Tax Considerations on M&A transactions
It is necessary that the tax considerations of an acquisition or sale are considered at the earliest opportunity so as to identify the opportunities and the pitfalls that are presented.
Tax Process on M&A Transactions
- Depending on whether we are acting for the Seller or the Buyer, pre-sale/purchase structuring is generally key to ensuring the most tax efficient structure is
– Pre Sale:
(a) Getting the house in order – could include filing o/s returns, reviewing structure for tax exposures and remediating where possible, potential Voluntary Disclosures to Revenue to reduce risk of deal abort/purchase price adj., Inter group transactions review etc
(b) Structuring sale to avail of (i) non-resident planning (this generally requires time and will be dependent on circumstances) or (ii) where resident, assessing reliefs/exemptions etc
(c) Consideration of potential tax elections pre-sale
(a) Tax efficient financing structures
(b) Stamp Duty and VAT planning etc
(c) Loss planning
- Review of Heads of Terms to ensure transaction is being structured in a tax efficient manner dependant on the client’s goals (can depend on whether acting for Seller or Purchaser)
- Tax Due Diligence process
- Review of Tax Warranties
- Review of Tax Indemnities
- Review of Withholding Tax Issues
- Review/Contribution to Disclosure Letters
- Review of other documentation relevant for sale (Preferential Loan Notes/Convertible Debt Notes
The critical point is for Tax to be considered in the process as soon as possible. Once the Heads of Terms are agreed, they are difficult to change. Once the sale/acquisition process begins, the opportunity to minimise tax risk or take advantage of planning opportunities diminishes rapidly. The implications of the structure of a sale are extremely case sensitive and will depend on the type of company and business involved, the type of asset, the purchaser and seller’s intentions and requirements together with the negotiating power and skill of the parties involved.
Implications for Sellers – Sell Side Advisory
Generally speaking, sellers will seek to structure transactions as share sales. A share sale provides the seller with the opportunity for a clean break from all the liabilities and duties associated with a company. In addition, a share sale opens up certain tax planning opportunities that may not exist for an asset sale (e.g. participation exemption etc).
Sell Side – Share Sale
Some other considerations favouring share sales are:
- Sellers can avoid paying double taxation. On an asset sale tax will have to be paid on gains arising on the sale of the individual assets and subsequently on the distribution of the proceeds to shareholders. On a share sale, however, the seller receives the proceeds directly and is therefore only taxed once on the gains realised from the sale;
- Where relief has been claimed on tax depreciable assets, a share sale normally provides that there are no claw-backs triggered as there is no disposal of the asset itself;
- If the company is being sold by a parent company, a sale of shares may qualify for participation exemption and gains will be received tax free. This exemption is provided for under TCA 1997 s626B and should apply if the company being sold, or its group, is wholly or mainly trading in nature and the parent has held at least 5% for at least 12 mths;
- Generally, employment law issues should not arise as employees are normally unaffected by a share sale as the company remains the employer (unless the details of the sale provide otherwise);
- In addition, there are little or no inherent changes required in respect of third party contracts – unlike an asset sale where all contractual arrangements need to be considered and consents sought;
- There may be tax losses within the company or capital allowances available on assets of the company that may transfer with the company (subject to anti-avoidance provisions such as Loss Buying restrictions:
- On a share sale the purchaser takes on all obligations and liabilities and duties associated with the company. However, while the seller is freed from any risks associated with the company (subject to tax warranty and indemnity issues – see further below) they also lose any rights as regards potential claims of the company;
- The transaction costs may be lower on a straightforward share sale;
- There will be no costs of winding up the company following a share sale.
It is important to note that although sellers are more likely to opt for a share sale there are factors that can make an asset sale the optimal structure. For instance, the original acquisition cost of the assets being sold could be decisive if the tax-deductible base cost is very high compared to a low base cost for the shares in a share sale.
Sell side – Asset Sale
Some Sell-side considerations favouring structuring the deal as an asset sale may include:
- An asset sale can have the effect of triggering accrued losses which can be used by the seller after the asset is disposed of;
- In some cases the sale of the shares in a company would result in the company leaving a group and triggering a clawback of relief on an intergroup transfer previously claimed. In such situations an asset sale may be preferable so as not to break a group relationship;
- As there is little to no risk on the purchaser in relation to understated or unidentified liabilities, generally there will be no requirement on the seller to give warranties.
Tax on the Sellers
On a share sale the seller will generally become liable to CGT at the current rate of 33% on any taxable gains. This rate of CGT is applied to an amount equal to the difference between the proceeds of the sale and the deductible costs associated with the shares (base cost). There will also be incidental costs in both the acquisition and disposal of the shares that can further reduce the seller’s taxable gain.
Where the seller is an individual, this can be reduced by Entrepreneurs Relief (10% on first €1m) or Retirement Relief (€750k tax free, remainder at 33%) if the qualifying criteria are met.
Where the seller is a corporate, the gain may be exempt under participation exemption provisions.
Regardless of whether the seller opts for an asset sale or a share sale, they must consider whether the company or assets need to be “tidied-up” or the business restructured prior to sale. For example, a seller may own shares in a company which carries on a number of different types of businesses and only wants to part of the overall business. As such, the seller may need to segregate the different elements of the business into different companies before continuing with the sale.
It is imperative that any pre-sale structuring occurs as a separate transaction to the sale and is undertaken for bona fide commercial reasons rather than securing a tax advantage. It is of particular importance that the restructuring is not documented as a condition of the onward sale.
The seller may also have capital losses available for offset against gains arising on a sale. Such losses may not be immediately accessible if they are elsewhere in a group. In this situation it may be necessary to restructure the group so that the capital losses can be used.
Capital losses cannot be moved around a group. Instead any asset that may generate a capital gain on disposal should be transferred to the company with the losses pre-disposal
Implications for Purchasers – Buy Side Advisory
Where commercially viable, a purchaser may opt for an asset sale. The main reason for this is the freedom it provides for purchasers to select whatever assets they want and leave behind undesirable liabilities and risks. Where a share sale is considered, it will be important for the purchaser to understand the tax exposure or tax issues in the company prior to agreeing a price and prior to negotiating the warranties and indemnities. See issues surrounding warranties and indemnities below.
Buy Side – Share Purchase
Purchasers should consider such benefits which can include the following:
- The stamp duty on a transfer of shares (1%) is lower than on a transfer of assets (2% – 7.5%);
- There should be no VAT for the purchaser on the acquisition of shares under transfer of a business relief, whereas there may be VAT on the acquisition of assets where the purchaser does not qualify for any of the available exemptions;
- Losses within the company acquired will transfer with the company to the purchaser on a share purchase for future use. There is no scope for the Purchaser to avail of losses on an asset purchase;
- Purchasers can plan in advance the structure of the acquisition of shares such as utilising a specific company or SPV for the acquisition, e.g. using Bidco to make the acquisition, availing of interest deductions on the financing to make the acquisition etc. This depends on the Purchasers structure and requirements.
Buy Side – Asset Purchase
On an Asset Purchase the purchaser should have regard to the following implications:
- Where new assets are purchased there will be an uplift in the base cost to the market value at the date of purchase. This could potentially result in a higher base cost on a future disposal. On a share sale the base cost of the assets contained within he company will remain at their original base cost as there has been no change in ownership of the asset and thus a large latent gain left with the company on a future disposal;
- The purchase price for certain tax depreciable assets can be written off over time;
- On an asset sale, the acquisition of trading stock as part of the deal can be used in future as for a tax deduction;
- Perhaps the most important benefit of an asset sale is the fact that the purchaser may asset-pluck leaving behind liabilities that are possibly too large or unquantifiable;
- As the liabilities and historic risks (tax and otherwise) associated with the company do not pass with the asset, an asset sale is generally less risky for the purchaser;
- An asset sale facilitates structuring the sale so as to mitigate the charge to stamp duty where there are assets that are capable of transferring by delivery or where there are stamp duty exemptions available for the asset transferring (e.g. intellectual property exemption);
- As the risk on an asset purchase is lower for the purchaser, the contractual negotiations of warranties is less complicated and in general, the due diligence process shouldn’t be as time consuming or as costly as with a share purchase.
Tax Implications for Purchasers
In general there are more tax implications for purchasers than for sellers on a share/asset sale. The basic reason for this is that the purchaser is taking the risk on the acquisition. This is partly because purchasers may have to consider the target’s entire tax history for the purposes of reaching a sale price or drafting warranties and indemnities.
In addition purchasers will also need to finance the acquisition which will require tax-efficient financing strategies. Purchasers will also have to consider any tax implications or savings opportunities that may arise post-acquisition and perhaps focus at an early stage on a potential exit strategy.
The main tax cost for the purchaser in making the acquisition is stamp duty which is levied at a rate of 1% on share sales, 1-2% on residential property and up to 7.5% on commercial property.
In circumstances where a target company has trading losses carried forward, then these losses should continue to be available post acquisition subject to Loss Buying Restrictions (where within any three year period there is both a change in the ownership and a major change in the nature or conduct of the trade carried on by the company – if this applies losses earned pre acquisition are lost). Where a purchaser wants to avail of trading losses carried forward then that purchaser will need to ensure that the activities of the company have not become so negligible prior to the sale so as to fall foul of this provision and also to ensure that there is no major change to the nature of the trade in the three years following the acquisition.
A purchaser will also need to consider whether the target company has any capital losses. There is a restriction on the use of capital losses arising prior to the acquisition. The capital losses will be unavailable for use against any pre-acquisition assets of the purchaser or a group company.
Summary of Tax Implications
|Tax||Share Sale||Asset Sale|
|CGT||One Tax Charge
The shareholders are subject to CGT on any gain arising on sale (unless corporate shareholder and participation exemption applies (TCA 1997 s626B) or unless the shareholder can avail of other reliefs, e.g. retirement relief).
|Potential Double Tax Charge
The company is subject to CGT on any gain arising on sale of assets. Post sale of assets, in order to extract the sales proceeds, a company must either (i) make a dividend to the shareholders or (ii) liquidate. On the making of a dividend, the Irish individual shareholders would be subject to income tax. On a liquidation the shareholders would be subject to CGT on any gain arising from liquidation of company (unless reliefs available). This gives rise to a double charge to CGT
|Stamp Duty||1% of consideration or market value of shares, whichever is higher||1% to 7.5% of consideration or market value of the assets. Although the rate of stamp duty is higher than on a share sale, there is more flexibility to reduce stamp duty under an asset sale. Certain assets are not subject to stamp duty, e.g. IP, assets that can transfer by delivery.|
|VAT||No VAT should arise on a share purchase||VAT transfer of business rules (TOB) may apply so that the transfer is not a supply for VAT purposes. TOB applies if (i) the purchaser is an accountable person; (ii) the business is sold as a going concern; (iii) the entire undertaking or part capable of operating as a going concern, is transferred. If individual assets are transferred VAT may arise.|
|Tax Losses||Tax losses of the target company should remain available to the target company, thereby passing to the purchaser (provided Loss Buying Restrictions don’t bite).||It would be very difficult to secure tax losses as the target company would not be transferred to the purchaser.|
|Balancing Allowances||A share sale should not impact the capital allowances position of the target company’s assets.||Balancing adjustments may arise on the sale of assets on which capital allowances were claimed.|
|Group Reliefs||The sale of a company in a tax group could trigger a clawback of group relief claims. For example, for SDCA 1999 s79 associated companies relief, companies must remain associated for at least 2 years from the transfer date.||The sale of an asset would not break a tax group and may be a more advantageous option than a share sale if group relief was claimed and the sale of the company would trigger a clawback.
If the asset being transferred was previously acquired from another tax group company in the last ten years, the seller would be subject to CGT on the original base cost of the group company from which it acquired the asset.