Professional Interpretation

Investment and M＆A is a shortcut for enterprise growth. With the development of China’s economy, the proportion of realty business is growing in China’s economic structure, and commercial real estate assets have gradually become an important part of the enterprise assets. The commercial realty business, after several years of development, has accumulated to a considerable size. Industry consolidation is a big trend, and investment and M＆A is the most effective means of industry consolidation. On account of huge value of commercial real estate, different ways of consolidation and M＆A will produce huge cost variance which is mainly reflected in tax cost. Therefore, in the process of commercial real estate consolidation and investment and M＆A, based on the actual situation of the transaction target and the transaction object, it should prudently choose appropriate pattern of investment and M＆A, in order to save maximum tax and reduce transaction cost. In the practice of M＆A, asset acquisition and share acquisition is a more common investment and M＆A model in commercial real estate, under which transaction structure, legal risk and tax cost are not the same. Based on the introduction of the two models of asset acquisition and share acquisition, Beijing DOCVIT Law Firm real estate and infrastructure team compares the different tax policies of two models and combines the relevant transaction target and legal risk control factors, as a result the team comes up with two models of alternative application and combined application.   

1. Asset Acquisition

It is generally understood that asset acquisition is a transaction in which an enterprise (hereinafter referred to as the acquirer) purchases the substantial operating asset held by another company (hereinafter referred to as the transferor) at the consideration. The form which the acquirer paying the transferor for consideration contains cash payment, non-cash payment or combination of the two.

Referring to the asset acquisition transaction of commercial real estate, the subject of transaction is the acquirer and the transferor held commercial real estate ownership, and the object of the transaction is the business assets of enterprise, i.e. the ownership of commercial real estate asset; the transferor transfers the ownership of commercial real estate asset, in order to get consideration in return from the acquirer by paying monetary capital and non-monetary capital. After finishing asset acquisition, the ownership of commercial real estate asset has been changed, but the equity structure of original transfers held commercial real estate asset will not change.

(1) Advantages

1. The law relationship is clear, and the acquirer does not have to undertake the risk of the transferor.

Under asset acquisition transaction, the acquirer undertakes to pay the transferor for consideration of transaction based on trade agreement. Because the consideration of transaction is specific and controllable legal risk, the acquirer does not have to undertake the risk of the transferor; after operation of holding commercial asset, the acquirer will not cause the useful barrier of commercial asset because of rights and obligations arranged by the transferor and others.

2. To deal with premium flexibly and increase pretax deduction account

The acquirer can enter cost which is the transferred commercial asset but actual expenditure in an account according to fact, and gradually amortize into operating cost in follow-up operation, in order to reduce current tax payable.

     (2) Disadvantages

1. The change of ownership is complicated and time-consuming. It is possible that the construction procedure is incomplete and need to be reapplied and made a supplementary payment.

The project development cycle of real estate is long, starting from the project, involving land use planning, project planning, construction permits, planning acceptance, completion acceptance, actual house area measurement and many others, any part existed procedures flaws, may be emerge in the process of changing commercial real estate ownership and increase law risk.

2. Higher tax cost

The tax cost of asset acquisition transaction is higher. The asset acquisition of commercial real estate mainly includes increment tax on land value, deed tax, value added tax, income tax and so on. The tax cost is higher.

    2. Equity acquisition

It is generally understood that equity acquisition is a transaction in which an enterprise (hereinafter referred to as the acquirer) purchases the stock rights of another company (hereinafter referred to as the transferor), in order to control the underlying enterprise. The form which the acquirer paying the consideration contains cash payment, non-cash payment or combination of the two.

Referring to the equity acquisition transaction of commercial real estate, the subject of transaction is the acquirer and the transferor held stock rights of underlying enterprise, and the object of the transaction is the stock rights of underlying enterprise, the transferor transfers all the stock rights of underlying enterprise, in order to get consideration in return from the acquirer by paying monetary capital and non-monetary capital. After finishing equity acquisition, the ownership of commercial real estate asset has not been changed, but the underlying equity structure of original transfers held commercial real estate asset will change. 

    (1)Advantages 

1. Simple procedure

Through signing equity transfer agreement and based on relevant law and regulation, the equity acquisition conducts the change of underlying enterprise equity, i.e. according to relevant transaction arrangement to achieve effective control and management toward commercial real estate assets.

2. Lower tax cost

Under transaction of equity acquisition, the transaction between the acquirer and the original shareholder of underlying enterprise, relatively speaking, undertakes the least tax cost, and the direct trade cost is the lowest, and will not affect sustaining commercial operation of commercial real estate held by underlying enterprise.

      (2)Disadvantages

1. The policy risk of equity acquisition

Equity acquisition will change the equity of underlying enterprise, due to underlying enterprise property/business qualification/market access and others different requests, may need to transact corresponding approval or filing procedures from relevant departments.

2. Or the risk is uncontrollability

After finishing equity acquisition, underlying enterprise will continuously operate, and the acquirer becomes underlying enterprise facing the risk of contingent liability as usual.  

3. It is difficult to integrate after merger and acquisition

After finishing equity acquisition, the acquirer need to accept the contracts and labor relations signed by the underlying enterprise, thus operation risk and administration cost has increased.

3. Compare tax under the model of asset acquisition and equity acquisition    

     4. The alternative application of asset acquisition and equity acquisition

The asset acquisition and equity acquisition have pros and cons. What model of merger and acquisition do the two sides of transaction need to adopt based on their own development requests, combined with the actual situation of project and the regulations of law and tax.

Firstly, look at demands of both sides. If the acquirer only needs high-quality commercial real estate assets of the transfer and change of their own asset structure, do not willing to undertake operational risk, personnel burden and contingent liability of the underlying enterprise, do not need to inherit patent trademark and others intellectual property, also do not need to utilize markets and clients of the underlying enterprise, in which case the acquirer generally adopts the way of asset acquisition. If the acquirer needs talents, businesses and operational qualification of the underlying enterprise, the acquirer generally adopts the way of equity acquisition and ensures the underlying enterprise in the exciting condition that can continue to operate commercial real estate assets.

Secondly, look at possible uncertainties in the process of trading. If the equity structure of the underlying enterprise is too complicated and the number of shareholders is large, the equity acquisition may has internal restrictions. This will not only increase the transaction cost, but also cause the uncertain transaction result. So it is generally recommended for equity acquisition. If the debtor-creditor relationship of the underlying enterprise is complicated, using equity acquisition for trading may face a large number of contingent liability existed in the underlying enterprise after finishing transaction, causing that the acquirer is involved in legal dispute for no reason. So it is not generally recommended for equity acquisition.

Certainly, referring to the merger and acquisition practice of commercial real estate assets, based on specific objective of transaction, combined the underlying enterprise with the practical situation of relevant commercial real estate assets, each side will achieve optimization of transaction cost under controllable legal risk in the most situation.

In recent years, China has introduced some documents encouraging asset restructuring at the legal and policy levels to help reduce asset restructuring cost of enterprises, especially tax costs. The eligible asset restructuring, referring to transfer of real estate and land use rights, will be affirmed as VAT Excluded. Referring to transfer of house and land ownership, it will be Deed Tax Excluded.

On that account, Beijing DOCVIT Law Firm real estate and infrastructure team suggests that, in the case of merger and acquisition of commercial real estate assets, based on legal due diligence on the underlying enterprise and commercial real estate assets, according to the requirements of tax preferential documents for asset restructuring, it is necessary to do relevant asset restructuring for concerned commercial real estate assets, assets and liabilities and equity. Designing reasonable transaction structure and model and comprehensively applying method of asset acquisition and equity acquisition, it will achieve transaction target of commercial real estate assets integration with minimum transaction/tax costs and legal risk.