Asset Deal vs. Share Deal

Foreign investors who are selling or buying Czech real estate are often seriously negotiating

whether the subject of the sale should be the shares in the property company or the property itself

should be sold/purchased.

Foreign investors who are selling or buying Czech real estate are often seriously negotiating

whether the subject of the sale should be the shares in the property company or the propertyitself should be sold/purchased. Bearing in mind that it is legally impossible for a non-resident

to purchase the property directly, the purchase of the shares seems to be the appropriate

solution - at first glance. From the tax viewpoint, there may be advantages and disadvantages

to a share deal or an asset deal, for the purchaser and the seller. This depends on theindividual tax positions of both parties, so there is no general rule. However, normally the

seller will prefer a share deal and the purchaser an asset deal through a newly established

Czech company.

Share Deal

The most common legal forms of property companies for developers are an a.s. (joint stockcompany) and an s.r.o. (limited liability company). Foreign investors also use a v.o.s.

(general partnership) or a k.s. (limited partnership with at least one general partner), mainly

driven by tax reasons. If the purchaser needs another kind of company than the propertycompany, such a company could be converted to the required legal form in a tax-neutral

way, but it will cost time and money to fulfil the requirements under the commercial code. In

such a case it is recommendable to discuss the possibilities and risks of such a legal

transformation with an experienced tax adviser and a lawyer. Regardless, a share deal willrequire a tax and legal due diligence for the company.

For the seller a share deal may bring the following advantages: There is no real estatetransfer tax, even if the real estate is the only property of the company. There is also no VAT

on the transfer of the shares. If the owner of the shares and the purchaser are foreign

residents, the Czech Republic will not levy any capital gains tax on the seller. The taxation in

his state of residence depends on the national tax laws and on any applicable double taxtreaty. If the owner of the shares is an individual holding the shares in his private portfolio,

any capital gains will be tax exempt if the shares are sold after a "speculation" period of six

months for an a.s. and five years for any other company.

The purchaser of shares has to face some disadvantages if there are hidden reserves in the

company. Hidden reserves are understood as the balance between the new purchase price

and the tax book value of the property. For example, if the property consists of a building witha tax book value of 60 and the price should be 100, there are hidden reserves of 40.

Although paying 100, the purchased company can only claim tax depreciation of 60 over the

residual tax lifetime of the building. This increases the income tax liability in the followingyears, compared with a direct purchase of the building. The other disadvantage is that the

purchaser "inherits" the tax burden associated with the hidden reserves. If the purchased

company sold the building for 100, it would have to pay 31 per cent corporation tax on the

hidden reserve and withholding tax on a subsequent distribution.

Asset Deal

For the purchaser an asset deal may have some advantages. He can use a newly formedcompany (but should be aware that only a registered company is permitted to acquire the

property) according to his specific needs. For new companies, the Czech thin capitalisation

rules are not applicable in the year of formation and the subsequent three years. He does notbuy any hidden reserves with an underlying tax burden as described above. The purchase

price for depreciable assets can be fully converted into tax depreciation and the purchaser

can use the accelerated depreciation method. For accounting purposes, a lower depreciation

method can be used to enable the company to make the required amount of distributions.The purchaser saves the cost of a tax and legal due diligence for the selling company. If the

building is sold with VAT, the purchaser can deduct the VAT only under specific conditions.

events

Asset Deal vs. Share Deal - CiJ Journal. com http://www.cijjournal.com/Main/Story.aspx?id=317

1 of 2 8/7/2010 10:56 PM

This and the effects of the changes to the VAT Act should be discussed in detail with a taxadviser.

The main disadvantage is the income tax on capital gains as mentioned above. Another

disadvantage for the seller of the real estate is that five per cent of the sales price (or thevalue stated in an appraisal if it is higher) must be paid as real estate transfer tax. If the

purchaser accepts to pay the tax for the seller, it is not tax-deductible and cannot be included

into the acquisition price.

In individual cases, there may be an opportunity to some tax structure the deal in a way

which will help the seller avoid paying taxes on capital gains. Most of these straightforward

models are based on unclear or missing tax provisions which are not secured byjurisprudence or official statements of the Ministry of Finance. Some models which are only

applicable under specific conditions should be in line with Czech law. A prudent tax adviser

should discuss with his client not only the opportunities, but also the risks of such a model.

Asset deal or share deal, in either case the parties will have to agree on the price. Tax

aspects can influence the purchase price. Therefore, it is recommendable to contact a tax

adviser at an early stage in the negotiations.

This article contributed by Klaus A. Schleweit, KPMG Prague

Klaus A. Schleweit

CiJ Journal video

© 2010 Roberts Publishing Media Group s.r.o.

Asset Deal vs. Share Deal - CiJ Journal. com http://www.cijjournal.com/Main/Story.aspx?id=317

2 of 2 8/7/2010 10:56 PM