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?
There are a number of differences.
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 like intellectual property, goodwill directly attributable to intellectual property, software and transmission capacity rights (as defined) may be depreciated for Irish tax purposes. 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 - of course, 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 in our experience 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 benefit to the acquirer.
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 please refer to 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.
Does an acquisition company get interest relief for borrowings to acquire the target? Are there restrictions on deductibility where the lender is foreign, a related party, or both? Can withholding taxes on interest payments be easily avoided? Is debt pushdown easily achieved? 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).
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?
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.
What post-acquisition restructuring, if any, is typically carried out and why?
It cannot be said that there is any typical tax-driven restructuring done in Ireland post-acquisition of either shares in a company or business assets.
Of course, restructurings will often be put in place post-acquisition, with attendant tax consequences, but in our experience these are usually driven by the business requirements of the company and the group acquiring the target.
For example, we have advised on restructurings that have seen the businesses of other group affiliate companies of the acquirer move to Ireland in order to obtain the benefit of the low Irish corporation tax rate of 12.5 per cent.
Additionally, we have seen restructurings put in place post-acquisition to enhance the business and tax efficiency of the target company. One example might be a company with manufacturing operations in Ireland, which instead enters into a contract manufacturing arrangement, and such a structure needs to be carefully managed in order to preserve the entitlement of the Irish company to the 12.5 per cent rate of corporation tax.
Finally, restructurings are often put in place in order to extract cash from the acquired company.
Can tax neutral spin-offs of businesses be executed and, if so, can the net operating losses of the spun-off business be preserved? Is it possible to achieve a spin-off without triggering transfer taxes?
It is possible for tax-neutral spin-offs of businesses to be executed in Ireland and for the trading losses of the spun-off business to be preserved. The transfer of a trade from one company to another is generally treated as the cessation and commencement of the trade, with trading losses not being available for use by the transferee. As an exception to this general rule, a provision allows a trade to be transferred from one company to another and, broadly, provided that the companies are in common ownership to the extent of not less than 75 per cent, the transferee is entitled to losses of the trade that arose while the trade was carried on by the transferor.
It is possible to avoid transfer taxes by executing a ‘hive down and hive out’ of a business, but various conditions must be met.
Migration of residence
Is it possible to migrate the residence of the acquisition company or target company from your jurisdiction without tax consequences?
Irish incorporated companies are generally tax-resident in Ireland. There is an exception to this where an Irish-incorporated company that is regarded as resident in a treaty partner country of Ireland, and not resident in Ireland for the purposes of the tax treaty between that country and Ireland, will be regarded as not resident in Ireland.
For companies incorporated before 1 January 2015 a second exemption also applies (until 31 December 2020 or earlier in certain circumstances). Such an Irish-incorporated company that is under the ultimate control of a person or persons resident in an EU member state or in a treaty country or which itself is, or is 50 per cent related to, a company whose principal class of shares is substantially and regularly traded on a stock exchange in an EU country or a treaty country, and that carries on a trade in Ireland or is 50 per cent related to a company that carries on a trade in Ireland, will not be tax-resident in Ireland if it is managed and controlled outside Ireland.
Where a company ceases to be resident in Ireland an exit tax regime applies. On ceasing to be resident, the company is deemed to have disposed of and reacquired all of its assets immediately before the event of changing residence, at their market value at that time, notwithstanding that no actual disposal takes place. The exit tax is disapplied in certain instances, including if the company is ultimately owned by a foreign company (ie, one controlled by a resident or residents of a country with which Ireland has a double tax treaty and not by an Irish-resident person).
Interest and dividend payments
Are interest and dividend payments made out of your jurisdiction subject to withholding taxes and, if so, at what rates? Are there domestic exemptions from these withholdings or are they treaty-dependent?
Interest paid by an Irish-resident company is subject to withholding tax, currently at the rate of 20 per cent, absent an exemption. Under Irish domestic law various exemptions from interest withholding tax exist, in addition to exemptions provided for under certain Irish tax treaties.
Irish-resident companies are required to withhold tax, currently at the rate of 20 per cent, on dividends and other distributions. There are extensive domestic exemptions from this dividend withholding tax for non-Irish investors, subject normally to documentary filing requirements, and it is generally likely that dividends paid by an internationally held Irish company may be paid free of Irish withholding tax without having to rely on an exemption under a relevant Irish tax treaty.
Tax-efficient extraction of profits
What other tax-efficient means are adopted for extracting profits from your jurisdiction?
The making of a dividend or other distribution (whether in cash or in kind) is the most common means of extracting profits from an Irish company.
In certain cases there can be Irish company law impediments to the ability of an Irish company to make a dividend or distribution. Also, a dividend or distribution is not tax-deductible.
There are other means that could be adopted to extract profits effectively. With the introduction from 1 January 2011 of Irish transfer pricing rules (subject to certain exceptions and grandfathering provisions), such rules may now need to be considered in respect of these other means.
For example, interest could be paid on a loan made by an affiliate in a lower tax jurisdiction. The critical issues here would be to ensure that there is exemption from Irish withholding tax on the interest and also that the Irish company is entitled to a tax deduction for the interest paid, which is subject to detailed conditions.
Alternatively, if another income stream could be created from Ireland to a lower tax jurisdiction and if the payment was tax-deductible, then this could be a tax-efficient way for effectively extracting profits, such as if the Irish company was to license in intellectual property from an affiliate located in a lower tax country. The issue to ensure would be that withholding does not apply, that the licensor company is not regarded as receiving the income from an Irish source and that the payment made by the Irish company is not excessive, as the excessive element could be denied deductibility.
Disposals (from the seller’s perspective)
How are disposals most commonly carried out - a disposal of the business assets, the stock in the local company or stock in the foreign holding company?
The method of carrying out disposals very much depends on the particular circumstances of the transaction. The disposal of the stock in a local company or foreign holding company would generally be the most common method of disposal. This is driven in part by the seller wishing to avoid a double charge to tax, at both company and shareholder level, where the disposal is by way of an asset disposal.
The availability of the substantial shareholdings exemption (see question 17) may favour a disposal of stock rather than a disposal of assets.
The market practice in the case of a stock disposal for a seller of shares to give a tax indemnity and tax warranties for certain pre-completion tax liabilities of the target may, in certain circumstances, make an asset disposal preferable for the seller.
Differing Irish stamp duty rates (see question 1) may result in a buyer insisting on a stock disposal.
Disposals of stock
Where the disposal is of stock in the local company by a non-resident company, will gains on disposal be exempt from tax? Are there special rules dealing with the disposal of stock in real property, energy and natural resource companies?
A disposal of stock in an Irish company by a company not resident in Ireland will be subject to tax in Ireland if the stock comprises unquoted shares deriving their value, or the greater part of their value, directly or indirectly from real estate in Ireland, Irish minerals or mineral rights, or exploration and exploitation rights in the Irish Continental Shelf.
Avoiding and deferring tax
If a gain is taxable on the disposal either of the shares in the local company or of the business assets by the local company, are there any methods for deferring or avoiding the tax?
As regards the disposal of stock in a company, a non-resident company should only be subject to Irish capital gains tax on a disposal if the shares are of the type referred to in question 16. This assumes that the shares were held as a capital asset by the seller.
If the seller is a company resident in Ireland, then the provisions of the Irish substantial shareholdings exemption may apply whereby if, broadly, the seller owns more than 5 per cent of the share capital of the target company for the past 12 months and the target company is a trading company or part of a trading group, and is resident in an EU country (which includes Ireland) or in a country with which Ireland has signed a double tax treaty, the capital gains should be exempt from Irish capital gains tax.
To the extent that an Irish seller does not meet these criteria, one method of deferring the capital gains tax would be if the seller received shares from the acquiring company. As set out above, the gain is rolled over and will be realised on a disposal of those shares.
If the gain is taxable, there are a number of tax structuring routes that could be put in place to mitigate the gain. For example, in the case of an Irish corporate seller, effecting the disposal so that a large distribution is taken by the seller immediately before the sale.
As regards the disposal of assets, there is no opportunity for the vendor to roll over any gain as this rollover relief was abolished within the past few years. Again, if the assets were used as part of a branch trade in Ireland or if the seller is resident in Ireland or ordinarily resident, then the gain will be within the scope of Irish capital gains tax. The circumstances of the transaction may allow some scope for tax structuring, such as the existence of prior losses within the group that could shelter the gain.