Nowadays, in the majority of acquisition transactions, a vendor loan is the final piece of acquisition financing.
Often the buyer of a company (shares or assets/liabilities) is unable to pay the entire purchase price and/or to finance it externally, and then the buyer owes the seller the last part of the purchase price for the company. This is what we call the vendor loan.
Usually there is little collateral left for the seller to cover the risks of a vendor loan. And often, especially in the case of bank financings, at least the repayment of the vendor loan is subordinate to the other financings. Given the high risk of the vendor loan, the question can be asked whether (1) it is correct (for tax purposes) to value it at face value and (2) whether subsequent changes in value will then have tax consequences.
Vendor loan tax
In a recent case, the question arose whether a claim (vendor loan) of €300,000 by the seller on the buyer regarding the purchase of the business of a partnership (asset/liability transaction) was indeed worth €300,000. No securities had been provided, the loan was subordinated to the bank and the interest rate was 5%.
The seller believed that the value of the claim was not €300,000, but only €170,000. The court disagreed but found that the claim was not worth €300,000 at the time of origination, but €225,000. This was an asset/liability transaction.
Thus, we see that the tax court does not always set a nominal claim between buyer and seller at nominal value. Also, therefore, the subsequent change in the value of that claim will in principle be tax relevant. So this is something that buyer and seller in an asset/liability transaction should be well aware of!
Legislation
The question is whether a vendor loan in a share sale has the same effect as in an asset/liability transaction (assuming that the buyer and seller are limited liability companies). It should be realized that in principle the same legislation applies to this, but that in the case of a share sale certain additional articles may be involved.
For example, the law stipulates that in case of an earn out (an uncertain consideration, for example three years still 25% of the profit) the change in the value of the earn out has no effect for tax purposes. So if shares are sold with, among other things, an earn out and the value of that earn out at the time of sale is €600,000, but that earn out ultimately yields 1 million, then that difference of €400,000 is untaxed for the seller and not deductible for the buyer.
The question is whether that therefore also applies to the change in value of a vendor loan if that loan is granted by the seller as part of the sale of the shares. The Supreme Court indicated in a 2018 court case that the change in value of a vendor loan is covered by the earn-out legislation. Thus, the change in the value of the vendor loan is therefore irrelevant for tax purposes, exactly unlike in the case of an asset/liability transaction.
Conclusion
It is impossible to imagine current acquisition practice without the vendor loan. Fiscally, it is important to realize that the value of the vendor loan can deviate from the nominal value of the vendor loan and change value thereafter. In the case of an asset/liability transaction, this usually has tax consequences, but not in the case of a share transfer.
