Investors in an asset deal must consider where and how the assets acquired are to be allocated, despite the more limited possibilities compared to share deals and despite the fact that, on business grounds, it is clear in advance which legal entity is acting as the investor. Investors must consider the future tax implications in the event of onward sale already during the acquisition stage. Any subsequent onward transfer will result in unnecessary transaction costs and taxes.
Taxes related to asset deals
If the legal implications of a M&A deal are considered in due time, the following questions will be posed in relation to a potential asset deal:
- What is the best way to sell a business division or an asset?
- When is prior divestment into an internally controlled legal entity advantageous and when is direct sale under an asset deal appropriate?
These questions will have to be posed by every decision maker.
Particular consideration should be given to risks under tax law, namely the problem of “Liquidation and Re-establishment” in cases involving a simultaneous change in all partners.
With regard to taxes, a difference should be made between the following:
- tax consequences following departure with cash settlement
- tax consequences following departure with settlement in tangible assets
- tax consequences following transfer of hidden reserves.
The refinancing of the departure settlement is often associated with the acceptance of a new partner. If and insofar as any direct payments have occurred or should occur between the incoming and outgoing partners, these must be raised and examined on a case-by-case basis.
Tax consequences following departure with cash settlement
The outgoing partner will realise the assets and liabilities of the partnership pro rata with his stake. Accordingly, the difference between the settlement claim and the income tax value of his capital share will constitute a taxable liquidation gain.
He will owe:
- direct federal tax
- cantonal tax
- AHV/IV/EO social contributions.
- In cases involving real estate in a canton adopting the monistic system of real estate capital gains tax: where appropriate, real estate capital gains tax
Tax consequences following departure with settlement in tangible assets
The adoption of partnership assets in order to redeem the settlement claim does not alter the tax liability on the liquidation gain. On the contrary: it is still necessary to consider a realisation of the increase in hidden reserves on the assets concerned!
Tax liability on realised hidden reserves
Are realised hidden reserves liable to taxation only on the outgoing partner or pro rata on all partners? This point is disputed within the literature and in practice:
- pro rata taxation for all partners
- taxation of the remaining partners only where the hidden reserves of the remaining partners are higher than those of the outgoing partner.
- see Duss Marco / Greter Marco / von Ah Julia, Die Besteuerung Selbständigerwerbender [The Taxation of Self-Employed Workers], Zurich 2004, S. 145.
If assets are removed from a simple partnership and transferred to another partnership of the outgoing partner, this may occur in a tax-neutral manner if the income tax values are taken on and carried over (see Article 19(1)(a) oft he Swiss Federal Law on the Direct Federal Tax).
Article 19 DBG: Restructuring
1 The hidden reserves of a business conducted in person (sole tradership or a partnership) shall not be subject to taxation in the event of restructuring, in particular in cases involving mergers, demergers or transformations, provided that tax liability in Switzerland continues and the previous relevant values for income tax purposes are carried over:
a. in the event of the transfer of assets to another business conducted in person;
b. in the event of the transfer of a business or part of a business to a legal person;
c. in the event of the exchange of participation of membership rights upon restructuring pursuant to Article 61(1) or of associations similar to mergers.
2 In the event of restructuring pursuant to paragraph 1(b), the hidden reserves transferred within the procedure shall be taxed subsequently pursuant to Articles 151–153, if during the five years following restructuring the participation or membership rights are sold at a price exceeding that of the equity transferred which is relevant for tax purposes; in such cases, the legal person may treat corresponding hidden reserves which have already been taxed as profit.
3 Paragraphs 1 and 2 shall apply mutatis mutandis to businesses under common ownership.
The preliminary question is once again whether the new partner:
- enters with an identical stake
- is accepted with a different stake (compared to the departing partner) .
Change of partner with identical stake
No tax consequences for the incoming partner.
On an accounting level, the incoming partner is entitled to cover the stake acquired from the outgoing partner
- out of hidden reserves and
this means that they are no longer hidden, but rather disclosed, which has the following consequences:
- a correspondingly higher capital account for the new partner
- a different income tax value for the old and the new partner
- complication of classification, accounting and determination of profits
- differentiation between classification of reserves
- old reserves from the period prior to the change of partner
- new reserves for the period following the change of partner
- maintenance of shadow accounts for old and new reserves
- determination of profits where realised subsequently
- old reserves only to be taxed through the old partner
- new reserves to be taxed pro rata through all partners.
- differentiation between classification of reserves
Equalisation by emergence of hidden reserves also in relation to existing partners
- in order to avoid shadow accounting and complications in the determination of profits, the existing partners may revalue the hidden reserves irrespective of the original goodwill, with the result that all will have the same income tax values with regard to the partnership.
- since the emergence of these hidden reserves will result in a taxable profit on revaluation along with a duty to pay social contributions for existing partners, it is expected that this equalisation variant will not be encountered frequently in practice.
Change of partner with different stake
If the new stake differs from that of the original partner, then logically speaking there are two possible variants:
- the partnership stake of the new partner is higher
- the partnership stake of the new partner is lower.
Higher partnership stake:
The tax consequences in this case are dependent upon how the legal transaction is structured:
- capital contribution with higher stake only with entitlement to profits
- capital contribution with higher stake with entitlement to profits and to hidden reserves of the partnership.
Capital contribution only with entitlement to profits
- for existing partners: no tax consequences
- for new partners: no income tax or social contributions chargeable upon realisation of old hidden reserves
- disadvantage: difference in calculation of profits for existing and new partners
Capital contribution with entitlement to profits and to hidden reserves of the partnership
- for exiting partners:
- capital contribution of new partner to hidden reserves by cash settlement to old partner or credit to his private account held with the partnership
- taxable capital gain
- direct federal tax
- income tax
- AHV/IV/EO social contributions
- for new partner: no tax implications
- no shadow accounting
- no complications in the determination of profits
- identical income tax values for the partnership, irrespective of stake.
Lower partnership stake:
The rules set out above governing a change of partner with an identical stake apply.