Tax issues for legal entities as sellers
Workshop on the occasion of the ISIS) seminar on 27 October 2020 entitled "Tax pitfalls in Mergers & Acquisitions transactions".
1st carve out
1.1 Case study
The Swiss HoldCo acquired the Target Group through a share deal with the purchase of all shares of the Swiss A-AG. Following the acquisition, the Target Group is to be integrated as far as possible into the existing structure of the HoldCo Group and newly acquired IP is to be transferred to IP-AG.
With regard to the acquisition, a purchase price allocation (PPA) was prepared by an independent third party in accordance with IFRS and assets and liabilities, including the existing IP of the target group, were valued. The difference to the purchase price is recorded as goodwill.
The acquired companies have the following profile:
- A-AG: holding company and owner of the A brand
- B-AG: Operative sales company and owner of patents and the B brand (no more research)
- C-AG: operating company and owner of the C brand
- D-AG: operating company and owner of the D brand
The A-AG is to be retained as an intermediate holding company and, following integration, will hold and manage the foreign investments of the entire Group.
Intended integration steps:
- Case 1: B & C's brands and B-AG's patents are to be transferred to IP-AG as part of the integration.
- Case 2: The D brand is left with D-AG, but is discontinued in the medium term.
- Case 3: Transfer of the B-AG to Swiss AG.
- Case 4: The B-AG is to assume the function of a limited risk distributor.
- Case 5: Transfer of the C-AG & D-AG to the sub-HoldCo.
1.2 The question
Explain the tax consequences of integration steps 1-5 and transfer options from a tax perspective.
2. milestone payments
2.1 Case study
A-AG, a pharmaceutical company based in Rotkreuz, Zug, purchases an active pharmaceutical ingredient ("API") from B-AG, also based in the canton of Zug. The parties agree on a purchase price of CHF 50 million, due upon signing the contract. If the active pharmaceutical ingredient passes the Phase 1 clinical trial, a second payment of CHF 100 million will be due. The clinical phase 1 trial may take years to complete in practice and it has been agreed that if the compound fails to complete phase 1 after five years, the additional payment of CHF 100 million will not be due. No further payments are due for any subsequent positive completion of clinical phases 2 and 3.
How is the transaction to be treated for profit tax purposes at A AG and B AG,
- If successful Phase I testing is likely?
- If after 5 years Phase I is terminated without success?
3. participation deduction
3.1 Case study - Participation deduction for earn-out payment
Zug-based A-AG sells all shares in its subsidiary T-AG to K-AG for TCHF 3000 (base purchase price) in the 2018 financial year. It is contractually agreed between the parties that, should the T-AG generate a profit of at least TCHF 400 in the 2018 financial year, an earn-out payment of TCHF 500 will be due in the 2019 financial year.
Other relevant factors in TCHF:
T-AG generates a profit of TCHF 800 in the 2018 financial year. the conditions for the agreed earn-out payment are therefore met and B-AG pays the A-AG the agreed additional TCHF 500 in the 2019 financial year.
3.2 The question
How high is the participation deduction of A-AG in the 2018 financial year and in the 2019 financial year?
Would a higher basic purchase price without earn-out be more advantageous for the A-AG with regard to the participation deduction?
3.3 Case study - Participation deduction on sale of shares in a US LLC
Z Investment AG, domiciled in Zug, holds 50% of the shares in a US Limited Liability Company (hereinafter "US LLC"). The US LLC is treated as a transparent vehicle for US tax purposes and its business capital and business results are allocated to its shareholders on a pro rata basis for US tax purposes.
The initial contribution of Z Investment AG to the US LLC amounts to CHF 50,000. In the meantime, the US LLC has taken up debt financing of CHF 700,000. On the assets side, in addition to a bank balance of CHF 300,000, the US LLC has two participations in operating corporations, the A-OpCo (book value of CHF 300,000) and the B-OpCo (book value of CHF 400,000).
In addition to the shares in US LLC, Z Investment AG also holds a 20% interest in the operating ABC-AG with a book value of CHF 350,000 (corresponds to the cost price).
The following dividends will be paid in the 2019 financial year:
- Dividend of ABC-AG totalling CHF 200,000
- Dividend of A-OpCo totalling CHF 140,000
- Dividend of B-OpCo totalling CHF 80,000
In the 2020 financial year, US LLC will sell one of its investments, the shares in AOpCo, for a total of CHF 1,000,000. Unlike in the previous year, no dividends will be paid in the 2020 financial year.
How is the participation deduction at Z Investment AG calculated in fiscal year 2019 (dividends) and in fiscal year 2020 (capital gains)?
3.5 Case study - Participation deduction on sale of shares in a limited partnership
SwissCo, with its registered office in Zug, holds, together with other foreign investors, shares (50%) in a foreign limited partnership (hereinafter "LP"). LP, for its part, holds all shares in a (foreign) operating company (hereinafter "OpCo") as its only asset.
There are currently discussions among investors as to whether the shares in the foreign OpCo should be sold to a third party, but a decision has not yet been made. If a majority of the investors decide against selling OpCo, the management of SwissCo intends to sell the shares in LP directly. Accordingly, the management would like to clarify the impact on the participation deduction of the sale of the shares in LP and on the sale of all shares in OpCo by LP.
Can SwissCo claim the participation deduction when selling its shares in LP?
What are the tax consequences at SwissCo level in the alternative scenario of the sale of OpCo by the foreign LP?
4. transaction costs
4.1 Model case - facts
Analytics Holding AG, based in Rotkreuz, Zug, is the parent company of the Analytics Group, which is active in the manufacture and sale of analytical laboratory equipment. Analytics Holding AG is held by two natural persons (Mr. A and Mr. B), who are also members of the Board of Directors of Analytics Holding AG, each holding 50%. In view of their advanced age, A and B wish to sell their shares to an independent buyer. Käufer AG shows interest.
The group structure of the Analytics Group has grown historically. Accordingly, the structure is somewhat oversized and there are numerous subsidiaries with similar functions. A and B, as members of the Board of Directors of Analytics Holding AG, decide to reorganize or simplify the Group structure, among other things with a view to the possible sale of Analytics Holding AG. To this end, a strategic review of the Group was carried out in advance and the restructuring was subsequently implemented.
The following (consultant) costs are incurred in the course of the previous reorganization and sales:
On the instructions of A and B, all involved consultants invoice their costs directly to Analytics Holding AG (invoice recipient).
- What are the tax consequences if Analytics Holding AG bears the costs?
- What costs should be borne by A and B to avoid negative tax consequences?