Those keeping a close watch on merger and acquisition transactions have probably noticed that a larger portion of such deals carried out recently in Lithuania include the reorganization of the companies involved. Depending on the nature of the transaction, there are a few possible schemes for a reorganization to take place. The most typical are: first, a merger of the target company with the acquiring company in order to finance the transaction (LBO transactions), and second, a spin-off of part of the business (most likely, real estate) from the company with the intention to further transfer the separated asset.
While such transactions are rather frequent in Lithuania, those mulling an M&A should carefully consider the possible tax implications and structure the transaction so as to avoid possible negative tax implications.
Lithuanian tax laws establish a principle of tax neutrality in cases of a company reorganization (that under the general rule involves both the merger and the de-merger of the company) implying that neither the companies participating in the reorganization nor their shareholders should suffer negative tax implications.
However, it must be pointed out that not all the reorganizations may benefit from this general rule. Irrespective of the fact that certain transactions would qualify as a reorganization under the Lithuanian Company Law or the Civil Code, only those reorganizations carried out in accordance with the specific schemes listed in the Law on Corporate Profit Tax may enjoy a tax-free status.
Otherwise, the capital gains realized by the shareholders (by receiving new shares in exchange for the shares held before the reorganization), as well as by the companies participating in the reorganization (by transfer of assets from one company to another as a consequence of the reorganization) might be taxed accordingly. It must be noted that both of the above-mentioned schemes are typical and involve specific risks that may trigger taxation.
Moreover, subsequent disposal of the shares might also be restricted if the acquirer would like to avoid negative tax consequences. In particular cases, to qualify for favorable tax treatment shareholders should not sell, or otherwise dispose of, the shares received as a result of the reorganization for at least three years. Otherwise, such a subsequent transfer of the shares may trigger taxation of the capital gain realized during the reorganization.
Taking into account that reorganization of the companies may also involve other important tax aspects 's e.g., loss of tax exemptions for the subsequent transfer of shares or possibility to carry forward the losses, the contemplated M&A transactions involving reorganizations should preferably be carefully analyzed and structured by professional tax planners.
Mantas Petkevicius is senior associate at the Sorainen Vilnius office.