Tax Implications of Mergers and Acquisitions: Expert Guidance

Mergers and acquisitions (M&A) are important strategies in the world of business, as they provide the opportunity for growth and expansion. While the strategic and operational benefits are often those which help with the decision-making process, there are lots of tax implications to consider as well. In this article, we will explore the tax implications of mergers and acquisitions in detail to help businesses maximise value and minimise risks.

Tax Implications to Consider

The tax implications when it comes to mergers and acquisitions are often multifaceted and therefore not straightforward. There are lots of factors that can have an impact, such as legal regulations, and the overall finances of the company. Here are the main tax implications to be aware of:

1.       Structure of the transaction

The type of transaction has huge tax implications as there are different rules depending on whether it is a share or asset purchase. With an asset purchase, the buyer acquires assets and liabilities, whereas, with a share purchase, the buyer acquires ownership of the company as a whole.

2.       Tax basis and depreciation

With an asset purchase, the acquired assets can be ‘stepped up’ to their fair market value, which in terms of tax can provide future depreciation benefits. What this does mean, in the short term, is that the seller can receive immediate tax liabilities.

3.       Capital gains tax

Capital gains tax is added onto the sale of shares or assets, and the rate at which this is taxed depends on lots of different factors, including the holding period of the assets, and whether the seller is an individual or a corporation. 

4.       Tax losses

One key thing to consider in M&A transactions is the ability to utilise the tax losses of the target company. There are specific rules governing whether tax losses are carried forward after a business is sold, and these can often be limited or forfeited when a change of control situation occurs.

5.       Indirect taxes

M&A transactions can also trigger indirect taxes including stamp duty, sales tax and VAT depending on the nature of the assets being sold.

6.       Cross-border considerations

For cross-border M&A transactions, issues such as withholding tax, transfer pricing and the application of double taxation are incredibly important to be aware of. These factors can cause significant delays, impacting the overall tax efficiency of the transaction.

Structuring the Deal for Tax Efficiency

Careful planning is essential when it comes to ensuring tax efficiency in M&A transactions. Immediate tax liabilities should be reduced, but long-term tax implications for both the buyer and the seller should be taken into account.

The first thing to think about is whether a purchase share or an asset share is best for the business. Each has their own tax implications:

• Asset purchase: the buyer can be selective about the assets they wish to acquire, to prevent them from inheriting unwanted liabilities. Acquired assets can offer depreciation benefits, but the seller is then stung with a higher immediate tax bill due to the recapture of depreciation or capital gains.
• Share purchase: the buyer acquires the entire company, including both assets and liabilities, and potential tax losses. This is a simpler method in terms of tax and allows for the deferral of certain tax liabilities. However, the buyer is risking any unknown tax liabilities associated with the company.

Utilising tax losses from the target company can have huge tax benefits when it comes to M&A transactions. There are often rules to prevent the abuse of tax loss carryforwards though, including:

• Change of ownership rules: if there is a significant change of ownership within the company, there are some rules and limits which remove the ability to use tax losses.
• Continuity of business requirements: some rules state that the business activities of the target company have to continue for a certain period of time after the transaction, to allow for the tax losses to be utilised.

It is important that buyers carry out their individual due diligence to understand the position of the company before they proceed with the transaction. Tax due diligence should also be performed as part of any M&A transaction, which includes a comprehensive review of the target company’s tax position including the following:

• Tax liabilities and contingencies: identification of any existing tax liabilities or any potential tax contingencies that could arise after the acquisition.
• Tax compliance: looking at the company’s historical tax compliance to ensure that there will be no future issues or tax penalties.
• Transfer pricing: for transactions that are multinational, it is key to assess the company’s transfer pricing policies to ensure tax compliance internationally.

Post-Transaction Considerations

Once the M&A transaction has been completed, there are often a few stages that need to be completed to ensure any ongoing liabilities are managed efficiently. Restructuring of operations is often the first step, which can have significant tax implications with regards to employee-related taxes and VAT.

Ongoing tax compliance is key to ensure there are no liabilities in the future, so all post-transaction restructuring activities need to be properly documented and reported to the relevant tax authorities.

The overall tax implications of mergers and acquisitions are complex, but Wright Vigar are on hand to help you through the process. Get in touch for a no-obligation chat if you are considering merging or acquiring a business.