Tax Considerations in Mergers & Acquisitions

Mergers and Acquisitions (“M&A”) are an effective way for businesses seeking to expand their operations in Singapore and internationally. While M&A may provide opportunities for businesses to expand their operations, leverage on economies of scale and gain an edge over their competitors, it is crucial for businesses to incorporate holistic tax planning into their M&A decision-making process and be aware of the evolving tax landscape in Singapore.

Choosing the Right Transaction Structure – Share Acquisition or Asset Acquisition

An M&A transaction may be structured either as a share acquisition or asset acquisition, or a combination of share / asset acquisition. From a tax perspective, a potential buyer or investor should review the attributes of the target entity and assess the ability to preserve these attributes, and the tax implications arising from their transfer.

Tax Attributes of the Target Company

Applicability of the M&A Allowance Scheme

One of the key tax considerations that Singapore investors should consider is whether they can take advantage of the M&A Allowance Scheme, to bring about tax savings alongside the M&A transaction.

This would require consideration of the acquisition structure, and whether the eligibility conditions of the acquiring company, acquiring subsidiary (where applicable) and target entity can be met.

Under the M&A allowance scheme, a buyer would be eligible to claim M&A allowance over a 5-year period, based on 25% of the value of acquisition (capped at S$40 million), for qualifying share acquisitions made from 1 April 2016 to 31 December 2025. The maximum M&A allowance a business can claim is capped at S$10 million for each year of assessment (“YA”) for all qualifying share acquisitions executed in the basis period for that YA.

To qualify, the acquiring company must acquire a minimum shareholding in the target company – either 20% of ordinary shares in the target or 50% of the ordinary shares in the target, depending on the conditions. It must also be incorporated and resident in Singapore, carry on a trade or business in Singapore on the date of acquisition, have at least 3 local employees (excluding directors) throughout the 12-month period prior to acquisition and must not be connected to the target for at least 2 years prior to acquisition.

The target entity must also be carrying on a trade, whether in Singapore or elsewhere and have at least 3 employees working for the company throughout the 12-month period prior to acquisition.

The M&A allowance scheme is only available for qualifying share acquisitions and is a key tax benefit that companies can take advantage of when buying shares in a target entity. In evaluating a proposed M&A transaction, investors should therefore consider how to structure the acquisition to take advantage of the M&A Allowance Scheme, and whether the target entity has the relevant attributes to enable them to qualify for the benefits under the scheme. If so, it may be worth to consider acquiring the shares of the target entity, to maximize tax savings through the M&A allowance scheme. While the scheme is in effect until 31 December 2025, we are hopeful that this scheme will be extended as Singapore aims to encourage more Singapore companies to scale up and expand through M&A.

Unutilised Tax Losses and Capital Allowances

Another tax attribute to consider would be whether the target has unutilized tax losses and capital allowances, available for carry forward to set off against future taxable profits. A share acquisition may be considered when looking at the long-term preservation of these unutilized tax losses and capital allowances. Under current tax rules, one of the conditions for a company to offset prior years’ unutilized tax losses, capital allowances and donations against current year profits, is that there must not be a substantial change in its shareholders and shareholdings at the ultimate holding company level, on the relevant dates of comparison. While the acquisition of shares in a target may result in a substantial change in shareholdings, an application for waiver of the substantial shareholding test may be made to the Inland Revenue Authority of Singapore, to preserve these unutilized tax loss items. A waiver application would likely be successful if it can be shown that the substantial change in shareholders occurred for bona fide commercial reasons and is not tax motivated.

In addition, within the context of a Singapore Group, a share acquisition of a target entity may also allow for the investor to enjoy benefits under the group relief framework, subject to the satisfaction of the shareholding requirements and availability of current year unutilized tax loss items.

Investors should therefore look at the current and intended outcome of the group holding structure and assess whether an investment through an acquisition of shares in the target can achieve a more efficient holding structure from a tax perspective.

Assets to be Transferred and Stamp Duty Implications

It is important for investors to consider the assets to be transferred in a potential M&A transaction, and the relevant transfer taxes applicable, such as stamp duties.

Stamp duty may be applicable on the purchase of certain assets such as real estate or immovable property. For purchase of immovable property in Singapore, buyer’s stamp duty (“BSD”) is payable at graduated rates on the higher of the purchase consideration or market value of the property. For residential properties, the BSD ranges from 1% to 6% for purchases made on or after 15 February 2023, whereas for non-residential properties, the BSD ranges from 1% to 5% for purchases made on or after 15 February 2023.

For the transfer of residential properties, Additional Buyer’s Stamp Duty (“ABSD”) may also be applicable. For acquisitions of any residential property in Singapore made on or after 27 April 2023 by non-individual entities, ABSD would be applicable at the rate of 65%. For individuals, the ABSD rates range from 0% to 60% depending on the profile of the individual (i.e. whether Singapore citizen, Permanent Resident or Foreigner, and whether 1st, 2nd, 3rd and subsequent residential property).

Investors should also be mindful of transfer taxes on the subsequent sale of such properties. In Singapore, Seller’s Stamp Duty (“SSD”) is applicable on residential property acquired on and after 20 February 2010 and disposed within certain duration, as well as industrial property acquired on and after 12 January 2013 and disposed within certain duration.

Currently, the SSD rates range from 0% to 12% for acquisition of residential properties made on and after 11 March 2017. For industrial properties, the SSD rates range from 0% to 15% for acquisitions made on and after 12 January 2013. The rates vary depending on the duration of the holding period. A shorter holding period would most likely attract a higher SSD.

In the case of a transfer of shares in a Singapore company, stamp duty is currently payable at 0.2% on the higher of consideration paid or market value of the shares. Additional Conveyance Duty (“ACD”) is also applicable on a qualifying transfer of equity interests in a Property Holding Entity that owns primarily residential properties in Singapore.

Notwithstanding the above, relief and remission from stamp duty may be applicable, subject to application by the buyer and the satisfaction of conditions under the Stamp Duties Act.

Transfer taxes such as stamp duties are likely to add to the overall costs of M&A transactions, and it is therefore prudent for investors to fully understand the applicable transfer taxes in determining the right transaction structure.

Exit Tax Considerations

The subsequent sale of shares or assets may not be taxable in Singapore, on the condition that these are capital gains. However, whether receipts are of an income or capital nature would depend on facts of the case and would generally depend on various factors which the taxpayer would have to support, such as the badges of trade.

However, gains derived from the sale of shares may also be protected under the Section 13W safe harbor provisions. Under Section 13W of the Singapore Income Tax Act (“SITA”), the gains derived by a divesting company from the disposal of ordinary shares in an investee company (be it incorporated in Singapore or elsewhere) made during the period from 1 June 2012 to 31 December 2027 are exempt from Singapore income tax, provided the following conditions are met:

Divesting company held at least 20% of the ordinary shares in an investee company for a continuous period of at least 24 months prior to the date of share disposal
Not an excluded divesting company: Gains from the disposal of shares must not be included as part of income taxable under Section 26 of the SITA
Not an excluded investee company: not related to a disposal of shares in an unlisted investee company (on or after 1 June 2022) that is in the business of trading, holding or development of immovable properties, whether in Singapore or elsewhere, unless certain exceptions apply.

Investors should thus consider the investment horizon and factor in potential exit taxes and tax savings as part of the decision-making process in an M&A deal. For Singapore tax purposes, investors should consider the benefits of the certainty of non-taxation of gains on disposal of equity investments under Section 13W of the SITA, when deciding between a share or asset acquisition.

Other tax attributes and factors

Risk appetite	Whether an investor intends to acquire shares or specific assets of an investee would also largely depend on the investor’s risk appetite. Where interest is focused on a particular business segment of the target, an investor may consider acquiring only that business segment. An acquisition of shares would mean acquiring the equity of the target entity, which may have various hidden risks and liabilities. Focusing on acquiring a business segment would therefore help an investor to manage risks and limit potential liabilities to those related to assets acquired.
Applicability of capital allowances and purchase price allocation	In the case of an asset deal, investors should also review and assess the nature of assets transferred and evaluate the possible tax savings through the availability of capital allowance claims on qualifying plant and machinery. The acquisition of such assets would thus provide the investor with potential tax savings over time through capital allowances which can be used to offset taxable profits. It is therefore necessary for investors to also review the purchase price allocation to ensure the value of assets are reasonably reflected in the sale and purchase agreement. For fixed assets, the purchase price should be allocated based on fair value, reflecting the amount that can be exchanged between knowledgeable, willing parties in an arm’s length transaction.
Goods and Services Tax (“GST”)	Indirect taxes such as GST should also be considered in deciding between acquiring shares or assets in an investee. For Singapore tax purposes, the sale of shares is an exempt supply, and GST need not be charged. GST would also not be chargeable on the transfer of assets, to the extent that these assets are part of the transfer of a business (whole or part thereof) as a going concern.
Deductibility of financing costs	Where debt financing is used to fund an M&A, an investor may also wish to consider the tax deductibility of such financing costs in an asset acquisition as opposed to a share acquisition. For Singapore income tax purposes, interest is deductible on capital employed to acquire income, by virtue of Section 14(1)(a) of the SITA. Hence, where interest is incurred on borrowings used to fund capital expenditure which is used to generate income for the Company (i.e. fixed assets), such interest cost should be tax deductible. However, where the borrowings are used to fund purchase of shares, interest deductibility would be restricted to income generated from the purchase of shares (i.e. dividend income), which is largely exempt under Singapore income tax regulations. Hence, the tax deductibility of interest costs may be more restricted to an investor in a share acquisition as opposed to an asset acquisition.
Tax Incentives	Investors should also consider the availability and applicability of tax incentive schemes in their M&A planning process. Some examples of Singapore tax incentives available for specific industries or activities, include the Global Trader Programme, Development and Expansion Incentive Scheme, Finance and Treasury Centre Incentive Scheme, or Maritime Sector Incentive – Approved International Shipping Enterprise Incentive Scheme. These incentive schemes would generally require an application to Singapore Government agencies and an applicant must present a business plan, showing the quantum of local business spending, projected revenue, or extent of fixed asset investments in Singapore, among various requirements. A buyer may thus evaluate how the acquisition of specific business segments or shares of a target could help to boost its ability to utilize these tax incentive schemes to enhance the post-transaction tax position and create long-term tax savings.

Conclusion

While M&A provides businesses with exciting growth prospects, it is important that proper tax planning be incorporated into M&A discussions and the deal-making process, so that a transaction can help maximise tax savings and reduce tax costs for businesses. Understanding the evolving tax regulations relevant to an M&A transaction would potentially help businesses to minimize tax risks and optimize the post-acquisition tax position, as part of achieving their strategic objectives.

It is also important for investors to consider performing a tax due diligence on the potential target company. This would help to uncover various attributes which will provide the investor with more information on the tax risks and implications associated with the purchase, and hence equip the investor with more power in the negotiation process.