A welcoming investment climate
Belgium has a long-standing tradition of welcoming foreign investment. Its strategic location, state-of-the-art transport infrastructure, highly productive and skilled workforce and many government incentives (e.g. attractive tax regime and subsidies) are just few of its selling points and secure its reputation as a centre of knowledge and innovation.
Belgium has established itself as a hub for foreign tech companies and domestic start-ups, which benefit from a stimulating community consisting of a high density of technology businesses, research centres such as the University of Leuven, which was named the most innovative university in Europe for four consecutive years to 2019, and knowledge clusters. Belgium is also a European leader in life sciences, for example, housing the production of the Pfizer COVID-19 vaccine for Europe. These factors contribute to Belgium’s 4th position in the European Innovation Scoreboard (2021) that provides a comparative analysis of innovation performance in EU countries.
The business-friendly tax environment continues to have a positive effect on the current investment climate as well. Foreign investors acquiring tech companies in Belgium may benefit from an attractive corporate income tax rate of 25% (down from 33% in recent years), while sellers of shares in Belgian companies pay no capital gains taxes.
A booming tech M&A market in Belgium
Thanks to its booming technology sector – it grew by 11.5% from 2015-2019, according to the sector’s federation Agoria – which employs more than 300,000 people, the Belgian tech M&A sector is very active and growing too. For instance, more than 140 TMT transactions were recorded in 2020 despite the COVID-19 pandemic that halted a lot of investment. In the first half of 2021 there have been 77 TMT transactions in Belgium, a sharp increase compared to the first half of 2020.
Many smaller Belgian companies are active in developing novel technologies such as Internet of Things, artificial intelligence and artificial reality. Active sectors include smart living, life sciences, B2B applications, fintech, mobility, health and music tech. It is therefore expected that many of these start-ups, backed by private equity investors, will later be scooped up by large Belgian or international companies.
Key legal issues to deal with in a tech acquisition
Several specific considerations must be considered in a technology M&A process in Belgium.
A large focus will always be on the target’s intellectual property rights such as patents, trade secrets, trademarks and copyrights, which usually are the main reason for the acquisition. Potential investors should identify crucial IP rights and assess whether and how these are protected to uncover any major obstacles for the preferred deal structure. Contrary to other jurisdictions, employees in Belgium frequently own the copyright on the work they create for their employer, unless it concerns software. The target’s employment agreements and work rules must therefore be carefully reviewed and, if needed, the IP rights must be transferred to the company. The same goes for self-employed consultants. If the target does not legally own such IP rights, it may be useless to the potential buyer.
Recent statistics show that about two thirds of tech deals in Belgium involve the acquisition of software companies, especially those in B2B cloud computing and SaaS solutions. Besides the review of essential software agreements such as license agreements or service agreements and accompanying documents including policies, manuals or information on user access protocols, it is important not to overlook the widespread use of open source software (OSS) in software development. This type of software is frequently subject to so-called ‘copyleft’ licenses, which require that the source code of the software built on OSS is made available for everyone to use, change and redistribute without any costs. In essence, the target company could be required to make its highly innovative solution available for free if it has been using OSS for its development. For a potential investor, this means a lack of license revenue and a clear deal breaker.
Other important issues must also be considered when entering tech M&A negotiations in Belgium. Labour law is very strict in the country. The risk of sham self-employment, whereby independent consultants are in fact subject to hierarchical supervision, is frequently present in tech companies. In the worst case, the consultancy agreement may be requalified into an employment agreement, leading to the company having to pay employer contributions for three years with surcharges and interest.
Technology companies further benefit from many subsidies, which are subject to specific terms and conditions. It is important to verify whether the government must approve a change of control of a subsidized company, or whether the transaction could even lead to a loss of subsidies or an obligation to reimburse them. Needless to say, privacy, data protection and cybersecurity due diligence have become crucial since the introduction of the GDPR.
Given the many challenges that investors face when entering a tech M&A transaction in Belgium, it is highly advisable to seek local legal and tax advise early in the process. A letter of intent drawn up early in the negotiations between the parties, for instance, may not be binding in some jurisdictions. By contrast, in Belgium it could be seen as a binding agreement if the price and object of the sale have been sufficiently agreed in such document. Local legal assistance will certainly help investors to avoid such risks.
