When planning an M&A deal, tax aspects matter. 

Sellers usually prefer a share sale. That way shareholders may pay limited capital gains tax but this needs checking in each country concerned.

Employees on a stock option plan also want to minimize their income tax/capital gains tax/social security liability. And they are afraid they may be let go.

But the buyers typically prefer to buy the main assets – which can increase the overall tax liability considerable for the sellers..

Sometimes buyers, especially those listed on a stock exchange, pay with their own stock (shares), not cash. There may even be a lock-up period or instalments. If so, the sellers can the sellers defer their tax hit until cash arrives? Often they can’t. Detailed rules exist and advance planning is vital for both sides.

Moreover, the buyer must sometimes withhold tax – from the sale consideration unless the sellers produce official clearance for any lesser rate of tax.

And make sure you check out all the taxes with advisors in each country concerned. Aside from income tax and capital gains tax, will other taxes have any implications? Other taxes may include: VAT/GST/Sales Tax, stamp duties, social security and so forth.

We recall one major deal where the rate of VAT on share (not cash) consideration wasn’t clear – in the end the consideration had to be changed, the VAT law had to be amended

. In another case, a VAT uncertainty to the tune of several billions of dollars had to be clarified in good time, before agreeing and signing anything.

We also recall a case where the buyer acquired the share capital of the acquired company and sought to strip out the intellectual property (IP). In the US this should be tax free if done under Internal Revenue Code Section 338 – upvaluing the IP cost to the cost of the newly acquired shares. But in the acquired company’s country the IP extraction triggered multiple tax surprises – capital gains taxes and dividend withholding tax. The solution was complex and partly involved retaining the work force of the acquired company.

International groups may face additional challenges, especially from newer initiatives of the OECD relating to “base erosion and profit shifting” (BEPS). For larger purchasers, these challenges may include:

• Pillar 1 re-allocating profit and tax to different countries (but stalled at present?)
• Pillar 2 minimum corporate income tax 15% and local comparable taxes (not stalled)

For international groups of all sizes, does the OECD Multilateral Instrument (MLI) have implications. The MLI catches e-commerce operations – foreign suppliers may be liable to tax in the country where consumers are located, even if the supplier has no physical presence in that country, it sells over the internet. This mainly impacts e-commerce suppliers that use a warehouse or certain types of local agent in the consumers’ country. Reference should be made to the MLI and tax treaty arrangements of the countries concerned, including any “synthesized” tax treaty (convention). International tax advisors should be consulted (we can help with this if requested).

Next Steps include:

• Start planning the ingredients of your proposed acquisition or sale based on the above.
• The type of deal impacts the immediate tax treatment.
• The deal may also be a good time to reorganize and improve the future annual bottom line. But it may be difficult taxwise for the buyer to buy shares and then strip out the assets.
• What works in one country may not work in other countries. Inquiry with local tax experts is needed, so is coordination.
• Not only income tax and capital gains tax matter. Don’t forget VAT, stamp duty, employee taxes and social security, ESOP taxes, etc.
• Many of the surprises may be predictable with proper preparation.
• What is the other side really after? Can you read between the lines?
• Consult legal and professional advisors in each country concerned in specific cases.
• Contact us if you are looking for an M&A candidate to buy or sell.
• Contact us if you have your candidate and want to prepare for an M&A deal or consult on the international tax side.

© Leon Harris 19.5.25, all rights reserved.  Email: [email protected],  Cell: +972-54-6449398