General Tax M&A introduction when selling an Irish business
Tax aspects are of high importance when selling a business. Your advisor needs to be up to date with the tax framework that applies to M&A transactions in Ireland. Effective planning and structuring can help you avoid complicated legal and regulatory issues in cross-border acquisitions. We provide relevant tax knowledge ourselves in M&A transactions or work with tax specialists that bring in the required taxation knowledge. Tax Law in Ireland is comprehensive and complex. The following article outlines some of the taxes involved in the sale of a business and is not deemed to be comprehensive in nature nor should it be accepted as fact or advice. Tax Law in Ireland regularly changes and you should consult a Tax Practitioner prior to selling your business. No two transactions are the same and consequently the tax implications will not be the same. The tax implications will depend on the transaction structure. We’ll look firstly at the tax implications of a Sale of Shares in a Company. It is assumed that the selling party falls within the charge to Irish Tax.
Tax Consideration in Share Sales
The selling party maybe an individual or a company. The rule is where an individual sells shares in a company and makes a gain, this gain is subject to Capital Gains Tax (CGT) at the prevailing rate (currently 33%). When a company sells shares in a subsidiary company (Trading Company) and realises a gain, this gain is generally tax free. Conditions apply, the shares must have been owned for more than a year. If the subsidiary company has Irish Land or Buildings interest and this makes up the greater value of the company the tax free status doesn’t apply. The subsidiary company should be a trading company. If part of the consideration is deferred for whatever reason the deferred portion of the sale is taxable at the time of closing. A little unfair given that a seller is paying tax on a gain that he actually hasn’t banked. e.g. Mr A sells his shares in company XYZ Ltd at a gain of €5m. €3m to be paid on exchange of contracts the balance of €2m in 2 years’ time. Mr A’s CGT gain for tax purposes is €5m of which 33% €1.65m becomes due within the current tax year.
For tax purposes the gain is calculated as follows:
Proceeds of the sales less Base Cost of Shares x Indexation Factor less incidental selling expenses. The indexation factor is a multiple allowed by Revenue for inflation purposes which has been capped at 31st December 2002. There are a number of Revenue Permissible rules that enable the reduction of the tax liability as follows:
- Retirement Relief (oddly one doesn’t actually have to retire only from the business in question)
- Special Pension Contribution
- Employment Termination Payment
Tax Consideration in Asset Sales
Assets Sales will be structured differently in all cases and the fundamentals of the deal need to be scrutinised to assess any tax liability. The following is a list of possible assets that could be sold.
- Trade Debtors
- Plant & Machinery
As an asset sale incurs a higher Stamp Duty cost than a share sale it may be worth noting that the above assets could be transferred to a new company and this entity sold.
The tax implications of a sale will depend upon the type of asset sold and the type of consideration received:
- Trade Debtors: Where trade debtors are sold as part of an asset sale the consideration paid for the trade debtors is equal to the debtors therefore a no gain no loss situation occurs, therefore not tax applies.
- Inventory: Similarly treated to Trade Debtors
- Plant & Machinery: The sale of depreciable capital assets may result in a balancing charge, a balancing allowance and/or a chargeable gain for the selling company.
- Goodwill: Goodwill is subject to CGT (Capital Gain tax).