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Tax Considerations when Buying a Business

 

The tax structure of a business acquisition can be the deciding factor when assessing the merits of buying a business.

Broadly speaking business purchase transactions take the form of either a share or an asset purchase and both differ widely in terms of what tax considerations come in to play.

A Buyer could also buy shares from a ‘hived-down’ new company to which the Seller has transferred only the assets a Buyer would like to buy.  This structure is a combination of both a share sale and an asset sale but from the Buyer’s perspective it would be a share purchase.

Each buy-out structure has different tax implications for a Buyer and Seller.

A Seller may want a business sale to take place by way of a share sale so that he receives funds directly and is only chargeable to capital gains tax on the difference between the sales price of the shares and their base cost.  A Buyer may wish to purchase assets of a business only so that she does not inherit latent gains on assets (see below) or potential outstanding tax liabilities of a the target company.  Below is a ‘bird’s eye view’ of the tax considerations arising for a buyer in a share and separately, an asset, purchase transaction.  Our next article will deal with the tax aspects from the point of view of a seller.

What tax considerations do I need to be aware of if I am buying shares in a target company?

  1. Stamp duty: Stamp duty costs in such a transaction are generally lower as shares are subject to 1% stamp duty on their market value whilst assets are subject to a rate of up to 2% in some cases.  However, in cases of a share sale there is less flexibility to reduce the stamp duty, e.g. by arranging for certain assets to transfer by delivery.
  2. Exposure for hidden tax liabilities of a target company:
    This is generally a principal concern for a Buyer when buying a company.  Logically, a Buyer does not want to be liable for tax liabilities of a company that arose during a period for which s/he was not in control.   The longer the target company has been in existence, the greater the risk that there are hidden or undocumented tax liabilities for which the Company may be found liable at a later stage.
    The main objective for a Buyer is to ensure that a target company is ‘clear’ from any hidden taxation liabilities arising from for example, failure to file returns and pay penalties arising therefrom, failure to correctly account for value added tax (VAT), incorrectly claiming reliefs, etc.  Researching into these areas is called ‘due diligence’ and is a central component to any business acquisition.  Tax due diligence will help establish the purchase price and the type of tax warranties and indemnities to be included in the share sale agreement amongst other things.
    The advantage from a tax perspective of using the ‘hived down’ structure referred to above is that the new ‘hived down’ company would have a short tax history which would mean less risk for a Buyer for hidden tax liabilities.
  3. Exposure for Latent gains on the sale of company assets in the future: In a share purchase transaction, the assets of the target company retain their original cost price.  This means that if/when the Buyer (through the target company) sells its assets it will have to pay corporation or capital gains tax on the difference between the sale price of that asset and the original cost of purchase (if any).  If the original cost of purchase of that asset is less than its market value on the date of acquisition of the target company, the Buyer will be liable to pay tax on that ‘latent’ gain if it subsequently sells those assets for greater than or equal to the market value on the date it acquired the company.  Latent gains could therefore reduce the value of a Buyer’s interest in the target company if they are not considered at the outset of a transaction.

 

What tax considerations do I need to be aware of if I am buying assets from a target company?

  1. No exposure for latent gains on the sale of target company assets  : In an asset purchase transaction, a Buyer acquires the assets at their market value at the date of sale and avoids potential exposure to latent gains referred to above.  A Seller would more than likely prefer a share sale to avoid having to pay capital gains tax, having regard to the fact that its members would be subject to further tax (income or dividend withholding tax) when extracting the sale proceeds from the selling company.
  2. No exposure for hidden tax liabilities : In an asset buyout, hidden tax liabilities can be left behind in the target company without requiring the Buyer to rely on detailed warranties which may prove unrecoverable from the Seller at a later time (because of its liquidation or exit from Ireland).
  3. Value Added Tax liability on assets purchased:  A Buyer may need to pay value added tax at 13.5% on the value of the assets – for example commercial property which has been developed in the past two years or remains in the ‘VAT Net’.  If the Buyer is not registered for VAT or cannot reclaim VAT paid, it remains an additional cost of the transaction.  In many situations it is possible for a Buyer to pay VAT on the purchase of an asset and reclaim it on the same day resulting in a cash neutral position but each Buyer every situation is unique and detailed advices are required in this regard.
  4. Tax advantages of purchasing premises directly in the name of the Buyer: There may be tax advantages to a Buyer purchasing real property of a business directly and for him/her/them to grant a commercial lease to the target company. A buyer should enquire with their advisers as to the tax benefits of doing so before executing any Share Sale and Purchase Agreement.

As you will see from our next article there are many competing objectives from a tax perspective for both a buyer and a seller in a business acquisition.

There are many ways in which Amorys Solicitors can be of assistance to a prospective Buyer in a business purchase transaction.  We advise on all aspects of merger and acquisition transactions for Small to Medium Enterprises (SMEs) including advice in relation to the form and structure of an acquisition or buy-out, carrying out due diligence and drafting corporate contracts including Share Sale and Purchase, and separately, Asset Sale and Purchase Agreements. If you would like further information in relation to any of the above please contact Deirdre Farrell by email on deirdre@amoyssolicitors.com, or telephone:  01 213 59 40 or your usual contact at Amorys.

The content of this article is for information purposes only and is not intended to be legal advice.  Amorys Solicitors is a boutique commercial and private client law firm in Sandyford, Dublin 18.

© August 2017, Amorys Solicitors