Part 1.2: Tax implications: share and assets acquisition

Question 1

What are the tax implications of share acquisitions from the position of the buyer (Bid co)? (5) explain them short.

Answer 1

1. Forming tax cost base (mitigate taxes): the acquisition of shares will form a tax cost base and will maximize it, this will mitigate tax on a future disposal.
2. Tax liability of target (Transfer of tax responsibility): Bid co becomes responsible when acquiring the shares. The responsibility may disclose undisclosed liabilities
3. Tax losses of target: tax losses expire after ownership transfer. and Tax benefits may also be preserved.
4. Transfer taxes: lower or even nihil rates of (transfer tax) stamp duty applied to a share transfer.
5. Unbundling of target’s assets – capital losses

Question 2

How can bid co minimize the risk of undisclosed liabilities? (3)

Answer 2

1. Bid Co may request tax clearances from tax authorities:
2. Due diligence to review tax matters (not rely on this alone): Acquisition audit: Determine whether the taxation matters have been properly dealt with and tax liabilities are reasonably provided for.
3. Tax indemnity clauses in sale agreement: Sale agreement contains comprehensive tax indemnities whereby target co warrants all forms of taxes, tax penalties or levies and provide for right of objection and appeal.
   o Might be difficult to enforce clause in cross border situations through the legal system.
   o Part of the purchase consideration may be place on deposit in escrow for a specified period; the money can be put aside for a period of time.

Question 3

What are the tax implications of selling shares from the position of the seller (Vendor)? (2) explain them short.

Answer 3

1. Other capital gains tax issues: selling shares, the vendor will realize capital gains. These will be primarily taxed in the jurisdiction of the vendor.
   - In some countries, substantial share holding or long-term holders may be exempt from taxes or get reduced taxes on realized capital gains.
2. Pre-sale dividends: If the Vendor is taxable in a jurisdiction which taxes capital gains it may be tax efficient for Target to pay up dividends to Vendor prior to a sale of Target’s shares. The pre-sale dividend will reduce the sale proceeds of Vendor’s share pro-rate and will therefore also reduce the taxable gain of Vendor pro-rate, unless the dividend has a direct link to the cost base.

Question 4

What are the tax implications of selling shares from the position of Target Co? (2) explain them short.

Answer 4

1. Tax losses/Tax credits: Tax losses, foreign tax credits, or other tax deductions may be affected by change in beneficial ownership.
2. Residence status: central management and control
   Cross-border change in shareholding may alter the effective management and control of Target Co and inadvertently cause it to be liable to tax in Bid Co’s jurisdiction.

Question 5

What are the tax implications of buying assets from the position of Bid Co? (6) explain them short.

Answer 5

1. Allocation of purchase price – tax relief on assets acquired by Bid Co: Try to allocate the purchase price over the various assets. Some countries you can depreciate assets more quickly => Allocate parts of the price where relief is greater. Goal: Obtain tax relief by depreciating the acquisition price asap. eg. Plant and equipment, buildings, inventory,…
   - Pre-acquisition of assets by a company located in a favorable location
   - Goodwill: some countries allowed to be amortized
   - Non-competition agreements: clause according which the seller is not allowed to act in the same line of business for a certain period of time.
2. Application of a discount:
3. Cost base of assets: forming a cost base of assets, that will mitigate tax on a future disposal
4. Transfer taxes: higher rates of (transfer tax) stamp duty applied to an asset transfer.
5. Transfer of provisions: certain liabilities are often assumed by the transferee, most notably provisions raised for employees’ pensions. The tax deduction of such a charge may not be available until the liability is actually incurred
6. Other issues: The transfer of certain assets may give rise to adverse tax consequences. Eg. a debt that subsequently turns bad may not be deductible to the Bid Co.

Question 6

What are the tax implications of selling assets from the position of Target Co? (3) explain them short.

Answer 6

1. Capital gains on disposals of certain assets: selling assets will realize capital gains. These will be taxed.
2. Loss of incentives (prikkel/ drijfveer): The sale of assets may also cause the forfeiture (kwijtspelen) of certain tax or cash incentives previously available to Target, for example by way of investment in new plant, depending on the type of activities carried on.
3. VAT/Indirect taxes: An asset deal may attract VAT and other indirect taxes. These taxes may represent a real tax cost or simply a timing issue because they are recoverable by the purchaser.
   Where the tax is recoverable, the timing of the recovery and issues associated to it (e.g. bearing interest) should be considered.
   - For example: insurance companies (when there are bidco) can’t recover those indirect taxes