Let us first recall the objectives of this reform: to enhance the competitiveness of our companies while establishing greater tax fairness, preventing certain large corporate groups from paying (almost) no tax in our country. The headline measure is therefore a gradual reduction in the nominal corporate income tax (CIT) rate (previously 33.99%) for all companies (down to 25%), with an even more pronounced cut for SMEs (down to 20%).
To finance this reform, notional interest deductions will be virtually eliminated, with only equity increases being taken into account. Furthermore, a minimum tax base will be established by limiting deduction opportunities for large companies.
Let us now examine more closely which specific measures will directly impact business acquisitions and disposals.
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Capital gains on shares: While capital gains on shares held by companies will generally become taxable going forward, an exception remains where the Participation Exemption regime (Revenus Définitivement Taxés or RDT) applies—requiring a minimum 10% shareholding and an uninterrupted holding period of one year. Consequently, nothing changes for a family holding company or an individual owner selling shares in a company at a capital gain, adhering to the principle of "normal management of private assets" (Art. 90, 1° CIR/WIB).
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Taxation of securities portfolios: Under the new 0.15% tax, registered shares would in principle be excluded. This once again distinguishes financial investors from owners of family businesses, who often pursue different objectives. However, this distinction between bearer and registered shares has drawn criticism from the Council of State (Conseil d'État), making this an issue to monitor closely.
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Reduction in deferred tax liabilities: The aforementioned reduction in the nominal CIT rate will directly impact the calculation of deferred taxes when applying valuation methods based on adjusted net asset value (NAV). Indeed, these methods account for unrealized capital gains between the book value and market value of certain assets (frequently real estate). Because the deferred tax liability is reduced, this will positively impact company valuations.
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Abolition of the tax on the Participation Exemption (RDT): For a holding company receiving dividends from a subsidiary, the previous system provided a 95% exemption, resulting in an effective tax rate of 1.69% (33.99% × 5%). The elimination of this tax will facilitate post-acquisition dividend upstreaming. This technique is frequently used to sweep excess cash out of the target company. Caution is warranted against overusing this mechanism, however, as it could trigger tax abuse provisions.
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Provisions for risks and charges: Strict limitations on these provisions, alongside applying the tax rate effective at the time the provision is recognized, mean that careful attention must be paid to potential future adverse tax repercussions.
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"Matching" principle: This new tax principle dictates that expenses must henceforth be matched against the fiscal year in which the related revenue is recognized. Acquisition due diligence will undoubtedly scrutinize this point with particular care in the coming years.
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Spread taxation on reinvested capital gains (Art. 47 CIR/WIB): The applicable tax rate will now be the rate in effect at the time the capital gain was realized, preventing windfall effects (i.e., realizing the gain prior to the introduction of the reduced CIT rate). Any target company that has availed itself of this measure will require a thorough examination of its future tax exposure.
Conclusion
In conclusion, this ambitious tax reform is relatively favorable for SME owners. While the worst-case scenario—a generalized tax on capital gains from share transfers—was avoided, financial investors will face increased tax burdens both at the corporate and personal levels. As a result, share deals will remain the preferred structure in the vast majority of transactions. Asset deals (cession de fonds de commerce) will remain more marginal, as capital gains in such structures remain taxable at the corporate level.
Certain measures will directly impact valuations and the execution of the transaction process itself. Tax due diligence, in particular, will become increasingly stringent.
Unquestionably, the tax landscape is becoming more complex and fast-changing, especially regarding business transfers. Now more than ever, securing sound professional advice is essential.
Article originally published in La Libre Économique by Tanguy della Faille, Partner at Fondaris, on 10/12/2017. Published/updated version on the Fondaris website with the author’s permission.
