Selected VAT aspects in M&A transactions
Workshop by Clara Bodemann and Paul Müller-Wittwer on the occasion of the ISIS) seminar on 05 April 2022 entitled "Current tax issues in national and international M&A transactions".
Case 1: The target company - typical VAT DD findings
1. facts of the case
Dr. A and Dr. B are holders of the shares in AB AG. It is very successful. Succession planning is pending. Dr. A and Dr. B would like EBITDA x 5 for their shares. But the employed doctors would never be willing to pay this price.
However, there are two renowned doctors (Prof. X and Prof. Y) who, due to special circumstances, would at best be willing to enter into a negotiation for this price. The shares would be acquired by an acquisition company.
Prof. X and Prof. Y commission a consultancy firm to carry out a DD. However, this should not be too expensive. Clear framework conditions are set for the DD. E.g. focus on deal breakers and other financially significant findings.
The financial statements of AB AG for the last 5 years are presented below (for simplicity, it is assumed that each year has been identical and the profit has been distributed as a dividend).
The appointed consultancy firm sets to work and now comes to check whether VAT DD issues arise.
The previous shareholders have informed, inter alia, as follows:
- Until now, AB AG has not been registered in the VAT register.
- They were of the opinion that as a medical practice they would achieve exempt turnover.
- Her cosmetic staff and assistants would all work under her supervision.
- There are special centre contracts in relation to the two general hospitals. They would each manage a department there. Together with the billing for the affiliated doctors, an additional fee is also paid. This also includes a supplementary order for the assistant doctors, some of whom are made available to the hospital's emergency department.
- They had very successful relationships with suppliers who were also willing to make a contribution to one or the other project. The cooperation with these suppliers is very transparent, as can be seen on the homepage (where these companies are listed under "Partners" with a link to their homepage).
- It was all a normal procedure for a medical practice. They had never had any VAT problems. All their colleagues had never reported VAT problems either. It will hardly be worth wasting much time here.
I. General issues
- Which period is relevant for a VAT DD?
- What special documents and information must normally be provided for VAT DD?
- What are the typical VAT DD findings?
II. Questions about the case study
- What could be the sectoral VAT DD findings here?
- What VAT DD findings could typically be found in the numbered items of the financial statements and what documents and information would be needed to identify them?
- You have discovered the following taxable benefits per year for the last 5 years:
A person involved in the transaction tells them:
"That's not a problem. Medical practices can account for VAT at the balance rate of 0.6%. CHF 920,000 x 0.6% = CHF 5,520 / year x 5 = CHF 27,600. That's not a significant risk in relation to the purchase price."
Do you agree?
Case 2: The transaction - tax succession, reporting procedure, etc.
1. facts of the case
AB AG is owned by two families, family A and family B. It has two successful divisions, A and B. The relationship between the two families, A and B, has recently been less successful. They are not in agreement about the strategy for the company as a whole and for the two divisions A and B.
The two families come to the conclusion that it is best if AB AG is split up and each family continues to run one division under its own responsibility.
The following steps are planned:
- The first preparatory measures for the separation of the divisions as of 01.01.2022 will already be taken in 2021 (e.g. creation of a profit centre account, setting up bookkeeping, separate bank accounts).
- Balance sheet as at 31.12.2021 as the basis for the valuation of the two divisions (prepared on 28.02.2022).
- Valuation as at 31.12.2021 of the two divisions by the jointly commissioned renowned consulting firm C AG. Determination of the required compensation payments (prepared on 31.03.2022).
- Thebenefits and risks of Division B shall pass to B AG on 01.01.2022.
- Draft contracts (prepared on 15.04.2022).
- Obtaining rulings from the Cantonal Tax Administration (profit and income taxes) and the Federal Tax Administration (withholding tax and stamp duties). All applications are approved (on 30.04.2022).
-For the purposes of these taxes, this is a "spin-off".
-It can be settled at the tax-relevant book values.
-With the exception of an increase in nominal value/KER, the spin-off is income tax neutral for the shareholder groups.
-There is no lock-up period for the disposal of the shares.
-A retroactive demerger is recognised. I.e. the profit tax liability of B AG already begins on 01.01.2022 and the income and expenses of division B are attributed to it as of this date.
- Spin-off of the assets and liabilities of division B to a newly founded B AG (contribution in kind to a subsidiary of AB AG), retroactively as of 01.01.2022 on the basis of a spin-off balance sheet as of 31.12.2021.
Public certification of the deed of formation and signing of the contribution in kind agreement: 27.05.2022.
Entry in the commercial register on 31.05.2022.
- Distribution of shares in B AG in proportion to the share capital to families A and B (dividend in kind) on the occasion of the extraordinary general meeting on 15.06.2022.
- Exchange of shares between families A and B also on 15.06.2022.
Family A transfers to family B the shares in B AG.
Family B transfers the shares in AB AG to family A.
Compensation payments are still made between the two groups of shareholders.
- external relationship until 30 June 2022 (in its own name, but for the account of B AG).
- On Friday 01.07.2022 , the B AG officially appears under its name. All services from this date onwards will be sent on its new letterhead. All (major) suppliers are informed that services from this date onwards must be addressed to B AG. The (main) contracts have been newly issued to B AG or have been rewritten to B AG by means of an addendum.
- AB AG shall prepare (simplified) interim financial statements as at 30 June 2022 . Based on this, AB AG prepares a spin-off statement. This is subject to an approval process. These are approved on 30.09.2022 .
The initial and target structure is shown below:
AB AG and B AG are (or will be) both liable to VAT and account for VAT according to the effective method and according to agreed charges.
The basis for the spin-off is the following spin-off balance sheet as at 31.12.2021.
The following quarterly financial statements have resulted for the first two quarters of 2022:
The accounting department plans to make the following demerger entries. However, it is partly uncertain under which date and with which VAT code it should make these entries (view of the transferring company).
I. Subject Area: Reporting Procedure / Retroactive Spin-off / Accounting
- Is it mandatory to use the notification procedure or can it be used voluntarily?
- Are the fair market values to be used for the declaration of the reporting procedure or does the FTA also accept the declaration of the book values according to the direct tax principles?
- Does the amount declared in item 200 of the VAT statement have any significance for any other levy apart from VAT?
- What amount should be declared in Form. No. 764 be declared in the present case?
- In which VAT statement should AB AG declare the reporting procedure?
- Which company must account for VAT on Division B services in the first two quarters of 2022?
- Does the spin-off statement for the first two quarters of 2022 have an impact on the declaration of the reporting procedure?
- Which date and which VAT code would you now set per entry in AB AG's accounting program when posting the spin-off or the spin-off settlement?
- Which date and which VAT code would you now set per entry in B AG's accounting programme when posting the spin-off or the spin-off settlement?
II. Subject area: Tax subject, joint liability and tax succession
- Does B AG, through the contribution in kind, enter into the tax rights and obligations of AB AG with respect to division B that have arisen by 31.12.2021 ("tax succession"), even if the VAT payable is not included in the inventory of assets and liabilities to be transferred?
- On 30 June 2023, the FTA notifies AB AG of a VAT audit for the tax periods 2018 to 2022. The FTA also audits Division B until 30 June 2022. In the subsequent assessment memorandum (EM), there is a correction in Division B totalling CHF 40,000 VAT for the years 2018 to 2021. The FTA sends the EM to AB AG on 30 September 2022.
Has the EM been legally opened to AB AG in this respect?
- The FTA (Criminal Prosecution and Offences Investigation Division) comes to the conclusion that criminal offences could be involved in Division B. However, the investigation of the offenders with regard to the possible penalty is disproportionate. A corporate fine in accordance with Art. 100 VAT Act comes into consideration.
Who may the VAT-SD order to pay the fine (AB AG or B AG)?
III. Variant: Spin-off for the purpose of sale
The background to the restructuring is that families A and B were considering selling the shares. Family B was the driving force.
Due diligence has revealed, among other things, certain risks until 2020 in both division A and B, including VAT risks.
Due to the risks, the prospective buyer (D AG, not a closely related person) is not interested in the shares of AB AG. She does not want to deal with the various legacy risks. However, it would be interested in Division B, provided that a solution could be found that B AG does not assume tax succession for the legacy burdens of Division B from the years before 2021.
In a framework agreement signed on 15 April 2022, the parties defined the individual steps analogous to the initial facts. According to this, after the restructuring, the B family will sell its shares in B AG to D AG for CHF 17 million with a purchase agreement dated 15 June 2022. One condition is that the FTA HA MWST agrees that the tax succession does not occur due to Art. 16 MWSTG.
The initial and target structure is shown below:
- Will the FTA provide information that Art. 16 VAT Act (tax succession) does not apply in the present case?
Case 3: VAT classification of transaction costs
1. facts of the case
Zurich Ltd is 100% owned by Basel Ltd. Basel AG holds participations in various companies and has the purpose of managing these participations. With the exception of minor interest income, it generates only income from investments. Basel AG intends to sell Zürich AG. The accounting and tax returns of both Zurich Ltd and Basel Ltd are prepared by a large tax and management consultancy (BIG1 based in Switzerland). In addition, Basel AG is assisted by a Swiss law firm in all legal and more complicated tax matters.
Basel AG engages the investment bank C domiciled in Switzerland (Bank C) and the BIG1 to support it in its sales project. The contract negotiations and the organisation and conduct of the contract negotiations are to be conducted by a law firm.
According to the contract, Basel AG agrees the following services with Bank C and BIG1:
- Contract between Basel AG and Bank C: Bank C is to find one or more potential buyers. In the case of several prospective buyers, Bank C is to assess them and make a recommendation to Basel AG. Bank C is to communicate the terms of the sale to the prospective buyers and serve as their contact for questions during the sales process. In the event of a successful sale, Bank C is to receive a commission (percentage share of the sale price).
- Contract Basel AG and BIG1: BIG1 has been commissioned with the preparation of a sales strategy, the preparation of all tax documents (incl. any necessary clean-up of past errors), the company valuation and the preparation of the vendor due diligence.
Basel AG commissions Bank C to support it in its sales project. There is no contractual relationship with BIG1. The contract negotiations and the organisation and conduct of the contract negotiations are to be conducted by a law firm.
According to the contract, Basel AG agrees the following services with Bank C:
- Contract between Basel AG and Bank C: Basel AG commissions Bank C to accompany the sale. Bank C is tasked with drawing up a sales strategy, valuing the company, preparing the vendor due diligence and determining the procedure for the contract negotiations (organising conference calls, etc.). In addition, Bank C is to assist in the search for a suitable buyer.
2nd question for variant 1 and variant 2:
How are the services of Bank C to be qualified for VAT purposes?
Case 4: Charging on transaction costs
1. facts of the case
Zurich Ltd is 100% owned by Basel Ltd. Basel AG holds participations in various companies and has the purpose of managing these participations. Basel AG has successfully sold Zürich AG (target company) to Bern AG.
Zurich Ltd had engaged the corporate and tax advisory firm BIG1 to assist with the sale. According to the contractual agreement between Zurich Ltd and BIG1, the latter was commissioned to correct errors in the tax returns of the past and to carry out a vendor due diligence (phase 1) in preparation for the sale and subsequently to accompany, organize and execute the sale for Basel AG A (phase 2).
After completion of the sale, BIG1 invoices Zurich Ltd for its services in accordance with the contract with VAT. There are no plans to pass on the costs from Zurich Ltd to Basel Ltd.
- Do the transaction costs charged by BIG1 to Zurich Ltd have to be passed on to Basel Ltd in full or in part as a matter of principle?
- Would the onward settlement have to be subject to a VAT surcharge?
Case 5: Input tax deduction on transaction costs
1. facts of the case
Zurich Ltd is 100% owned by Basel Ltd. Basel AG holds interests in various companies and has the purpose of managing these holdings. With the exception of minor interest income from the investment of its own assets, it generates only income from participations. Basel AG has successfully sold Zürich AG to Bern AG.
Basel AG had commissioned the business and tax consultancy firm BIG1 to accompany the sale. In accordance with the contractual agreement between Basel AG and BIG1, the latter was commissioned to correct errors in the past tax returns and to carry out a vendor due diligence (phase 1) in preparation for the sale and then to accompany, organise and complete the sale for Basel AG (phase 2).
BIG1 invoices its services with VAT in accordance with the contract. Basel AG has agreed with Bern AG that the transaction costs will be shared. Basel AG would like the invoice for the costs related to phase 1 to be issued directly to Zurich AG. The costs from phase 2, on the other hand, are to be invoiced to Basel AG.
Variant: While the contract negotiations go well at the beginning, Basel AG and the potential buyer cannot agree on material points. The contract negotiations are therefore broken off and the sale does not take place. BIG1 invoices its previous services with VAT.
- Can Basel AG claim the input tax deduction in connection with the invoice from BIG1 for phase 2?
- What are the considerations if BIG1's invoice for Phase 1 is made directly to Zurich Ltd?
- Variant: Can Basel AG deduct the VAT invoiced to it by BIG1 as input tax even if the contract is terminated?
Case 6: Transaction costs and subscription tax for private shareholder
1. facts of the case
The private shareholder A (resident in Gstaad) is the sole shareholder of Wien AG and has sold his 100% shareholding in Wien AG to Bern AG (no other shareholdings). For the preparation of this elaborate sales process as well as for the monitoring of the sale, A was advised by the Austrian company Salzburg-Beratungs-AG (no Swiss VAT registration).
In preparation for the sale, Salzburg-Beratungs-AG cleans up errors in past tax returns and prepares all documents for vendor due diligence (phase 1). Salzburg-Beratungs-AG is also tasked with accompanying, organising and handling the sale for A (phase 2).
After completion of the sale, Salzburg-Beratungs-AG invoices its services to A with local VAT (invoice amount of net excluding foreign VAT EUR 100,000). A pays the invoice upon receipt on 14 February 2022. A would like to be reimbursed by Wien AG for the costs in connection with phase 1 or to charge them to it.
- What VAT consequences arise for A as a result of the contract with Salzburg-Beratungs-AG and the invoicing?
- Does passing on the invoice costs have consequences for A from the point of view of Swiss VAT?