TAX link. Surviving insolvency. Content. Belgium. October 2013

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1 TAX link October 2013 Surviving insolvency Content Belgium Canada France Italy Luxembourg The Netherlands Portugal Spain UK Belgium The financial crisis of the last couple of years has had a significant impact on the business community worldwide. Indeed, a lot of corporations were literally obliged to cut their losses as a result of the unwinding, divestiture or impairment of a prior-year financial or business transaction. Hereafter, we will briefly comment on the Belgium tax treatment of such insolvency matters. Use of tax losses As a result of the financial crisis, a Belgium corporation may have incurred both accounting and tax losses. Obviously, this was not expected at the outset of a financial or business investment, but may lead to tax planning opportunities going forward. Specifically, the Belgium tax treatment of tax losses is fairly relaxed compared to other jurisdictions. To illustrate: in Belgium, tax losses can be carried-forward without any limitation in terms of time and amount. For that reason, Belgium tax losses are generally considered a true asset of the company and are therefore part of the equation when the shares of the company at hand are valued. In addition, Belgium tax losses are utilised at company level and not at mere business unit level. Assume a Belgium company with two business units A and B, who each have a totally different type of business. Assume that business unit A makes a profit of 1,000 while business unit B suffers a tax loss of 800. If this is the case, the Belgium company will only pay 33.99% Belgium corporate tax on 200. If the shares of a Belgium company with tax losses are purchased by a new shareholder, the tax losses will survive the change of control if it is demonstrated that the change of control is not for tax purposes only. This can be evidenced, for example, by a commitment of the new shareholder not to significantly amend the nature of activities and headcount of the Belgium company after the share deal. Furthermore, in the event that a Belgium company with tax losses (stemming from a business activity X) starts to develop a new type of activity Y, the tax losses can also be offset against an arm s length profit derived from activity Y. On this point, it is advised that the business activity X is not ended abruptly. It should in particular be safeguarded that the company is not dormant during a couple of years before the new (profitable) activity Y is rolled-out. Indeed, in such extreme cases the Belgium tax authorities may argue that the Belgium company is deemed liquidated (implying all tax losses forfeit) while a new company (without tax losses) is incorporated. As far as liquidation scenarios are concerned, note that both the Belgium tax authorities and the Belgium tax ruling commission accept a deficitary (ie loss-making) liquidation of a Belgium company without adverse Belgium tax ramifications. Finally, if a Belgium company is part of a legal reorganisation (eg merger or spin-off) which is embedded with genuine and predominant business reasons, the company s tax losses survive such tax-free reorganisation pursuant to a prorate rule which is a function of the loss-making company s fiscal net equity divided by the sum of the net equity amounts of all companies involved in the reorganisation. TAX Link - Surviving insolvency - October

2 Write-off of loans The above clearly confirms that tax losses do have a value for Belgium tax purposes. The question thus arises how a Belgium company may end up having tax losses stemming from insolvency issues. One example is a tax loss resulting from the write-off of a loan receivable. In summary, such accounting write-off is taxdeductible if it is demonstrated that the (Belgium or foreign) debtor is indeed insolvent and that chances are thus low that the Belgium creditor will ever be reimbursed. Needless to say that this comes down to a very subjective and in-depth factual analysis. Similar rules apply to a commercial receivable, eg resulting from a sale of goods with deferred payment. Still, as a practical comment, note that our experience shows that the Belgium tax authorities tend to accept a tax deduction of a receivable writeoff easier in the event of a commercial receivable (compared to a loan receivable). Where the loss of a commercial receivable is fixed and certain (which is a factual matter, usually implying that all possible legal actions to pursue the collection have been executed a dubious debt is insufficient), the VAT charged to the debtor can be recovered, provided that a credit note is being issued. Note that in the case of bankruptcy, this can only be done from the moment the court has declared the state of bankruptcy. Special rules apply for judicial reorganisations. A Belgium company may also decide to waive its (loan or commercial) receivable from a (mostly related) Belgium or foreign debtor. If so, and obviously in particular in an intercompany context, the Belgium tax authorities will investigate whether this is an at arm s length transaction or not. In essence, and referring to both numerous Belgium tax ruling decisions and case law, mainly a conditional waiver of debt is accepted for tax purposes. That is, the waiver should preferably contain a so-called return-to-better-fortune clause: ie the debt will rejuvenate if the debtor satisfies certain pre-defined profitability criteria (eg a certain EBITDA level). Where the supplier had previously recovered the VAT on the bad debt and collects the VAT from the debtor anyway at a later stage (due to a return to better fortune), he must reimburse the recovered VAT to the VAT authorities. Capital losses on shares Both realised and unrealised capital losses on shares suffered by a Belgium company are disallowed for Belgium tax purposes (since Belgium has an attractive participation exemption regime for dividend income and capital gains on shares). However, there is one important exception to this rule: if a Belgium company is the shareholder of a (Belgium or foreign) subsidiary which is liquidated, the Belgium company s profit and loss may be hit by a liquidation loss. This liquidation loss will presumably result from the fact that the net book value of the subsidiary s shares is removed from the Belgium balance-sheet while no liquidation proceeds whatsoever are received by the Belgium parent. If so, the liquidation loss is tax-deductible up to a maximum of the amount of the liquidated subsidiary s paid-up capital corresponding with the shareholding held by the Belgium parent. If the Belgium parent had recorded impairments on those shares in prior years, these would have been disallowed for Belgium tax purposes. However, upon liquidation of the subsidiary, such prior-year disallowed expenses are recaptured in the hands of the Belgium company. Impact of a fiscal unity There is no fiscal unity for Belgium corporate tax purposes. Hence, if a Group has both a Belgium company with tax losses and a Belgium company with tax profits, the Group may consider utilising the tax losses at Group level by means of at arm s length transfer pricing which should be embedded with a sound business rationale. Cross border insolvency matters Our comments above apply to both domestic and cross border insolvency issues. However, in a cross border intercompany context, the Belgium tax authorities are likely to pay even more attention to the arm s length nature of the transactions. Contributed by Kurt De Haen & Wouter Brackx, VMB Tax Consultants, Belgium and Obviously, the business case for the waiving Belgium company will also have to be demonstrated. This evidence can consist, for example, of the fact that, thanks to the waiver, a foreign affiliate is saved from bankruptcy and thus the Belgium company itself is protected against bad publicity and/or a loss of a foreign market share. As far as the opposite direction is concerned, if a Belgium company (with tax losses) is the beneficiary of a debt waiver, the question arises whether the Belgium company can actually offset its tax losses against the accounting profit resulting from the debt waiver. In summary, the answer is affirmative if the business case of the (preferably conditional) waiver is demonstrated as explained above. 2 TAX Link - Surviving insolvency - October 2013

3 Canada While many countries are coming out of recession and others are still struggling, many clients are dealing with the effects of their own insolvency or that of their customers, suppliers and others with whom they deal. The following is a brief outline of some of the Canadian tax issues that may be encountered with respect to insolvency. Tax Losses In times of insolvency, many businesses may be looking into ways of utilising the often significant losses that have accumulated in a company. Generally speaking, non-capital losses can be carried back three years and forward 20 years, while capital losses (which can generally only be applied against capital gains) can be carried back three years and forward indefinitely. Upon bankruptcy, there is a deemed year-end of the company, and any losses accumulated prior to the date of bankruptcy cannot be used should the company subsequently be discharged from bankruptcy. Utilisation of tax losses within a related corporate group In Canada, there is no concept of fiscal unity or consolidated reporting; each corporation must file separate Canadian tax returns each year. However, generally speaking, within a related corporate group, corporations may be combined, through tax-deferred corporate reorganisations usually involving amalgamations or wind-ups. As such, within a related corporate group, planning can be done to combine loss companies with profitable companies so that the losses of one can be used against the profits of the other, thereby accomplishing similar results as fiscal unity or Consolidated Reporting, admittedly in a much more involved (and expensive) manner. Sale of tax losses to an unrelated party While the Canadian taxation system is designed to allow for the sharing of losses within a related corporate group, it is not nearly so generous when it comes to the utilisation of losses by an unrelated party. Specifically, when there is an Acquisition of Control (AOC) by an unrelated party of the shares of a particular corporation, the utilisation of any tax losses by the acquired corporation post AOC is severely restricted. Upon an AOC, any capital losses carried forward expire and therefore cannot be used subsequent to the AOC. In addition, any pregnant or unrealised capital losses are deemed to have been realised immediately before the AOC and, as such, are lost as well. Finally, post-aoc capital losses cannot be carried back to the pre- AOC period. In effect a capital loss wall is created upon an AOC. What all this means is that, other than for non-capital losses that meet the conditions enumerated above, loss companies cannot be sold to an unrelated third party which would then combine the purchased loss company with one of its profitable companies to utilise the losses. Loans Often in times of insolvency, a company may not be able to pay the loans it owes and/or may have trouble collecting loans receivable from other struggling businesses. Generally speaking, with respect to trade accounts payable and accounts receivable, any write-offs would directly affect taxable income for Canadian tax purposes, including allowances for doubtful debts. However, with respect to non-trade debts, different rules may apply, some with applicability to the debtor and some to the creditor. Debtor Essentially, if a debt was incurred for the purpose of earning income, its forgiveness by the creditor would subject that debt to the debt forgiveness rules for Canadian tax purposes. The debt forgiveness rules require that the amount of the forgiven debt, first be applied to reduce or eliminate certain tax account balances, the most common being non-capital losses carried forward and the undepreciated capital cost (UCC) of capital assets. Then, 50% of any remaining unapplied amount would be included in the taxable income of the debtor. Finally, if the debtor is insolvent at the end of the taxation year, the remaining unapplied amount that was added to the debtor s taxable income would be deducted from its taxable income. For example, if a debtor s CAD200,000 loan payable is forgiven by the creditor, and the debtor has CAD50,000 of non-capital losses carried forward, CAD50,000 of UCC and no other tax account balances, CAD100,000 of the CAD200,000 would be applied to reduce the non-capital losses carried forward and the UCC to $nil, and 50% of the remaining CAD100,000, or CAD50,000, would be added to the debtor s taxable income. If, at the end of the debtor s taxation year, the debtor was insolvent (liabilities > assets), the CAD50,000 that was added to the debtor s taxable income would then be deducted from its taxable income, thereby resulting in no immediate negative tax consequences for the debtor even though it never had to and will never have to repay any of the loan. As such, the debt forgiveness rules are advantageous and could be of great use in restructuring an insolvent Canadian corporation. As a general rule, upon an AOC, non-capital losses come up against the same wall as capital losses, except in one particular situation. Provided that the same business that was carried on by the corporation prior to the AOC is carried on by the corporation after the AOC with a reasonable expectation of profit, the wall will not apply to losses from that same business or a similar business. If these conditions are met, non-capital losses can be carried back and forward as usual. Note, however, that the taxation authorities take a very narrow view on whether the same business is in fact continuing and also what constitutes a similar business for this purpose. TAX Link - Surviving insolvency - October

4 Creditor Generally speaking, a creditor who writes off a loan receivable that was incurred for the purpose of earning income would incur a capital loss, subject to all of the restrictions discussed above with respect to the utilisation of capital losses. In very specific and limited circumstances, Canadian-Controlled Private Corporations may be able to apply a portion of these losses against ordinary income. VAT issues In the case of the insolvency or bankruptcy of a GST/HST (goods and services tax and harmonised sales tax) registrant, the receiver or trustee appointed to carry on the affairs of the insolvent or bankrupt company is deemed to be the agent of that company. Thus, the receiver or trustee steps into the shoes of the company and there would be a seamless transition of the application of these taxes as it concerns the characterisation of supplies made and the eligibility for input tax credits. Creditors of an insolvent person are entitled to bad debt relief in respect of the VAT portion of their uncollected accounts receivable. For example, if an outstanding debt included HST that applied at the rate of 13%, the creditor would be entitled to deduct 13/113 of the amount of the debt written off from the creditor s GST/HST remittance. The CRA expects creditors who claim bad debt relief to be able to demonstrate that they have exhausted all reasonable means of collecting their debt; a statement issued by a bankruptcy trustee concerning the amount the creditor is expected to receive once creditors claims are settled will usually satisfy this requirement. In view of the bad debt relief creditors may claim, the CRA will often assess an insolvent debtor for the tax portion of unpaid trade debts. This is done under the premise that the debtor company has not paid the tax to its suppliers and the suppliers will have abandoned their efforts to collect the tax given the bad debt relief to which they are entitled. Unremitted GST and HST collected or collectible by registrants, are debts owing to the Crown. Directors of corporations are jointly and severally liable with the corporation for the remittance of the latter s net tax liability. The CRA must follow certain formalities and respect certain time limits following a corporate bankruptcy if it wishes to take action against a director. A director who finds himself in this situation may raise a due diligence defence to counter the CRA s claim. There is an extensive body of case law that has developed over the years concerning the worthiness of the due diligence defense. Until such time as GST/HST collected is remitted to the CRA, it is deemed to be held in trust for the Crown. This gives the Crown a super-priority over ordinary creditors of an insolvent registrant who do not enjoy the same privileges. Nevertheless, the Crown s deemed trust is effectively dissolved on a bankruptcy and the Crown s claim is then relegated to ordinary status. It is interesting to note that when a debtor makes a proposal to unsecured creditors under Canada s bankruptcy laws to settle his debts at less than their full principal amount, the debtor s GST/HST liability to the CRA would normally be included as one of the debts. The CRA would be entitled to vote on the proposal with other creditors and the decision of the creditors pursuant to an accepted proposal would bind the CRA. Contributed by: Cliff Benderoff and Sam Lackman, Nexia Friedman, Canada and France Carryover and carryback of tax losses While tax losses may be carried forward indefinitely, the amount is limited for fiscal years closed on or after 31 December The amount of losses offsettable in any given year is limited to EUR1 million plus 50% of the taxable profit above EUR1 million. Companies subject to corporate income tax may carry back losses against the non-distributed profit arising in the previous fiscal year. In such event, the carryback is computed as follows: it receives a credit equal to the loss multiplied by the current corporate income tax rate. Losses carried back may not exceed EUR1 million. The credit may be offsettable against corporate income tax payable during the following five years. At the end of this period, the balance is refundable. The use of tax losses is restricted in the event of a significant change in the company s activity. In particular, the loss carryover and carryback is jeopardised when an addition or a termination of a business results in a change of 50% or more of either the revenue or the average headcount and fixed assets. Non-refundable loans and capital Until the amended financing law for 2012 dated 16 August 2012, 4 TAX Link - Surviving insolvency - October 2013

5 advisors generally recommended companies willing to assist a company subject to financial difficulties that they provide direct financial assistance, eg the waiver of a debt, rather than make a capital contribution. As of today, our position is different due to the following provisions. Non-refundable loans made to insolvent companies have been subject to new principles since the amended financing law for 2012 (applicable to fiscal years closed since 4 July 2012), which significantly restrict deductions for financing assistance. These new provisions have set up a principle of non-deductibility for the provision of financial assistance between companies, with the following exceptions: when the assistance to companies has been provided for commercial purposes: the assistance is totally deductible when the assistance has been provided to an insolvent company subject to one of the following legal procedures: conciliation, safeguard, insolvency, bankruptcy. In such circumstances, the deductibility is however limited to the negative net assets of the insolvent company and for the amount above the negative net assets, in proportion to the shares held by the other shareholders. The financial assistance may be provided to an indirect subsidiary. In both cases, the beneficiary company should be taxable on these amounts. This taxation can however be avoided when the financial assistance is provided by the direct holding company, when it increases the share capital by an amount equal to or above the amount of the assistance provided. In these new circumstances, if a company is willing to assist an insolvent subsidiary, we recommend that companies consider an additional capital contribution rather than a waiver of debt as the additional capital contribution would not be taxable at the level of the recipient subsidiary. French tax principles regarding the acknowledgement of a reduction in the value of shares consist in the booking of an impairment provision, even though the latter is reversible. If the loss is total and definitive, it is treated as if it were a disposal of the corresponding assets and therefore the booking of a capital loss. This regime applies both to shares in French and also to shares in non-french subsidiaries. When a foreign subsidiary of a French company is in a difficult situation (eg long-term losses), the economic value of the shares decreases. When the net equity is negative, the value of the shares in the subsidiary is mathematically zero. An impairment provision must be booked. In principle, at the time of acquisition, subsidiary shares are booked for the actual cost of purchase, or the contribution value. At the closing of each fiscal year, the value of these shares must be reviewed and determined by the entity. The provisions for impairment on shares are subject to the tax regime applicable to long-term losses. They are not considered as deductible operating expenses. VAT In France, VAT on services is due at the time of the payment, therefore insolvency issues have no impact on the principle of VAT neutrality. ` The situation is different regarding goods, as VAT is due at the time of the sale and not of the payment. However in the case of unpaid sales of goods, the recovery of VAT is strictly limited. The latter could only be feasible when a definitive loss is computed under French GAAP and subject to specific formalities: such as a copy of the invoice with a mention describing the unpaid status of the invoice. The parent company is not liable for the payment of VAT of an insolvent subsidiary. Tax Consolidation Group Related French companies subject to corporate income tax, with at least 95% common ownership held directly or indirectly by a parent company which has elected for tax consolidation for a five-year period, may elect for tax consolidation. Under the French tax consolidation regime, the head of the tax group files a consolidated return and is liable for tax, based on the net taxable income of consolidated companies. In the case of the insolvency and bankruptcy of a tax consolidated subsidiary, this company is excluded from the group. The tax losses of the subsidiary incurred prior to the tax consolidation period are not available to the group. Tax losses arising during the tax consolidation period can be recognised at the level of the tax consolidated group. Cross border insolvency In case of a cross border insolvency, we consider it essential for the countries involved to combine their expertise, as the consequences may vary significantly from one State to another. The examples below illustrate this risk. Where issues arise in non- French entities, several additional limitations may occur: the possibility of a tax deduction for financial (not commercial) assistance provided by a French holding company to an EU subsidiary is strictly limited to certain circumstances. Among the conditions for deductibility is that the assisted company must be subject to an insolvency procedure compliant with the principles enacted in Appendix A of CE 1346/2000 regulations, dated 29 May 2000 (This is likely to exclude non-eu entities.) while, in principle, France grants the possibility for a French parent company to obtain a tax deduction for provisions for impairment of foreign shares, the impact of a double tax treaty on such tax deductions was not resolved until a very recent Court decision from the French Council of State (Conseil d Etat 12 June 2013 no , 3e and 8e s.s. Société BNP Paribas). Further to this Court decision, such a deduction is not possible when the bilateral tax treaty with France withdraws the right to tax capital gains. Such a scenario may occur in the case of substantial shareholdings (eg the double tax treaty between France and Canada), predominantly affecting real estate companies. Contributed by Delphine Parigi, Novances DPZ, France TAX Link - Surviving insolvency - October

6 Italy Due to the current economic crisis, an increasing number of Italian companies are facing financial difficulties and potential insolvency. In these circumstances, tax issues assume a critical relevance and consequently correct tax planning can make a significant difference. In the following we present a brief summary of the main tax issues (regarding corporations) that should be taken into account in such problematic situations: a) tax losses b) loans c) capital d) fiscal unit e) VAT and f) cross border insolvency. Tax losses Especially in difficult periods, rules restricting the deduction of tax losses should be carefully considered. Tax losses cannot be carried back. In 2011, the regime regarding tax loss carry-forward was amended; new rules provide that companies may carry forward tax losses indefinitely but that prior year tax losses may be used in each year only to offset up to 80% of taxable corporate income. The new regime applies also to unexpired losses that were unused as of 31 December Previous rules allowed a five-year limit for the carry forward (without quantitative limits). A more beneficial regime applies to newly established companies, provided that the tax losses relate to a new activity. These companies can fully deduct tax losses incurred during the first three years of business activity, without the above mentioned quantitative limit. In addition, restrictions to tax losses carried-forward apply in the following circumstances: (i) When the majority of shares of a company are transferred and the main business activity of the same company changes (with some exceptions provided by law) (ii) to mergers and demergers: the companies involved must pass the so called vitality test, based on the average of the previous two-year gross ordinary revenues and expenses related to employees; in addition, even if the companies pass the vitality test, the carry-forward is limited to the amount of the equity of the company that has suffered the losses to be carried forward. In either of the above cases it is possible to set aside such rules through a specific ruling. Since 2012 companies that have generated tax losses for three consecutive tax years (or tax losses for two tax years and have taxable income lower than a certain amount for one tax year, over a period of three consecutive years) qualify as nonoperating companies from the following tax year. The main consequences of this are: a presumption of a minimum taxable income 10.5% increase in the corporate income tax rate limitations in the use of VAT credits. It is possible to set aside these rules in some cases either as permitted by law or through a specific ruling. With regard to a company in liquidation, tax losses are deductible according to the ordinary rules, without being subject to the 80% limit mentioned above. There are no special rules regarding the treatment of tax losses in any of the main insolvency procedures (bankruptcy, arrangements with creditors or debt restructuring agreements). Loans Thin capitalisation rules were cancelled in At present, payment of interest (and similar expenses, including those deriving from financial lease agreements) exceeding interest income may be deducted, each year, up to 30% of the gross operating margin ( ROL - a figure similar to EBITDA) in the statutory income statement. Interest expenses that are not deductible in a year may be carried forward indefinitely and offset against the 30% of ROL available in subsequent years; the eventual amount of ROL exceeding the net interest expense in a given year, may be carried forward to increase 30% of ROL of subsequent years. A special provision concerns the issuance of bonds by companies other than listed companies or banks. In these cases, the deductibility of the interest expense is only allowed provided that, at the time of issue, the effective rate of return of the bonds does not exceed either: twice the official discount rate for bonds and similar securities traded on regulated markets in the EU or EEA or placed through a public offer the official discount rate increased by two-thirds, for bonds and similar securities other than the above. (An exception is provided for bonds subscribed by some institutional investors) If the effective rate of return exceeds such limits, interest expense in excess of the amount resulting from the application of the above rates is not deductible. A widespread form of funding for companies is represented by shareholders financing. Where a company is experiencing financial difficulties, the shareholders could typically waive their credit in order to equitise the company. In such an event, the waived amount cannot be deducted against business income by the shareholder company but it increases the cost of the participation relevant for tax purposes. With regard to the participated company, the waiver does not give rise to any taxable income. Where the company that waives the financing was not a shareholder (eg a bank or another company of the group), the waiver would represent taxable income for the debtor. The renouncing company could deduct the loss only if it results from certain and precise elements. An exception exists for waivers done in the course of bankruptcy proceedings or restructuring plans pursuant to article 182-bis of IBL. In such circumstances, even if the waiving company is a third party, the losses are automatically tax deductible and the waivers do not give rise to taxable income for the financed company. 6 TAX Link - Surviving insolvency - October 2013

7 Capital Since 2011, Italian companies (and Italian branches of nonresident companies) are entitled to an additional deduction from taxable income, namely ACE. The deduction is computed by applying a notional yield (3% until 2013) to the net increase in the equity of the company (deriving from cash contributions or from undistributed profits added to available reserves) as shown by the annual financial statements as compared to the equity as at 31 December 2010 (not taking into account 2010 profits). An issue could arise regarding the sale of shareholdings. In such a situation it is important to check whether the conditions for the application of the participation exemption regime are met. If they are, capital gains and losses are only partially taxed/ deducted. In particular, if the shareholder is a company, it is taxed only on 5% of the eventual capital gain arising on disposal, while any eventual capital loss is not deductible. However, if the pex rules are not met, the shareholder is fully taxed on the eventual capital gain but it may deduct the eventual capital loss. In the case of a winding up, if the shareholder is a company, the distribution of the final profits reserves is treated as a dividend distribution (taxation on only 5% of the amount). Final distribution of other (capital) reserves must be compared to the value of the original tax value, in order to determine the existence of a capital gain or of a capital loss. (The same happens where there is no distribution). Such items are taxed as described above with regard to sales of shareholdings. Fiscal unit Italian tax rules provide for a tax consolidation regime. According to these rules, all taxable income/losses of group companies are aggregated and taxed at the level of the controlling company. If the sum is negative, the controlling company is entitled to carry forward the loss. Tax losses incurred before the commencement of this regime can be used only by the company that suffered them. Special rules apply with regard to the deduction of interest. The excess over 30% of ROL of net interest expense (accrued and/ or carried forward under the consolidation regime) that a single participating company cannot deduct, can be used to reduce the consolidated taxable income up to the amount of 30% of the ROL that another participating company has not utilised to deduct its own interest expense. If certain conditions are met, the excess 30% ROL of foreign companies owned by a member of the tax consolidated group can also be taken into account. VAT According to Italian VAT law, the failure to collect a debt from a debtor can lead to the issue by the supplier of a credit note and the deduction of the related VAT (that it has already paid to the tax authorities but has not collected from the customer) only on the occurrence one of two specific events: an unsuccessful enforcement of the collection of the debt, or the beginning of a bankruptcy procedure (but not other similar but different procedures, such as arrangements with creditors or debt restructuring agreements). Without one of the above conditions, the taxpayer is not allowed to issue a credit note. Cross border insolvency Regard should be given to the EU Regulation no.1346/2000, concerning cross border insolvency proceedings. This Regulation has defined and harmonised the rules regarding the applicable law, the jurisdiction and the mutual acknowledgment of judgements, as well as strengthened the level of cooperation between professionals engaged in cross border insolvency proceedings within the EU. Contributed by Barbara Scampuddu and Paolo Pagani, Hager & Partners, Italy and Luxembourg Loss compensation Following 1990, in Luxembourg tax losses can be carried forward without a time limit. For this to happen, companies are required to regularly maintain their books and records. Losses may not be carried back. TAX Link - Surviving insolvency - October

8 Currently, article 114(2)(3) of the Luxembourg Income Tax Act (ITA), requires that the person who incurred the losses is identical to the person seeking to make use of them. Business successions are recognised although, at one time, the carryover of tax losses was restricted to those subject to tax in Luxembourg. More recently, the Luxembourg administration was concerned that restricting the relief to those subject to tax in Luxembourg may be held to be discriminatory by the Court of Justice of the European Union (CJEU) in the case of nonresident companies. Therefore they published a Circular No. 114/3 at the end of 2012 to address the possibility of where there was a business succession between non-resident companies. The tax administration will no longer apply the requirement subject to tax in Luxembourg, in case of business successions. However, in March 2013, it was suggested that the law relating to successions would be amended further. The proposal is that the business successor may only offset the losses of the acquired company if the business successor was fully subject to Luxembourg corporate income tax during the years that the acquired company sustained those losses. But, at the time of writing, this change in the law is on hold as we currently have no government (elections are due in October). Luxembourg law does not require that there has to be an economic reason for a company with losses to take over another activity (a restructuring), but the tax-authorities will review whether or not there has been an abuse of the law, with the use of the losses being the sole purpose for the restructuring. Because of this risk, it may be advisable to inform the tax authorities about the reason for the restructuring. Loan or capital As Luxembourg is known as the country of financial companies, a lot of companies are financing their subsidiaries by participating in their capital or by granting loans to them. In Luxembourg, a loss in the value of a participation is immediately tax-deductible when the depreciation in the value of the participation is booked. Where the participation is of at least 10% or the investment is at least EUR6,000,000, the capital gain is tax-exempt. This depreciation is only recognised as a final loss if the subsidiary does not recover. A company can also grant a loan to its subsidiaries and where the subsidiary cannot repay the loan, the loss on the loan is taxdeductible. From 2011 for new loans, and from 2012 for existing intra-group financing loans, there is a new obligation to apply the OECD Transfer Pricing Guidelines to debt-funding intra-group financing activities. The requirement to prepare transfer pricing documentation is part of this new obligation. The circular introducing these changes also included a list of requirements in relation to the organisational and economic substance of a financing company, which is a novelty since it is the first time that a concrete list of requirements has been issued in Luxembourg. Fiscal unity A Luxembourg company and its wholy owned (at least 95% of the capital, which may be reduced to 75% in exceptional situations) Luxembourg subsidiaries may form a fiscal unity. To qualify for tax consolidation, both the parent and the subsidiaries must form a fiscal unity. The fiscal unity allows the subsidiaries to combine their tax results with the tax results of the parent company. However, since 2013, there is a minimum tax for every company. Prior to this, only the parent company of a fiscal unity was liable to the minimum tax. The Law was amended and, henceforth, the parent company will be liable for the aggregate amount of minimum tax that would have been due by each of the companies who are part of the fiscal unity. The maximum minimum tax is EUR21,400 (including a 7% solidarity surcharge). With the existence of this minimum tax it is not always a good idea to have a fiscal unity. Provisions Provisions for losses and uncertain liabilities may be tax deductible for tax purposes. Also extra depreciation can be taken into account where this can be justified. VAT Luxembourg VAT law exempts small businesses from VAT. The threshold for being exempt is a turnover of EUR10,000. This is now being increased to EUR25,000. For small companies it is also possible to pay just the VAT on the invoices already paid by the client at the date of declaration. A tax-credit can be declared for bad debts. Incentives A global investment tax credit equal to 7% of the acquisition value of investments made during the year is available, subject to a ceiling of EUR150,000 and 2% on the balance. A supplementary investment tax credit equal to 12% of the acquisition value of the qualifying investments made during the tax year, is also available. For intellectual property rights acquired or registered after 31/12/2007, 80% of the income resulting from the exploitation and 80% of the capital gains arising from the assets are exempt from tax. Qualifying rights are also exempt from net wealth tax. Conclusion Whilst there may be some incentives for making global investments, there are no particular reliefs for losses arising from insolvency. As with other situations, tax advisors will need to act with their clients to minimise the issues arising. Contributed by Lut Laget, VGD Luxembourg, Luxembourg 8 TAX Link - Surviving insolvency - October 2013

9 The Netherlands The banking crisis was the start of the financial crises. Not only the banks, but also some countries appeared to be insolvent. The Dutch economy is still in depression. On the other hand the stock exchanges are positive and in many countries the economic situation is changing rapidly. For many companies the sun is starting to shine at the horizon. They need to survive or to finance growth. The right tax planning is essential. Loss compensation Carry back and forward The fiscal loss of a Dutch taxable entity can be carried back to the previous year. If there is still a loss after carry back, this loss can be forwarded for the next nine years. Based on a special provision it was possible to have a carry back period of three years but this provision was abolished. For many companies the carry back period is too short. However a reintroduction of the extended carry back is not expected. Profit and loss planning Planning of the taxable base is required to take account of tax losses. For some companies even the carry forward period is too short to offset the losses against profits. In some cases it is wise to realise a taxable profit within a group, for example by selling assets to another member of the group. Regarding the planning for loss utilisation, it is important to identify at what moment the profits and losses have to be reported. In many cases the report of an unrealised profit can be deferred. Transfer of shares The transfer of more than 30% of the shares in a subsidiary with tax losses can lead to the loss of tax losses. To prevent a trade in companies with losses, legislation was introduced several years ago. The legislation is quite technical but there are, with the right tax planning, still possibilities to transfer the shares and retain the losses. Permanent establishment and loss compensation From 2012 the profits and losses of a foreign permanent establishment are no longer part of the Dutch taxable income. The object exemption for permanent establishments has put an end to this so-called loss import. Profits and losses from a foreign permanent establishment are exempted immediately. They therefore have no impact on the final Dutch taxable results. In the past the loss import legislation was one of the reasons for Dutch companies to start foreign activities with a branch. Nowadays the advice is more about starting the activities with a (foreign) legal entity. In most cases the Dutch participation exemption will apply on the profits. The losses can in many cases be realised in the Netherlands through a deduction in respect of a loan granted by the NL parent to the foreign subsidiary (see the following). Loan or capital In many cases parent companies will be the main finance company for bad performing subsidiaries. For Dutch tax purposes it is important as to whether a loan qualifies as an actual loan or is considered to be a capital contribution. The advantage of granting a loan is that losses on loans can in principle be tax deductible. Capital is in many cases not deductible because of the participation exemption. The participation exemption will exempt not only the profits but also the losses from the taxable base. Capital losses can only be deductible in case of the liquidation of the subsidiary. In 2008, the Dutch High Court of Justice introduced new jurisprudence regarding the fiscal classification of loans. To avoid non-deductibility it is wise to formalise the loan in the right way and to benchmark the main aspects (interest, securities etc). From a cross border perspective the classification can differ; if for example the Dutch based company grants a (hybrid) loan to a foreign based subsidiary the loan can be classified as capital in the Netherlands. The participation exemption will apply on this capital. This can lead to the (profitable) situation of a deduction for the interest in the foreign country and receiving the payment in the Netherlands under the participation exemption. Fiscal unity For the Dutch corporate income tax it is possible for two or more entities (Dutch NV s or BV s) to form a fiscal unity (FU). The main condition is that the parent holds at least 95% of the shares in the subsidiary. Within a FU the profits and losses can be aggregated. A loss from the subsidiary can be directly offset against the profit of the parent or any other subsidiary of the FU. A FU can in this respect be a good solution in order to have a rapid utilisation of tax losses. Tax burden at the end An insolvent subsidiary can at the end cause severe tax burdens. If the company, part of the FU, is liquidated this company will be released from debts. This release will lead to a taxable profit, which profit will cause an extra corporate income tax for the FU. To prevent this extra tax it is advisable to end the FU at the right moment. Some anti-abuse provisions apply so proper advice is necessary. Transfer of losses The sale of the shares of a (bad performing) subsidiary will lead to the end of the fiscal unity. The losses will stay at the level of the parent company. Under certain conditions the losses of a FU can be transferred to the subsidiary. This aspect should be examined before the transfer of shares. VAT Repayment VAT is harmonised within the EU. This means that if the recipient of the goods and services is insolvent, a repayment of the VAT can be claimed, subject to certain conditions. On the other hand it is obliged to repay the VAT the moment that it is established that creditors will not be paid. TAX Link - Surviving insolvency - October

10 Liability within a fiscal unity It is also possible to form a fiscal unity (FU) for VAT purposes. This FU is in many cases very practical. It can however be an obstacle if an insolvent company is part of the FU. A specific provision with respect to liability applies for companies that are part of a FU. All entities within the FU are liable for the payment of VAT. Insolvent companies will in many cases have a high VAT burden, because they cannot repay all their creditors. If this company is part of a FU all entities of the fiscal unity will be liable for the repayment of the VAT. Liability of directors A director can be liable for VAT (and wage taxes) where there is a case of mismanagement. If a company cannot pay its taxes it is advisable to report this in time to the Dutch tax authorities. The consequences of a late report are far-reaching; the deemed mismanagement will lead to a joint liability for the directors. Cross border aspects The cross border aspects of multinational companies are complex, especially when there are insolvent companies within the group. Qualification aspects will arise. For example a loan granted to a foreign subsidiary can be qualified as a loan in one country and as capital in the other. This will lead not only to discussions with the local tax authorities about the qualification for the domestic legislation but also with respect to the qualification issue regarding the tax treaty. The main tax topic for international companies, transfer pricing, will also be important when it comes to insolvent companies. One of the questions will be whether the interest on the loan meets the arm s length requirements but many other issues will also arise. Special incentives In order to stimulate investment, a special provision applies in the Netherlands until the end of Investments in the Netherlands can benefit from accelerated depreciation. The main aspect is that 50% of the investment can be depreciated in To stimulate investment in R&D the Dutch innovation box was introduced (2007). The income from this box can be taxed at the rate of only 5% corporate income tax. Visit nl for more information. When you see a chance Take it (according to Steve Winwood). Many entrepreneurs act in the same way. However restructurings and insolvencies often give rise to complex tax issues with undesirable consequences. In most cases it can pay to take measures in time. If you require further information on Dutch tax aspects and debt issues of insolvent companies please contact us. Contributed by Hans Eppink, KroeseWevers Accountants & Tax Consultants, The Netherlands Portugal Portugal is one of the countries suffering greatly from the Eurozone financial and economic crisis. The significant cuts determined by the Economic Adjustment Programme negotiated with the Troika (European Commission, European Central Bank and IMF), led the Portuguese economy to unprecedented rates of unemployment and to the highest level of insolvencies ever registered. Although the economic adjustment has not reached its end, recent indicators suggest that Portugal is enjoying an improved outlook on its way to returning to sustainable growth and financial stability. In order to create conditions to attract foreign investment and increase tax competitiveness, the Portuguese Government has recently put forward for discussion a comprehensive CIT reform, which is expected to enter into force on 1 January From a tax perspective, this is therefore a crucial moment for surviving companies to start planning their future on an (expected) growth economy and under a new tax environment. We set out below our comments on the main tax issues related to the treatment of insolvency and recovering companies. Whenever applicable, we also comment of the projected changes to be implemented from 2014 onwards. Tax losses According to the Portuguese CIT law, tax losses may be carried forward for up to five years. However, the deduction of tax losses is limited to 75% of the taxable profit assessed in the relevant fiscal year. No carry back of losses is allowed. Transfer of shares /Group restructuring Relief for losses carried forward will be denied if, in respect of the year(s) where the losses were incurred there has been a substantial change of the type of activities carried out by the company. Likewise, no deduction of losses will be allowed if there has been a change in the ownership of 50% or more of the shares or of the voting rights in the company. However, in special situations of recognised economic interest, the Minister of Finance may authorise that these restrictions do not apply. The Portuguese tax law does not have a specific tax regime applicable to the acquisition of insolvent companies. It may be very difficult to justify the economic reasons underlying such deals, and consequently the tax authorities may not authorise the carry forward of the losses held by the insolvent target company CIT reform The CIT Reform Commission has proposed to extend to 15 years the carry-forward period for losses originated as from 1 January The offsettable losses will remain limited to 75% of the taxable profit of the year. 10 TAX Link - Surviving insolvency - October 2013

11 It is also expected that the new regime will reduce the number of the cases where an ownership change implies tax loss irrecoverability. Loans Where the loans provided to subsidiaries (participation level above 10%) qualify as debt, any eventual losses can only be tax deductible to the extent that they result from a special process of recovery or from insolvency. The losses registered on debts from non-subsidiary companies are only accepted for tax purposes if the credit was granted under the regular commercial activity of the company and provided that there is sound evidence of irrecoverability. As regards the write-off of debts (loans or commercial), the tax deduction for the corresponding losses is only possible if the operation is supported by sound economic reasons and evidence of its indispensability to the maintenance of the companies activity (indispensability test). Capital As a general rule, only 50% of the negative balance of capital gains and capital losses resulting from the disposal of shares, including redemption or amortisations with capital reduction, is deductible for tax purposes. The 50% limitation also applies to other losses or negative equity variations deriving from shares and other equity components such as quasi-equity capital contributions. In certain circumstances, when the shares have been held for less than three years and the counterpart of the acquisition or transfer of the relevant shares is a related company, a company resident in a blacklisted territory or a Portuguese company subject to a special tax regime, then the losses or capital losses may be disregarded for tax purposes. Fiscal unity issues Tax grouping is allowed provided that the parent company holds, directly or indirectly, at least 90% of the capital and more than 50% of the voting rights of the subsidiaries. Other conditions should also be met. Under the tax grouping regime, the taxable income of the group is computed on the basis of the taxable income and losses of the companies included in the group. Companies under insolvency or special recovery proceedings must be excluded from the group perimeter. The CIT Reform commission has proposed the reduction of the threshold for eligibility for the group taxation regime already in place and the adaptation of the current regime to the ECJ s case-law. Consequently, the eligibility holding threshold should be reduced from 90% to 75%, allowing the creation of taxable groups in more situations. VAT The Portuguese bad-debt VAT regime has recently suffered significant changes that affect its general rules, creating additional requirements to perform VAT adjustments. On this basis, two different regimes are established, one for debts that become due before 1 January 2013 (old regime) and another one for the debts that become due from that date onwards (new regime). Regarding the old regime, the existing requirements for the VAT recovery on bad debts, based on the taxable status of the debtor, value of the debt and type of judicial proceeding in place are maintained. However, significant restrictions and additional requirements are introduced for the recovery of VAT in insolvency procedures. Regarding the new regime, a clear distinction between bad debts and irrecoverable debts is made, with specific conditions for recovery in each one of the situations. In the case of bad debts, that are in default for more than 24 months, the recovery is allowed upon prior authorisation from the tax authorities, provided the asset has been written-off for accounting purposes and that procedures to recover the bad debt have been undertaken. The invoices underlying the bad debts, the debtors identification, the amount of the VAT to be adjusted and the recovery efforts carried out by the taxpayer, should have been certified by a statutory auditor. For irrecoverable debts, that is debts deemed irrecoverable within the scope of specific judicial proceedings (eg insolvency proceeding), the new regime also requires certification by a statutory auditor, stating that all the legal requirements for the deduction are complied with. Additionally, in specific situations, the recovery of VAT is not allowed. For example, no relief is provided if the credits are owed by individuals or legal persons with special relations with the beneficiary or if, at the time of the transaction, the acquirer has been declared insolvent in judicial proceedings. Finally, it should be noted that the sale of the bad debts, even if undertaken at a discount, precludes the possibility of VAT recovery. Cross border issues The above comments apply, in general, to cross border insolvency issues involving Portuguese companies. However, under cross border transactions, the Portuguese Tax Authorities tend to adopt a more restrictive approach and therefore special attention should be taken in order to avoid transfer pricing issues and the application of anti-abuse measures. Contributed by Pedro Tardão Alves, Nexia, CPLA & Associados, SROC, Lda, Portugal TAX Link - Surviving insolvency - October

12 Spain Tax losses Tax losses can be carried forward up to a maximum of 18 years after their generation. Companies may decide how and when to offset losses during this period. Certain limitations exist for offsetting such tax losses: 1. The amount of offsetable tax losses shall be reduced by the amount of the positive difference between the value of shareholder contributions howsoever made, in respect of the holding acquired and the acquisition cost of the holding, where all the three following circumstances exist: a) a majority of the capital stock or of the rights to share in the income of the entity has been acquired by a person or entity or by a group of related individuals or entities after the end of the tax period, to which the tax losses relate b) the individuals or entities referred to in a) had a holding of less than 25% at the end of the tax period in which the tax losses were generated c) the entity has not performed any economic operations in the six months prior to the acquisition of the holding that confers a majority interest in the capital stock. 2. For tax periods beginning in 2013, companies must consider the following limitations when using (offsetting) tax losses generated in prior periods: companies or fiscal unities with a turnover in the previous year of between EUR20 million and EUR60 million: up to 75% of their taxable income companies or fiscal unities with a turnover in the previous year exceeding EUR60 million: up to 50% of their taxable income. Loans -Deductibility of interest expense Restriction on net financial expenses The amount of net financial expenses deductible for Spanish Corporate Income Tax (CIT) purposes is limited yearly to 30% of the operating profit for the tax period. This limitation is more a rule for the temporary allocation of the financial expenses than an absolute limitation to the deduction for Spanish CIT purposes of such expenses. However it is nonetheless likely to have a significant impact on certain types of transactions, eg LBOs and sale and leaseback transactions. net financial expenses means all financial income and expenses accrued (regardless of the lender but ignoring nondeductible intra-group financial expenses); and operating profit means the profit for the tax period, excluding fixed asset depreciation, non-financial asset subsidies, impairment and the profit/loss derived from the transfer of fixed assets. It does include dividends from subsidiary companies where the shareholding participation, direct or indirect, is i) at least 5% or ii) the participation acquisition value is higher than EUR6 million (unless the participation was acquired through leveraged transactions that generated intra-group non-deductible financial expenses, as explained below). Net financial expenses below the EUR1 million threshold are deductible without limitation. In the case of entities which form part of a fiscal unity, the 30% limit will refer to the fiscal unity as a whole and should the tax group break up, the right to deduct the outstanding financial expenses credit will be assigned among the members pro rata to their contribution to the generation of the expenses. Excess of net financial expenses can be deducted over the subsequent 18 years. Restrictions not applicable to all entities The 30% limitation will broadly not be applicable to: credit entities and assurance entities as well as their funding SPVs tax period in which an entity extinguishes. Restriction where there is no valid economic reason for transactions, giving rise to expenses Certain intra-group financial expenses are not tax deductible unless there are valid economic reasons for carrying out the transactions which give rise to such expenses. This measure targets financial expenses derived from intra-group leveraged transactions carried out with the aim of acquiring shares of a group subsidiary (usually a foreign subsidiary) or of making capital contributions into a foreign group subsidiary. These sorts of transactions were undertaken because Spanish CIT law allowed unlimited deductibility of the financial expenses (ie debt push-down structures) whilst the foreign-sourced dividends and capital gains from those subsidiaries are tax exempt. Capital contributions made by shareholders to a subsidiary or branch in Spain are exempt from capital duty where a shareholder cancels indebtedness by contributing existing credit to the participated company in exchange of a capital increase, the capital increase will be valued at the market value of the credit. A positive difference between the nominal value of the credit and its market value will be considered as taxable income at the level of the debtor. Such income should reduce the amount of tax losses that may be carried forward Fiscal unity If an entity that belongs to a tax group has been declared in bankruptcy or the equity is lower than 50% of the nominal capital, it will be automatically excluded from the Fiscal Unity unless the net equity balance is restored before the yearly accounts corresponding to that tax period have been approved by shareholders. If the entity excluded happens to be the dominant entity of the Fiscal Unity, the Fiscal Unity will disappear. VAT - Reduction of taxable amount in case of bankruptcy declaration/total or partial non-payment According to article 90 of VAT Directive 2006/112/EC Spain has determined the conditions under which taxable amount may be reduced. Bankruptcy declaration The VAT chargeable event must have occurred before the judge has issued the decree declaring debtor s bankruptcy. 12 TAX Link - Surviving insolvency - October 2013

13 Reverse charge rule in real estate transactions Reverse charge rule applies to: a transfer of real estate as a consequence of a bankruptcy procedure second and subsequent transfers of buildings that are exempt from VAT. The VAT taxpayer can waive the right to this exemption when the acquirer is an entrepreneur acting within his business or professional activity and has the right to fully deduct the VAT paid on his acquisitions the execution of security rights on real estate property in payment or for the payment of guaranteed debt or of the obligation to cancel debt by the acquirer. The reduction must be made within either one month (ordinary bankruptcy process) or 15 days (shortened bankruptcy process) have elapsed since the date on which the judge issued the decree declaring debtor s bankruptcy. The reduction must be communicated to the Spanish Tax Authorities within one month from the date of issue of the rectification invoice. Total or partial non-payment More than one year must have elapsed since the chargeable event. Such period is reduced to six months if the creditor is an entrepreneur or professional whose turnover has not exceeded EUR6 million in the preceding year. In the case of successive payments more than one year must have elapsed since a payment is due. The VAT taxpayer must have claimed payment either by suing the debtor or by a Notary Public s requirement. In the case of successive payments it is sufficient to have claimed at least one payment. The reduction must be made within three months from when the one year / six months period elapsed. The reduction must be communicated to the Spanish Tax Authorities within one month from the date of issue of the rectification invoice. Credits that may not benefit from taxable amount reduction 1. credits guaranteed by security interests, the part secured 2. debts guaranteed by credit institutions or mutual guarantee societies or debts guaranteed by a credit insurance or surety bond contract 3. debts between related individuals or entities 4. debts owed or guaranteed by public law entities. Cross border For tax periods starting in 2103 impairment of participated non-quoted entities is no longer tax deductible for Corporate Income Tax purposes the availability of capital allowances available in respect of the financial goodwill in non-resident indirectly owned investees has been questioned (Decision EC). In July 2013, a European Commission Decision was notified by which an investigation has been opened into possible illegal state financial aid for the depreciation of financial goodwill for Corporate Income Tax purposes, when this goodwill only appears in participations of non-resident entities acquired indirectly. This Decision orders the Kingdom of Spain to never grant new financial aid until the illegality of the aid is decided, and invites the Spanish authorities to inform possible beneficiaries of its existence. impairment of credits granted to related persons or entities is not deductible for corporate income tax purposes unless insolvency has been declared by a judge. According to binding tax rulings, insolvency being declared by a judge means that the judge has to have opened the liquidation period and consequently, it is not enough merely that bankruptcy has been declared by the judge. Contributed by Pablo Gómez-Acebo and José Ángel Martínez Muro, Nexia Spanish desk, Spain and UK There are four English insolvency procedures for companies; company voluntary arrangements (CVAs), receivership, administration and liquidation (which can be in the form of a voluntary winding up or a compulsory winding up). Of these, the two most common are administration and liquidation. Most insolvency situations start with administration, the primary aim being to rescue the company. If this fails, the business and assets may be disposed of and the company wound up, often via liquidation. One of the consequences of the commencement of liquidation is that the company loses beneficial ownership of its assets. While TAX Link - Surviving insolvency - October

14 this does not cause a disposal event for capital gains tax purposes, it has tax consequences; reliefs requiring a minimum level of ownership will be lost. This will affect areas like group relief for corporation tax, stamp duty and stamp duty land tax. The commencement of liquidation and administration is also the occasion of a new accounting period for tax purposes. The following notes provide more detail on some of the main tax issues related to insolvency. Tax losses Trading losses Normal rules are that a UK company while trading can carry forward trading losses indefinitely and can carry back a trading loss one year. If trade continues during an insolvency process, then losses are still available. Where a company ceases to trade, losses that arise in the last accounting period ( terminal losses ) can be carried back and set against profit in the previous three years. Where tax losses are present, care should be taken to optimise the utilisation of tax losses and to help achieve favourable outcomes for creditors. When trade ceases, losses cannot be carried forward and it is therefore vital to match receipts with available losses pre cessation as far as possible. From a business continuation perspective, the sale of the business and assets as a going concern is often the optimum solution. This is often referred to as a pre-pack, where the business is sold before appointment of the Administrator. Otherwise a sale can occur following a period of trading whilst under administration. Where trade continues, relief for trading expenses and losses brought forward should continue to be available. Capital losses In liquidation and administration, a company s assets continue to be chargeable to capital gains; this includes disposals made after liquidation. Capital losses incurred before the date of liquidation can be carried forward against gains realised on or after that date. Any capital loss not utilised against other gains in the year it arises is carried forward and can only be used against future capital gains. Therefore transaction tax planning is needed to minimise and shelter tax on gains on disposals of assets, property/land and buildings. NTLR deficit Non trading loan relationships A company can claim relief against all types of profits for a nontrading deficit incurred in the same year or carry back against the previous year s loan relationship profits. A calculation of NTLR deficits will include interest costs and may include expenses incurred directly with managing those deficits (bank charges). Unused NTLR deficits will be carried forward for relief against future non-trading profits subject to a claim. Capital allowances/tax depreciation Timing of cessation of business can be key to the ability to utilise capital allowances. Where a trade is permanently discontinued, balancing adjustments are made in respect of the pools of plant and machinery, qualifying for capital allowances for the chargeable period which ends on the last day of trading. The disposal value to be brought into account is to be taken as the proceeds on a subsequent sale unless there is no sale, in which case market value at the time of cessation is used. Depending on previous allowances claimed this disposal value can result in a balance of capital allowances that can be offset against other profits. Loans Under the loan relationship legislation, where a loan is accounted for under the amortised cost basis and the borrower meets an insolvency condition, then any release of the loan is treated as non-taxable. Where the loan is from a related party, there is a matching provision for the creditor, so that no deduction is available for the write off or release, subject to certain limited exceptions. Where unconnected loans exist, renegotiating the debt structure with lenders is sometimes the only practical option to ensure that taxable credits do not arise where a formal insolvency process has not been initiated. The key issue for distressed companies not in an insolvency process is that borrowers can be subject to corporation tax on debt releases which may lead to large residual tax liabilities, or absorption of tax losses. Considering the effect of a restructuring on the taxation of a third party lender is therefore likely to be a key issue. Capital Broadly the order of priority on the insolvency of a company is: preferred creditors expenses of administration unsecured creditors including shareholders. In insolvency there will be a disposal of the shares for shareholders, when the company is finally wound up. For UK purposes, distributions made in respect of share capital and any other reserves in a winding up will be treated as capital distributions for tax purposes as opposed to income distributions. Where a distribution is made of an asset other than cash (ie a dividend in specie) there will be two disposals to be taken into account. First the company may be subject to corporation tax on chargeable gains, in respect of its disposal of the asset, which will be deemed to take place at market value. Secondly the shareholder may be subject to tax on the deemed market value of the asset received. Group relief Where there is a corporate group, losses of one company can be relieved by other companies with profits. As noted above, in the case of an insolvent liquidation, an insolvent company cannot claim group relief. In the case of an administration, if trade continues, the company should continue to claim group relief. Therefore it is important to plan around qualifying tax losses that are expected to arise and that may be surrendered by 14 TAX Link - Surviving insolvency - October 2013

15 way of group relief by a member of a 75% owned group to be set against the profits of a fellow group member. It is usual in insolvency cases for losses to be surrendered for consideration, typically half the tax saved by the claimant company. VAT When a liquidator or administrator is appointed to a VAT registered entity, HMRC should be informed of the appointment within 21 days. Where the group VAT representative member becomes insolvent it is not possible for the other VAT group members to continue using the group VAT number. Any solvent continuing group members will need to be re-registered for VAT. It may also be beneficial to undertake intra-group asset transfers within the VAT group prior to the liquidation of the company as this may avoid any VAT issues on transfers between two different VAT groups. For distributions, it is vital to analyse where the parent company of a group is based, as this will determine how the company and recipients are taxed. From a UK perspective, company distributions carry no withholding tax. The taxation of the distribution in the hands of the recipient will be dependent on the tax legislation applicable to the recipient. Contributed by Rajesh Sharma, Smith & Williamson, UK A VAT return must be made up to the date of appointment of a liquidator or administrator and thereafter up to the normal VAT return dates. Disposals of assets in the course of winding-up may be taxable for VAT purposes. Generally, the sale of plant and machinery and fixtures and fittings will be taxable unless it forms part of the sale of a business as a going concern. The sale of patents, licences, trademarks and other rights will also be subject to VAT. The sale of land and buildings will generally be exempt unless an option to tax has been exercised over the land and buildings, or the buildings are new. Although disposals of individual assets may give rise to VAT liabilities, the sale of a business or part of a business as a going concern does not, though generally pre-pack arrangements would fall within these criteria. Cross border issues Insolvency proceedings will only commence in the UK if a company s centre of main interests is also in the UK. The place of incorporation is not relevant. Generally, the main cross border issues are; how international debt is relieved, how capital gains/losses are realised and how distributions are made. There have been a number of recent UK tax measures introduced affecting international groups. These include: the ability of UK permanent establishments of non UK resident companies to surrender losses the ability to defer payments of tax on migration an irrevocable election can be made by companies to exempt all foreign branch profits from UK corporation tax. Similarly where an election is in place, foreign branch losses would not be relievable against UK taxable profits. TAX Link - Surviving insolvency - October

16 Tax Link serves two purposes. It provides a forum for updating our clients and contacts on developments in tax legislation around the globe and for highlighting the range of tax services available from Nexia member firms. In addition, Tax Link serves as a notice board to inform member firms on the activities of the various tax committees and focus groups within the Nexia network. This update was edited by Mike Adams, Tax USA Director at Nexia International. If you require further information or would like to contribute articles for future editions, please contact: Mike Adams Nexia International does not accept any responsibility for the commission of any act, or omission to act by, or the liabilities of, any of its members. Nexia International does not accept liability for any loss arising from any action taken, or omission, on the basis of this publication. Professional advice should be obtained before acting or refraining from acting on the contents of this publication. Membership of Nexia International, or associated umbrella organisations, does not constitute any partnership between members, and members do not accept any responsibility for the commission of any act, or omission to act by, or the liabilities of, other members. Nexia International is the trading name of Nexia International Limited, a company registered in the Isle of Man. Company registration number: 53513C. Registered office: 2nd floor, Sixty Circular Road, Douglas, Isle of Man, IM1 1SA.



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