M&A Matters

25 Pages·2017·0.85 MB·English

M&A Matters
October 2017
kpmg.com/uk/mamatters
2 | M&A Matters – October 2017
Contents
Welcome to the October 2017 edition of M&A Matters ................................... 3

CIR and the implications for M&A transactions ................................................ 4

CIR and the regime anti-avoidance rules .......................................................... 7

Input VAT recovery by holding companies on transaction costs ...................... 9

The Multilateral Instrument (MLI) and its impact on

cross border tax treaties ................................................................................. 12

Contractual interpretation ............................................................................... 15

AIFMD update ................................................................................................ 18

ATAD 2 impact for Luxembourg-based private equity funds .......................... 21

Your contacts .................................................................................................. 24

© 2017 KPMG LLP, a UK limited liability partnership and a member frm of the KPMG network of independent member frms affliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.
3 | M&A Matters – October 2017
Welcome to the October 2017 edition
of M&A Matters
M&A Matters incorporates the latest topical tax updates with a
broader review of M&A insights.
We begin the October issue in full swing We have a broader update on the
with Rob Norris and Mark Eaton providing Alternative Investment Fund Managers
an update on the corporate interest Directive (AIFMD) by Julie Patterson and
restriction regime and the implications for Zeeshan Arshed and the outlook for the
M&A transactions. future.
Then, Tim Jones, Sarah Reynolds and Ian To round us off, Giuliano Bidoli and
Mullen from KPMG Indirect Tax Advisory Sophie Richard from KPMG in Luxembourg
give an update on HMRC guidance for VAT take us on a tour of the European anti-
recovery for holding companies, a topic we tax avoidance directive (ATAD 2) and
know is keenly watched on the deal side. its measures in dealing with hybrid Alistair Haley
Robin Walduck, James Sia, Mark Hutton mismatches. KPMG in the UK
and Sarah Beeraje guide us through the We hope you will enjoy our latest edition T: [phone]
latest on the OECD BEPS (base erosion of M&A Matters. If you would like further E:
4 | M&A Matters – October 2017
CIR and the implications for
M&A transactions
Following the publication of the summer Finance Bill, we now have confrmation the corporate interest
restriction (“CIR”) regime is due to apply from 1 April 2017 whatever a company’s year-end. In this
article, we consider the implications for M&A transactions.
Introduction to the CIR regime Identifying the CIR group
Key points Under the corporate interest restriction The CIR rules operate by reference to
– When modelling post-acquisition (CIR) rules, interest-like expenses are the ‘worldwide group’. In particular, the
cash fows, the impact of the CIR disallowed to the extent that the net fnance total disallowed amount is computed on
rules on the expected tax relief charge taken from the UK tax computations a groupwide basis and is then allocated
for fnancing costs is vital – we exceeds the interest capacity. between UK group companies. It is vital to
recommend that modelling is The interest capacity is based on a correctly identify the ultimate parent and
undertaken early on before the percentage of tax-EBITDA (taken from the which entities comprise the worldwide
structure is determined – the tax computations) or, if lower, a measure group. Typically this follows the International
previously held assumption that of the net interest expense, based on the Accounting Standards (IAS) defnition of
bank debt will be fully deductible group accounts (the debt cap), but is always consolidated subsidiaries.
may no longer be valid. at least £2 million. Generally speaking, a worldwide group
– The CIR rules operate by will consist of all entities that would form
reference to a worldwide group Modelling impact of the CIR rules – part of a group applying IAS; broadly, a
which is headed by its ultimate new approach required parent and its consolidated subsidiaries.
parent – changes to the ultimate The approach to modelling post-acquisition An IAS parent will only be treated as the
parent impact the CIR calculations. cash fows must now take account of the ultimate parent if it is a ‘relevant entity’,
–
r
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in part on group interest from The model must take into account the hybrid holds more than 10 percent by value). The
the group accounts and certain and other mismatch rules and the interaction CIR grouping rules mean that a partnership
interest (i.e. payable to related with the revised loss utilisation rules. The is only capable of being the ultimate
parties) is excluded which reduces combination of rules and restrictions is leading parent of a worldwide group if it meets the
the capacity to deduct interest. to greater complications and we’re seeing old relevant conditions described above.
assumptions being thrown out the window.
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5 | M&A Matters – October 2017
A subsidiary under IAS will not qualify as allowance will be lost where a new – Carry forward of excess debt cap
a CIR subsidiary if the investment in that top holding company is inserted amount: The deductibility of net
company is measured at fair value under which becomes the ‘new’ ultimate interest for a period is based, in part,
IAS (as opposed to having its results parent of the group, e.g. if a new on the debt cap allowance (using
The CIR rules provide
consolidated on the more normal line-by­ holding company is added in fgures from the group accounts).
line basis). Such a company is excluded preparation for an IPO. Where there is a disallowance in a “for disa llow ed interest-
from the CIR group of its IAS parent.
• Where a subsidiary is sold or period and the debt cap is not the like expenses and
limiting factor, the excess debt cap
For groups which are owned by private purchased, they will not be able
amount can be carried forward and unused allowances to
equity partnerships, particular care will be to take with them any interest
required to identify the ultimate parent. allowance from when they were may result in more interest being be carried forward to a
deducted in a future period. This is
a member of the seller group; later period.
carried forward as a group attribute in
Impact of the CIR rules – utilisation instead the seller group will retain
a similar manner to a carried forward
of carried forward amounts the ability to utilise any carried interest allowance.
The CIR rules provide for disallowed forward interest allowance.
interest-like expenses and unused Carry forward and reactivation of It should be noted that whereas a group’s
allowances to be carried forward to a later disallowed interest: Interest-like expenses capacity to access relief for current year
period. If there is a change in ownership which have been disallowed are carried interest is increased by any unexpired
of a company or group, an assessment is forward as an attribute of a company and interest allowance carried forward from
required as to whether these attributes are may be deducted by that company in a earlier periods (see above), its capacity
still available and who can access them. later period where there is “headroom” in to reactivate interest disallowed in prior
years only takes account of the current
– Carried forward interest allowance: the amount of the allowable interest. This period interest allowance. It is generally
Net interest-like expenses for UK attribute is carried forward across the sale unlikely that a group would have both
companies are deductible to the of the company or a change in the ultimate carried forward disallowed interest
extent they do not exceed the interest parent, broadly, provided that the activities and a carried forward unused interest
allowance for the current period plus of the company continue. The existing allowance but this could arise following an
the interest allowances carried forward change in ownership rules (in Part 14 CTA acquisition. For example, where a group
from earlier periods that have not 2010) and the proposed new loss utilisation with unexpired carried forward interest
expired. The unused interest allowance rules have not been extended to amounts allowances (and no previous disallowances)
for a period can be carried forward for carried forward under the CIR rules. acquires a company with carried forward
up to fve years and may allow more of However, the CIR regime targeted anti- disallowed interest, it will only be possible
the interest-like expenses, which arise avoidance rule and possibly the transfer of to reactivate such disallowed interest
in a later period, to be deducted. This is deductions anti-avoidance provisions (in to the extent that the group has current Tax Matters Digest “devil is

an attribute of the group and not of any Part 14A CTA 2010) could be relevant. year excess interest allowance after the the detail” series of articles

particular company in that group. acquired company has joined the group. – Further details of the CIR rules
• Where a group is acquired, the This illustrates the level of detailed are provided in a series of weekly
‘old’ group ceases and any carried understanding of the rules which will Tax Matters Digest “devil is in
forward interest allowance is be required to model the impact of the the detail” articles which look at
lost. Similarly, any carried forward acquisition. aspects of the CIR rules in “bite
sized chunks”
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6 | M&A Matters – October 2017
Related parties Changes in composition of the
group – interaction with the
For each period, a group can elect to
calculate the interest allowance based CIR elections
on the group ratio method. Under this The CIR rules contain over ffteen possible The CIR rules contain
method, the interest capacity is based, in elections which can mostly be made or “over 15 po ssible
part, on a group accounts measure of net amended after the end of a period. Where
interest-like expenses (known as qualifying companies are purchased and sold, it elections which can
net group-interest expense). For these will be necessary to assess the impact mostly be made or
purposes, interest-like expenses payable of elections on the acquired company or
amended after the end
to a related party are not included, thereby group.
reducing the capacity to deduct interest. If of a period.
– Some elections are made for the
the group ratio method is to be used, it will
group. Where a company becomes
be necessary to assess whether the group
a member of a new CIR group, any
is paying interest etc. to related parties.
such election will cease to apply to
For example, bank borrowing can be the company and calculations will be
treated as being from a related party based on whether the “new” group
where a guarantee, indemnity or other has made an election.
fnancial assistance is provided by a related
– Alternatively, an election may be made
party who is not a member of the group.
by a company which is unaffected by
However, a bank’s security package should
leaving or joining a group.
not cause them to be treated as a related
party in relation to the borrowing, provided
the guarantee is only from companies
within the group.
Rob Norris
Where a group is owned by private
Director – KPMG in the UK
equity partnerships, particular care will be T: [phone]
required to identify funding from related E:
7 | M&A Matters – October 2017
CIR and the regime anti-avoidance rules
The CIR regime contains what HMRC draft guidance describes as a regime anti-avoidance rule (RAAR)
counteracting certain arrangements achieving a better result under the CIR rules than would otherwise
be the case. Groups will need to consider whether the RAAR applies to any restructuring transactions that
may affect the group’s overall disallowance (or reactivation) of interest under the CIR rules. The RAAR is
broadly drafted and, unlike similar anti-avoidance provisions, does not contain a general exclusion for
arrangements that are consistent with the principles and policy objectives underlying the CIR rules.
Overview of the RAAR • Reactivating previously disallowed Transitional rules
The RAAR provides that any ‘tax advantage’ amounts under the CIR rules that The general rule is that the RAAR applies in
that would arise from ‘relevant avoidance would not otherwise have been relation to arrangements whenever entered
arrangements’ is to be counteracted by the reactivated (or having greater into (i.e. including any arrangements
making of such adjustments as are just and amounts reactivated or having entered into before 1 April 2017).
reasonable. amounts reactivated in a different
accounting period). However, three transitional exclusions are
Arrangements are ‘relevant avoidance available.
arrangements’ if both: When assessing whether there is a tax
advantage, ‘tax’ includes any amount Exclusion 1 – arrangements that
– The main purpose, or one of the main chargeable as if it were corporation tax or accelerate deductions pre-1 April 2017
purposes, of the arrangements is treated as if it were corporation tax (e.g.
to enable a company to obtain a tax controlled foreign companies (CFC) charge The RAAR will not apply to arrangements
advantage; and and bank levy) and diverted profts tax. so far as they reduce the amount that
would otherwise be disallowed under
– The tax advantage is attributable (or It should be noted that the anti-avoidance the CIR rules post-1 April 2017 via paying
partly attributable) to any company: rule does not test whether there is a tax amounts before 1 April 2017.
• N
u
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having lower amounts disallowed of the CIR rules where this would otherwise
or having amounts disallowed in a be disallowed if paid post-commencement,
different accounting period); or or paying non-interest expenses,
such as pension contributions, before
© 2017 KPMG LLP, a UK limited liability partnership and a member frm of the KPMG network of independent member frms affliated with KPMG International
Cooperative (“KPMG International”), a Swiss entity.
8 | M A& Matters – tcO ober 2017
oc mmenec ment that wolu d otherwise MH CR draft iug danec says this mihg t
redecu taIBE- x A DT and therefore the involve a rg opu restrtcu ru in g so as to
rg opu s’ ac paic ty to dedtcu interest post-
�– allow the rg opu to be able to beneft
oc mmenec ment of the CI R rlu es.
from the pbu li c infrastrtcu ru e rlu es or
Exclusion 2 – loans being brought into �– refnanec debt that wolu d not auq lify
the UK as “auq lifyin g net rg opu i- nterest Rob Norris
epx ense” with debt that does auq lify iD retc or – KPMG in the UK
hT e RAR will not apply if the ta x
(thereby potentially inrc easin g the T: 4+ (0)121 223 763
advantaeg ac n reasonably be reag rded
amonu t of interest allowable nu der the E:
9 | M&A Matters – October 2017
Input VAT recovery by holding companies
on transaction costs
After almost 20 years of Summary of input VAT recovery So far, so good – we now have a clear set
discussion – where are we now? guidance of principles issued by HMRC that, to be
deductible, input VAT must be incurred by a
In order for a HoldCo to be in a position
taxable person in the course of an economic
Input VAT recovery in respect of to deduct VAT incurred on deal fee costs,
deal-related costs has been an H
foMlloRwCin sgt attweos tmhatin i tc noenedditsio tnos s: atisfy the atoc ttiavxitayb alen ds uhpapvleie as dmiraedcet abnyd t himatm peedrsiaotne. link
area of intense interest to HMRC Where these conditions are not met (e.g.
for many years, following a – Ii.te m. iut shta bse c othnetr areccteipdie fnotr othf eth seu psupplyp ly,
ibt ehcaasu nseo tehceo nHoomldiCc oa cisti vniotyt )t, hteh er eHcoipldieCnot or
number of landmark legal cases. (including by novation), it has made use
cannot recover any VAT on the deal costs.
HMRC fnally published its latest of the supply, and has been invoiced
guidance earlier this year in VAT and paid for the supply; and Undertaking an economic activity
Manual VIT40600, which sets out – The costs on which VAT is incurred for VAT purposes
must have a direct and immediate
what it now considers to be the link to taxable supplies conducted by The diffculty that many HoldCos have is
being able to show that the VAT incurred
criteria for input tax deduction by the HoldCo (or the VAT group that the
HoldCos (holding companies). HoldCo is a member of). rae HlaoteldsC tos a’ na cetcivoitnieosm tiec nadc ttiov itbye –m aosr eo ften
Importantly, the HoldCo must be undertaking “passive” in nature (e.g. holding of shares,
This article explains what the new an economic activity in order to have any receiving dividends, etc.). It was accepted
HMRC guidance says, explores possibility of recovering the VAT it incurs, back in 1993 (Polysar) that the mere
some remaining uncertainties gevroeunp i.f Iint ios rad emr etom dbeemr ofn as tfrualtley tahxea nbelec VeAssTa ry a
ecqouniosmitioicn a acntidv ithyo lfdoirn VgA oTf psuhraproese is .n ot an
and suggests what best practice direct and immediate link for VAT recovery,
now looks like. the costs incurred may relate to: HMRC accepts this “economic activity”
– Taxable supplies made by the HoldCo condition will be met where evidence exists
in its own right, e.g. management to show that a HoldCo makes, or intends to
charges; and/or make, supplies of management services for
a consideration to its subsidiaries.
– If HoldCo is VAT-grouped, its economic
activities should support taxable However, following the ECJ decision in
supplies made by the VAT group, e.g. Larentia + Minerva (C-108/14), HMRC
management services or interest- consider that the holding of shares (a non­
bearing loans to other VAT group economic activity) can only be disregarded
members that make taxable supplies in relation to those subsidiaries to which
outside the VAT group. taxable management services are supplied.
© 2017 KPMG LLP, a UK limited liability partnership and a member frm of the KPMG network of independent member frms affliated with KPMG International
Cooperative (“KPMG International”), a Swiss entity.
10 | M&A Matters – October 2017
Therefore, where a HoldCo only makes steady-state corporate acquisition rather
supplies to some of its subsidiaries, the than a fnance-backed acquisition where
holding company will be undertaking a the SPV set up to acquire the target joins
mixture of economic and non-economic the target’s VAT group upon acquisition.
activities, and an apportionment of VAT
HMRC provide an example in their guidance
recovery will be appropriate between
of where a business acquires a direct
these two activities. On this basis, full
VAT recovery would only be an option for competitor or a similar/complimentary
HoldCos that make supplies to all of their business with a view of increasing its own
subsidiaries. HMRC’s guidance does not market share and achieving effciencies
consider the VAT implications where the through greater integration of its supply
subsidiary receiving the supply does not chain as being a direct, continuous and
undertake any economic activity. necessary extension of a taxable activity of
the holding company.
HMRC’s guidance states that for VAT to be
recoverable, a direct and immediate link is By contrast, a company which purchases
required between the deal costs and the
a business as a free standing enterprise
management services carried out.
with a view to making money on dividends
or an eventual sale does not have a direct,
When is a separate Master Service
continuous and necessary link as there
Agreement (MSA) not required? is there is no direct link between the
This was an unexpected surprise. HMRC acquisition and the existing business.
states that where a shareholding is
acquired as a direct, continuous and Costs incurred by the “Target”
necessary extension of a taxable activity This is also good news - HMRC’s
of the HoldCo, a separate activity (e.g. confrmation that the VAT incurred on the
management services) is not required to costs by the target of an acquisition –
facilitate VAT recovery on associated costs. vendor due diligence costs for example
This is thought to have come as a result – may also be recoverable where it can be
of the UKFTT case of Heating Plumbing shown the target is the true recipient of
Services Ltd – in which the Tribunal found the supplies in question, and the supplies
that where the purpose of an activity is were received for the purposes of the
to further strengthen the business, the business carried on by the target.
VAT on associated costs is recoverable –
HMRC had previously argued the target
without the need for a specifc MSA to be
could never have received the services
put in place – as they relate to the existing
since it was not the entity making the
economic activity of the business.
supply. Happily, HMRC have changed their
However, it appears that HMRC may only view in this regard.
seek to allow this approach in limited
circumstances and as advisors we think it
more likely that this test would apply to a
© 2017 KPMG LLP, a UK limited liability partnership and a member frm of the KPMG network of independent member frms affliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.