How business restructure may create tax advantages
If the process is handled properly, solvent companies undergoing restructure, merger, and/or acquisition may see some tax benefits.
An important issue to focus on during business restructure, merger or acquisition is ensuring no associated person capital gains arise. As it is common for existing companies to sell their businesses to a new company owned by the shareholders of the old companies, this scenario requires careful planning to avoid adverse tax consequences.
Associated person gains are not taxable when derived but are taxable on distribution to shareholders, even if the gain is distributed in the course of liquidation. Company assets including business goodwill need to be sold at market value. Otherwise, the dividend rules may give rise to a transfer of value resulting in a deemed dividend.
The need to sell at market value, however, can result in an associated person capital gain being derived. Additionally, any income distributed to shareholders directly during restructure will then be taxed by the IRD.
Thus, when undergoing restructure to form a new company, stakeholders must plan carefully to avoid associated person capital gains. Fortunately, Gerry Rea can help with your restructuring and merging plans.
* We note as part of the Government’s close company review, legislation is proposed that will eliminate the taxation of associated person gains. However, this only applies to “close companies” which are those companies with five or fewer natural person shareholders owning more than 50% of the voting interests. Companies in which trusts hold the majority of shares will not qualify.
If you have any further questions about business restructuring approaches, please email Paul at firstname.lastname@example.org