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 that 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).

Providing the detail necessary on the UBOs can be exceptionally complex for companies that are Private Equity (PE) or Venture-Capital (VC) backed, as items such as an organizational structure chart may not be fully drafted yet. And when the time to get a bank account set up extends into many months, companies can find that their operational timelines face serious disruption.

What Does It Take to Get a Local Bank Account Set Up Overseas?

In most countries, a local entity is required to set up a local bank account so that the Tax ID can be presented 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, share capital needs to be deposited in the bank account 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 additional weeks or months to finalize the opening of a bank account.

Tax Registrations

Once the entity type has been determined, i.e., limited company, branch, representative office, etc., the company will register for the applicable local taxes. In most countries, this is a separate and additional step following the incorporation of the entity. 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, where deadlines are exceptionally tight and the entities must be operational quickly, the 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 their VAT registration, it cannot deduct potential VAT that is related to the acquisition. This is usually not a trivial amount; therefore, the consequences are likely to be significant.

Tax Compliance Before and After You Are Operational

Before taxes can be filed, companies will need to assess whether a local resident director or fiscal representative must be assigned. This individual may be required to have a local tax registration number.

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

Companies often believe that because they have incorporated, are tax registered, and do not carry out any transactions, that they do not have any tax filing obligations – 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. Systems need to be configured 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.

Tax Compliance Is Typically Not Covered by the TSA

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

These requirements help the buyer to continue to operate, help them account for the transactions and prepare financial reports. However, any items that have to do with local tax filings and local compliance obligations are not included in the TSA.

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, and with a team of experts on hand, we can ensure 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.