Acquisitions (from the buyer’s perspective)Tax treatment of different acquisitions
What are the differences in tax treatment between an acquisition of stock in a company and the acquisition of business assets and liabilities?
In a share purchase, the purchaser assumes the historic tax liabilities of the company. In the case of an asset purchase, the purchaser does not generally assume past tax liabilities of the business.
Stamp duty is generally assessed on the transfer of Irish registered shares at 1 per cent of the consideration, whereas the sale of assets, subject to certain exemptions (eg, non-Irish situate assets, intellectual property and assets transferred by delivery only), may be assessed for stamp duty at the rate of 6 per cent of the consideration due. Stamp duty on transfers of shares of Irish companies that derive the greater part of their value from Irish real estate may, subject to certain conditions, also be assessed at the rate of 6 per cent.
Share sales are exempt from VAT. Irish asset sales are subject to VAT at rates of up to 23 per cent, although full VAT relief can be obtained where, broadly, the assets are being transferred as part of a transfer of a business.Step-up in basis
In what circumstances does a purchaser get a step-up in basis in the business assets of the target company? Can goodwill and other intangibles be depreciated for tax purposes in the event of the purchase of those assets, and the purchase of stock in a company owning those assets?
A purchaser will get a step-up in basis in the business assets of a company when buying the assets rather than acquiring stock. This may provide a tax benefit by reducing the gain on which tax is chargeable in the event that the purchaser sells the assets at a later date.
Capital expenditure on certain intangible assets such as intellectual property, goodwill directly attributable to intellectual property, software and transmission capacity rights (as defined) may be depreciated for Irish tax purposes. For expenditure incurred on the acquisition of intellectual property by an Irish company, an 80 per cent restriction applies to the deduction that may be claimed by the taxpayer so that only 80 per cent of the profits of the business exploiting the intellectual property rights may be reduced (but allowing any excess to be carried forward).
Capital expenditure on other intangibles, not specifically accorded an entitlement to depreciation for Irish tax purposes under Irish tax legislation, generally does not benefit from tax depreciation. Similarly, the purchase of shares in a company will not of itself give rise to an entitlement to depreciate intangible assets owned by the company; as explained, the company may itself have entitlement to depreciation allowances if it incurred capital expenditure on the purchase of qualifying intangibles.Domicile of acquisition company
Is it preferable for an acquisition to be executed by an acquisition company established in or out of your jurisdiction?
In the case of a stock acquisition, Irish stamp duty will be charged on the acquisition of shares in an Irish company regardless of whether the acquisition company is established in or outside of Ireland.
It may be advantageous to use an Irish-established, Irish tax-resident company as the acquisition company, given that dividends received by it from another Irish tax-resident company are tax-exempt in Ireland. The use of such an acquisition vehicle may also allow for the Irish substantial shareholdings capital gains tax exemption to be availed of.
Even if the acquisition company is not an Irish-established, Irish tax-resident company, it is likely, given the extensive exemptions from Irish dividend withholding tax, that dividends may be paid by the Irish target free of Irish dividend withholding tax if the acquisition company is internationally held. The use of a non-Irish tax-resident acquisition vehicle will not necessarily avoid a gain on the disposal of the stock being within the charge to Irish tax (see question 16).
In a business asset acquisition, if the business is intended to be carried on in Ireland after the acquisition, it may be preferable to use an Irish-established, Irish tax-resident acquisition company, as the carrying on of the Irish business by a non-Irish tax-resident company is likely to bring it within the charge to Irish tax by virtue of carrying on a business in Ireland. The non-Irish-resident acquisition company could thus be potentially liable to both Irish and foreign tax on the Irish business income.Company mergers and share exchanges
Are company mergers or share exchanges common forms of acquisition?
The Irish company law that came into force on 1 June 2015 allows two Irish incorporated private companies to merge, whereby the assets and liabilities of one company are transferred to the other and the transferring company is dissolved. Previously, mergers between Irish companies were not possible. It remains to be seen whether or not Irish domestic mergers will become a common form of acquisition.
An Irish company may be merged with another company incorporated in the EU. A number of such mergers have been effected, but this is consequent to relatively recently introduced legislation, and generally has taken place within a group context, so it is not a common form of acquisition by third parties in Ireland at present.
Share-for-share exchanges are not uncommon forms of company acquisition. A share-for-share exchange may qualify for exemption from stamp duty subject to certain conditions.
A share exchange will most often arise where a publicly quoted company is acquiring the target company as the former has a ready market for its shares.
Where the shares of the acquiring company are issued to the shareholders of an Irish company as consideration for the acquisition of their existing shares, then, subject to certain conditions being satisfied, the transaction should qualify for Irish capital gains tax rollover relief for shareholders who would be within the charge to Irish capital gains tax on the sale. This relief provides that the selling shareholder is deemed not to have disposed of his or her shares in the original company and the new shares received in the acquiring company are deemed to be the same asset as the original shares with the same base cost and other tax attributes as the original shares. When the recipient of the shares subsequently disposes of the shares in the acquiring company for cash, shareholders who would be within the charge to Irish capital gains tax may be subject to tax at 33 per cent on the chargeable gain arising, subject to exemptions.Tax benefits in issuing stock
Is there a tax benefit to the acquirer in issuing stock as consideration rather than cash?
In the case of a stock issue, it may be possible to avoid the 1 per cent stamp duty charge altogether. Furthermore, the chargeable gain in the hands of the selling shareholder (if within the charge to Irish tax on the sale) may be deferred, which has indirect economic benefits to the acquirer.Transaction taxes
Are documentary taxes payable on the acquisition of stock or business assets and, if so, what are the rates and who is accountable? Are any other transaction taxes payable?
Yes. For further details on the stamp duty and VAT payable, see question 1.
In the case of a share sale, the accountable person to pay stamp duty is the purchaser of the shares.Net operating losses, other tax attributes and insolvency proceedings
Are net operating losses, tax credits or other types of deferred tax asset subject to any limitations after a change of control of the target or in any other circumstances? If not, are there techniques for preserving them? Are acquisitions or reorganisations of bankrupt or insolvent companies subject to any special rules or tax regimes?
Trading losses may survive a change in control of the target. However, on the change of ownership of a company with trading losses, in certain circumstances a special provision applies to disallow the carry-forward of the trading losses if there is both a change in ownership of the target and a major change in the nature or conduct of the trade carried out by the target.Interest relief
Does an acquisition company get interest relief for borrowings to acquire the target? Are there restrictions on deductibility generally or where the lender is foreign, a related party, or both? In particular, are there capitalisation rules that prevent the pushdown of excessive debt?
A tax deduction is available for the acquisition company for interest payments made by it in respect of borrowings to acquire the target, provided certain conditions are met.
There are no general thin capitalisation rules. However, restrictions have been introduced to disallow a deduction in certain circumstances, including in some cases where interest is paid on borrowings from a company that is connected with it and where the borrowings are used to acquire ordinary share capital of a company from a company that is connected with it.
The avoidance of withholding tax on interest payments is generally achieved by borrowing from a lender in an appropriate jurisdiction to which interest can be paid gross (see question 13).
The European Anti-Tax Avoidance Directive, which provides for an interest deductibility limitation rule similar to the recommendation contained in the BEPS action proposals, must be implemented by each EU member state by 2019, subject to derogations for member states that have equivalent measures in their domestic law. Ireland is currently invoking a derogation in respect of having to implement the interest deductibility limitation rule contained in the Directive. This derogation is potentially available until 1 January 2024. However, it has been indicated that the interest deductibility limitation rule may be implemented at an earlier date in Ireland, potentially as early as 1 January 2020.
Debt pushdown may be achieved with appropriate structuring. It may be necessary to have a subsidiary of the target company that is connected with the acquisition company, in order for the conditions allowing deduction to be met.Protections for acquisitions
What forms of protection are generally sought for stock and business asset acquisitions? How are they documented? How are any payments made following a claim under a warranty or indemnity treated from a tax perspective? Are they subject to withholding taxes or taxable in the hands of the recipient? Is tax indemnity insurance common in your jurisdiction?
The accepted market practice in Ireland in a stock acquisition is for protection to be given by the seller to the buyer in the form of both a tax indemnity and tax warranties. A tax indemnity is generally given in the form of a separate tax deed. The documentation generally categorises such payment as a reduction in the purchase consideration. To minimise the risk of taxability of payments, the purchaser rather than the target should be indemnified.
Tax warranties are also sought, primarily to provide the buyer with the necessary tax history of the company required to deal with tax matters going forward. In addition, the warranties may cover certain matters not covered by the tax deed. The tax warranties are included in the share purchase agreement.
Tax warranties are also commonly sought in a business asset acquisition but are minimal given the limited circumstances in which Irish tax liabilities may attach to assets. The tax warranties are included in the asset purchase agreement.
Tax warranty and indemnity insurance is becoming increasingly prevalent in Irish transactions. The most common type of policy is the buyer-side policy.