Starting a business in an undeveloped market such as Albania's can be stressful. International companies aiming to expand may prefer, therefore, to acquire established local companies instead of incorporating new subsidiaries. Despite the fact that the international economic downturn has also slowed down the M&A market, Albania has been less exposed due to the fact that its market is not fully integrated with the global economy.
Attempts have been made to undertake M&A deals through the listing of companies on the stock market through IPOs, but until now, due to legal and institutional malfunctions, all M&A transactions in Albania have happened outside of the regulated markets. Despite the presence of a more or less complete legal framework, as of the date of writing, no company has listed its shares with Tirana Stock Exchange (TSE). This review therefore focuses on off-market M&A transactions.
The terms merger, demerger and acquisition generally refer to aspects of corporate dealing involving the purchase, sale and combination of different companies' shares and assets. Under Albania's Company Law, the term merger implies the fusion and combination of two or more companies (Article 215). A demerger is the opposite process consisting in the separation of a company into two or more companies and consequent transfer of assets and liabilities (Article 227, paragraph 1).
Under the Company Law, the term acquisition refers to the acquisition of shares of a company. However, in a broader sense, the term acquisition includes also transactions for the acquisition of all or part (spin-offs) of the assets of a company. Moreover, under the Albanian Competition Law, mergers, acquisitions and other transactions aiming to transfer the control of an undertaking are generally defined as concentrations unless there is a specific reference to a legal definition. In this review the term mergers and acquisitions, or M&A, is used in the broader sense.
Mergers and demergers under company law
The Company Law envisages the company merger and demerger procedures as exclusively applicable to limited liability companies and joint stock companies. A company may not be reorganised during its first year of establishment.
Acquisition
Under the Company Law, a merger is realised through transfer of all of the assets and liabilities of the target company to another existing company, called the acquiring company, in exchange of shares of the acquiring company (Article 215). Companies involved in this transaction must prepare and approve a merger agreement regulating the consequences of the merger between the companies especially with reference to the exchange rate of shares or special rights granted thereby. The method used to determine the exchange rate of shares is subject to evaluation by independent experts appointed by the companies involved in the merger. The Company Law requires pre- and post-transaction disclosures and provides for instruments protecting minority shareholders and creditors.
As the aim of this procedure is to transfer all of the assets and liabilities of the target company in favour of the acquiring company, the outcome of the merger by acquisition is the winding up and cancellation of the target company without undergoing liquidation procedures. Shareholders of the target company become shareholders of the acquirer based on the approved share-exchange ratio.
Formation of a new company
Under the Company Law, this technique consists of the formation of a new company (NewCo) to which all assets and liabilities of the merging companies are transferred, in exchange for the shares of NewCo (Article 226). The procedures, disclosures and transaction documents (including the assessment of the share exchange ratio by independent experts) required by the Company Law for the merger by formation of a new company are generally the same as for the technique of merger by acquisition.
The outcome of the merger by formation of a new company is the establishment of NewCo, which inherits all assets and liabilities of the merging companies, and the winding up and cancellation of the merging companies without undergoing liquidation procedures. Shareholders of the merging companies become shareholders of NewCo based on the approved share-exchange ratio.
Cross-border merger
A cross-border merger is generally defined as the fusion and combination of two or more companies belonging to different jurisdictions. The Albanian Company Law has a gap with regard to cross-border mergers since the rules on company mergers apply only to domestic companies. Therefore, a merger involving an Albanian company and a foreign company would not be executable as a formal merger (either by acquisition, or formation of a new company) under the Company Law.
As the merger procedures of the Company Law were somehow a novelty for domestic companies, the inclusion of cross-border mergers in the process was postponed. Nevertheless, other M&A techniques and sometimes a more intricate route may be used as an alternative to achieve the final result of a cross-border merger.
Demergers
Under Article 227 of the Company Law, in the demerging procedures, all assets and liabilities of the demerged company are transferred to two or more existing companies or NewCos (the beneficiary companies). The demerged company and the beneficiary companies (existing companies) must prepare and approve a demerger agreement regulating the consequences of the demerger, especially with reference to the share-exchange ratio and special rights granted thereby.
The procedures, disclosures and transaction documents (including the assessment of the share-exchange ratio by independent experts) required by the Company Law for the merger by formation of a new company, are generally the same as for demergers.
The outcome of the demerger is that the beneficiary companies inherit, at the approved ratios, all assets and liabilities of the demerged company, and the latter is wound up and cancelled without undergoing liquidation procedures. Shareholders of the demerged company become shareholders of the beneficiary companies based on the approved share-exchange ratio.
Acquisitions
The following are the general M&A techniques for which there is no detailed regulation in the Company Law, and as such their realisation is more flexible and adaptable to the aims of the parties entering the transaction.
Acquisition of shares
An acquisition of shares occurs when an individual/legal entity acquires existing or newly-issued shares of a company. The Company Law provides very few specific requirements regulating the transfer of shares, such as the written form of the share purchase agreement, its registration with relevant registries and compliance with any pre-emption rights granted by the articles of association of the company. As such the acquisition of shares is subject to general civil code provisions on the transfer of property and/or rights, and thus, together with fiscal benefits described below, make this M&A technique the preferred one in the Albanian market.
Acquisition of the business/assets
An acquisition of assets occurs when an individual/legal entity acquires the business or only the assets of entrepreneur or of a company. As for the acquiring of shares, the main legal framework regulating the acquisition of assets is the civil code and its provisions on the transfer of property and/or rights.
In case of the transfer of the business, the Company Law provides that the acquirer of the business may continue to use the trade name and other distinctive signs of such business (with or without an addition indicating the transfer), only by specific consent of the previous owner. However, if such trade names are used, the acquirer shall be liable for all liabilities of the previous owner. Any agreement to the contrary may never be relied on as against third parties, even if it has been disclosed, unless the entrepreneur or the company proves that the third party knew about the agreement or could, in view of evident circumstances, not have been unaware of it.
Based on the above, and on potential risks of treatment as a VAT-able transaction (as explained later), this technique is very seldom used in Albania.
Spin-offs/SPVs
Albanian legislation does not offer specific provisions for the corporate spin-off (and here we will use the common definition of spin-off as the division of a company or organisation becoming an independent business). Due to the above-mentioned potential tax implications of the transfer of business/assets, or in case where the objects of the transaction are only specific seller's assets, the spin-off technique is often used in Albania.
With this technique, after the parties have identified the object of the transaction (whether part of a business or merely an asset), the seller establishes a new company, and by way of contribution in kind transfers the business or the asset to NewCo and holds its newly-issued shares. Under the Company Law the contribution in kind must be evaluated (where NewCo is a joint-stock company, the contribution in kind must be evaluated by an independent expert appointed by the court). In the case where NewCo is a joint-stock company, the company performing the spin-off must be established for at least two years and together with the evaluation report of the assets being transferred to NewCo must also submit to the company registry its financial statements for the last two financial years.
As there is no capital stamp duty and the contribution to the capital of a company is VAT exempted (as described below) the spin-off technique combined with the establishment of a special purpose vehicle is often used.
Following the completion of the spin-off transaction, the buyer acquires the shares of NewCo.
Tax implications
Albanian tax legislation does not provide specific tax treatments for the above M&A techniques. Therefore, in order to understand tax implications arising on such transactions, each technique should be evaluated on a case-by-case basis according to general tax requirements as to the taxable profits and/or capital gains it creates and the consequences of the changes to the capital structure of the company as well as the taxability of transactions for VAT purposes.
Mergers and demergers
Under the Albanian law on income tax fiscal losses cannot be carried forward in case the capital structure of a company changes by more than 25% during a tax year. This is a general provision, and the law does not provide specific exemptions for the treatment of fiscal losses in cases of changes in capital structure due to a merger or demerger. Therefore, in practical terms, companies involved in the process of a merger or demerger might face technical difficulties in carrying forward fiscal losses as well as delays during the process of the transfer of tax liabilities or credits in the system of the tax authorities from one company to the other.
In addition to the above, given the underdeveloped status of the Albanian stock market, such techniques are not widely used in Albania.
Under Albanian VAT law, transactions with company shares, capital, obligations and other securities are deemed as financial transactions, and as such are VAT exempt. As mergers and demergers of companies deal with shares and capital restructuring, the resulting transactions are not subject to VAT.
Acquisition of shares
With regard to VAT, the transfer of shares is treated as a financial transaction and, as is the case with mergers and demergers, this transaction is not subject to VAT.
From an income tax point of view, a transaction for the acquisition of shares potentially creates taxable profits for the shareholders selling existing shares. The taxable profit is calculated on the capital gain (difference between the sale price or the value of the contribution and the purchase price), and is subject to a tax rate of 10%.
New shareholders are not taxable at the moment of the purchase of shares, but may be potentially taxable on exit, at a tax rate of 10% on the capital gain (as explained above).
As is the case with mergers and de-mergers, at the moment of the transaction the acquiring company loses the right to use any fiscal losses created by the acquired company up to that moment.
The acquisition of shares provides for a straightforward method of planning potential tax liabilities, and is therefore the technique most often used in the Albanian M&A market.
Acquisition of the business/assets
Differently from the other techniques which, from a fiscal perspective, give rise only to implications in relation to income tax, the acquisition of business assets may potentially give rise also to VAT issues.
The sale of business/assets may be deemed as a transaction subject to VAT, if the transferred business/asset(s) has no "economical autonomy" (defined as the ability to operate independently at full functionality as an economic unit also with the acquirer). For example, the transfer should include all elements needed for the production of goods, such as the premises, equipment, raw material, and so on. If the sale relates only to part of such elements, then the transaction may be deemed as a normal sale of goods, and as such it will be subject to VAT at an actual rate of 20%.
The full elements to identify the functions of an independent economic unit should be assessed on a case-by-case basis; their incorrect identification may result in a sudden increase of the cost of the transaction of at least 20% (the VAT rate), without taking into account potential penalties and late payment interest for incorrect VAT declaration and payment.
Moreover, if the assets being sold as part of the business consist of immovable property, then a property transfer tax is applicable on the transaction (transfer of buildings owned by the selling company to the acquiring company is taxed at 2% of the sale price, whereas transfer of land is taxed at between €7/m2 and €14/m2). In addition, income realised by the seller company will also be taxable under general corporate tax provisions.
As the law does not offer objective security on elements to assets if the transferred business/assets fulfill the test of the 'economical autonomy'. The tax issues identified above do not make the technique of acquisition of business/assets very attractive.
Spin-offs/SPVs
In case the seller conducts more than one established business under the same company (such as production and distribution of goods) and the parties wish to transfer only one of the businesses of the seller (only the distribution business, for example) then the straightforward sale of shares is not possible. As an alternative to the acquisition of the business/assets, the parties may choose to use the spin-off/SPV technique to avoid part of the tax issues mentioned in the above paragraph.
As mentioned earlier in the section explaining the spin-off technique, the assets or part of the business of the seller are transferred by means of contribution in kind to NewCo which is a non-taxable transaction for VAT purposes. Moreover, the subsequent transfer of NewCo's shares will be VAT exempt.
However, if the assets include immovable properties, the above-mentioned tax on property transfer shall still be applicable. The seller will also be subject to 10% capital gain tax (as above) with regard to sale of the shares of NewCo. The purchase price for the calculation of the gain is the estimated value of the assets contributed in kind to NewCo.
NewCo may not use that portion of fiscal losses carried forward by the parent company which relates to the part of the business contributed in kind to the capital of NewCo.
Merger control
Under the Albanian Competition Law, a concentration shall be deemed to arise where a change of control occurs due to:
(i) the merger of two or more previously independent undertakings or parts of undertakings;
(ii) the acquisition (purchase of securities, assets by contract or other means), by one or more persons already controlling at least one undertaking, or by one or more undertakings, of direct or indirect control of the whole or parts of one or more other undertakings; or
(iii) the exercise of direct or indirect control (exercise of powers) over one or more undertakings or any part thereof.
The establishment of a joint venture does not constitute a concentration pursuant to the law if it has as its object or effect the coordination of the competitive behaviour of undertakings that remain independent. Such joint ventures shall be appraised under the terms of the law regulating prohibited agreements.
Moreover, a concentration must be notified to the Competition Authority to receive authorisation, if in the preceding business year:
(a) the parties' combined annual worldwide turnover exceeded 7 billion Lekë ($70 million) and at least one of the parties' annual turnover in Albania exceeded 200 million Lekë;
(b) the parties' combined turnover in Albania exceeded 400 million Lekë and at least one of the parties' annual turnover in Albania exceeded 200 million Lekë;
The pre-merger notification should be submitted within 30 days form the conclusion of a binding agreement, acquisition of controlling interest/establishment of joint venture, or announcement of public bid. The concentration may not be closed without the authorisation of the Competition Authority. Fines for failure to file (1% of the turnover for the preceding business year), and unauthorised closing apply (up to 10% of the turnover for the preceding business year).
In addition to the pre-merger authorisation by the Competition Authority, if the target company operates in specific regulated sectors (banking, insurance, non-banking financial, or energy), and the transaction envisages the transfer of significant shareholdings (usually the transfer of control, or a lower significant shareholding, such as, in the banking and insurance sector, a share representing more than 10% of the capital), in addition to the companion approval, a pre-merger approval by the regulators.
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About the author
Shpati Hoxha is a partner of the firm and specialises in corporate law, antitrust, and IP & IT. He has been involved in a number of privatisations and complex corporate transactions such as the raising and restructuring of share capital, company restructuring and transformation, and M&A. He has also provided advice and assistance to investors from the viewpoint of corporate governance and compliance of clients’ business policies with antitrust and competition regulations, and has been involved also in IP registration and administrative/judicial enforcement cases.
Hoxha was part of the legal teams that drafted the new Albanian commercial registry law and company law, and is a local partner for the World Bank’s Doing Business project.
He holds a JD equivalent in comparative commercial law and is author and co-author of several publications in corporate and competition law. He speaks Albanian, English and Italian. |
Contact information
Shpati Hoxha
Hoxha Memi & Hoxha
P.O. BOX no. 48
Rr. Nikolla Tupe no. 5
first floor, Tirana, Albania
Tel: +355 4 2 274558
Fax: +355 4 2 244047
Email: shpati.hoxha@hmh.al
Web: www.hmh.al |
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About the author
Ilir Johollari’s is an associate whose practice focuses on corporate & commercial law, energy law, tax and labour law. He has been involved in commercial transactions. Before joining HM&H in 2008, he worked at Tonucci & Partners Law Firm.
Johollari holds a Master’s in International Business Law and a JD equivalent in law. He is a qualified Albanian lawyer and speaks Albanian, English and Italian. |
Contact information
Ilir Johollari
Hoxha Memi & Hoxha
P.O. BOX no. 48
Rr. Nikolla Tupe no. 5
first floor, Tirana, Albania
Tel: +355 4 2 274558
Fax: +355 4 2 244047
Email: ilir.johollari@hmh.al
Web: www.hmh.al |
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About the author
Brunila Leskaj is a tax consultant who is in charge of the recently established tax and accounting advisory department of HM&H, and her practice focuses on tax advisory services, accounting and tax compliance, financial reporting (NAS and IFRS) and tax audits. Before joined the firm in 2010, she was senior tax consultant with PricewaterhouseCoopers Albania. She has rendered tax advice, accounting, tax compliance and financial reporting services to several local and international companies in industries including banking, construction, manufacturing and trade.
Leskaj has an MBA and a BSc in Finance. She speaks Albanian, English and Italian. |
Contact information
Brunila Leskaj
Hoxha Memi & Hoxha
P.O. BOX no. 48
Rr. Nikolla Tupe no. 5
first floor, Tirana, Albania
Tel: +355 4 2 274558
Fax: +355 4 2 244047
Email: brunila.leskaj@hmh.al
Web: www.hmh.al |