Tax Issues of Buying a Business

The structure of the acquisition is crucial in optimising tax planning around the transaction. The vendor and purchaser can have different objectives in this regard with some having a preference for a share sale over an asset sale or vice versa, depending on the facts of the case.

In broad terms, where the business being sold is part of a company, this can be sold by way of transfer of the shares in the company. In doing so the purchaser takes on the company’s history, contracts with employees/suppliers/customers, potential tax liabilities and so forth. As an alternative the business can be sold by way of an asset sale, where the purchaser can select which parts of the business they wish to acquire.

Some of the advantages to a share sale are as follows:

• Where the purchaser acquires the shares through a new company, this can have numerous advantages. From a financing perspective it may be more straightforward to have the new company take on the borrowings, as it would be possible to receive a dividend from the target company without a tax charge arising (where both companies so elect), which could assist with the repayment of the loan. Furthermore, where certain conditions are met, the new company could avail of relief for the interest on these borrowings. It is important that anti-avoidance provisions surrounding the recovery of capital are considered here also. This could also be transferred by way of group relief in a situation where there were a number of trading companies in the group. By contrast interest relief for individuals is being phased out, and will no longer apply from 2014.
• Stamp Duty is applicable at 1% on the transfer of Irish shares. Certain assets, such as commercial property, would attract a 2% rate.
• In the event that the company has historical unutilised trading losses, then these may be carried forward against future profits from that same trade (subject to anti avoidance provisions to counter loss buying).
• An “Earn out” could be put in place in a scenario where the vendor was seen as playing a pivotal role in the performance of the company. In that case the purchaser could agree to pay a fixed price plus an additional amount to be paid in the future providing certain targets are met. This would incentivise the vendor to stay on in that case, which could prove of benefit to the company. From the purchasers point of view it is important that this would be structured in such a way that any payment related to the sale of the shares rather than the performance of an office or employment.

 An asset sale would also have a number of advantages:

• The purchaser can pick and choose which assets they require, and not be bound by the history of the company.
• In the event that the vendor were to become insolvent, then any warranties provided in relation to tax liabilities may be worthless.
• Any latent gain on the assets transferred would be crystallised at the time of purchase, unlike with a share sale.
• There are certain specified intangible assets, expenditure on which attracts capital allowances, which may lean a purchaser towards an asset sale where they are contained in a business.
• In addition there are a number of exemptions from Stamp Duty, such as the transfer of intellectual property. Also certain assets can be transferred by way of delivery, meaning that Stamp Duty would not apply.

 An important aspect of any share sale is the due diligence report. The chief purpose behind this review is to allow the purchaser to review the tax profile of the company and to identify any potential exposure. This can then drive further discussions on the sale price, in the event that a provision is necessary for tax payable. In addition following this review we can assist with the drafting of the tax deed of indemnity. This can afford some protection to a purchaser for tax liabilities over and above those disclosed by the vendor, and also for a tax liability in excess of that provided for in the accounts up to the date of sale, or which arises outside of the ordinary course of business.

Lastly, an issue that has to be considered in a share sale is whether it is necessary to obtain clearance from Revenue prior to the consideration passing. There is a requirement that where the consideration exceeds €500,000 and the shares derive greater than 50% of their value from certain specified assets (which includes land situated in the State), then the purchaser must retain 15% of the consideration and pay this over to Revenue unless they obtain a CG50 clearance certificate from Revenue before closing. It is important that this requirement is considered at an advanced stage.

As can be seen from the above, there are many areas in which OSK Tax Consultants can be of assistance to a prospective purchaser from a tax perspective.

Niall Dempsey is Tax Director in OSK. OSK Tax advisors Dublin offer tax planning advice including mergers, acquisitions and due diligence.

The above is intended as a brief summary of some of the tax issues which need to be considered from the purchasers perspective. It is important that detailed advice be obtained in the course of an acquisition.