TA X R E F E R E N C E L I B R A RY N O 1 1 2

Published in association with:

Arthur Cox
Asters
burckhardt
Fenwick & West
KPMG China
Slaughter and May
Taxand Netherlands

Mergers &
Acquisitions
Mergers & Acquisitions
3 China
Key tax challenges and opportunities facing China outbound investors
With increased in Chinese investment to all parts of the world, KPMG China’s John Gu, part-
ner, Michael Wong, partner, Alan O’Connor, director, and Karen Lin, director, take a look at
the tax challenges for businesses and best practices to ensure Chinese investors’ offshore struc-
tures are efficient.

9 Ireland
Ireland: Domestic dependability, international variability
Little has changed in Irish domestic tax law to affect M&A transactions in 2016. Nevertheless,
international developments, both political and fiscal, have made for a very different landscape,
impacting the type of deals being done and indeed the appetite for dealmaking, write Aisling
Burke and Caroline Devlin of Arthur Cox.

14 Netherlands
Tax clauses in a share purchase agreement under Dutch law
Frank Buitenwerf and Roos Jongeneel of Taxand Netherlands explore the main considerations
of the tax clauses in a share purchase agreement that are governed by Dutch law.

19 Switzerland
Swiss rules on withholding tax securities – discrimination of foreign investors?
Switzerland has been known for a long time as a popular location for international trading compa-
nies. Due to its business-friendly environment it has hosted all types of trading companies, from
headquarters of multinationals to small trading offices with only one employee, for decades.
Such companies may face a serious withholding tax risk, write Rolf Wüthrich and Noëmi Kunz-
Schenk of burckhardt.

24 Ukraine
M&A environment and trends in Ukraine
Asters’ Constantin Solyar, partner, Alexey Khomyakov, partner, and Pavlo Shovak, associate,
provide a breakdown of the tax work included in structuring Ukraine transactions and the influ-
ence of external regulations on deals.

28 UK
Will the shifting tectonic plates of international politics move the UK into the Atlantic?
Steve Edge and James Hume of Slaughter and May face down the biggest issues facing UK
taxpayers. Since the article they wrote last year was published, two things have loomed large on
the UK M&A horizon.

32 US
US international M&A tax developments
There has been a large number of US developments in the M&A area, particularly due to a
series of regulations and other guidance issued by the Obama Administration in its final two
months in office. Jim Fuller and David Forst of Fenwick & West explore what these develop-
ments mean for taxpayers.

W W W. I N T E R N AT I O N A LTA X R E V I E W. C O M 1
EDITORIAL

Editorial 8 Bouverie Street

elcome to International Tax Review’s
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Editor, TPWeek.com Salman Shaheen
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Reporter, TPWeek.com Lena Angvik

W M&A guide 2017. Transactional work

is the bread and butter for many tax
practices, and the market has bounced back
lena.angvik@euromoneyplc.com
Production editor João Fernandes
jfernandes@euromoneyplc.com
PublisherOliver Watkins
strongly to near its pre-financial crisis levels, owatkins@euromoneyplc.com
with 2016 being the third consecutive year in Associate publisher Andrew Tappin
which overall transactional volume surpassed atappin@euromoneyplc.com
$2.5 billion. Business manager Brittney Raphael
However, 2016 was quieter than the brittney.raphael@euromoneyplc.com
Joe Stanley-Smith
record-breaking year of 2015. The overall Senior marketing executive Sophie Vipond
Deputy editor sophie.vipond@euromoneyplc.com
number of deals worth more than $10 billion
International Tax Review Marketing executiveAnna Sheehan
was around 35% lower than 2015, with the
anna.sheehan@euromoneyplc.com
average deal size also lower at $115.4 million,
Subscriptions manager Nick Burroughs
but ‘mega deals’ such as the purchase of Time Warner by AT&T, Bayer’s nburroughs@euromoneyplc.com
$66 billion purchase of Monsanto and the $52 billion merger between Account manager Samuel Webb
Sunoco Logistics Partners and Energy Transfer Partners. Qualcomm’s samuel.webb@euromoneyplc.com
purchase of NXP Semiconductors for around $47 billion became the CEO, Legal Media Group Matthias Paul
largest semiconductor deal on record.
Moving into 2017, British American Tobacco’s $49 billion deal to © Euromoney Trading Limited, 2017. The copyright of all editorial
matter appearing in this Review is reserved by the publisher.
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Permanent establishment (PE) is a key consideration in many of the opinions or advice given. This publication is not a substitute for
jurisdictions covered in the M&A guide, as is the concept of state aid in professional advice on specific transactions.
the EU and surrounding countries. The UK’s exit from the European
Directors John Botts (Chairman), Andrew Rashbass (CEO),
Union has created shockwaves around the world, particularly in the UK Colin Jones, The Viscount Rothermere, Sir Patrick Sergeant,
itself and the EU, and the election of Donald Trump has thrown the Paul Zwillenberg, David Pritchard, Andrew Ballingal, Tristan Hillgarth
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2 W W W. I N T E R N AT I O N A LTA X R E V I E W. C O M

Key tax challenges and
opportunities facing China
outbound investors
With increased in
Chinese investment to
all parts of the world,
KPMG China’s John
Gu, partner, Michael
Wong, partner, Alan
O’Connor, director,
and Karen Lin,
director, take a look at
the tax challenges for
businesses and best
practices to ensure
Chinese investors’
offshore structures are
efficient.
W W W. I N T E R N AT I O N A LTA X R E V I E W. C O M
CHINA
hinese outbound investment had another record year in 2016, with
C announced deals by Chinese outbound investors increasing 118.7%
to $206.6 billion compared to 2015’s previous high of $94.4 bil-
lion. This stellar growth could see near-term moderation in the face of
recent changes, such as stricter regulatory scrutiny of certain transactions
and a tightening of controls on foreign exchange purchases and cross
border payments. However, these regulatory changes are not viewed as
entailing a shift in China’s national ‘going-out’ strategy and are not
expected to stop China actively engaging in outbound investment. With
growth continuing in Chinese investment to all parts of the world, we
take a closer look at the key tax considerations, and in particular, the tax
issues, for Chinese investors when structuring their overseas investments.
Tax can have a significant impact on the after-tax profits that
Chinese investors derive from investing overseas. Managing the total
tax cost on overseas investments, therefore, needs to be a key consider-
ation for Chinese investors to help maximise their after-tax return from
such investments.
Impact that tax can have on investment returns
Chinese tax resident companies are subject to worldwide taxation at a
standard People’s Republic of China’s (PRC) corporate income tax rate of
25%. This rate is generally lower than the effective corporate income tax
cost for most of the countries that ranked among the top destinations for
Chinese outbound direct investment (ODI) in 2016, particularly when
the effect of withholding taxes is taken into account – see Figure 1.
Therefore, one common focal point for outbound Chinese investors
is managing the level of withholding taxes imposed on the repatriation of
overseas investment earnings (seen in blue on Figure 1), either through
China’s double tax treaties (where a direct investment has been made
from China) or under the treaties of the jurisdiction of an offshore inter-
mediate holding company, where it is commercially justifiable to do so.
The ability of Chinese investors to establish and maintain the necessary
commercial substance for such structures to be effective may become
more challenging, as China and source countries continue to strengthen
their treaty anti-abuse mechanisms in line with the OECD’s BEPS Action
6 measures.
However, it is also important for Chinese investors to minimise
instances of possible double taxation in China on the earnings of the
overseas investment. There are three key features of the Chinese interna-
3
CHINA
Figure 1: Effective corporate income tax rates for top Chinese ODI destination countries in 2016
United States
Switzerland
Brazil
Israel
Germany
Finland
United Kingdom
Australia
Canada
0% 5% 10% 15% 20%
tional tax system that are relevant for Chinese outbound
investors in this regard – tax residence, taxation of foreign
sourced income and controlled foreign company rules. We
will look at each of these areas in more detail and the chal-
lenges that they present.
Tax residency of offshore entities
Under PRC tax law, an entity that is established outside of
the PRC can be subject to PRC corporate income tax on its
worldwide income if its “place of effective management” is
located in the PRC. Chinese authorities adopt a “substance
over form” approach when assessing whether an entity’s
“place of effective management” is located in the PRC.
Chinese companies must therefore be mindful to imple-
ment protocols to ensure their foreign subsidiaries do not
have their place of effective management in China and inad-
vertently become tax resident in China. Some of the busi-
ness protocols which could be considered include:
• Senior management responsible for daily production,
operation and management of the enterprise should not
perform their duties mainly in the PRC;
• Strategic, financial and human resources decisions should
not be made or approved in the PRC;
4 W W W. I N T E R N AT I O N A LTA X R E V I E W. C O M
PRC Corporate Income Tax
Corporate
Income Tax
(2016)
Withholding
Tax
25% 30% 35% 40% 45% 50%
Sources: Mergermarket, KPMG analysis
• Major properties, accounting records, company stamps,
board/shareholders’ meeting minutes, etc. should not be
kept in the PRC;
• The majority of directors (or equivalent) with voting
rights or senior management should not habitually reside
in the PRC.
These protocols are important because a change in resi-
dence of the foreign subsidiary could have a number of neg-
ative implications, such as triggering exit taxes under the tax
laws of the overseas country, the foreign subsidiary’s profits
becoming subject to PRC corporate tax at 25%, and/or the
foreign subsidiary no longer being able to access double tax-
ation agreements (DTAs) in its country of incorporation.
However, there may also be certain situations where it is
beneficial for a non-PRC company to apply to be deemed a
PRC-resident company, which is possible under Guoshuifa
(2009) No. 82 or Notice 82. One such situation could be
under a PRC ‘sandwich’ structure as shown in Figure 2.
A PRC ‘sandwich’ arises where one Chinese operating
company (PRC Sub) is held by another Chinese parent
company (PRC Parent) through one or more overseas sub-
sidiaries. The profits of the PRC Sub will be fully subject to
tax again when they are received by the PRC Parent ‘via’ the

offshore company(s) because the Chinese tax paid by the
PRC Sub is not a foreign tax for tax credit purposes. Making
Figure 2: PRC “sandwich” for PRC FTC purposes
the non-Chinese intermediate holding company(s) tax resi-
dent in the PRC can help to avoid double PRC taxation on
the PRC Sub’s earnings when they are repatriated back to
the PRC Parent, because dividends paid from one Chinese
resident company to another are tax exempt.
A second situation might be where, for non-tax rea-
sons, a Chinese investor has incorporated an offshore
company to make its overseas investments. We see Hong
Kong commonly used in this way as it helps the Chinese
investor to recycle funds from the initial investment for
use in other offshore acquisitions and to facilitate future
listings. As the funds are outside of China, they will not
be subject to PRC foreign exchange and investment
approvals. Deeming the foreign holding company as a
PRC tax resident may be a way to avoid an offshore com-
pany adding an additional tier to the corporate structure
for the purposes of claiming foreign tax credits (discussed
in more detail below), and should not adversely impact
the offshore company’s ability to claim benefits under
China’s double tax treaties.
PRC foreign tax credits
The second key area is China’s system for relieving double
tax on foreign sourced income. Although many capital
exporting countries use the exemption method for taxation
of foreign sourced dividends and capital gains, China still
operates a credit system. This can lead to potential double
taxation if the Chinese investor is unable to claim a credit for
foreign taxes paid on foreign sourced earnings.
Dividends received by a PRC entity from its overseas
investments are generally subject to PRC corporate tax at
25%. However, a PRC entity will be entitled to credit the
foreign taxes paid, which are attributable to such dividends
(e.g., withholding tax on the dividend and income taxes
paid on the underlying profits of the foreign entity paying
the dividend), provided certain conditions are satisfied.
It is important to ensure that foreign tax credits can be
claimed when profits are repatriated to the PRC to avoid
potential double taxation on such profits. For example,
profits derived from a PRC entity’s Australian subsidiary
would be subject to 30% Australian income tax but no addi-
tional PRC income tax would be incurred where a foreign
tax credit can be claimed i.e., the profits would be effectively
taxed at 30%. Whereas, if no foreign tax credit were allowed,
the profits would be subject to tax in both Australia and the
PRC, effectively taxing them at 47.5%.
One of the key constraints for claiming foreign tax credits
is the limitation on the number of ‘layers’ of foreign sub-
sidiaries, with an indirect credit only able to be claimed
down to the third tier of foreign subsidiaries (certain groups
of specified enterprises are able to claim indirect credits up
W W W. I N T E R N AT I O N A LTA X R E V I E W. C O M
CHINA
PRC Investor
Dividend
Non-PRC HoldCo
Dividend
PRC Sub Non-PRC Subs
to five tiers). This limitation means that Chinese investors
need to pay close attention to both the legal structure of
overseas companies, which they are looking to acquire, and
the benefits vs costs of using an offshore investment plat-
form to acquire such targets. Where an offshore holding
structure pushes the tax-paying operating companies of the
foreign target beneath the third tier of offshore subsidiaries,
the benefits from accessing a more favourable tax treaty will
need to be balanced with the potential additional tax cost
that may arise due to the inability to claim a credit for for-
eign taxes paid for PRC tax purposes on profit repatriations.
Alternatively, a restructure of the overseas target group to
“flatten” the number of tiers of foreign subsidiaries may be
required, which might trigger upfront tax and non-tax costs
for the investor.
Controlled foreign companies
Article 45 of the PRC Corporate Income Tax law is the
PRC’s controlled foreign company regime. Where an off-
shore entity is considered a controlled foreign company
under article 45, the PRC resident shareholder will be
required to include an amount equal to its effective inter-
est in the foreign enterprises’ undistributed profits as a
deemed dividend when computing their own PRC taxable
income. In other words, the profits derived by its foreign
subsidiaries which are kept outside of the PRC will still be
taxable in the PRC notwithstanding that they have not yet
been repatriated.
5
CHINA
John Gu
Partner, tax
KPMG China
8th Floor, Tower E2, Oriental Plaza
Beijing 100738, China
Tel: +86 10 8508 7095
john.gu@kpmg.com
John Gu is a partner and head of deal advisory, M&A tax and
head of private equity for KPMG China. He is based in Beijing
and leads the national tax practice serving private equity
clients. John focuses on regulatory and tax structuring of
inbound M&A transactions and foreign direct investments in
the People’s Republic of China (PRC). He has assisted many off-
shore funds and Renminibi (RMB) fund formations in the PRC
and has advised on tax issues concerning a wide range of
inbound M&A transactions in the PRC in the areas of real
estate, infrastructure, sales and distribution, manufacturing, and
financial services.
Broadly, article 45 will apply if a foreign entity is
controlled by PRC tax residents; if the effective foreign
tax burden on the profits of the foreign entity is less than
half of the PRC corporate tax rate (i.e., less than 12.5%);
and if the foreign entity fails to distribute its profits
without a legitimate commercial reason or reasonable
operational need.
Managing the application of article 45 to foreign sub-
sidiary entities is crucial to managing PRC tax payments
and overall cash flow concerns, particularly where the off-
shore operations are structured through entities located in
jurisdictions which effectively tax the profits at a rate
lower than the PRC. Typically, PRC entities with sub-
sidiaries in such jurisdictions would need to demonstrate
legitimate commercial reasons or some reasonable opera-
tional need for retaining funds and not distributing profits
back to the PRC, for example, reinvestment of the funds
into underlying business or business expansion.
China issued, in draft form, certain revisions to its con-
trolled foreign companies (CFC) rules in 2015, which
would see some tightening around the determination of
‘control’ for CFC purposes. It also proposed the removal
or amendments to certain exclusions provisions from the
application of the CFC rules. The Chinese authorities
have not yet finalised these new rules, but these are antic-
ipated to be issued sometime in 2017.
We have seen the Chinese authorities invoke the CFC
rules on a limited number of enforcement cases in the last
few years. However, we expect this issue will become more
6 W W W. I N T E R N AT I O N A LTA X R E V I E W. C O M
Michael Wong
Partner, tax
KPMG China
8th Floor, Tower E2, Oriental Plaza
Beijing 100738, China
Tel: +86 10 8508 7085
michael.wong@kpmg.com
Michael Wong is a partner and head of the outbound tax prac-
tice for KPMG China. He is based in Beijing and leads the
national outbound tax practice serving state owned and pri-
vately owned PRC companies in relation to their outbound
investments. Michael has extensive experience leading global
teams to assist Chinese state-owned and privately-owned
companies conduct large-scale overseas M&A transactions in
various sectors including energy and power, mining, financial
services, manufacturing, infrastructure and real estate.
closely scruitinised once revised rules are finalised and
published.
New tax reporting obligations
In addition to managing the overseas and PRC tax costs on
its overseas investments, Chinese investors should take
notice of new tax reporting obligations, which could poten-
tially cover their overseas investments. Last year, the State
Administration of Taxation issued an announcement that
updated China’s transfer pricing documentation require-
ments and introduced new country-by-country reporting
(CbCR) requirements for Chinese groups and their consol-
idated subsidiaries (Announcement 42: The Enhancement
of the Reporting of Related Party Transactions and
Administration of Contemporaneous Documentation).
The new Chinese CbCR obligations will be triggered
where the Chinese investor is the ultimate holding company
for a multinational group, which has a consolidated revenue
of CNY 5.5 billion ($800 million) in its previous fiscal year
exceeds, roughly equal to the €750 million threshold under
BEPS Action 13. The new CbCR requirements will apply
from the 2016 fiscal year onwards and the CBC report will
need to be submitted annually together with the Chinese
investor’s income tax return (due in May of the following
year). As such, Chinese investors who have completed or are
considering making overseas investments that will result in
the group exceeding the CBC reporting threshold should
take appropriate steps to compile and report the required
data.
CHINA
Alan O’Connor
Director, tax
KPMG China
8th Floor, Tower E2, Oriental Plaza
Beijing 100738, China
Tel: +86 10 8508 7521
alan.oconnor@kpmg.com
Alan O’Connor joined KPMG Hong Kong from Australia in 2000
and became a director in 2013. He worked in Hong Kong for
more than 10 years before relocating to Beijing in 2011, where
he continues to provide tax services to Chinese outbound
investors. He has extensive experience providing due diligence
and transaction related tax advisory services to major Hong
Kong and Chinese based clients, and has been involved in
international tax planning projects, merger and acquisition
transactions and due diligence exercises involving Asia, Europe
and North America.
Closing remarks
Managing PRC tax issues can be just as important as foreign
tax considerations when implementing an effective holding
structure for overseas investment. Chinese investors should
8 W W W. I N T E R N AT I O N A LTA X R E V I E W. C O M
Karen Lin
Director, Tax
KPMG China
50th Floor, Plaza 66
1266 Nenjing West Road
Shanghai 200040, China
Tel: +86 21 2212 4169
karen.lin@kpmg.com
Karen joined KPMG Hong Kong in 2005 and KPMG Beijing in
2011. Since 2011, Karen has been specializing in international
taxation and assisting Chinese multinational corporations with
outbound M&A transactions, including international tax structur-
ing, tax due diligence and transaction related tax advisory serv-
ices. During 2014 and 2015, Karen joined a NASDAQ listed multi
national media group focusing in managing the group’s taxa-
tion matters covering the Asia Pacific region.
be careful in observing the relevant PRC tax rules to ensure
that their offshore structures are effective and can therefore
achieve their intended result of maximising the after-tax
returns from such investments.

Ireland: Domestic dependability,
international variability
Little has changed in
Irish domestic tax law
to affect M&A
transactions in 2016.
Nevertheless,
international
developments, both
political and fiscal,
have made for a very
different landscape,
impacting the type of
deals being done and
indeed the appetite for
dealmaking, write
Aisling Burke and
Caroline Devlin of
Arthur Cox.
W W W. I N T E R N AT I O N A LTA X R E V I E W. C O M
IRELAND
n an annual update on Ireland’s international tax strategy, Ireland’s
I Minister for Finance confirmed the government’s “rock solid commit-
ment to the 12.5% corporation tax rate”. So, while there is no inten-
tion to change the domestic tax offering, Ireland must still conform with
the EU, US and OECD tax reform. The question is how competitive it
can remain in the course of doing so?
US inversions
Ireland has been a favoured jurisdiction in recent years for multinational
groups seeking the optimal location for operational and tax purposes.
While the key reasons for Ireland’s popularity remain unchanged (low
corporation tax rate, comprehensive network of double tax treaties,
straightforward, certain and efficient tax system, EU membership, com-
mon law jurisdiction, English speaking), the tightening of US Treasury
rules aimed at curbing corporate inversions slowed down activity in
2016. The new rules in particular targeted, and succeeded in terminat-
ing, the proposed $160 billion merger of Pfizer and Allergan. However
inversions continue to be viable for deals with a different fact pattern, as
evidenced by the completion of the Johnson Controls merger with Irish-
based Tyco in September 2016.
European M&A
European groups choosing Ireland as a parent company location is
increasingly becoming a feature of the Irish corporate and tax law land-
scape. In particular, pharmaceutical companies such as Cortendo/
Strongbridge and Flamel/Avadel are relocating their parent companies
to Ireland by way of cross-border mergers or other methods. While some
of the same tax features that appeal to US multinationals are also relevant
in an EU context, Ireland’s access to US and international capital markets
is proving a strong draw. Shares in Irish-incorporated parent companies
that are listed on a stock exchange in the US or Canada can be treated as
equivalent to American depositary receipts (ADRs) so that transfers
cleared through the depository trust company (DTC) are not subject to
stamp duty.
Increased European M&A activity is expected in Ireland in the wake
of Brexit. For example, in a 50:50 EU-US merger with a dual listing in
the EU and the US, a third jurisdiction is often sought to locate domicile
of the merged entity. While to date, the UK may have been competitive
in terms of its offering, Ireland is now the only country ticking all the
9
IRELAND
Aisling Burke
Partner, tax group
Arthur Cox
Tel: +353 (0)1 618 1113
aisling.burke@arthurcox.com
Aisling Burke is a partner in the tax group of Arthur Cox and
advises multinationals and corporate clients on tax structuring,
inward investment, cross-border tax planning and the tax
aspects of a wide variety of transactions including M&A (both
public and private), migrations, reorganisations and financing
arrangements. Aisling has particular expertise in advising on
the tax consequences of doing business in and from Ireland.
Aisling also advises banks, insurance companies, investment
funds and asset management companies on financial services
taxation including advice on debt issuance programmes, struc-
tured finance, derivatives and securitisation transactions. She
has frequently advised on the structuring of property related
transactions in recent years.
Aisling has extensive experience of dealing with the Irish
Revenue Commissioners in contentious and non-contentious
matters.
boxes as an EU/EEA member state, which is English speak-
ing, and which is a common law jurisdiction offering a
favourable corporate tax regime.
Brexit
On the subject of Brexit, midmarket M&A activity in
Ireland slowed down in 2016 as a result of the uncertainty
surrounding the UK’s exit from the EU. However, this
should pick up again in 2017 as UK companies seek suit-
able Irish acquisition targets to allow access to the EU sin-
gle market. In particular, such UK companies may wish to
complete mergers under the Cross-Border Merger
Directive before the UK’s exit from the EU. Irish-indige-
nous companies may also take advantage of the relatively
weak sterling to make value acquisitions in the UK, which
could have the added benefit of avoiding potential customs
duties and tariffs when selling into the UK in the future.
However, the principal area of Brexit-related activity in
Ireland will be the financial services industry, with UK
financial service providers that require continued access to
the EU/EEA markets looking to relocate to an EU mem-
ber state such as Ireland.
Ireland has extensive domestic law exemptions from
interest withholding tax which apply without recourse to a
10 W W W. I N T E R N AT I O N A LTA X R E V I E W. C O M
treaty and without the need to complete any procedural for-
malities. In addition, Ireland continues to benefit from the
provisions of the EU Parent-Subsidiary Directive and the
EU Interest and Royalties Directive, as well as from its wide
network of tax treaties. Ireland’s securitisation vehicle, the
Section 110 company, was made BEPS-compliant in 2011
by providing that no deduction is available for profit partic-
ipating interest unless the interest is subject to tax in an
EU/treaty partner country.
Politically speaking, Ireland and the UK were often allies
in the area of tax policy at EU level, for example in opposing
proposals for a common consolidated corporate tax base
(CCCTB) when mooted in 2011. Now that such proposals
have been revived, Ireland finds itself lacking a friend in the
EU with the political influence and power of the UK.
US treaty negotiations
The US published its updated model tax treaty (MTT) in
February 2016 and Ireland’s Department of Finance
announced in August 2016 that it was entering into a rene-
gotiation of the Ireland-US tax treaty. Ireland’s existing
treaty with the US dates back to 1997 and differs signifi-
cantly from the provisions of the updated US MTT. The
updated US MTT is not drafted with a small, open-econo-
my treaty partner in mind. In particular, there is concern
that the limitation on benefits (LOB) clause could reduce
the ability of Irish companies to qualify for treaty benefits in
circumstances where there is no tax policy justification for
such a restriction and no tax avoidance.
However, since the announcement of the renegotiation a
new administration has entered into power in the US and
the OECD has published its multilateral instrument (MLI)
as part of the BEPS Project. The MLI aims to implement
the tax treaty-related measures of the BEPS Project and will,
once ratified, simultaneously amend multiple bilateral
treaties. Therefore, the appetite for negotiating a new bilat-
eral treaty between Ireland and the US may have waned and
it is hoped that cross-border investment in Ireland will con-
tinue under the more certain and appropriate provisions of
the MLI.
BEPS
The OECD BEPS outputs are, by the OECD’s own admis-
sion, ‘soft law’ legal instruments. However, while the
reports, in themselves, do not have direct legal effect, the
pace at which various measures have been implemented by
participating countries into domestic laws has made the
project a resounding success.
Ireland has been a consistent supporter of the BEPS Project
and early adopter of BEPS measures. Ireland has a substance-
based system of taxation which has meant that foreign direct
investment has always translated to job creation. As a result
Ireland has a highly skilled cluster of support services for the

pharmaceutical, medical devices, technology, financial servic-
es and aircraft leasing industries. It is anticipated that the
focus of the BEPS Project on substance will attract further
foreign direct investment and jobs to Ireland.
In terms of the implementation of BEPS measures to
date, Ireland introduced country-by-country reporting obli-
gations with effect from fiscal year beginning January 1
2016, and we understand that Ireland will sign up to the
MLI in Paris in June 2017 following its recent submission
of a list of qualifications to the MLI.
While other measures have not yet been introduced into
Irish law, buyers in the Irish M&A market will want to
ensure that any potential acquisition is BEPS-proofed for
the future. In particular it will be essential that sufficient
substance is located in Ireland to support the business of
Irish target companies. It is important that employees in
Ireland undertake the activities purported to be undertaken
by their employer. If Irish companies outsource certain
activities, it is important that their Irish-based employees
actively oversee the performance of those activities.
Furthermore if Irish companies have employees who fulfil
employment duties outside Ireland, the nature and extent of
those duties must be assessed in order to determine whether
companies have a permanent establishment (PE) in another
jurisdiction.
Documentation of Irish target companies relating to IP
arrangements and intra-group financing arrangements must
be reviewed to ensure compliance with updated OECD
transfer pricing guidelines. Tax-efficient intra-group financ-
ing must also be examined with a view to identifying
arrangements that might fall foul of interest limitation rules
(discussed further in the context of EU ATAD below).
Finally, Irish Revenue tax opinions/confirmations issued
to Irish companies must obviously be examined by any
potential buyer. While in Ireland these are viewed as non-
binding opinions that merely interpret and apply the law, the
European Commission may take a different view of such
opinions. Irish Revenue has recently confirmed its policy
that all of its opinions/confirmations are subject to a maxi-
mum validity period of five years, or such shorter period as
may have been specified when providing the opinion/con-
firmation, so the expiry date of opinions/confirmations
should also be checked in due diligence.
EU Anti-Tax Avoidance Directive (ATAD)
The EU plans for the ATAD to be the vehicle by which it
co-ordinates implementation of BEPS measures across its
member states. The ATAD was proposed in January 2016
and adopted at the EU Council in July 2016. Unlike soft-
law BEPS outputs, ATAD minimum standards must be
transposed into domestic law by specific deadlines:
• interest limitation rules (January 1 2019 unless a member
state has existing national-targeted rules preventing
W W W. I N T E R N AT I O N A LTA X R E V I E W. C O M
IRELAND
Caroline Devlin
Partner, co-chair tax group
Arthur Cox
Tel: +353 (0)1 618 0585
caroline.devlin@arthurcox.com
Caroline Devlin is co-chair of the tax group at Arthur Cox. She
has extensive experience in advising both domestic and inter-
national companies on structuring their tax affairs for various
types of transactions. Her experience covers a wide variety of
transactions including M&A, reorganisations, tax planning
involving maximising IP assets and advising on efficient cash
extraction methods.
Caroline is very experienced in advising international clients
on doing business in and through Ireland. She acts for a broad
range of international clients including multinational corpora-
tions, private equity houses, hedge funds and financial institu-
tions as well as growth and emerging companies.
Caroline is a member of the Irish Tax Institute’s Tax
Administration Liaison Committees, which deal with various tax
issues including the implementation of BEPS and the ATAD in
Ireland. Caroline is particularly experienced in advising on
financing structures, including aircraft and equipment leasing.
Caroline also leads Arthur Cox’s Asia Pacific group.
BEPS risks which are equally effective to the ATAD rules,
in which case the interest limitation rules must be imple-
mented by January 1 2024);
• controlled foreign company (CFC) rules (January 1
2019);
• hybrid mismatch rules (January 1 2019);
• exit tax (January 1 2020); and
• general anti-abuse rule (GAAR) (January 1 2019).
As alluded to above in the context of BEPS measures, the
financing of acquisitions and the viability of existing intra-
group financing arrangements will be impacted by the intro-
duction of fixed-ratio interest limitation rules in Ireland,
which hitherto did not apply. Net interest costs (being gross
deductible borrowing costs less taxable interest income) are
only deductible up to 30% of the taxpayer’s earnings before
interest, taxes, deductions and amortisation (EBITDA).
Member states may opt, inter alia, for a group exclusion
provision that allows taxpayers to deduct net interest
exceeding the 30% threshold if their net interest to EBITDA
ratio is no higher than the consolidated group’s net interest
to EBITDA ratio. Ireland has indicated it intends to avail of
the deferred implementation date for interest limitation
11
IRELAND
rules of January 1 2024 although it is unclear whether
Ireland’s existing interest deductibility rules would satisfy
the conditions of the derogation, without further guidance
on the interpretation of those conditions.
While interest limitation rules will represent a new Irish
tax measure, their impact may be limited due to the fact that
Irish companies that form part of a worldwide group do not
generally carry a lot of debt. Interest deductions are often
availed of in jurisdictions which have a higher tax rate than
12.5%.
The introduction of anti-hybrid rules could make Ireland
a more attractive location for treasury companies within a
group. With double deduction or deduction/non-inclusion
structures in other jurisdictions no longer viable, tax at 12.5%
on the profits of financing activities is a competitive proposal.
While the introduction of CFC rules will be a new depar-
ture for Ireland, locating a holding company in a low-tax
jurisdiction such as Ireland may be efficient under the new
EU-wide CFC regime. The CFC rules re-attribute certain
types of income earned by low-taxed controlled subsidiaries
(or PEs) to the parent holding company. In summary, a
CFC is a more than 50% controlled subsidiary where the
actual corporate tax paid by that subsidiary is lower than the
12 W W W. I N T E R N AT I O N A LTA X R E V I E W. C O M
difference between the corporate tax that would have been
charged in the parent holding company jurisdiction and the
actual corporate tax paid by the subsidiary. If a subsidiary is
classified as a CFC, its undistributed passive income can be
attributed to its parent company unless it carries on substan-
tive economic activity supported by staff, equipment, assets
and premises. Therefore while the new CFC rules may not
greatly impact Irish holding companies, where groups have
Irish subsidiaries that avail of the 12.5% rate, those Irish sub-
sidiaries should carry on substantive economic activity in
Ireland. Irish Revenue places particular emphasis on the
level of activity being carried on in Ireland by employees
with the requisite skills and experience when considering
whether the 12.5% rate of corporation tax on trading
income applies and therefore Irish trading subsidiaries
should meet the substantive economic activity test.
Conclusion
While constancy is at the core of Irish domestic tax policy,
Ireland must adapt to conform to international tax reform.
Ireland’s focus will be on availing of the opportunities aris-
ing from uncertainty overseas and remaining a competitive
location for inward investment and M&A activity.
NETHERLANDS
Tax clauses in a share
purchase agreement under
Dutch law
Frank Buitenwerf and
Roos Jongeneel of
Taxand Netherlands
explore the main
considerations of the
tax clauses in a share
purchase agreement
that are governed by
Dutch law.
14 W W W. I N T E R N AT I O N A LTA X R E V I E W. C O M
n our daily M&A tax practice it is common that a share purchase
I agreement for the acquisition of Dutch taxpaying corporates is con-
cluded under Dutch law, whereas the parties involved are not all famil-
iar 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 nei-
ther 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 consider-
ations 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 interpre-
tation of the SPA and the tax indemnities or tax warranties included,
without trying to be exhaustive.
General interpretation
Under the so-called Haviltex criterion that was introduced by the
Dutch Supreme Court, the interpretation of an agreement that is gov-
erned 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 negoti-
ations 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 effec-
tive 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 war-
ranty, in case information on a breach was disclosed dur-
ing, 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 informa-
tion 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 tar-
get 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
W W W. I N T E R N AT I O N A LTA X R E V I E W. C O M
NETHERLANDS
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 spe-
cific 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 fis-
cal 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 condi-
tions precedent are fulfilled). In the SPA it can be includ-
ed 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
15
NETHERLANDS
Frank Buitenwerf
Taxand Netherlands
Tel: +31 20 435 6499
frank.buitenwerf@taxand.nl
www.taxand.nl
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.
for the account of the purchaser. Should the target com-
pany be included in a fiscal unity, the tax charge for this
period is, by law, borne by the seller’s group and a mech-
anism 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 cor-
porate tax on non-tax deductible leakage and non-recov-
erable 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 corpo-
rate tax payable is in principle allocated to the parent com-
pany 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 remuner-
ation for the tax charge.
16 W W W. I N T E R N AT I O N A LTA X R E V I E W. C O M
Roos Jongeneel
Taxand Netherlands
Tel: +31 20 435 6400
roos.jongeneel@taxand.nl
www.taxand.nl
Roos Jongeneel is a senior associate at Taxand Netherlands,
where she specialises in M&A and international corporate taxa-
tion. 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.
Secondary tax liabilities
Although the parent company within a fiscal unity for cor-
porate 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 desig-
nated 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 con-
tinue 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 notifica-
tions 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 con-
tractors. These liabilities should be covered by the tax
indemnity in the SPA.
NETHERLANDS
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 trans-
fer 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
18 W W W. I N T E R N AT I O N A LTA X R E V I E W. C O M
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.
Closing remarks
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 there-
fore not be sufficient or efficient to use a standard SPA tem-
plate. 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.

Swiss rules on withholding tax
securities – discrimination of
foreign investors?
Switzerland has been
known for a long time
as a popular location for
international trading
companies. Due to its
business-friendly
environment it has
hosted all types of
trading companies,
from headquarters of
multinationals to small
trading offices with
only one employee, for
decades. Such
companies may face a
serious withholding tax
risk, write Rolf Wüthrich
and Noëmi Kunz-
Schenk of burckhardt.
W W W. I N T E R N AT I O N A LTA X R E V I E W. C O M
SWITZERLAND
ften, the origin, the purchaser as well as the transporter of goods
O traded by Swiss companies are outside of Switzerland. In such sit-
uations, the inventory of Swiss trading companies is normally not
stored in Swiss warehouses, but anywhere in the world, and the receiv-
ables from the sales by the Swiss trading company are to a large extent
receivables against non-Swiss domiciled parties.
One might intentionally establish a Swiss trading company or one
might take over such a company in the course of an acquisition. Various
articles described the advantages of Swiss trading companies, be it for
taxes, employment, legal certainty, living standard for the employees,
etc., but also all kind of pitfalls (partial liquidation, transposition, etc.) to
be avoided not to trigger Swiss income taxes, withholding tax or stamp
duties. Not often described, however, was a Swiss measure under which
a Swiss company may be forced to provide a security for possible future
withholding taxes by means of a cash payment to or a guarantee on
behalf of the Swiss Federal Tax Administration (SFTA). This article
describes the situation in which a non-Swiss controlled Swiss company
can be forced to grant a security for Swiss withholding taxes due in the
future. We are of the opinion that – in a non-Swiss parent – Swiss sub-
sidiary situation – a decision of the SFTA to provide a withholding tax
security results in a breach of the non-discrimination clause similar to
Art. 24 para. 5 OECD Model Convention (OECD MC) as contained in
the Swiss tax treaties. The SFTA should therefore consider its treaty obli-
gations when applying the domestic legislation on providing withholding
tax securities not to breach the applicable non-discrimination clauses and
refrain from requesting a withholding tax security.
Let’s assume the following example: A Swiss trading company
(SwissCo) has assets of $1,000: Cash at Swiss bank of $100, receivables
against non-Swiss resident clients of $600 and goods at warehouses out-
side of Switzerland of $300. On the liabilities side it has a formal capital
of $100 and profits carried forward of $900. SwissCo does not distribute
any dividends as it needs its cash to finance its ongoing business activity.
SwissCo is now sold from SwissHoldCo, a Swiss holding company to
USHoldCo, a US holding company.
Swiss dividend withholding tax of 35%
In Switzerland, dividend distributions are, in principle, subject to divi-
dend withholding tax of 35%. To domestic intragroup dividend distribu-
tions the reporting procedure can be applied and the Swiss withholding
19
SWITZERLAND
tax is not levied. Furthermore, if a non-Swiss parent compa-
ny holding a qualifying participation in a Swiss subsidiary is
located in a state with which Switzerland has concluded a
tax treaty, then the Swiss subsidiary may be allowed to apply
directly the reduced treaty tax rate (normally 0% or 5% for
dividends from qualifying participations) if the reporting
procedure is approved by or at least the request to apply the
reporting procedure is filed with the SFTA within 30 days
following the shareholder meeting deciding the dividend.
Thus, as a principle, Switzerland still knows a dividend with-
holding tax of 35% and the reporting procedure, which (par-
tially) releases a company from the levy of the withholding
tax in a parent – subsidiary situation, must still be consid-
ered the exemption from the levy of the withholding tax.
If said withholding tax principles are applied to our exam-
ple then the following results: In principle, SwissCo has
retained earnings of $900 and must pay Swiss withholding tax
of $315 (35% of $900) in case of distribution of the retained
earnings or in case of liquidation of SwissCo. As USHoldCo
can apply the tax treaty with Switzerland, the Swiss withhold-
ing tax is reduced from 35% to 5% and SwissCo must pay a
withholding tax of $45 if the reporting procedure is approved
in advance by the SFTA. If the reporting procedure does not
apply (e.g. because no request was filed in advance or because
the US parent does not qualify for the reporting procedure as
it is treated as an S corporation for US tax purposes), the full
withholding tax of 35% will be levied.
Obligation to provide withholding tax security
Art. 47 of the Swiss federal law on withholding taxes
(WHTL) states that the SFTA can ask a corporate taxpayer
to provide a security for withholding taxes, interest and fur-
ther expenses, even if such withholding taxes, interest or
expenses are neither assessed nor due but solely as the col-
lection of the future withholding tax seems to be at risk.
Irrespective of the possibility of appealing against a decision
of the SFTA to provide a withholding tax security, such a
decision of the SFTA is immediately enforceable and the
amount to be secured can be enforced by the SFTA against
the Swiss company. By application of Art. 47 WHTL the
SFTA may therefore request from SwissCo a security of
$315 (35% of $900). As the US-Swiss tax treaty previews a
reduced dividend withholding tax of 5% SwissCo may, in
practice, request that the security shall be reduced to $45
(5% of $900) instead of $315. Such a reduction of the secu-
rity will only be granted if SwissCo disposes of a permission
issued by the SFTA to apply directly the reduced dividend
withholding tax under the tax treaty. If such permission is
not issued, then no reduction will be granted and the secu-
rity equal to 35% of the distributable retained earnings will
be due. The amount of the security to be provided will be
reviewed and adopted on an annual basis by the SFTA based
on the effective facts and circumstances.
20 W W W. I N T E R N AT I O N A LTA X R E V I E W. C O M
For withholding tax security purposes Art. 9 of the ordi-
nance to the WHTL (WHTO) contains a special provision
applicable to non-Swiss controlled entities. The provision
states that the collection of the withholding tax may be
deemed to be at risk if:
• More than 80% of the capital in a Swiss company is
directly or indirectly held by persons with residence out-
side of Switzerland,
• More than 50% of the assets of the company are located
outside of Switzerland, and
• The Swiss company does not distribute on an annual
basis an adequate dividend.
For the purpose of Art. 9 WHTO receivables or rights
against non-Swiss resident persons are considered assets
located outside of Switzerland. A dividend distribution is
deemed to be adequate if at least 6% of the distributable
profits of the Swiss company are distributed every year.
If the three abovementioned conditions are met, the col-
lection of the Swiss withholding tax may be deemed to be at
risk by the SFTA and the SFTA may assess the provision of
a security by the Swiss company. This security must be paid
immediately and can be provided either by cash payment or
by bank, insurance or third party guarantee on behalf of the
SFTA. It should be noted that board members of a company
may, under certain circumstances, be kept personally liable
for withholding taxes, including the providing of a security.
Art. 9 WHTO is drafted as a ‘can’, and not as a ‘must’
provision. If the requirements of Art. 9 WHTO are fulfilled
the SFTA can, but does not absolutely have to ask for a secu-
rity. There is room for discretion for the SFTA when taking
a decision. As there is room for discretion the effective situ-
ation of a company must be considered taking into account
all facts and circumstances when deciding whether or not a
security is justified. It must especially be judged whether or
not there is a real danger that the future collection of the
withholding tax is at risk. Therefore, even if the before cited
three conditions of Art. 9 WHTO are met, the necessity of
providing a security should not automatically be deemed to
be fulfilled. This is, also according to Swiss literature, the
reason why the legislator drafted Art. 9 WHTO as a ‘can’
provision.
In practice, however, it looks like tax inspectors in
charge do not often make use of their freedom of discre-
tion, when the three requirements are met, but rather
threaten taxpayers with the obligation to either provide a
security or to distribute an adequate dividend. Normally,
the concerned group will solve the problem by deciding a
dividend distribution of at least 6% of the distributable
equity. Especially if the 0% withholding tax rate under a
tax treaty is applicable, dividends can be distributed with-
out any Swiss withholding tax consequences. There are,
however, also situations, under which the Swiss dividend
withholding tax is not reduced to 0%, as it is, as mentioned

Rolf Wüthrich
burckhardt Ltd.
Mühlenberg 7
4010 Basel, Switzerland
Tel: +41 61 204 01 00
wuethrich@burckhardtlaw.com
Rolf Wüthrich is an international tax lawyer with particular
expertise in domestic and international tax planning andin-
bound and outbound transactions, especially between the USA
and Switzerland. He also has strong experience in corporate
restructuring and acquisitions as well as general corporate sec-
retarial services.
here before, the case under the US-Swiss tax treaty.
Furthermore, such forced dividends are normally contrary
to the business plan of a company. Instead of having the
possibility to build up a solid equity basis the SFTA forces
companies to reduce their Swiss equity basis by dividend
distributions and to lend debt capital resulting in a lower
Swiss profit due to deductible interest paid and in a lower
taxable equity. One might think that it should also be in
the interest of the SFTA to build up Swiss equity invest-
ments by non-Swiss investors. However, practice shows a
different face and an implementation of Art. 9 WHTO
without considering the freedom of discretion as well as
without taking into account collateral damages caused by
the SFTA for the business location Switzerland.
Art. 9 WHTO breaching non-discrimination according to
Art. 24 para. 5 OECD MC
Art. 47 WHTL is applicable to SwissCo owned by
USHoldCo as the 3 requirements of Art. 9 WHTO are ful-
filled. As a consequence, SwissCo must either distribute an
adequate dividend or must provide a security.
Let’s assume that SwissHoldCo did not sell SwissCo.
Under this assumption, more than 50% of the assets of the
company are still located outside of Switzerland (which is
the justification to request a security due to the fact that the
Swiss withholding tax might be in danger). Differently from
W W W. I N T E R N AT I O N A LTA X R E V I E W. C O M
SWITZERLAND
Noëmi Kunz-Schenk
burckhardt Ltd.
Mühlenberg 7
4010 Basel, Switzerland
Tel: +41 61 204 01 70
kunz@burckhardtlaw.com
Noëmi Kunz-Schenk’s areas of expertise are domestic and
international tax issues and tax planning, particularly in corpo-
rate reorganisations, restructurings, structured finance, financial
products, acquisitions and divestments andhigh net wealth
individuals.
burckhardt Ltd. provides its clients and their businesses with
comprehensive, tailored advice on national and international
tax planning issues and structuring, offers corporate secretarial
and notary service, supports clients with professional expertise
and broad international experience on restructurings, mergers
and acquisitions as well as joint ventures, corporate financing,
advises on inbound and outbound investments and in all mat-
ters related to employment, trade and transport law as well as
to private clients.
our basic example is the fact that the shareholder,
SwissHoldCo, is still a Swiss resident, i.e. there is Swiss con-
trol, and not a non-Swiss resident person, i.e. non-Swiss
control. As a consequence of the Swiss control Art. 9
WHTO does not apply, opposite to the non-Swiss con-
trolled situation to which Art. 9 WHTO applies. Thus, Art.
9 WHTO states an obligation which distinguishes between
Swiss controlled and non-Swiss controlled and which only
applies to the non-Swiss controlled Swiss company, and not
to Swiss controlled Swiss companies.
The obligation to provide a security to the SFTA accord-
ing to Art. 9 WHTO results in a financial obligation for the
Swiss company as either the Swiss withholding tax security
must be paid to the SFTA or (bank, insurance or other) fees
for a guarantee will be due and other disadvantages may
result from granting a guarantee (impact on credit liability
of a company) or making a cash payment. The granting of a
security results in a cash drain and, as a consequence, in a
competitive disadvantage for the non-Swiss controlled com-
pany.
Non-discrimination under tax treaties
Art. 24 para. 5 of the OECD MC states that enterprises of
a contracting state, the capital of which is wholly or partly
owned or controlled, directly or indirectly, by one or more
residents of the other contracting state, shall not be subjected
21
SWITZERLAND
in the first-mentioned state to any taxation or any require-
ment connected therewith which is other or more burden-
some than the taxation and connected requirements to
which other similar enterprises of the first-mentioned state
are or may be subjected.
In its tax treaties Switzerland normally includes a provi-
sion similar to Art. 24 para. 5 OECD MC. From a Swiss per-
spective Art. 24 para. 5 OECD MC therefore reads:
“Swiss enterprises, the capital of which is wholly or partly
owned or controlled, directly or indirectly, by one or more
residents of the other contracting state, shall not be subject-
ed in Switzerland to any taxation or any requirement con-
nected therewith which is other or more burdensome than
the taxation and connected requirements to which other
similar enterprises of Switzerland are or may be subject.”
The non-discrimination clause of Art. 24 para. 5 OECD
MC shall, notwithstanding the provisions of Art. 2 of the
OECD MC, apply to taxes of every kind and description
(Art. 24 para. 6 OECD MC).
The object of Art. 24 para. 5 OECD MC is to ensure the
equal treatment for taxpayers residing in the same state, i.e.
to ensure that all resident companies are treated equally
regardless of who owns or controls their capital. The non-
discrimination provision according to Art. 24. para. 5
OECD MC is also applicable to the Swiss withholding tax
regulations and, as a consequence, to the rules regarding the
provision of a security according to Art. 47 WHTL in con-
nection with Art. 9 WHTO.
Tax treaty law overrules domestic law
When applying domestic tax law then prevailing provisions,
including non-discrimination clauses of Swiss tax treaties
must be applied by the Swiss tax authorities. The rules on
provision of a security by Swiss companies controlled by
non-Swiss entities according to Art. 47 WHTL and Art. 9
WHTO cannot, therefore, result in a breach of Art. 24 para.
5 OECD MC or the respective non-discrimination clause is
a Swiss tax treaty, but must be in accordance with the obli-
22 W W W. I N T E R N AT I O N A LTA X R E V I E W. C O M
gations Switzerland entered into by signing tax treaties with
such a non-discrimination clause.
A breach of Art. 24 para. 5 OECD MC is, in our opinion,
given if a withholding tax security is requested by the SFTA
from a Swiss company in case of non-Swiss control, but no
security is requested in case of Swiss control. The SFTA
must treat non-Swiss controlled entities similar to Swiss con-
trolled entities. A breach of Art. 24 para. 5 OECD MC is
not only given if the tax burden by a non-Swiss controlled
company is higher than the tax burden carried by a Swiss
controlled company. A breach of Art. 24 para. 5 OECD is
also given if the non-Swiss controlled company is subject to
obligations deviating from the obligations applicable to the
Swiss controlled entity.
Of course, it is at the discretion of the Swiss legislator to
include in Art. 9 WHTO rules regarding the provision of a
security by non-Swiss controlled entities. It is also at the dis-
cretion of the legislator to stipulate discriminatory regulations
as long as such regulations do not result in a breach of treaty
obligations. Has Switzerland, however, concluded a tax treaty
with a provision similar to Art. 24 para. 5 OECD MC, then
Switzerland is bound to its treaty obligations not do discrimi-
nate against non-Swiss controlled entities for Swiss withhold-
ing tax and security purposes. Otherwise such entities suffer a
disadvantage opposite Swiss controlled entities as the provision
of a security leads to a cash drain for the non-Swiss controlled
entities resulting in an economic disadvantage. The triggering
of such a disadvantageous position by the SFTA for the non-
Swiss controlled entity clearly results in a breach of the non-
discrimination clause according to Art. 24 para. 5 OECD MC.
The SFTA, as many other states as well, still struggles
with the practical implementation of non-discrimination
clauses. The understanding of non-discrimination as well as
the importance of applying tax law in a non-discriminatory
manner is an ongoing development. This gives us hope that
the day will come when tax administrations accept and
implement the non-discrimination obligations applicable to
them by virtue of signed tax treaties.
UKRAINE
M&A environment and trends
in Ukraine
Asters’ Constantin
Solyar, partner, Alexey
Khomyakov, partner,
and Pavlo Shovak,
associate, provide a
breakdown of the tax
work included in
structuring Ukraine
transactions and the
influence of external
regulations on deals.
24 W W W. I N T E R N AT I O N A LTA X R E V I E W. C O M
fter a turbulent past couple of years, we are starting to see signs of
A stability and slow recovery. The IMF predicts 2.5% growth in GDP
and slowing down of inflation to 8.5% in 2017. Some independent
experts are even a bit more optimistic with their estimates, forecasting a
2.9% GDP growth. The de-escalation of the conflict in eastern Ukraine
had a favourable impact on the economy by bringing macroeconomic
stability, increasing consumer confidence, but most importantly fostering
business activity. Deferred demand on the market where both consumers
and investors were waiting to see how the things will progress before
spending or investing their money starts to play its role by bringing some
additional transactional work for the lawyers.
Ukraine has implemented some reforms in recent years by bringing
more transparency into many fields, including state procurement and
energy sectors, guaranteeing more protection to private ownership,
greater protection to minority shareholders, and better judicial enforce-
ment. The country has slightly improved its position in the Doing
Business rankings by the World Bank. The process of change is slow, but
nonetheless still going steadily. One of the bold moves the country is
making is a full reboot of the Supreme Court. The active selection
process of new judges is underway, and is being carried out under close
supervision by the civil society. The state is going to pay high salaries to
the successful candidates and to attract professionals with diversified legal
backgrounds.
The most active industry sectors for investment and M&A in recent
years were agricultural, IT, finance, energy, and logistics. Prices for many
assets have dropped significantly in recent years, making investors believe
that there is room for growth in the future. Ukraine is booming as an IT
outsourcing market. The country’s solid technical heritage and engineer-
ing background, coupled with the 5% flat tax on income of IT develop-
ers, makes it a very attractive and cost-efficient jurisdiction for many IT
companies and startups.
Structuring M&A deals
Indirect transfers
Because of the 20% VAT being triggered on the asset transfer the major-
ity of M&A deals are structured as share deals. Though the VAT cost is
temporary and VAT can be recovered over time, usually the buyers do
not want to create cash outflow unless there are legal risks of participa-
tion in the equity that outweigh the tax benefit.

A number of M&A deals are done through the indirect
transfer of shares where the Ukrainian target is owned by a
foreign holding company and the sellers sell their shares in the
foreign holding company to the buyer, and thus the buyer is
taking over the holding company, which continues to own the
Ukrainian target. The Netherlands and Cyprus are among the
popular jurisdictions for establishing a holding company to
own the Ukrainian target. However, Cyprus has begun to lose
its popularity in certain segments of Ukrainian businesses.
Ukraine does not try to tax such indirect transfers. In
many cases, it is not the 15% Ukrainian capital gains tax that
the parties are trying to avoid, but rather strict and prohib-
itive currency control regulations that Ukraine still has in
place after the dramatic events of the past. The goal of which
is preventing panic outflow of hard currency from the coun-
try by imposing a number of restrictions.
Another incentive for the parties to structure their invest-
ments indirectly through a foreign holding company is for-
eign corporate laws that tend to be more flexible than
Ukrainian regulations. In many cases, parties want to enter
into shareholder agreements that put their own tailor-made
checks and balances to their relations when it comes to own-
ing and managing the Ukrainian target. This is not some-
thing that the Ukrainian law allows, though the corporate
law reform is underway.
Direct transfers
Disposal of shares in the Ukrainian company by a non-resi-
dent company is subject to 15% capital gains tax. The tax
may be eliminated/reduced by the double tax treaty. Even
when the parties to the deal are of Ukrainian origin in many
instances they still try to use foreign companies for tax and
non-tax reasons.
Ukrainian tax officials and policymakers tend to look
around and analyse developments in neighbouring countries.
For instance, some of the very recent trends in Russia where
that their tax authorities attacked conduit Cypriot companies
without proper substance, these were claimed to be used
merely for saving on Russian capital gains tax and could be
taken into account by Ukrainian authorities. In one of these
cases, the Russian tax authorities analysed the structure of the
deal and substance of the Cypriot company involved.
Apart from BEPS, this is one of the signals to businesses
that involving foreign companies without proper substance
into M&A deals may not be that practically safe anymore in
Ukraine. However, it has to be admitted that in many such
cases the Ukrainian sellers may not have, predominant
intention to save on capital gains tax because at the end of
the fiscal year they declare and pay the personal income tax
out of dividend distributions received from such foreign
companies that were used as sellers of the Ukrainian targets.
In these cases, the structures were motivated by non-tax
reasons such as getting out of the scope of strict currency
W W W. I N T E R N AT I O N A LTA X R E V I E W. C O M
UKRAINE
Constantin Solyar
Partner, Tax
Asters
Leonardo Business Center
19-21 Bohdana Khmelnytskoho St.
Kyiv 01030, Ukraine
Tel: +38044 230 60 00
constantin.solyar@asterslaw.com
Constantin Solyar is a tax partner at Asters. He has been prac-
ticing tax for 11 years. Constantin advises in all areas of
Ukrainian domestic and international tax with a strong focus
on transactional and M&A work for multinationals and foreign
investment. Before joining Asters, he worked in Big 4 firms in
Ukraine and in Luxembourg.
Constantin was named up and coming lawyer in taxation by
Chambers Europe and recommended in the Tax Directors
Handbook by Legal 500. He holds an LLM degree from Harvard
Law School.
control regulations or getting better protection by falling
within the jurisdiction of foreign courts.
Currency control regulations
Previously, during the direct sale of shares in the Ukrainian
target entity, foreign sellers and buyers were considering
either making settlements through investment bank
accounts opened with Ukrainian banks, or paying directly
using their foreign bank accounts. Because of the temporary
restrictions of the Ukrainian National Bank, the first struc-
ture of the payment is not practical at the moment. The sell-
er may not be able to repatriate the proceeds from the sale
of shares abroad and may be required to keep these funds in
Ukraine until the temporary restriction is lifted.
If the foreign parties opt for the second option (i.e. making
settlements abroad), there will be a problem with payment of
the Ukrainian capital gains tax on disposal shares. Some peo-
ple may hardly call it a problem because as a result of the
inconsistency between tax and currency control regulations
the tax may not be payable at all. This inconsistent result
stems from the absence of mechanism in the law on payment
of the capital gains tax in such a setting. The law requires that
the tax shall be withheld by the Ukrainian tax agent that
somehow participates in the money settlement between the
parties and does not provide for the mechanism to pay the tax
by the seller itself or to delegate the tax payment to some
other party. Because there is no such tax agent within the
meaning of the law there is no capital gains tax.
There is a draft law trying to cure this defect, but so far we
do not see any active movement in parliament to adopt it.
25
UKRAINE
Alexey Khomyakov
Partner, Tax
Asters
Leonardo Business Center
19-21 Bohdana Khmelnytskoho St.
Kyiv 01030, Ukraine
Tel: +38044 230 60 00
alexey.khomyakov@asterslaw.com
Alexey Khomyakov focuses primarily on taxation. Alexey has
accumulated extensive experience in tax aspects in M&As, cor-
porate reorganisations, financing and restructuring, securities,
and foreign investments. He has structured cross-border financ-
ing within the framework of IPO, and Eurobond issuance for
Ukrainian large-sized businesses. Alexey also represents clients
in tax disputes.
BEPS
On November 22 2016, the Ukrainian government
declared Ukraine’s adherence to the OECD’s BEPS initia-
tive. The Ukrainian Minister of Finance declared that the
application was submitted to the OECD and that Ukraine
joins the Inclusive Framework on BEPS starting from
January 1 2017. This is not the first BEPS-related initia-
tive. Recently, the President of Ukraine issued the Decree
on Measures to Tackle Base Erosion and Shifting of Profits
Abroad, Law No.180/2016, which established the work-
ing group on development of the respective draft laws.
However, at this time, there are no BEPS-related
changes to the tax laws and we have not heard about
recent draft laws being prepared to implement BEPS
measures. Nevertheless, because of its membership in the
Inclusive Framework on BEPS, Ukraine should imple-
ment at least four actions of the BEPS, including:
• Action 5 on Countering Harmful Tax Practices More
Effectively, Taking into Account Transparency and
Substance;
• Action 6 on Preventing the Granting of Treaty Benefits
in Inappropriate Circumstances;
• Action 13 on the Country-by-Country Reporting
Implementation Package; and
• Action 14 on Making Dispute Resolution Mechanisms
More Effective.
BEPS-related developments will likely impact rules for
granting a treaty relief. In particular, Action 6 which
requires the introduction of amendments into both the
double tax treaties (i.e. limitation on benefits rule and
principal purpose test) and the domestic law (i.e. GAAR)
to ensure proper application of the double tax treaties.
Time will show how Ukraine is going to implement these
26 W W W. I N T E R N AT I O N A LTA X R E V I E W. C O M
Pavlo Shovak
Associate, Tax
Asters
Leonardo Business Center
19-21 Bohdana Khmelnytskoho St.
Kyiv 01030, Ukraine
Tel: +38044 230 60 00
pavlo.shovak@asterslaw.com
Pavlo Shovak is a tax associate at Asters. Pavlo advises on all
aspects of Ukrainian tax law and acts for a wide range of
domestic and international clients in various industries. His tax
practice covers all areas of direct and indirect taxation, includ-
ing the tax aspects of Ukrainian M&A, corporate restructurings
and corporate finance transactions. Pavlo represents clients in
disputes with Ukrainian tax authorities.
actions, but so far we do not see any active movement.
Unlike many other developed tax jurisdictions, Ukraine
was not adopting any similar BEPS anti-avoidance meas-
ures in the past. This means that there will be no replace-
ment/revision of any old anti-avoidance rules, but instead
the new rules that are expected to be drafted.
State aid
Recent EU state aid cases have attracted lots of attention
in non-EU member states. These are of particular interest
for Ukraine because under the EU-Ukraine Association
Agreement, Ukraine should implement a legal framework
for state aid based on the EU acquis communitaire. On
July 1 2014, the Ukrainian parliament adopted the Law of
Ukraine on the State Aid to Business Entities, Law No.
1555-VII, which outlines core principles of the state leg-
islation and allocates monitoring and control functions
over the compliance with the new rules to the
Antimonopoly Committee of Ukraine (AMC).
The new law will come into effect on August 2 2017.
Theoretically, it could be assumed that the AMC follow-
ing the EU practice may start reviewing some domestic
tax rulings issued by the tax authorities. However, in our
view this is not likely to happen because Ukrainian tax rul-
ings are generally pro-fiscal in nature and do not tend to
treat businesses favourably from the tax perspective.
Furthermore, as a matter of practice the tax rulings are
not binding on the tax authorities, they may opt to apply
an approach, which differs from the one described in the
ruling and claim tax deficiency. In such cases, the taxpayer
who followed the tax ruling will be only relieved from the
tax penalties, but would still be required to pay the prin-
cipal amount of the tax.
UK
Will the shifting tectonic plates
of international politics move
the UK into the Atlantic?
Steve Edge and James
Hume of Slaughter
and May face down
the biggest issues
facing UK taxpayers.
Since the article they
wrote last year was
published, two things
have loomed large on
the UK M&A horizon.
28 W W W. I N T E R N AT I O N A LTA X R E V I E W. C O M
he first is the result of the UK referendum, which was a vote for
T Britain to leave the EU, and the second is Donald Trump’s unex-
pected victory in the presidential election in the US, which seems
likely to bring long-awaited tax reform in its wake. There is a lot of spec-
ulation as to what form that might take.
At a time when the after-effects of the financial crisis were still not
fully resolved, the introduction of further uncertainty into the UK M&A
markets was far from welcome.
No one wants to announce a deal and then find that dramatic external
events or developments disrupt that deal whilst it is in the process of closing.
The counterpoint to this, of course, is that the announcement that the
UK would leave the EU resulted in a significant fall in the value of ster-
ling – had events in the US followed a more predictable course, this
might have been expected to lead to US multinationals in particular bar-
gain hunting in the UK. The fact that it looks as if the pressure to re-
invest in order to maintain US tax deferral as regards unremitted
low-taxed overseas income might be removed in the future, however,
means that we have yet to see many signs of that.
The US election result put the turmoil in Europe in a different per-
spective – and the elections on the continent later this year may continue,
or bring a halt to, the populist process.
The deep pessimism immediately after the referendum result about
the economic consequences to the UK of losing its status as the
European jurisdiction with a very open economy, a more flexible labour
market than many others and a (if not the) world-leading financial centre
with guaranteed access to continental Europe seems likely to turn out to
have been exaggerated.
There have been some good recent signs of continuing confidence in
the UK – not least the decision by McDonald’s to locate its non-US IP
in the UK and Apple’s search for a major headquarters location in the
UK (along with one such announcement in the financial sector).
HM Treasury is working very hard to maintain the message that the UK
is “open for business” and also to reassure those in the financial sector that
the UK will do as much as it can to preserve access to European markets.
Tax is only part of any business decisions to be made here of course –
something that has been illustrated by the financial sector’s response to
entreaties from France to move significant amounts of business there.
The labour laws in France are clearly a perceived obstacle and US banks
in particular have not made light of that point.

In the tax area, the loss of European treaties seems
unlikely to have a major impact. In terms of income flows
(dividends, interest and royalties), the UK’s extensive dou-
ble tax treaty network, coupled with the fact that the UK is
not itself a withholding tax jurisdiction as regards the pay-
ment of dividends, means that any differences are very much
at the margin. The fact that the OECD is making moves in
relation to the resolution of cross-border tax disputes may
take some of the sting out of the loss of full access to the
Arbitration Convention. The Merger Directive has not real-
ly added much to the corporate reorganisation reliefs already
available in the UK.
When UK tax reform started in 2008/2009, the change
to a territorial system of taxation (no tax on foreign divi-
dends and much less aggressive CFC rules) could be said to
have been driven by cases the UK had lost in the European
Court of Justice (ECJ) against taxpayers seeking to protect
fundamental freedoms, but HM Treasury and HM Revenue
& Customs did not see it in that way. The changes were
born of a straight desire to become internationally compet-
itive, which is why the rules were introduced on a global
basis rather than just within the EU, so it seems unlikely that
any of that will change – and all the signs are that the UK
corporate tax rate will continue to be pushed down (so that
it may reach a 15% level).
For the moment, however, anyone looking for reasons
not to do an M&A deal will find plenty of them.
Looking at the way different companies may now be
changing because of the tax situation in the UK:
UK multinationals
Although Vodafone announced virtually immediately that it
was initiating a review to see whether or not it would be bet-
ter to be headquartered in the EU (and announced later
that it had decided not to make a change), most UK multi-
nationals have remained calm about the situation and satis-
fied themselves that a UK corporate headquarters is unlikely
to be prejudiced by Brexit because income flows into the
UK are unlikely to be significantly affected and the position
of local subsidiaries operating within the EU should remain
unchanged. Provided, therefore, that Brexit is not accompa-
nied by adverse UK tax changes, the expectation would be
that multinationals already based here will not want to
change their position. They will obviously though keep the
position under review.
Non-UK multinationals
These fall into two categories:
1) companies that have set up manufacturing operations in
the UK and are exporting into Europe; and
2) companies that are either simple regional holding compa-
nies or are engaged in UK product distribution.
As indicated by the government’s exchanges with Nissan,
W W W. I N T E R N AT I O N A LTA X R E V I E W. C O M
UK
manufacturers based in the UK are obviously going to be
more concerned about the outcome to tariff negotiations
than companies from other sectors. An adverse outcome
there may have an impact on both existing manufacturing
businesses and on decisions to locate new manufacturing
bases in the UK (though, as already mentioned, tax is not
the only question to be considered in such a decision-mak-
ing process).
For inbound UK distribution companies, nothing is like-
ly to change – apart from the usual developments as busi-
nesses decide how best to distribute their products into any
market (i.e. either directly by having people on the ground
or remotely through digital sales techniques) with different
tax consequences depending on the structure used.
Regional holding companies are again unlikely to be
affected – though those looking for a European holding
company in the future might have cause to reflect on the rel-
ative advantages of the UK and others who offer a similar tax
regime. Again, the total package will be what determines the
answer to this – the fact that it may be easier to put sub-
stance on the ground in one place rather than the other will
probably play the biggest role in any decision.
European countries (like Germany) which reacted to the
Cadbury case by giving broad CFC exemptions only to sub-
sidiaries based in an EU country (so the analysis for UK sub-
sidiaries may change) may have to think again about
whether or not that is an appropriate response – particularly
if the result is that companies based in their jurisdiction suf-
fer CFC taxation when really they ought not to.
Financial sector
Two things are clear:
1) no one knows what is going to happen; but
2) financial services companies cannot leave it to the last
minute to make changes – so many of them are starting
to make plans now.
Most of that planning is being done, however, on the
basis that the amount of staff moving will be relatively small,
sufficient to effectively service an appropriately enhanced
‘booking office’ with the major infrastructure being left
back in the UK. Whether that remains the model will need
to be tested once the Brexit negotiations are completed but
it clearly makes no sense for major banks operating in the
EU to have their back office substance fragmented across a
number of jurisdictions and there is apparently no appetite
to move the whole of the business presently in the UK to
any one place on the continent.
_________________________________________________
The UK is as conscious as any other EU country of the fact
that businesses were mobile. The freedoms meant that it
could not effectively put any restriction (other than CGT
exit charges, but they would not bite on substantial holdings
29
UK
Steve Edge
Slaughter and May
Tel: +44 20 7090 5022
steve.edge@slaughterandmay.com
Steve Edge qualified with Slaughter and May in 1975 and acts
for clients across the full range of the firm’s practice.
Steve advises on the tax aspects of private and public merg-
ers, acquisitions, disposals and joint ventures and on business
and transaction structuring (including transfer pricing in all its
aspects) more generally. He also advises many banks, insur-
ance companies, hedge funds and others in the financial serv-
ices sector in a wide range of areas.
Much of Steve’s work has multinational cross-border aspects
to it and so he is often working closely with other leading
international tax advisers around the world.
In recent years, Steve has also been heavily involved in
many in-depth tax investigations of specific domestic or
international issues including transfer pricing in particular. He
therefore has considerable experience of dealing with HMRC
at all levels.
where the UK has a participation exemption) on a compa-
ny’s ability to move in or out.
That was what gave rise to the realisation that the UK
needed to have a competitive tax regime in order to satisfy
the businesses it had already and attract others to the UK.
The Corporation Tax Road Map issued by the Coalition
government in 2010 and by the Conservative government
in 2015 provided ample evidence of that.
Thus, regardless of whether or not Brexit was happening,
the UK’s competitive tax policy was bound to continue.
There is no chance of the UK trying to follow a Singapore
model – it does not need to do that. Having that tax policy
in place creates a good platform for what may need to be
done in response to Brexit.
As regards to M&A activity, US tax changes may mean
that inversions no longer happen but the last year has seen
Coca-Cola European Partners establish itself in the UK hav-
ing successfully left the US.
Other activity will depend on market developments but
there is no reason to suppose that, in a merger, the UK
would not come out as the superior holding jurisdiction if
all other things are equal.
The only potential fly in the ointment is that the govern-
ment will need to make the stamp duty exemption created
30 W W W. I N T E R N AT I O N A LTA X R E V I E W. C O M
James Hume
Slaughter and May
Tel: +44 20 7090 3953
james.hume@slaughterandmay.com
James has been a tax associate at Slaughter and May since
2008. He advises on all areas of UK tax law and acts for a
wide range of clients, including large multinationals, banks,
insurers, hedge funds and commodities traders. He has a par-
ticularly strong focus on corporate tax and is known for the
commercial focus of his advice. James has extensive experi-
ence of domestic and cross-border M&A, joint ventures, and
corporate finance transactions generally. He also has a diverse
tax consultancy practice, covering all areas of taxation from
transfer pricing to employee remuneration, and has worked on
a number of disputes and settlements with HMRC.
by the HSBC ECJ litigation survive Brexit if a merger which
results in significant shares going into Euroclear or alterna-
tive dispute resolution form is not to result in a significant
stamp duty reverse tax (SDRT) season ticket charge.
Quite where US tax reform will end up is a mystery.
The US corporate tax system has been plagued with
problems for years. It is a major revenue yielder for the gov-
ernment and so the effects of reform may need to be
absorbed elsewhere. At present, pure domestic companies
pay a high 35% federal rate, US-based multinationals can
generate large amounts of low-taxed cash offshore without
CFC problems and inbound investors have been able to gear
up to a much greater level than their domestic counterparts.
Too many distortions – but each had a special interest group
firmly behind it.
Before the election it seemed possible that, if the
Democrats could ever do what they wanted to do, they
would end up with a system pretty much like the UK’s but
possibly with a 15% corporate tax rate domestically and
deciding whether or not CFC rules were going to be a prob-
lem. There might have been a repatriation charge on the
huge funds left offshore but that would have been about it.
In other words, the US would have been a slightly modified
territorial system.

But that would not apparently have yielded much addi-
tional tax.
So, now the pressure seems to be on to give favourable
consideration to a radical reform (called a destination-based
cash flow tax; DBCFT) which would charge tax on imports
and exempt exports as well as giving 100% tax relief for cap-
ital expenditure.
In blunt terms, this would give an immediate boost to
the US economy equal to tax on the US’s trading deficit.
You can see how it would be presented – a boost to US
manufacturing with an exemption for exports and a tax
penalty on imports. Also, no relief for interest so further
restrictions on “games by foreigners investing in the US”.
W W W. I N T E R N AT I O N A LTA X R E V I E W. C O M
UK
This may be too attractive an opportunity for the incoming
government to ignore – but its consequences for international
investors and for US multinationals will take a lot of time to
work through. While that happens, US companies may not be
as interested in merger or acquisition activity as they have
been in recent times – and companies looking at a US acqui-
sition will find that very difficult to price in after-tax terms.
We should know better where we are in a few months but
there will be a lot of hard work to be done after that – and
the WTO will potentially put a spanner in the works if it sees
the DBCFT as an unauthorised border tariff. A US VAT
would obviously be much easier – but it is apparently polit-
ically unacceptable as a “tax on consumers”.
31
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US international M&A tax
developments
There has been a large
number of US
developments in the
M&A area, particularly
due to a series of
regulations and other
guidance issued by the
Obama Administration
in its final two months
in office. Jim Fuller
and David Forst of
Fenwick & West
explore what these
developments mean for
taxpayers.
32 W W W. I N T E R N AT I O N A LTA X R E V I E W. C O M
Section 385 regulations
Section 385 regulations, which affect the tax treatment of corporate
debt, were finalised. The regulations reserve all aspects of their applica-
tion to foreign debt issuers. Thus, they do not apply in an outbound con-
text, such as when a US parent company makes a loan to its foreign
subsidiary. However, the rules still apply in an inbound context.
The blacklisted transaction rules under the final regulations follow the
pattern set forth in the proposed regulations. The general rule and fund-
ing rule both remain in place essentially as proposed. However, the final
regulations add a number of new exceptions and expand some of the
existing exceptions to the application of the per se funding rule.
Under the general rule, unless an exception applies, a covered debt
instrument is treated as stock to the extent it is issued by a covered mem-
ber to a member of the covered member’s expanded group in one or
more of the following transactions:
• In a distribution;
• In exchange for expanded group stock, other than in an exempt
exchange; or
• In exchange for property in an asset reorganisation, but only to the
extent that, pursuant to the plan of reorganisation, a shareholder in
the transferor corporation that is a member of the issuer’s expanded
group immediately before the reorganisation receives the covered
debt instrument with respect to its stock in the transferor corporation.
The funding rule is intended to serve as a backstop, to prevent
expanded group members from achieving the same result indirectly as
could be achieved directly with a general rule transaction. Under the
funding rule, unless an exception applies, a covered debt instrument is
treated as stock to the extent it is issued by a covered member (the
funded member) to a member of the funded member’s expanded
group in exchange for property, pursuant to a per se rule or a principal
purpose rule. A covered debt instrument is treated as funding any one
or more of the following blacklisted distribution or acquisition trans-
actions.
• A distribution of property by the funded member to a member of the
funded member’s expanded group, other than in an exempt distribu-
tion of stock pursuant to an asset reorganisation that is permitted to
be received without the recognition of gain or income under
§ 354(a)(1) or 355(a)(1) or, when § 356 applies, that is not treated
as “other property” or money described in § 356;

• An acquisition of expanded group stock, other than in an
exempt exchange, by the funded member from a member
of the funded member’s expanded group in exchange for
property other than expanded group stock; or
• An acquisition of property by the funded member in an
asset reorganisation, but only to the extent that, pursuant
to the plan of reorganisation, a shareholder in the trans-
feror corporation that is a member of the funded mem-
ber’s expanded group immediately before the
reorganisation receives other property or money within
the meaning of § 356 with respect to its stock in the
transferor corporation.
A few other changes from the proposed regulations are
that the E&P exception is expanded to include all of an
issuer’s E&P accumulated after the proposed regulations
were issued (April 4 2016) and while it was a member of the
same expanded group. The “cliff effect” of the $50 million
threshold exception is removed. Taxpayers can exclude the
first $50 million of debt that otherwise would be recharac-
terised under the blacklisted transaction rules. The 90-day
delay in implementation of the blacklisted transaction rules
is expanded so that any debt instrument that is subject to
recharacterisation but that is issued on or before January 19
2017 – the date 90 days after publication of the final regu-
lations in the Federal Register – will not be recharacterised
until January 20 2017.
Section 901(m) regulations
Section 901(m) provides that in the case of a covered asset
acquisition (CAA), the disqualified portion of any foreign
tax determined with respect to the income or gain attribut-
able to relevant foreign assets (RFAs) will not be taken into
account in determining the relevant foreign tax credit.
Instead, the disqualified portion of any foreign income tax
(the disqualified tax amount) is permitted as a deduction. A
CAA is a qualified stock purchase as defined in § 338; (2)
any transaction that is treated as an acquisition of assets for
U.S. income tax purposes and as the acquisition of stock of
a corporation (or is disregarded) for purposes of foreign
income tax; (3) any acquisition of an interest in a partner-
ship that has an election in effect under § 754 (§ 743(b)
CAAs); and (4) to the extent provided by the IRS, any sim-
ilar transaction.
The new regulations identify the assets that are RFAs
with respect to a CAA. An asset is subject to a CAA, if, for
example:
1) In the case of a qualified stock purchase to which § 338
applies, new target is treated as purchasing the asset from
old target;
2) In the case of a taxable acquisition of a disregarded entity
that is treated as an acquisition of stock for foreign
income tax purposes, the asset is owned by the disregard-
ed entity at the time of the purchase and therefore the
W W W. I N T E R N AT I O N A LTA X R E V I E W. C O M
US
James Fuller
Fenwick & West
Tel: +1 650 335 7205
jpfuller@fenwick.com
www.fenwick.com
Jim Fuller is a partner in the tax group at Fenwick & West in
Mountain View, California. He is one of the world’s top 25 tax
advisers, according to Euromoney. Fuller is described as one of
the three “most highly regarded” US tax practitioners in Law
Business Research’s Who’s Who Legal (2016), and is the only
US tax adviser to receive a coveted Chambers ‘star performer’
rating (higher than first tier) in Chambers USA (2016).
Fuller and his firm have served as counsel in more than 150
large-corporate IRS Appeals proceedings and more than 70 fed-
eral tax court cases. Seven Fenwick tax partners appear in
International Tax Review’s Tax Controversy Leaders Guide.
Fenwick has been named US (or Americas) Tax Litigation Firm
of the Year three times at ITR’s annual Americas Awards
Dinners.
Two of our tax partners were shortlisted by Euromoney at its
Women in Business Law Awards dinners in the America’s
Leading Lawyer for Tax Dispute Resolution category. One is a
two-time winner of the award.
Much of our tax dispute resolution work has involved trans-
fer pricing. Fenwick & West is first tier in ITR’s World Transfer
Pricing (2016). Five Fenwick tax partners have appeared in
Euromoney’s World’s Leading Transfer Pricing Advisers. Transfer
pricing cases in which we have been involved include: Apple
Computer, Xilinx, DHL, and LimitedBrands, among others. The
vast majority of our transfer pricing cases have been resolved
in Appeals, some on a ‘no change’ basis.
Other cases in which we’ve represented clients in federal tax
litigation matters include those that involved Sanofi, CBS,
Analog Devices, Dover, Chrysler, Textron, Johnson Controls, Del
Commercial, Illinois Tool Works, VF, S.C. Johnson, Intel, CMI Int’l,
Laidlaw, Hitachi, Union Bank, GM Trading, and others.
buyer is treated as purchasing the asset from the seller;
and
3) In the case of a § 743(b) CAA, the asset is attributable to
the partnership interest transferred in the § 743(b) CAA.
Other portions of the regulations provide rules for deter-
mining the basis difference with respect to an RFA, taking
into account basis difference under the applicable cost
recovery method or as a result of a disposition of an RFA,
and successor rules for applying § 901(m) to subsequent
33
US
David Forst
Fenwick & West
Tel: +1 650 335 7254
Fax: +1 650 938 5200
dforst@fenwick.com
www.fenwick.com
David Forst is the practice group leader of the tax group of
Fenwick & West. He is included in Euromoney’s Guide to the
World’s Leading Tax Advisers. He is also included in Law and
Business Research’s International Who’s Who of Corporate Tax
Lawyers (for the last six years). David was named one of the
top tax advisers in the western US by International Tax Review,
is listed in Chambers USA America’s Leading Lawyers for
Business (2011-2016), and has been named a Northern
California Super Lawyer in Tax by San Francisco Magazine.
David’s practice focuses on international corporate and part-
nership taxation. He is a lecturer at Stanford Law School on
international taxation. He is an editor of and regular contributor
to the Journal of Taxation, where his publications have included
articles on international joint ventures, international tax aspects
of M&A, the dual consolidated loss regulations, and foreign
currency issues. He is a regular contributor to the Journal of
Passthrough Entities, where he writes a column on internation-
al issues. David is a frequent chair and speaker at tax confer-
ences, including the NYU Tax Institute, the Tax Executives
Institute, and the International Fiscal Association.
David graduated with an AB, cum laude, Phi Beta Kappa,
from Princeton University’s Woodrow Wilson School of Public
and International Affairs, and received his JD, with distinction,
from Stanford Law School.
transfers of RFAs that have basis difference that has not yet
been fully taken into account.
Section 367(d) regulations
Treasury and the IRS finalised without any substantive
changes the § 367 regulations that significantly (1) narrow
the active foreign trade or business exception and (2)
change the rules governing the outbound transfer of intan-
gibles in particular regarding foreign goodwill and going
concern value. The final regulations also retain the proposed
regulation’s effective date so that the new rules apply to
transfers on or after September 14 2015.
In the preamble to the final regulations, Treasury and the
IRS discussed and rejected virtually every taxpayer comment
or suggestion regarding the proposed regulations. Of
course, Treasury and the IRS needed to go to Congress to
34 W W W. I N T E R N AT I O N A LTA X R E V I E W. C O M
make changes of this magnitude. Unfortunately, there will
now be a period of substantial uncertainty until these regu-
lations are withdrawn or the courts address them.
As with the proposed regulations, the regulations elimi-
nate the favorable treatment for foreign goodwill and going
concern value by narrowing the scope of the active trade or
business exception under § 367(a)(3) and eliminate the
exception under Temp. Treas. Reg. § 1.367(d)-1T(b) that
provided that foreign goodwill and going concern value are
not subject to § 367(d);
The regulations also remove the 20-year limitation on
useful life for purposes of § 367(d).
Killer B notice
Notice 2016-73 announced that the Treasury and the IRS
intend to issue regulations under § 367 to modify the so-
called “Killer B” anti-repatriation rules relating to the treat-
ment of certain triangular reorganisations involving one or
more foreign corporations. The Notice also announced that
the Treasury and the IRS intend to issue § 367 regulations
to modify the amount of an income inclusion required cer-
tain inbound non-recognition transactions (the ‘all E&P’
amount).
The notice is highly technical, and is generally intended
to target transactions designed to repatriate earnings and
profits of foreign corporations without incurring US tax via
the § 367(a)/§ 367(b) priority rule.
F reorganisation regulations
The IRS published final regulations regarding F reorganisa-
tions. F reorganisations under § 368(a)(1)(F) involve a
“mere change” in the identity, form, or place of organisation
of one corporation. F reorganisations can be wholly domes-
tic, wholly foreign, or cross border.
The new regulations adopt regulations that were pro-
posed in 2004. They also include rules on outbound F reor-
ganisations (domestic transferor corporation and foreign
acquiror corporation) by adopting, without substantive
change, proposed regulations that were issued in 1990.
These regulations, adopted as § 367 regulations, were pre-
viously in effect as temporary regulations.
The final regulations generally adopt the regulations pro-
posed in 2004, but with certain changes. The preamble
states that like the 2004 proposed regulations, the final reg-
ulations are based on the premise that it is appropriate to
treat the resulting corporation in an F reorganisation as the
functional equivalent of the transferor corporation and to
give its corporate enterprise roughly the same freedom of
action as would be accorded a corporation that remains
within its original corporate shell.
Under the final regulations, six requirements apply.
Four of the six requirements are generally adopted from
the 2004 proposed regulations. First, all the stock of the
US
resulting corporation, including stock issued before the
transfer, would have had to be issued in respect of stock of
the transferor corporation. Second, a change in the owner-
ship of the corporation in the transaction would not have
been allowed, except for a change that had no effect other
than that of a redemption of less than all of the shares of
the corporation. Third, the transferor corporation would
have had to completely liquidate in the transaction,
although it did not need to legally dissolve. Fourth, the
resulting corporation would not have been allowed to hold
any property or possess any tax attributes immediately
before the transfer, other than a nominal amount of assets
to facilitate its organisation or to preserve its existence.
The fifth and sixth requirements address comments
received with respect to the proposed regulations regarding
“overlap transactions,” for example, transactions involving
the transferor corporation’s transfer of its assets to a poten-
tial successor corporation other than the resulting corpora-
tion in a transaction that could also qualify for
non-recognition treatment under a different provision of
the Code.
Under the fifth requirement, immediately after the F reor-
ganisation, no corporation other than a resulting corporation
may hold property that was held by the transferor corpora-
tion immediately before the F reorganisation if the other cor-
poration would, as a result, succeed to and take into account
the items of the transferor corporation described in § 381(c)
(corporate attributes in a reorganisation).
The sixth requirement is that immediately after the F
reorganisation, the resulting corporation may not hold
property acquired from a corporation other than a transferor
corporation if the resulting corporation would, as a result,
succeed to and take into account the items of the other cor-
poration described in § 381(c).
The 2004 proposed regulations also contained an inde-
pendently important rule: an F reorganisation may be a step,
or series of steps, before, within, or after other transactions
36 W W W. I N T E R N AT I O N A LTA X R E V I E W. C O M
that effect more than a mere change, even if the resulting
corporation has only a transitory existence following the
mere change. In some cases, an F reorganisation sets the
stage for later transactions by alleviating non-tax impedi-
ments to a transfer of assets. In other cases, prior transactions
may tailor the assets and shareholders of the transferor cor-
poration before the commencement of the F reorganisation.
Treasury and the IRS concluded that step transaction
principles generally should not apply to recharacterise the
F reorganisation in such a situation because F reorganisa-
tions involve only one corporation and do not resemble
sales of assets.
However, the preamble states that notwithstanding this
rule, in a cross-border context, related events preceding or
following an F reorganisation may be related to the tax con-
sequences under certain international provisions that apply
to F reorganisations. For example, such events may be rele-
vant for purposes of applying certain rules under § 7874
(inversions) and for purposes of determining whether stock
of the resulting corporation should be treated as stock of a
controlled foreign corporation for purposes of § 367(b).
The final regulations also adopt a provision of the 2004
proposed regulations that the qualification of a reorganisa-
tion as an F reorganisation would not alter the treatment of
other related transactions. For example, if an F reorganisa-
tion is part of a plan that includes a subsequent merger
involving the resulting corporation, the qualification of the
F reorganisation as such will not alter the tax consequences
of the subsequent merger.
Anti-inversion rules
The IRS issued final and temporary inversion regulations
that adopted the rules of Notices 2014-52 and 2015-27 as
regulations. As a general matter these regulations simply
incorporate the previous notices into a regulatory format.
The new regulations, also attack serial inversion acquisitions,
something that was not covered in the previous notices.