1. EDUCATING SUPPORTING REPRESENTING www.charteredaccountants.ie Stage 3 Module 11 Reorganisations, Liquidations and Sale of a Business Chartered Tax Consultant Presenter Name – Fergal Ryan Chartered Accountants House

2. Overview Company Reorganisations Liquidations Sale of Business

3. Overview Company Reorganisations LiquidationsSale of Business Transfer of assets and businesses between group members Reliefs Company and Shareholder perspectives Appointment of liquidator Disposal & Distribution of Assets Pre-sale restructuring Due diligence Tax review of legal documents  Wide Variety of Tax Issues  Numerous Tax Heads -CGT; SD; CT; IT; VAT  Challenging and complex

4. Intra Group Transfers Main tax heads –CGT –Stamp Duty Other Taxes –CT –VAT Tax Reliefs; obligations and clawbacks

5. CGT Groups Sec 617 TCA 1997 Group Relief “No gain/No loss” on disposal on intra group transfers of chargeable assets Qualifying groups CT on chargeable gains and CGT on development land

6. CGT Group Sec 616(1)(bb) TCA 1997 Principal company and all effective 75% subs “Company” – Sec 616(1)(a) TCA 1997 –Tax resident in EU or in EEA country having DTA with Ireland “Principal Company” – Sec 616(1)(c) TCA 1997 –A parent of a 75% subsidiary

7. Effective 75% Subsidiary Sec 616(1)(b) TCA 1997 75% ownership and entitlement tests –≥ 75% ordinary share capital (direct or indirect) –≥ 75% distributable profits –≥ 75% distributable assets on liquidation CGT Group – Principal company and its effective 75% subs and their effective 75% subs Includes companies <75% owned by principal co Contrast with CT Groups

8. CGT Groups A G E C B D F 80% 90% 80% 75% 40% 80%

9. CGT Groups A D B C 90% 60% 90% 25% A,B,C and D are a CGT Group

10. Intra Group Transfers Sec 547 TCA 1997 MV applies where bargain not at arm’s length Sec 549 TCA 1997 Connected persons within Sec 547 Sec 10(6) TCA 1997 Control test – connected companies –Same person has control of both companies –Person controls one company and connected persons or he together with connected persons control the other company

11. Intra Group Transfers CGT event on transfer of chargeable assets From one group company to another MV applies Sec 617 TCA Relief may apply

12. CGT Group Relief Sec 617 TCA 1997 No CGT on transfers between group members –Transaction is between group members –Co transferring asset is resident in the State or asset is a chargeable asset immediately before the transfer –Co acquiring asset is resident in the State or the asset is a chargeable asset immediately after the transfer Non resident companies – Irish branch assets Non resident company liable to CGT Sec 649(2) TCA 97 Development land gains within Sec 617 group relief

13. EU and EEA EU and EEA companies can be part of CGT group CGT group relief for chargeable assets only Transfer and transferee within CGT charge Sec 617 relief for non residents –EU/EEA resident –Holding branch assets in Ireland

14. EU and EEA Revenue concession –Worldwide group –Transfer of trade carried on in the State –Profits and gains liable to corporation tax –Assets in use for trade – no discontinuance –Bona Fide commercial reasons – not to avoid tax –Submission to Revenue –Formal undertakings from transferee and group parent EU fundamental freedoms?

15. CGT Groups Sec 617 TCA 1997 Transfers deemed to be made at “no gain/no loss” Acquiring company takes base cost and acquisition date of transferor No crytallisation of gain at time of intra-group transfer Realised losses cannot be transferred to group members Asset with gain could be transferred into group company with loss prior to sale

16. CGT Groups Group relief applies automatically Takes precedence over other reliefs (not S291A) Example: Sec 626B TCA 1997 –CGT exemption for sale by parent of shares in a subsidiary Group relief applies to: –CT on chargeable gains –CGT on development land gains

17. Trading Stock CGT Group Relief does not apply to trading stock Sec 618 TCA 1997 applies Sec 596 TCA 1997 Capital asset held as trading stock of one group company Transferred to another group company where it is held as trading stock Vice versa

18. Sec 596 Relief Capital Asset becomes Trading Stock of transferee Trading Stock becomes Capital Asset of transferee Deemed disposal @ mv CGT gain/loss arises CGT group relief applies Sec 617 TCA 1997 Election by transferee to reduce MV trading stock by amount of capital gain No election if a loss arises Transferor treated as transferring a capital asset CGT Group relief available Transferee deemed to acquire asset for same cost and at same date of acquisition by transferor Review Intra Group gains of trading stock 12.5% CT on profits? CT on chargeable gain?

19. Clawback of Relief Potential Clawback of CGT Group Relief –When asset sold outside the CGT group –When the co with the asset leaves the group –Where the asset ceased to be a chargeable asset

20. Sale of Asset outside Group Sec 619(2) TCA 1997 Original cost and acquisition date of member group acquiring asset All group members deemed to be the same person Sec 619(1) TCA 1997 – application of Sec 555 No reduction for capital allowances where gain arises Loss restricted by capital allowances claimed by other group company

21. Co Leaving Group Sec 623(2) TCA 1997 Deemed disposal where co leaves CGT group within 10 years of acquiring asset Sec 623(4) TCA 1997 Departing company: –Deemed to have sold and immediately reacquired asset –At date asset was acquired from other group co

22. Co Leaving Group Sec 623(1) TCA 1997 Clawback provisions do not apply where bona fide liquidation Sec 623(3) –Two or more associated companies –Cease to be members of group at same time –No clawback on assets transferred between them –Where relief under Sec 617 previously claimed

23. Asset Ceases to be Chargeable Sec 620A TCA 1997 Co resident in EU/EEA country acquires asset Group Relief provisions apply Asset becomes situated outside the State Co deemed to be sold and immediately reacquired

24. Stamp Duty Reliefs SD payable on actual consideration given Exception – gift or voluntary disposition @ MV Potential Stamp Duty @ 6% for intra group transfers Sec 79 SDCA 1999 – associated companies relief SD on intra group transactions eliminated

25. Associated Companies Relief Sec 79 SDCA 1999 90% 90% beneficial ownership – direct and indirect 90% entitlement to profits on distribution 90% entitlement to assets on winding up 90%

26. Associated Companies Beneficial v Legal ownership Appointment of liquidator Company ceases to be beneficial owner Company holds legal title Sec 79 SDCA 1999– beneficial ownership 90% profit and asset tests similar to CT loss groups Non Irish resident and registered companies can qualify

27. Associated Companies Revenue Notes for Guidance – body corporate with share capital Adjudication by Revenue – Sec 20SDCA 1999 Statutory declaration confirming conditions met

28. Example MIAMI Seattle Boston Toronto SDL BSL TRL 90% 100% 90% 100% 90%

29. Anti Avoidance Sec 79(5) SDCA 1999 Any part of consideration provided by person other than a company associated with transferor or transferee Bank borrowings excluded if commercial

30. Anti Avoidance Sec 79(7) SDCA 1999 – claw back provision Two companies cease to be 90% associated Within two years of transfer Bona fide liquidations not excluded from claw back – unlike CGT groups Possible Revenue concession for group reorganisations

31. Stamp Duty Where Sec 79 SDCA 1999 relief does not apply Review proposed transaction Can plant be transferred by delivery? Can debtors be retained – collection agent?

32. Intra Group Transfers Withholding Tax Corporation Tax VAT

33. Withholding Tax Sec 980 TCA 1997 Withholding tax applies @ 15% Even where CGT group relief available Consideration > €500,000 Irish land, minerals or exploration rights Shares in non listed companies deriving value from above assets Goodwill of Irish trade CG 50 clearance

34. Corporation Tax Sec 400 TCA 1997 Election for trade to continue 75% common ownership Losses forward claimed Assets tranferred @ tax wdv Sec 401 loss buying rules – major change in ownership or activities or dormant trade Sec 312 TCA 97 – no IBA claw back on election

35. VAT Sec 3(5)(b)(3) VATA 1972 Assets transferred between group companies Transferee must be an accountable person – VAT registered Transfer constitutes undertaking or part of undertaking capable of being operated on an independent basis

36. Reorganisations of Share Capital Pre-sale structuring plan Introduction of new investors CGT for shareholders Reliefs covered in detail at Stage 2, Module 5 Section 5.14 Refresher – some examples

37. “Paper for Paper” Sec 584 TCA 1997 Shares exchanged for other shares in same company Shares allotted in proportion to existing shares Sec 584(3) TCA 1997 Reorganisation or reduction of share capital No disposal of original shareholding New shares take original cost and acquisition date of old shares for future CGT

38. Example Adam purchased 5,000 ord shares in S Ltd Cost €10,000 Date 10 th January 1993 Reorganisation of share capital in April 2002 Adam received 2,000 new shares in exchange for his 5,000 ord shares 2,000 new shares sold in December 2010 for €60,000

39. CGT Computation Date of disposal10 th December 2010 Sale Proceeds€60,000 Cost January 1992 5,000 of shares€10,000* Indexation (91/92)1.406 Indexed Cost€14,060 Gain€45,940 *no disposal of original shares in April 2002

40. Exchange of Shares Original shares plus consideration New shares take on original cost of old shares New consideration treated as enhancement expenditure

41. Example 1/5/1986 : 1,000 Ord Shares bought Cost €6,000 June 1997 : Reorganisation of company 2,000 new shares received in exchange for original shares plus payment by shareholder of €1,000 30 th November 2010: 2,000 shares sold for €100,000

42. CGT 2010 Sale Proceeds€100,000 Cost 1/5/1986€6,000 Indexation1.637 (€9,822) Enhancement Exp June 1997 €1,000 Indexed1.232 (€1,232) Gain €88,946

43. Exchange of Shares Exchange of old shares for New Shares plus consideration Deemed part disposal of old shares Cash or value of assets received by shareholder New shares have base cost of old shares minus the part allocated to part disposal

44. Example July 1996 M bought 4,000 shares acquired in M Ltd Cost €5,000 in July 2006 CGT July 2000 – Part disposal Sale Proceeds €4,000 Cost €5,000 x €4,000 = €1,429 €14,000 Indexation 1.251 €1,788 Gain €2,212 July 2000 M received €4,000 plus 3,000 new shares in M Ltd as part of reorganisation MV 3,000 shares in July 2000 = €10,000 August 2010 M sold 3,000 shares for €42,000 CGT August 2012 Sale Proceeds €42,000 Cost Original €5,000 Used €1,429 €3,571 x 1.251 €4,467 Gain €37,533

45. Group Reorganisations Why do corporate groups restructure? Reduction of number of companies in group Lower compliance costs – audit, tax, company secretarial Pre-sale restructuring plan for tax efficient sale Introduction of new investors Management buy-in

46. Reorganisations Corporate restructuring Transfer of businesses, assets or shares To acquiring company Acquiring company issues shares in itself to transferor company or its shareholders

47. Corporate Restructuring Common TypesPotential Tax Share for Share Swap Co B issues shares to Co A shareholders in exchange for shares in Co A Share for Undertaking three party swap Co A transfers business to Co B. Co B issues shares to Co A S/H Share for Undertaking two party swap Co A transfers business to Co B Co B issues shares to Co A CGT for Co A on transfer of shares, assets or business (CT on C Gains) CGT for Co A shareholders or company A on shares swapped or sold Stamp Duty for Co B on acquisition of shares, business or assets CT for companies for CA assets transferred VAT on transfers of assets

48. Share for Share Swap S/H A Co A S/H B S/H A S/H B Co B Co A Co B

49. Share for Undertaking 3 Party Swap S/H A Co A S/H B S/H AS/H B Co B Business Co A Business

50. Share for Undertaking 2 Party Swap S/H A Co A S/H B Co B Business Co B A S/H Co B Co A business Co A

51. CGT Reliefs and Stamp Duty Reliefs Reconstruction No definition in tax law  Case Law Brooklands Selangor Holdings Ltd v IRC Basic character remains unchanged Same persons as members Baytrust Holdings Ltd V IRC No fundamental difference after reconstruction Patrick W Keane v Revenue Shareholder dispute – reorganisation of share capital Streaming = partition/division TB 48 Substantially the same business carried on by substantially the same persons

52. CGT Reliefs and Stamp Duty Reliefs Undertaking No statutory definition UK case law “Business or enterprise undertaken by a company” Greengrocer’s business – pound of apples ≠ part of American Leaf Blending Co Business a wider concept than trade Activity may be intermittent Swithland Investments case – as distinct from acquisition of some of the underlying assets TB 48 – segregation of business and not merely of assets Capable of being carried out in its own right No of employees being transferred

53. CGT Reliefs and Stamp Duty Reliefs Amalgamation Not defined in legislation Re South African Supply and Cold Storage Co Ltd Rolling of two concerns into one Welding /blending Not merely the continuance of one concern Not necessary to have a new company Merged undertakings TB 48 – blending of one or more undertakings into one Shareholders substantially remaining unchanged Joining together of two or more companies

54. Share for Share Exchange Sec 568 TCA 1997 Company issues shares to a person in exchange for their shares in another company Acquiring company has or will have control of target company or General offer made to member of target company Which if satisfied will give control to acquiring company Bona Fide commercial reasons No scheme with main purpose of tax avoidance No disposal or acquisition for CGT

55. Stamp Duty Relief Sec 80 SDCA 1999 Reconstructions and amalgamations for share for share swaps Transfer of shares in target company to acquiring company Clawback of relief if beneficial ownership of shares in target company not held for 2 years Interest @.0219% per day from date beneficial ownership ceases Interest from date of transaction if false information

56. Stamp Duty Relief Bona Fide Commercial reasons – main purpose not avoidance of tax Acquiring company must acquire 90% of target company 90% acquisition in single transaction Consideration must be 90% in new shares in acquiring company Shares must be issued in proportion to shareholdings in target company Acquiring company must be limited and Irish/EU resident Target company can be unlimited and resident anywhere Acquiring company must increase share capital for takeover Adjudication by Revenue compulsory Statutory declaration from company or solicitor

57. Share for Undertaking 3 Party Target transfers all or part if business To acquiring company In exchange for shares in acquiring company Shares issued to shareholders of target company Undertaking will be owned by the acquiring company Acquiring company owned by original shareholder plus target company shareholder

58. Potential Taxes CGT – target company on disposal of undertaking CGT – shareholders of target company – value passing out of shares SD – up to 6% on acquiring company CT cessation issues and balancing charges VAT on transfer of undertaking

59. CGT Relief Company Level Sec 615 TCA 1997 Transfer of business at no gain/no loss Target company gets no consideration other than acquiring company taking over liabilities Companies must be Irish or EU resident Assets transferred must be chargeable assets No relief for development land Sec 633 TCA 1997 – extends relief for development land under scheme of reconstruction or amalgamation

60. CGT Relief Company Level Partitions do not qualify for Sec 615 TCA 1997 relief Concessional relief for “family partitions” Substantial Identity of ownership Before and after reconstruction – TB 48 Immediately after the reconstruction No contract for sale should exist prior to reorganisation Revenue pre clearance provided No clawback provisions

61. CGT Relief - Shareholders Sec 587 TCA 1997 Acquiring co issues shares to shareholders of target company In proportion to original shareholdings Original shares must be retained or cancelled No CGT disposal triggered New shares take on cost of original shares

62. Transfer of Business Sec 130 TCA 1997 Transfer of business is a distribution TB 48 – where Sec 587 and 615 TCA 1997 apply Bona fide reconstructions Revenue practice is not to invoke Sec 130 TCA 1997

63. Stamp Duty Relief Sec 80 SDCA 1999 Substantial SD savings – up to 6% Bona fide reconstruction –Assets must be an undertaking or part of undertaking –90% of consideration are shares in acquiring company –Substantial continuity of ownership in acquiring company –No minimum holding period for shares –Clawback if relief granted on false information

64. Share for Undertaking 2 Party Company transfers all or part of its business to another company In exchange for shares in that company After the swap, shareholders of target own shares in acquiring company Acquiring company carries on previous business of target company

65. 2 Party Swap CGT Relief for Target Company Sec 631 TCA 1997 Deferral of CGT on transfers of a trading operation between EU resident members –All or part of trade carried on in Ireland transferred to another company –Consideration is the issue of shares in acquiring company to target company –Company incorporated, tax resident and liable to CT in EU State

66. CGT Relief – 2 Party Immediately after the transfer –Assets transferred must be used in trade of acquiring company –Carried on in Ireland –Acquiring co must be chargeable to CT or CGT after transfer –Acquiring company cannot be exempt from CT or CGT under DTA Clawback if shares sold within 6 years by target company Base cost of shares reduced by deferred gain Sec 308A TCA 97 – no BC on trade assets in merger

67. Stamp Duty Relief Acquiring company Sec 80 SDCA 1999 – same rules as for 3 party swap Consideration shares issued to target company Clawback if target company ceases within 2 years No clawback if beneficial ownership lost due to reconstruction, amalgamation or liquidation

68. Partition of Family Trading Companies Demergers can qualify for the reconstruction reliefs Business carried on in two companies after demerger Shareholders interests remain the same Reliefs do not apply where businesses divided into individual ownership Revenue concession for family partitions

69. Partition of Family Trading Companies Family trading company or group Broken into individual trading companies No CGT will apply – Sec 587 and 615 TCA Value of each individual holding Remains strictly unaltered after partition Other conditions to be met Tax Briefing 44 Reorganisation of shares into separate classes Deriving value from separate trades New companies formed to take over trades

70. Partition of Family Trading Companies No money or money’s worthAll parties Irish resident No value shiftingTrading companies only Parties accept original CGT cost applies Trades capable of division Non trade assets < 10% Shareholders accept original CGT cost applies Separated trades must continue Family partition onlyGroups – 100% sub of family co Sec 623 TCA 97 applies 100% Family companiesBona fide – no tax avoidance

71. Partition – Family Companies Advance approval from Revenue must be sought Concession does not apply to Stamp Duty Significant cost for family restructuring with partitions

72. Other Taxes PAYE Revenue concession No Forms P45 Advance Clearance VAT, CT and CGT withholding

73. Employment Law EU “TUPE” Regulations 2003 Protection of Employees on Transfer of Undertakings Intra-Group or internal reorganisation Rights and obligations under employment contract transfers to new employer Employees must be given (within 30 days): –Date of transfer –Reason for transfer –Legal, social and economic implications for employee –Measures envisaged for employees

74. Share Valuations Open Market Value – sec 548(4) TCA 1997 Willing buyer and purchaser Purchaser has access to all information Most common methods –Dividend Yield –Earnings –Net Assets

75. Dividend Yield Minority shareholdings < 25% Amount and timing of dividend payments Significant part of return Shareholder not in a position to exercise control Methodology – historic dividends paid Current dividends position – maintained?

76. Earnings More substantial shareholdings Maintainable earnings Capitalised using P/E Ratio Pattern of past earnings Weighted average of past 3/5 years P/E of comparable quoted company Discount P/E for lack of market

77. Net Assets Balance Sheet Value Adjust for market values of fixed assets Consider intangibles not on balance sheet Consider if little or no relationship to level of earnings Hybrid method may be appropriate

78. Liquidations Liquidations more common now Cash extraction method following sale of business or assets Appointment of liquidator Tax issues for liquidator and shareholders Various reliefs – clawback can be triggered on liquidation

79. Appointment of Liquidator Three types of liquidations 1.Creditors voluntary – initiated by company 2.Court liquidation – initiated by company, creditor (Revenue) or shareholder 3.Members’ Voluntary Liquidation – group rationalisations, extraction of assets Appointment of liquidator – tax consequences CT, CGT, SD and VAT

80. Corporation Tax Cessation of AP Commencement of AP Terminal Loss Relief for group Restriction on distributions – close company surcharge implications Deductibility of termination payments to employees

81. Summary APsLossesClose Company Surcharge Sec 27(7) TCA 1997 Appointment of liquidator Filing and payment due dates Post cessation income Sec 397 TCA 1997 TLR on cessation of trade Sec 410 TCA 1997 Co ceases to be a member of group No group relief for losses post appointment of liquidator Distribution made in course of liquidation Cannot be sued to reduce close company surcharge Capital dividends in course of winding up

82. Summary Termination Payments Payments in excess of Statutory Redundancy UK Courts Has employee a contractual right to payment? If payment is ex gratia and employee has no contractual right to receive the payment  no tax deduction if payment made after cessation of trade Sec 109(2) TCA 1997 – tax deduction for statutory redundancy payments Includes amounts paid in post cessation period

83. Stamp Duty No SD on appointment of liquidator Implications for reliefs claimed Sec 80 SDCA relief on share for share undertaking two party swap Clawback of relief if relationship broken within two years – exception for liquidation Sec 79 SCDA 1999 relief Clawback if relationship ceased within two years No exemption on liquidation

84. Capital Gains Tax Company ceases to be beneficial owner of asset on appointment of liquidator Sec 616(4) TCA 1997 – exemption where group relationship ceased on a winding up Sec 623(1) TCA 1997 – exemption from clawback of intra-group transfer where company ceases to be a member of the group due to bona fide liquidation

85. Value Added Tax Liquidator must register for VAT Where assets being sold – taxable person Liquidator is an accountable person New VAT number allocated

86. Distributions by Liquidator Capital Gains Tax Sec 571(5) TCA 1997 Liquidator is accountable for CGT Base cost of assets at date acquired by company – Sec 78(8) TCA 1997 Two exposures to CGT Disposal of assets by liquidator Distributions by liquidator to shareholders

87. Distributions by Liquidator Sec 583 TCA 1997 Shareholder deemed to dispose of shares when a capital distribution received Retirement Relief – Sec 598 TCA 1997 Technically not applicable Sec 598(7) TCA 1997 – relief allowed on capital distributions in course of winding up of family company Concession – where company assets sold < 6 months prior to liquidation – TB 26

88. Retirement Relief and Liquidation Assets sold preliminary to liquidation Proceeds included as business chargeable assets No concessional relief to distributions in specie Only cash distributions qualify

89. Assets Sold by Liquidator Assets qualifying for capital allowances CT on balancing charges VAT on property – review implications CGT withholding – CG50 Sec 980 TCA 1997

90. Stamp Duty Nominal SD applies to distribution of asset in specie SD can arises where –Assets are subject o a mortgage or charge –Shareholders agree to take over third party debt –Company has outstanding loan payable which is forgiven To avoid the ad valerom stamp duty Clear all mortgages and debts prior to distribution in specie Not a clear option – example page 593/594

91. Buying and Selling a Business Numerous tax issues Share sales v Asset sales Tax and commercial differences Vendor and Purchaser perspectives Tax Due Diligence – common issues Purchase agreements – tax warranties and indemnities

92. Buying and Selling a Business Negotiation stage Agreement for Sale reached Main terms of transaction recorded in writing Heads of Agreement Outlines key terms of transaction Hard to achieve mutual tax benefits Vendor’s tax objectives – maxismise after tax proceeds Purchaser – minimise after tax consideration

93. Buying and Selling a Business Different tax objectives – seller and buyer Difficult to reconcile  detailed negotiations Adjustment to sale consideration? Assumption of pre-sale restructuring tax risks?

94. Share v Asset Sales Commercial considerations often dictate form of sale Sale of separate business unit within a company? Does purchaser want only part of business or certain assets? Does vendor want to retain certain assets? Purchaser reluctant to acquire shares – historic risks Compromise – pre sale restructuring e.g. “hive out”

95. Vendor – Sale of Shares Tax perspective – share sales preferred Avoids potential double CGT charge CGT effective rate 25% Base cost if previously purchased Sec 626B TCA 1997 relief for corporate vendors Disposal of substantial shareholding in sub CGT free for holding company CGT “deferred” until funds extracted from holding company

96. Purchaser – Acquisition of Shares May favour share purchase Stamp Duty savings – 6% v 1% SD based on gross value of assets SD on share sale reflects net value SD Planning –Allocation of consideration between assets –Transfer by delivery –Vendor retaining trade debtors

97. Purchaser – Acquisition of Shares Purchaser inherits cost of any latent tax liabilities Unrealised gains or latent balancing charges Reduces gain or profits on further sale of assets CGT triggered if company leaves group with assets transferred from other group companies using CGT group relief Sec 79 SDCA 1999 clawback trigger – intra group asset transfers within last 2 years

98. Vendor – Asset Disposals Vendor can select assets for sale/retention Retention of non core assets – investment properties Loss position – CGT losses forward Shelter gains on assets sold Sale of assets giving rise to CGT loss or Balancing Allowances Use of losses within vendor’s corporate group

99. Purchaser – Acquisition of Assets No liability in respect of history of company No latent gains on assets acquired Higher Stamp Duty, although may be able to mitigate using various methods

100. Pre Sale Restructuring Compromise to asset v share deal Part of business being sold Restructure to facilitate a share sale Transfer of assets to newly formed sub with immediately sale of sub – Sec 79 SDCA and Sec 617 TCA 1997 clawbacks Use of restructuring reliefs Share for share three party swap

101. Pre Sale Restructuring TB 48 – SD reliefs not clawed back Tax efficient scheme of restructuring Reconstruction cannot be contingent on sale or transfer of assets Reorganisation carried out prior to binding sale agreement

102. Anti Avoidance Value stripping prior to sale of shares Depreciatory transaction Target company transfers assets at undervalue Target company pays dividends Sec 621 TCA 1997 – prevention of artificial capital losses Calculation of allowable loss on share disposal takes account of under-value on assets transferred

103. Anti Avoidance Sec 621 TCA applies where value of shares reduced by “depreciatory transactions” Disposal of assets between group members other than @ mv Other transactions between group members where company whose shares are being sold or its 75% was party to transaction Reduction of allowable loss – no impact on gain Sec 622 TCA 1997 – dividend stripping Distribution includes Sec 130 TCA 1997 transfers

104. Anti Avoidance Sec 591A TCA 1997 Share disposal and abnormal distribution to vendor Distribution treated as consideration for shares Includes abnormal distribution to persons connected to vendor Excess over dividend expected if no share disposal Prevents conversion of CGT into FII

105. Deferred Consideration Deferred consideration often included in sale agreement Dependent on post deal performance of target business over time period Cash consideration – immediate CGT Shares in acquiring company – Sec 586 TCA 1997 – share for share

106. Deferred Consideration Sec 563 TCA 1997 Deferred consideration taken into account No reduction for risk of non recoverability or where sale consideration contingent CGT computation amended if deferred consideration is not paid Known as “earn outs” Case law

107. Deferred Consideration Marren v Ingles Share sale – additional amount payable if shares were quoted within next few years Deferred consideration had to be valued for CGT Separate asset – “right to receive” future consideration Additional CGT on receipt of future consideration Gain on actual consideration less value attributed on share disposal Very difficult to value future proceeds

108. Deferred Consideration Revenue applies Marren v Ingles Part of consideration –Deferred or –Contingent and –Uncertain in amount Risk of CGT rate increasing No carry back of loss when “right to receive” happens

109. Example Shares sold March 2008 for €3m Further sum to be paid in March 2010 based no increase in turnover Valued at €200,000 in March 2008 CGT paid in 2008 on gain of €3.2m Actual turnover increase = €500,000 Additional CGT on €300,000 Actual turnover increase of €100,000 Capital loss of €100,000 – no carry back to 2008

110. Deferred Consideration Overall cap on contingent payment Proceeds not wholly unascertainable Outside scope of Marren v Ingles? CGT paid on max consideration Amended Sec 563(1)(b) TCA 1997 if actual consideration is less than max Vendor could receive deferred consideration in form of shares – Sec 586 TCA 1997 relief

111. Stamp Duty Sec 80 SDCA 1999 – may be no relief if cash consideration Non share element < 10% Limit on deferred consideration – SD on the maximum amount SD on shares taken at time of sale plus future cash if 10% rule breached

112. Tax Due Diligence Purchaser obtains sufficient information Target’s business Possible adjustment to purchase price Many areas covered in due diligence including tax Objectives –Ensure tax liabilities of target provided in its financial statements –Identify tax liabilities that are not provided in financial statements –Highlight other potential tax exposures /contentious issues

113. Legal Process – Share Sales 1.Draft share purchase agreement prepared by purchaser’s advisors Sent to vendor’s advisors – includes tax warranties and indemnities 2.Vendor’s advisors review share purchase agreement and prepare Disclosure Letter 3.Final drafts of Share Purchase Agreement and Tax Deed of Indemnity circulated between parties and agreed 4.Share Purchase Agreement; Tax Deed of Indemnity and Disclosure Letter signed; consideration paid and transaction closed 5. Stamp Duty paid on share transfers by purchaser

114. Due Diligence Comprehensive Engagement Letter Review of financial accounts of target company Prepare due diligence checklist Adapt general checklist to type of business Focus on perceived risk areas –Status of Tax Returns and submission –Expressions of doubt or Revenue rulings –Details of CT, VAT, PAYE SD, CT, Withholding taxes Preparation of Tax Due Diligence Report –Scope, periods and taxes reviewed and results –Assumptions made; documents relied upon; limitations

115. Key Areas LossesTax losses forward CGT Base CostBalance sheet value review CGT intra group transfers Pre 6/4/1974 assets Shares owned in company – share for share relief? ClawbacksAssets acquired from other group companies – CGT or SD clawback Close CompaniesUndistributed estate and investment income Professional Services companies Benefits to participators and associates Loans to participators Interest to directors Deferred TaxFully provided for? Assumptions underlying DT provisions

116. Common areas of review Review Group Structure Confirm tax residence of each company CT and CGT Tax Returns Submitted; accepted; expressions of doubt Outstanding liabilities with no provision Restriction on loss relief – late filing of returns Latest Revenue Audit – review issues Significant tax issues – provision made? DWT issues for distributions made

117. Common areas of review PAYE/PRSI/Levies- returns and liabilities Mileage and subsistence claims Profit sharing and share options schemes- Revenue approvals Consultants/self employed persons engaged VAT compliance VAT Rates on sales VAT input credit claims – disallowable items

118. Warranties and Indemnities Most important part of share purchase agreement for tax adviser Purchaser relies on representations made by vendor Impose legal obligation on vendor to compensate purchaser for any undisclosed tax liabilities arising after sale Issues identified in Due Diligence determine nature and scope

119. Warranties and Indemnities Outcome of Due Diligence – additional warranties and indemnities will not provide protection Purchase price reduction for specific tax liabilities? Indemnity is promise to compensate for specified tax liability Purchaser does not need to prove breach or show specific loss suffered

120. Warranties and Indemnities Breach of tax warranty is a breach of a contractual term Purchaser must show financial loss suffered Claim more difficult than under indemnity Disclosure letter prepared by vendor Notifies purchaser of matters that could breach warranties

121. Warranties and Indemnities No claim for breach of warranty for issues in disclosure letter Focus on general disclosures Seek specific indemnity if potential liability disclosed Vendor’s advisor – limit vendor’s exposure Draft disclosure letter as comprehensive as possible

122. Example WarrantyThere is no material dispute or disagreement outstanding with any tax authority DisclosureThe target company is currently being audited by the Revenue Commissioners in respect of VAT for the period 1 st January 2008 to 31 st December 2008. The audit has just commenced and is expected to be completed by 31 st January 2010. IndemnityThe vendor indemnifies the buyer in respect of a taxation liability arising as result of an event which is outside the ordinary course of the target company’s business, which occurs after the accounts date, but before completion.

123. Other Areas Definition of tax Exclusion to liability –Liability reflected in latest audited accounts –Exclusion for pre completion restructure of target company exclusion – requested by purchaser –Failure by purchaser to make election to Revenue Limits on warranty and indemnity claims Time limits to make claims – min 5 years Notification and conduct of claims

124. Round Up Transfer of Assets and Businesses Group Reorganisations Reliefs for Intra group transfers CGT, Stamp Duty Clawbacks Withholding Taxes Corporation Tax Value Added Tax

125. Round Up Reorganisation of Share Capital Change of Ownership Reconstructions Amalgamations Transfer of Undertakings Share for Share Share for Undertakings Share Valuations

126. Round Up Liquidations Distributions CGT and SD Buying and selling a business Share v Assets disposals Vendor and Purchase perspectives Pre sale restructuring Deferred Consideration

127. Round Up Due diligence Legal Process for share transactions Warranties and Indemnities Disclosure Letter