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After acquiring a target group with European operations, US MNEs often seek to integrate the target group into their own corporate structure. A key consideration is where to locate the central holding platform for the European operations and which entities to eliminate. Where the purchaser and the target both have a holding structure, the purchaser's holding company is typically retained unless the target has strong operational presence in the holding jurisdiction.
From a tax perspective, a key aspect in selecting a holding jurisdiction in an MNE context is minimising tax leakage on profit repatriation. For this purpose, US MNEs typically compare common European holding jurisdictions such as the Netherlands, Luxembourg and Switzerland in terms of:
- participation exemption regimes;
- dividend withholding tax;
- non-resident taxpayer rules; and
- treaty networks.
The review of withholding tax leakage should go beyond comparing treaty withholding tax rates. In recent years, many countries have placed greater emphasis on the level of substance in the holding jurisdiction in assessing whether to grant withholding tax relief under the applicable treaty. In practice, a lack of substance may result in lengthy discussions regarding tax residency, beneficial ownership and/or the application of the principal purpose test. A similar trend can be seen in EU case law (see the recent NEO case). It has therefore become increasingly important to locate the holding company in a jurisdiction where the US MNE has relevant presence.
An important next question is at what level the substance should be located. In our experience, when assessing beneficial ownership, many jurisdictions consider substance at a country level. Some countries however adopt a stricter approach focused on the immediate parent and deny relief where the substance is located in the indirect parent or a sister company in the same country. US MNEs should take this into account when deciding between a flat versus tiered holding structure and designing cost-sharing arrangements.
Another factor in designing the post-closing holding structure is the allocation of (acquisition) debt. US MNEs often transfer subsidiaries to the holding company against debt such that interest expenses can be offset against taxable income within the holding company’s tax group. This can be another reason to align the holding company’s location with existing operations. At the same time, interest deduction limitations, transfer pricing considerations and measures restricting debt pushdowns must be monitored closely.
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Part one of the M&A series
Before considering the implications of a CTB election, it may be useful to review our first Snippet, which addresses another key post-closing consideration: access to tax attributes following an acquisition.
Part two of the M&A series
After reading this Snippet on access to tax attributes post-acquisition, you may also be interested in the second Snippet which discusses another key M&A post-closing consideration for U.S. multinationals acquiring a Dutch target company: the impact of U.S. check-the-box elections.
