Peculiarities of taxation in terms of acquisitions and mergers

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M&A transactions (mergers and acquisitions) is the process of combining the capital and other assets of two or more companies to consolidate operations and conduct common activities. As a rule, such transactions allow companies to increase their profits by expanding spheres of influence and consolidating the market.

Mergers and acquisitions are regulated by the law “On Joint Stock Companies”. A merger is the process of merging two or more companies that form a new legal entity. The newly created company receives all the rights and obligations of other organizations. In this case, liquidation can be implied with the subsequent transfer of assets.

A takeover is the joining of one legal entity to another. The difference lies in the fact that here one of the companies gets control over the assets of another company after its reorganization, as well as its rights and obligations.

One of the most pressing and difficult issues in the implementation of mergers and acquisitions is taxation. Not all entrepreneurs understand how the tax base is determined, taxes are accrued and paid. In this article we will look at this issue in more detail.

Tax administration in mergers and acquisitions

The purpose of mergers and acquisitions is to implement the interests of the participants who most influence the form of the transaction. To get the desired effect and profit, it is necessary to prepare an economic justification and assess tax and financial risks. The main instrument of transactions is the reorganization of working legal entities. In this case, the main risks for business are associated with the possibility of identifying unfulfilled tax obligations from the reorganized companies. That is why you need to know about the principles of paying taxes during reorganization.  

The Tax Code states that the legal successor of the reorganized company must pay taxes regardless of whether or not there is information about the debt. Also, the legal successor pays penalties and fines imposed on the reorganized legal entity before the completion of the reorganization. At the same time, the deadlines remain the same.

The transfer of rights and obligations is carried out on the basis of such documents:

• Transfer act – when merging, joining and converting.
• Separation balance – when allocating and dividing legal entities.

These documents contain data on the succession of all obligations of the reorganized company in respect of all its creditors and debtors. Thus, the documents directly indicate the amount of debt. It is possible that this amount will be inconclusive, since until the reorganization is completed, the legal entity can continue to carry out transactions and conduct operations. Moreover, it should be borne in mind that the information of the separation balance sheet and the transfer act are not reflected in accounting records. Thus, the reorganized firm, after the transfer of assets to the assignee, does not write them off from its balance sheet on the date of transfer. The legal successor does not have the right to reflect the received property on the specified date on its balance sheet.

Another risk is associated with a mismatch in the value of assets on the separation balance sheet and the transfer act. The fact is that a long period of time passes from the date of approval of these documents to the moment of valid state registration of reorganized firms. During this period, significant changes may occur with the property. This applies to depreciation or write-off as a result of damage. Thus, the cost is reduced. Therefore, by the time of state registration, the real state of affairs in terms of price and availability of fixed assets may not coincide with the documented one.

Types of taxes and payment specifics

When conducting mergers and acquisitions, it is important to know how to calculate and pay certain types of taxes:

• Income tax. In the case of a takeover or merger of companies, income tax may be distributed between the two companies depending on how the transaction was conducted. This may affect the size of the tax base and the tax debt of each of the companies.
• VAT. In the case of a takeover or merger of companies, VAT may be accounted for in different ways depending on the way the transaction is conducted. For example, if the transaction is carried out in the form of asset sales, VAT can be taken into account for each of the parties to the transaction.
• Property tax. Acquisitions and mergers of companies may also affect taxation in the real estate sector. For example, if one company acquires another that owns real estate, then this may lead to a change in the tax rate on this property.
• Personal income tax (personal income tax). In the case of a takeover or merger of companies, it may be necessary to revise the employee remuneration system. This may lead to a change in the amount of payroll tax deductions.
• Tax on the sale of assets. Depending on the transaction method, the asset tax may be accounted for in different ways. For example, if the transaction is carried out in the form of asset sales, the tax will be calculated for each party to the transaction.

These are just some of the features of taxation in terms of acquisitions and mergers of companies. It is important to understand that taxation can vary greatly depending on the type of transaction and other factors, so it is always recommended to get advice from a qualified tax consultant. VALEN specialists have extensive knowledge in the field of tax law, including taxation during M&A transactions.

Below we will consider the procedure for calculating and paying some taxes in more detail.

Property tax

The object of taxation is the property of the organization, which is the fixed assets. For companies participating in the reorganization, the composition of the property taxable object changes if the object is removed from the fixed assets or is registered. At the same time, those objects whose rights are not registered will be taken into account as incomplete capital investments.

If we talk about the reorganization of the company, this rule does not apply. The fact is that incomplete capital investments include the costs of construction and installation work, for the purchase of a building. The legal successor does not yet bear the costs of buying the property. Thus, when forming the first reporting, the volume of rights transferred to the new organization has already been determined. All transferred property is accounted for as part of fixed assets from the date of registration of the new organization and participates in the calculation of property tax.

Transport tax

The rules for the transfer of cars to the successor, or rather their non-compliance, may affect the order of taxation by transport tax.

A subject becomes a payer of transport tax if vehicles recognized as an object of taxation are registered in his name. Thus, the fact of registration of cars is important for paying the tax. The Federal Tax Service receives such information from the State Traffic Inspectorate. Until the former owner removes the cars from the register, he continues to be a payer of transport tax.

Thus, in order to exclude disputes with the Federal Tax Service, the reorganized company must transfer vehicles to another company in time in terms of vehicle registration.

Land tax

Land tax taxpayers are companies and individuals who own land or permanently (indefinitely) use the resource. As in the calculation of transport tax, information about registered land plots, rights and transactions with them, as well as about their owners, is submitted to the tax inspectorate by the bodies conducting the state land cadastre.

Thus, the fact of the obligation to pay taxes arises after the state re-registration of the land plot. The beginning of the period is the date of making such an entry in the Unified State Register of Rights to Immovable Property and Transactions with It (EGRN).

It is important to understand that in the absence of title documents for land and the absence of long-term re-registration, this fact is considered as tax evasion. At the same time, the tax base is determined on the basis of information from the state land cadastre. And if there is no data on a specific land plot, then the amount of tax cannot be determined. It is important to restore lost documents in time to avoid litigation.

How to file a tax return

A company that stops working as a result of reorganization cannot file a tax return before the reorganization is completed, since the tax period has not been completed. Until the end of the period and the closure of the company, it is impossible to reliably determine the amount of taxes to be paid. The date of completion of the reorganization means the term of termination of the company. A company whose information is not contained in the Unified State Register of Legal Entities also cannot file a declaration.

Who should take on such obligations? The successor company. Such firms file tax returns on their own behalf and at their place of registration. It is necessary to submit an updated declaration for the reorganized organization, including tax periods in which the successor has not yet been created.

Thus, the legal successor is obliged to submit a tax return on income tax for the reorganized companies. The document is submitted at the location of the company or in electronic form. The title page and other sheets of the declaration indicate the details of the reorganized organization.

It is important to know that the information of the dividing balance sheet or the transfer act may not be sufficient to determine the full amounts of taxes required to be paid by each of the legal successors. That is why, at the decision-making stage, it is necessary to settle the issues of succession to taxes during the transition period.

If a joint-stock company is undergoing reorganization, then the transfer act and the separation balance sheet must contain information on the procedure for determining the successor. If the type, composition, and value of assets of the company being closed change during the reorganization process, the procedure for determining the legal successor may become invalid.

It is important to understand that most of the rights are transferred to the parent company. This means that the property is transferred from balance to balance. Thus, for one company the object will cease to exist, for another it will arise. The same thing happens with the obligation to pay taxes. One company loses it, another acquires it. The problem of accurately determining the moment of occurrence of the object of taxation is relevant for all property taxes: corporate property tax, transport tax, land tax.

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