M&A hot tax topics

Session Co-Chairs

Devon Bodoh, Weil, Gotshal & Manges, Miami
Susanne Schreiber, Bär & Karrer, Zurich

Speakers

Amie Colwell Breslow, Jones Day, Washington, DC
Jisun Choi, Skadden, Arps, Slate, Meagher & Flom, London
Andrea D'Ettorre, Facchini Rossi Michelutti, Milan
Sylvia Dikmans, Houthoff, Amsterdam
Konstantin Ecker, Eversheds Sutherland, Frankfurt am Main

Reporter

Natalia Ishyna
Makery, Munich
natalia.ishyna@makery-group.com

Introduction

The panel addressed current tax issues relevant to cross-border M&A transactions. Based on perspectives from the United States, the United Kingdom, Germany, Italy, and the Netherlands, the co-chairs and speakers elaborated on relevant case law, recent legislative and administrative developments, and practical deal experience. The discussion focused in particular on the tax treatment of earn-outs and other forms of deferred or contingent consideration (including management holdbacks), the characterisation of warranty and indemnity payments, the VAT recoverability of transaction costs, the impact of Pillar Two rules on M&A structuring, redomiciliation and group migration to the US, and mechanisms for cash repatriation in cross-border transaction structures.

Panel discussion

Taxation of earn-outs and deferred consideration

The panel opened with a comparative analysis of the tax treatment of earn‑outs, using a concise case study to examine implications for both corporate and individual shareholders across the represented jurisdictions.

In the UK, the earn-out right itself is treated as an asset acquired as of closing and disposed when the earn-out is paid. The fair market value of the right is included in the computation of chargeable gains on the disposal of shares (potentially exempted under the substantial shareholding exemption (SSE) for corporate sellers). Any excess received in the later years over that fair market value is then subject to a further charge to capital gains tax (CGT), but without the benefit of the SSE. The practical consequence is that the UK imposes a two-stage CGT analysis, with different rates potentially applying to each stage.

Under Italian rules, for sellers that are corporate shareholders, deferred but certain consideration is generally included in the capital gain at closing under the accrual principle, whereas contingent earn‑outs are taxed only once they become certain in subsequent years. A noteworthy feature of the Italian regime is that, in line with International Financial Reporting Standards (IFRS)‑aligned Italian generally accepted accounting principles (GAAP), deferred consideration with a significant financing component may be split into principal and interest for accounting purposes. In this case, the interest component is disregarded and treated as part of the purchase price for capital gains purposes, that is taxable on an accrual basis as business income, thereby increasing the corporate income tax (CIT) base in the year accrued. Where sellers are individuals, any deferred consideration and earn-out payment is taxable when received on a cash basis. If individuals are also managers, returns on management incentive plan (MIP) shares may be recharacterised as employment income if disproportionate to the capital invested. To mitigate this risk, MIPs are commonly structured to meet the Italian carried-interest safe harbour, which presumes capital gains treatment where specified conditions are satisfied.

Germany is currently facing heightened uncertainty following the unpublished 2023 ruling of the Federal Tax Court, which holds that earn-out payments are taxable in the year of receipt. The core problem is that at that point the seller no longer holds shares, meaning the participation exemption and partial income relief may technically no longer be available. Legislative clarification is urgently needed; without it, sellers face significant uncertainty when negotiating share purchase agreement (SPA) provisions and may bear materially higher tax costs than anticipated.

In the US, the installment sale regime allows sellers to pick up gain over time based on a gross profit ratio, though an election to recognise all gain upfront may be preferable where tax rates are expected to rise. A frequently under-modelled trap is the mandatory recharacterisation of a portion of deferred payments as interest income. Where earn-outs are tied to continued employment, recharacterisation as compensation — triggering ordinary income rates and payroll taxes — remains a significant risk.

Sylvia Dikmans noted that for Dutch corporate sellers, the participation exemption is broadly available and earn-out payments are generally tax-exempt, provided the earn-out is properly structured as a true purchase price element and not tied to ongoing services.

Management holdbacks and the golden parachute rules

The panel also addressed the tax treatment of consideration payable to management shareholders who continue as employees post-closing.

In the UK, capital gains treatment for management sellers is generally achievable where they hold shares and receive no more per share than institutional investors, but this requires careful, case-by-case documentation.

In Italy, the Revenue Agency has in very recent assessments begun recharacterising portions of the management purchase price as ‘other income’ – even where no additional consideration was received relative to financial investors – on the basis that a portion of the purchase price remunerates post-closing SPA obligations of the managers such as reinvestment commitments and the obligation to continue to work for the target for a period of time after the sale.

In the Netherlands, retention-based earn-outs carry an elevated wage tax risk, and payments to high earners may trigger a 75 per cent employer levy as excessive severance.

In the US, section 280G imposes a 20 per cent excise tax on excess parachute payments to disqualified individuals and denies the corporation a deduction for the excess; exposure should be identified and modelled early in due diligence.

Taxation of warranty and indemnity payments

The UK's treatment of warranty and indemnity (W&I) payments rests on an uncomfortable legal foundation. Case law treats the contractual right to receive a W&I compensation as a CGT asset in its own right, meaning that a receipt by the buyer could in principle be taxed as a capital gain – a result that sits uneasily with the commercial rationale of such payments. HM Revenue & Customs' Extra Statutory Concession D33 allows qualifying payments to be treated as purchase price adjustments, but the concession is not statutory, and its conditions must be verified on the facts. Where W&I insurance is in place, the tax character of proceeds remains uncertain, and W&I policies now routinely include explicit gross-up provisions.

In Germany, the recommended approach is to structure warranty payments as purchase price adjustments and to ensure that the buyer assigns any claim to the target company with proper documentation. If the payment goes directly to the target, it risks being treated as taxable income at the target level. The panel noted that W&I insurance proceeds are treated as taxable income for the recipient, as they do not reduce or increase the purchase price between the parties. A gross-up received in connection with such a payment is similarly taxable.

In Italy, the Revenue Agency and the Supreme Court hold conflicting views – the Agency treating indemnity payments as price adjustments (confirmed in 2022 rulings), the Court treating them as fully taxable windfall gains (established 2020 and reaffirmed in 2023). SPAs should provide for price adjustment treatment, and buyers should additionally seek a gross-up obligation and consider filing a tax ruling request.

Amie Colwell Breslow noted that the US offers the simplest treatment in this area: W&I payments are treated as additional purchase price, provided that the SPA contains appropriate characterisation language. This treatment applies regardless of whether the payment flows directly between seller and buyer or is routed through the target.

VAT deductibility of transaction costs

One of the most practical ‘takeaways’ of the session concerned the recovery of VAT on transaction costs, which has historically been an area of high uncertainty.

Sylvia Dikmans outlined the Dutch position, which has been the subject of a series of decrees from the State Secretary of Finance providing guidance on input VAT recovery in M&A transactions. The starting point in the Netherlands is that the acquiring holding company must qualify as a VAT entrepreneur, which requires active involvement in managing subsidiaries, evidenced by the provision of taxable management services. If that threshold is not met, no input VAT is recoverable. Even where the holding company qualifies, share transfers are VAT-exempt and costs directly attributable to the sale of shares are therefore generally not recoverable. The State Secretary has controversially drawn a distinction between pre-closing services and post-closing services, a distinction that is not clearly supported by European Union case law.

Andrea D’Ettorre reported a landmark development in Italy. The transformative 2026 Revenue Agency rulings finally aligned with rulings made in 2024 by the Supreme Court. SPVs in merger leveraged buy-outs (MLBOs) are now acknowledged as VAT-taxable persons entitled to deduct input VAT on transaction costs. Crucially, there is a strict deadline of August 2026 for taxpayers to file refund claims for past transactions dating back to 2016.

Pillar Two: Practical deal-room challenges

The panel’s discussion of Pillar Two in the M&A context was frank about the challenges that remain largely unresolved. Panellists agreed that the integration of Pillar Two liabilities into standard deal mechanics – purchase price adjustments, closing accounts, tax indemnities and W&I insurance – is still in its early stages.

A primary challenge is that neither buyer nor seller wants to share sensitive group-wide Pillar Two tax data. Insurance for Pillar Two risks also remain a ‘black box’. While some insurers may cover specific tax aspects, the premiums are high, and the market is still in the early stages of determining what constitutes ‘proper’ due diligence for such coverage.

The panel also raised the question of whether Pillar Two creates competitive advantages for certain acquirers – specifically, private equity funds (whose portfolio entities are typically outside consolidated groups) and US-headquartered multinationals, whose Pillar Two position may benefit from the new Organisation for Economic Co-operation and Development (OECD) side-by-side agreement as well as the interaction with US international tax rules such as global intangible low-taxed income (GILTI) and foreign-derived intangible income (FDII). These dynamics are likely to shape deal structures and buyer behaviour in the coming years.

Redomiciliation and migration to the US

The trend of international companies relocating their TopCos to the US is accelerating, driven by market liquidity and index inclusion.

Devon Bodoh walked through several structural approaches, each with distinct US and non-US tax consequences. A straightforward inbound merger (in which the foreign entity merges into a newly formed US corporation) is generally tax-free from the perspective of the US entity and non-US shareholders but may produce a taxable event for US shareholders in the target under section 367, which overrides the normal non-recognition rules for inbound reorganisations. Shareholders owning ten per cent or more must include their ‘all E&P amount’ (earnings and profits) as a deemed dividend, while sub-ten per cent shareholders must either recognise gain or make a corresponding income inclusion election.

An alternative structure – the equity reorganisation via a stock-for-stock exchange followed by a check-the-box election on the former foreign parent – was also discussed. While this can avoid shareholder-level taxation for public shareholders, it triggers an all-E&P inclusion for the new US TopCo, which must be managed carefully. A further structural tool involves waiting 12 months before executing certain steps, so that the section 245A dividends-received deduction becomes available to shelter the inclusion.

Jisun Choi outlined the UK approach, often involving statutory demergers to facilitate US listings. However, these remain complex as they must satisfy ‘exempt distribution’ rules, which generally require the spin-off entity to be UK or EU tax-resident.

Cash repatriation in M&A transactions

The session concluded with strategies for extracting cash from subsidiaries in jurisdictions with strict capital reservation rules, like Germany.

German corporations are generally only allowed to distribute balance sheet profit. To unlock cash, companies may merge entities to trigger an accounting step-up to fair market value. While tax-neutral, this method may result in the forfeiture of all tax loss carry-forwards and may trigger real estate transaction tax.

Conclusion

The 2026 panel underscored that M&A tax is increasingly defined by time-sensitive recovery mechanisms (eg, the Italian VAT window) and jurisdiction-specific court pivots (such as German earn-outs). As the US continues to relax rules for inbound domestications, the gap between the US and European tax regimes continues to narrow, shifting the focus of dealmakers toward corporate law flexibility and index inclusion.