Question

Company A is considering buying the assets of Company B in a taxable transaction. Please consider what the income tax impacts are for the following issues:

1.Treatment of acquired assets by Company A.

2.Tax treatment of sale to Company B.

3.Tax Treatment of sale to shareholders of Company B.

4.Transfer of net operating loss carryforwards and tax credits of Company B to Company A.

Answer 1

Ans:

a)Treatment of acquired assets by Company A:

Company A will be getting reduction allowance on capital assets acquire and thus saving income tax.

b) Tax treatment of sale to Company B:

Company B will be liable to short term capital gain(STCG) or long term capital gain(LTCG) on capital assets sold and accordingly liable to pay income tax on that capital gain as per Income Tax Law applicable in the respective country. Further Written down Value of Assets and Salvage Value will be considered for calculation of STCG or LTCG Gains. Further there is always resulting a short term capital gain in case of Depreciable Assets. But in case of Non-Depreciable Asset, either short term capital gain/extended term capital gain may arise based on period of holding of respective asset by company. There will also be a tax implication of Deferred Tax Asset or Deferred Tax Liability for Company B.

c) Tax Treatment of sale to share holders of Company B:

Same treatment as above.

d) Transfer of net operating loss carry forwards and tax credits of Company B to Company A:

            While computing the Taxable income of Company A for the purpose of Income tax purposes, the net operating loss of Company B will not be careful for the above purpose. It is assumed as per the above question that the Company has A only acquire or bought the assets of Company B but not acquired Company B or merged with it. Hence the Net Operating loss carries forwards and tax credit of Company B has no importance and will not come in the books of Company A.