A company or group may rearrange its business activities or ownership structures by merging with another company; acquiring another company or reorganising its corporate structure.
These transactions usually involve the transfer or exchange of shares and/or the transfer of business assets or undertakings in return for shares. These transactions may be classed as “reconstructions” or “amalgamations” or “paper for paper” transactions as no actual cash passes between the parties. The exchange of shares or the transfer of assets are disposals for capital gains tax purposes.
The following taxes should be considered in any company re-organisation:-
- Capital Gains Tax
- Stamp Duty
- Corporation Tax
- VAT
- Capital Allowances
Reliefs
If the transactions are structured in a particular way, the parties may be able to claim reliefs from some of the aforementioned taxes. The main Reconstruction & Amalgamation Relief are relief from Capital Gains Tax are contained in Section 586 & 587 of Taxes Consolidation Act 1997 and the relief from Stamp Duty are in Section 80 of Stamp Duties Consolidation Act 1999. In order to claim the various reliefs appropriate tax advice from a qualified tax advisor and Revenue approval should be obtained prior to commencing the restructure.
Reconstruction & Amalgamations
Tax Briefing 48 issued by the Revenue Commissioners defines a reconstruction and amalgamation as:-
A Reconstruction takes place where an “undertaking” carried on by a company is in substance preserved and transferred to another company consisting substantially of the same shareholders (“substantial identity of shareholding”).
An Amalgamation is the blending of two or more existing undertaking into one undertaking, the shareholders of each blending company becoming substantially the shareholders in the company, which carries on the blended undertaking.
The basic philosophy behind schemes of reconstruction and amalgamation is that the original shareholders keep an interest in the original business.
Company Reconstructions or Amalgamations are typically effected by:
- Share for Share Exchange
- Share for Undertaking Exchange
I will now examine each transaction from a company law & company secretarial perspective.
Share for Share Exchange
A Share for Share Exchange is where a company (Acquiring Company) issues shares or debentures to a person in exchange for shares or debentures of another company (Target Company). Section 586 TCA 1997 treats the exchange of shares as if both companies are the same company and the exchange of shares is a re-organisation of its share capital. The exchange shall not be deemed to be a disposal for capital gains tax purposes.
The main conditions to obtain the Section 80 Stamp Duty relief include:-
- The parties must confirm to the Revenue that there is a bona fide scheme of reconstruction of any company or companies or the amalgamation of any companies.
- The scheme must be affected for bona fide commercial reasons and not as part of a scheme or arrangement and the main purpose of which is tax avoidance.
- The acquiring company must be a limited liability company incorporated in Ireland or another EU State.
- The target company may be incorporated anywhere in the world (but a target company which does not have a share capital structure may prove difficulty obtaining the relief).
- The acquiring company must either be incorporated with an object in its memorandum of association to acquire, or passes a resolution authorising an increase in its nominal or issued share capital for the purpose of acquiring, at least 90% of the issued shares in the target company.
- Cash and other forms of non-share consideration is restricted to 10% of the total consideration. Any liabilities assumed or discharged by the acquiring company are ignored for these purposes.
- The relief will be clawed back if the statutory declaration is false or the acquiring company ceases within two years to be the beneficial owner of the shares acquired in the target company otherwise in consequence of reconstruction, amalgamation or liquidation.
- Shares must be allotted and issued by the acquiring company to the registered shareholders in consideration and exchange for their shares in the target company. The proportions must be maintained but not necessarily that the acquiring company issues the same number of shares.
- A statutory declaration must be sworn by a solicitor for the company setting out the details of the transaction.
- The acquiring company must have control of the target company following the share for share exchange i.e. there is the same identity of shareholders in the acquiring company as there was in the target company following the share for share exchange.
Company Secretarial Steps
- Company Due Diligence on both companies
- Amend the Memorandum and Articles of Association of the acquiring company
- Transfer of shares in the target company from registered holders to acquiring company
- Allotment of shares in the acquiring company to registered shareholders in the target company
- Section 80 Statutory Declaration sworn by a solicitor
- The instrument in respect to which the relief is being claimed must be executed within 12 months of the date of registration of the acquiring company or the date of the resolution increasing the nominal share capital of the acquiring company.
- Issues share certificates & update the Registers of both companies
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Share For Undertaking
A Share for Undertaking is where a company (Acquiring Company) issues shares to either a company (Target Company) (2 way swap) or to the shareholders in the Target Company (3 way swap) in exchange for the undertaking or part of the undertaking of the Target Company. An undertaking must be a business and in the case of a part of an undertaking it must be capable of comprising a separate business.
The main conditions to obtain the Section 80 Stamp Duty relief include:-
- The parties must confirm to the Revenue that there the scheme is for the bona fide reconstruction of any company or companies or the amalgamation of any companies.
- The scheme must be affected for bona fide commercial reasons and not as part of a scheme or arrangement and the main purpose of which is tax avoidance.
- The acquiring company must be a limited liability company incorporated in Ireland or another EU State.
- The target company may be incorporated anywhere in the world.
- The acquiring company must either be incorporated with an object in its memorandum of association to acquire, or passes a resolution authorising an increase in its nominal or issued share capital for the purpose of acquiring, the undertaking or part of the undertaking of the target company.
- Cash and other forms of non-share consideration is restricted to 10% of the total consideration. Any liabilities assumed or discharged by the acquiring company are ignored for these purposes.
- The relief will be clawed back if the target company ceases within two years to be the beneficial owner of the shares issued to it by the acquiring company otherwise in consequence of reconstruction, amalgamation or liquidation.
- Shares must be allotted and issued by the acquiring company to the registered shareholders in the target company( applicable to three party share for undertaking swaps) or to the target company (applicable to two party share for undertaking swaps) in consideration for the undertaking in the target company.
- A statutory declaration must be sworn by a solicitor for the company
- The company has sufficient distributable profits to ensure the transaction does not result in a breach of Section 45 Companies (Amendment) Act 1983. Accounts should be prepared to confirm this position and confirmed by the Auditors.
Company Secretarial Steps
- Company Due Diligence on both companies
- Amend the Memorandum and Articles of Association of the acquiring company
- Allotment of shares in the acquiring company to either the registered shareholders in the target company or to the target company
- Section 80 Statutory Declaration sworn by a solicitor
- Issues share certificates & update the Registers of both companies
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It is vitally important that the proper steps are completed and recorded in order to obtain the various reliefs and that the changes in shareholding are recorded in the Registers of the companies involved.