Key Contacts: Michael McGivern – Head of Tax |
Introduction
Acquiring or selling a business is a significant milestone for all concerned, the acquiring and departing shareholders (in the case of a company purchase), and the employees. The commercial, legal, operational and financial issues to be addressed are numerous.
It’s important that tax is considered in the overall process as early as possible. Tax issues typically arise in the following areas:
• Pre-sale planning,
• Pre-sale due diligence,
• Pre-sale legal documentation, and
• Post sale restructuring.
Our firm has extensive tax experience in all four areas, and while the four areas are linked, this article focuses on the first part – pre-sale planning.
Consider what should be sold – shares or assets?
An obvious place to start is to decide on what should be sold. For example, where a company carries on the targeted business, should the shares of a company be sold, or should the company sell the targeted trading assets. In our experience, share sales are generally more common than asset sales, and the perceived non tax benefits of share sales include simplicity (including a lack of TUPE obligations), and a clean break for the sellers (subject to warranty/tax deed commitments given by the sellers and possible earn outs issues etc). However share sales can also have perceived disadvantages including a possible inability of a purchaser to “cherry-pick” assets, a possible exposure to latent historic liabilities within the target company, and the possibility of having to deal with dissident minority shareholders.
The tax implications of a transaction can differ significantly depending on whether it is structured as a share sale or an asset sale. There can be many tax-related factors to consider including:
• Less layers of tax can arise on a share sale when compared to an asset sale.
• Where the shares are sold by a company, it may be possible for the selling company to obtain a tax free disposal of the target company.
• Where shares are sold by an individual, it may be possible to avail of Entrepreneur Relief, which currently provides for a reduced 10% CGT rate on lifetime gains of up to €1.5m on certain disposals.
• The stamp duty rate which typically (but not always) applies to share transfers is currently 1%, whereas the stamp duty rate for other asset sales can be 7.5%.
• Tax losses carried forward by the target company should generally be preserved in a share sale, subject to anti-avoidance rules.
• The sale of shares is not subject to VAT, and both parties should be aware that this can mean that VAT arising on costs related to the sale/purchase may be irrecoverable.
• A sale of shares may give rise to a clawback of reliefs previously claimed (for example stamp duty group relief and/or CGT group relief).
• A share sale can give rise to a mismatch in value whereby a company may hold assets which have a historically low tax base cost but the company shares are being acquired based on the current market value of these assets, albeit that the difference may be reflected as deferred tax on the company’s balance sheet.
With careful and timely advance planning it should be possible to successfully address these issues, but they need to be considered.
Other relevant tax issues may include the following:
Cash free debt free share sales
- These are quite common, and may provide a departing working shareholder with an opportunity to deploy excess cash to enhance his/her pension provision.
Use of personal holding companies.
- The ideal tax time to implement a personal holding company structure is when a trading company is about to commence trading or is in its early years when values are low, or when a new investment round is about to take place.
- Ideally, entrepreneurs who are setting up new businesses or participating in a funding round should consider what is their optimum shareholding to deal with a future exit. For example, they should consider whether just prior to a future share sale, they wish all of their shares to be held personally, or via a personal holding company, or through a hybrid mix of both personal and corporate ownership.
- They should also consider their post-sale funding requirements to fund both their personal lifestyle and future investment decisions, and precisely how the post-sale proceeds will be used.
- In recent years there has been increased Revenue scrutiny of personal holding company structures. Specifically, Revenue wishes to ensure that such structures are put in place for bona fide commercial reasons and are not part of a scheme or arrangement the main purpose of which or one of the main purposes of which is tax avoidance. Where Revenue successfully challenges such structures on these grounds, CGT and stamp duty share for share reliefs which may otherwise be available on putting the structures in place, will not apply and this can be costly.
- Finally, shareholders should carefully consider precisely why to they want a personal holding company structure in the first place. For example, is it for asset protection or some other purposes or a combination of purposes?
Transferring shares to family members
- Having considered their post-sale financial requirements, it may be the case that shareholders decide to transfer some of their shares to family members in advance of a third-party sale.
- In such cases the shareholders should consider what tax reliefs may be available to both them and the family members on the pre-sale transfers (principally CGT and CAT and the possibility of CGT being used as a credit against CAT arising on the same transaction), and what timelines between transfers and third party sales must be met to maximise the related CGT and CAT tax reliefs, without subsequent clawbacks.
- In light of some of the CGT/CAT clawback complexities, and for other commercial reasons, sometimes a better option might be to implement a growth share or family partnership structure.
Conclusion
You’ll see from the above that there are many tax issues to consider in advance of the sale of a business, on both the buy and sell sides. Obtaining early and appropriate tax advice is a critical component of a successful sales or acquisition outcome.
