Tax aspects of a restructuring: what should you look out for?

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A restructuring not only involves legal and operational choices (as explained in National restructurings through merger or demerger: the legal framework), but also always has far-reaching tax consequences. An early tax analysis is essential to avoid unforeseen tax assessments. At the same time, a restructuring may form part of a well-considered tax optimisation strategy. Through this contribution, we provide an overview of a number of important tax considerations. 

Tax considerations in a restructuring   

Correctly assessing the tax impact of a restructuring is essential to avoid unpleasant surprises. Corporate income tax is often the first aspect that comes to mind, but VAT and registration duties may also be relevant. What should be considered, among other things?

  

Tax neutrality

A merger or demerger is exempt from corporate income tax if the following two conditions are met at the same time: 
  • the acquiring or receiving company is a resident company or an intra-European company; 
  • the operation may not have tax fraud or tax avoidance as its main objective (or as one of its main objectives). Where the operation does not take place on the basis of sound business reasons, such as restructuring or rationalisation of the activities of the companies involved in the operation, this may give rise to the presumption, unless proof to the contrary is provided, that the operation has tax fraud or tax avoidance as its main objective (or as one of its main objectives). 
The exemption regime for a merger or demerger is mandatory: as soon as a merger or demerger meets the conditions, the operation automatically falls under the principle of tax neutrality, with no possibility of waiving it (provided, of course, that the other tax law conditions in this respect are fulfilled). 

Tax neutrality means that the acquiring or receiving company takes the place of the acquired or demerged company with regard to rights and obligations. 

The neutrality principle amounts to a deferral of tax: all latent taxable matter is transferred to the acquiring company. 

Impact on the tax losses carried forward and "DRD surpluses"

If a company involved in a tax-neutral restructuring still has tax losses carried forward or so-called "DRD surpluses" (this is an exemption for dividends received that could not yet be applied), a limitation will be applied on the basis of the so-called fiscal net value of each of the companies involved. The fiscal net value is the difference between the fiscal value of the assets and the fiscal value of the liabilities. 

Limitation of the losses of the acquiring company in a merger

The amount of the losses of the acquiring company that remain recoverable after the tax-free merger is limited by multiplying the available loss by the following fraction: 

fiscal net value of the acquiring company before the operation 

total fiscal net value of the acquiring company and the acquired components before the operation 

Limited transfer of the losses of the acquired company to the acquiring company in a merger 

The amount of recoverable losses of the acquired company that is transferred to the acquiring company in a tax-free merger is determined by multiplying the existing tax losses by the following fraction: 

fiscal net value of the acquired components before the operation  

total fiscal net value of the acquired components and the acquiring company before the operation  

What is the impact on the losses in a (partial) demerger?

Where the acquiring company is an existing company, tax neutrality does not fully apply to transferred tax losses and DRD surpluses. These are transferred only to a limited extent, in proportion to the fiscal net value of the transferred components, as described above. 

Where the acquiring company is a newly incorporated company, no limitation applies to the transferred tax losses.

VAT

In the case of mergers, VAT is in principle not applicable, on the basis of the "going concern" principle. The VAT Code provides that, on the transfer of a universality of goods, for consideration or free of charge, by way of a contribution to a company or otherwise, the transfer falls outside the scope of VAT where the acquiring company has a full or partial right to input VAT should the transfer be subject to VAT. 

In essence, this comes down to avoiding pre-financing of VAT at the time of the transfer and to the capital goods present retaining the VAT characteristics they had before the transfer, which is relevant for the later determination of any revision obligations on the part of the acquiring company. 

This "going concern" principle can also come into play in the case of demergers, but the conditions relating to the presence of a business division, to be assessed from the perspective of the transferee, must then be met, which is not necessarily the case. Consider, for example, the mere splitting off of an immovable property, which can have a financial impact because of a revision that may have to be carried out. 

The specific formalities, namely the drawing up of documents and the reporting in the VAT return on the part of the acquiring company as well as of the transferor, must not be lost sight of here. 

Particular attention must be paid to the presence of a VAT unit or, where appropriate, to considering the formation of a VAT unit before carrying out the restructuring, in order to avoid any negative financial consequences. 

Registration duties

The Registration Duties Code provides for an exemption from registration duties in the event of a contribution of a universality of goods or of a branch of activity to a company by way of merger or demerger, or to one or more new or existing companies, provided that both of the following conditions are met: 

  • the contributing company has its seat of effective management or its registered office within the territory of the EU;  
  • the contribution (after deduction of the sums owed by the contributing company) is remunerated exclusively by shares in the capital representing corporate rights. A cash payment of no more than 10% of the nominal value of the shares allocated is permitted.  
Mixed contribution

If there is no contribution of a branch of activity, for example in the context of a (partial) demerger, and the contribution is partly remunerated other than by the allocation of shares (for instance by the take over of a debt), the agreement is subject, to the extent of that other remuneration, to the registration duties laid down for agreements for consideration having goods of the same nature as their object. In Flanders the rate is 12%. 

The tax on entry into service and a tax-neutral restructuring

The Flemish Tax Code does not provide for an exemption from the tax on entry into service (BIV) on the transfer of ownership of vehicles in the context of a tax-neutral reorganisation of a business. The business to which the vehicles would be transferred as a result of the restructuring does not benefit from a regime of tax neutrality for the BIV, so that this tax is due again. 

Do you want to know what a restructuring means for you from a tax perspective?

Get in touch with BDO for an exploratory conversation. Together we map out the tax impact, identify possible optimisations and translate everything into a clear plan, so you can focus on what matters: doing business.