A vendor loan is not automatically taxed at its face value: case law shows that the tax value may be lower, and that subsequent changes in value may have tax implications. In the case of an asset/liability transaction, however, such changes in value are generally tax-relevant. In a share transaction, according to the Supreme Court (June 29, 2018, ECLI:NL:HR:2018:1019), they generally fall under the earn-out provision and are therefore tax-neutral—provided there is a clear link between the vendor loan, the purchase price, and post-acquisition performance.
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.
In most cases, there are few remaining forms of collateral available to the seller to cover the risks of a vendor loan. And often—especially in the case of bank financing—at least the repayment of the vendor loan is subordinated to other financing. Given the high risk associated with a vendor loan, the question arises as to whether (1) it is (tax) appropriate to value it at its face value and (2) whether subsequent changes in value would have tax consequences.
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How is a vendor loan valued for tax purposes?
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!
What laws apply to a vendor loan?
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 the case of an earn-out (an uncertain consideration, such as 25% of profits over the next three years), changes in the value of the earn-out have no tax implications. 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 this also applies to changes in the value of a vendor loan if that loan is granted by the seller in connection with the sale of the shares. In a 2018 court case (June 29, 2018, ECLI:NL:HR:2018:1019) that changes to a vendor loan fall under the earn-out legislation, provided there is a clear link between the amount of the vendor loan, the purchase price of the shares, and the company’s performance following the acquisition. The change in the value of the vendor loan is therefore not relevant for tax purposes, in contrast to 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.
Frequently Asked Questions
Is a vendor loan always valued for tax purposes at its face value?
No. Case law shows that a court may value a vendor loan at less than its face value, for example, because no collateral has been provided and the loan is subordinated.
Does a change in the value of a vendor loan have tax implications in an asset/liability transaction?
Yes, in principle. Any subsequent change in the value of the receivable is then relevant for tax purposes for both the buyer and the seller.
Does a change in the value of a vendor loan have tax implications in the context of a share transaction?
Often not: according to the Supreme Court (June 29, 2018, ECLI:NL:HR:2018:1019), the vendor loan falls under the earn-out provision, provided there is a clear link between the vendor loan, the purchase price, and post-acquisition performance. The change in value is then tax-neutral.
What is the difference between a vendor loan and an earn-out?
A vendor loan is the portion of the purchase price that the buyer still owes the seller. An earn-out is an uncertain additional payment that depends on future performance, such as a profit-based payment spread over a number of years.
Why is a vendor loan risky for the seller?
This is because there is often little collateral provided, and the loan is usually subordinated to bank financing, which increases the risk associated with the receivable.
