Tax Implications of Share and Asset Sales (PDF)

Share and asset sale, Acquisition of IP - **[ Share sale and asset sale tax implications]** - Tax implications for the transferor - Tax exemption under section 13W of the ITA - Carry over of capital allowances ("CA") -- section 23 of the ITA - **[s23 ITA]** Same Business test (**[App...

Share and asset sale, Acquisition of IP - **[ Share sale and asset sale tax implications]** - Tax implications for the transferor - Tax exemption under section 13W of the ITA - Carry over of capital allowances ("CA") -- section 23 of the ITA - **[s23 ITA]** Same Business test (**[Applies despite exemption under substantial shareholding test]**) **[s23(4) ITA]** Substantially shareholding test - Exemption by Minister - Carry over of unutilised losses / donations -- section 37 of the ITA - **[Stamp duty implications]** - What is charagble property? - First schedule to the Stamp Duty Act - **[When]** is it payable? - Transfer of shares - **[Additional Conveyance Duty]** (\"ACD\") - are Singapore residential property being held? - Sale of IP; tax treatment of royalties - Tax due diligence - What do we look for? - Review of tax positions taken in tax returns - Identify potential tax exposure / risk - Implications - Tax warranties - Tax Indemnities - Other considerations - M&A options - Asset / Business sale - Transfer of trading stock (Share) - Transfer of capital assets - Acquisition of intellectual property - Withholding Tax - Royalties - Who pays? - Stamp duty; exemptions Takeaways In mergers and acquisitions transactions, parties need to decide whether to conduct the transaction as a share sale or an asset sale. Tax due diligence is important to identify potential tax liabilities and issues in the target entity. Tax warranties and tax indemnities can provide remedies for the buyer if the seller\'s statements are incorrect. Foreign tax issues should be considered in cross-border transactions. Withholding tax may apply on certain payments made to non-residents. Understanding the tax implications and conducting tax due diligence is crucial in M&A transactions. Andrew Yip (00:00.098) Hi everyone, welcome to the second text lecture. Today I\'ll be key text considerations arising in mergers and acquisitions transactions. And in the next lecture, I will be covering the options for corporate restructuring. Now, further ado, let\'s look at the content. We will be covering share sale, followed by asset sale, and we will talk a little bit about tax due diligence and what typically taxpayers are looking for. Of course, we have to consider stamp duty implications arising from the &A transaction. And finally, we will look at the transfer of a specific asset in the form of intellectual property rights, tax treatment of royalties. Now, essentially, I plan to use this as an introduction to refolding tax regime. And we can consider how that works in the &A transaction in the commercial context. Next, we\'ll look at share sale and asset sale. Typically, in a &A transaction, parties will need to decide whether to conduct the transaction as a share sale or an asset sale. In a third party context, parties will need to agree. But even for internal restructuring, where we\'re trying to streamline the operations of a company, you will need to decide whether to achieve the outcome through a share sale or an asset sale. So what\'s the difference? In a share sale, you are buying the company lock, and barrel, meaning with all its assets and liabilities and tax attributes, whereas in asset sale, the buyer will get to choose what assets and liabilities they would like to acquire. So in the example of a buyer wanting to buy the IP rights of a particular company but does not want the rest of the business, you opt for asset sale. But the seller may only be insisted to sell if he gets to sell the whole business via a share sale. So typically, you will see that seller prefer a share sale whereas the buyer prefers an asset sale. Andrew Yip (02:04.438) In the last lecture, we talked about Singapore not having a capital gains tax regime. So if the seller derives a gain from selling the shares and if the gain is capital in nature, there is no tax. Now whether a gain is capital revenue in nature is essentially a question of fact. We discussed the badges of trade in the last lecture as well. Now if the gain is revenue in nature, it could be tax. The gain is Singapore source or foreign source but received in Singapore. There\'s also a statutory exemption in the form of Section 13w safe harbour set out in the Income Tax Act. There are specific conditions that need to be met in order for the Section 13w exemption to be revoked. Essentially, Sala has to own the shares for at least 24 months and legally and beneficially own at least 20 % of the ordinary shares. Even if the statutory exemption is not invoked, one can still consider whether the gain is capital or revenue in nature in determining whether this affects. GST, a transfer of shares, is generally treated as an exempt supply for GST purposes. Let\'s talk about carryover of attributes to the buyer. As I said earlier, typically when you have a share you are buying the company locks, time, and barrel, including its tax attributes, such as unutilized losses, capital allowances, or donation. And these attributes could be used by the buyer to offset future taxable income of the entity, provided that these attributes can be preserved. So let\'s look at some of the conditions for carryover of capital allowances. There\'s the same business test, and there\'s also the substantial shareholding test. Andrew Yip (04:09.43) Now, the purpose of having this test is to prevent abuses where\... companies structure the sale of loss -making company to a profitable company for them to offset or reduce their tax deal going forward. If the substantial shareholding test cannot be met, tax payers can apply to the Minister for Finance to seek an exemption from the substantial shareholding test provided that the Minister is satisfied that such change is not for the purpose of deriving any tax benefit or obtaining any tax advantage. Now, you still need to apply the same business test even if the shareholding test cannot be met and the waiver is obtained. Similarly on unutilized losses and donation, you also have to look at the same share, substantial shareholding test. And the relevant dates here are a little bit different in determining the carryover of unutilized capital allowance and unutilized losses. For losses, you look at the year in which the loss was incurred and not the year of assessment in which the loss arose. Whereas for capital allowances, both relevant dates refer to the year of assessment in which the allowance of those. So you will recall in the last lecture, I described the difference here being a year of assessment 2023 makes reference to financial year 2022, because in Singapore, we tax on a preceding year basis. So tax payable basically for our return on year of assessment 2023 really paying tax. Andrew Yip (05:57.742) for the basis period in the financial year before I think we talked about this earlier in terms of even if you\'ve got the substantial shareholding test exemption, if you can\'t meet it, you get a waiver, you still need to meet the same business test. Now let\'s look at stamp duty. So stamp duty is a tax on instrument. So to be very clear, you are paying tax on instrument. And generally, we have to pay stamp duty in Singapore on instrument transfer of shares in Singapore company or foreign company and maintain a share of branch registered in Singapore or if there is a transfer in the interest of Singapore\'s removal property which will include leases. stamp duty is generally payable within 14 days. after the instrument transfer is executed in Singapore. And within 30 days, if the instrument is executed outside Singapore and received in Singapore, within 30 days of receipt, you have to paste the new B. Otherwise, are late penalty import. Andrew Yip (07:11.31) For transfer of shares, the stand duty will be computed at a rate of 0.2 % on the higher of the consideration or market value of the shares transferred. As an administrative concession or as an administrative practice, the Inter -Revenue Authority of Singapore, IROHs, allow the use of net asset value of the shares if no open market value is available. Now, ACD. ACD could apply on the transfer equity interest including shares in an entity that holds Singapore residential property or beneficially owns more than 50 % of equity interest, earlier or in earlier in one or more entities that hold Singapore residential property. So in determining whether HDB applies, one needs to look at whether the company\'s hold residential property which is defined broadly. Andrew Yip (08:01.964) Now, let\'s take a look at Textile Deletions. Andrew Yip (08:07.864) companies will need to conduct tax -to -diligence before deciding to buy another entity. And essentially, tax is just one of the areas that in an &A transaction companies will look into. Of course, for tax purposes, typically, you look for any potential tax liability that will not be apparent. you\'ll be looking at information to understand the text profile of the target that you\'re buying. This is really for you to understand whether there are any future issues that you need to take into account. So a lot of in &A transaction, parties will engage advisors to conduct due diligence including tax. And sometimes for tax, you may have the law firm engaged in &A transaction during the tax due diligence, or you may see an accounting firm engaged to conduct the tax due diligence as part of the financial due diligence. In the dark situation, the lawyers will need to work with the team that does the tax due diligence to understand the issues so that they can better prepare the SBA to take into account any potential risk that they have identified. Which then may lead to negotiating rest of the warranties or potentially negotiate a reduction in purchase price or potentially negotiate and part of the purchase price will help in escrow until the tax liability is discharged following the expiration of a time bar period. And you basically have different country have different time bar periods. So depending on the target entity, you need to understand what is the time bar period there. Andrew Yip (09:57.036) Now let\'s look at tax warranties. This is basically a remedy for a buyer if a seller statement is incorrect, although the buyer will have to prove loss and restriction on recovery of damages. Essentially, tax warranties do provoke disclosure of tax issues because if a seller is not willing to provide a warranty on a specific tax issue, it suggests that there is a risk that could So these are some of the typical key gronties for transactions that you see. Andrew Yip (10:33.92) And sometimes when there\'s a specific tax liability that\'s been identified, parties may agree to enter into a tax indemnity where solid governance requires to pay an amount equal to any tax liability that\'s identified resulting from certain events. Sometimes tax indemnity is due in as part of SPA. Sometimes we see tax indemnity being provided as a separate tax deed. Andrew Yip (11:02.614) Now, this is some of the definition of how a text indemnity could look like when it comes to defining what a text liability is. And there\'s also usually limitation and exclusion, where the seller tried to limit the scope of a text indemnity. Andrew Yip (11:25.026) Finally, just wanted to mention that other than considering Singapore issues in cross -border transaction, we should also be sensitive to potential foreign tax issues. So in this example, if the target is a Singapore holding company that holds shares in say Indonesia and China, potentially even if there are no significant tax issues in Singapore on the transfer of the Singapore hold hold shares, this could trigger tax in China or Indonesia where the local tax authorities see that the transfer of the Singapore whole -share effectively mean that there\'s a transfer of ownership of entity in their jurisdictions. And this could create tax liability for the seller and also could create issues for the buyer. There\'s a question of whether the buyer needs to withhold tax and report those tax to the local tax authorities when it\'s making payment to the vendor. So these are issues what we need to consider and potentially work with our foreign colleagues to look into this. Now let\'s switch gears and look at asset and business sale. There is no specific asset tax regime in Singapore. So essentially when we need to consider the tax implication arising from an asset or business sale, we need to look at a specific asset in transfer. And then on the goods and services tax fund, you have to charge GSD if the seller is GSD registered. Otherwise, there\'s also the assumption that could apply where the transaction qualifies as a transfer of a Boeing Johnson. where certain specific conditions are met, then the entire transaction is treated as excluded for GSD purposes, such that you don\'t have to impose GSD. So typically, you look at the transfer of trading stock in venture capital. Section 32 sets out how the trading stock will be valued at the time of sale. And then you look at transfer of other capital assets, depending on whether you have claimed capital allowances on the capital asset. Andrew Yip (13:29.71) It could be a balancing charge or balancing allowance or companies in a related party transaction can elect a Section 24 election to have the asset transfer tax written down there. So in summary, there are pros and cons in both a share and asset sale, much depends on the circumstances surrounding the transaction. Now let\'s look at acquisition of IP as a specific asset. So as I said earlier, Singapore has no capital gains tax. So in general, you sell IP for gain and you are not in the business of buying and selling IP. there\'s no tax. But if the company has claimed for it for Section 19B, writing down allowance when the company first acquires the IP rights, then there could be a recapture of the writing down allowances claim. So when the company makes or rather acquire IP, that\'s generally a capital expenditure. Now in Singapore, as we don\'t tax capital again, capital expenditure generally non -deductible. But there\'s a special regime under Section 19B where a company can elect to claim writing down allowance over 5, 10 or 15 years and make an irrevocable election. But not all IP rights are tax amortizable or subject to writing down allowance. Essentially, this is the in Section 19B -11 and it excludes certain type of intangible assets such as customer lease or work processes. Andrew Yip (15:09.364) If you subsequently sell, as I said earlier, this could be subject to recapture where there could be a balancing charge or charge on the proceeds coming up on the sale of IP, even though the gain is treated as capital in nature. Andrew Yip (15:29.454) Now, let\'s look at withholding tax. Generally, withholding tax is imposed on certain prescribed payments that are deemed source in Singapore and paid to non -Singapore tax residents under a certain exemption of five. So Section 12.7 of the Income Tax Act is the section that sets out the deemed source rule, where if a royalty payment is made to a non -resident and certain criteria are triggered, such as where the royalty is drawn by a Singapore tax resident or PE in Singapore or deductible against Singapore source income or they will be withholding tax that\'s triggered when the payor makes the royalty payment, he will have to withhold tax at the domestic rate of 10%. Although this could be reduced by 3D. So for example, under Singapore -Germany treaty, the rate of withholding can be reduced from 10 % to 8%. There are other treaties reduce the withholding tax rate even more. For example, Singapore\'s Arlan City reduces it to 5 % and Singapore\'s Netherlands City reduces the withholding tax rate to zero. If the payor fails to withhold tax, there could be penalty for late withholding. Although parties are free to negotiate and shift the commit burden of the withholding tax contractually. In the next lecture, we will also talk about some other payments that would trigger reporting tax, such as interest. Now with that, come to an end on lecture two. I\'ll see you in lecture Andrew Yip (17:10.594) Thank you.