This presentation includes recent international tax developments in the following: 1. General anti-abuse rules (GAAR) and specific anti-abuse rules (SAAR) foreseen by the OECD and the European Union. With a special focus on the Principal Purpose Test (PPT) included in the MLI, ATAD 1 and Parent-Subsidiary Directive. 2. Digital Economy - analysis of the different approaches and proposals of the OECD, the US and the EU, among other. Lack of consensus at an international level, long-term vs. short-term measures, nexus and profit allocation. 3. Quick review of the main tax issues to consider when approaching an M&A deal in Spain, with a focus on typical foreign Private Equity (PE) structures. We discuss the taxes involved when entering (buying), maintaining (creating value) and exiting (selling) the investment.

1. PPT, Digital Economy, Spanish M&A deals
Andreu Bové Boyd, International Tax Lawyer

2. PRINCIPLE PURPOSE TEST (PPT)
2

3. 1. OECD - Overview
 BEPS Project objectives:
1. Reinforce the coherence of corporate income tax rules at the international
level
2. Substance of the economic activities
3. Improve transparency
 Allocate income/profits where economic activity is carried out and where value is
created
 Minimum standards (flexible):
– Exchange of rulings (Action 5)
– Preventing treaty abuse (Action 6)
– Country-by-Country Report (Action 13)
– Improve dispute resolution (Action 14)
PPT
3

4. 1. OECD – Action Plan 6
 Treaty abuse as a major BEPS concern
 PROBLEM: Treaty shopping - claiming treaty benefits in situations where benefits
were not intended to be granted (e.g. letterbox/conduit/shell companies)
 loss of tax revenue
 SOLUTION: include anti-abuse provisions in DTT (Minimum standard commitment)
1. Include clear statement in DTT Preamble  DTT intended to eliminate double
taxation AND prevent tax avoidance (i.e. not creating opportunities for reduced
or non-taxation through treaty shopping arrangements)
2. Include AAR: PPT alone (GAAR); LOB (SAAR) & PPT combination; or LOB &
mechanism to deal with conduit arrangements - flexibility
PPT
4

5. 1. OECD – Action Plan 6
 LOB vs PPT
 LOB - objective criteria (+wording); certainty; limited approach – USA
 PPT - subjective criteria (-wording); case-by-case; broad approach - EU
 Existing SAARs in DTTs (e.g. beneficial owner, real estate entities)
 Existing domestic AARs + case law (uncoordinated approaches)
 Relationship between Domestic AAR vs International AAR (?)
PPT
5

6. 1. OECD – PPT in Model Tax Convention (MTC)
 PPT clause in Article 29.9 of MTC:
“a benefit under this Convention shall not be granted […] if it is reasonable to
conclude […] that obtaining that benefit was one of the principal purposes of any
arrangement or transaction that resulted directly or indirectly in that benefit
[SUBJECTIVE TEST], unless it is established that granting that benefit in these
circumstances would be in accordance with the object and purpose of the relevant
provisions of this Convention [OBJECTIVE TEST].”
: Was obtaining the benefit one of the taxpayer’s principal
purposes? Easy for the Tax Authorities (NOT sole or essential purpose)
: Would granting the treaty benefit defeat the ‘object and purpose’
of the Provisions/Treaty? Relief for taxpayer (difficult to interpret)
PPT
6

7. 1. OECD – PPT in MTC
 Objective Test (cont.)
- Object and purpose clause??
i. Action Plan 6: DTT’s purpose is to provide benefits in respect of bona fides
exchanges of goods and services, and movements of capital and persons
(encourage cross border investments), as opposed to arrangements whose
principle objective is to secure a more favorable tax treatment.
ii. MLI (preamble) - “Desiring to further develop their economic relationship
and to enhance their co-operation in tax matters,”.
iii. Commentaries to MTC: “promote […] exchanges of goods and services, and
the movement of capital and persons.”
PPT
7

8. 1. OECD – PPT in MLI
 PPT clause (same as MTC)
 Applies by default (minority opted for LOB)
PPT
8

9. 1. OECD – PPT
 Problems with PPT
 Subjective nature – same transactions could be treated differently
(constitutional?)
 Tax benefit does not need to be main purpose (lowering the bar for tax
authorities)
 Uncertainty - GAAR may apply even if commercial reasons
 MNE’s will always consider tax costs as a relevant factor (typical to be
one of the principal purposes) – even if arrangement were perfectly
legitimate
 Burden on taxpayer (exception to the rule) – prove that the decision would’ve
taken place even without the tax benefit
PPT
9

10. 2. EU
 Commissions’ 2016 recommendation if PPT clause included in DTTs:
“a benefit under this Convention shall not be granted […] if it is reasonable to
conclude […] that obtaining that benefit was one of the principal purposes of any
arrangement or transaction that resulted directly or indirectly in that benefit,
unless it is established that it reflects a genuine economic activity or that
granting that benefit in these circumstances would be in accordance with the
object and purpose of the relevant provisions of this Convention.’”
 Doesn’t apply if genuine economic activities (commercial motive, no abusive
arrangement, no real economic functions, no material risk) - ECJ’s Cadbury
Schweppes decision - Underlying reasoning: ‘World without taxes’
PPT
10

11. 2. EU – ATAD 1 and PDS
 Article 6 of Directive (EU) 2016/1164 of 12 July 2016 (“ATAD 1”), similar to PSD
“a Member State shall ignore an arrangement or a series of arrangements which,
having been put into place for the main purpose or one of the main purposes of
obtaining a tax advantage that defeats the object or purpose of the applicable tax
law, are not genuine having regard to all relevant facts and circumstances.
[…] an arrangement or a series thereof shall be regarded as non-genuine to the
extent that they are not put into place for valid commercial reasons which reflect
economic reality.
3. Where arrangements or a series thereof are ignored in accordance with
paragraph 1, the tax liability shall be calculated in accordance with national law.”
PPT
11

12. 2. EU
 OECD’s PPT constitutes restriction of UE’s fundamental freedoms (e.g.
establishment)
 Restriction is only accepted if justified and proportional
- Justification: prevent tax avoidance (only if “wholly artificial arrangements”
which do not reflect economic reality; Cadburry Schweppes)
- Proportional: taxpayer should be able to demonstrate that its activities are
genuine (balancing burden of proof)
PPT
12

13. 2. EU
 EU Case Law (CJUE):
 Essential aim is it to obtain tax advantage (Halifax)
 Legislation must provide for consideration of objective and verifiable elements
in order to determine weather a transaction represents a purely artificial
arrangement (Thin Cap GLO)
 Directive is against general abuse clauses that, in addition, put the burden on
the taxpayer (Eqiom / Enka)
 Tax Authorities cannot confine themselves in general predetermined
presumption of tax evasion or tax. They must carry out individual assessment
in each case (provide prima facie evidence of fraud and abuse – absence of
economic reasons) (Deister Holding / Juhler Holding)
 Economic reality test (of CJUE) applicable to PPT OECD?
PPT
13

14. 2. EU
 OECD PPT not in line with EU Law (ATAD and Parent-Subsidiary Directive)
 PPT is broader because it does not require artificiality
 EU GAAR limited to artificial arrangements
 Tax forum shopping is permitted in the EU (freedom of establishment and
movement of capital) if no artificial arrangement
 Abusive is defined as: non-genuine activities or artificial arrangements. Thus
fundamental freedom can be limited if there’s abuse
 The more substance – the better
 Minimum of substance (physical presence and functions aligned with underlying
economic rationale)
 Multiple-layer GAARs: DTT’s PPT / EU’s ATAD 1 and PSD / Domestic GAARs
PPT
14

15. DIGITAL ECONOMY
15

16. 1. What is the problem?
 Current Corporate Tax rules:
– Conceived for traditional business (“brick and mortar”)
– Profits are taxed where value is created
– Nexus (where to tax) and profit allocation (how much to tax) are based on
having physical presence
 How is value created in digital businesses?
– No physical presence
– Contribution of the end-users in the creation of value
– Importance of intangible assets (hard to value)
– Winner-takes-most structures
 Digital economy is of global nature – ideal approach: international solution
(≠wringfence)
DIGITAL ECONOMY
16

17.  Interim Report (No consensus):
– USA – General reform needed (not just digital companies)
– EU – Targeted measures needed for digital companies. Current legal
framework do not take into account new models of value creation in the
digital economy. Misalignment in nexus and profit attribution
– Other countries – BEPS in enough (no changes needed yet)
 Unclear where value is created. Is raw data valuable? How should this data be
valued? Should it be treated differently to industrial data?
 Keys features of digitalized businesses:
1) Scale without mass
2) Heavy reliance on intangible (IP)
3) User participation, network effects and user-generated content
EU believes this creates value (User value creation)
DIGITAL ECONOMY
17

18.  Long-term solutions
– Nexus and Profit allocation
– But no real consensus
– 2020
 Short-term solutions
– No real consensus
– Against: reducing innovation, investment, welfare, over-taxation and
compliance costs (adverse consequences)
DIGITAL ECONOMY
18

19.  Short-term solutions (cont.)
Action is needed (fairness, sustainability and public opinion), despite risks
• Comply with international obligations
• Temporary measures
• Targeted in scope
• Avoid over-taxation (cascade effect)
• Minimize impact for business creation start-ups and small companies
DIGITAL ECONOMY
19

20.  Current CT rules (where and how to tax) rely on physical presence  “brick and
mortar businesses”
 Current CT rules to the digital economy  Misalignment between where profits
are taxed and where value is created
 Tax fairness, competitive economy and sustainable tax revenues
 User value creation
 Directive proposals:
1. Common EU solution for digital activities – reform CIT rules
2. Interim tax
 Adjusting DTT
 Political matter (unanimous vs qualified majority)
– Supporters: France, Germany, Italy, Austria, Portugal, Spain
– Against: Ireland, Luxembourg, Malta, Denmark and Sweden
DIGITAL ECONOMY
20

21.  Long-term Directive – Digital PE
‒ Establish taxable nexus and principles for profit attribution (better capture
value creation)
‒ Nexus: Pay taxes in each Member State where a significant digital presence
(PE). Supply digital services and any of the following meet:
1. Revenues from users located in Member State (IP address) > 7M EUR
2. Number of users located in MS (IP address) > 100,000
3. Number of business contracts with users located in MS (residency) >
3,000
‒ Attribution of profits to the significant digital presence (what to tax):
‒ Functional analysis
‒ Economically significant activities (collection, storage, processing, analysis
of user data and user-generated content; sale of online advertising
spaces, supply of digital services 8streaming, subscriptions)
DIGITAL ECONOMY
21

22.  Long-term Directive – Digital PE (cont.)
‒ DEMPE functions + profit split method
‒ Applies intra-EU and with countries that have no DTT
‒ Ideally – adapt DTT
‒ Measures should be included as amendment to CCCTB
DIGITAL ECONOMY
22

23.  Short-term Directive – Digital Services Tax
– Urgent problem  Member States are taking unilateral measures
– Avoid unilateral/uncoordinated measures and Single Market fragmentation
– Easy to implement measure and levels playing field until comprehensive
solution in place
– Target revenues from supply of digital services where user contribution is
significant to value creation
– Tax the revenues from the processing of user input (not user participation)
– 3% on gross revenues
DIGITAL ECONOMY
23

24.  Short-term Directive – Digital Services Tax (cont.)
– Taxable persons: MNEs with worldwide revenues >750M EUR and with taxable
revenues in EU > 50M EUR
– Taxable revenues:
• internet advertising (Facebook, Google)
• platform intermediation that provides underlying services/goods
(Amazon, Alibaba, Airbnb, Uber)
• selling data collected about users generated online
 Companies providing online content (Netflix, Spotify) and e-retailers (IKEA, Zara) are not
affected, since user participation is less important in their value creation
– Place of taxation: Member State where the device is being used (IP address)
– Proportion of revenue for a Member State: Nº times an advertisement
appeared, number of underlying transactions concluded and number of users
who’s data was transmitted
DIGITAL ECONOMY
24

25.  Short-term Directive – Digital Services Tax (cont.)
– One-Stop-Shop (Special identification number)
– Annual self assessment
– Enforcement by each member State
– Deductible from Corporate Tax
– Supporters: France, Germany, Italy, Austria, Portugal, Spain
DIGITAL ECONOMY
25

26. 3. Other countries
 Despite BEPS’ cooperation, countries are acting/positioning themselves
unilaterally on this matter
‒ Argentina, Italy, Israel – changes in the PE concept
‒ India, Italy, UK and Greece – Revenue tax
‒ UK and Australia – Diverted Profits Tax
 USA’s position: digital businesses are not sufficiently unique to warrant a separate
treatment. With the tax reform, value is now taxed in the US. US is open to discuss
profit allocation, but it should be done on a broader basis (not only for digital
companies). Totally against an excise tax. US appears to be now ready to discuss
permanent establishment and income allocation rules.
 Source vs Residence + Now destination (value of the market)
DIGITAL ECONOMY
26

27. SPANISH M&A DEALS
27

28. SPANISH M&A DEALS
28
 Buyer or Seller
WHO IS OUR
CLIENT
WHAT IS BEING
BOUGHT / SOLD
 Shares (SPA) or Assets (APA)
WHAT TAXES
ARE INVOLVED
 Direct taxes or
Indirect taxes
Tax advice will depend on…

29.  Buyer -Private Equity-
1. Entry -Purchase-
2. Maintenance -Create Value-
3. Exit -Sell-
SPANISH M&A DEALS
29

30. 1. ENTRY – PURCHASE
 INDIRECT TAXES (VAT or Transfer Tax)
 Buyer’s tax residence not important
 SPA: exempt of VAT and Transfer Tax
 Anti-abuse clause: acquire control of underlying “passive” real estate
 APA: VAT applies (general rule), except if branch of business (“independent
business unit”) (“totality of assets or part thereof”)
 Real estate subject to Transfer Tax  “Dismantling” the branch will depend on
the purchaser’s activity (exempt?)
SPANISH M&A DEALS
30

31. 1. ENTRY – PURCHASE
 EXAMPLE: APA - Initial situation
SPANISH M&A DEALS
31
Buyer
Business
branch 1
Seller
Business
branch 2
Target

32. 1. ENTRY – PURCHASE
 EXAMPLE: APA - Final situation
SPANISH M&A DEALS
32
Buyer
Business
branch 1
Seller
Business
branch 2

33. 1. ENTRY – PURCHASE
 EXAMPLE: Indirect tax consequences
– Business Unit  No VAT
– Sounds good! But…
– Transfer Tax on the Real Estate (8-10%)!!
 Solutions:
– Dismantle “business unit”  Good if buyer can deduct VAT
– Property company (rental)  Segregate real estate (PPT, anti-abuse)
SPANISH M&A DEALS
33

34. 2. MAINTENANCE
 PARTICIPATION EXEMPTION:
– Dividend distribution
– 5% or 20M EUR
– 1 year holding period
– Anti-abuse clause: non EU/EEA control of holding company, unless its
incorporation and activity are business driven (PPT, substance)
SPANISH M&A DEALS
34

35. 2. MAINTENANCE
 NET FINANCIAL EXPENSES (LBOs)
– 30% limit on EBITDA (changes from ATAD)
• 1M EUR safe harbor
• Excess of financial expenses - carry-forward (unlimited)
• Excess of EBITDA (5 years)
SPANISH M&A DEALS
35
Example B.- Excess of EBITDA
Year n n+1 n+2 n+3
EBITDA 125.000.000 100.000.000 75.000.000 50.000.000
30% EBITDA 37.500.000 30.000.000 22.500.000 15.000.000
Net financial expenses 25.000.000 25.000.000 25.000.000 25.000.000
Deductible NFE (current year) 25.000.000 25.000.000 25.000.000 25.000.000
Non-deductible NFE (current year) 0 0 0 0
Tax adjustment 0 0 0 0
Excess for future years (accumulated) 12.500.000 17.500.000 15.000.000 5.000.000

36. 2. MAINTENANCE
 NET FINANCIAL EXPENSES (LBOs)
– Merger / consolidation: EBITDA of the absorbed entity is not included,
unless...
• Acquisition year: EBITDA of the absorbed entity cannot be used, if the
loan represents 70% of the purchase price (“30% EQUITY RULE”)
• Following years: Debt must be reduced in 8 years to 30%
• Other considerations: earn-outs and deferred compensations, carve-outs,
escrow accounts.
SPANISH M&A DEALS
36

37. 2. MAINTENANCE
SPANISH M&A DEALS
3737
Bidco
(ES)
Target
(ES)
Luxco
Bank
100%
100%
Merger/Consolidation
Loan
Limited
Partner
General
Partner

38. 2. MAINTENANCE
SPANISH M&A DEALS
Year n n+1 n+2 n+3 n+4 n+5 n+6 n+7 n+8
Acquisition price 100
Debt 60 56,25 52,5 48,75 45 41,25 37,5 33,75 30
Financial expense deduction J J J J J J J J J
Year n n+1 n+2 n+3 n+4 n+5 n+6 n+7 n+8
Acquisition price 100
Debt 80 73,75 67,5 61,25 55 48,75 42,5 36,25 30
Financial expense deduction L L L L L L L L L
Year n n+1 n+2 n+3 n+4 n+5 n+6 n+7 n+8
Acquisition price 100
Debt 70 65 60 55 50 45 40 35 30
Financial expense deduction J J J J J J J J J

39. 2. MAINTENANCE
 NOLs
– Compensation limit:
• 70% of taxable base (general rule)
• 1M EUR safe harbor, in any case
• 50% if turnover between 20M-60M EUR
• 25% if turnover > 60M EUR
• No limit period
– Mergers: only under Tax Neutrality Regime (business driven M&A)
– Consolidation: NOLs before/after entering consolidation group; double limit
(individual + group)
SPANISH M&A DEALS
39

40. 3. EXIT
 Sale and capital gain
– Depends on seller’s tax residence
• Spanish entity: participation exemption (% and holding period)
• Foreign entity:
a) DTT – no taxation, except real estate underlying (Dutch and
Swedish DTT don’t have this clause)
b) No DTT: 19% on the capital gain
SPANISH M&A DEALS
40

41. 3. EXIT
 Sale and capital gain
SPANISH M&A DEALS
41
Bidco
(ES)
Target
(ES)
Luxco
100%
100%
Limited
Partner
General
Partner
Bidco
(ES)
Target
(ES)
Dutchco
100%
100%
Limited
Partner
General
Partner
Bidco
(ES)
Target
(ES)
Swissco
100%
100%
Limited
Partner
General
Partner

42. 3. EXIT
 Sale and capital gain
SPANISH M&A DEALS
42
Bidco
(ES)
Target
(ES)
Luxco
100%
100%
Limited
Partner
General
Partner
Bidco
(ES)
Target
(ES)
Dutchco
100%
100%
Limited
Partner
General
Partner
Bidco
(ES)
Target
(ES)
Swissco
100%
100%
Limited
Partner
General
Partner

43. SUMMARY
43

44.  PPT
 OECD’s PPT is very broad (subjective test)
- One of the principle purposes
 EU GAAR is more limited (ATAD1 and PSD)
- Main purpose + wholly artificial
 Review structures & Substance (premises, staff and equipment)
 DIGITAL ECONOMY
 OECD – no consensus
- USA – broader approach (not only to digital businesses)
- EU – value is in user data – nexus & profit attribution
 EU
- Long term: Digital PE
- Short term: 3% on revenues
Summary
44

45.  Spanish M&A deals
 Entry: VAT (business unit/real estate)
 Maintenance: participation exemption, financial expenses (30% LBOs) and
NOLs
 Exit: No taxation, unless real estate
Summary
45

46. This presentation belongs to Bové Montero y Asociados, SL. The information contained in this document cannot be used or distributed without proper individual advice.
Barcelona │ Madrid │ Palma de Mallorca │ Sevilla │ Valencia
Andreu Bové Boyd
Lawyer & Economist
International Tax Dpt.
above@bovemontero.com