Cross-Border Carve-Outs: Essential Tax Implications

Part Three: Tax Implications

To conclude our three-part series on cross-border carve-outs, our experts delve into tax-related activities associated with this specific type of business transaction.

From exploring the complexities of setting up a local bank account overseas to debunking the common misconceptions of tax compliance, this final blog will wrap up the series with some vital tax information you need to know to successfully complete your carve-out transaction.

The Challenge of Setting Up a Local Bank Account to Pay Taxes

Every bank has its own process when it comes to foreign companies looking to establish a new relationship, making it impossible to standardize this country to country. Some banks are notoriously heavy on documentation and Know Your Customer (KYC) obligations and require significant documentation related to the Ultimate Beneficial Owners (UBO).

Private Equity or Venture Capital (VC) backed companies may have a harder time providing the detail necessary on the UBOs. Drafting a complete organizational structure chart can add complexity as some items might not be fully developed yet. When the time to set up a bank account extends into many months, companies can find that their operational timelines face serious disruption.

How to Set Up a Local Bank Account Set Up Overseas?

In most countries, companies must establish an account with a local entity to present the Tax ID to the local bank.

In some countries, you need to open a bank account before incorporation and deposit the share capital. For example, in Austria, companies must deposit share capital, and the bank should then provide a confirmation letter. Without such confirmation, the company’s registry will not register the entity. This may then extend the timeline to becoming operational.

Because banks have due diligence teams reviewing all the documentation, they may request more information, demand wet signatures, multiple copies, and in-person meetings, which can add weeks or months to finalize the opening of a bank account.

Tax Registrations

The company determines its entity type, such as limited company, branch, or representative office, it can register for applicable local taxes. In most countries, this is a separate and additional step following the entity’s incorporation. The number of registrations and the timeline to complete them varies drastically by country. For example, in Germany, you have payroll registrations, tax registrations, and local tax registrations. That means three different authorities, each with their own timescales and requirements for paperwork.

In carve-out transactions, deadlines are exceptionally tight and entities must be operational quickly. In these cases, tax registrations are a key component to allow entities to take on assets and employees.

Furthermore, asset deals are subject to VAT (Value Added Tax) implications. If a business is not able to complete its VAT registration, it cannot deduct potential VAT related to the acquisition. This is usually not a trivial amount; therefore, the consequences will likely be significant.

Tax Compliance Before and After You Are Operational

Before filing taxes, companies must assess the need to assign a local resident director or fiscal representative. This individual may be required to obtain a local tax registration number.

In most carve-outs, there is a time gap between when both the entity is incorporated and tax registrations are complete and when the acquisition occurs.

Many companies mistakenly believe that they have no tax filing obilgations if they are incorporated, tax registered ,or do not carry out any transactions. Surprisingly, this is incorrect. Even if your company has no transactions, once you are VAT registered, you may be required to file nil tax returns, as is the case in Italy and Germany.

Putting in place a solution for filing VAT returns might not be as simple as it seems. Companies must configure their systems to meet local requirements. This requires a significant amount of work, and it is the area where businesses are most likely to go wrong. From a tax and accounting perspective, this is a huge challenge for companies completing an M&A carve-out transaction.

TSA Does Not Typically Cover Tax Compliance

Another common misconception is that once a Transition Service Agreement (TSA) is in place, the seller is going to support the buyer with tax compliance. However, we have seen in practice that most of the time, the TSA focuses on providing accounting information, bookkeeping, billing, and tracking inventory, but not tax compliance.

These requirements help the buyer to continue to operate, help them account for the transactions, and prepare financial reports. However, the TSA does not include any items related to local tax filings and local compliance obligations.

The buyer might wrongly assume that the seller will support them, but this is not the case. This means the seller must find a solution to deal with the tax obligations.

Do You Need Help Conducting These Cross-Border Carve-Out Activities?

HSP Group is perfectly placed to assist businesses with their carve-out activities. With a team of experts on hand, HSP ensures all the key areas, such as setting up a new bank account and ensuring tax compliance, are taken care of.

Simply contact us today to discuss your specific requirements and to find out more about how we can help.