Retaining and incentivising the management of portfolio companies is key for private equity firms. Managers will thus invest alongside with investors and enter into some incentive arrangements. At a future exit, they may then expect to walk away from their investment with a significant return.
Belgian managers may invest through a personal holding company or directly. Is this however a good idea? In contrast, should the managers invest directly? In any case, it is essential for them to have a clear understanding of how their share in the exit proceeds will be taxed.
While capital gains on shares may not suffer Belgian tax, their possible tax charge at 33% (plus local taxes) should however be addressed. In this respect, the Tax Ruling Service has issued a few decisions which may provide some comfort about the absence of tax charge on share-related capital gains realised by portfolio company managers.
In a nutshell, the following elements may speak in favour of the absence of tax charge on such capital gains:
- The investment is not material or disproportional to the manager’s private wealth;
- There is no external financing;
- It is a long-term investment;
Discussing the structure of the management investment and incentive arrangements beforehand is essential. The success of a deal can rise and fall with the retention of the right talents within the company. Providing managers with a clear investment scenario and highlighting the tax consequences will help motivating and retaining them.
For more insights into reward-related attention points in an acquisition context, read our entire contribution here and follow our next publications on BEPS in M&A, which will each focus on a more detailed aspect of the Transactions continuum.
