Header Image

The M&A Perspective - II/2014

15 May 2014

Favorable Tax Rulings as Unlawful State Aid in the EU - Beware of Repayment Obligations
On 11 September 2013, the EU Commission launched a state aid investigation by sending information requests to member states regarding their tax ruling systems. The initial request was sent to three member states: Ireland, Luxembourg and the Netherlands. Further requests to other member states may follow. The Commission needs this information in order to assess whether certain tax practices favor certain companies, in breach of EU state aid rules. Under these rules, the Commission can force EU member states to retroactively reconsider and invalidate tax rulings that infringe the state aid rules, and to recover from beneficiaries of such rulings any tax benefit considered amounting to unlawful state aid going back as long as ten years.

In order to protect an acquirer of an entity with EU subsidiaries against any possible outcome of this preliminary investigation, especially a contingent obligation to pay back purported state aid in the form of unlawfully beneficial tax rulings, the following safeguards are recommended: In the due diligence process, the buyer should inquire about the existence of any favorable tax rulings issued by an EU member state, in order to be able to assess the level of risk. Usually, the customary tax indemnities in the acquisition agreement do not effectively and clearly cover state aid cases. Therefore, if there is such a risk and the parties do not want to reflect that upfront appropriately in the purchase price, the acquirer should demand the seller to indemnify him in full for ten years against any possible reimbursement/payment obligations arising from purportedly unlawful state aid.

Read more:

Swiss Popular Initiative "Against Mass Immigration" - What Are the Consequences?
On 9 February 2014, the Swiss voters narrowly approved the initiative "Against Mass Immigration" with 50.3% of the votes. The initiative aims to limit immigration through quotas. The acceptance of the initiative obliges the federal council (the Swiss government) to renegotiate the entire EU labor market agreements within three years; the current treaties stay in force in the meantime. As an immediate consequence, the federal council was no longer allowed to sign the already negotiated free movement accord with Croatia, which joined the EU in July 2013.

A few weeks after the vote, the further consequences are still unclear. Foreign investors and potential acquirers of Swiss businesses are particularly interested to know whether it is still possible to send foreign employees to Switzerland. The answer is yes. The initiative has no immediate legal consequences on the labor market, as the current treaties stay in force until the initiative's implementation (which may take up to three years). The mid- and long-term consequences are still unknown. It remains to be seen where the implementing legislation will come out. In that context, it is important to note that although in a democratic vote the majority decides, one of the very important principles of Switzerland's direct democracy is that strong minorities also need to be adequately considered in the political process, and 49.7% voted against the initiative. This could lead to the introduction of a quota system that effectively limits immigration (respecting the majority's will), but not unreasonably (respecting the will of the strong minority).

Read more:
Court Decision on Swissair Cash Pooling - A Red Flag for Past Dividends?
In a recent decision regarding auditor liability, the Zurich Commercial Court held that upstream and cross-stream loans granted by a Swiss company may under certain conditions reduce its freely disposable equity and with this its legal ability to pay out dividends. The anonymized decision purportedly concerned the auditors of Swisscargo, a former subsidiary of Swissair, which took part in the Swissair group cash pooling. Swisscargo's auditors were held liable because they confirmed the legality of a contemplated dividend without deducting from the freely disposable equity the intra-group loans that were granted by the company in the context of a group cash pooling.

The decision's consequences are unclear and discussed controversially in legal doctrine. It also remains to be seen whether the judgment will be upheld by the Swiss Federal Supreme Court. Already the Zurich Commercial Court's first decision in this matter was reversed by the higher court and sent back for reconsideration. If this decision were upheld, dividends in groups with cash pooling arrangements would need to be (re-)analyzed in detail. The question would be whether, following the court's calculation method, the company (still) had sufficient freely disposable equity to declare the relevant dividend. If the answer were no, the dividend would be null and void and would need to be repaid to the company. In the context of a sale of a Swiss company that participated in a cash pooling, sellers consequently need to assess the risk that, based on the reasoning of this court decision, the company will seek to reclaim past dividends after consummation of the transaction. Buyers need to verify whether they are covered in case the target company is obliged to repay dividends received from former subsidiaries before closing. The M&A Perspective will of course keep you posted on future related developments.

Read more:

Back to overview