Tax under different Mode of Real Estate M&A

Abstract：M&A is a short-cut to business development, with the real-estate accounts much heavier in the businesses’ assets, those investors who want to expand business by acquiring asset or equity should think things through about tax issues under these two different modes of M&A.

Asset acquisition

Asset acquisition refers that one party purchase from the other party who have the real-estate property with consideration in the form of cash, non-cash or combination of both. In this case, the purchaser is transferee as well, who obtains the psychical property by acquisition. Once the business is done, only the ownership to property changes while the transferor’s share structure would not be affected.

The good point of above mode is that purchaser’s obligation provides in contract is simple and explicit, who only gives the consideration stipulates in contract, any risks beyond that wouldn’t impact the purchaser; in addition to this, transferee could bill his payment for consideration into accounting, then this payment cost could be amortized in the subsequent tax term to reduce the tax payable due in each term. However, the real estate project generally runs through many processes and involves a long period, any defects incurred in this process will be probably arising to affect the property title change to purchaser (transferee), moreover, tax contribution is comparatively large including but not limited to VAT, Deed, Income Tax. etc. for purchaser.

Equity acquisition

This mode refers one business achieves its goal to control another business who have real-estate property via purchasing the other party’s share, similarly, consideration could be cash, non-cash or combination of both. The ownership of the property keeps the same after the contraction is done, While the transferor’s share structure varies due to new investors participating.

Equity acquisition runs through simpler formalities in comparison with the asset acquisition, purchaser could gain effective control on the real estate once the purchasing is completed. Since risk exists in policy due to different share structure requirement of different business type, besides, investor would assume liability with the original shareholders such as debt of transferor, Investor should have knowledge of government policy and conduct a due diligence investigation of target business before purchasing decision is made, tax is not a heavy burden for purchaser to bear under this mode.

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Which option is better for you?

Each of above-mentioned modes has its own (dis)advantages, contracting parties should decide which option taken depending upon their actual status, residency’s legal systems and tax contribution.etc.

If the purchaser gives more emphasis on the transferor’s quality resources while reluctant to take operation risks, burden of staff or existing debts, and the transferor hasn’t much valued intellectual property, then purchaser could take the way of asset acquisition; should the purchaser still need the assistance from the targeting company on human resources, operation qualification to assure the real estate can still be active as a going concern, equity acquisition could be a better option.

Uncertain factors exists in the transaction process

If the targeting business has complex share structure among its many shareholders , limitation on share transferring would increase the transaction cost and bring the uncertainty to transaction results, or if targeting business involves complicated creditor’s liabilities, the purchaser would have possibility to face such challenges, then equity acquisition would not be recommended.

A few legal documents and policies are issued to encourage assets recombination these years, aiming to reduce the merging cost, especially the tax cost. It is good news for those business who can meet such qualifications, VAT, Deed would not be imposed on real estate property involves in transferring.

Advice from Real Estate and Facilities Team of DOCVIT :

Business are advised to design a transaction mode and structure based on due diligence report of targeting business, in comply with the requirements listed in tax-favorable documents, combining above-discussed two measures, to realize the cost optimization with the legal risk controllable.

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