This subject, which occupies DSM teams during a good part of the year, takes on even more importance as the temperature drops. The purpose of this article is to give you a few points to think about to move forward more calmly towards the end-of-year celebrations.
The first point to bear in mind when managing an international group is that the impact will not be the same everywhere. In some jurisdictions, it is possible to effectuate this debt-equity conversion with retroactive effect, but not only is this not the case everywhere, it also entails a risk for the companies concerned, namely a risk of non-enforceability against the tax authorities.
One must also be careful with respect to the nature of the debt and require a shopping list to know, jurisdiction by jurisdiction, what is possible. For example, is it possible to contribute loans, payments made on another entity’s behalf, fees for services provided, etc.? Moreover, can one contribute from an indirect shareholder or go down the chain?
The implementation of the appropriate documentation is particularly important when being audited. Bookkeeping is key and this is where one will need a team that can optimize the legal documentation. Too often we arrive at the audit stage to find scattered loan agreements, sometimes half-signed but almost always not harmonized within the group, while most of the transactions should be executed at arm’s length according to transfer pricing principles with a single agreement executed within the group.
The last point to bear in mind is to check the other contractual commitments, in particular bank financing which could restrict room for maneuver. It is common to find clauses that limit the distribution of proceeds to a certain use or pledges on receivables.
One last piece of advice for the road: don’t neglect the paperwork, even if it may seem superfluous today, the more a company grows and the more it will be necessary to attract investors, reassure banks, and validate an audit. We hope that consideration of these tips will help prevent you from getting “stuck” in a few years, but whatever happens, our teams are here to find solutions to help you move forward. You innovate, we find your way forward. By Renaud LE SQUEREN, Partner – Avocat à la Cour, and Héloïse CUCHE, Senior Associate – Avocat à la Cour.
