Tax – Change ahead?

UK

Following a year of political change in the UK in 2024, the new government published its Corporate Tax Roadmap alongside the Autumn Budget last year, seeking to provide clarity, certainty and predictability regarding the major features of the corporate tax system until the end of this five-year Parliament.

The Roadmap sets out a number of key components of the UK tax system that will be maintained: principally, corporation tax will be capped at its current rate of 25%, and existing investment allowances, including full expensing and R&D relief, will be retained. The government also committed to holding only one significant fiscal event each year – an Autumn Budget – with the aim of reducing tax changes and providing more notice of those that are implemented. 

However, the tax regime never stands still. A number of changes have already been announced by the government to take effect in 2025, and there are further potential changes at an earlier stage of development, some with a domestic focus and others with a more international outlook.

Key changes to come in the UK in 2025

As announced in the Autumn Budget, employers will, from 6 April 2025, face increased National Insurance contributions (NICs), with the rate rising from 13.8% to 15% and the threshold for such payments decreasing. As a consequence, businesses have warned of potential price rises and job losses. 

For individuals disposing of interests in a business, there will be staged increases in the rate of capital gains tax (CGT) available for Business Asset Disposal Relief and Investors Relief, rising from 10% to (ultimately) 18% from 6 April 2026, coupled with a reduction in the lifetime limit for Investors Relief from £10 million to £1 million. In the short term, the erosion of these reliefs has accelerated some M&A activity amongst SMEs, and in the longer-term, the disposal, and therefore potentially the holding, of such interests will become less attractive from a tax perspective.

For private capital managers, the CGT rate applying to carried interest will increase from 28% (for higher and additional rate taxpayers) to a flat rate of 32% from 6 April 2025. A more radical shift will come in 2026, when carried interest becomes subject to income tax (plus NICs), with a reduced rate (effectively c.34.1%) available if certain conditions (subject to government consultation) are met. Concerns have been expressed that these changes, together with an overhaul of the tax rules applying to UK resident non-UK domiciled individuals (so-called 'non doms') taking effect from 6 April 2025, may lead to highly mobile fund managers departing the UK and a reduction in the attractiveness and international competitiveness of the UK's funds industry.

Spain

The substance of intermediate holding vehicles and questions of beneficial ownership have become a hot topic in Spain in private equity deals and acquisitions of portfolios of loans.

In effect, in the past few years the Spanish Tax Authorities have focused on the withholding tax treatment of dividends and interest paid by Spanish companies to intermediate EU vehicles. They have in many cases challenged the application of domestic law exemptions applicable to payments made to EU residents on the basis that the companies to which payments were made should not be regarded as the beneficial owners of the income. In that context, the Spanish Tax Authorities have thoroughly reviewed the financing structure of the intermediate vehicle (eg back-to-back financing structures), the amount of taxes paid in the relevant EU country by such vehicle, the composition of the board of directors and CVs of the directors, adoption of key decisions, etc. By way of example, they have disregarded structures of international funds with employees in the relevant EU country arguing that those employees were engaged in back-office services (eg accounting, local legal and tax compliance, treasury services, etc.) but none of them were key executives involved in the adoption of the main investment decisions. 

Similarly, on leveraged buyout (LBO) transactions implemented by international funds in Spain, through a Spanish acquisition vehicle that borrows the debt and forms a tax consolidation group to offset such debt against taxable profits of the target group, there have also been examples of the Spanish Tax Authorities concluding that the acquisition debt was abusively structured as borrowed by the Spanish vehicle, while the real investment decisions were made by the international fund and not by such Spanish acquisition vehicle. In these cases, the Spanish Tax Authorities have highlighted that the Spanish acquisition vehicle is not involved in the negotiation process (eg LOIs/binding offers/equity commitment letters are signed by the international fund reserving the right to assign the position to a vehicle which, in many cases, has not yet been incorporated), the representatives are key executives of the relevant fund, etc., leading them to conclude that the real acquirer of the target group is the relevant fund, being the entity which is the one effectively structuring, approving, financing and completing the acquisition. As a result, the Spanish tax authorities have argued that the LBO debt financing of the acquisition should not be taken into account for Spanish tax purposes. 

Conversely, while there is a general trend in increasing the substance of intermediate holding companies and providing a business rationale for their incorporation, there have also been cases where the existence of co-investors at the level of the Spanish acquisition vehicle (eg reinvestment of the seller or managers) has prevented the Spanish Tax Authorities from challenging the interposition of such company to borrow the LBO debt.

In light of anticipated taxpayer appeals against the position of the Spanish Tax Authorities, taxpayers will need to carefully monitor future judgments from Spanish courts, to see whether and the extent to which the Spanish Tax Authorities' decisions and views on these matters are upheld. 

Germany

General political backdrop

After the governing coalition collapsed in November 2024, the legislative process in the German parliament became more challenging towards the end of 2024 and the beginning of 2025. Early elections were held on 23 February 2025 from which the largest opposition party, the centre-right Christian Democrats, emerged as the strongest party. 

They will, however, need a coalition partner to form a new government. Coalition talks with the centre-left Social Democrats, which were part of the previous government, were about to start at the time of writing, with a view to forming a new government by Easter 2025. Tax issues have not been front and centre of the election campaign, and it is therefore hard to predict potential future changes to the German tax legislation. 

Before the election, the former coalition partners had agreed on 13 December 2024 to implement a Tax Reform Act, which included minor adjustments to the income tax rate. On 19 December 2024, the German parliament had approved a simplified version of this act, excluding controversial reporting obligations for domestic tax arrangements. 

Most recently, an updated version of the Tax Haven Defence Ordinance was issued in December 2024, reflecting the recent EU blacklist of non-cooperative jurisdictions for tax purposes and on 5 December 2024, the Federal Ministry of Finance had published a discussion draft for a Minimum Tax Adjustment Act. This Act aims to adjust German Pillar Two Rules and implement the OECD Administrative Guidance from June 2024. The draft also proposes changes in income taxation, such as the abolition of the royalty limitation rule.

Transaction and M&A Tax: Pillar Two 

From a transaction and M&A tax point of view, one of the major recent developments resulted from the introduction of Pillar Two legislation.

This had implications for drafting tax indemnity clauses in larger German M&A deals as it added complexity. A tax indemnity should now also account for potential top-up taxes under Pillar Two legislation that may be imposed under the so-called Income Inclusion Rule (IIR) and the Undertaxed Payments Rule (UTPR).

With the new compliance requirements under Pillar Two, including the need to file notifications and tax returns for the German minimum tax group, tax clauses should clearly outline the responsibilities for compliance and the handling of any disputes.

In Germany, the head of the minimum tax group is responsible for filing the tax return and paying the top-up tax. However, all members of the group are jointly and severally liable for the tax owed. This means tax indemnity clauses should ideally also address the potential secondary liabilities of all group members.

These changes highlight the need for careful drafting and review of tax indemnity clauses to ensure they adequately address the new risks and obligations introduced by Pillar Two.

Luxembourg

Review of 2024 and outlook for 2025

Luxembourg's fiscal landscape has experienced significant developments in 2024. This year has been characterised by the implementation of various tax measures and reforms aimed at fostering economic growth. These initiatives reflect the new government's dedication to maintaining Luxembourg’s AAA credit rating and enhancing the nation's economic attractiveness. 

For corporations, a phased reduction in the corporate income tax rate commenced, with the first decrease from 17% to 16% taking effect in 2025. As a result, the overall maximum combined corporate income tax rate in Luxembourg City will decline in 2025 from the current 24.94% to 23.87%. 

Additionally, several tax clarifications were made through updates to tax circulars or the codification of principles derived from administrative case law, particularly regarding the tax treatment of repatriations under share classes. A new head of tax authorities has been appointed to drive digitalisation, simplify procedures, and improve taxpayer communication. These efforts aim to reduce tax disputes and create a more efficient, transparent tax environment. The government also plans to expand Luxembourg’s double tax treaty network to strengthen its status as a global financial hub.

For M&A transactions, the most important tax topic has undoubtedly been the introduction of the Pillar Two minimum taxation rules for multinational enterprise groups and large-scale domestic groups in the European Union, with the Luxembourg law of 22 December 2023 bringing the IIR and the Qualified Domestic Minimum Top-up Tax (QDMTT) into effect for fiscal years beginning on or after 31 December 2023. This development has become a significant challenge in various sectors including the fund and securitisation industries, as these rules have introduced concerns through complexity and ongoing updates with the OECD commentaries and administrative guidelines. Luxembourg has already amended its Pillar Two law, in December 2024, to clarify key rules and integrate updates into its legislation, for greater legal certainty.

The Pillar Two minimum taxation rules are expected to keep tax practitioners engaged in 2025 and beyond when evaluating risks associated with M&A transactions, joint ventures, investment funds, and securitisation arrangements. This is particularly pertinent given the UTPR takes effect from fiscal years beginning on or after 31 December 2024, and the uncertainties surrounding its global applicability following the US elections.

France

Taxation of management packages in France: major changes in 2025

The French Finance Act for 2025 provides for a new tax and social security framework targeting management package gains made by French employees or corporate officers of target entities (the "New Framework").

The aim of this New Framework is to mitigate the consequences of recent case law of the French Supreme Administrative Court (Conseil d'Etat 13/07/2021, no. 435452, 428506, and 437498) in which the Court found that gains realised by a manager as part of a management package were to be taxed as salary income where such gains could be regarded as the consideration for the manager's position in the company.

Owing to the lack of guidelines regarding the type of instruments possibly falling within the scope of this case law, significant legal uncertainty arose, leading to multiple tax and social security reassessments (often accompanied by penalties). 

The Finance Act for 2025 aims to clarify the taxation scheme for management package gains. In essence, it introduces a dual taxation approach allowing management package gains to be taxed (i) as capital gains (at a maximum rate of 34%^[1]) up to a threshold of three times the company's financial performance during the investment period and (ii) as salary income (at a maximum rate of 59%^[2]) for the fraction of the gain exceeding such performance threshold.

Uncertainties surrounding this New Framework

Overall, the New Framework is expected to primarily benefit investment funds and PE players, as it mitigates the risk of exit gains being recharacterised as salaries, which could lead to employer contributions reassessments by the French social security authorities. However, various questions remain regarding the New Framework, which mainly concern managers. 

First, the text lacks clear criteria for determining whether instruments are granted in consideration for a manager's position within a company. This ambiguity creates uncertainty about whether the realised gain falls within the scope of this regime. The new law does not offer improvements over the 2021 case law on this matter. However, future clarifications may be provided by public guidelines from the French tax authorities.

Also, in cases such as secondary LBOs, where managers contribute all or part of their shares to a reinvestment vehicle, it is anticipated that the net gain resulting from this contribution will be eligible for a tax deferral regime only to the extent that it is taxable as capital gains. Conversely, the tax on the remaining portion, which is treated as salary income, should be payable immediately, even though the manager would not receive any proceeds in a purely cashless transaction. 

Finally, it is important to note that the instruments targeted by the New Framework cannot be acquired or subscribed through a share savings plan (plan d'épargne en actions; or PEA). For package instruments that were already subscribed through a PEA before 15 February 2025, the portion of the disposal gain that is taxable as salary will no longer qualify for a tax exemption under the PEA regime after this date.