CMS Guide to Leveraged Finance across Europe most jurisdictions only an upstream merger would ... CMS Guide to Leveraged Finance across Europe . Bulgaria

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CMS Guide to Leveraged Finance across Europe

2012

3 Introduction

4 Albania 5 Austria 6 Belgium

8 Bosnia and Herzegovina 9 Bulgaria

10 Croatia

11 Czech Republic

12 France 13 Germany 15 Hungary

16 Latvia 17 Lithuania

18 Luxembourg

19 Montenegro

20 The Netherlands

21 Poland

22 Portugal

24 Romania

25 Russia

26 Serbia

27 Slovakia

28 Slovenia

29 Spain

31 Turkey

32 Ukraine

33 United Kingdom

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This document has been prepared as an introductory reference summary providing details on a legal system that may impact on issues that commonly arise in structuring and financing of leveraged buy out transactions. This document is not intended to be a comprehensive treatise on all aspects of law that may affect a leveraged buy out or to give details of the structures that can be used to overcome the challenges revealed. It does not give legal advice relating to individual transactions and may not be relied upon as such.

General points

— Generally, debut push down is achieved by way of merger. In most jurisdictions only an upstream merger would overcome existing challenges such as financial assistance restrictions (as there are generally no “white wash” like procedures) and interest deductibility limitations.

— Whilst most jurisdictions do not have particular restrictions for a merger process, transactions have to be analysed on a case-by-case basis from a regulatory perspective (i.e. the impact of an upstream merger on existing operating licenses of a target) as well as change of control provisions in main commercial contracts (focus point for due diligence process). Mergers involve shareholder approvals and where less than 100% is purchased; the ability of minority shareholders to block a merger process has to be examined.

— Where less than a 100% of the shares of the target are being purchased, the dilution effect of a merger has to be carefully considered.

— In jurisdictions where transfer pricing or other reasons guarantee fees may have to be payable to the group company giving the guarantee, the application of VAT to such fees would have to be considered (whereas generally guarantee fees can remain as intra-group receivables, VAT may be immediately payable and have a direct impact on cash flows).

— In jurisdictions with a smaller network of beneficial double tax treaties, fronting bank structures can be used.

Introduction

Bristol

Amsterdam

Brussels

UtrechtLondon

Edinburgh

Aberdeen

Antwerp

Paris

Leipzig

Lyon

Strasbourg

Madrid

Seville

Lisbon

Casablanca

Algiers

Rome

Milan

Zurich

Ljubljana

Vienna BratislavaBudapest

Zagreb

SarajevoBelgrade

Sofia

Bucharest

Prague

Warsaw

Kyiv

Moscow

MontevideoBuenos Aires

Shanghai

Beijing

Munich

Dresden

Berlin

Hamburg

DuesseldorfCologne

Frankfurt

Stuttgart

Rio de Janeiro

Luxembourg

Tirana

Rio de Janeiro

ShanghaiBeijing

CMS offices

3

Albania

Financial assistance prohibitionFinancial assistance prohibition is expressly envisaged for joint-stock companies (sh.a.). The prohibition does not apply to limited liability companies (sh.p.k.).

Intra-group security and guaranteesIntra-group security is permitted, should it not infringe the financial assistance prohibition rules.

Upstream loans and affiliate guarantees are not prohibited, subject to financial assistance rules. In such cases, transfer pricing issues should also be taken in consideration.

Withholding taxAlbanian law envisages a withholding tax rate of 10%. Pursuant to double tax treaties, to which Albania is party, the withholding tax may be reduced following the relevant procedures.

Thin capitalisation rules/Interest deductibilityThin capitalisation rules apply in Albania if a company’s liabilities exceed four times the amount of its equity (excluding short-term loans). The interest paid on the exceeded amount is not tax deductible. The thin capitalisation restrictions do not apply to banks, insurance and leasing companies.

Central Bank reportingNo notification or reporting required under Albanian law.

Debt push down/Merger restrictionsNo specific merger restrictions apply.

4 | CMS Guide to Leveraged Finance across Europe

Austria

Financial assistance prohibitionA prohibition to provide financial assistance (i.e. by a company securing loans which are granted to finance its acquisition) is applicable only to public limited companies (Aktiengesellschaft) but in general not to private limited companies (Gesellschaft mit beschränkter Haftung) (applicable only pursuant to a minority opinion).

Intra-group security and guaranteesUpstream and cross guarantees and securities are permitted, provided that the security is commercially justified (betrieblich gerechtfertigt) and the granting of security is at arm’s length and does not, if enforced, threaten the security provider’s solvency (existenzvernichtend).

Withholding taxGenerally a withholding tax rate of 25% is applicable on dividends. No withholding tax is levied on interest on loans.

Thin capitalisation rules/Interest deductibilityThere are no specific thin capitalisation rules and no limits on deductibility of interest (interest capping rules).

Central Bank reportingNo notification or reporting required under Austrian law.

Debt push down/Merger restrictionsDebt push down mergers are generally not permitted, unless the target company’s assets (aside from the shares of the target company) exceed the debts assumed due to the merger.

5

Belguim

Financial assistance prohibitionLimited liability companies are entitled to grant loans or securities for the acquisition of their own shares, if the following requirements are met:

— The operation is under the liability of the board of directors and occurs with fair market conditions — The operation is subject to a decision of the general meeting (special majority) — The board of directors must draft a special report — The loan must be granted out of distributable reserve — If the shares are acquired through a sale of the company of its own shares or a capital increase, the

acquisition or subscription should be done at fair price value

If the above conditions are not complied with, any financial assistance is prohibited.

Intra-group security and guaranteesSubject to financial assistance rules, upstream intra-group securities and guarantees are permitted if it is provided for in the articles of association of the company (usually a catch-all clause suffices) and if it is in the corporate interest of the granting company. To assess the latter condition, the so-called ‘corporate interest test’ must be done.

This test can be met if it can be demonstrated that (i) the guarantor itself (even indirectly) derives a benefit from granting the guarantee and (ii) the amount that is secured, the duration of the guarantee and the risk that it will be called are not disproportionate to the financial means available to the guarantor and the benefit derived from the transactions.

Withholding taxAs a matter of principle, interest paid by a resident company is subject to withholding tax at a rate of 21%.

Under domestic law implementing the provisions of the EU Interest and Royalties Directive (2003/49), outbound interest payments are exempt from withholding tax, provided that the recipient is an associated company of the paying company and is resident in another Member State.

Tax treaties concluded by Belgium usually provide for credit relief in respect of interest.


Thin capitalisation rules/Interest deductibilityA one-to-one debt/equity ratio applies to loans granted by individual directors, shareholders and non-resident corporate directors to their company. Interest relating to debt in excess of this ratio is re-qualified into a non-deductible dividend. Furthermore, the interest rate may not exceed the market rate.

A five-to-one debt/equity ratio applies to debt if the creditor is a related company and/or is exempt or taxed at a reduced rate in respect of the interest paid on the debt. Interest relating to debt in excess of this ratio is considered a non-deductible business expense.

Central Bank reportingNo notification or reporting required under Belgian law.

Debt push down/Merger restrictionsSubject to financial assistance rules and from a corporate law perspective there are no issues regarding a debt push down mechanism or merger restrictions.

7

Bosnia and Herzegovina

Financial assistance prohibition In Bosnia and Herzegovina (BiH)* a prohibition to provide financial assistance applies to both joint stock companies and limited liability companies. Intra-group security and guaranteesIntra-group security is generally permitted provided it does not constitute financial assistance. Withholding taxIn FBiH and in RS a withholding tax rate of 10% applies (with exception of dividend tax which is 5% in FBiH) unless reduced by a double tax treaty. Thin capitalisation rules/Interest deductibilityThin capitalisation rules apply under a formula mandated by local law. Central Bank reportingCross-border lending is subject to notification of loans with the Ministry of Finance of FBiH and the Ministry of Finance of RS. Debt push down/Merger restrictionsNo specific merger restrictions apply.

*Bosnia and Herzegovina consists of two separate and distinctive administrative entities: the Federation of Bosnia and

Herzegovina (FBiH) and the Republic of Srpska (RS). Formally, Brčko District is a part of both entities. The two entities and

the Brčko District have their own governmental structures as well as legislation and regulations, which means that leverage

buy out transactions, as well as other areas of law, are subject to legal regulations at entity level, depending on where the

transaction is being concluded.


Bulgaria

Financial assistance prohibitionA prohibition to provide financial assistance applies to joint stock companies in line with EU provisions.

Intra-group security and guaranteesIntra-group security is permitted provided it does not constitute financial assistance. Both upstream and affiliate guarantees are allowed provided they do not constitute financial assistance.

Withholding taxWithholding tax on interest applies at a rate of 10% unless the lender is a Bulgarian branch of a foreign bank or the lender is resident in a treaty friendly country.

Thin capitalisation rules/Interest deductibilityThin capitalisation rules apply under a formula mandated by local law.

Central Bank reportingForeign loans must be notified to the Central Bank within 14 days of taking the loan. The notification is for statistical registration purposes only with a small fine for non-registration. However, when seeking to make payments, a local bank will demand confirmation of notification before permitting any payment under the loan.


9

Croatia

Financial assistance prohibitionA prohibition to provide financial assistance applies to both joint stock companies (dd) and limited liability companies (doo). In case of the latter, although not specifically provided for in Companies Law, the authors and judges agree that financial assistance prohibition applies to limited liability companies as well.

Intra-group security and guaranteesIntra-group security is permitted provided it does not constitute financial assistance and is also further subject to insolvency law provisions. To mitigate such risks, guarantees are usually limited to the amount borrowed by the relevant entity and any security granted has to be on arm’s length terms. Upstream loans are not prohibited, subject to financial assistance rules.

Withholding taxWithholding tax is applicable to interest payments at a rate of 15%. Croatia has entered into a number of double taxation treaties but only certain jurisdictions benefit from 0% withholding tax on interest (such as France, Germany, Ireland and the Netherlands).


Central Bank reportingCross-border lending is subject to notification of loan amendments with the National Bank of Croatia. This notification is required for statistical purposes only.

Debt push down/Merger restrictionsMerger structures could be used to cure financial assistance restrictions and also to achieve debt push down. No specific restrictions apply to mergers. The merger process would generally take approximately six months.


Financial assistance prohibitionGranting financial assistance is permitted for limited liability companies (s.r.o.) and joint stock companies (a.s.) subject to relatively strict ‘whitewash’ conditions, which have been set down recently, above all for joint stock companies.

Intra-group security and guaranteesGenerally permitted however an expert valuation may be required for transfer pricing requirements. Guarantee fees may need to be put in place.

Withholding taxWithholding tax is generally applicable at a rate of 15%. The withholding tax may be avoided subject to double tax treaties. Most relevant jurisdictions benefit from good double tax treaties with the Czech Republic.


Central Bank reportingLong term debt needs to be notified to the Czech Central Bank.


Czech Republic

11

France

Financial assistance prohibitionA prohibition to provide financial assistance applies to both joint stock companies (SA) and limited liability companies (SARL).

Intra-group security and guaranteesIntra-group security is permitted provided it does not constitute financial assistance and is also further subject to insolvency law provisions and sufficient corporate or group benefit. To mitigate such risks, guarantees are usually limited to the amount borrowed by the relevant entity and any security granted has to be on arm’s length terms. Upstream loans are not prohibited, subject to financial assistance rules.

Withholding taxNo withholding tax is applicable to interest payments, except to creditors located in certain ‘non cooperative’ tax havens.


Central Bank reportingCross-border lending is subject to notification of loan amendments to the National Bank of France by the lender’s bank.

Debt push down/Merger restrictionsMerger structures could be used to cure financial assistance restrictions and also to achieve debt push down.

No specific merger restrictions apply. The merger process would take approximately six months.


Germany

Financial assistance prohibitionFinancial assistance provided by a stock corporation (Aktiengesellschaft) for the purchase of its own shares is not permitted.

Financial assistance provided by a limited liability company (Gesellschaft mit beschränkter Haftung) may be restricted by and subject to applicable share capital maintenance rules.

Intra-group security and guaranteesIntra-group securities and guarantees issued by a stock corporation to secure the purchase of its own shares are not permitted.

Intra-group securities and guarantees issued by a limited liability company (Gesellschaft mit beschränkter Haftung) may be, especially in up-stream and cross-stream scenarios, restricted by and subject to applicable share capital maintenance rules.

Withholding taxSubject to any double tax convention (Doppelbesteuerungs-abkommen), no withholding tax is imposed on interest payments received with respect to loans, except for interests received on notes or receivables to be entered into a public debt register (öffentliches Schuldbuch) or in a foreign register (ausländisches Register) or issued as global certificate (Sammelurkunde) or as partial debenture (Teilschuld-verschreibung), or in cases where the debtor of interest payments is a domestic banking or financial institution in accordance with the German Banking Act (Kreditwesengesetz).

Thin capitalisation rules/Interest deductibilityIn principle, interest expenses may be deducted from the income up to the amount actually incurred.

Businesses may only deduct interest payments up to the amount of their interest earnings (Zinsertrag) or the EBITDA to be offset (verrechenbar), unless, inter alia, the interest expenses amount to less than €3 million or the company does not belong or only proportionately belongs to a group of companies (Konzern).

13

Central Bank reportingPayments made by a German resident to a non-German resident as well as advances in a certain aggregate amount may be subject to prior notification to Deutsche Bundesbank.

Anyone whose voting rights in an issuer of, inter alia, notes or other financial instruments (Emittent) having its seat in the Federal Republic of Germany reaches, exceeds or falls below certain percentages has to notify that to the Federal Banking Supervisory Office and the issuer itself.

Debt push down/Merger restrictionsA debt push down may be restricted by, and subject to, applicable share capital maintenance rules. The extent of a debt push down may further be commercially restricted by the provisions regarding the interest deductibility as well as the financial standing of the company taking over the debt.

Any merger which creates or strengthens a dominant position in the market may be, under certain conditions and exemptions, subject to applicable antitrust and competition laws.

Other specificsSome security documents (such as a share pledge with respect to the shares in a German limited liability company) need to be notarised. The notarial fees incurred in connection with such establishment of securities are, by law, based on the value of the security and are not negotiable.

Commercial contracts or existing financing agreements may contain so-called ‘change-of-control’ provisions which need to be considered with respect to the buy-out.


Hungary

Financial assistance prohibitionA prohibition to provide financial assistance applies only to joint stock companies (“Rts”) but not to limited liability companies (Kfts).

Intra-group security and guaranteesGenerally permitted under corporate law but subject to transfer pricing analysis for tax purposes.

Withholding taxNo withholding tax is applicable provided payments are made to a corporation (as opposed to an individual).

Thin capitalisation rules/Interest deductibilityThin capitalisation rules apply. Bank loans are generally excluded but shareholder loans or loans from lenders who are not banks would be caught by the rules.

Central Bank reportingNo notification or reporting required under Hungarian law.


15

Financial assistance prohibitionA prohibition to provide financial assistance is applicable only to public limited companies (AS) but not to private limited companies (SIA).

Intra-group security and guaranteesGenerally permitted, although shareholders approval is recommended.

Withholding taxThe general applicable withholding tax rate is 10%. No withholding tax applies on interest paid on loans from foreign banks provided these are registered in the EU. The network of double tax treaties is poor, Lithuania being the only country with 0% withholding.

Thin capitalisation rules/Interest deductibilityThin capitalisation rules apply based on a formula mandated by law and generally cover related party debt.

Central Bank reportingNo notification or reporting required under Latvian law.


Latvia


Lithuania

Financial assistance prohibitionFinancial assistance is prohibited under Lithuanian law.

Intra-group security and guaranteesIntra-group security is generally permitted, subject to financial assistance rules.

Withholding taxWithholding tax applies on interest paid on loans from foreign banks subject to double treaty relief. The generally applicable domestic tax rate is 10%. An exemption applies to EU countries. The network of double tax treaties is very poor, Latvia being the only country with 0% withholding. Fronting bank structures are usually used to overcome this.

Thin capitalisation rules/Interest deductibilityDeductibility on interest paid for debt which has been incurred to pay for the shares of a subsidiary may be challenged. Thin capitalisation rules generally apply, however third party loans are not subject to such rules.

Central Bank reportingNo notification or reporting required under Lithuanian law.


17

Financial assistance prohibitionFinancial assistance is possible under certain conditions provided for by Luxembourg law.

Intra-group security and guaranteesIntra-group security and guarantees are generally permitted. Upstream and cross guarantee are subject to certain restrictions.

Withholding taxDomestic withholding tax on interest payments vary according to the specific circumstances from 0%, 10% to 35%. In addition, if interest is re-characterised as dividends, a 15% withholding tax may apply.

Thin capitalisation rules/Interest deductibilityLuxembourg law does not contain any concrete legal provisions for thin capitalisation rules, being the ratio between equity and liabilities. There is however a commonly applied administrative practice from the tax authorities.

Central Bank reportingLoan agreements have to be notified to the Central Bank of Luxembourg but only for statistical purposes and if certain thresholds are met.

Debt push down/Merger restrictionsNo specific merger restrictions apply. Specific legal provisions apply to mergers involving entities listed on the Luxembourg Stock Exchange or professionals of the financial sector.

Luxembourg


Montenegro

Financial assistance prohibitionA prohibition to provide financial assistance applies as a rule for both joint stock (AD) and limited liability companies. However, the prohibition on financial assistance applicable to limited liability companies is not absolute as all shareholders unanimously may decide to authorise the granting of loans or security in relation to the acquisition of the company’s own shares.

Intra-group security and guaranteesIn general, transactions between the company and majority shareholders are deemed as transactions between related persons and will be subject to insolvency rules, which may in certain circumstances result in a challenge by the liquidation.

Withholding taxWithholding tax on interest is applicable at a rate of 9%. Montenegro has entered into a number of double tax treaties but only certain jurisdictions benefit from 0% withholding tax on interest.

Thin capitalisation rules/Interest deductibilityNo thin capitalisation rules apply.

Central Bank reportingNo notification or reporting required under Montenegrin law.

Debt push down/ Merger restrictionsNo specific merger restrictions apply.

19

Financial assistance prohibitionUnder Dutch law it is, in principle, prohibited for a company with limited liability (B.V.) to provide security with the aim of acquiring shares in its capital. This scheme applies mutatis mutandis to a public company limited by shares (N.V.). However, under certain restrictions, both limited liability companies and public companies are allowed to provide loans with the aim of acquiring shares in its own capital.

A B.V. is only allowed to grant loans with a view to the subscription for, or acquisition of, shares or depositary receipts of shares, provided that such loans do not exceed the amount of the distributable reserves and provided that such loans are permitted in its articles of association. The possibilities for an N.V. are subject to additional conditions.

Intra-group security and guaranteesGenerally permitted, there are no specific restrictions under Dutch law.

Withholding taxDividend withholding tax applies at a rate of 15%. However, no dividend withholding tax is due on dividends received under the application of the participation exemption. Foreign shareholders can benefit from a reduced dividend withholding tax rate due to a large treaty network and the application of the EU Parent Subsidiary Directive. The Netherlands does not levy any withholding tax on interest and royalty payments.

Thin capitalisation rules/Interest deductibilityThe deductibility of interest for the corporate income tax is limited for under-capitalised companies. For this purpose, thin capitalisation currently means a debt-to-equity ratio of 3:1. If this ratio is exceeded by more than €500,000, interest on surplus debt cannot be deducted unless the company is able to demonstrate that its debt-equity ratio is in line with the debt-equity ratio of the (international) group of which it is part of.

Central Bank reportingFor statistical purposes, selected parties are required to report data on material cross-border payments to the Netherlands Central Bank on a regular basis.

Debt push down/Merger restrictionsSubject to certain restrictions, a B.V. is permitted to affect a debt push down. These restrictions are comparable to the restrictions to provide loans with the aim of acquiring shares in its own capital by the B.V., as discussed under the possibility for financial assistance. Affecting a debt push down is not permitted for a N.V. However, in practice this restriction is taken away by converting the N.V. into a B.V. by amending the articles of association before a Dutch civil law notary.

The Netherlands


Financial assistance prohibitionProvision of financial assistance is applicable only to joint stock companies (SA) but not to limited liability companies (Spzoo).

Intra-group security and guaranteesIntra-group security is generally permitted, subject to financial assistance rules, but corporate benefit would have to be demonstrated. The Polish company giving the guarantee should be remunerated to avoid transfer pricing risks.

Withholding taxWithholding tax is triggered on payment of interest to a foreign bank. The generally applicable domestic rate (in the absence of a double tax treaty) is 20% and can be lower for payments to associated companies located in the EU. However, withholding tax is generally 0% under double tax treaties (of which Poland has a good network) but most apply to financial institutions which may cause a problem for mezzanine loans (although some jurisdictions work).

Thin capitalisation rules/Interest deductibilityThin capitalisation rules apply under Polish law. Thin capitalisation rules do not apply to loans from third party banks but would apply to parent and sister company loans and may also apply to other related parties loans.

Central Bank reportingNotification for statistical purposes to the Central Bank is required.


Poland

21

Portugal

Financial assistance prohibitionThere is a financial assistance prohibition in line (almost verbatim) with the Second Company Law Directive (77/91/EEC) applicable to companies limited by shares (sociedades anónimas) but not to companies limited by quotas (sociedades por quotas) the application of the financial prohibition to companies limited by quotas (shareholdings) is a controversial matter amongst Portuguese scholars. It should also be noted that the principles set out in Directive 2006/86/EC have not yet been adopted into the Portuguese legal system.

Any contract or unilateral transaction which is deemed as an infringement to the financial assistance prohibition shall be deemed null and void.

Intra-group security and guaranteesIntra-group security is generally permitted, subject to financial assistance rules. Transfer pricing rules apply. VAT will apply over values due, or considered to be due, in accordance with arm´s length unless the grantor is a financial entity (thus exempted).

Withholding taxWithholding tax at a rate of 25% is usually applicable over interest payments, unless:

— Double taxation treaty applies (usual reduced rates vary from 10 to 15%) — Interest & Royalties Directive applies (5% rate until 2013 and 0% onwards) — The lender is a Tax Resident Financial Entity (0% rate, notwithstanding final taxation at normal

corporate income tax rate) — The lender is a Nontax Resident Financial Entity and the borrower is a Tax Resident Financial Entity

(0% rate)

Thin capitalisation rules/Interest deductibilityThin capitalisation rules only apply to associated companies which are non-EU entities (any company located within an offshore (as listed by the Minister of Finance) is deemed to be considered associated); in such case interest exceeding a 2:1 debt-to-equity ratio, will not be considered as tax deductible.


Central Bank reportingForeign financial transactions are subject to reporting to the Bank of Portugal for statistical purposes.In addition, also for statistical purposes, banks (and other financial institutions) are required to notify the Bank of Portugal on a monthly basis the balance of any credit transactions on their loan book.


Transfer of tax losses upon a merger is subject to prior request to the Minister of Finance.

Provided certain conditions are met, it is possible to apply a special Companies´ Group tax regime according to which corporate income tax is assessed on a consolidated basis (e.g. tax losses incurred by a given entity within the group may be offset against other group´s entity´s profits).

Real estate transfer tax is due upon transfer of real estate properties within a merger, though a waiver may be requested from the Ministry of Finance which shall be contingent on acknowledgment of the projects´ economic importance.

Other specificsA reverse merger may be advisable if the operation of the incorporated entity requires licenses or other types of government authorisations and the transfer thereof is limited in any way (e.g. subject to licensor’s consent).

Loans and/or guarantees are usually subject to stamp duty at rates varying from, respectively 0.04% to 0.6%, depending on loan/security term.

Purchase of more than 75% of a company limited quotas (shareholdings), which holds real estate properties triggers Real Estate Transfer Tax.

Non-resident capital gains arising from the disposal of shares is usually tax exempt in Portugal; notwithstanding so, some of the more recent double taxation treaties entered into by Portugal, in accordance with current OCDE model, such capital gains are liable to tax whenever the assets of the disposed company consist of more than 50% real estate.

23

Romania

Financial assistance prohibitionCorporate law prohibits financial assistance by a joint stock company (SA) for the purchase of its own shares. The prohibition does not apply to limited liability companies (SRL).

Intra-group security and guaranteesIntra-group security is generally permitted, subject to financial assistance rules, but corporate benefit would have to be demonstrated. Where the link is remote, guarantee fees could be put in place to create corporate benefit.

Withholding taxThere is generally withholding tax in Romania at a domestic rate of 16% (subject to certain exceptions for EU based related companies). The withholding tax may be avoided if a double tax treaty applies. There are several jurisdictions for which the withholding percentage is 0% (but this may not apply in all cases where lenders are not banks).

Thin capitalisation rules/Interest deductibilityRomanian law provides for thin capitalisation rules. These do not generally apply to loans from financial institutions but would apply to shareholder loans and loans from lenders who are not financial institutions.

Central Bank reportingLong term foreign debt needs to be notified, for statistical purposes only, to the National Bank of Romania.


Other specificsCosts related to taking security over immoveable property could be high (they include notary fees and land book registration fees which in total could amount to 1% of the amount of the secured obligations).


Russia

Financial assistance prohibitionThere are no financial assistance rules at present in Russia.

Intra-group security and guaranteesGenerally permitted. The Russian company giving a guarantee to non-Russian subsidiaries should be remunerated to avoid transfer pricing risks.

Withholding taxWithholding tax is triggered on payment of interest to a foreign bank (subject to the relevant double tax treaty relief). The domestic withholding tax rate on interest payments is 20%. Fronting bank structures can be used to overcome this.

Thin capitalisation rules/Interest deductibilityInterest expenses are deductible for profit tax purposes subject to certain limits/caps which are more relevant to the mezzanine debt portion as the cap is currently 22% for foreign currency loans. Offshore financing structures with on-lending to a Russian company could be put in place. Thin capitalisation rules apply. Thin capitalisation rules may extend to third party debt if guaranteed by a related party.

Central Bank reportingProvided that the credit institution is registered in one of jurisdictions which are a party to the Money Laundering Organisation, the Russian borrower does not need to register a loan with Russian Central Bank but only to open a ‘deal passport’ (which is usually done with the local bank involved in the transaction).

Debt push down/Merger restrictionsNo specific merger restrictions apply. However competition authority (FAS) approval may be needed.

25

Serbia

Financial assistance prohibitionProhibition on financial assistance applies to both joint stock and limited liability companies.

Intra-group security and guaranteesIntra-group security and upstream and affiliate guarantees are not allowed in favour of a foreign parent or affiliate unless they are for a purpose permitted by the National Bank of Serbia (NBS) and does not constitute financial assistance.

Withholding taxIn Serbia withholding tax of 20% applies unless reduced by a double tax treaty. Relevant jurisdictions benefiting from 0% double tax treaties are more limited.


Central Bank reportingGenerally, according to Serbian law, a Serbian company may take a financial loan from a foreign creditor only if the funds are used for one of seven permitted purposes allowed by the NBS. NBS approval for both loans and agreements has to be obtained prior to drawdown and this process can cause significant delays.

Debt push down/Merger restrictionsThere is no precedent for upstream or downstream mergers of the type commonly seen in cross-border acquisition financing (i.e. as a workaround to financial assistance prohibitions). The acquisition loan can be taken on the books of the target but no security can be given in relation thereto.

Other specificsSerbia is a difficult market because of a triumvirate of overlapping regulations by the NBS, Serbian legislation and FX restrictions. The primary concern for Serbian authorities is that Serbian money or assets not be expatriated from Serbia and the various laws and restrictions are designed around this general principle.


Financial assistance prohibitionFinancial assistance prohibition only applies to joint stock companies and not to limited liability companies.

Intra-group security and guaranteesGenerally permitted under corporate law but subject to transfer pricing analysis for tax purposes.

Withholding taxWithholding tax is generally applicable at a domestic rate of 19% (which may be reduced in certain circumstances). The withholding tax may be avoided subject to double tax treaties. Most commonly used jurisdictions are Cyprus, Luxembourg and the Netherlands.

Thin capitalisation rules/Interest deductibilityThin capitalisation rules were reintroduced in 2010 based on a formula mandated by local law.

Central Bank reportingNo notification or reporting required under Slovakian law.


Other specificsUse of an upstream merger in real estate transactions needs to be considered, as it would imply that tenants might have an automatic right to terminate lease agreements.

Slovakia

27

Slovenia

Financial assistance prohibitionFinancial assistance restrictions apply to joint stock companies only. Certain limitations apply to limited liability companies as well (e.g. any guarantees given should not interfere with the nominal capital of the company so these guarantees would be valid only up to the amount of reserves and undistributed profit).

Intra-group security and guaranteesUpstream and cross guarantees and creation of security are permitted, provided the entity giving such guarantees and security directly benefits from the loan it guarantees.

Withholding taxWithholding tax generally applies to payments of interest to non-resident banks by a Slovenian resident at a rate of 15%. Interest payments by a Slovenian bank to non-residents are exempt from withholding tax. The network of treaties providing for 0% withholding tax is limited, most of the treaties do however provide for a slightly lower withholding rate than that generally applied under Slovenian law.

Thin capitalisation rules/Interest deductibilityAs a general rule interest (whether the debt is owed to a related party or not) is only deductible if the debt is incurred to earn revenues that are taxable. Thin capitalisation rules apply based on a formula mandated by Slovenian law. Bank debt would become subject to thin capitalisation rules if guaranteed by the parent company or another entity owning 25% of the Slovenian entity.

Central Bank reportingThe credit arrangement will have to be reported by Slovenian entities to the Central Bank of Slovenia but this is only a monthly reporting obligation of Slovenian residents and has no effect on the validity or enforceability of the credit arrangement.

Debt push down/Merger restrictionsUpstream loans can be made subject to certain restrictions and provided these do not infringe minority shareholder rights (i.e. are not seen as preferential distributions to majority shareholders). Mergers are possible, but are subject to consents of employees and the majority of creditors.

Other specificsShares acquired following a public tender offer cannot be given as security in favour of the lenders who financed the public tender offer.


Financial assistance prohibitionThere is a general prohibition to provide financial assistance for both limited liability companies (Sociedad de Responsabilidad Limitada) and public limited companies (Sociedad Anónima). Under Spanish law, companies may not anticipate funds, grant loans, guarantees or provide any type of financial assistance for the acquisition by a third party of its own shares (or for the acquisition of the shares of its mother company, or, with regards to limited liability companies, of any other company within its group).

Intra-group security and guaranteesThere is no restriction for intra-group guarantees or securities. The granting of guarantees or securities does not need to be listed as a specific corporate object in the articles of association of the company in order for it to lawfully engage in such activities. Instead, the granting of guarantees or securities is considered as an ancillary activity. The guarantor always holds a right of repetition against the secured party that may be exercised in case the guarantee is enforced.

Withholding taxFor the fiscal years 2012 and 2013 the withholding tax rate on dividends is and will be 21%. The same rate is applicable to interest on loans, except for interests on loans payable to credit institutions. It is foreseen that starting on January 1 2014; the withholding tax rate on dividends will be reduced to 19%.

Thin capitalisation rules/Interest deductibilityThere are no specific thin capitalisation rules.

Regarding the limits on deductibility of interest, there is a limitation to the deduction of financial expenses to 30% of the EBITDA, being expenses up to €1 million deductible in any case. Interest not deducted may be carried forward up to 18 years, and if in a given year, interest expenses do not reach 30% of EBITDA, the difference between the interest deducted and the said threshold can be carried forward (i.e. 30% EBITDA cap may therefore be increased). Also, as of January 1 2012, interest expenses derived from intra-group financing to acquire shares/participations of any kind of entities will not be tax deductible unless the existence of sound business reasons behind the transaction is duly evidenced.

Spain

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Central Bank reportingNo notification or reporting is required under Spanish law. However, Spanish companies that receive financial loans and credits or refundable advance payments from non-residents, and vice versa, have to obtain, for informative purposes, from the Bank of Spain the corresponding code number (NOF or Número de Operación Financiera), in transactions exceeding €3 million.

Debt push down/ Merger restrictionsDebt push down mergers are generally permitted under Spanish law. However, there are formal requirements to fulfil whenever the pushed down debt has been maintained for less than three years before the merger, including:

— The preparation of a merger project which includes details of the resources and foreseen deadlines for the repayment of the debt

— A directors report detailing the reasons that justify the merger and an economic and business plan for the merged company

— An expert’s report on the reasonability of the above and an opinion on whether there is financial assistance.


Financial assistance prohibitionNo financial assistance regulations (but legislation is being prepared). The Capital Markets Board (CMB) as the authority overseeing capital markets and public companies is however scrutinising it from the perspective of minority shareholder protection. In practice it is therefore hard to be able to provide security on target’s assets on day one. A company that exceeds a certain number of shareholders for a certain period of time is deemed to be publicly held and thus subject to CMB regulations.

Intra-group security and guaranteesWhilst not necessarily prohibited by corporate law provided some corporate benefit is demonstrated, intra-group lending (especially upstream) would be subject to CMB regulations, in the case of public companies.

Withholding taxNo withholding tax on interest payments of bank loans. There are a number of specific Turkish taxes that are relevant to a financing; BITT tax: 5% surcharge on interest paid to a Turkish bank; VAT: 18% on interest paid to a foreign entity other than a bank or financial institution; RUSF: 3% on the principal in case of a foreign currency loan and 3% on interest in case of a Turkish Lira loan from a foreign entity in each case where the maturity is less than one year (calculated on a weighted average method).

Thin capitalisation rules/Interest deductibilityInterest on acquisition loans is generally not deductible, even following a merger. Thin capitalisation rules should not apply to bank loans, provided cash guarantees are not given by a related party in relation thereto.

Central Bank reportingRegistration with the Turkish Central Bank is required.

Debt push down/ Merger restrictionsIn case of a public company, a merger would require CMB approval.

Other specificsDe-listing of a public company is subject to the CMB and whilst there would seem to be precedent of public companies going “private” as a result of the number of shareholders decreasing below a certain level or a certain period, there is less precedent of de-listing of companies listed on the Istanbul Stock Exchange.

Turkey

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Ukraine

Financial assistance prohibitionA joint stock company is prohibited from lending funds for the purpose of financing the acquisition of its own shares. There are no other more specific financial assistance rules.

Intra-group security and guaranteesFrom a corporate law perspective, intra-group security and guarantees are permitted the subject to transfer pricing and tax concerns which need to be considered.

Withholding taxGenerally withholding tax applies to interest payments to foreign banks at a domestic rate of 15%, subject to relief under double tax treaties. The double tax treaty network is quite limited but fronting bank structures are usually used to overcome this.

Thin capitalisation rules/Interest deductibilityThere are no specific thin capitalisation rules, but there are limits on deductibility of interest (interest capping rules).

Central Bank reportingLoan agreements have to be registered with the National Bank of Ukraine (NBU) to become effective (as well as any amendments made thereto). The loan agreements should contain a specific provision stating that the loan agreement will become effective upon its registration with the NBU or otherwise it will not be registered by the NBU.

Debt push down/ Merger restrictionsNo specific merger restrictions apply.

Other specificsThere is an 11% limit applicable to one year foreign currency (major convertible currencies) loans.


United Kingdom

Financial assistance prohibitionUnder the Companies Act 2006, unless certain exceptions apply, it is unlawful for:

— A public company to give financial assistance directly or indirectly for the purpose of the acquisition of its own shares or those of a parent company. This prohibition extends to the public subsidiary giving any post-acquisition assistance and to any financial assistance given to reduce or discharge any liability incurred by the third party or another person for the purpose of the acquisition

— A private company to give financial assistance directly or indirectly for the purpose of the acquisition of shares of its public parent company. The prohibition is extended to cover any financial assistance given to reduce or discharge any liability incurred by the third party or another person for the purpose of the acquisition

The exceptions include where the assistance is not for the purpose of the acquisition, or if the giving of the assistance is only an incidental part of some larger purpose for the company. In each case, assistance needs to be given in good faith and in the interest of the company. Typically, the acts constituting financial assistance would include the granting of security and/or guarantees and/or making loans in connection with the acquisition.

Intra-group security and guaranteesIntra-group security is permitted provided it does not constitute financial assistance; however it is important that the security/guarantees are for the commercial benefit of the company.

Withholding taxWithholding tax is applicable to interest payments at a rate of 20% unless the lender is i) a UK company or a UK permanent establishment of an overseas company; ii) a partnership where all the partners of which fall within iii), iii) resident in a treaty friendly country; or iv) an associated company resident in the EU. No withholding under iii) and iv) is subject to prior approval from HMRC.

Thin capitalisation rules/Interest deductibilityThin capitalisation rules generally apply, although third party loans are not subject to such rules. The UK also imposes a “debt cap”, which restricts interest deductions of large groups by reference to the group’s consolidated finance costs. In addition, there are other anti-avoidance provisions which may prevent a tax deduction for interest, for example, on loans entered into for unallowable purposes.

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Central Bank reportingNo notification or reporting required under UK law.

Debt push down/ Merger restrictionsThe merger of two or more UK companies is unusual as UK legislation does not permit the transfer of all contractual obligations without counterparty consent. However, there is an established process to merge one or more UK companies with one or more companies in other EU countries under EU cross-border merger regulations.


Contacts

ALBANIABesnik DurajT +355 4 430 2123F +355 4 240 0737E [email protected]

AUSTRIAGünther HanslikT +43 1 40443 3550 F +43 1 40443 93550E [email protected]

BELGIUMArnaud van Oekel T +32 2 743 69 54 F +32 2 743 69 01 E [email protected]

BOSNIA & HERZEGOVINANedžida Salihović-WhalenT +387 33 296408 F +387 33 296410E [email protected]

CENTRAL AND EASTERN EUROPE(including Bulgaria, Croatia, Czech Republic, Hungary, Latvia, Lithuania, Montenegro, Poland, Romania, Russia, Serbia, Slovakia, Slovenia, Turkey and Ukraine)

Paul StallebrassT +420 2 210 98 805 F + 420 221 098 000E [email protected]

Ana RadnevT +420 2 210 98 862 F +420 221 098 000E [email protected]

Mills KirinT +420 2 210 98 894 F + F +420 291 028 000E [email protected]

FRANCEGérard KlingT +33 1 47 38 56 46 F +33 1 47 38 55 44E [email protected]

GERMANYMarkus PfaffT +49 69 71701 342 F +49 69 71701 40642 E [email protected]

LUXEMBOURGVivian WalryT +352 26 27 53 21 F +352 26 27 53 53 E [email protected]

THE NETHERLANDSEduard ScheenstraT +31 20 3016 447 F +31 20 3016 336 E [email protected]

PORTUGALFrancisco Xavier de AlmeidaT +351 21 095 81 39 F +351 210 958 155 E [email protected]

SPAINCarlos Peña BoadaT +34 91 451 92 90F +34 91 441 21 93E [email protected]

UNITED KINGDOMSimon JohnstonT +44 20 7367 2008F +44 20 7367 2000 E [email protected]

Mark MoselingT +44 20 7367 2971 F +44 20 7367 2000 E [email protected]

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CMS Guide to Leveraged Finance across Europe most jurisdictions only an upstream merger would ... CMS Guide to Leveraged Finance across Europe . Bulgaria