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11.1. Direct and Indirect Tax Consequences of Re-Organizations

Business Transformation and Reorganization

Ireland's reorganization environment is quite open for both domestic and foreign companies and investors. Reorganization in Ireland can take place through a merger or acquisition.

Merger

Irish law allows for the merger of Irish resident enterprises other Irish enterprise, as well as the merger of Irish resident enterprises with enterprises resident in other EU member states under the Cross-border Mergers Directive.

Three types of merger are possible under the EU regime:

  • Merger by acquisition.
  • Merger by formation of a new company.
  • Merger by absorption

The transaction types allowed for mergers include shares for shares and assets for shares. Liquidation of a company involved in a merger in Ireland may be required. Mergers are typically eligible for relief of both stamp duty and capital gains tax for mergers involving share for share exchanges, and for mergers involving intra group asset transfers.

Acquisition

An acquisition in Ireland can take the form of a purchase or transfer of assets or a purchase of shares of a company.

M&A Tax Considerations

Transfer Taxes / Stamp Duty

The transfer or sale of assets is generally subject to stamp duty of 2%, unless transferred by delivery and consideration made in cash.

Share for asset exchanges are generally exempt from stamp duty if certain conditions are met. The conditions include:

  • A limited liability company must be registered or increase its share capital for the purpose of acquisition of the assets
  • The acquiring company must be incorporated in Ireland or another EU member state
  • At least 90% of the consideration for the asset acquisition must include the issuance of shares in the acquiring company to the target company or to the holder(s) of shares in the target company

The transfer or sale of shares is generally subject to stamp duty of 1% on the higher of the consideration or market value.

Share for share exchanges are generally exempt from stamp duty if certain conditions are met. The conditions include:

  • A limited liability company must be registered or increase its share capital for the purpose of acquisition of at least 90% of the share capital of the target company
  • The acquiring company must be incorporated in Ireland or another EU member state
  • At least 90% of the consideration for the share acquisition must include the issuance of shares in the acquiring company to the holder(s) of shares in the target company
  • The acquiring company must hold the shares of the target company for at least two years

For both assets and shares, the stamp duty basis is the higher of market value or consideration paid.

Value-Added Tax (VAT)

The transfer or sale of assets would normally be subject to VAT at a rate of up to 23%. In general though, relief from VAT is available if the transferred assets are part of a business continuing operation as a going concern.

The transfer or sale of shares is not subject to VAT.

Capital Gains

The transfer or sale of assets would normally be subject to capital gains tax (CGT) at a rate of 33%, although share for asset exchanges are typically able to obtain CGT relief. CGT relief is subject to the following conditions:

  • Both the target company and acquiring company must be resident Ireland or other EU member states
  • The acquiring company must issue shares in exchange for the assets to the shareholders of the target company (when shares are issued directly to the target company, CGT relief does not apply)

When CGT relief applies for asset transfer, the acquirer takes the assets at the original base cost of those assets to the target company.

The transfer or sale of shares is also subject to capital gains tax, although in a share for share transfer the capital gains tax is generally deferred until the acquire shares are later disposed of. Capital gains exemption may also apply for companies resident in Ireland that hold at least 5% of the shares of the target company, or is a member of a qualifying group. (Covered in Sec. 6.)

Depreciation

If capital allowances were claimed on acquired assets prior to acquisition, the sale can result in a recapture charge. Capital allowances are covered in Sec 6.3.

Capital allowance recapture is not relevant to share acquisitions.

In the case of a qualifying merger, capital allowances for assets will continue as if no transfer was made.

Cost-basis

In general, under an asset acquisition, the acquirer is able to step-up the cost-basis of the assets for tax purposes. Note, however that under certain conditions covered above under Capital Gains, the acquirer may not be able to step-up the cost-basis.

Under a share acquisition, step-up is not allowed.

Transfer of Tax Attributes

In the case of an asset acquisition, any unutilized losses of the target company will remain with the target company.

In the case of a share acquisition, any unutilized losses can be transferred to the acquirer and used to offset subsequent profits. Note, however, that the loss carry forward will not be allowed in the following to situations:

  • There is a change in both the ownership and nature of the acquired company's trade or business within 3 years of the acquisition
  • There is a change in ownership at any time the activity level of the acquired company becomes negligible and before any revival of the trade or business

Transfer of Liabilities and Business Risks

In the case of asset acquisitions, no liabilities or business risks of the target company will be transferred. In the case of share acquisitions, the liabilities and risks will be transferred.

Thin Capitalization

There are no thin capitalization rules in Ireland.