Merger and Acquisition Tax 667

MERGER AND ACQUISITION
The benefits and drawbacks of either shares or asset acquisition would depend on various
factors, including the tax attributes of the Target Company, the acquiring company, business fit
of the Target Company with the buyer, and most importantly, the commercial considerations.
In a share acquisition, the buyer may be exposed to liabilities and exposure in the Target
Company. As such, the buyer would need to carry out a due diligence exercise on the Target
Company’s business in a stock acquisition compared to an asset acquisition.
MERGER AND ACQUISITION : ACQUISITION OF SHARES
The main advantage of acquisition by shares is that the tax attributes such as
unabsorbed tax losses or tax incentives remain with the Target Company.
Generally, companies are allowed to carry forward their accumulated tax losses
( 7 years w.e.f from YA19) and unutilised capital allowances to be set off against
their future business income. Furthermore, companies that ceased operations
for several years may still utilise accumulated losses and unabsorbed capital
allowances to be set off against new business income.
However, with effect from the Year of Assessment 2006, accumulated tax losses
and unabsorbed capital allowances of a Target Company which is dormant shall
be disregarded in the event there is a change of more than 50% of the
shareholding in the Target Company.
MERGER AND ACQUISITION :
ACQUISITION OF SHARES
TRANSFERS OF SHARES ARE CAPITAL IN NATURE HENCE, NOT TAXABLE UNLESS IT
IS RPC SHARES WHICH WILL BE SUBJECT TO RPGT.
COMPANIES MAY APPLY FOR EXEMPTIONS UNDER PARA 17(1) OF THE RPGT ACT
1976 AND SECTION 15 OR 15A OF THE STAMPT DUTY ACT 1949:
◦ if the acquisition of shares or assets is in connection with a scheme of
amalgamation or reconstruction and the consideration comprises
substantially of shares in the transferee company; or
◦ if the shares or assets are transferred between associated companies (i.e.
there must be 90% direct or indirect relationship between the transferee and
the transferor).
ACQUISITION OF BUSINESS ASSETS
In an asset acquisition, any tax attributes such as unabsorbed tax losses and tax
incentives remain with the Target Company and may not be transferred to the
buyer.
Generally, unabsorbed tax losses and capital allowances of a Target Company
may not be transferred to the acquiring company in an asset acquisition.
Any tax incentives or exemption currently enjoyed by the Target Company will
unlikely be transferred to the acquiring company. Generally, the buyer will have
to submit a new application for tax incentives or exemptions upon acquiring the
business, if it is eligible.
In an asset acquisition, the buyer has the choice of determining the assets / liabilities to
be acquired. However, the buyer should still carry out a limited due diligence exercise
on the assets to be acquired.
For income tax purposes, transfer of fixed assets between RELATED parties may be
effected at the tax written down value of the assets. This means that the seller will not
have any taxable balancing charge or deductible balancing allowance arising from the
sale. The buyer will also be deemed to have acquired the assets at its tax written down
value. The transfer value of the fixed assets will be disregarded and the buyer would be
entitled to claim annual allowances based on the original acquisition cost of the fixed
assets but restricted to the tax written down values of the assets acquired. No initial
allowance may be claimed on these fixed assets.
TRANSFER OF REAL PROPERTIES SUBJECT TO RPGT AS WELL AS STAMP DUTY. HOWEVER MAY APPLY FOR
EXEMPTION UNDER PARA 17(1) OF RPGT Act 1976 AND SECTION 15/15A OF THE STAMP DUTY ACT 1949.
Financing of Acquisitions
ACQUISITION OF SHARES
◦ INTEREST EXPENSE IS SUBJECT TO INTEREST RESTRICTION AS LOAN IS USED
FOR INVESTMENT PURPOSE ( i.e ACQUIRING SHARES OF TARGET COMPANY)
◦ Interest incurred on funds used to acquire a business under an asset deal
should be fully tax deductible as the loan is used for business purpose ( e.g
buying the machineries of the target company instead of buying shares).

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MERGER AND ACQUISITION

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