Expansion of the business places the manager in front of the classical choice – grow organically or make an acquisition? Once the acquisition is decided to proceed upon and all other strategic considerations are satisfied, a business should decide whether the acquisition should proceed by acquiring assets or shares of a specific business.

It is this choice that triggers an inquiry into the formal and non-formal considerations of the legal system of the jurisdiction where the business or the assets are located. In general two considerations drive the decision making on this matter – liability and tax. If it is thought that the target business has accumulated risks which are not worth taking or the financial liabilities are not worth acquiring, the decision would be for acquisition of assets.

On the other hand, if it is thought that there will be benefits or liabilities (whichever is the case) in terms of tax which would make or break the benefits of transaction, then the decision will be based on tax considerations.

Acquisition of high technologies from Armenian IT sector is gaining momentum as the IT cluster accumulates considerable know-how and experience and gains competitive advantage in the region (and the world if you wish). These acquisitions are often coupled with the desire to acquire the teams within the IT businesses.

The taxation aspects of technology and software transfer as well as payment of acceptable consideration for such are the main drivers to make the choice of transfer of assets or shares. Software and other technology developed by the target are usually accounted for on the balance sheet at cost value which is then is to be taxed by VAT if the transaction is proceeding as asset transfer. For a foreign investor acquiring the technology such VAT will not be deductible and hence a loss for the business in terms of the price. On the other hand, the target company will need to pay corporate income tax at 20% and withhold dividend tax at 5% to be able to distribute the profit to the owners (usually physical persons).

An alternative is the share transfer of the target company. In accordance with article 64 of the Armenian Tax Code (ATC), the transactions implying alienation of shares or other rights in the capital of a company are exempt from VAT. By the same token, Article 149 of the ATC exempts the income received from alienation of shares by physical person from taxation by personal income tax.

Our firm deploys further knowledge and know-how for liquidation and transfer of the assets of the business to the acquirer for saving on tax as the ATC provides exemptions on the taxation of corporate income tax for profits received from a company under liquidation.

Author: GOR MARGARYAN, Partner

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Disclaimer:

This material is produced by Legelata CJSC. The material contained in this newsletter is provided for general information purposes only and does not contain a comprehensive analysis of each item described. Before taking (or not taking) any action, readers should seek professional advice specific to their situation. No liability is accepted for acts or omissions taken in reliance upon the contents of this material.