In our daily M&A tax practice it is common that a share purchase agreement for the acquisition of Dutch taxpaying corporates is concluded under Dutch law, whereas the parties involved are not all familiar with Dutch civil law or Dutch tax law. As a result, the parties can have opposing ideas on the required content and meaning of the tax clauses. It can, in such a situation, be a challenge to explain the necessity and the impact of the wording in the process of negotiations and it shows that working with a standard share purchase agreement (SPA) template is neither sufficient nor efficient.
In this article we will first highlight the aspects of interpretation of a SPA under Dutch law. We will continue by exploring the main considerations for tax clauses in a SPA that is drafted for the acquisition of Dutch taxpaying corporates (regardless of whether the SPA is governed by Dutch law).
SPA governed by Dutch law
In the process of drafting, it should already be taken into account whether any risk lies in the interpretation of the specific tax clause in case of a dispute between the parties. In this regard it is important to note that, under Dutch law, it will not always be the wording of the SPA that prevails.
Below, we will describe certain highlights with regard to the interpretation of the SPA and the tax indemnities or tax warranties included, without trying to be exhaustive.
Under the so-called Haviltex criterion that was introduced by the Dutch Supreme Court, the interpretation of an agreement that is governed by Dutch law will highly depend on the meaning that parties under the applicable circumstances reasonably could have granted to the wording and on what both parties reasonably could expect from each other.
In order to explore the underlying meaning of the parties, inter alia, the correspondence shared between the parties in the process of negotiations and drafting of the SPA will be of importance. It can therefore be that the interpretation ultimately granted to a specific tax clause in a SPA by a Dutch Court can deviate from the literal wording.
Over the years various nuances to this criterion have been made in case law. Important circumstances that impact the interpretation of a SPA are, inter alia, whether professional counsel has been involved in drafting the wording in a specific manner and the language in which the agreement has been drafted. The interpretation of terminology used, for example, in English language and law practice can impact the interpretation of such clause under Dutch law.
In order to mitigate the risks for either party involved, various items should be considered during the process of drafting and negotiations:
- To carefully discuss the key tax clauses, such as the tax indemnity, tax warranties and the tax charge at the effective date, to ensure that both parties have sufficiently reviewed whether their understanding of the wording is in line;
- To explain in writing the meaning of any mark-up made, as we often see that material mark-ups are made to the tax clauses during the final stages of the negotiations, whereby the final amendment is the result of commercial negotiations; and
- For SPAs drafted in English, it is advisable to include a specific reference in Dutch to the definition included in Dutch tax law.
Tax indemnities v tax warranties
The allocation of historic tax liabilities of the target to the seller can be done via either the inclusion of a tax indemnity or a tax warranty in the SPA.
The main difference between the two possibilities is that the purchaser in principle cannot rely on a tax warranty, in case information on a breach was disclosed during, for example, the tax due diligence process. Under Dutch law, the seller will have the obligation to provide the purchaser with sufficient information but in its turn, the purchaser will have the obligation to carefully review the tax position of the target company and the information provided. A full description of the thin line between the obligation to investigate and the obligation to provide information is outside the scope of this contribution, but certain concise guidelines can be provided based on case law by the Dutch Supreme Court. The purchaser may in principle rely on the information provided by the seller, but should raise additional questions if doubt arises. In case it is clear to the seller that the purchaser does not have a correct understanding of the tax position of the target company, the purchaser should be informed. If it fails to do so on key items, compensation can be claimed or, as an ultimate remedy, the SPA may be cancelled based on misrepresentation.
Furthermore, in cross-border transactions the scope of the tax indemnity often varies based on what both parties are accustomed to. It is possible that the tax indemnity is included as an obligation to reimburse the purchaser for any damage relating to the breach (in which case the amount of damages should first be determined), or as a covenant to pay the historic tax liability including, for example, penalties and interest charged.
Specific tax clauses to be included
Regardless of whether the SPA is governed by Dutch law, it should include specific tax clauses in case Dutch taxpaying entities are included in the target. Below, we will continue by exploring the main considerations for the tax clauses in such a SPA. These items should be taken into account when negotiating the SPA, regardless of whether you represent the purchaser or the seller.
Definition of taxes
The definition of taxes in the SPA should, as a general rule, cover all taxes payable by the target company, including penalties, interest charges and other costs for late payment or filing. The taxes should not only include direct corporate taxes, but also VAT and customs duties, wage tax and social security contributions, real estate transfer tax, and various municipal taxes.
An important item to consider is the qualification of any amount payable as a recharge of unlawful state aid (resulting from a tax benefit obtained). There is no consensus on whether such recharge falls under the scope of the definition of taxes and it is therefore advisable to include this with specific wording in the SPA.
Fiscal unity regime
Dutch taxpaying entities can be included in a fiscal unity (a tax group) for Dutch corporate tax and VAT purposes.
Entities included in a fiscal unity for corporate tax are considered as one taxpayer and the parent company is the designated taxpayer for the fiscal unity. In cases where a fiscal unity exists, at least the following items should be described in the SPA.
- One of the requirements for forming a fiscal unity is that the parent company holds at least 95% of the shares in the subsidiaries. The acquisition of a subsidiary within a fiscal unity will therefore result in an exit of that company from the fiscal unity. However, the timing of the exit may vary (e.g. at signing, closing, or the moment when the conditions precedent are fulfilled). In the SPA it can be included that certainty in advance is requested from the Dutch tax authorities;
- All taxable results are by law allocated to the designated taxpayer until the fiscal unity ceases to exist with regard to the target company. The calculation of the tax charge at the effective date should therefore be in line with the tax charge at the date of exit from the fiscal unity;
- Often, the fiscal unity will cease to exist at closing. In case of a 'locked box' transaction, the taxable results of the period between the effective date and closing should be for the account of the purchaser. Should the target company be included in a fiscal unity, the tax charge for this period is, by law, borne by the seller's group and a mechanism for a correction should be included in the SPA. The tax charge for the locked box period is furthermore affected by the tax treatment of leakage (e.g. non-deductible transaction costs). The description of leakage should therefore also include wording to cover the corporate tax on non-tax deductible leakage and non-recoverable VAT;
- Should the target company report losses available for carry forward at closing, a specific request should be filed with the Dutch tax authorities to allocate these losses to the target company post-closing. It is advisable to include the obligation to file such a joint request in the SPA; and
- Following the exit from the fiscal unity of the seller, the target company will be a stand-alone taxpayer or may be included in the fiscal unity of the purchaser's group. In both cases a stand-alone balance sheet for tax purposes of the target company upon exit should be drafted and it is market practice that the purchaser is provided with this balance sheet including explanatory notes. It is advisable to include this obligation and a dispute resolution in the SPA.
The tax regime for fiscal unities include various anti-avoidance provisions that may result in corporate tax being payable by the fiscal unity upon an exit. The corporate tax payable is in principle allocated to the parent company but the target company can claim a step-up for tax purposes and can depreciate in the following years. If this situation arises, the seller's group may require a remuneration for the tax charge.
Secondary tax liabilities
Although the parent company within a fiscal unity for corporate tax purposes is primarily liable for the corporate tax payable, subsidiaries remain jointly and severally liable for all corporate tax liabilities for the period in which they were included in the fiscal unity if the parent company does not pay the corporate tax due. This secondary liability should be covered by a tax indemnity in the SPA.
A fiscal unity for VAT purposes will also have the result that the companies are considered a single taxable entity for VAT purposes. Similarly to a corporate tax fiscal unity, the VAT due for a VAT fiscal unity is normally paid by a designated company (e.g. the parent company). In case a written decision on the existence of the fiscal unity is issued by the Dutch tax authorities and VAT would be underpaid, all grouped companies remain jointly and severally liable for all VAT liabilities for the period in which they were considered to be included in the fiscal unity. This secondary liability should be covered by a tax indemnity in the SPA. Although the VAT fiscal unity will likely end at closing due to a breach of the linkage requirements, the secondary liability will continue to build up until the Dutch tax authorities are informed in writing of the change to the fiscal unity. The Dutch tax authorities should therefore be notified of the change in a VAT group immediately following closing. Notwithstanding that parties generally send such notifications at their own initiative, it is also advisable to include this obligation in the SPA.
In addition, a secondary liability may by law arise for VAT and wage tax liabilities for hired personnel and contractors. These liabilities should be covered by the tax indemnity in the SPA.
Tax exposures as a result of the transaction
The Netherlands does not levy any stamp duty or capital taxes upon the transfer of shares in a Dutch company. The acquisition may, however, lead to Dutch real estate transfer tax of up to 6% in cases where companies qualify as a "real estate company" under Dutch tax law. This item should be covered during the due diligence and the SPA should clearly state which party will ultimately bear the costs of the real estate transfer tax. By law, the real estate transfer tax will be levied from the purchaser. In cases where the commercial negotiations result in the real estate transfer tax being borne by either the seller of the target company, the SPA should include specific wording on this matter.
The existence of an option plan may furthermore lead to a wage tax liability for the target company in cases where the option rights of its employees can be exercised at closing. Dutch wage tax may be due on the difference between the current value of the shares and the exercise price. Should the wage tax due be borne by the target company and not by the employee, the wage tax liability will further increase following a gross up. The existence and tax consequences of an option plan should be reviewed during tax due diligence and the SPA should clearly state which party will bear the costs of this exposure.
In international transactions, parties may be accustomed to different market practices regarding tax clauses in a SPA. A SPA drafted for the acquisition of Dutch taxpaying entities requires, however, specific considerations and it will therefore not be sufficient or efficient to use a standard SPA template. In cases where the SPA is governed by Dutch civil law, the due diligence performed and the understanding of all parties involved will furthermore impact the explanation of the wording of the SPA.
Frank Buitenwerf is a partner in the M&A team and corporate tax department of Taxand Netherlands. Frank has extensive experience in the tax structuring of domestic and cross-border acquisitions and reorganisations. He advises private equity funds, hedge funds and corporations on the tax impacts of a wide range of areas, including M&A deal structuring and tax due diligence. He has been admitted to the Dutch Bar and is also a member of the Dutch Association of Tax Advisers.
Roos Jongeneel is a senior associate at Taxand Netherlands, where she specialises in M&A and international corporate taxation. She is an experienced adviser in the field of M&A and corporate restructuring. Her clients are private equity funds, multinational enterprises and innovative start-ups. Roos is admitted to the Dutch Bar and a member of the Dutch Association of Tax Advisers.