In the dynamic world of global business, change is the only constant. As economies recover from the pandemic-induced slowdown, companies are recalibrating their strategies, seeking growth opportunities, and exploring new horizons. At the heart of this transformation lies the fascinating realm of mergers and acquisitions (M&A). This article is the first in a series of several articles related to pre-M&A activities.

This article is written by Dick Brinkhof ([email protected]) Ariel Hou ([email protected]). Dick and Ariel are both part of RSM Netherlands International Tax Services with a specific focus on Global Tax Policy and International Tax Advisory.

What are the current M&A trends?

In the fast-paced international business world, M&A have long been key strategies for companies seeking growth, market expansion, and strategic advantages. As we navigate the ever-evolving landscape of global commerce, even though challenging conditions are expected to persist as we enter 2024, several prominent trends have emerged, reshaping the dynamics of M&A activity and prompting a closer examination of innovative approaches to structuring these transactions.

A notable trend in recent years is the surge in cross-border M&A transactions, reflecting a broader shift towards globalization and emphasizing the importance of international expansion strategies. This trend is driven by companies seeking new market opportunities, access to specialized technologies or talent pools, and economies of scale through consolidation. Additionally, the convergence of industries, fuelled by technological advancements and changing consumer preferences, has led to transformative M&A activity aimed at leveraging synergies and positioning companies at the forefront of emerging markets. Moreover, environmental, social, and governance (ESG) considerations are increasingly influencing M&A strategies, with companies prioritizing ESG integration throughout the process to mitigate risks and enhance long-term value creation potential.

What are the fiscal facilities for pre-M&A activities?

M&A are vital strategies for companies seeking growth and optimization. Prior to the M&A deals, business normally need to be prepared and re-organized. This overview explores business mergers, legal mergers, share mergers, and legal demergers, outlining their tax implications, strategic benefits, and operational impacts. Understanding these dynamics is crucial for businesses navigating the complexities of pre-M&A in today's competitive landscape.

Business Mergers: A business merger involves the transfer of a business or part thereof from one company to another, typically in exchange for shares newly issued by the acquiring company. Tax benefits include that capital gains derived from a business merger may be exempt if specific conditions are met, including maintaining shares acquired for a minimum period and ensuring alignment in tax regimes between merging entities. This approach is commonly adopted when the startup operations within existing entities undergo expansion and necessitate separation to enable scaling up.

Legal Mergers: A legal merger involves the consolidation of two or more companies, either through the acquisition of assets and liabilities or the creation of a new entity that absorbs the merging companies. Similar to business mergers, legal mergers can offer exemptions on capital gains under specific conditions, provided the merger is primarily driven by valid commercial motives. Strategically speaking, legal mergers enable companies to enhance market position, realize synergies, and capitalize on economies of scale, fostering sustainable growth and competitive advantage. Legal demergers are typically favoured when the transfer of all commercial contracts to a new legal entity becomes overly complex. In such instances, a legal merger enables the efficient transfer of all commercial contracts at once to the new legal entity.

Share Mergers: A share merger occurs when one company acquires shares in another company, resulting in the exchange of shares between shareholders of both entities. Share mergers generally produce tax-neutral consequences for companies involved, as they are transactions between shareholders rather than entities. Capital gains exemptions may apply to shareholders if the merger is not primarily aimed at tax avoidance and meets regulatory requirements. This facility is frequently used for an easy carve out.

Legal demergers: This facility involves the transfer of assets and liabilities to multiple entities, either through split-ups (transferring all assets and liabilities) or split-offs (transferring part of the assets and liabilities). This may qualify for exemptions on capital gains if specific conditions, such as valid commercial motives and regulatory compliance, are met.

Forward thinking

Despite the availability of certain facilities in the Netherlands, stringent criteria must be met to qualify for these benefits. Additionally, other operational-level business considerations need to be taken into account when selecting the appropriate facilities to proceed with. A critical example could involve a company primarily engaged with required licenses (e.g. customs declarations) where the feasibility of both entities obtaining crucial certification after a legal demerger could be pivotal and potentially impact the entire arrangement. If this outcome is unfavourable, exploring alternative facilities becomes imperative for the company.

In summary, strategic foresight in M&A taxation involves navigating regulatory shifts, devising innovative tax structures, integrating ESG criteria into deal-making, leveraging digital solutions, forging strategic alliances, and advancing thought leadership in tax matters.

Incorporating environmental, social, and governance factors into tax strategies not only promotes sustainable practices but also enhances deal attractiveness and resilience. Embracing digital tools and strategic partnerships enables firms to streamline tax processes, enhance operational efficiency, and maintain a competitive edge in the M&A landscape. Furthermore, thought leadership initiatives, such as sharing tax insights and engaging with stakeholders, position organizations as trusted advisors and industry frontrunners, driving innovation and success in the dynamic realm of M&A taxation.

By anticipating changes in tax legislation and market conditions, companies can optimize tax outcomes, ensure regulatory compliance, and mitigate tax-related risks in cross-border transactions. With the help of leveraging these Dutch acquisition vehicles, companies can navigate complex tax landscapes, optimize financial outcomes, and drive sustainable growth through strategic M&A.