic tax law then prevailing provisions,including non-discrimination clauses of Swiss tax treatiesmust be applied by the Swiss tax authorities. The rules onprovision of a security by Swiss companies controlled bynon-Swiss entities according to Art. 47 WHTL and Art. 9WHTO cannot, therefore, result in a breach of Art. 24 para.5 OECD MC or the respective non-discrimination clause isa Swiss tax treaty, but must be in accordance with the obli-

gations Switzerland entered into by signing tax treaties withsuch a non-discrimination clause.A breach of Art. 24 para. 5 OECD MC is, in our opinion,

given if a withholding tax security is requested by the SFTAfrom a Swiss company in case of non-Swiss control, but nosecurity is requested in case of Swiss control. The SFTAmust treat non-Swiss controlled entities similar to Swiss con-trolled entities. A breach of Art. 24 para. 5 OECD MC isnot only given if the tax burden by a non-Swiss controlledcompany is higher than the tax burden carried by a Swisscontrolled company. A breach of Art. 24 para. 5 OECD isalso given if the non-Swiss controlled company is subject toobligations deviating from the obligations applicable to theSwiss controlled entity. Of course, it is at the discretion of the Swiss legislator to

include in Art. 9 WHTO rules regarding the provision of asecurity by non-Swiss controlled entities. It is also at the dis-cretion of the legislator to stipulate discriminatory regulationsas long as such regulations do not result in a breach of treatyobligations. Has Switzerland, however, concluded a tax treatywith a provision similar to Art. 24 para. 5 OECD MC, thenSwitzerland is bound to its treaty obligations not do discrimi-nate against non-Swiss controlled entities for Swiss withhold-ing tax and security purposes. Otherwise such entities suffer adisadvantage opposite Swiss controlled entities as the provisionof a security leads to a cash drain for the non-Swiss controlledentities resulting in an economic disadvantage. The triggeringof such a disadvantageous position by the SFTA for the non-Swiss controlled entity clearly results in a breach of the non-discrimination clause according to Art. 24 para. 5 OECD MC. The SFTA, as many other states as well, still struggles

with the practical implementation of non-discriminationclauses. The understanding of non-discrimination as well asthe importance of applying tax law in a non-discriminatorymanner is an ongoing development. This gives us hope thatthe day will come when tax administrations accept andimplement the non-discrimination obligations applicable tothem by virtue of signed tax treaties.

U K R A I N E


M&A environment and trendsin Ukraine

Asters’ ConstantinSolyar, partner, AlexeyKhomyakov, partner,and Pavlo Shovak,associate, provide abreakdown of the taxwork included instructuring Ukrainetransactions and theinfluence of externalregulations on deals.

A fter a turbulent past couple of years, we are starting to see signs ofstability and slow recovery. The IMF predicts 2.5% growth in GDPand slowing down of inflation to 8.5% in 2017. Some independent

experts are even a bit more optimistic with their estimates, forecasting a2.9% GDP growth. The de-escalation of the conflict in eastern Ukrainehad a favourable impact on the economy by bringing macroeconomicstability, increasing consumer confidence, but most importantly fosteringbusiness activity. Deferred demand on the market where both consumersand investors were waiting to see how the things will progress beforespending or investing their money starts to play its role by bringing someadditional transactional work for the lawyers.

Ukraine has implemented some reforms in recent years by bringingmore transparency into many fields, including state procurement andenergy sectors, guaranteeing more protection to private ownership,greater protection to minority shareholders, and better judicial enforce-ment. The country has slightly improved its position in the DoingBusiness rankings by the World Bank. The process of change is slow, butnonetheless still going steadily. One of the bold moves the country ismaking is a full reboot of the Supreme Court. The active selectionprocess of new judges is underway, and is being carried out under closesupervision by the civil society. The state is going to pay high salaries tothe successful candidates and to attract professionals with diversified legalbackgrounds.

The most active industry sectors for investment and M&A in recentyears were agricultural, IT, finance, energy, and logistics. Prices for manyassets have dropped significantly in recent years, making investors believethat there is room for growth in the future. Ukraine is booming as an IToutsourcing market. The country’s solid technical heritage and engineer-ing background, coupled with the 5% flat tax on income of IT develop-ers, makes it a very attractive and cost-efficient jurisdiction for many ITcompanies and startups.

Structuring M&A dealsIndirect transfersBecause of the 20% VAT being triggered on the asset transfer the major-ity of M&A deals are structured as share deals. Though the VAT cost istemporary and VAT can be recovered over time, usually the buyers donot want to create cash outflow unless there are legal risks of participa-tion in the equity that outweigh the tax benefit.

U K R A I N E


A number of M&A deals are done through the indirecttransfer of shares where the Ukrainian target is owned by aforeign holding company and the sellers sell their shares in theforeign holding company to the buyer, and thus the buyer istaking over the holding company, which continues to own theUkrainian target. The Netherlands and Cyprus are among thepopular jurisdictions for establishing a holding company toown the Ukrainian target. However, Cyprus has begun to loseits popularity in certain segments of Ukrainian businesses.

Ukraine does not try to tax such indirect transfers. Inmany cases, it is not the 15% Ukrainian capital gains tax thatthe parties are trying to avoid, but rather strict and prohib-itive currency control regulations that Ukraine still has inplace after the dramatic events of the past. The goal of whichis preventing panic outflow of hard currency from the coun-try by imposing a number of restrictions.

Another incentive for the parties to structure their invest-ments indirectly through a foreign holding company is for-eign corporate laws that tend to be more flexible thanUkrainian regulations. In many cases, parties want to enterinto shareholder agreements that put their own tailor-madechecks and balances to their relations when it comes to own-ing and managing the Ukrainian target. This is not some-thing that the Ukrainian law allows, though the corporatelaw reform is underway.

Direct transfersDisposal of shares in the Ukrainian company by a non-resi-dent company is subject to 15% capital gains tax. The taxmay be eliminated/reduced by the double tax treaty. Evenwhen the parties to the deal are of Ukrainian origin in manyinstances they still try to use foreign companies for tax andnon-tax reasons.

Ukrainian tax officials and policymakers tend to lookaround and analyse developments in neighbouring countries.For instance, some of the very recent trends in Russia wherethat their tax authorities attacked conduit Cypriot companieswithout proper substance, these were claimed to be usedmerely for saving on Russian capital gains tax and could betaken into account by Ukrainian authorities. In one of thesecases, the Russian tax authorities analysed the structure of thedeal and substance of the Cypriot company involved.

Apart from BEPS, this is one of the signals to businessesthat involving foreign companies without proper substanceinto M&A deals may not be that practically safe anymore inUkraine. However, it has to be admitted that in many suchcases the Ukrainian sellers may not have, predominantintention to save on capital gains tax because at the end ofthe fiscal year they declare and pay the personal income taxout of dividend distributions received from such foreigncompanies that were used as sellers of the Ukrainian targets.

In these cases, the structures were motivated by non-taxreasons such as getting out of the scope of strict currency

control regulations or getting better protection by fallingwithin the jurisdiction of foreign courts.

Currency control regulationsPreviously, during the direct sale of shares in the Ukrainiantarget entity, foreign sellers and buyers were consideringeither making settlements through investment bankaccounts opened with Ukrainian banks, or paying directlyusing their foreign bank accounts. Because of the temporaryrestrictions of the Ukrainian National Bank, the first struc-ture of the payment is not practical at the moment. The sell-er may not be able to repatriate the proceeds from the saleof shares abroad and may be required to keep these funds inUkraine until the temporary restriction is lifted.

If the foreign parties opt for the second option (i.e. makingsettlements abroad), there will be a problem with payment ofthe Ukrainian capital gains tax on disposal shares. Some peo-ple may hardly call it a problem because as a result of theinconsistency between tax and currency control regulationsthe tax may not be payable at all. This inconsistent resultstems from the absence of mechanism in the law on paymentof the capital gains tax in such a setting. The law requires thatthe tax shall be withheld by the Ukrainian tax agent thatsomehow participates in the money settlement between theparties and does not provide for the mechanism to pay the taxby the seller itself or to delegate the tax payment to someother party. Because there is no such tax agent within themeaning of the law there is no capital gains tax.

There is a draft law trying to cure this defect, but so far wedo not see any active movement in parliament to adopt it.

Constantin SolyarPartner, TaxAsters

Leonardo Business Center19-21 Bohdana Khmelnytskoho St.Kyiv 01030, UkraineTel: +38044 230 60 [email protected]

Constantin Solyar is a tax partner at Asters. He has been prac-ticing tax for 11 years. Constantin advises in all areas ofUkrainian domestic and international tax with a strong focuson transactional and M&A work for multinationals and foreigninvestment. Before joining Asters, he worked in Big 4 firms inUkraine and in Luxembourg.

Constantin was named up and coming lawyer in taxation byChambers Europe and recommended in the Tax DirectorsHandbook by Legal 500. He holds an LLM degree from HarvardLaw School.

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BEPSOn November 22 2016, the Ukrainian governmentdeclared Ukraine’s adherence to the OECD’s BEPS initia-tive. The Ukrainian Minister of Finance declared that theapplication was submitted to the OECD and that Ukrainejoins the Inclusive Framework on BEPS starting fromJanuary 1 2017. This is not the first BEPS-related initia-tive. Recently, the President of Ukraine issued the Decreeon Measures to Tackle Base Erosion and Shifting of ProfitsAbroad, Law No.180/2016, which established the work-ing group on development of the respective draft laws.

However, at this time, there are no BEPS-relatedchanges to the tax laws and we have not heard aboutrecent draft laws being prepared to implement BEPSmeasures. Nevertheless, because of its membership in theInclusive Framework on BEPS, Ukraine should imple-ment at least four actions of the BEPS, including:• Action 5 on Countering Harmful Tax Practices More

Effectively, Taking into Account Transparency andSubstance;

• Action 6 on Preventing the Granting of Treaty Benefitsin Inappropriate Circumstances;

• Action 13 on the Country-by-Country ReportingImplementation Package; and

• Action 14 on Making Dispute Resolution MechanismsMore Effective.BEPS-related developments will likely impact rules for

granting a treaty relief. In particular, Action 6 whichrequires the introduction of amendments into both thedouble tax treaties (i.e. limitation on benefits rule andprincipal purpose test) and the domestic law (i.e. GAAR)to ensure proper application of the double tax treaties.Time will show how Ukraine is going to implement these

actions, but so far we do not see any active movement.Unlike many other developed tax jurisdictions, Ukrainewas not adopting any similar BEPS anti-avoidance meas-ures in the past. This means that there will be no replace-ment/revision of any old anti-avoidance rules, but insteadthe new rules that are expected to be drafted.

State aidRecent EU state aid cases have attracted lots of attentionin non-EU member states. These are of particular interestfor Ukraine because under the EU-Ukraine AssociationAgreement, Ukraine should implement a legal frameworkfor state aid based on the EU acquis communitaire. OnJuly 1 2014, the Ukrainian parliament adopted the Law ofUkraine on the State Aid to Business Entities, Law No.1555-VII, which outlines core principles of the state leg-islation and allocates monitoring and control functionsover the compliance with the new rules to theAntimonopoly Committee of Ukraine (AMC).

The new law will come into effect on August 2 2017.Theoretically, it could be assumed that the AMC follow-ing the EU practice may start reviewing some domestictax rulings issued by the tax authorities. However, in ourview this is not likely to happen because Ukrainian tax rul-ings are generally pro-fiscal in nature and do not tend totreat businesses favourably from the tax perspective.Furthermore, as a matter of practice the tax rulings arenot binding on the tax authorities, they may opt to applyan approach, which differs from the one described in theruling and claim tax deficiency. In such cases, the taxpayerwho followed the tax ruling will be only relieved from thetax penalties, but would still be required to pay the prin-cipal amount of the tax.

Alexey KhomyakovPartner, TaxAsters


Alexey Khomyakov focuses primarily on taxation. Alexey hasaccumulated extensive experience in tax aspects in M&As, cor-porate reorganisations, financing and restructuring, securities,and foreign investments. He has structured cross-border financ-ing within the framework of IPO, and Eurobond issuance forUkrainian large-sized businesses. Alexey also represents clientsin tax disputes.

Pavlo ShovakAssociate, TaxAsters


Pavlo Shovak is a tax associate at Asters. Pavlo advises on allaspects of Ukrainian tax law and acts for a wide range ofdomestic and international clients in various industries. His taxpractice covers all areas of direct and indirect taxation, includ-ing the tax aspects of Ukrainian M&A, corporate restructuringsand corporate finance transactions. Pavlo represents clients indisputes with Ukrainian tax authorities.

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Will the shifting tectonic platesof international politics movethe UK into the Atlantic?Steve Edge and JamesHume of Slaughterand May face downthe biggest issuesfacing UK taxpayers.Since the article theywrote last year waspublished, two thingshave loomed large onthe UK M&A horizon.

T he first is the result of the UK referendum, which was a vote forBritain to leave the EU, and the second is Donald Trump’s unex-pected victory in the presidential election in the US, which seems

likely to bring long-awaited tax reform in its wake. There is a lot of spec-ulation as to what form that might take.At a time when the after-effects of the financial crisis were still not

fully resolved, the introduction of further uncertainty into the UK M&Amarkets was far from welcome. No one wants to announce a deal and then find that dramatic external

events or developments disrupt that deal whilst it is in the process of closing. The counterpoint to this, of course, is that the announcement that the

UK would leave the EU resulted in a significant fall in the value of ster-ling – had events in the US followed a more predictable course, thismight have been expected to lead to US multinationals in particular bar-gain hunting in the UK. The fact that it looks as if the pressure to re-invest in order to maintain US tax deferral as regards unremittedlow-taxed overseas income might be removed in the future, however,means that we have yet to see many signs of that. The US election result put the turmoil in Europe in a different per-

spective – and the elections on the continent later this year may continue,or bring a halt to, the populist process. The deep pessimism immediately after the referendum result about

the economic consequences to the UK of losing its status as theEuropean jurisdiction with a very open economy, a more flexible labourmarket than many others and a (if not the) world-leading financial centrewith guaranteed access to continental Europe seems likely to turn out tohave been exaggerated. There have been some good recent signs of continuing confidence in

the UK – not least the decision by McDonald’s to locate its non-US IPin the UK and Apple’s search for a major headquarters location in theUK (along with one such announcement in the financial sector).HM Treasury is working very hard to maintain the message that the UK

is “open for business” and also to reassure those in the financial sector thatthe UK will do as much as it can to preserve access to European markets. Tax is only part of any business decisions to be made here of course –

something that has been illustrated by the financial sector’s response toentreaties from France to move significant amounts of business there.The labour laws in France are clearly a perceived obstacle and US banksin particular have not made light of that point.

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In the tax area, the loss of European treaties seemsunlikely to have a major impact. In terms of income flows(dividends, interest and royalties), the UK’s extensive dou-ble tax treaty network, coupled with the fact that the UK isnot itself a withholding tax jurisdiction as regards the pay-ment of dividends, means that any differences are very muchat the margin. The fact that the OECD is making moves inrelation to the resolution of cross-border tax disputes maytake some of the sting out of the loss of full access to theArbitration Convention. The Merger Directive has not real-ly added much to the corporate reorganisation reliefs alreadyavailable in the UK. When UK tax reform started in 2008/2009, the change

to a territorial system of taxation (no tax on foreign divi-dends and much less aggressive CFC rules) could be said tohave been driven by cases the UK had lost in the EuropeanCourt of Justice (ECJ) against taxpayers seeking to protectfundamental freedoms, but HM Treasury and HM Revenue& Customs did not see it in that way. The changes wereborn of a straight desire to become internationally compet-itive, which is why the rules were introduced on a globalbasis rather than just within the EU, so it seems unlikely thatany of that will change – and all the signs are that the UKcorporate tax rate will continue to be pushed down (so thatit may reach a 15% level).For the moment, however, anyone looking for reasons

not to do an M&A deal will find plenty of them.Looking at the way different companies may now be

changing because of the tax situation in the UK:

UK multinationalsAlthough Vodafone announced virtually immediately that itwas initiating a review to see whether or not it would be bet-ter to be headquartered in the EU (and announced laterthat it had decided not to make a change), most UK multi-nationals have remained calm about the situation and satis-fied themselves that a UK corporate headquarters is unlikelyto be prejudiced by Brexit because income flows into theUK are unlikely to be significantly affected and the positionof local subsidiaries operating within the EU should remainunchanged. Provided, therefore, that Brexit is not accompa-nied by adverse UK tax changes, the expectation would bethat multinationals already based here will not want tochange their position. They will obviously though keep theposition under review.

Non-UK multinationalsThese fall into two categories:1) companies that have set up manufacturing operations inthe UK and are exporting into Europe; and

2) companies that are either simple regional holding compa-nies or are engaged in UK product distribution.As indicated by the government’s exchanges with Nissan,

manufacturers based in the UK are obviously going to bemore concerned about the outcome to tariff negotiationsthan companies from other sectors. An adverse outcomethere may have an impact on both existing manufacturingbusinesses and on decisions to locate new manufacturingbases in the UK (though, as already mentioned, tax is notthe only question to be considered in such a decision-mak-ing process).For inbound UK distribution companies, nothing is like-

ly to change – apart from the usual developments as busi-nesses decide how best to distribute their products into anymarket (i.e. either directly by having people on the groundor remotely through digital sales techniques) with differenttax consequences depending on the structure used.Regional holding companies are again unlikely to be

affected – though those looking for a European holdingcompany in the future might have cause to reflect on the rel-ative advantages of the UK and others who offer a similar taxregime. Again, the total package will be what determines theanswer to this – the fact that it may be easier to put sub-stance on the ground in one place rather than the other willprobably play the biggest role in any decision.European countries (like Germany) which reacted to the

Cadbury case by giving broad CFC exemptions only to sub-sidiaries based in an EU country (so the analysis for UK sub-sidiaries may change) may have to think again aboutwhether or not that is an appropriate response – particularlyif the result is that companies based in their jurisdiction suf-fer CFC taxation when really they ought not to.

Financial sector Two things are clear:1) no one knows what is going to happen; but2) financial services companies cannot leave it to the lastminute to make changes – so many of them are startingto make plans now. Most of that planning is being done, however, on the

basis that the amount of staff moving will be relatively small,sufficient to effectively service an appropriately enhanced‘booking office’ with the major infrastructure being leftback in the UK. Whether that remains the model will needto be tested once the Brexit negotiations are completed butit clearly makes no sense for major banks operating in theEU to have their back office substance fragmented across anumber of jurisdictions and there is apparently no appetiteto move the whole of the business presently in the UK toany one place on the continent._________________________________________________

The UK is as conscious as any other EU country of the factthat businesses were mobile. The freedoms meant that itcould not effectively put any restriction (other than CGTexit charges, but they would not bite on substantial holdings

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where the UK has a participation exemption) on a compa-ny’s ability to move in or out. That was what gave rise to the realisation that the UK

needed to have a competitive tax regime in order to satisfythe businesses it had already and attract others to the UK.The Corporation Tax Road Map issued by the Coalitiongovernment in 2010 and by the Conservative governmentin 2015 provided ample evidence of that.Thus, regardless of whether or not Brexit was happening,

the UK’s competitive tax policy was bound to continue.There is no chance of the UK trying to follow a Singaporemodel – it does not need to do that. Having that tax policyin place creates a good platform for what may need to bedone in response to Brexit.As regards to M&A activity, US tax changes may mean

that inversions no longer happen but the last year has seenCoca-Cola European Partners establish itself in the UK hav-ing successfully left the US. Other activity will depend on market developments but

there is no reason to suppose that, in a merger, the UKwould not come out as the superior holding jurisdiction ifall other things are equal. The only potential fly in the ointment is that the govern-

ment will need to make the stamp duty exemption created

by the HSBC ECJ litigation survive Brexit if a merger whichresults in significant shares going into Euroclear or alterna-tive dispute resolution form is not to result in a significantstamp duty reverse tax (SDRT) season ticket charge. Quite where US tax reform will end up is a mystery.The US corporate tax system has been plagued with

problems for years. It is a major revenue yielder for the gov-ernment and so the effects of reform may need to beabsorbed elsewhere. At present, pure domestic companiespay a high 35% federal rate, US-based multinationals cangenerate large amounts of low-taxed cash offshore withoutCFC problems and inbound investors have been able to gearup to a much greater level than their domestic counterparts.Too many distortions – but each had a special interest groupfirmly behind it.Before the election it seemed possible that, if the

Democrats could ever do what they wanted to do, theywould end up with a system pretty much like the UK’s butpossibly with a 15% corporate tax rate domestically anddeciding whether or not CFC rules were going to be a prob-lem. There might have been a repatriation charge on thehuge funds left offshore but that would have been about it.In other words, the US would have been a slightly modifiedterritorial system.

James HumeSlaughter and May


James has been a tax associate at Slaughter and May since2008. He advises on all areas of UK tax law and acts for awide range of clients, including large multinationals, banks,insurers, hedge funds and commodities traders. He has a par-ticularly strong focus on corporate tax and is known for thecommercial focus of his advice. James has extensive experi-ence of domestic and cross-border M&A, joint ventures, andcorporate finance transactions generally. He also has a diversetax consultancy practice, covering all areas of taxation fromtransfer pricing to employee remuneration, and has worked ona number of disputes and settlements with HMRC.

Steve EdgeSlaughter and May


Steve Edge qualified with Slaughter and May in 1975 and actsfor clients across the full range of the firm’s practice.

Steve advises on the tax aspects of private and public merg-ers, acquisitions, disposals and joint ventures and on businessand transaction structuring (including transfer pricing in all itsaspects) more generally. He also advises many banks, insur-ance companies, hedge funds and others in the financial serv-ices sector in a wide range of areas.

Much of Steve’s work has multinational cross-border aspectsto it and so he is often working closely with other leadinginternational tax advisers around the world.

In recent years, Steve has also been heavily involved inmany in-depth tax investigations of specific domestic orinternational issues including transfer pricing in particular. Hetherefore has considerable experience of dealing with HMRCat all levels.

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But that would not apparently have yielded much addi-tional tax.So, now the pressure seems to be on to give favourable

consideration to a radical reform (called a destination-basedcash flow tax; DBCFT) which would charge tax on importsand exempt exports as well as giving 100% tax relief for cap-ital expenditure.In blunt terms, this would give an immediate boost to

the US economy equal to tax on the US’s trading deficit.You can see how it would be presented – a boost to USmanufacturing with an exemption for exports and a taxpenalty on imports. Also, no relief for interest so furtherrestrictions on “games by foreigners investing in the US”.

This may be too attractive an opportunity for the incominggovernment to ignore – but its consequences for internationalinvestors and for US multinationals will take a lot of time towork through. While that happens, US companies may not beas interested in merger or acquisition activity as they havebeen in recent times – and companies looking at a US acqui-sition will find that very difficult to price in after-tax terms.We should know better where we are in a few months but

there will be a lot of hard work to be done after that – andthe WTO will potentially put a spanner in the works if it seesthe DBCFT as an unauthorised border tariff. A US VATwould obviously be much easier – but it is apparently polit-ically unacceptable as a “tax on consumers”.

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US international M&A taxdevelopments

There has been a largenumber of USdevelopments in theM&A area, particularlydue to a series ofregulations and otherguidance issued by theObama Administrationin its final two monthsin office. Jim Fullerand David Forst ofFenwick & Westexplore what thesedevelopments mean fortaxpayers.

Section 385 regulationsSection 385 regulations, which affect the tax treatment of corporatedebt, were finalised. The regulations reserve all aspects of their applica-tion to foreign debt issuers. Thus, they do not apply in an outbound con-text, such as when a US parent company makes a loan to its foreignsubsidiary. However, the rules still apply in an inbound context.The blacklisted transaction rules under the final regulations follow the

pattern set forth in the proposed regulations. The general rule and fund-ing rule both remain in place essentially as proposed. However, the finalregulations add a number of new exceptions and expand some of theexisting exceptions to the application of the per se funding rule.Under the general rule, unless an exception applies, a covered debt

instrument is treated as stock to the extent it is issued by a covered mem-ber to a member of the covered member’s expanded group in one ormore of the following transactions:• In a distribution;• In exchange for expanded group stock, other than in an exemptexchange; or

• In exchange for property in an asset reorganisation, but only to theextent that, pursuant to the plan of reorganisation, a shareholder inthe transferor corporation that is a member of the issuer’s expandedgroup immediately before the reorganisation receives the covereddebt instrument with respect to its stock in the transferor corporation.The funding rule is intended to serve as a backstop, to prevent

expanded group members from achieving the same result indirectly ascould be achieved directly with a general rule transaction. Under thefunding rule, unless an exception applies, a covered debt instrument istreated as stock to the extent it is issued by a covered member (thefunded member) to a member of the funded member’s expandedgroup in exchange for property, pursuant to a per se rule or a principalpurpose rule. A covered debt instrument is treated as funding any oneor more of the following blacklisted distribution or acquisition trans-actions. • A distribution of property by the funded member to a member of thefunded member’s expanded group, other than in an exempt distribu-tion of stock pursuant to an asset reorganisation that is permitted tobe received without the recognition of gain or income under§ 354(a)(1) or 355(a)(1) or, when § 356 applies, that is not treatedas “other property” or money described in § 356;

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• An acquisition of expanded group stock, other than in anexempt exchange, by the funded member from a memberof the funded member’s expanded group in exchange forproperty other than expanded group stock; or

• An acquisition of property by the funded member in anasset reorganisation, but only to the extent that, pursuantto the plan of reorganisation, a shareholder in the trans-feror corporation that is a member of the funded mem-ber’s expanded group immediately before thereorganisation receives other property or money withinthe meaning of § 356 with respect to its stock in thetransferor corporation.A few other changes from the proposed regulations are

that the E&P exception is expanded to include all of anissuer’s E&P accumulated after the proposed regulationswere issued (April 4 2016) and while it was a member of thesame expanded group. The “cliff effect” of the $50 millionthreshold exception is removed. Taxpayers can exclude thefirst $50 million of debt that otherwise would be recharac-terised under the blacklisted transaction rules. The 90-daydelay in implementation of the blacklisted transaction rulesis expanded so that any debt instrument that is subject torecharacterisation but that is issued on or before January 192017 – the date 90 days after publication of the final regu-lations in the Federal Register – will not be recharacteriseduntil January 20 2017.

Section 901(m) regulationsSection 901(m) provides that in the case of a covered assetacquisition (CAA), the disqualified portion of any foreigntax determined with respect to the income or gain attribut-able to relevant foreign assets (RFAs) will not be taken intoaccount in determining the relevant foreign tax credit.Instead, the disqualified portion of any foreign income tax(the disqualified tax amount) is permitted as a deduction. ACAA is a qualified stock purchase as defined in § 338; (2)any transaction that is treated as an acquisition of assets forU.S. income tax purposes and as the acquisition of stock ofa corporation (or is disregarded) for purposes of foreignincome tax; (3) any acquisition of an interest in a partner-ship that has an election in effect under § 754 (§ 743(b)CAAs); and (4) to the extent provided by the IRS, any sim-ilar transaction.The new regulations identify the assets that are RFAs

with respect to a CAA. An asset is subject to a CAA, if, forexample:1) In the case of a qualified stock purchase to which § 338applies, new target is treated as purchasing the asset fromold target;

2) In the case of a taxable acquisition of a disregarded entitythat is treated as an acquisition of stock for foreignincome tax purposes, the asset is owned by the disregard-ed entity at the time of the purchase and therefore the

buyer is treated as purchasing the asset from the seller;and

3) In the case of a § 743(b) CAA, the asset is attributable tothe partnership interest transferred in the § 743(b) CAA.Other portions of the regulations provide rules for deter-

mining the basis difference with respect to an RFA, takinginto account basis difference under the applicable costrecovery method or as a result of a disposition of an RFA,and successor rules for applying § 901(m) to subsequent

James FullerFenwick & West


Jim Fuller is a partner in the tax group at Fenwick & West inMountain View, California. He is one of the world’s top 25 taxadvisers, according to Euromoney. Fuller is described as one ofthe three “most highly regarded” US tax practitioners in LawBusiness Research’s Who’s Who Legal (2016), and is the onlyUS tax adviser to receive a coveted Chambers ‘star performer’rating (higher than first tier) in Chambers USA (2016).Fuller and his firm have served as counsel in more than 150

large-corporate IRS Appeals proceedings and more than 70 fed-eral tax court cases. Seven Fenwick tax partners appear inInternational Tax Review’s Tax Controversy Leaders Guide.Fenwick has been named US (or Americas) Tax Litigation Firmof the Year three times at ITR’s annual Americas AwardsDinners.Two of our tax partners were shortlisted by Euromoney at its

Women in Business Law Awards dinners in the America’sLeading Lawyer for Tax Dispute Resolution category. One is atwo-time winner of the award.Much of our tax dispute resolution work has involved trans-

fer pricing. Fenwick & West is first tier in ITR’s World TransferPricing (2016). Five Fenwick tax partners have appeared inEuromoney’s World’s Leading Transfer Pricing Advisers. Transferpricing cases in which we have been involved include: AppleComputer, Xilinx, DHL, and LimitedBrands, among others. Thevast majority of our transfer pricing cases have been resolvedin Appeals, some on a ‘no change’ basis.Other cases in which we’ve represented clients in federal tax

litigation matters include those that involved Sanofi, CBS,Analog Devices, Dover, Chrysler, Textron, Johnson Controls, DelCommercial, Illinois Tool Works, VF, S.C. Johnson, Intel, CMI Int’l,Laidlaw, Hitachi, Union Bank, GM Trading, and others.

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transfers of RFAs that have basis difference that has not yetbeen fully taken into account.

Section 367(d) regulationsTreasury and the IRS finalised without any substantivechanges the § 367 regulations that significantly (1) narrowthe active foreign trade or business exception and (2)change the rules governing the outbound transfer of intan-gibles in particular regarding foreign goodwill and goingconcern value. The final regulations also retain the proposedregulation’s effective date so that the new rules apply totransfers on or after September 14 2015.In the preamble to the final regulations, Treasury and the

IRS discussed and rejected virtually every taxpayer commentor suggestion regarding the proposed regulations. Ofcourse, Treasury and the IRS needed to go to Congress to

make changes of this magnitude. Unfortunately, there willnow be a period of substantial uncertainty until these regu-lations are withdrawn or the courts address them.As with the proposed regulations, the regulations elimi-

nate the favorable treatment for foreign goodwill and goingconcern value by narrowing the scope of the active trade orbusiness exception under § 367(a)(3) and eliminate theexception under Temp. Treas. Reg. § 1.367(d)-1T(b) thatprovided that foreign goodwill and going concern value arenot subject to § 367(d);The regulations also remove the 20-year limitation on

useful life for purposes of § 367(d).

Killer B noticeNotice 2016-73 announced that the Treasury and the IRSintend to issue regulations under § 367 to modify the so-called “Killer B” anti-repatriation rules relating to the treat-ment of certain triangular reorganisations involving one ormore foreign corporations. The Notice also announced thatthe Treasury and the IRS intend to issue § 367 regulationsto modify the amount of an income inclusion required cer-tain inbound non-recognition transactions (the ‘all E&P’amount). The notice is highly technical, and is generally intended

to target transactions designed to repatriate earnings andprofits of foreign corporations without incurring US tax viathe § 367(a)/§ 367(b) priority rule.

F reorganisation regulationsThe IRS published final regulations regarding F reorganisa-tions. F reorganisations under § 368(a)(1)(F) involve a“mere change” in the identity, form, or place of organisationof one corporation. F reorganisations can be wholly domes-tic, wholly foreign, or cross border. The new regulations adopt regulations that were pro-

posed in 2004. They also include rules on outbound F reor-ganisations (domestic transferor corporation and foreignacquiror corporation) by adopting, without substantivechange, proposed regulations that were issued in 1990.These regulations, adopted as § 367 regulations, were pre-viously in effect as temporary regulations. The final regulations generally adopt the regulations pro-

posed in 2004, but with certain changes. The preamblestates that like the 2004 proposed regulations, the final reg-ulations are based on the premise that it is appropriate totreat the resulting corporation in an F reorganisation as thefunctional equivalent of the transferor corporation and togive its corporate enterprise roughly the same freedom ofaction as would be accorded a corporation that remainswithin its original corporate shell. Under the final regulations, six requirements apply.

Four of the six requirements are generally adopted fromthe 2004 proposed regulations. First, all the stock of the

David Forst

Fenwick & West

Tel: +1 650 335 7254Fax: +1 650 938 [email protected]

David Forst is the practice group leader of the tax group ofFenwick & West. He is included in Euromoney’s Guide to theWorld’s Leading Tax Advisers. He is also included in Law andBusiness Research’s International Who’s Who of Corporate TaxLawyers (for the last six years). David was named one of thetop tax advisers in the western US by International Tax Review,is listed in Chambers USA America’s Leading Lawyers forBusiness (2011-2016), and has been named a NorthernCalifornia Super Lawyer in Tax by San Francisco Magazine.David’s practice focuses on international corporate and part-

nership taxation. He is a lecturer at Stanford Law School oninternational taxation. He is an editor of and regular contributorto the Journal of Taxation, where his publications have includedarticles on international joint ventures, international tax aspectsof M&A, the dual consolidated loss regulations, and foreigncurrency issues. He is a regular contributor to the Journal ofPassthrough Entities, where he writes a column on internation-al issues. David is a frequent chair and speaker at tax confer-ences, including the NYU Tax Institute, the Tax ExecutivesInstitute, and the International Fiscal Association.David graduated with an AB, cum laude, Phi Beta Kappa,

from Princeton University’s Woodrow Wilson School of Publicand International Affairs, and received his JD, with distinction,from Stanford Law School.

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resulting corporation, including stock issued before thetransfer, would have had to be issued in respect of stock ofthe transferor corporation. Second, a change in the owner-ship of the corporation in the transaction would not havebeen allowed, except for a change that had no effect otherthan that of a redemption of less than all of the shares ofthe corporation. Third, the transferor corporation wouldhave had to completely liquidate in the transaction,although it did not need to legally dissolve. Fourth, theresulting corporation would not have been allowed to holdany property or possess any tax attributes immediatelybefore the transfer, other than a nominal amount of assetsto facilitate its organisation or to preserve its existence.The fifth and sixth requirements address comments

received with respect to the proposed regulations regarding“overlap transactions,” for example, transactions involvingthe transferor corporation’s transfer of its assets to a poten-tial successor corporation other than the resulting corpora-tion in a transaction that could also qualify fornon-recognition treatment under a different provision ofthe Code.Under the fifth requirement, immediately after the F reor-

ganisation, no corporation other than a resulting corporationmay hold property that was held by the transferor corpora-tion immediately before the F reorganisation if the other cor-poration would, as a result, succeed to and take into accountthe items of the transferor corporation described in § 381(c)(corporate attributes in a reorganisation). The sixth requirement is that immediately after the F

reorganisation, the resulting corporation may not holdproperty acquired from a corporation other than a transferorcorporation if the resulting corporation would, as a result,succeed to and take into account the items of the other cor-poration described in § 381(c). The 2004 proposed regulations also contained an inde-

pendently important rule: an F reorganisation may be a step,or series of steps, before, within, or after other transactions

that effect more than a mere change, even if the resultingcorporation has only a transitory existence following themere change. In some cases, an F reorganisation sets thestage for later transactions by alleviating non-tax impedi-ments to a transfer of assets. In other cases, prior transactionsmay tailor the assets and shareholders of the transferor cor-poration before the commencement of the F reorganisation. Treasury and the IRS concluded that step transaction

principles generally should not apply to recharacterise theF reorganisation in such a situation because F reorganisa-tions involve only one corporation and do not resemblesales of assets. However, the preamble states that notwithstanding this

rule, in a cross-border context, related events preceding orfollowing an F reorganisation may be related to the tax con-sequences under certain international provisions that applyto F reorganisations. For example, such events may be rele-vant for purposes of applying certain rules under § 7874(inversions) and for purposes of determining whether stockof the resulting corporation should be treated as stock of acontrolled foreign corporation for purposes of § 367(b). The final regulations also adopt a provision of the 2004

proposed regulations that the qualification of a reorganisa-tion as an F reorganisation would not alter the treatment ofother related transactions. For example, if an F reorganisa-tion is part of a plan that includes a subsequent mergerinvolving the resulting corporation, the qualification of theF reorganisation as such will not alter the tax consequencesof the subsequent merger.

Anti-inversion rulesThe IRS issued final and temporary inversion regulationsthat adopted the rules of Notices 2014-52 and 2015-27 asregulations. As a general matter these regulations simplyincorporate the previous notices into a regulatory format.The new regulations, also attack serial inversion acquisitions,something that was not covered in the previous notices.

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