Newsletter
TAX BENEFITS UNDER MERGERS AND ACQUISITION ACT ARE NOT APPLICABLE TO NOMINAL MERGER
The Ministry of Finance (MOF) issued a news release on 10 March 2010 declaring that the tax benefits under the Merger & Acquisition Act (M&A Act) are provided to remove the potential obstacles for mergers and acquisitions, and for enterprises to achieve the result of upgrading operation efficiency, growth and international competitiveness. Nonetheless, if enterprises aim to pursue tax benefits by means of nominal merger, the tax authority would not allow the enterprises apply for tax benefits to such nominal merger, according to the substance-over-form-principle.
The MOF raised an example in the news release to illustrate "nominal merger" ("Example"), in which Company A, Company B and Company C underwent re-structuring with the steps of: i) Company A purchased 100% shares in Company B at the price of 1.2 billion with one billion of premium, as Company B's fair value was 0.2 billion and thus Company A booked 1.2 billion of long-term invest-ment as its asset; ii) Shortly after that, Company A underwent a spin-off ("Spin-off") and set up a 100% owned subsidiary Company C, and transferred 100% shares in Company B from Company A to Company C whereby 1.2 billion of long-term investment in Company B was booked as Company C's asset ; and iii) Shortly after the Spin-off and transfer of shares in Company B from Company A to Company C, Company B and Company C underwent merger ("Merger") followed by dissolution of Company C and hence Company C's long-term investment in Company B of 1.2 billion was written off. Accordingly, one billion of goodwill was generated and booked by Company B. However, Company B became Company A's 100% directly owned subsidiary again (the same as after Step i)).
MOF is of the view that the restructuring transactions above are involved with a nominal merger for the purpose of Company B's amortization of one billion of goodwill in 15 years under the M & A Act, because these transactions were conducted in a short time and the Spin-off and Merger do not change the original structures of Company A and Company B whereby no synergy was generated from Merger. Moreover, if Spin-off and Merger were not conducted, the amortization of goodwill by Company B would not be available under current tax laws, which even accentuated the purpose of utilization of tax benefits by Company B by means of nominal merger. MOF declared that the tax authorities would assess mergers and acquisitions carefully, and would make adjustments according to "sub-stance-over-form-principle" and the spirit of M&A Act if the tax authorities regarded the transactions as "nominal".