Tax Issues in Mergers and Acquisitions:

YouTube Link: https://www.youtube.com/watch?v=L4TvmpHwPwY

Key Learnings:

A. Tax Consequences for Target Shareholders:

1. Tax implications are important in any mergers and acquisition deal. The deal can be tax-free or
taxable depending on various factors.

2. Depending on the deal structure – all stock deal or All cash deal or combination of both- the tax
implications arise.

3. In all cash deal, the shareholders of a target company are liable to pay capital gains tax if the cash
offered in exchange of shares exceeds the buying price of the share of target company for
shareholders. For this reason, bidders expect a higher premium in all cash deals. While all cash deal
may not be viable for an acquiring company.

4. In all stock deal, there won’t be tax consequences for shareholders of target company.

5. Mergers and acquisition deals are structures in such a way that there would be no tax
consequences for shareholders of a target company.

B. Taxable and Non-Taxable Merger and Tax Attributes of Target:

1. Mergers can be taxable or non-taxable. One of the motives behind acquiring a company can be to
reduce tax burdens for a profitable acquirer. If target company is having net operating losses or tax
losses on its financial books, the acquirer can take advantage of this to offset its tax consequences.

2. In case of purchase of only assets (instead of buying the whole company) of a target company or
target company doesn’t continue its operations after merger, tax attributes like tax losses would go
away. Deals are structures in such a way that the acquirer gets to retain the tax attributes of a target
company (if it has tax losses).

3. Section 382 of the Internal Revenue Code in the US limits the tax losses that can be absorbed by
acquirers or offset after the ownership change of a target company.

C. Step Up in Basis:

1. The acquirer gets a new basis in target’s assets. Usually, the assets are revalued and the acquires
sets a basis such that there would be higher depreciation on the target’s assets.

2. Higher depreciation leads to reduction in net operating income on which taxes are to be paid.

Learnings from Discussion and Additional Reading (In context of India)

1. Modes of M&A transactions in India

a. Share Acquisition

b. Asset Acquisition – i. acquisition of entire business ii. Acquisition of individual asset

c. Merger

d. Demerger
2. Tax consequences arising out the deal are different for different types of deals.

3. Impact for Acquirer’s perspective

 Impact on tax losses:

The effect on continuity of any accumulated tax losses is decided by whether the target
company whose shares are transferred is ‘a company in whom the public is substantially
interested’ or not. The tax law lays down certain conditions for the company to be classified
as a ‘company in which the public is substantially interested’.

In a slump sale, the tax losses are not transferred to the transferee entity.

 Step Up of Cost Base:

In a share acquisition, the cost base of assets of the company for tax deductibility does not
change, since there is no change in the status of the company. However, any premium paid
by the buyer for acquisition of the shares is not incorporated into the value of the block of
assets of the company whose shares are acquired. The premium is available to the buyer as
a cost of acquisition of the shares and is deductible for the purpose of income tax only at the
time of transfer of the shares by the buyer.

In a slump sale, the transferee is allowed to allocate the lump sum consideration to the
individual assets and liabilities acquired based on their fair value.