Tax implications in M&A deal structuring

Mergers and acquisitions (M&A) involve complex financial negotiations that demand careful tax planning. The way a transaction is structured can substantially impact the tax responsibilities of both the buyer and the seller. The two main methods of structuring these deals—asset purchases and share purchases—each come with distinct tax considerations.

Comparing asset purchases and share purchases

 An asset purchase is when a buyer acquires individual assets from the target company, such as real estate, intellectual property, or equipment. This structure allows the buyer to adjust the tax basis of these assets, which may lead to higher depreciation or amortisation benefits over time. However, asset purchases can be more disadvantageous for the seller, as they may face double taxation: once when the assets are sold and again when the proceeds are distributed to shareholders.

Share purchase can involve acquiring the target company’s shares. This method typically offers tax benefits to the seller, as it is often taxed at a more favourable capital gains rate. However, while the process is generally simpler for the buyer since they are purchasing the entire business, they also inherit the target’s liabilities, potential losses, and other tax attributes, which can bring both benefits and risks.

Key tax factors in structuring M&A deals

• Tax basis of assets and depreciation: In asset purchases, one of the key advantages for the buyer is the ability to “step up” the tax basis of the acquired assets. This step-up can lead to larger depreciation deductions in future years, reducing taxable income and resulting in tax savings.

• Capital gains vs. ordinary income: Depending on the transaction’s structure, the seller’s tax treatment of the proceeds will differ. Asset sales typically result in ordinary income taxation for the seller, while share sales may qualify for capital gains tax treatment, which is often more advantageous.

• Utilising tax losses: Buyers and sellers should consider how any existing tax losses will be used post-transaction. In some cases, losses may be carried forward to offset future earnings, while a change in control can restrict this ability.

• Impact of ownership changes: A shift in ownership, such as in the case of a share purchase, can affect the ability to use specific tax attributes like net operating losses (NOLs). Understanding how a change in control will impact tax benefits is crucial in M&A planning.

• Costs associated with the deal: Legal, advisory, and due diligence costs incurred during the transaction must be accounted for in the tax strategy. These expenses are generally capitalised and amortised over time, but the specific treatment can vary depending on the deal structure chosen.

Conclusion

 The way an M&A deal is structured significantly affects the tax outcomes for both parties. Whether the agreement involves an asset or share purchase, each structure presents unique tax advantages and challenges. To maximise the efficiency of the transaction, both the buyer and seller should engage in thorough tax planning and seek guidance from tax professionals to determine the most advantageous approach.

Note: The content of this blog post is for general informational purposes only and should not be construed as tax advice or professional guidance. Please consult with a qualified professional for advice tailored to your specific circumstances.