Professional Interpretation

M&A is a short-cut to business development, with the real-estate accounts much heavier in the businesses’ assets, those investors who want to expand business by acquiring asset or equity should take issues into consideration under these two different modes of M&A.

 Asset acquisition

Asset acquisition refers that one party purchase from the other party who hashe real-estate property with consideration in the form of cash, non-cash or combination of both. In this case, the purchaser is transferee as well, who obtains the psychical property by acquisition. Once the business is done,  only the ownership to property changes while the transferor’s share structure will not be changed.

The advantage of above mode is that purchaser’s obligation provides in contract is simple and explicit, who only gives the consideration stipulated in contract, any risk beyond that will not impact the purchaser; in addition to this, transferee could bill his payment for consideration into accounting, then this payment cost could be amortized in the subsequent tax term to reduce the tax payable due in each term. However, the real estate project generally runs through many processes and involves a long period of time, any defects incurred in this process will be probably arising to affect the property title change to purchaser (transferee).Moreover, to purchase, tax duty is comparatively heavy, including but not limited to VAT, Deed Tax, Income Tax. etc. 

Equity acquisition

This mode refers one party achieves its goal to control another entity, who has real-estate property by purchasing the other party’s share, with consideration in the form of could be cash, non-cash or combination of both. The ownership of the property keeps the same after the transaction is done, while the transferor’s share structure changes due to the transaction.

Equity acquisition runs through simpler formalities in comparison with the asset acquisition, purchaser could gain effective control on the real estate equity, once the purchasing is completed. Since risk exists in policy due to different share structure requirement of different business mode, investor will assume liability with the original shareholders such as debt of transferor, Investor should have knowledge of government policy and conduct a due diligence investigation of target business entity, before acquisition plan, tax is not a heavy burden for purchaser to bear under this mode.

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Which option is better for you?

Each of above-mentioned modes has its own advantages and disadvantages, the parties should choose upon understanding their actual needs, residency’s legal systems and tax contribution, etc.

If the purchaser gives more emphasis on the transferor’s quality resources while reluctant to take operation risks, burden of staff or existing debts, and the transferor hasn’t much valued intellectual property, purchaser could consider asset acquisition; should the purchaser still need the assistance from the targeting company on human resources, operation qualification to assure the real estate can be active as a going concern, equity acquisition will be a better option.

Uncertain factors exists in the transaction process

If the target entity has complex share structure among its shareholders , limitation on share transferring would increase the transaction cost and bring the uncertainty to transaction results, or if the target business entity involves complicated creditor’s liabilities, the purchaser is much more possible to face such challenges, then equity acquisition will not be recommended.

Many legal documents and policies are issued to encourage assets recombination these years, aiming to reduce the merging cost, especially the tax cost. It is good news for those business entities which can meet such qualifications, VAT, Deed Tax will not be imposed on real estate property involves in transferring.

Advice from Real Estate and Facilities Team of DOCVIT :

It is advised to design a transaction mode and structure based on due diligence report of target business entity in comply with the requirements listed in tax-favorable documents, combining above-discussed two measures, to realize the cost optimization with the legal risk reduction.