CHOOSING A BUSINESS TRANSFER METHOD
Abusiness transfer is sometimes a necessary activity for companies, and the impact from tax normally plays an important role in how a transfer deal should be structured. If transferring shares isn’t viable, then the common questions you need to ask include:
How many options do we have for our business transfer? Which one should we use? Which one is the cheapest? For merging businesses, there are three common options in Thailand. Determining the best option depends on your current business and tax profiles. Below are the basic characteristics of each option.
Amalgamation: As outlined in the Civil and Commercial Code (CCC) and the Public Company Act, this involves Company A merging with Company B to create Company C, a new entity. Tax is exempt and the originating companies (A and B) are considered totally dissolved from a tax perspective after the merger. But transferring assets, liabilities, contracts, employees, etc will not be complicated as they will pass over to the new company via the law.
Entire business transfer (EBT): This is a method under the Revenue Code in which tax is exempt if the conditions are met. It requires the transferor to dissolve the company and enter liquidation after transferring all assets and liabilities. For example, Company A transfers its entire business to Company B, resulting in the liquidation of A, leaving only B. With this method, you must choose your surviving entity and legally novate existing contracts and transfer the entire business, including employees, to the surviving entity.
Normal business transfer (NBT): This involves an asset sale agreement where no special requirement is put in place. The parties have the flexibility to choose which items will be transferred and neither company is forced to liquidate. But the necessary legal steps must be taken to novate contracts and transfer selected assets and liabilities, as well as employees, to the acquirer.
Based on this information, many people may prefer an amalgamation or an EBT because taxes are exempt. But there are other important issues that must not be overlooked before choosing a final answer.
Costs that are not exempt: Not all costs can be eliminated, even under an amalgamation or an EBT. The existing costs might be significant depending on the nature of the business and assets. Common remaining costs include the registration fee for the transfer of land, buildings and vehicles. Carried-over tax bases and profiles: For both an amalgamation and an EBT, the transferee must assume and continue the transferor’s tax bases and profile when calculating its tax base. However, the transferor’s unused loss carried forward cannot be transferred in any case. Because the transferor must be dissolved after the transfer, any unused loss will be gone. This can make an amalgamation a less preferable option if the loss is significant. For an EBT, this must be factored in when deciding which entity will continue. Assets and liabilities that can’t be
transferred: It’s important to distinguish between assets and liabilities that are just practically difficult to transfer, and those that, by law, cannot be transferred (for example a non-transferable business licence). This factor has a definite impact on the choice of transfer method and on choosing the surviving entity.
For an EBT, if some elements are just too difficult to execute (getting full consent from all debtors and counterparties for example), you will need an alternative plan to manage these items. But if this would result in commercial limitations, an amalgamation or an NBT may be a more practical solution. Transfer of non-tax deductible provisions: Identifying which entity gets the tax deduction for the transfer of non-tax deductible provisions is necessary. Each transfer method may result in a different tax result. Careful interpretation and research of the Revenue Department’s views are recommended, because you don’t want to be in a position where significant tax deductions are with the dissolved entity, and there aren’t sufficient profits to utilise them.
Moreover, if the deduction is with the transferor, the transferee needs to plan ahead on how to segregate the provision from its own provisions so that a proper tax adjustment can be made in the future. Transfer value and purchase price
allocation: For an NBT, it’s crucial to show that the business is transferred at fair market value and to be able to explain how the purchase price was allocated. Different types of assets are subject to different types of indirect tax and may be subject to withholding tax. Understanding the nature, tax base and tax point of each item will reduce the risk of non-compliance.
Because every deal is unique, choosing a business transfer method needs careful analysis to minimise unnecessary costs and post-deal surprises. All parties must understand the consequences of each option and factor them in when negotiating and implementing the transfer.