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Blogs - The M&A Perspective

Favorable Tax Rulings as Unlawful State Aid in the EU - Beware of Repayment Obligations

15.05.2014 – 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.