Corporate Restructurings Tax Considerations (PDF)

Tax Practice III: Key tax considerations on M&A and corporate restructuring Allen Tan 1 Contents 1. Restructuring options a. Liquidation b. Striking-off c. Corporate Amalgamation 2. Stamp duty implications and relief possibilities 3. Borrowi...

Tax Practice III: Key tax considerations on M&A and corporate restructuring Allen Tan 1 Contents 1. Restructuring options a. Liquidation b. Striking-off c. Corporate Amalgamation 2. Stamp duty implications and relief possibilities 3. Borrowing costs, deductibility of interest expenses and withholding tax implications 2 Restructuring options Share sale (refer to Lecture 2) Asset sale (refer to Lecture 2) Liquidation – Striking off Amalgamations 3 Liquidation tax consequences A liquidation can be implemented, amongst others, by way of a members’ voluntary winding up or a striking off. There are no specific Singapore cases or provisions in the Singapore Income Tax Act on the characterization of the liquidating distribution in a liquidation (i.e., whether such distributions are capital in nature or not). – Based on UK cases (which can be persuasive, though non-binding, in Singapore courts), a liquidating distribution should be treated as a return of capital rather than a distribution of income. If so, a liquidating distribution should be considered as capital in nature and not subject to Singapore income tax. However, there will be a loss of tax attributes (i.e., there will be no carry-over of unutilised capital allowances, unabsorbed losses etc., to surviving entities in the group). If the entity is GST-registered, it will also need to be deregistered for GST purposes. 4 Striking off tax consequences A company may be struck off as an alternative to the members’ voluntary winding up process. Before striking-off can take place, the company must clear out its assets and liabilities (i.e., to zero-rise its balance sheet). In other words, all assets (whether cash or non-cash) and liabilities must be distributed and / or novated before it may submit an application for striking-off.) 5 Corporate Amalgamations Generally tax neutral where a valid election for tax neutral treatment under section 34C of the ITA is made. This means that assets and liabilities will be transferred to the surviving company at net book value, and the surviving entity is treated as having stepped into the shoes of the amalgamating company and continued with its business. A prerequisite under section 34C(2) is that it must be a “qualifying amalgamation” which includes amongst others, a short form amalgamation under section 215D of the Companies’ Act. – A statutory short form amalgamation (i.e., the Amalgamation) only applies between: a Singapore incorporated parent company and its wholly-owned Singapore subsidiary, pursuant to section 215D(1) of the Companies Act (i.e., a vertical amalgamation); or two or more wholly-owned Singapore incorporated subsidiaries of the same corporation, that corporation being incorporated in or outside of Singapore, pursuant to section 215D(2) of the Companies Act (i.e., a horizontal amalgamation). Thus, as a practical note, it may be necessary to effect pre-positioning transfers of shares so that a short-form amalgamation can be carried out, which may trigger tax consequences (see Lecture 2 on the tax consequences of share transfers). 6 Corporate Amalgamations The key advantages of the section 34C tax election are, among others: – where an amalgamating company (Amalco 1) holds shares in another amalgamating company (Amalco 2), and the shares of Amalco 2 are cancelled on the amalgamation, Amalco 1 is treated as having disposed of the shares in Amalco 2 immediately before the amalgamation for an amount equal to the cost of the shares to Amalco 1. – an election to treat the consideration provided for trading stocks to be taken over to be at net book value, such that no gain or loss arises from the amalgamation; and – the transfer of unabsorbed (or unutilised) capital allowances, donations, and/or losses in the amalgamating companies to the amalgamated company, subject to the prescribed conditions being met. The conditions include the same business and shareholding tests as provided under sections 23 and 37 of the ITA (see Lecture 2 for more details of the applicable tests). However, the surviving entity will inherit all outstanding tax liabilities of the amalgamating companies. 7 Corporate Amalgamations GST implications: If both entities are GST-registered, ordinarily they should be required to charge GST at the prevailing rate on the transfer of assets / liabilities. However, there should generally be no adverse GST implications where a section 34C election is made and both the amalgamating and amalgamated companies are GST-registered, as the amalgamation will generally automatically qualify as a transfer of business as a going concern (“TOGC”) by way of administrative concession (unless the surviving entity will be part of a GST group). TOGC is an excluded transaction for GST purposes. 8 Corporate Amalgamations Stamp duty implications: Under section 32C of the Singapore Stamp Duties Act 1929 ("SDA"), Singapore stamp duty is triggered on the deemed conveyance on sale, pursuant to a notice of amalgamation, of any chargeable property held by each amalgamating company which is transferred to and vested in the amalgamated company. – “Chargeable property” is defined in section 32C(3) and includes an interest in immovable property situated in Singapore or stocks and shares registered in a register kept in Singapore. Even if stamp duty is triggered, to consider if stamp duty relief is applicable (see subsequent slides). 9 Stamp Duty Relief Section 15(1) of the Stamp Duties’ Act 1929 - Relief Provision Relief from ad valorem stamp duty 15.—(1) If it is shown to the Commissioner’s satisfaction that the prescribed conditions have been fulfilled, ad valorem stamp duty under Articles 3(a), (b), (ba), (bb) and (c) and 9(c) in the First Schedule is not chargeable on any instrument executed on or after 1 July 2000 for the purposes of or in connection with — (a) the transfer of the undertaking or shares in respect of a scheme for the reconstruction of any company or companies, or the amalgamation of companies; (b) the transfer, conveyance or assignment of any beneficial interest in any asset between such entities that are associated in such manner as may be prescribed; 10 Stamp duty relief Background: Recap (see Lecture 2): Stamp duty is generally imposed on transfers of (i) shares of a Singapore company or foreign company with a share or branch register in Singapore or (ii) interest in Singapore immovable property, and an agreement for the lease of Singapore immovable property. Hence if any of the restructuring options discussed previously involve the transfer of chargeable property (for e.g., shares in a Singapore company), there will be stamp duty consequences. In the case of an amalgamation, the notice of amalgamation issued under section 215F of the Companies’ Act 1967 is treated as the instrument, the execution of which triggers stamp duty. However, in order to facilitate corporate restructuring which have bona fide commercial purpose (e.g. to streamline operations, eliminate redundant entities), stamp duty relief may be available under either the Relief from Stamp Duty Upon Reconstruction or Amalgamation of Companies Rules ("Reconstruction Rules") or the Relief from Stamp Duty Upon Transfer of Assets between Associated Permitted Entities Rules 2014 ("APE Rules"). The conditions are highly prescriptive. 11 Stamp duty relief Timeline / process: – The stamp duty relief process involves (i) evaluating whether the transaction (for e.g., a share transfer) qualifies for stamp duty relief under either the Reconstruction Rules or the APE Rules, and (ii) preparing and submitting a stamp duty relief application to IRAS, together with supporting documents evidencing that each condition is met. – The application must be submitted within (i) 14 days from the date that the share transfer instrument or document is executed in Singapore, or (ii) 30 days from the date that the instrument or document is executed entirely outside Singapore (regardless of whether it is received in Singapore). 12 Applicability of relief rules However, the rules can be very prescriptive. Relief most straightforward under a short form amalgamation. Relief is possible for a share sale, asset sale (discussed in lecture 2) if the conditions are met. 13 Borrowing costs Deduction available under section 14(1)(a) of the ITA 14.—(1) For the purpose of ascertaining the income of any person for any period from any source chargeable with tax under this Act (called in this Part the income), there are to be deducted all outgoings and expenses wholly and exclusively incurred during that period by that person in the production of the income, including — (a) except as provided in this section — (i) any sum payable by way of interest; and (ii) any sum payable in lieu of interest or for the reduction thereof, as may be prescribed by regulations (including the restriction of the deduction of the sum in respect of money borrowed before the basis period relating to the year of assessment 2008), upon any money borrowed by that person where the Comptroller is satisfied that such sum is payable on capital employed in acquiring the income; 14 Borrowing costs The applicable test is the ‘direct link’ test: – The Singapore Court of Appeal in Andermatt Investments Pte Ltd v Comptroller of Income Tax 2 SLR(R) 866 has interpreted the phrase "payable on capital employed in acquiring the income" as a requirement for a "direct link between the money borrowed and the income produced“. – For instance, in that case, the taxpayer incurred interest on a loan used to acquire shares of a property-holding company, after which the taxpayer acquired the property generating rental income after the property-holding company liquidated. The interest was not deductible against the rental income earned as there was an insufficient link – the assets purchased (shares vs. property) and the nature of the income changed (dividend income vs. rental income). The Singapore CA in JD Ltd v Comptroller of Income Tax 1 SLR(R) 484 has interpreted the ‘direct link’ test even more narrowly, – "the income" vs "any income" – the direct link test should be assessed in relation to a particular source of income and not income generally. Hence, in relation to interest incurred in the acquisition of assets, only interest expenses attributable to income-producing assets are deductible. 15 Borrowing costs Interaction between section 14(1)(a) and section 15 prohibition Section 14(1)(a) is wider than the general deduction formula in section 14(1) such that the restrictions there do not apply to section 14(1)(a), i.e., the section 15(1)(c) prohibition against capital expenditure does not apply. Hence interest payable on a loan for capital expenses are deductible so long the specific conditions under section 14(1)(a) are met. 16 Borrowing costs Withholding tax (WHT) implications For the concept of WHT, refer to lecture 2. WHT (at an applicable rate of 15%) could also apply to interest payments – see section 12(6) of the ITA. As mentioned in lecture 2, similarly, the WHT rate may be reduced if an applicable double-tax treaty applies and the relevant conditions are met. 17 Copyright Notice Copyright © 2023, Singapore Institute of Legal Education. All rights reserved. No direct or indirect reproduction, publication, communication to the public, adaptation or any other use (that is prohibited and/or proscribed by copyright laws) of this video in whole or in part in any form or medium is allowed without the written permission of the Singapore Institute of Legal Education. 18