Transcript Slide 1

Chartered
Tax
Consultant
Stage 3 Module 11
Reorganisations, Liquidations and
Sale of a Business
Presenter Name – Fergal Ryan
Chartered Accountants House
www.charteredaccountants.ie
EDUCATING
SUPPORTING
REPRESENTING
Overview
• Company Reorganisations
• Liquidations
• Sale of Business
Overview
Company
Reorganisations
Liquidations
Sale of Business
•Transfer of assets and
businesses between
group members
•Reliefs
•Company and
Shareholder
perspectives
•Appointment of
liquidator
•Disposal &
Distribution of Assets
•Pre-sale restructuring
•Due diligence
•Tax review of legal
documents
Wide Variety of Tax Issues
Numerous Tax Heads -CGT; SD; CT; IT; VAT
Intra Group Transfers
• Main tax heads
– CGT
– Stamp Duty
• Other Taxes
– CT
– VAT
• Tax Reliefs; obligations and clawbacks
CGT Groups
• Sec 617 TCA 1997
• Group Relief
• “No gain/No loss” on disposal on intra group
transfers of chargeable assets
• Qualifying groups
• CT on chargeable gains and CGT on
development land
CGT Group
• Sec 616(1)(bb) TCA 1997
• Principal company and all effective 75% subs
• “Company” – Sec 616(1)(a) TCA 1997
– Tax resident in EU or in EEA country having DTA with
Ireland
• “Principal Company” – Sec 616(1)(c) TCA 1997
– A parent of a 75% subsidiary
Effective 75% Subsidiary
• Sec 616(1)(b) TCA 1997
• 75% ownership and entitlement tests
– ≥ 75% ordinary share capital (direct or indirect)
– ≥ 75% distributable profits
– ≥ 75% distributable assets on liquidation
• CGT Group – Principal company and its effective
75% subs and their effective 75% subs
• Includes companies <75% owned by principal co
• Contrast with CT Groups
CGT Groups
A
80%
90%
C
B
80%
75%
D
E
80%
40%
F
G
CGT Groups
A
90%
60%
B
90%
25%
C
D
A,B,C and D are a CGT Group
Intra Group Transfers
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Sec 547 TCA 1997
MV applies where bargain not at arm’s length
Sec 549 TCA 1997
Connected persons within Sec 547
Sec 10(6) TCA 1997
Control test – connected companies
– Same person has control of both companies
– Person controls one company and connected persons
or he together with connected persons control the
other company
Intra Group Transfers
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CGT event on transfer of chargeable assets
From one group company to another
MV applies
Sec 617 TCA Relief may apply
CGT Group Relief
• Sec 617 TCA 1997
• No CGT on transfers between group members
– Transaction is between group members
– Co transferring asset is resident in the State or asset is a
chargeable asset immediately before the transfer
– Co acquiring asset is resident in the State or the asset is
a chargeable asset immediately after the transfer
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Non resident companies – Irish branch assets
Non resident company liable to CGT
Sec 649(2) TCA 97
Development land gains within Sec 617 group relief
EU and EEA
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EU and EEA companies can be part of CGT group
CGT group relief for chargeable assets only
Transfer and transferee within CGT charge
Sec 617 relief for non residents
– EU/EEA resident
– Holding branch assets in Ireland
EU and EEA
• Revenue concession
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Worldwide group
Transfer of trade carried on in the State
Profits and gains liable to corporation tax
Assets in use for trade – no discontinuance
Bona Fide commercial reasons – not to avoid tax
Submission to Revenue
Formal undertakings from transferee and group parent
• EU fundamental freedoms?
CGT Groups
• Sec 617 TCA 1997
• Transfers deemed to be made at “no gain/no loss”
• Acquiring company takes base cost and
acquisition date of transferor
• No crytallisation of gain at time of intra-group
transfer
• Realised losses cannot be transferred to group
members
• Asset with gain could be transferred into group
company with loss prior to sale
CGT Groups
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Group relief applies automatically
Takes precedence over other reliefs (not S291A)
Example:
Sec 626B TCA 1997 –CGT exemption for sale
by parent of shares in a subsidiary
• Group relief applies to:
– CT on chargeable gains
– CGT on development land gains
Trading Stock
• CGT Group Relief does not apply to trading
stock
• Sec 618 TCA 1997 applies Sec 596 TCA 1997
• Capital asset held as trading stock of one group
company
• Transferred to another group company where it
is held as trading stock
• Vice versa
Sec 596 Relief
Capital Asset becomes
Trading Stock of transferee
Trading Stock becomes
Capital Asset of transferee
•Deemed disposal @ mv
•CGT gain/loss arises
•CGT group relief applies
•Sec 617 TCA 1997
•Election by transferee to
reduce MV trading stock by
amount of capital gain
•No election if a loss arises
•Transferor treated as
transferring a capital asset
•CGT Group relief available
•Transferee deemed to
acquire asset for same cost
and at same date of
acquisition by transferor
Clawback of Relief
• Potential Clawback of CGT Group Relief
– When asset sold outside the CGT group
– When the co with the asset leaves the group
– Where the asset ceased to be a chargeable asset
Sale of Asset outside Group
• Sec 619(2) TCA 1997
• Original cost and acquisition date of member
group acquiring asset
• All group members deemed to be the same
person
• Sec 619(1) TCA 1997 – application of Sec 555
• No reduction for capital allowances where gain
arises
• Loss restricted by capital allowances claimed by
other group company
Co Leaving Group
• Sec 623(2) TCA 1997
• Deemed disposal where co leaves CGT group
within 10 years of acquiring asset
• Sec 623(4) TCA 1997
• Departing company:
– Deemed to have sold and immediately reacquired
asset
– At date asset was acquired from other group co
Co Leaving Group
• Sec 623(1) TCA 1997
• Clawback provisions do not apply where bona
fide liquidation
• Sec 623(3)
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Two or more associated companies
Cease to be members of group at same time
No clawback on assets transferred between them
Where relief under Sec 617 previously claimed
Asset Ceases to be Chargeable
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Sec 620A TCA 1997
Co resident in EU/EEA country acquires asset
Group Relief provisions apply
Asset becomes situated outside the State
Co deemed to be sold and immediately
reacquired
Stamp Duty Reliefs
• SD payable on actual consideration given
• Exception – gift or voluntary disposition @ MV
• Potential Stamp Duty @ 6% for intra group
transfers
• Sec 79 SDCA 1999 – associated companies
relief
• SD on intra group transactions eliminated
Associated Companies Relief
• Sec 79 SDCA 1999
90%
90%
• 90% beneficial ownership – direct and indirect
• 90% entitlement to profits on distribution
• 90% entitlement to assets on winding up
Associated Companies
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Beneficial v Legal ownership
Appointment of liquidator
Company ceases to be beneficial owner
Company holds legal title
Sec 79 SDCA 1999– beneficial ownership
90% profit and asset tests similar to CT loss
groups
• Non Irish resident and registered companies can
qualify
Associated Companies
• Revenue Notes for Guidance – body
corporate with share capital
• Adjudication by Revenue – Sec 20SDCA
1999
• Statutory declaration confirming conditions
met
Example
MIAMI
90%
100%
90%
Toronto
100%
TRL
Boston
Seattle
90%
90%
BSL
SDL
Anti Avoidance
• Sec 79(5) SDCA 1999
• Any part of consideration provided by person other
than a company associated with transferor or
transferee
• Bank borrowings excluded if commercial
Anti Avoidance
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Sec 79(7) SDCA 1999 – claw back provision
Two companies cease to be 90% associated
Within two years of transfer
Bona fide liquidations not excluded from claw
back – unlike CGT groups
• Possible Revenue concession for group
reorganisations
Stamp Duty
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Where Sec 79 SDCA 1999 relief does not apply
Review proposed transaction
Can plant be transferred by delivery?
Can debtors be retained – collection agent?
Intra Group Transfers
• Withholding Tax
• Corporation Tax
• VAT
Withholding Tax
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Sec 980 TCA 1997
Withholding tax applies @ 15%
Even where CGT group relief available
Consideration > €500,000
Irish land, minerals or exploration rights
Shares in non listed companies deriving value
from above assets
• Goodwill of Irish trade
• CG 50 clearance
Corporation Tax
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Sec 400 TCA 1997
Election for trade to continue
75% common ownership
Losses forward claimed
Assets tranferred @ tax wdv
Sec 401 loss buying rules – major change in
ownership or activities or dormant trade
• Sec 312 TCA 97 – no IBA claw back on election
VAT
• Sec 3(5)(b)(3) VATA 1972
• Assets transferred between group companies
• Transferee must be an accountable person –
VAT registered
• Transfer constitutes undertaking or part of
undertaking capable of being operated on an
independent basis
Reorganisations of Share Capital
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Pre-sale structuring plan
Introduction of new investors
CGT for shareholders
Reliefs covered in detail at Stage 2, Module 5
Section 5.14
• Refresher – some examples
“Paper for Paper”
• Sec 584 TCA 1997
• Shares exchanged for other shares in same
company
• Shares allotted in proportion to existing shares
• Sec 584(3) TCA 1997
• Reorganisation or reduction of share capital
• No disposal of original shareholding
• New shares take original cost and acquisition
date of old shares for future CGT
Example
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Adam purchased 5,000 ord shares in S Ltd
Cost €10,000
Date 10th January 1993
Reorganisation of share capital in April 2002
Adam received 2,000 new shares in exchange
for his 5,000 ord shares
• 2,000 new shares sold in December 2010 for
€60,000
CGT Computation
• Date of disposal
• Sale Proceeds
• Cost
January 1992
5,000 of shares
Indexation (91/92)
Indexed Cost
Gain
10th December 2010
€60,000
€10,000*
1.406
€14,060
€45,940
*no disposal of original shares in April 2002
Exchange of Shares
• Original shares plus consideration
• New shares take on original cost of old shares
• New consideration treated as enhancement
expenditure
Example
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1/5/1986 : 1,000 Ord Shares bought
Cost €6,000
June 1997 : Reorganisation of company
2,000 new shares received in exchange for
original shares plus payment by shareholder of
€1,000
• 30th November 2010: 2,000 shares sold for
€100,000
CGT 2010
• Sale Proceeds
• Cost 1/5/1986
Indexation
Enhancement Exp
June 1997
Indexed
• Gain
€100,000
€6,000
1.637
(€9,822)
€1,000
1.232
(€1,232)
€88,946
Exchange of Shares
• Exchange of old shares for New Shares plus
consideration
• Deemed part disposal of old shares
• Cash or value of assets received by shareholder
• New shares have base cost of old shares minus
the part allocated to part disposal
Example
•July 1996
•M bought 4,000 shares
acquired in M Ltd
•Cost €5,000 in July 2006
CGT July 2000 – Part disposal
Sale Proceeds
€4,000
Cost
€5,000 x €4,000 = €1,429
€14,000
Indexation
1.251 €1,788
Gain
€2,212
•July 2000
•M received €4,000 plus 3,000
new shares in M Ltd as part of
reorganisation
•MV 3,000 shares in July 2000 =
CGT August 2012
Sale Proceeds
Cost
Original
€5,000
Used
€1,429
€42,000
Group Reorganisations
• Why do corporate groups restructure?
• Reduction of number of companies in group
• Lower compliance costs – audit, tax, company
secretarial
• Pre-sale restructuring plan for tax efficient sale
• Introduction of new investors
• Management buy-in
Reorganisations
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Corporate restructuring
Transfer of businesses, assets or shares
To acquiring company
Acquiring company issues shares in itself to
transferor company or its shareholders
Corporate Restructuring
Common Types
•Share for Share Swap
Co B issues shares to Co A
shareholders in exchange for
shares in Co A
•Share for Undertaking three
party swap
Co A transfers business to Co B.
Co B issues shares to Co A S/H
•Share for Undertaking two party
swap
Co A transfers business to Co B
Co B issues shares to Co A
Potential Tax
•CGT for Co A on transfer of
shares , assets or business
(CT on C Gains)
•CGT for Co A shareholders
or company A on shares
swapped or sold
•Stamp Duty for Co B on
acquisition of shares,
business or assets
•CT for companies for CA
assets transferred
•VAT on transfers of assets
Share for Share Swap
S/H A
S/H B
S/H A
Co B
Co A
Co B
Co A
S/H B
Share for Undertaking 3 Party Swap
S/H A
Co A
S/H B
Co B
S/H A
S/H B
Co B
Co A
Business
Business
Share for Undertaking 2 Party Swap
S/H A
Co
A
S/H Co B
S/H B
Co B
Co A
A
Co B
Business
Co A
business
CGT Reliefs and Stamp Duty Reliefs
Reconstruction
•No definition in tax law  Case Law
•Brooklands Selangor Holdings Ltd v IRC
•Basic character remains unchanged
•Same persons as members
•Baytrust Holdings Ltd V IRC
•No fundamental difference after reconstruction
•Patrick W Keane v Revenue
•Shareholder dispute – reorganisation of share capital
•Streaming = partition/division
•TB 48
•Substantially the same business carried on by
substantially the same persons
CGT Reliefs and Stamp Duty Reliefs
Undertaking
•No statutory definition
•UK case law
•“Business or enterprise undertaken by a company”
•Greengrocer’s business – pound of apples ≠ part of
•American Leaf Blending Co
•Business a wider concept than trade
•Activity may be intermittent
•Swithland Investments case – as distinct from acquisition
of some of the underlying assets
•TB 48 – segregation of business and not merely of assets
•Capable of being carried out in its own right
•No of employees being transferred
CGT Reliefs and Stamp Duty Reliefs
Amalgamation
•Not defined in legislation
•Re South African Supply and Cold Storage Co Ltd
•Rolling of two concerns into one
•Welding /blending
•Not merely the continuance of one concern
•Not necessary to have a new company
•Merged undertakings
•TB 48 – blending of one or more undertakings into one
•Shareholders substantially remaining unchanged
•Joining together of two or more companies
Share for Share Exchange
• Sec 568 TCA 1997
• Company issues shares to a person in exchange
for their shares in another company
• Acquiring company has or will have control of
target company or
• General offer made to member of target company
• Which if satisfied will give control to acquiring
company
• Bona Fide commercial reasons
• No scheme with main purpose of tax avoidance
• No disposal or acquisition for CGT
Stamp Duty Relief
• Sec 80 SDCA 1999
• Reconstructions and amalgamations for share for
share swaps
• Transfer of shares in target company to acquiring
company
• Clawback of relief if beneficial ownership of
shares in target company not held for 2 years
• Interest @.0219% per day from date beneficial
ownership ceases
• Interest from date of transaction if false
information
Stamp Duty Relief
Bona Fide Commercial reasons – main purpose not avoidance of tax
Acquiring company must acquire 90% of target company
90% acquisition in single transaction
Consideration must be 90% in new shares in acquiring company
Shares must be issued in proportion to shareholdings in target company
Acquiring company must be limited and Irish/EU resident
Target company can be unlimited and resident anywhere
Acquiring company must increase share capital for takeover
Share for Undertaking 3 Party
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Target transfers all or part if business
To acquiring company
In exchange for shares in acquiring company
Shares issued to shareholders of target company
Undertaking will be owned by the acquiring
company
• Acquiring company owned by original shareholder
plus target company shareholder
Potential Taxes
• CGT – target company on disposal of
undertaking
• CGT – shareholders of target company – value
passing out of shares
• SD – up to 6% on acquiring company
• CT cessation issues and balancing charges
• VAT on transfer of undertaking
CGT Relief
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Company Level
Sec 615 TCA 1997
Transfer of business at no gain/no loss
Target company gets no consideration other than
acquiring company taking over liabilities
Companies must be Irish or EU resident
Assets transferred must be chargeable assets
No relief for development land
Sec 633 TCA 1997 – extends relief for
development land under scheme of
reconstruction or amalgamation
CGT Relief Company Level
• Partitions do not qualify for Sec 615 TCA 1997
relief
• Concessional relief for “family partitions”
• Substantial Identity of ownership
• Before and after reconstruction – TB 48
• Immediately after the reconstruction
• No contract for sale should exist prior to
reorganisation
• Revenue pre clearance provided
• No clawback provisions
CGT Relief - Shareholders
• Sec 587 TCA 1997
• Acquiring co issues shares to shareholders of
target company
• In proportion to original shareholdings
• Original shares must be retained or cancelled
• No CGT disposal triggered
• New shares take on cost of original shares
Transfer of Business
• Sec 130 TCA 1997
• Transfer of business is a distribution
• TB 48 – where Sec 587 and 615 TCA 1997
apply
• Bona fide reconstructions
• Revenue practice is not to invoke Sec 130 TCA
1997
Stamp Duty Relief
• Sec 80 SDCA 1999
• Substantial SD savings – up to 6%
• Bona fide reconstruction
– Assets must be an undertaking or part of undertaking
– 90% of consideration are shares in acquiring company
– Substantial continuity of ownership in acquiring
company
– No minimum holding period for shares
– Clawback if relief granted on false information
Share for Undertaking 2 Party
• Company transfers all or part of its business to
another company
• In exchange for shares in that company
• After the swap, shareholders of target own
shares in acquiring company
• Acquiring company carries on previous business
of target company
2 Party Swap
• CGT Relief for Target Company
• Sec 631 TCA 1997
• Deferral of CGT on transfers of a trading
operation between EU resident members
– All or part of trade carried on in Ireland transferred to
another company
– Consideration is the issue of shares in acquiring
company to target company
– Company incorporated, tax resident and liable to CT in
EU State
CGT Relief – 2 Party
• Immediately after the transfer
– Assets transferred must be used in trade of acquiring
company
– Carried on in Ireland
– Acquiring co must be chargeable to CT or CGT after
transfer
– Acquiring company cannot be exempt from CT or CGT
under DTA
• Clawback if shares sold within 6 years by target
company
• Base cost of shares reduced by deferred gain
• Sec 308A TCA 97 – no BC on trade assets in merger
Stamp Duty Relief
• Acquiring company
• Sec 80 SDCA 1999 – same rules as for 3 party
swap
• Consideration shares issued to target company
• Clawback if target company ceases within 2
years
• No clawback if beneficial ownership lost due to
reconstruction, amalgamation or liquidation
Partition of Family Trading Companies
• Demergers can qualify for the reconstruction
reliefs
• Business carried on in two companies after
demerger
• Shareholders interests remain the same
• Reliefs do not apply where businesses divided
into individual ownership
• Revenue concession for family partitions
Partition of Family Trading Companies
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Family trading company or group
Broken into individual trading companies
No CGT will apply – Sec 587 and 615 TCA
Value of each individual holding
Remains strictly unaltered after partition
Other conditions to be met
Tax Briefing 44
Reorganisation of shares into separate classes
Deriving value from separate trades
New companies formed to take over trades
Partition of Family Trading Companies
No money or money’s worth
All parties Irish resident
No value shifting
Trading companies only
Parties accept original CGT cost
applies
Trades capable of division
Non trade assets < 10%
Shareholders accept original
CGT cost applies
Separated trades must continue
Family partition only
Groups – 100% sub of family co
Sec 623 TCA 97 applies
Partition – Family Companies
• Advance approval from Revenue must be sought
• Concession does not apply to Stamp Duty
• Significant cost for family restructuring with
partitions
Other Taxes
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PAYE
Revenue concession
No Forms P45
Advance Clearance
VAT, CT and CGT withholding
Employment Law
• EU “TUPE” Regulations 2003
• Protection of Employees on Transfer of
Undertakings
• Intra-Group or internal reorganisation
• Rights and obligations under employment
contract transfers to new employer
• Employees must be given (within 30 days):
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–
Date of transfer
Reason for transfer
Legal, social and economic implications for employee
Measures envisaged for employees
Share Valuations
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Open Market Value – sec 548(4) TCA 1997
Willing buyer and purchaser
Purchaser has access to all information
Most common methods
– Dividend Yield
– Earnings
– Net Assets
Dividend Yield
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Minority shareholdings
< 25%
Amount and timing of dividend payments
Significant part of return
Shareholder not in a position to exercise control
Methodology – historic dividends paid
Current dividends position – maintained?
Earnings
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More substantial shareholdings
Maintainable earnings
Capitalised using P/E Ratio
Pattern of past earnings
Weighted average of past 3/5 years
P/E of comparable quoted company
Discount P/E for lack of market
Net Assets
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Balance Sheet Value
Adjust for market values of fixed assets
Consider intangibles not on balance sheet
Consider if little or no relationship to level of
earnings
• Hybrid method may be appropriate
Liquidations
• Liquidations more common now
• Cash extraction method following sale of
business or assets
• Appointment of liquidator
• Tax issues for liquidator and shareholders
• Various reliefs – clawback can be triggered on
liquidation
Appointment of Liquidator
• Three types of liquidations
1. Creditors voluntary – initiated by company
2. Court liquidation – initiated by company, creditor
(Revenue) or shareholder
3. Members’ Voluntary Liquidation – group
rationalisations, extraction of assets
• Appointment of liquidator – tax consequences
• CT, CGT, SD and VAT
Corporation Tax
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Cessation of AP
Commencement of AP
Terminal Loss Relief for group
Restriction on distributions – close company
surcharge implications
• Deductibility of termination payments to
employees
Summary
APs
Losses
Close Company
Surcharge
•Sec 27(7) TCA
1997
•Appointment of
liquidator
•Filing and
payment due dates
•Post cessation
income
•Sec 397 TCA 1997
•TLR on cessation
of trade
•Sec 410 TCA 1997
•Co ceases to be a
member of group
•No group relief for
losses post
appointment of
liquidator
•Distribution made
in course of
liquidation
•Cannot be sued to
reduce close
company surcharge
•Capital dividends
in course of
winding up
Summary
Termination Payments
•Payments in excess of Statutory Redundancy
•UK Courts
•Has employee a contractual right to payment?
•If payment is ex gratia and employee has no
contractual right to receive the payment  no tax
deduction if payment made after cessation of trade
•Sec 109(2) TCA 1997 – tax deduction for statutory
redundancy payments
•Includes amounts paid in post cessation period
Stamp Duty
• No SD on appointment of liquidator
• Implications for reliefs claimed
• Sec 80 SDCA relief on share for share
undertaking two party swap
• Clawback of relief if relationship broken within
two years – exception for liquidation
• Sec 79 SCDA 1999 relief
• Clawback if relationship ceased within two years
• No exemption on liquidation
Capital Gains Tax
• Company ceases to be beneficial owner of asset
on appointment of liquidator
• Sec 616(4) TCA 1997 – exemption where group
relationship ceased on a winding up
• Sec 623(1) TCA 1997 – exemption from
clawback of intra-group transfer where company
ceases to be a member of the group due to bona
fide liquidation
Value Added Tax
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Liquidator must register for VAT
Where assets being sold – taxable person
Liquidator is an accountable person
New VAT number allocated
Distributions by Liquidator
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Capital Gains Tax
Sec 571(5) TCA 1997
Liquidator is accountable for CGT
Base cost of assets at date acquired by
company – Sec 78(8) TCA 1997
• Two exposures to CGT
• Disposal of assets by liquidator
• Distributions by liquidator to shareholders
Distributions by Liquidator
• Sec 583 TCA 1997
• Shareholder deemed to dispose of shares when
a capital distribution received
• Retirement Relief – Sec 598 TCA 1997
• Technically not applicable
• Sec 598(7) TCA 1997 – relief allowed on capital
distributions in course of winding up of family
company
• Concession – where company assets sold < 6
months prior to liquidation – TB 26
Retirement Relief and Liquidation
• Assets sold preliminary to liquidation
• Proceeds included as business chargeable
assets
• No concessional relief to distributions in specie
• Only cash distributions qualify
Assets Sold by Liquidator
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Assets qualifying for capital allowances
CT on balancing charges
VAT on property – review implications
CGT withholding – CG50 Sec 980 TCA 1997
Stamp Duty
• Nominal SD applies to distribution of asset in
specie
• SD can arises where
– Assets are subject o a mortgage or charge
– Shareholders agree to take over third party debt
– Company has outstanding loan payable which is
forgiven
• To avoid the ad valerom stamp duty
• Clear all mortgages and debts prior to distribution
in specie
• Not a clear option – example page 593/594
Buying and Selling a Business
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Numerous tax issues
Share sales v Asset sales
Tax and commercial differences
Vendor and Purchaser perspectives
Tax Due Diligence – common issues
Purchase agreements – tax warranties and
indemnities
Buying and Selling a Business
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Negotiation stage
Agreement for Sale reached
Main terms of transaction recorded in writing
Heads of Agreement
Outlines key terms of transaction
Hard to achieve mutual tax benefits
Vendor’s tax objectives – maxismise after tax
proceeds
• Purchaser – minimise after tax consideration
Buying and Selling a Business
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Different tax objectives – seller and buyer
Difficult to reconcile  detailed negotiations
Adjustment to sale consideration?
Assumption of pre-sale restructuring tax risks?
Share v Asset Sales
• Commercial considerations often dictate form of
sale
• Sale of separate business unit within a company?
• Does purchaser want only part of business or
certain assets?
• Does vendor want to retain certain assets?
• Purchaser reluctant to acquire shares – historic
risks
• Compromise – pre sale restructuring e.g. “hive
out”
Vendor – Sale of Shares
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Tax perspective – share sales preferred
Avoids potential double CGT charge
CGT effective rate 25%
Base cost if previously purchased
Sec 626B TCA 1997 relief for corporate vendors
Disposal of substantial shareholding in sub
CGT free for holding company
CGT “deferred” until funds extracted from
holding company
Purchaser – Acquisition of Shares
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May favour share purchase
Stamp Duty savings – 6% v 1%
SD based on gross value of assets
SD on share sale reflects net value
SD Planning
– Allocation of consideration between assets
– Transfer by delivery
– Vendor retaining trade debtors
Purchaser – Acquisition of Shares
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Purchaser inherits cost of any latent tax liabilities
Unrealised gains or latent balancing charges
Reduces gain or profits on further sale of assets
CGT triggered if company leaves group with
assets transferred from other group companies
using CGT group relief
• Sec 79 SDCA 1999 clawback trigger – intra
group asset transfers within last 2 years
Vendor – Asset Disposals
• Vendor can select assets for sale/retention
• Retention of non core assets – investment
properties
• Loss position – CGT losses forward
• Shelter gains on assets sold
• Sale of assets giving rise to CGT loss or
Balancing Allowances
• Use of losses within vendor’s corporate group
Purchaser – Acquisition of Assets
• No liability in respect of history of company
• No latent gains on assets acquired
• Higher Stamp Duty, although may be able to
mitigate using various methods
Pre Sale Restructuring
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Compromise to asset v share deal
Part of business being sold
Restructure to facilitate a share sale
Transfer of assets to newly formed sub with
immediately sale of sub – Sec 79 SDCA and Sec
617 TCA 1997 clawbacks
• Use of restructuring reliefs
• Share for share three party swap
Pre Sale Restructuring
• TB 48 – SD reliefs not clawed back
• Tax efficient scheme of restructuring
• Reconstruction cannot be contingent on sale or
transfer of assets
• Reorganisation carried out prior to binding sale
agreement
Anti Avoidance
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Value stripping prior to sale of shares
Depreciatory transaction
Target company transfers assets at undervalue
Target company pays dividends
Sec 621 TCA 1997 – prevention of artificial
capital losses
• Calculation of allowable loss on share disposal
takes account of under-value on assets
transferred
Anti Avoidance
• Sec 621 TCA applies where value of shares
reduced by “depreciatory transactions”
• Disposal of assets between group members
other than @ mv
• Other transactions between group members
where company whose shares are being sold or
its 75% was party to transaction
• Reduction of allowable loss – no impact on gain
• Sec 622 TCA 1997 – dividend stripping
• Distribution includes Sec 130 TCA 1997 transfers
Anti Avoidance
• Sec 591A TCA 1997
• Share disposal and abnormal distribution to
vendor
• Distribution treated as consideration for shares
• Includes abnormal distribution to persons
connected to vendor
• Excess over dividend expected if no share
disposal
• Prevents conversion of CGT into FII
Deferred Consideration
• Deferred consideration often included in sale
agreement
• Dependent on post deal performance of target
business over time period
• Cash consideration – immediate CGT
• Shares in acquiring company – Sec 586 TCA
1997 – share for share
Deferred Consideration
• Sec 563 TCA 1997
• Deferred consideration taken into account
• No reduction for risk of non recoverability or
where sale consideration contingent
• CGT computation amended if deferred
consideration is not paid
• Known as “earn outs”
• Case law
Deferred Consideration
• Marren v Ingles
• Share sale – additional amount payable if shares
were quoted within next few years
• Deferred consideration had to be valued for CGT
• Separate asset – “right to receive” future
consideration
• Additional CGT on receipt of future consideration
• Gain on actual consideration less value
attributed on share disposal
• Very difficult to value future proceeds
Deferred Consideration
• Revenue applies Marren v Ingles
• Part of consideration
– Deferred or
– Contingent and
– Uncertain in amount
• Risk of CGT rate increasing
• No carry back of loss when “right to receive”
happens
Example
• Shares sold March 2008 for €3m
• Further sum to be paid in March 2010 based no
increase in turnover
• Valued at €200,000 in March 2008
• CGT paid in 2008 on gain of €3.2m
• Actual turnover increase = €500,000
• Additional CGT on €300,000
• Actual turnover increase of €100,000
• Capital loss of €100,000 – no carry back to 2008
Deferred Consideration
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Overall cap on contingent payment
Proceeds not wholly unascertainable
Outside scope of Marren v Ingles?
CGT paid on max consideration
Amended Sec 563(1)(b) TCA 1997 if actual
consideration is less than max
• Vendor could receive deferred consideration in
form of shares – Sec 586 TCA 1997 relief
Stamp Duty
• Sec 80 SDCA 1999 – may be no relief if cash
consideration
• Non share element < 10%
• Limit on deferred consideration – SD on the
maximum amount
• SD on shares taken at time of sale plus future
cash if 10% rule breached
Tax Due Diligence
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Purchaser obtains sufficient information
Target’s business
Possible adjustment to purchase price
Many areas covered in due diligence including
tax
• Objectives
– Ensure tax liabilities of target provided in its financial
statements
– Identify tax liabilities that are not provided in financial
statements
– Highlight other potential tax exposures /contentious
issues
Legal Process – Share Sales
1. Draft share purchase agreement prepared by
purchaser’s advisors
Sent to vendor’s advisors – includes tax warranties and
indemnities
2. Vendor’s advisors review share purchase agreement and
prepare Disclosure
Letter
3. Final drafts of Share Purchase Agreement and Tax Deed of
Indemnity circulated between parties and agreed
4. Share Purchase Agreement; Tax Deed of Indemnity and
Disclosure Letter
Due Diligence
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Comprehensive Engagement Letter
Review of financial accounts of target company
Prepare due diligence checklist
Adapt general checklist to type of business
Focus on perceived risk areas
– Status of Tax Returns and submission
– Expressions of doubt or Revenue rulings
– Details of CT, VAT, PAYE SD, CT, Withholding taxes
• Preparation of Tax Due Diligence Report
– Scope, periods and taxes reviewed and results
– Assumptions made; documents relied upon; limitations
Key Areas
Losses
•Tax losses forward
CGT Base Cost
•Balance sheet value review
•CGT intra group transfers
•Pre 6/4/1974 assets
•Shares owned in company – share for share relief?
Clawbacks
Assets acquired from other group companies – CGT
or SD clawback
Close Companies
•Undistributed estate and investment income
•Professional Services companies
•Benefits to participators and associates
•Loans to participators
•Interest to directors
Common areas of review
Review Group Structure
Confirm tax residence of each company
CT and CGT Tax Returns
Submitted; accepted; expressions of doubt
Outstanding liabilities with no provision
Restriction on loss relief – late filing of returns
Latest Revenue Audit – review issues
Significant tax issues – provision made?
Common areas of review
PAYE/PRSI/Levies- returns and liabilities
Mileage and subsistence claims
Profit sharing and share options schemes- Revenue
approvals
Consultants/self employed persons engaged
VAT compliance
VAT Rates on sales
VAT input credit claims – disallowable items
Warranties and Indemnities
• Most important part of share purchase
agreement for tax adviser
• Purchaser relies on representations made by
vendor
• Impose legal obligation on vendor to
compensate purchaser for any undisclosed tax
liabilities arising after sale
• Issues identified in Due Diligence determine
nature and scope
Warranties and Indemnities
• Outcome of Due Diligence – additional
warranties and indemnities will not provide
protection
• Purchase price reduction for specific tax
liabilities?
• Indemnity is promise to compensate for specified
tax liability
• Purchaser does not need to prove breach or
show specific loss suffered
Warranties and Indemnities
• Breach of tax warranty is a breach of a
contractual term
• Purchaser must show financial loss
suffered
• Claim more difficult than under indemnity
• Disclosure letter prepared by vendor
• Notifies purchaser of matters that could
breach warranties
Warranties and Indemnities
• No claim for breach of warranty for issues in
disclosure letter
• Focus on general disclosures
• Seek specific indemnity if potential liability
disclosed
• Vendor’s advisor – limit vendor’s exposure
• Draft disclosure letter as comprehensive as
possible
Example
Warranty
There is no material dispute or disagreement
outstanding with any tax authority
Disclosure
The target company is currently being audited by the
Revenue Commissioners in respect of VAT for the
period 1st January 2008 to 31st December 2008. The
audit has just commenced and is expected to be
completed by 31st January 2010.
Indemnity
The vendor indemnifies the buyer in respect of a
taxation liability arising as result of an event which is
outside the ordinary course of the target company’s
Other Areas
• Definition of tax
• Exclusion to liability
– Liability reflected in latest audited accounts
– Exclusion for pre completion restructure of target
company exclusion – requested by purchaser
– Failure by purchaser to make election to Revenue
• Limits on warranty and indemnity claims
• Time limits to make claims – min 5 years
• Notification and conduct of claims
Round Up
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Transfer of Assets and Businesses
Group Reorganisations
Reliefs for Intra group transfers
CGT, Stamp Duty
Clawbacks
Withholding Taxes
Corporation Tax
Value Added Tax
Round Up
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Reorganisation of Share Capital
Change of Ownership
Reconstructions
Amalgamations
Transfer of Undertakings
Share for Share
Share for Undertakings
Share Valuations
Round Up
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Liquidations
Distributions
CGT and SD
Buying and selling a business
Share v Assets disposals
Vendor and Purchase perspectives
Pre sale restructuring
Deferred Consideration
Round Up
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Due diligence
Legal Process for share transactions
Warranties and Indemnities
Disclosure Letter