Areas of uncertainty in Greek M&A deals
Michael Stefanakis of Deloitte Greece addresses the hot topics that keep arising in M&A transactions in Greece.
2022 featured multibillion-euro M&A deals in the Greek hospitality, food, and financial services industries. The number of transactions remains high, yet grey areas continue to exist. This article focuses on some of these grey areas commonly arising in Greek M&A deals.
Due diligence scope
A share deal is usually preceded by tax due diligence. The buyer will conduct due diligence on the tax affairs of the target company for most tax areas. The temporal scope of the tax due diligence usually covers all unaudited tax years that are not statute barred.
There are instances where defining the scope of the tax due diligence may become challenging or even contentious. This is the case where a share deal is preceded by a carve-out through a corporate reorganisation, such as a demerger or a spin-off, or even a transfer of a business unit as a going concern.
Greek entrepreneurs rarely have a potential exit in mind when structuring their business endeavours. Very frequently, therefore, a single company is the corporate vehicle that hosts multiple businesses, which may even be unrelated.
An example and key issues
Imagine a single company (OldCo) operating different hotels. A potential buyer is often only interested in one of the businesses (for example, one hotel). In such case, the parties most often structure the transaction as a share deal, which is conditional on the target business being carved out into a new company (NewCo), the shares of which are purchased by the buyer. This kind of transaction structure is mandated both for reasons of tax efficiency and other commercial and legal reasons (for example, the continuity of legal relationships).
If the carve-out takes place via a corporate reorganisation such as a demerger or a spin-off, NewCo becomes a universal successor of OldCo by law. This universal succession captures rights and liabilities related to the business carved out.
The question therefore arises as to whether historical tax liabilities (including hidden ones) follow the target business into the new corporate vehicle (NewCo). On the basis that there is no straightforward answer to this question and no established case law or guidance, a potential buyer usually wants to conduct tax due diligence on the business carved out to identify any contingent liabilities that NewCo may inherit in its capacity as successor by law.
From a practical perspective, it is challenging to perform tax due diligence on a separate business unit within a larger company. For example, the profits of one business unit may be blended with the losses of another. Since the final corporate income tax is assessed on the profit of the entire company, it will be challenging to quantify a cash tax exposure and attribute it to the target business.
While it remains possible to perform tax due diligence on OldCo as a whole, this is often met with hostility by the seller, which may not want to disclose data relating to businesses that are outside the transaction perimeter. Tax due diligence on OldCo is also impractical if the businesses outside the transaction perimeter are larger than the target business that is being carved out.
In such circumstances, it is imperative for buyers to receive a full tax indemnity that is carefully drafted to capture liabilities of NewCo in its capacity as successor by law and any tax liabilities that may result from the carve-out itself.
Similar considerations apply to asset deals. While in an asset deal the acquiring company is not a successor by law, it may be held jointly liable for liabilities of OldCo up to the amount of the purchase price under general civil law principles. Such joint liability theoretically also encompasses tax. This is why a tax due diligence discussion is also on the table in asset deals.
VAT treatment of due diligence fees and transaction costs in share deals
With regard to the VAT treatment of due diligence and advisory fees in general, there are broadly two issues to consider:
Whether Greek or foreign VAT should apply to invoices from foreign suppliers (for example, invoices issued by foreign tax, financial and legal advisers); and
Whether Greek VAT would be recoverable for the acquiring Greek company.
The answer to the first question – at least in the case of EU suppliers – depends on whether the acquiring Greek company qualifies as a VAT entrepreneur. If the acquiring company qualifies as a VAT entrepreneur, then foreign suppliers will not charge VAT on their invoices and the acquiring company will reverse-charge Greek VAT, since most often the place of supply will be Greece under the general B2B rule.
The Greek tax administration does not envisage a separate VAT registration process. A Greek company registers for tax on incorporation and obtains a single tax identification number, which is valid for all tax areas, including VAT. In the context of its original tax registration, a Greek company generally self-assesses whether it is a VAT entrepreneur, without the Greek tax authority requiring proof of economic activity. The market practice is to declare that a holding company is a VAT entrepreneur, regardless of whether it engages in an economic activity. This option triggers VAT compliance obligations (such as the filing of VAT returns) and the obligation to reverse-charge Greek VAT on invoices from foreign suppliers.
As regards the second question (VAT recoverability), Greek VAT will only be recoverable to the extent that the acquiring company carries out a VAT-able activity. The acquiring company will usually not have any VAT deduction right if it is set up merely to acquire shares in a target, unless it carries out other activities such as providing management services. On this basis, Greek VAT on due diligence and advisory fees is usually a cost in most share deals.
Buyers should always carefully complete the appropriate tax forms in the context of the incorporation of their acquiring Greek company and obtain expert VAT advice. In many instances it will be more beneficial for a pure holding company that is set up as the acquisition vehicle to not register as a VAT entrepreneur, as this will create savings on VAT compliance costs and, in addition, foreign suppliers may charge VAT at their, often lower, local rates.
Corporate income tax deductibility of acquisition debt
Another area that requires careful consideration is the corporate income tax deductibility of interest on acquisition debt. The buyer is usually interested in receiving the maximum tax benefit in terms of corporate income tax deductions on interest paid to acquire the shares in the target.
If the company acquiring the shares is a pure holding company, it will usually derive tax-exempt dividends and capital gains income from the acquired business. Therefore, it will have no need to reduce its tax bill through deductible interest expenditure. Since Greece has no group tax regime, the acquisition debt can be deducted against the operating income of the target company only via a merger between the acquiring company and the target company.
The Greek income tax code provides that expenses, including interest expense, that relate to the acquisition of participations yielding tax-exempt dividends and capital gains are not tax deductible. This is a permanent disallowance and aims to prevent an alleged double benefit (exempt dividend income on the one hand and tax deduction of related interest expense on the other hand).
The subsequent merger of the acquiring company with the target company would presumably result in the double benefit falling away, since there is no longer any possibility to produce exempt dividend and capital gains income. For instance, the transfer of the acquired business would generate a taxable gain, not an exempt one, since it will take the form of an asset deal. However, there is no clear case law or guidance under the provisions of the income tax code as to whether interest should be deductible post merger of the acquiring and the target company.
From May 26 2022, expenses that relate to the acquisition of participations are deductible when:
The combined turnover of the acquiring and the acquired company exceeds €450,000 (approximately $483,000) according to their latest published annual financial statements or corporate income tax returns (as the case may be); and
The deductible amount does not exceed 30% of the average turnover of the acquiring company for the three years before the acquisition.
The above requirements/limitations do not apply if the acquiring company has not completed a full financial year or its sole activity is the holding of participations.
This provision has generated confusion between tax advisers, most notably because it fails to clarify how it interacts with the general provisions of the Greek income tax code; pursuant to which, expenses relating to the acquisition of participations yielding tax-exempt dividends and capital gains are non-deductible. Guidance by the tax authority is eagerly anticipated.
Assuming, however, that transaction costs, including interest on share acquisitions, can now be treated as prima facie deductible based on this new provision, the favourable deductibility position could remain post merger, adding more arguments in favour of buyers.