One company has acquired another. What now?
There are advantages to keeping two separate legal entities – each one's results can be measured on its own, legal risks stay separated, and more. But after an acquisition like this, it is worth considering the opposite: merging the two companies and dissolving one of them.
Here are the main advantages of a merger:
- Eliminating duplication and cutting costs – A merger makes it possible to eliminate duplicate functions and save on the costs of employees, offices and advisers.
- Transferring employees – If the plan is to move employees between the companies, doing so as part of a merger is simpler.
- Offsetting carried-forward losses – Where one company is loss-making and the other is profitable, the past losses of one can be offset against the profits of the other (sometimes subject to certain limitations), reducing the overall tax burden.
- Offsetting current losses – Similarly, if one entity generates profits on an ongoing basis and the other generates losses, a merger allows them to be offset against each other and reduces the tax burden. Losses arising after the merger are not subject to limitations.
- Reducing shareholder balances – A merger is a good way to net off debt balances: if one company received a loan from a shareholder and the other made a loan to that shareholder, the merger reduces the balances, and with them the exposure to tax on shareholder withdrawals from the company (Section 3(i1) of the Income Tax Ordinance).
- Reducing retained earnings – If one of the companies has an accumulated deficit, the merger can reduce the combined retained earnings balance, narrowing the exposure to the tax on undistributed profits and the amount of dividend that needs to be distributed (Section 81C of the Ordinance).
In Summary
An acquisition is a good opportunity to revisit the holding structure. A merger is not right for every case, but it is worth considering early on. Considering a merger after an acquisition and want to look at the tax aspects in advance? Get in touch.