Hotels Update: Preparing for a Hotel Sale – Share Sale or Asset Sale? Part 2
07 September 2017
In part 1 of "Preparing for a Hotel Sale", we reviewed the practical considerations, from a corporate perspective, associated with structuring a hotel deal as either an asset sale or a share sale. In this second part, we look at the mechanisms available to buying and selling parties to determine the sale price and the various taxation matters to be considered for both approaches.
In an asset sale, a buyer and seller will need to carry out a stock take at completion to determine the amount and value of stock in the hotel. This can include beverages, food and cleaning products. Consideration should be given to:
- the identity of the independent valuer to be appointed
- which party will be responsible for the independent valuer's costs
- what methodology the independent valuer is to use
A buyer and seller will also need to agree on an indicative apportionment account. This shows the parties’ best estimate of the value of the assets and liabilities of the company to be transferred at the date of completion. The assets and liabilities arising in the period up to and including completion are typically for the account of the seller. The assets and liabilities arising after completion are typically for the account of the buyer. In the period following completion, usually three to four weeks, both parties must calculate the actual value of the assets and liabilities at the point in time that the deal was completed and reflect this in a final apportionment account. A post completion adjustment to the purchase price is then made where required to reach the final purchase price.
In a share sale, the parties can opt to agree a pre-determined price payable for the shares. The buyer generally carries out a valuation exercise by referring to a balance sheet drawn up between the parties prior to completion. The price is then agreed between the parties. This mechanism is known as a “locked box”.
If the company continues to trade, a completion accounts mechanism is the most common method of determining the final purchase price to be paid for the shares. In this instance, the final purchase price is determined after completion of the transaction has taken place. This is done by referring to the accounts of the company, which are made up to the date of completion. Following completion, usually four to eight weeks, completion accounts are drawn up. This is done in accordance with an accounting methodology agreed between the buyer and seller in the share purchase agreement. This enables a buyer to confirm whether the company’s actual financial position at completion is consistent with the financial position set out in the accounts on which a buyer has based its valuation of for the shares. A buyer can then make a post completion adjustment to its valuation of the shares, where required.
Stamp duty is a tax on documents. Therefore, a document such as a business transfer agreement is stampable where it transfers assets from a seller to a buyer. Stamp duty applies at the rate of 2% on the consideration paid or the market value. There are certain exemptions from stamp duty. Where assets are capable of being transferred by delivery, no stamp duty should apply where the business transfer agreement includes such a provision. The transfer of other assets may be exempt from stamp duty, e.g. certain intellectual property. Therefore, in an asset sale, a buyer should analyse the assets being acquired and clearly specify the value attributable to each asset so that there is no doubt over the stamp duty treatment.
Stamp duty is charged at a rate of 1% of the consideration paid for or the market value of the shares, whichever is higher, in a share sale.
Capital gains tax
Hotel deals are typically structured as asset sales. In an asset sale, each of the assets transferring needs to be considered from a capital gains tax (CGT) perspective. The current rate of CGT is 33% for chargeable gains arising.
Share sales also give rise to CGT. However, an exemption may apply to gains arising on the sale of trading companies that do not base their value on Irish land or building assets provided certain conditions are met. To the extent that assets have a low base cost for tax purposes, a buyer buying shares may be inheriting a latent capital gain for which it might seek a price reduction. For this reason, a buyer’s preference is often an asset sale as it gives the buyer full market value base cost in the asset.
A buyer of Irish land or buildings or shares deriving their value from Irish land or buildings or goodwill of a trade being carried on in Ireland is obliged to withhold 15% of the purchase consideration, where it exceeds €500,000. The withholding obligation does not apply where the seller provides the buyer with a clearance certificate issued by Irish Revenue. An Irish resident seller can get this by virtue of its Irish tax residence. However, a non-Irish resident seller will only get this where it has paid the CGT it owed or proved to Irish Revenue that it has no such liability. Although procedural, this is an important point to bear in mind because it can hold up transactions.
Transfer of business relief should generally apply to the acquisition of a hotel. This relieving provision ensures that the sale of a business is not a supply for VAT purposes so VAT does not arise, provided the buyer is an accountable person i.e. VAT registered. A full analysis should be carried out upfront to ascertain whether this relief applies. In particular, where real estate is being transferred, and transfer of business relief applies, a buyer may take on a seller’s VAT history in the real estate. Therefore a full VAT due diligence of the property should be undertaken.
The sale of shares is VAT exempt.
Interest deductibility will be a key concern for a buyer funding the acquisition of a hotel business, whether by asset or share acquisition. In either case, care needs to be taken in the structuring and documentation to ensure the availability of a tax deduction for financing costs. Withholding tax on interest must also be analysed.
We recommend that buying and selling parties take time in advance to consider the legal, financial and tax pros and cons involved in structuring a hotel deal as a share sale or asset sale. Advice should be sought from your legal, financial and tax advisors on the implications of both structures, which will assist in making this decision.
The content of this article is provided for information purposes only and does not constitute legal or other advice.