Approval for maintaining a fiscal unity in M&A transactions with an interim covenant
In a share sale transaction with which we recently assisted, the Dutch Tax and Customs Administration approved maintenance of the fiscal unity (fiscale eenheid) for Dutch corporate income tax (vennootschapsbelasting), despite the fact that the seller’s control is restricted during the period after the share sale agreement has been signed. As a result of that transaction, the Dutch Ministry of Finance has included specific approval for comparable transactions in the recently amended Fiscal unity Decree (Besluit fiscale eenheid).
One of the requirements for a fiscal unity for corporate income tax is that a taxpayer holds the entire legal and beneficial ownership of at least 95% of the shares in the capital of another taxpayer. If the ownership requirement is no longer satisfied, the fiscal unity terminates. Premature termination of the fiscal unity can have undesirable tax consequences.
When shares in a subsidiary are sold, it regularly happens that legal transfer of the shares does not take place at the same time as the agreement is signed, for example because of the need to wait for the approval of a supervisory authority (such as the Dutch Authority for Consumers and Markets (the “ACM”)). As a result, the parties have to make arrangements for the period between the signing of the agreement and the moment of legal transfer of the shares, in order to safeguard the value of the shares (those arrangements are also known as “interim covenants”). Almost invariably, those arrangements comprise, inter alia, approval rights for the buyer regarding actions that the seller/subsidiary wishes to perform during that (interim) period, such as applying for consent for a dividend distribution, taking on or dismissing directors, etc. These approval rights restrict the seller’s control of the shares.
Until recently, the Tax and Customs Administration’s position was that if the subsidiary is part of a fiscal unity with the seller, the control restriction means that the seller no longer meets the ownership requirement for tax purposes and the fiscal unity terminates at the moment when the agreement is signed. In the transaction that we guided, maintaining the fiscal unity was highly important from the tax point of view. After extensive discussions with the Dutch Tax and Customs Administration and the Dutch Ministry of Finance, approval was granted for the fiscal unity to be maintained until the moment of legal transfer of the shares, despite control being restricted by the agreement.
As a result of that transaction, the Dutch Ministry of Finance has included specific approval for comparable transactions in the recently amended Fiscal unity Decree. In order to benefit from this approval, the seller and the relevant subsidiary must submit a written request to the relevant tax inspector within two weeks of the agreement being concluded.
