In occasions, clients who wish to acquire a business suggest conducting the purchase transaction through the acquisition of assets or a branch of activity, instead of buying shares, to avoid “inheriting” the tax risks of the acquired business.
On this matter, it is important to note that the purchase of assets or a branch of activity does not, by itself, limit the buyer’s tax liability for events prior to the purchase.
Article 42.1.c) of the Spanish General Tax Law (Law 58/2003) indicates that those who succeed in the ownership or exercise of economic activities, under any title, will be jointly liable for the tax debt of the previous owner derived from the exercise of such economic activity.
This joint liability also extends to obligations arising from the failure to pay withholding taxes and payments on account taxes that should have been made, as well as to any potential sanctions.
This means that if assets are purchased to continue developing the same business or activity that the seller was conducting, there will be joint liability of the buyer for the seller’s tax debts, and therefore, the buyer will not avoid “inheriting” the tax risks of the acquired business.
The only way to avoid inheriting tax liability in the purchase of assets or a branch of activity is to request the certificate referred to in Article 175.2 of the Spanish General Tax Law. According to this article, anyone intending to acquire the ownership of economic activities, in order to limit the joint liability contemplated in Article 42.1.c) of the Spanish General Tax Law, will have the right, with the current owner’s consent, to request from the Tax Authorities a detailed certification of the debts, sanctions, and tax liabilities derived from the exercise of such economic activities. The Tax Authorities must issue this certification within three months from its request. In such a case, the buyer’s liability will be limited to the debts, sanctions and liabilities contained in the certification. If the certification is issued without mentioning debts, sanctions, or liabilities, or if it is not provided within the specified period of three months, the buyer will be exempt from the past tax liability.
This means that in the purchase of assets or a branch of activity, the tax risk is not automatically avoided, but there exists the possibility of limiting this risk by requesting a certificate. If the Tax Authorities issues the certificate including certain debts and sanctions of the seller, the buyer’s joint tax liability will be limited to the debts and sanctions specified in the certificate and, therefore, cannot be greater. If three months pass from the request and the Tax Authorities have not issued the certificate, the buyer’s tax liability exemption will be total.
Since the tax contingencies are usually an essential element in the negotiation of any purchase, obtaining the certificate can greatly facilitate the negotiation of the purchase agreement and the guarantees required by the buyer.
Based on this, one might wonder why a large number of asset or branch of activity purchase transactions are carried out without the existence of such a certificate, with the buyer assuming a tax risk that it would not otherwise have, and adding complexity to the negotiation of the purchase contract and the seller’s guarantees.
This is likely due to the belief, among many sellers, that requesting the certificate may draw the attention of the Tax Authorities, and as a result, they may open an tax audit of the business being sold. Obviously, if a tax audit were to be opened during the negotiation of the purchase agreement, this would have a direct impact on the transaction and could even halt it.
Another possible reason for not requesting the certificate is that when the parties sit down to negotiate tax contingencies, they are already at the end of the process and, at that point, they do not want to wait three months to close the purchase.
In our opinion, the question of how to structure a transaction (as an asset purchase or as a share purchase) should be resolved, first and foremost, based on the business needs and strategic objectives of the parties, and not based on the mere tax liability issue.
Does the buyer prefer to acquire a company, or to directly integrate the business into its own company? For example, an asset purchase may be of interest when the buyer wants to integrate the purchased activity directly into the buying company instead of acquiring a separate company, thus streamlining the group’s corporate structure.
Is the business transferred the only activity of the seller, or are there other business units in the seller that are not part of the transaction? An asset purchase makes sense when a company has several business units and only one of them is being sold. This would be the case, for example, of a company that has a real estate leasing unit and a real estate development unit, and only one of the activities is to be transferred.
Does the seller want to receive the sale price as an individual or as a legal entity? Knowing the destination the seller will give to the funds received and understanding its taxation will be a very relevant issue, not only to assess its own total tax burden in each of the options (sale of shares or sale of assets) but also to evaluate and understand the tax effects of both options on the buyer too.
These are the main issues that the parties must resolve from a business and strategy perspective, and from there, the issue of passing the tax liability must be analyzed.
Proposing an asset purchase transaction solely for not passing the tax liability does not provide any advantage if the parties eventually do not request the certificate from Article 175.2 of the Spanish General Tax Law, as the buyer will always be jointly liable for taxes along with the seller.
Additionally, in an asset purchase, the transfer procedure will likely be more complex, as the assets are transferred individually, requiring a detailed listing and the communication/formalization of their transfer according to their nature. For example, all suppliers must be notified of the change of ownership, the change of contracts with employees and their deregistration/registration with Social Security must be formalized, the name change of licenses must be processed, the change of ownership of trademarks must be registered, authorization for the transfer of the lease must be requested, or the change of ownership of real estate must be registered in the Property Registry, etc.
Therefore, before considering whether a transaction should be carried out as an asset purchase or as a share purchase, our recommendation is that the parties analyze and seek appropriate advice to determine the advantages of each option.
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