In the United States#
| No | Perspective | Stock Purchase | Asset Purchase | 338(h)(10) Election |
|---|---|---|---|---|
| 1 | Sellers | Shareholders | Corporate entity | Shareholders |
| 2 | Assets and Liabilities | Buyer gets everything | Buyer picks and chooses | Buyer gets everything |
| 3 | Valuation of Assets and Liabilities | Book values used, but modified for any step-ups or step-downs | Every single asset/liability must be valued separately | Book values used, but modified for any step-ups or step-downs |
| 4 | Seller Taxes | Single taxation—shareholders pay capital gains tax | Double taxation—taxes on purchase price minus fair market value as well as on shareholder proceeds | Double taxation—taxes on purchase price minus fair market value as well as on shareholder proceeds |
| 5 | Book Basis | Assets/liabilities stepped up or down for accounting purposes | Assets/liabilities stepped up or down for accounting purposes | Assets/liabilities stepped up or down for accounting purposes |
| 6 | Tax Basis | Buyer assumes seller’s tax basis for assets/liabilities | Buyer receives tax step-up for assets/ liabilities | Buyer receives tax step-up for assets/liabilities |
| 7 | Goodwill and Other Intangibles | Not amortized for tax purposes and not tax-deductible | Amortization is tax-deductible; amortized over 15 years for tax purposes | Amortization is tax-deductible; amortized over 15 years for tax purposes |
| 8 | Seller Net Operating Losses (NOLs) | Buyer can apply Section 382 after transaction to reduce taxes | Completely lost in transaction | Completely lost in transaction |
| 9 | Complexity | Inexpensive and quick to execute | Complex and time-consuming—need to value and transfer each asset | Inexpensive and quick to execute |
| 10 | Used For | Most public/large companies | Divestitures; distressed sales; some private companies | Private companies; compromise between buyer and seller |
| 11 | Preferred By | Sellers | Buyers | Both |
| 12 | Combined Balance Sheet | Add all seller’s assets and liabilities (assume shareholders’ equity is wiped out); adjust for write-ups, write-downs, and new items | Add only the seller’s assets and liabilities that the buyer is acquiring; adjust for write-ups, write-downs, and new items created in acquisition | Add all seller’s assets and liabilities (assume shareholders’ equity is wiped out); adjust for write-ups, write-downs, and new item |
| 13 | Goodwill Created | = Equity Purchase Price - Seller Book Value + Seller Existing Goodwill - PP&E Write-Up - Intangibles Write-Up - Seller Existing Deferred Tax Liability (DTL) + Write-Down of Seller Existing Deferred Tax Asset (DTA) + New DTL Created | = Equity Purchase Price - Seller Book Value + Seller Existing Goodwill - PP&E Write-Up - Intangibles Write-Up - Seller Existing DTL + Write-Down of Seller Existing DTA | = Equity Purchase Price - Seller Book Value + Seller Existing Goodwill - PP&E Write-Up - Intangibles Write-Up - Seller Existing DTL + Write-Down of Seller Existing DTA G23 |
| 14 | Goodwill Treatment | Not amortized for accounting purposes; not amortized for tax purposes and not tax-deductible | Not amortized for accounting purposes; amortized over 15 years for taxes and tax deductible | Not amortized for accounting purposes; amortized over 15 years for taxes and tax deductible |
| 15 | Intangibles Treatment | Amortized for accounting purposes; not tax-deductible | Amortized for accounting purposes; tax-amortized over 15 years and tax-deductible | Amortized for accounting purposes; tax-amortized over 15 years and tax-deductible |
| 16 | Depreciation from PP&E Write-Up | Affects pretax income but not tax-deductible | Affects pretax income and tax deductible | Affects pretax income and tax deductible |
| 17 | New DTL Created | Total Asset Write-Up* Buyer Tax Rate | 0 | 0 |
| 18 | Annual NOL Usage Allowed | Seller’s Equity Purchase Price* MAX(Previous 3 Month’s Adjusted Long-Term Rates) | 0 | 0 |
| 19 | DTA Write-Down | Seller’s Equity Purchase Price* MAX(Previous 3 Month’s Adjusted Long-Term Rates) =MAX(0, NOL Balance - Allowed Annual Usage* Years until Expiration) | Subtract entire NOL balance from DTA | Subtract entire NOL balance from DTA |
In the United Kingdom#
In the United States, a Section 338(h)(10) election allows the buyer and seller of a corporation to treat a stock purchase as an asset acquisition for federal income tax purposes. This provides the buyer with a stepped-up basis in the target’s assets, potentially offering tax benefits.
The United Kingdom does not have a direct equivalent to the U.S. Section 338(h)(10) election. However, the UK tax system offers mechanisms that can achieve similar outcomes:
Election for Capital Gains Treatment on Share Sales: In the UK, the sale of shares is typically subject to capital gains tax. Companies can sometimes benefit from the Substantial Shareholdings Exemption (SSE), which exempts gains on qualifying share disposals from tax. This exemption applies when certain conditions are met, such as the selling company holding a substantial shareholding in the company being sold for a specified period.
Section 198 Election: When assets are sold, the buyer and seller can jointly elect to fix the value of certain assets for capital allowance purposes. This election determines the amount the buyer can claim as capital allowances (tax depreciation) on qualifying assets, effectively allowing both parties to agree on the allocation of the purchase price to specific assets.
Intangible Fixed Assets Regime: For transactions involving intangible assets, the UK’s intangible fixed assets regime allows companies to obtain tax relief for the amortization or impairment of intangible assets, aligning the tax treatment more closely with accounting practices.
While these UK mechanisms differ from the U.S. Section 338(h)(10) election, they can be utilized to achieve favorable tax outcomes in corporate transactions. It’s essential to consult with a tax professional to navigate these options effectively, as their applicability depends on specific transaction details and compliance with relevant tax laws.
Reference#
- Mergers and acquisitions Basics Negotiation and Deal Structuring by donald dePamphilis, Academic Press (2011)
