What is the impact of Pillar 2 on deals?

The timing of when Pillar 2 will go live needs to be closely followed. The political and commercial dynamic of who could implement first is becoming a factor when determining a holding company location for new acquisitions.

Pillar 2 awareness is crucial for deals

Deals have always required the acquirer to consider the tax position of the target, the tax implications for the acquirer and tax cost of any anticipated restructuring. That doesn’t change in principle, under Pillar 2, but there are additional points to keep in mind.

To start with, acquirers will need to determine whether the potential transaction falls within the scope of the Pillar 2 requirements. They will need to first determine the Ultimate Parent Entity (UPE) and whether the €750m consolidated turnover threshold is met. Where a target is being acquired by a private equity fund, one point that requires attention is whether the fund structure impacts where and how the ‘group’ is defined. For example, groups, which on a stand-alone basis are below the €750m threshold, may be surprised to find that their private equity parent’s ownership structure means they actually fall within the scope of the rules. This is something each private equity owned group will need to consider. This will be particularly important ahead of a sales process.

Pillar 2 needs to be considered from the outset, lest the new rules have a negative effect on post-acquisition plans. For example, the transitional period (as from 30 November 2021) could affect the ability of a group to integrate and move assets as part of post-acquisition integration.Also be aware that US tax overlays, commonly seen in European deals, such as check-the-box elections and Section 338 elections can add new complexity in a Pillar 2 world.

This makes it important to understand the Pillar 2 position when making deals. In-house tax teams are often running with stretched resources and time, so consulting advisors with international tax expertise specifically focused on deals can improve the process.

Every structure presents its own unique implications.

Making the deal work under Pillar 2

We’re working with a number of organisations to help them work towards an optimal approach to their deals in a Pillar 2 world.

The €750m threshold itself provides an interesting and new commercial dynamic that could impact pricing on future sale processes. For example, a standalone group below the threshold may be a more attractive proposition to a PE buyer than a large MNE buyer which is in the scope of Pillar 2. The mechanics for how you test the €750m threshold may also impact how and when groups exceed the threshold in a buy-and-build platform. For example, an asset deal bolt-on may be preferable if a share transaction would otherwise bring you in the scope of the rules earlier.

Buyside processes will need to be more sophisticated when it comes to conducting due diligence on tax accounting adjustments. There are many adjustments that can impact the Pillar 2 calculation, including foreign exchange differences, losses being carried forward in groups with permanent differences, local tax incentives and debt for equity swaps, to name a few.

Pillar 2 will affect legal documents needed for the transactions as well. Sales purchase agreement negotiations and banking documents, for example, will need to be adjusted to clarify who bears the Pillar 2 tax and where that cash comes from.

Deals will continue under Pillar 2 and, with proper care, businesses will continue to benefit from them. The world of tax and deals is always evolving – Pillar 2 is just the latest evolution. We will continue to offer advice to organisations looking to make the best deal they can, whilst avoiding any surprises or additional costs. We’re happy to talk about how we do that if you’d like to know more.