M&A part two: tax risk and compliance

A report on a session at the 15th Annual IBA London Finance and Capital Markets Tax Conference held on 26 and 27 January 2026

Chair

Devon Bodoh, Weil Gotshal & Manges, Miami and Washington, DC

Panellists

Francesco Capitta, Facchini Rossi Michelutti, Milan

Amie Colwell Breslow, Jones Day, Washington, DC

Olivier Dauchez, Gide Loyrette Nouel, Paris

Reto Heuberger, Homburger, Zürich

Mike Lane, Slaughter and May, London

Amelia O’Beirne, A&L Goodbody, Dublin

Reporter

Wieger Kop, Houthoff, Amsterdam

Introduction

This panel discussed certain mergers and acquisitions (M&A) considerations, whereby the panellists touched on the considerations for indirect share transfers and certain anti-abuse provisions, such as the limitation on benefits (LOB) and principal purpose test (PPT). They also specifically discussed the new developments under the Organisation for Economic Co-operation and Development’s (OECD) Pillar Two framework and the side-by-side (SBS) agreement.

Panel discussion

Indirect share transfers

The panel started by discussing the tax implications of indirect share transfers. Mike Lane indicated that the United Kingdom may levy capital gains taxes depending on the transferred assets and the applicability of a double tax treaty. Certain jurisdictions, especially some African jurisdictions, consider an indirect share transfer as a deemed disposal and reacquisition of assets/liabilities, resulting in a tax liability, but also resulting in a step-up. Real estate transfer tax may also be due on an indirect share transfer, such as in cases involving German real estate. The indirect share transfer may also result in the loss of carry forward tax losses in certain jurisdictions.

The members of the panel agreed that Italy, France and the United States generally do not levy taxes on indirect capital gain taxes unless significant local real estate is involved. But various considerations in each jurisdiction must be taken into account.

Francesco Capitta said that Italy may challenge the tax residency and treaty eligibility of foreign entities due to indirect share transfers. In the case of an Italian buyer, the first aspect to consider is the deemed residence rule, according to which the foreign company is deemed to be tax resident in Italy. However, this is a rebuttable presumption and taxation may be limited, eg, under the Italy–Luxembourg double tax treaty.

In case of an indirect share transfer with a Luxembourg structure, if the company becomes tax resident in Italy from 1 January in the year of acquisition, the question arises as to whether the company can also be considered to be an Italian tax resident for capital gains tax purposes. The Italian entity may also lose its carry forward tax losses.

Olivier Dauchez discussed a recent French court case that determined that a Luxembourg entity’s place of effective management was in France, despite the fact that there were no French premises and staff and board meetings were held in Luxembourg. Furthermore, the French ultimate shareholders of a structure involving an indirect share transfer may be subject to controlled foreign company (CFC) rules.

Amie Colwell Breslow said that it is important to assess the application of the US foreign tax credit regime on indirect share transfers occurring below the US structure in order to avoid double taxation, as not all foreign taxes qualify for a tax credit. Colwell Breslow and Devon Bodoh stated that, in practice, these types of indirect share transfers also require a close assessment of other applicable rules, such as discussions with the US Securities and Exchange Commission (SEC).

Anti-abuse provisions

Next, the panel discussed various anti-abuse rules, such as the LOB, PPT and local anti-abuse rules. As a starting remark, Bodoh and Colwell Breslow agreed that the US is not necessarily the best treaty partner for other jurisdictions. The US has a great number of national anti-abuse rules, also taking into account various common law doctrines.

The economic substance of taxpayers is a hot topic and of increasing importance. It is important to ‘thread the needle’ in international structures to ensure that these broad national anti-abuse rules do not apply. Bodoh added that it is important to pre-tailor deals, perform sufficient due diligence and also consider the post-transaction structure in the context of these rules.

Colwell Breslow also indicated that most US double tax treaties contain an LOB clause and she discussed the main taxpayer classes that qualify for treaty application.

Reto Heuberger clarified that Switzerland has certain substance criteria, whereby two out of three criteria must be met by the foreign entities in the structure for treaty eligibility. An entity has sufficient substance if it has: (1) at least 30 per cent equity compared to its assets, (2) an active trade or business or holding company function and/or (3) employees and office infrastructure. Heuberger discussed how these substance criteria apply in practice in typical German, Dutch, Luxembourg and UK structures. However, treaty benefits may still be denied to a certain extent after a transaction has occurred if the structure was initially held within an aggressive tax structure.

Capitta then continued to discuss the Italian treaty position. As Italy has not ratified the OECD’s Multilateral Instrument (MLI), it generally does not have a PPT clause, save for certain new treaties (such as the treaty with China). However, Italy does have General Anti-Avoidance Rules (GAAR). 

In a 2025 case, the withholding tax exemption was ultimately upheld on a distribution to a Luxembourg entity based on a look-through approach, despite the fact that the Luxembourg entity was not considered to be the beneficial owner. Dauchez elaborated that France has quite a substantive list of indicators to determine beneficial ownership, including factual indicators concerning the distribution itself and functional (substance) indicators.

Pillar Two

The final topic covered by the panel was Pillar Two in the context of M&A.

Amelia O’Beirne outlined the workings of the new SBS agreement and indicated that it must be transposed into national law in various EU jurisdictions. She discussed the various new exemptions under the SBS agreement. The SBS safe harbour rule applies if the multinational group’s jurisdiction has an eligible domestic and global tax system, whereby the current requirements appear to be tailored to the US tax system.

The ultimate parent entity (UPE) safe harbour rule effectively replaces the Undertaxed Profits Rule (UTPR) safe harbour rule and limits Pillar Two’s application in the UPE jurisdiction if that jurisdiction has a qualifying domestic tax system.

The newly introduced substance safe harbour rule allows a broader set of incentives to exist under the Pillar Two regime. Qualified Domestic Minimum Top-up Tax (QDMTT) taxation is generally unaffected by the SBS agreement.

The success of the SBS agreement will be monitored and reviewed, initially in 2029. O’Beirne then proceeded to discuss certain interesting outcomes of the SBS agreement, as Pillar Two taxation may differ depending on whether a US entity owns the group.

The panel also discussed whether these tax trends have increased re-locations of companies to the US, although these re-locations may also be based on non-tax related considerations, such as salaries.