Management exit considerations: capital gains tax treatment

Written by Hugues Lamon 12 November 2015


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:

    1. The investment is not material or disproportional to the manager’s private wealth;
    2. There is no external financing;
    3. 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.

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