Transactions
18 June 2008

Further to our September mailing from last year, we would like to further update you with some new developments with respect to the draft memorandum from the rulings commission on the conditions for getting a ruling on the tax-exempt nature of a post acquisition merger.

The rulings commission informed us verbally recently that they have changed their initial position from the one outlined in the above mentioned draft memorandum; they have decided not to grant any rulings on the tax-exempt nature of a post acquisition merger where a passive holding company has acquired an operating target through debt financing.

You may recall that, according to the initial draft memorandum, the commission would issue positive rulings on the tax exempt nature of these sorts of mergers provided that an informal thin capitalisation test was fulfilled AND a business plan was submitted (with a 'a posteriori' audit). A post acquisition merger of this sort would have allowed the merged company to offset any interest expenses of the acquisition loan against the taxable income of the operating company.

Conversely, with respect to the situation where an operating company acquires an operating target company through debt financing, followed by the merger of the two companies, the rulings commission is still willing to grant rulings on the tax-exempt nature of the merger. As already foreseen in the draft memorandum, in order to get such a ruling, one needs to on the one hand give evidence of the economic and financial needs for the merger and, on the other hand - in addition to the legal requirements – ensure that the informal thin capitalisation test is fulfilled. For your information, you will find the five tests - one of which is to be fulfilled to pass the informal thin capitalisation test - in the right section of this page.

We regret that, with this point of view, the rulings commission has simply closed the door to tax-free mergers for an operational company within a holding company, that is set up for the acquisition of the operational company. Furthermore, it is regrettable that, for a post acquisition merger of two operational companies whereby acquisition debt is pushed into the merged entity, an additional test (the informal thin capitalisation test) is imposed; this is in addition to the need for a financial or economic rationale for the merger, as foreseen in the income tax code.

We are now awaiting the formal memorandum from the rulings commission, and will keep you posted accordingly in the event this formal opinion should deviate from the information above, which was informally communicated to us.

Finally, we remain hopeful that this negative point of view from the rulings commission re-opens the discussion on the implementation of tax grouping in Belgium!

Should you have any questions, please do not hesitate to contact the PwC M&A Tax Team or your regular PwC contact person.

Best regards

Jan Muyldermans
Lead Transactions Partner