A Global Guide To M&A The Netherlands

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1 A Global Guide To M&A The Netherlands by Marc Sanders, Partner, Taxand Netherlands Contact: Marc Sanders E. nl, T This article in question and answer format is the latest in a series provided by Taxand from their Global Guide To M&A : "Quality tax advice, globally" From A Buyer's Perspective 1. What are the main differences among acquisitions made through a share deal versus an asset deal in your country? Asset deal The acquired assets and goodwill can be depreciated/amortized for tax purposes at the purchase price (fair market value). In general, no (tax) liabilities are inherited. Th e Dutch loss-making companies of the acquirer's group can absorb profitable operations of the target company. In principle, all acquisition costs are deductible. Capital gains taxation is at the level of the seller (reflected in the purchase price). Possible transfer taxes apply on real estate (6 percent on commercial real estate). The potential benefit of the target company's carryforward losses is retained by the seller (if still available after a gain on the sale of the assets). Share deal The buyer may benefit from the target company's carryforward losses (see section 6 below). There is a lower chance of transfer tax on real estate. The seller may be able to apply the participation exemption, which exempts capital gains and dividends (see section 9 below). There is no depreciation of assets at purchase price and no amortization of goodwill. Th e buyer is in principle liable for the target company's existing (tax) liabilities. The buyer may incur a potential dividend withholding tax liability on retained earnings.

2 In principle, all costs relating to acquisitions as well as disposals of participations qualifying for the participation exemption are not deductible. In the case of a share deal, the acquisition costs should be added to the cost price of the participation. These may not be depreciated for tax purposes and this is only beneficial in case of liquidation or for purposes of establishing the interest deduction restricted under the Dutch participation interest regime (see section 4). Some costs (including costs relating to the financing) may however be deductible. Therefore the allocation and specification of the costs should be monitored carefully. Monitoring these costs is also important for VAT purposes. In the event that the acquisition of a participation is debt-financed, it will be difficult to deduct the corresponding interest considering the various restrictions on interest deductions. 2. What strategies are in place, if any, to step up the value of the tangible and intangible assets in case of share deals? Due to the application of the participation exemption, there are very limited planning strategies to create a step-up in share deals. 3. What are the particular rules of depreciation of goodwill in your country? Acquired goodwill can in general be depreciated over at least 10 years (at an annual rate of 10 percent). Self-created goodwill can generally not be activated and is therefore not depreciable. 4. Are there any limitations to the deductibility on interest of borrowings? Dutch interest deduction restrictions are complicated and professional advice should be sought in this regard. Under Dutch case law, restrictions apply to interest paid on loans that function as equity (hybrid financing) or are qualified as loss-financing or as a fictitious loan. The general abuse of law principle should also be taken into account. The Dutch Corporate Tax Act also provides for numerous and complicated interest deduction restrictions. Therefore professional tax advice should be sought in this regard. First, the reported interest (and the other terms and conditions of the financing) has to be at arm's length. Secondly, the interest deduction is denied if a loan with no fixed maturity (or a maturity of more than 10 years) is obtained from a related company and the loan bears either no interest or interest at a rate which is substantially lower than that which would have been agreed upon between unrelated parties. In addition, deduction is denied for interest incurred in respect of loans relating to: Profit distributions or repayment of capital to a related company or related individual. A capital contribution in a related company. The acquisition or increase of a participation in a company which becomes a related company after this acquisition or increase. Exceptions may apply to transactions based on sound business reasons or if the interest is effectively taxed at a sufficient rate at the creditor's level.

3 As of January 1, 2013, the Dutch thin capitalization regime has been abolished and the participation interest regime has been enacted. Based on the new rule, as of 2013 a taxpayer may not deduct excessive participation interest expenses relating to loans taken out from both affiliated as well as third party creditors. This is to the extent that as the average acquisition price of a (qualifying) participation exceeds the average fiscal equity of the Dutch company, the participation is deemed excessively leveraged. Interest expenses and related costs incurred on this excess financing are in principle not deductible insofar as the interest exceeds EUR750,000. Exceptions may apply to loans taken out to finance expansions of operational activities of the group and detailed rules apply to reorganizations. Finally, under the leveraged acquisition holding regime, the deduction is denied for interest on the debt at acquisition company level, insofar as the acquisition vehicle's interest costs exceed the acquisition vehicle's profit on a stand-alone basis (tainted interest). The limitation applies only to the extent that: The tainted interest exceeds EUR1m. The debt-to-equity ratio of the fiscal unity exceeds a 2:1 ratio ( i.e., 66.6 percent debt and 33.3 percent equity). Interest will therefore be restricted if the acquisition company itself does not have sufficient taxable profit to set off the interest. In general, the acquisition company will not have significant taxable profits and the interest deduction will, consequently, be restricted. Nevertheless the amount of interest, which is non-deductible following the proposed regime, may under certain conditions be carried forward and offset against the acquisition company's holding profits in subsequent years. The limitation of interest deductions will apply to both group and third party interest payments. Tax planning strategies can be considered to mitigate this regime. 5. What are usual strategies to push-down the debt on acquisitions? As discussed earlier (see section 4 above), in general debt push-down structures are limited due to the leveraged acquisition holding regime. Yet various planning structures may be available to achieve an interest deduction. Furthermore, asset transactions could constitute a tax efficient alternative to share transactions, especially if the target company has carryforward losses available. 6. Are losses of the target company/ies available after an acquisition is made? Carryforward losses may not be available as a result of the transfer of the shares in the target company. Under anti-abuse rules, the carryforward losses are not available if the ultimate ownership in the target company has changed substantially (30 percent or more), with the oldest loss year, unless an exception applies ( e.g., the target company is an active trading company which has not substantially decreased its activities or intends to decrease its activities substantially in the future). Separate rules apply to holding or finance companies. 7. Is there any indirect tax on transfer of shares (stamp duty, transfer tax etc.)? Th e Netherlands does not levy capital tax, net worth tax, stamp duties or a minimum tax. If a

4 company is considered to be a (commercial) real estate company, the transfer of shares in the company may trigger a 6 percent real estate transfer tax (see section 10). 8. Are there any particular issues to consider in the acquisition of foreign companies? Th ere are no particular issues to consider in the case of an acquisition of foreign participations. In general (not limited to foreign companies), the costs relating to the transaction (acquisition costs) are not deductible, but should be added to the cost price of the subsidiary. Furthermore it is important to review the applicability of the Dutch participation exemption and proper implementation of substance at the level of the Dutch company (the latter is particularly important from the source jurisdiction's perspective, or if a ruling is requested). 9. Can the group reorganize after the acquisition in a tax neutral environment? What are the main caveats to consider? A fiscal unity (tax group) can be formed between a Dutch parent company and any Dutch subsidiaries in which it owns 95 percent of the shares. Inclusion in a fiscal unity means that, for Dutch corporate tax purposes, the subsidiaries' assets and activities are attributed to the parent company. The main advantage of a fiscal unity is that losses of one company can be offset against the profits of another in the year they are incurred (as discussed above). However, restrictions may apply with respect to leveraged acquisitions. The participation exemption applies to shareholdings provided that certain conditions are met (see section 14 below). The Dutch tax system provides for a merger and a split-off facility. This means that under certain conditions companies (or parts of companies) can be merged or split-off in order to obtain the desired group structure. 10. Is there any particular issue to consider in the case of companies whose main assets are real estate? If a company is considered a real estate company, the transfer of shares in the company may trigger a 6 percent real estate transfer tax (on commercial real estate). A company qualifies as a real estate company if: On a consolidated basis the assets consist of 70 percent or more of Netherlands real estate. The real estate is used for 70 percent or more for the purchase, sale or exploitation of real estate. Th e acquisition of the shares in a real estate company is taxed only if, together with affiliated companies or individuals, an interest of 33 percent is obtained or increased. However, various reorganizations exemptions may apply. 11. Thinking about payment of dividends out of your country and a potential exit, is there any particular country that provides a tax efficient exit route to invest in your country? Th e Netherlands has a statutory dividend withholding tax rate of 15 percent. The extensive tax treaty network of the Netherlands usually

5 eliminates or significantly reduces the dividend withholding tax rate. A Dutch cooperative (co-op) corporate entity is frequently used if the treaty rate is not reduced to 0 percent or if the shareholders do not qualify as a qualifying resident under the treaty ( e.g., funds). A Dutch co-op is an entity similar to a Dutch BV the main difference being that a co-op is not subject to dividend withholding tax provided that certain requirements are met. No withholding tax on dividend distributions will be due even if there is no tax treaty or if anti-abuse rules ( i.e., limitation of benefits) in an applicable treaty apply. Luxembourg and UK holding structures are also used if the dividend withholding tax rate cannot be reduced to 0 percent through a treaty or the use of a co-op. Taxation on the difference between the book value and the market value of the assets and any goodwill in general remains with the seller. Share deals The participation exemption can be applied. The (tax) liabilities are in principle transferred to the buyer. Th e potential benefit of carryforward losses is transferred to the buyer. Costs related to the sale are generally not deductible. 12. How is foreign debt usually structured to finance acquisitions in your country? As described above, the Netherlands has a number of restrictions on interest deductions. Planning techniques can be used to retain an interest deduction, but require a detailed analysis. From A Seller's Perspective 13. What are the main differences between share and asset deals? Asset deals 14. How are capital gains taxed in your country? Is there any participation exemption regime available? In addition to profit distributions, the Dutch participation exemption also applies to capital gains on the disposal of a qualifying participation (or part of), as well as to currency gains, many hybrid loans and certain option schemes. The main rule is that the Dutch participation exemption applies to participations of at least 5 percent in the nominal paid-up capital of a company (non-transparent entity). There is no requirement as to the duration of the period in which a participation must be held by the parent company. The potential benefit of the target's carryforward losses are in principle retained by the seller. The participation exemption applies as long as the participation is not held as a portfolio investment. The intent ( i.e., purpose for holding the shares) of

6 the Dutch parent company is the decisive criterion. A participation in a company is held as a portfolio investment if it is held with the intent to merely receive a return on investment that can be expected in the case of normal asset management. The participation exemption should apply if the taxpayer is a top holding of the group, if the taxpayer serves as an intermediate holding company, or if the activities of the subsidiaries are in line with the activities of the parent of the taxpayer. Under certain circumstances a subsidiary is deemed to be a portfolio investment subsidiary ( e.g., if the subsidiary qualifies as a group financing subsidiary). If the subsidiary qualifies as a portfolio investment subsidiary, the participation exemption will nevertheless apply under the following safe harbor rules: The subsidiary is subject to a reasonable tax on its profits from a Dutch perspective (rate test). Th e assets of the portfolio investment subsidiary consist directly or indirectly of less than 50 percent of low-taxed free portfolio investments (asset test). Under the rate test, the subsidiary itself should be subject to an effective corporate tax rate of 10 percent or more. A statutory tax rate of 10 percent should generally be sufficient. Under the asset test, the assets of the subsidiary should not directly or indirectly largely ( i.e., more than 50 percent) consist of low-taxed ( i.e., less than 10 percent corporate tax rate) portfolio investments. Free portfolio investments are assets that are not required for the business of the owner of these assets. Real estate, as well as rights related directly or indirectly to real estate, is in general not considered a free portfolio investment. 15. Is there any fiscal advantage if the proceeds from the sale are reinvested? Th e taxpayer may defer taxation of the capital gain realized upon disposal of a business asset by forming a reinvestment reserve. If the proceeds realized upon disposal exceed the asset's book value, the taxpayer may form a reinvestment reserve for the excess if, and so long as, the company intends to reinvest this amount. The amount for which the investment has been formed must generally be reinvested no later than within three years after the year of disposal. Various anti-abuse rules apply with respect to this regime.

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