In simple terms, a share swap is an arrangement whereby a limited company acquires a stake in the shares of another limited company. The shares acquired must produce more than half of the voting rights of all the shares in the company. A share exchange allows for a better ownership structure and more efficient use of capital.
The Limited Liability Companies Act does not explicitly provide for the exchange of shares, but instead refers to the issue of shares by way of contribution. Share exchange is in fact a tax law concept. In this article, we discuss the benefits and tax consequences of share exchanges.
Share exchange in practice
The share exchange arrangement is used to when forming a group structure and is often used to create a holding company. Forming a group can be useful when, for example, you want to to improve the efficiency of the company's business, to streamline the corporate structure, to optimise taxation or to retain key employees in the company.
An exchange of shares is a useful arrangement in situations where, for example. a larger company wants to buy a smaller companybut does not want to pay a cash or debt consideration.
Exchange of shares is possible be carried out without any immediate income tax consequences in a tax-neutral manner. It is always advisable to plan and carry out the exchange with a specialist, as the process is regulated by company and tax law and involves several different stages.
Experts in-house lawyers will assist you through the process, so you can concentrate on running your business.
Example of a share exchange
Take the example of entrepreneur A, who owns 100% of the shares in his company B. The business is profitable and to improve risk management, A wants to segregate the profits generated by the company's activities. A share swap is carried out, whereby A transfers shares in his company to another holding company, either a completely new one or an existing one. In return, he receives a number of shares in that company which gives him a majority of the voting rights in the holding company.
The end result is that the entrepreneur indirectly owns his company through a holding company and a group structure is created. The parties to the share exchange are therefore in this case the acquiring company B, the holding company whose shares are being acquired and its shareholders.
The good thing about a share swap such as the one described is that the actual business of the company the business name of the company remains the same. This saves additional changes to the company's existing contracts and avoids the need for change notifications to the Trade Register.
However, a share exchange can have affect the company's contractsif they contain restrictions on the ownership of the business company. These restrictions may relate, for example, to the financial terms of the company's contracts.
The benefits of share swaps
The group structure created by an exchange of shares brings various tax and risk management benefits. For example, the tax exemption of dividends between group companies allows profits from a subsidiary's business to be distributed tax-free to the parent company.
As shares are generally valued at fair value in a share exchange, the parent company's net assets may increase more than before the share exchange, which allows for a more tax-efficient distribution of dividends. Such diversification of assets between companies can also make sense from a risk management point of view, as assets are hedged against the operational risks of the business company.
The group structure can also be useful for loss compensation, as companies can be separated by provide group support. A share exchange can also prepare for a future acquisition by separating the assets of the company being acquired from the other assets of the group. In certain situations, it can be a convenient way of completing the whole transaction.
A share exchange can also be a useful tool for a company to to engage key people in the company through share ownershipwhen the company's non-core assets do not add to the cost of acquiring the shareholding.
Read also about the design of a company statute.
Taxation of turnover
By following the Business Tax Act, the share exchange can be carried out without any immediate income tax consequences. Income tax liability is only deferred until the time when the shares received in the exchange are transferred.
What does it involve?
This tax neutrality implies, for example, that any cash consideration given in a share exchange may not exceed 10% of the nominal value of the shares given as consideration or, in the absence of a nominal value, of the share capital paid up in respect of the proportion corresponding to the shares.
If a financial penalty is paid and the amount of the penalty is less than ten per cent, the exchange of shares shall be treated as a taxable supply to that extent. In general, share exchanges are carried out entirely without a cash consideration, in which case the consideration is shares issued by the acquiring company.
Tax neutrality also requires that the company acquiring the shares must. must obtain a majority of the voting rights in the target company through the shares and the entire exchange must be made for business reasons. Before the share exchange, it is always advisable to request a preliminary ruling from the Tax Administration in order to ascertain the tax consequences of the transaction.
The situation as regards the transfer tax is as follows. The party acquiring the shares, i.e. B in the example above, must pay transfer tax on the fair value of the shares it receives in accordance with the Transfer Tax Act.
However, the other party to the exchange, usually the shareholder of the holding company, does not have to pay transfer tax as long as the shares it issues in the share issue are new shares issued by the company.
A share exchange may result in a change of ownership of the target company, which may have an impact on the deduction of the company's losses for tax purposes. If the change of ownership means that the losses cannot be deducted, the company may apply to the tax authorities for an exemption from deducting them. This derogation is generally granted if the change of ownership is due to business or similar reasons.
Are you facing a share swap in your company? - Our lawyers will support you through the process
On average, a share exchange takes around 3-6 months and is a strictly regulated process.
The tax neutrality of an exchange of shares requires strict compliance with the provisions of the Business Tax Act and, if done incorrectly, the exchange can even be considered tax evasion.
Our in-house lawyers have a long track record of handling tax matters and the entire share exchange process, so please feel free to contact us and we will work together to find the best solution for you and your company.
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