COVID-19 #7 Carve-out and sale of non-core or distressed businesses


In the current climate, it is expected that companies in a wide variety of industries will be confronted with a significant drop in sales volumes, possibly causing faltering cashflow positions or even cash crunches. Although the Belgian government, in concertation with financial institutions, are trying to stem the bleeding with short term measures, such as the postponement of repayment of bank debt (principal amount only) or the guarantee scheme for short term loans with a maturity of less than 1 year, companies may reassess their strategic choices and fold back on their core business. Selling off non-core activities as a catalyst to revitalise the core business.

Item #7: Carve-out of non-core / distressed business to fold back on core business

The complexity of selling non-core or distressed assets highly correlates with the degree of integration between the core business and the ancillary activities. In most instances, selling non-core assets therefore starts with assessing the disintegration options to realise a split between the two (or more) activities with the ultimate goal to increase the overall value.

From a tax perspective, multiple options could be considered, each with their own opportunities and risks. The options range from (taxable) asset deals to (tax-neutral) restructurings, such as (partial) demergers or contributions of a line of business, followed by a (tax exempt) sale of the shares in the newly created company. As a tax-neutral transaction may be the obvious answer these days to achieve cash tax neutrality, we will first investigate some key reflexions of such tax-neutral transactions. In a next article, we will then focus on asset deals. After all, there is no one-fits-all approach to such multifaceted business queries.

Some of us may be tempted by the idea of a tax-neutral carve-out followed by a tax-exempt sale of shares to divest part of the business. This may be particularly true if the overall objective of the transaction is to generate a maximum of cash to rejuvenate the core business.

However, this transaction may lead to a (very expensive) price if the tax authorities would successfully oppose to the way the carve-out is structured. Therefore, it is crucial that sound business reasons underpin the tax neutral operation. As tax authorities by default only review the situation one or two years after the transaction, solid pre-transaction documentation detailing both the – often non-quantifiable – business drivers and the quantified tax implications is critical to stand the test. Although full comfort on the tax neutrality of the transaction may be provided through a binding advance decision (i.e. so-called ruling), the lack of timing will often spoil the party in distressed situations.

Even if there is no time to reach out to the ruling office, it doesn’t harm to consider some of the criteria that the ruling commission repeatedly put forward in assessing restructuring files.

Spend your money wisely

It is no secret that the ruling office typically requests the taxpayer to (fully) reinvest the sales price of the shares in the remaining business. Whereas returning the proceeds to the shareholders by way of capital reduction or dividend distribution is certainly not adding to the business case, deleveraging intra-group debt may have its challenges as well.

Plan ahead

Recently, the ruling office has been demanding from taxpayers that the beneficiary company already legally exists at the retroactivity date in order to accept a retrospective partial demerger. Although such retroactivity is common practice in Belgium, it is based on administrative leniency and should be considered carefully.

Don’t wait until it’s too late

A partially demerged company will forfeit all carried-forward tax losses and carried-forward dividend received deduction if its net fiscal value is negative prior to the partial demerger (click here). Although the consequences of the dilution rule are evidently disproportionate in this instance, it is certainly important to consider the position taken in this respect.  

Opportunistic behaviour is a killer

Whereas a contribution of a line of business by default requires that the transferred assets qualify as a line of business for corporate income tax purposes, this is not legally required for a partial demerger. However, as the concept of line of business is anyway required for VAT and registration duties, it is regularly relevant after all. Whether or not the transferred assets and liabilities qualify as a line of business very much depends on the factual circumstances and is often food for discussion.

Without having been exhaustive above, a lot of tax considerations come into play when contemplating a tax-neutral carve-out. Especially when it relates to a distressed business. Since any unexpected tax cash-out directly knocks out the objective of cash generation, you may want to have all possible pitfalls mapped before engaging in such a transaction to safeguard the tax neutrality.


While most companies have applied for the COVID-19 measures available by now, we see that quite some groups struggle to monitor closely their short-term (and certainly mid-term) cash position and how to manage and optimise it further to steer their company through this crisis in the best way possible. We meanwhile have created the following email platform: in order to give you a sounding board in these challenging times.