Who Pays and How Much? Taxation of Share and Asset Deals From the Seller’s and Buyer’s Perspective

The article has also been published in Almatalent Juridiikan ajankohtaiset (in Finnish).

The price of a business acquisition is negotiated at the negotiating table, but the tax burden is determined by legislation. Depending on the structure of the transaction, the tax implications can vary significantly for the parties involved. A prudent party prepares for tax consequences well in advance of the actual transaction – and can thus save on the tax costs of the business acquisition. In this article, we explain the logic behind business acquisition taxation, particularly from the perspective of the seller and the buyer.

The Structure of the Transaction Is Key: A Share Purchase or an Asset Deal?

In a share purchase, the buyer acquires the shares of the target company, whereby the target company continues its operations with no legal changes. The seller transfers the shares and pays tax on any capital gains. The buyer, in turn, takes ownership of the company as it stands – with all its liabilities and obligations.

In an asset deal, the target company sells its entire business or individual assets to the buyer. The subject of the sale is therefore the company’s business, not its share capital. The seller is the target company, and the tax consequences primarily apply to it.

The parties often have differing interests regarding the structure of the transaction. The seller typically favors a share purchase, whilst the buyer may prefer an asset deal, as the company’s existing liabilities and obligations remain with the selling company and because an asset deal offers the buyer the opportunity to utilize the depreciation of the acquired assets for tax purposes. Furthermore, the transaction structure may affect the target company’s taxation, e.g. its right to utilize tax losses recognized for it. The choice of structure is therefore a key part of the transaction’s tax planning.

Taxation of the Seller

In a share transaction, the seller realizes taxable income if the sale price of the shares exceeds their acquisition cost and the costs incurred from the sale. For a natural person, the capital gain is capital income, which is taxed at a rate of 30% up to EUR 30,000 and at a rate of 34% on the amount exceeding this. When assessing the tax implications of an individual transaction, all capital income received by the taxpayer during the same tax year is added together.

Instead of the acquisition cost, a natural person may use the so-called deemed acquisition cost, in which case no other expenses may be deducted from the capital gain. If the shares have been held for less than ten years, the deemed acquisition cost is 20% of the sale price. For shares held for at least ten years, the deemed acquisition cost is 40%.

If the seller is a limited company, the taxation of capital gains may differ significantly from that of a natural person. Under the Business Income Tax Act, capital gains on fixed asset shares may, under certain conditions, constitute tax-exempt income for the company. This so-called tax exemption for fixed asset shares requires, among other things, that the selling company has owned at least ten per cent of the target company’s share capital and that the shares have been held continuously for at least one year. If the sale of fixed asset shares is not tax-exempt, the capital gain arising from the transaction is taxed as part of the company’s other income for the tax year at the corporate tax rate.

In change of generation situations, the seller may be able to transfer the shares entirely tax-free, provided the transaction meets the conditions laid down in the Income Tax Act. A capital loss arising from a loss-making disposal is, as a general rule, deductible from other capital income.

Taxation of the Buyer

From the buyer’s perspective, the key tax issues in a share transaction are the determination of the acquisition cost and the transfer tax liability. In a share transaction, the buyer cannot make tax deductions from the price of the shares acquired; instead, the acquisition cost is only realised when the shares are subsequently sold on.

In an asset deal, the situation is more favorable for the buyer, as acquired assets, such as equipment, machinery and intangible rights, can be capitalized on the balance sheet and depreciated for tax purposes, thereby reducing the buyer’s taxable income in future years.

In the case of transfers of shares in limited companies and shares in housing and property companies, the purchaser is liable to pay transfer tax amounting to 1.5% of the purchase price. In the case of transfers of land and buildings, the transfer tax is 3%. Transfer tax is added to the acquisition cost of the shares, so it is taken into account in the subsequent calculation of capital gains. Transfer tax is also payable in an asset deal to the extent that the business being acquired includes securities or real estate.

A share transaction does not give rise to VAT liability. Nor is VAT payable in an asset deal where the transaction meets certain conditions laid down in the Value Added Tax Act.

In so-called underpriced transfers of ownership, or transfers made partly or wholly as a gift, the transferee may be eligible for significant tax relief provided the conditions of the Inheritance and Gift Tax Act are met.

Proactive Tax Planning and the Most Common Pitfalls

Tax planning for a business transaction should be started as early as possible – ideally years before the planned transaction. Arrangements regarding the ownership structure, such as setting up a holding company or incorporating the business through a demerger or business transfer, take time to implement in a tax-efficient manner.

In unclear situations (preferably well in advance of the transaction), the parties may apply to the Tax Administration for a fee-based advance ruling on the tax treatment of the planned transaction. The advance ruling issued is binding on the Tax Administration in relation to the applicant, provided that the arrangement is carried out as described in the application for the advance ruling.

The timing of taxation for business transactions is generally determined, in both income tax and transfer tax, by the date on which the transfer takes place. In a share transaction, taxation applies to the tax year in which the binding purchase agreement is signed, and not, for example, according to the date of payment of the purchase price or the transfer of ownership. This is particularly worth bearing in mind for transactions taking place around the turn of the year, where the timing of the contract signing may affect which tax year the capital gain or loss is allocated to. Furthermore, it is advisable to clarify in advance the timing of taxation on any additional purchase price and the transfer tax costs arising from such an additional purchase price.

The most common mistakes in tax planning for business acquisitions include starting the planning too late, choosing the transaction structure without sufficient tax analysis, and failing to take into account restrictions on the target company’s right to deduct losses. It is also surprisingly common to overlook transfer tax and its calculation basis, as well as potential VAT issues.

As part of tax planning for a transaction, attention should also be paid to how the allocation of expert fees related to the acquisition is carried out among the various taxpayers, as there are differences between income tax and VAT regulations regarding the deductibility of such expenses.

In Conclusion

The taxation of business acquisitions is a complex matter in which the structure of the transaction, the position of the parties and the timing all influence the outcome. The interests of the seller, the buyer and the target company may conflict with one another, and an optimal solution requires a careful overall assessment.

Proactive tax planning can yield significant savings and help avoid unpleasant surprises during the transaction process. We recommend seeking expert advice as early as the preparatory stage of the transaction – timely guidance pays for itself many times over.

More on this topic at our seminar on May 26 at 8:30 AM – further details and registration to follow.