Tax traps and opportunities in Western Europe

06/12/2021 Western Europe has long offered businesses far and wide attractive opportunities for investment. With its ideal placement in Europe and integration with the European Union, it tends to be less of a source of tax uncertainty; however, conducting business can still be challenging for investors working between different tax environments.

In the Mazars report, ‘Doing M&A in Western Europe: tax traps and structuring opportunities', we highlight what businesses can expect from conducting deals in the region and how they can avoid the tax traps while making the most of the structuring opportunities. Our Mazars M&A Tax team shares their insights on the findings and the opportunities and challenges related to mergers and acquisitions in the region.

The report covers tax challenges and opportunities in Belgium, Cyprus, Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. Which tax traps are the most prominent in the region?

The most prominent traps in the region are definitively the financial expenses deduction limitation - notably rates limitation, thin capitalization rules, ATAD,  and the use of tax losses in case of change of control - notably regarding anti-avoidance measures and other limitations imposed on companies after a change of ownership.

In addition to this, transfer pricing documentation remains a major challenge for companies, as even if a document is not always mandatory, companies must be able to demonstrate the arm’s length character of the intercompany transaction. 

What solutions would you advise businesses to pursue to avoid these traps?

There are several precautions businesses can take to avoid these traps, including monitoring the level of debt to achieve a full deduction of interest, keeping in mind the possible forfeiture of tax losses in order to negotiate price adjustments during the negotiation process, and documenting transfer pricing policy. These traps must be considered when conducting a negotiation to acquire a company or a group. 

Despite the challenges and tax traps that businesses may confront, there are still many benefits to doing M&A in Western Europe. What are the key advantages and top tax structuring opportunities for investors in the region? 

The main opportunities in the region are the capital gains rates or capital gains exemption, in addition to the group tax regimes, which offer the possibility to aggregate the taxable result of the target in the acquirer group. and the tax exemptions applicable to a merger.

How does Western Europe compare to other regions in the world when it comes to M&A?

It is a common perception that Western Europe is a less challenging region when it comes to M&A, but complications in the process remain Although the majority of countries in Western Europe are member states of the EU, acquisition and integration processes respond to local specificities in each country and conducting M&A operations can be a source of uncertainty. 

What advice would you offer to a business leader looking to do M&A in Western Europe? What is the first thing they need to do to prepare their business for the journey?

When looking to do M&A in Western Europe, it is important to not assume the common misconception that  EU tax law is harmonised, and understand that each country has its own specificities, traps, and opportunities. Having an M&A tax advisor where the target operates is key to better understanding the tax environment of the target and will help businesses prepare for the journey.

This is the third report in the ‘Doing M&A in’ series, which will also covers Doing M&A in CEE and Doing M&A in Asia Pacific.


To learn more about the risk and opportunities in Western Europe, click here.