Share and Asset Sale, Acquisition of IP PDF

Tax Practice II: Key tax considerations on M&A and corporate restructuring Allen Tan 1 Contents 1. Share sale 2. Asset sale 3. Tax due diligence 4. Stamp duty implications 5. Acquisition of IP; tax treatment of royalties...

Tax Practice II: Key tax considerations on M&A and corporate restructuring Allen Tan 1 Contents 1. Share sale 2. Asset sale 3. Tax due diligence 4. Stamp duty implications 5. Acquisition of IP; tax treatment of royalties 2 Share sale vs asset sale In a share sale, the whole target company is purchased by acquiring its shares with all its assets and liabilities. In an asset sale, the buyer can generally choose which assets (or liabilities) to acquire. Broadly, the seller typically prefers a share sale while the buyer generally prefers an asset sale. 3 Share sale – income tax implications Income tax implications for the transferor No income tax if capital receipt: Any gain derived from the transfer of shares is not be subject to Singapore income tax to the extent that the gain is capital and not income in nature. – Singapore does not have a capital gains tax regime. Whether a gain is capital in nature is a question of fact. If the shares are held on a revenue account, then the gain will be income in nature and subject to Singapore income tax. – For instance, if the transferor is in the trade or business of buying or selling in shares. 4 Share sale – income tax implications Tax exemption under section 13W of the ITA Safe harbour: There is a safe harbour rule under section 13W of the Singapore Income Tax Act (“ITA”) which provides for the exemption of gains derived by a company from the disposal of ordinary shares in another company between 1 June 2012 to 31 December 2027, if all conditions are met. The conditions are, amongst others: – (1) seller has at all times during a continuous period of at least 24 months (ending on the date immediately prior to the date of disposal of such shares), – (2) legally and beneficially owned at least 20% of the ordinary shares in that company. GST implications A transfer of shares is generally treated as an exempt supply for Singapore GST purposes. Carry over of tax attributes for the buyer Tax attributes: Unutilised losses, capital allowances and donations that allow companies to set-off income in future years  taxpayers would want to preserve these tax attributes. 5 Share sale – income tax implications Carry over of capital allowances (“CA”) – section 23 of the ITA Two main requirements: – ‘Same Business’ Test - section 23(1). – ‘Substantial Shareholding’ Test: The ultimate shareholders of the company must be substantially the same (i.e., at least 50% of the total number of issued shares of the company are held by or on behalf of the same persons) on (i) the last day of the YA in which the CA arose, and (ii) the first day of the YA in which the CA is to be deducted - see section 23(4), (7). Purpose: To prevent profitable companies from buying loss-making ones or those with unutilised CA to lessen their tax bill. Exemption from Substantial Shareholding Test: The Minister or his appointee may exempt the company from the ‘Substantial Shareholding’ test if it is satisfied that such change in the shareholders is not for the purpose of deriving any tax benefit or obtaining any tax advantage - see section 23(5). Note that even if an exemption is granted, the ‘Same Business’ test will still apply - the CA can only be used for deduction against the gains or profits derived from the same trade or business in respect of which the allowances would have been made - see section 23(6). 6 Share sale – income tax implications Carry over of unutilised losses / donations – section 37 of the ITA Main requirement is the ‘Substantial Shareholding’ Test: The ultimate shareholders of the company must be substantially the same (i.e., at least 50% of the total number of issued shares of the company are held by or on behalf of the same persons) on (i) the last day of the year in which the loss was incurred or the donation was made, and (ii) the first day of the YA in which the loss or donation is to be deducted - see section 37(12), (14). Note: The relevant dates are different for the carry over of capital allowances and losses / donations. − For losses / donations, for the first relevant date we look at is the year in which the loss was incurred and not the YA in which the loss arose. − For capital allowances, both relevant dates refer to the YA in which the allowance arose. 7 Share sale – income tax implications Carry over of unutilised losses – section 37 of the ITA Exemption from Substantial Shareholding Test: The Minister or his appointee may exempt the company from the ‘Substantially Shareholding’ test if it is satisfied that such change in the shareholders is not for the purpose of deriving any tax benefit or obtaining any tax advantage - see section 37(16). Note that if an exemption is granted, the ‘Same Business’ test will apply: Any loss may only be deducted against the profits the same trade or business of the company in respect of which that loss was incurred - see section 37(17). 8 Stamp duty implications What is chargeable property? See the First Schedule of the Stamp Duties Act 1929 (“SDA”). Note that stamp duty is a tax on instruments. – Generally, stamp duty is imposed on instruments effecting the transfer of (i) shares in a Singapore company or foreign company that maintains a share or branch register in Singapore or (ii) Singapore immovable property (including leases). When is it payable? - see section 46, SDA – If the instrument is executed within Singapore, it is payable within 14 days after it is executed in Singapore. – Where the instrument is executed outside of Singapore, it is payable within 30 days after it has been received in Singapore. 9 Stamp duty implications For a transfer of shares, the instrument or agreement effecting the share transfer is subject to stamp duty at the rate of 0.2% on the higher of (i) the consideration or (ii) the market value of the shares transferred. – If there is no market value and no fair market valuation of the shares, as an administrative practice, the net asset value can be used as a proxy for the value of the shares transferred. Additional conveyance duty (“ACD”)? ACD may also be applicable on the transfer of equity interests (including shares) in an entity that (i) holds Singapore residential property; or (ii) beneficially owns more than 50% equity interest, directly or indirectly, in one or more entities that hold Singapore residential property. ACD, if applicable, applies in addition to any stamp duty (e.g., on the transfer of the shares). – "Residential property" is defined broadly for ACD purposes and includes (among others) commercial and residential property and property zoned for mixed purposes one of which is residential. 10 Tax due diligence What do we look for? Potential tax liabilities that may otherwise go unnoticed Information to understand current tax profile of the Target Future issues Review tax positions taken in tax returns Business operations Restructuring Specific major transactions Identifying potential tax exposure / risk Scope: Can be very broad, e.g., income tax, GST / VAT, stamp duty, withholding tax, transfer pricing, tax incentive / grants Covered period: Periods not subject to statutory limitations Quantum: Materiality threshold Implications May lead to further warranties, negotiation for tax deed / indemnity Possible impact on purchase price, need of a retention (e.g., specific tax escrow), completion accounts, pre-transaction restructuring and financial limitations 11 Tax warranties Provides a remedy for Buyer (damages) if Seller’s statements are incorrect, subject to Buyer proving loss and restrictions on the recovery of damages (remoteness, mitigation) Provokes disclosure of any tax issues Key warranties for all transactions: – all returns filed, completed and correct – all liabilities on or before accounts date provided for – disputes and investigations – no tax avoidance – no tax liability in other jurisdictions – no non-ordinary course transactions post the accounts date – [all inter-company transactions on an arm’s length basis] 12 Tax indemnity General indemnity covering tax liabilities of Target arising from pre-completion income, profits and gains and events. Seller covenants with Buyer to pay an amount equal to any Tax Liability of the Target resulting from or by reference to: – any income, profits or gains earned, accrued or received on or before the Completion Date; – any Tax Liability of the Target that would not have been payable had there been no breach of any Tax Warranties and which is not the subject of the covenants in the foregoing clauses; – other specific concerns for tax liabilities of target arising from pre- and post- completion tax risks identified in due diligence 13 Tax indemnity The definition of what amounts to a Tax Liability that is covered by the tax indemnity is key. Generally defined to include: – any liability of target to make an actual payment of Tax; – the loss or reduction in the amount of any Tax asset which is reflected in the target’s accounts; – the loss or reduction in the amount of a tax asset of the target arising post-Completion or of a tax asset of a member of the Buyer’s group arising at any time in circumstances where the Buyer would otherwise have a claim against the Seller under the tax deed Consider also the costs and expenses of making claim under the tax indemnity (From the Seller’s perspective) Consider the Limitations and Exclusions as a way of narrowing the scope – For e.g., Discharged prior to completion or provided for in accounts, Breach of SPA or tax deed by Buyer, Windfall income and gains, Claims or elections assumed in the target’s account, Financial limitations, Time Limits 14 Other considerations Transfer tax considerations – Indirect share transfer As Singapore is a common jurisdiction for holding companies, an indirect share transfer of foreign subsidiaries may trigger indirect transfer tax issues in other jurisdictions – For e.g., there is a Singapore company that holds a foreign subsidiary. Certain jurisdictions such as China and Indonesia may “see through” the share transfer and deem that the transaction is in substance a transfer / acquisition of the foreign entity and impute tax accordingly in that jurisdiction. 15 Asset / business sale There is no specific exit tax regime in Singapore that is triggered upon a business transfer. The Singapore income tax implications will be determined based on each of the underlying assets and liabilities to be transferred. GST is payable on the sale of an asset by a taxable person in the course or furtherance of business carried on by that person. – However, where the transaction qualifies as a transfer of business as a going concern, then it will be treated as an excluded transaction for GST purposes. 16 Asset / business sale Transfer of trading stock (Important from the seller’s perspective) The valuation of trading stock will be as follows: – Trading stock: (see section 32 of the ITA) the value is taken to be the consideration given for the transfer if: – it is sold or transferred for valuable consideration to a person who carries on or intends to carry on a trade or business in Singapore; and – the cost may be deducted by the buyer as an expense in computing the gains or profits of that trade or business. in any other case, the value is taken to be the amount that would have been realised if it had been sold at OMV. 17 Asset / business sale Transfer of capital assets (Important from the seller’s perspective) Capital assets: A disposal of plant and machinery or other capital assets may result in a balancing charge which is subject to tax – A balancing charge is triggered when an asset (in respect of which capital allowances have been claimed) is disposed and the disposal value exceeds the tax written down value (“TWDV”)of the asset (i.e., the price at which the seller acquired the asset less the capital allowances claimed thus far). – The balancing charge is taxable as income and has the effect of clawing back any excess allowances claimed by the seller. – For certain asset sales between related parties, the buyer and seller can elect to treat the TWDV of the asset sold as the deemed sale price, so that the seller is not subject to any balancing charge - see section 24 of the ITA. 18 Summary Share sale Often no tax burden for the seller (from an income tax perspective) Carry over of tax attributes available for the buyer Tax issues follow the sale  need for tax due diligence, tax warranties / indemnities Generally, GST-exempt Stamp duty implications Asset sale No carry over of tax attributes No GST if the transfer qualifies as a transfer as a going concern Tax issues do not follow the sale Seller may be liable to income tax due to balancing charge on disposal of capital assets / sale of trading stock at OMV Stamp duty implications - depends on whether there is transfer of chargeable property 19 Acquisition of IP Income tax implications Singapore has no capital gains tax Section 19B writing down allowances are available for capital expenditure incurred by a company carrying on a trade or business in acquiring intellectual property rights for use in the trade or business – subject to certain exclusions - see section 19B(11) and (12) The company is required to make an election to claim the writing down allowances over a 5-, 10- or 15-year period on a straight-line basis. Definition of “intellectual property rights” - section 19B(11) – “the right to do or authorise the doing of anything which would, but for that right, be an infringement of any patent, copyright, trade mark, registered design, geographical indication, layout-design of integrated circuit, trade secret or information that has commercial value, or the grant of protection of a plant variety” – Note that it does not include customer information, customer lists, information on work processes and compilations of such information - see section 19B(11A) 20 Acquisition of IP Section 19B writing down allowances No further writing down allowances may be made if the intellectual property rights (i) come to an end without being subsequently revived; (ii) are sold, transferred or assigned; or (iii) the company permanently ceases to carry on the trade or business. A balancing charge may be triggered where the intellectual property rights are sold, transferred or assigned. 21 Royalties Introduction to withholding tax Generally, withholding tax is imposed on the certain prescribed payments that are deemed sourced in Singapore and paid to non-Singapore tax residents, unless certain exemptions or concessions apply (see Lecture 1 on what is Singapore sourced income). Section 12(7) of the ITA - A “royalty or other payment in one lump sum or otherwise for the use of or the right to use any movable property” is deemed to be Singapore-sourced income if it is: − borne by a Singapore tax resident or permanent establishment in Singapore (except in respect of any business carried on outside Singapore through a permanent establishment outside Singapore); or − deductible against any Singapore-sourced income. Where the royalty is deemed to be Singapore-sourced income, the payment of such royalty to a non- Singapore tax resident is generally subject to withholding tax at 10% on the gross payment - see section 43(3A) of the ITA 22 Royalties Introduction to withholding tax Who pays? – It is the payor’s obligation to withhold the amount of tax payable and pay such amount to IRAS. – However, the economic burden can be shifted by contractual agreement between the parties. Note that the applicable withholding tax rate may be reduced under an applicable tax treaty if the relevant conditions are met (for e.g., the non-Singapore resident is tax resident in an applicable treaty jurisdiction). – For e.g., the Singapore-Germany tax treaty imposes a concessionary rate of 8%. 23 Copyright Notice Copyright © 2023, Singapore Institute of Legal Education. All rights reserved. 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