Greek tax considerations commonly encountered in private share deals
Maria Zoupa and Daphne Cozonis of Zepos & Yannopoulos discuss some of the tax considerations usually relevant for both sellers and buyers when planning and negotiating the transactional part of such acquisitions of non-listed companies seated in Greece.
The Greek market has been seeing significant private acquisitions in recent months and transactions in the form of share deals continue to dominate the M&A space. This article presents a brief overview of the most common tax issues that are considered by the parties in relation to those deals.
Taxes triggered (or not) upon the transaction
There are no indirect taxes as such on the sale and transfer of shares issued by companies seated in Greece. Therefore, a buyer is not subject to taxation in Greece when purchasing or receiving shares issued by Greek companies.
The Greek capital gains tax treatment of sellers depends on the sellers’ tax residency and, in the case of Greek tax-resident sellers, on whether such sellers are individuals selling in a private context or they are instead legal persons or entities, Greek branches of foreign enterprises or individuals selling in the context of a business.
Non-Greek resident legal persons and entities are not subject to income tax in Greece in respect of sales of shares in Greek companies, in so far as they do not transact through a permanent establishment (branch) they may have in Greece. Also, non-Greek resident sellers who are individuals are exempt provided that they are tax-resident in jurisdictions having concluded a Treaty for the Avoidance of Double Taxation with Greece and that they submit relevant evidence to the tax authorities.
Capital gains realised by Greek companies and enterprises as well as by branches in Greece of foreign enterprises from the disposal of shares in Greek companies form part of their taxable basis for income tax purposes in the fiscal year in which they are realised. It is to be noted that the prevailing corporate income tax rate for the fiscal year 2022 is 22%. Certain credit institutions are taxed at 29% whereas the tax for individuals engaged in a business is progressive based on their level of income.
“Transactions in the form of share deals continue to dominate the M&A space”
However, Greek resident legal persons are exempt from tax on capital gains arising from the disposal of shares in EU Parent-Subsidiary Directive-qualifying subsidiaries, insofar as they hold at least 10% participation in those subsidiaries for a minimum holding period of 24 months.
This treatment applies for income generated from January 1 2020 onwards. Losses arising from the transfer of such qualifying participations are deductible for tax purposes after January 1 2020 only to the extent that such losses had been reflected in financial statement valuations having occurred until December 31 2019 and provided that such losses shall be realised until December 31 2022.
Greek tax-resident individuals are generally subject to 15% income tax (5% in certain stock option plans) on capital gains from the transfer of shares in Greek companies (in addition to any applicable Special Solidarity Contribution). Minimum capital gains are determined in an imputed manner based on the target company’s equity and profitability.
Balancing interests in tax warranties and indemnities
It is seldom the case for buyers of shares in Greek companies not to push for tax indemnities and warranties addressing the allocation of tax risks that may materialise after a transaction is closed.
The drafting and negotiation of such clauses requires not only legal acumen but also a specialised knowledge of the applicable tax rules and procedures, especially taking into account that general indemnities will often not capture sufficiently the particularities of the Greek tax ecosystem which should be driving them.
Prescription periods and tax audit probabilities
The likelihood of a tax audit resulting in higher tax payments occurring after a share deal is one of the drivers in relation to tax indemnity clauses. Τherefore, one point of relevance for the parties are the rules concerning the prescription period in respect of the right of the Greek State to impose taxes.
It is worth noting in this respect that improvement towards achieving certainty for taxpayers has been made in recent years as compared to the practice in the past, when prescription periods were frequently being extended right before expiry, by virtue of consecutive legislative extensions. The Supreme Administrative Court has - in a landmark decision issued in 2017 - ruled that that legal provisions extending prescription periods should be in accordance with the constitutional principle of limited retroactivity of tax laws and therefore should be enacted not later than one year following the year when the relevant tax obligation had arisen.
The above being said, tax authorities can audit the accuracy of tax returns, as well as the general compliance of taxpayers with their tax obligations, on the basis of procedures provided for in the Tax Procedures Code currently in force in Greece, as well as pursuant to the legislation applicable to periods prior to the Code’s enactment in 2013, depending on the year audited.
In accordance with the Tax Procedures Code, the state’s right to assess taxes is, in principle, prescribed after a period of five years as of the end of the year when a tax return is due to be filed.
Taking into account that legal persons and legal entities are obliged to file their annual income tax returns within in principle six months as of the end of the relevant fiscal year, for persons whose fiscal year ends on December 31, the right of the State is effectively prescribed within six years.
The applicable prescription is 10, instead of five, years as of the end of the year when a tax return is due to be filed, in cases where the relevant taxpayer has not filed a tax return within the five year period and in cases of emergence for the tax authorities of new data or new information which could not have come to their knowledge within the five-year period. This is so provided that such new information would lead to a higher tax assessment in respect of the relevant matter.
There are a number of derogations from the above rules. For example, a 10-year prescription period applies in cases of tax evasion committed in fiscal years up to 2017. Another example is that in case that a taxpayer files an administrative appeal or an appeal before courts, the prescription period is extended to one year from the issuance of the administrative decision or irreversible court decision, as the case may be.
What is also relevant to note is that the Governor of the Independent Authority for Public Revenue prioritises tax audits on the basis of risk analysis criteria, information from internal and external sources and, exceptionally, non-publishable criteria. For example, in accordance with the Governor’s decision for the audits to be performed in the year 2022, at least 70% should capture tax years, cases, periods or liabilities of the last five years whereas at least 75% of those should, in principle, capture the last three years.
The impact of due diligence
The results from a buyer’s tax due diligence, not only in respect of fiscal years and transactions not yet audited by the tax authorities but also in respect of findings of already conducted tax audits, should help buyers mitigate any transactional risks through negotiating appropriate terms which may range from agreeing a price reduction or taking security to in fact negotiating appropriate tax warranties and indemnities.
Information on findings of already conducted tax audits shall be of particular relevance since, unless correcting actions have been adopted, the tax authorities will often initiate audits by singling out the same types of findings of previous years.
From a seller’s perspective, a Vendor’s tax due diligence could help identify from the outset any available corrective actions and in general would help sellers to be better prepared in share purchase negotiations.
As part of the quest to impose limitations on tax indemnities with the aim of ensuring a quick settlement of open matters, sellers may invoke the existence of ‘tax certificates’ without reservations in respect of unaudited fiscal years of a target company.
A tax certificate is a, currently optional, process available to certain types of Greek companies (in the form of AE, ΕΠΕ and IKE) as well as to branches in Greece of foreign enterprises whose annual financial statements are mandatorily audited by certified auditors and audit firms. The tax certificates are issued by such certified auditors or audit firms who are performing the statutory audit.
The scope and process for the tax certificates is determined through decisions of the Governor of the Independent Authority for Public Revenue and they are to comprise details on any tax infringements and failures to pay taxes or to pay taxes accurately, that can be derived from the books of an audited enterprise. Infringement findings in a tax certificate can be taken into account by the tax authorities when prioritising tax audits.
From a contingency point of view, sellers may seek to achieve a risk apportionment to their benefit by arguing that any material tax issues will have been raised during a tax certificate audit and therefore that buyers having reviewed the relevant certificates should have gained comfort in respect of the pertinent unaudited fiscal years prior to closing.
On the other hand, tax certificates are no longer mandatory (as was the case between the fiscal years 2011 and 2015) nor do they impose any limit on the right of the tax authorities to conduct tax audits, as it may have been the case for a limited period in the past. Therefore, buyers will customarily push back on such an approach by the sellers.
Tax indemnity limitations and more
It is all of those factors mentioned above that can be expected to affect the extent and the limitations agreed over tax indemnity and warranty clauses. Buyers may insist that claims arising from a tax indemnity remain in effect until such time as any claim of the state to impose taxes is barred whereas sellers will aim at agreeing time as well as, potentially, quantitative limitations.
Along with the scope of tax indemnities, a number of other tax-related issues, such as the conduct of tax proceedings which may give rise to a buyer’s claim, the impact of diminishment of any tax losses, the existence of tax refunds, the ability of the target to benefit from tax amnesties, etc may become points of focus when negotiating and drafting tax matters in share purchase agreements.
The timely identification of the tax matters of concern for a target and its subsidiaries, the careful preparation of a relevant negotiation strategy and, eventually, a legal drafting reflecting accurately the intent of the parties, should help achieve in effect a proper balancing of the parties’ interests.
Warranty and indemnity insurance: on the rise
A rising trend in the Greek market is for warranties and indemnities to be underwritten by W&I insurers, who thus assume the risks arising from indemnity claims of buyers or from a breach of warranties by sellers. In this connection, buy-side due diligence becomes relevant for defining the areas which will be covered and those that will be excluded from the policy.
On the tax side, the considerations mentioned above as to the scope and frequency of tax audits will also play a role in the underwriting risk assessment.
Post- transaction tax matters
Post-transaction tax matters in share deals, often concern the tax treatment of earn-out clauses and the payment of indemnities.
The Greek tax authorities have recently ended, through clarifications issued in August 2021, a long-standing ambiguity which has been impacting also the tax treatment of earn-out clauses. In specific, it has been clarified that, in case that the parties in share deals agree an additional price which is made contingent upon the occurrence of future and uncertain events, such additional price is taxed upon such occurrence. This position relieves taxpayers from any need to file retroactive tax returns based on the approach that the relevant taxes are always triggered as at the time of transfer of the shares.
The character of revenues from earn-out clauses in the hands of founders - CEOs selling shares when such persons retain management control after a transaction, is another tax matter to be addressed. In case that a divestment is combined with continued employment, a proper allocation between purchase price and income from employment should be made. The intent of the parties in each case, as reflected in the relevant documentation, should set the tune towards ensuring proper tax compliance.
Taxation of indemnity payments
In general, under Greek law the payment of contractual indemnities is subject to stamp tax at 2.4%. Both parties can be assessed with the tax by the Greek State. However, the parties can agree contractually on the allocation of the stamp tax between them. In the lack of such an agreement in sale transactions, the tax is shared equally between the parties (but the Greek State can still claim it from any one of them).
In practice, to the extent that payments in implementation of the tax risk allocation clauses between buyers and sellers are agreed to be in the form of price adjustments, no stamp taxes should arise given that share transfers are exempt from stamp tax.
Zepos & Yannopoulos
T: +30 210 6967077
Daphne Cozonis is a partner at Zepos & Yannopoulos. She specialises in corporate and international taxation with particular focus on the financial and insurance sector as well as on finance and capital markets transactions.
Daphne has more than 20 years’ experience advising clients on a broad range of tax matters, such as in relation to private equity acquisitions, structured finance, funds, corporate restructurings and complex corporate taxation matters.
Daphne was admitted to the Athens Bar Association in 1995 and joined our firm in 1998.
Zepos & Yannopoulos
T:+30 210 6967073
Maria Zoupa is a partner at Zepos & Yannopoulos. She a leads the firm’s corporate tax advisory and compliance team.
Maria advises multinationals on the full spectrum of corporate and international tax matters relevant to their Greek business, involving entry in the market/set up guidance, financing, operation, restructuring or exit of their Greek subsidiaries. She is also active in M&As, assisting clients with tax due diligence, negotiations and structuring of transactions. She also specialises in energy taxation and has extensive experience in tax matters relevant to the acquisition, sales and generally restructurings of businesses active in the energy industry.
Maria was admitted to the Athens Bar in 1999 and joined our firm in 1998. Maria is a member of the firm’s executive committee.