The Disciplines of M&A
The structural fork between shares and assets, the reorganisation rules that make a deal tax-free, and what a global minimum tax did to cross-border structuring.
Tax is rarely why a deal happens, but it is frequently why a deal is structured the way it is. The same business bought at the same price can yield very different after-tax outcomes depending on whether shares or assets change hands, where the buyer sits, and what elections follow.
This is a description of rules, not tax advice. Rates, thresholds and dates change often, and application to any transaction depends on facts not addressed here.
Historic liabilities. A share buyer inherits everything the company has done: unpaid taxes, disputed assessments, employment claims, environmental exposure. An asset buyer takes only what is scheduled, subject to successor-liability, VAT and payroll rules.
The structural fork: shares or assets
Basis. Usually decisive. An asset buyer takes a cost basis in what it buys and can depreciate it. A share buyer takes a cost basis in the shares only; the assets inside keep their historic, often heavily depreciated, basis, so the buyer pays a market price for a low depreciation shield.
Why sellers prefer shares. A corporate seller of assets is taxed on the gain inside the company and again when proceeds are distributed. Selling shares collapses that to one shareholder-level tax, and in many jurisdictions the gain is exempt under a participation regime.
A section 338(h)(10) election treats a stock purchase as an asset purchase for federal tax purposes. It is available where a corporation buys at least 80% of the stock of a target that is an S corporation or a consolidated-group subsidiary, and not where individuals own the stock of a target C corporation. It is joint: the stock sale is disregarded, the deemed asset sale is taxed, the buyer gets the step-up, and single-level taxation is preserved for the seller (GRF CPAs).
The section 336(e) election, from final regulations in 2013, covers ground 338(h)(10) cannot. It applies to a "qualified stock disposition" — at least 80% of a domestic target's stock sold to unrelated persons within 12 months — and the acquirors "may be individuals, partnerships, trusts, or corporations," with multiple buyers permitted. It is made by seller and target, not jointly, and produces the same deemed asset disposition and fair market value basis (Jones Day). Both trade an immediate corporate-level gain for a future depreciation stream, so buyers typically pay a gross-up for the seller's incremental tax.
A common pre-closing step is the F-reorganisation — a "mere change in identity, form, or place of organization" under section 368(a)(1)(F). An S corporation is contributed to a new holding company that elects S status; the operating company becomes a qualified subchapter S subsidiary. Rev. Rul. 2008-18 confirms this does not terminate the S election, which continues with the new parent, and that the new parent takes a new EIN while the subsidiary keeps its original one (Rev. Rul. 2008-18). The QSub can then convert to an LLC and the buyer purchases LLC interests — asset-purchase treatment and a step-up without disturbing contracts or corporate history, and without relying on the S election having been validly maintained since inception.
Section 368 defers gain for target shareholders where consideration is acquirer stock:
Two doctrines sit over all of these. Continuity of interest requires target shareholders to retain a meaningful proprietary stake: the regulations contain an example in which 50% stock and 50% cash satisfies the test, and courts have accepted lower percentages, cited in the 25% to 41% range, so any figure is a safe-harbour convention rather than a statutory line. Continuity of business enterprise, under Treas. Reg. §1.368-1(d), requires the acquirer either to continue a historic business of the target or use a significant portion of its historic business assets, tested across the acquirer's qualified group (same source). Non-qualifying consideration is boot, triggering gain up to the amount received.
Buyers routinely overvalue a target's net operating losses. An ownership change occurs when the percentage held by one or more 5-percent shareholders increases by more than 50 percentage points over the lowest such percentage during a testing period, generally the three years ending on the relevant date. The annual cap on pre-change losses is then the section 382 limitation: the old loss corporation's value multiplied by the long-term tax-exempt rate published by the IRS. If the old loss corporation's business enterprise is not continued throughout the two-year period beginning on the change date, section 382(c) reduces the limitation to zero (26 U.S.C. §382). Because the limitation turns on equity value and a low published rate, a distressed target — the kind with large losses — generates a small annual allowance, and a change of business direction after closing can extinguish them entirely.
Where change-of-control payments to a "disqualified individual" — an officer, shareholder or highly compensated individual — equal or exceed three times that person's base amount, section 280G disallows the payor's deduction for the excess over one times base amount and section 4999 imposes a 20% excise tax on the individual. Base amount is average compensation over the five most recent tax years ending before the change of control. Private companies have an escape: payments are not parachute payments if approved, after adequate disclosure, by 75% of the shareholders entitled to vote immediately before the change (American Bar Association).
The Inflation Reduction Act of 2022 added two provisions of direct M&A relevance, both effective after 31 December 2022. The corporate alternative minimum tax imposes 15% by reference to adjusted financial statement income on corporations with at least $1 billion in average income over the prior three years, with a separate $100 million test for domestic subsidiaries of foreign multinationals; being book-based, it bites where book and tax treatment of an acquisition diverge. The stock repurchase excise tax under section 4501 imposes 1% on repurchases by domestic corporations whose stock trades on an established securities market, subject to a $1 million annual de minimis and reduced by the value of stock issued that year, including to employee plans. An exception applies where the repurchase is part of a section 368(a) reorganisation and the shareholder recognises no gain or loss (Covington & Burling).
Section 163(j) caps net business interest deductions at 30% of adjusted taxable income. From 2022 to 2024 ATI was computed after depreciation and amortisation — an EBIT measure — sharply reducing capacity for capital-intensive and leveraged borrowers. The 2025 One Big Beautiful Bill Act restored the EBITDA measure, computing ATI "without regard to depreciation, amortization or depletion," for tax years beginning after 31 December 2024, while adding restrictions from 2026: it applies whether the taxpayer deducts or capitalises the interest, and domestic ATI excludes subpart F, section 956 and GILTI inclusions and the section 78 gross-up (Grant Thornton).
It also permanently restored 100% bonus depreciation under section 168(k) for property acquired and placed in service after 19 January 2025; property acquired on or before that date stays under the prior phase-down (40% for 2025, 20% for 2026) (BDO).
Substantial shareholding exemption. A corporate seller's gain on shares is exempt where it holds at least 10% of the ordinary share capital (TCGA 1992 Sch 7AC para 8) for a continuous 12-month period, with a five-year window after the holding falls below 10% for disposals from 1 April 2017 (previously one year). It is why UK corporate sellers prefer share sales.
Transfer taxes. Stamp duty on a transfer on sale of stock or marketable securities is 0.5% of consideration, with an exemption for instruments certified at £1,000 or less. Real estate is charged separately under stamp duty land tax at rates far above 0.5%.
Degrouping charges. Where an asset moved between group companies on a no gain/no loss basis and the transferee leaves the group within six years still holding it, TCGA 1992 s.179 deems a disposal and reacquisition at market value as at the intra-group transfer. Since Finance Act 2011 the gain is added to the consideration for the share disposal, so where the share sale qualifies for SSE the degrouping gain is exempt too; CTA 2009 s.782A does the same for the s.780 intangibles charge (ICAEW).
Corporate interest restriction. The CIR applies only where net interest and financing costs exceed £2 million in 12 months. Above that, the fixed ratio method limits relief to the lower of 30% of UK taxable profits before interest, tax and capital allowances, and worldwide net interest expense; a group ratio election is available where external gearing is higher.
Business asset disposal relief. Founders selling qualifying shares — broadly at least 5% of ordinary share capital and voting rights, held with officer or employee status throughout two years — pay a reduced rate within a £1 million lifetime limit, cut from £10 million for disposals on or after 11 March 2020. The rate was 10% before 6 April 2025, is 14% from 6 April 2025 and rises to 18% from 6 April 2026.
The Merger Directive (Council Directive 2009/133/EC) covers mergers, divisions, partial divisions, transfers of assets and exchanges of shares between companies of different Member States, with cash limited to 10% of nominal value. Article 4 defers taxation of capital gains at the transferring company's level, conditioned on assets remaining connected with a permanent establishment in the transferor's Member State; Article 8 gives shareholders a rollover; Article 15 lets Member States deny benefits where tax avoidance is a principal objective.
ATAD. Council Directive (EU) 2016/1164 sets a common minimum standard: Article 4 restricts net interest deductions to 30% of tax EBITDA with a EUR 3,000,000 exemption threshold; Article 5 taxes unrealised gains on assets leaving a jurisdiction, with a five-year instalment option; Article 6 is a general anti-abuse rule aimed at arrangements "not genuine having regard to all relevant facts and circumstances"; Articles 7–8 impose CFC rules; Article 9 covers hybrid mismatches, extended to third countries by ATAD II (Directive (EU) 2017/952). Sources conflict on dates: Article 11 provides for application from 1 January 2019 with exit taxation from 1 January 2020, while the European Commission's own summary states four measures took effect on 1 January 2020 and hybrid mismatch rules on 1 January 2022, so the operative date must be checked locally.
Participation exemptions. The Netherlands exempts dividends and capital gains on holdings of at least 5% of the investee's capital that are not portfolio investments; where intent is unclear it can still apply if the subsidiary is taxed at a real rate of at least 10%, or if no more than 50% of its assets are portfolio investments. Luxembourg exempts dividends where the holder has at least 10% of share capital or an acquisition price of at least EUR 1.2 million (EUR 6 million for capital gains), held 12 uninterrupted months, subject to a subject-to-tax test and recapture of prior deductions. Germany exempts capital gains on shares from corporation and trade tax but adds back 5% as non-deductible expenses — an effective 95% exemption — with a 10% minimum shareholding at the start of the calendar year for the dividend exemption.
DAC6. Council Directive (EU) 2018/822, in force from 25 June 2018, amended Directive 2011/16/EU to require mandatory automatic exchange of information on reportable cross-border arrangements. The obligation falls on intermediaries — advisers, lawyers, banks — shifting to the taxpayer where none is engaged or privilege applies.
Pillar Two of the OECD/G20 Inclusive Framework agreement, endorsed by over 135 jurisdictions in October 2021, establishes the Global Anti-Base Erosion (GloBE) Model Rules: large multinationals must pay a minimum tax in each jurisdiction where they operate. The threshold is EUR 750 million of consolidated revenue and the minimum effective rate 15%, computed jurisdiction by jurisdiction. Where the effective rate falls below 15%, top-up tax is collected — primarily through the Income Inclusion Rule at the ultimate parent, with the Undertaxed Profits Rule as a backstop where the IIR does not reach the low-taxed income. A qualified domestic minimum top-up tax lets a jurisdiction collect it locally rather than cede it abroad.
In the EU, Council Directive (EU) 2022/2523 implements it, with the threshold tested over four of the previous five fiscal years, IIR transposition by 31 December 2023 and UTPR application from 31 December 2024. The UK's multinational and domestic top-up taxes apply to accounting periods beginning on or after 31 December 2023. Which regimes were in force elsewhere for 2026 could not be established from primary sources in this pass; treat the EU and UK dates as verified and check others individually.
The effect on M&A is structural rather than arithmetic:
Section 7874. Where former shareholders of the US target hold at least 80% of the foreign acquirer afterwards, the foreign parent is treated as a domestic corporation taxed on worldwide income. At 60% to 79%, the group keeps foreign status but the US subsidiary faces restrictions on using credits and deductions against certain income. An exception applies where the group has substantial business activities in the foreign country, tested at 25% of employees and compensation, assets and income. Temporary regulations of April 2016 disregarded stock issued by the foreign acquirer in prior US acquisitions during the preceding three years — the serial-inversion rule, aimed at acquirers inflating their size through successive US deals to stay under the thresholds (Congressional Research Service R44617). They are widely credited with ending the inversion wave, though the CRS report confirms only the timing.
Treaty abuse. The BEPS Multilateral Instrument lets governments modify existing bilateral treaties without renegotiating each one, implementing minimum standards against treaty abuse. Its centrepiece is the principal purpose test, denying a treaty benefit where obtaining it was one of the principal purposes of an arrangement — so a holding company inserted to access a favourable withholding rate needs commercial rationale and substance. The number of MLI signatories and its entry-into-force date could not be verified from the OECD pages accessible in this pass.
Withholding taxes remain first-order: on dividends repatriating proceeds, on interest on acquisition debt, and increasingly on capital gains of non-residents. China applies 10% to gross China-source passive income of non-resident enterprises without an establishment there, subject to treaty reduction.
Indirect transfer taxes. Some jurisdictions tax the sale of a foreign holding company whose value derives from local assets. The Indian Finance Act 2012 deemed shares of a foreign company situated in India where they derive value substantially from Indian assets, and did so retrospectively, reaching transactions completed before 28 May 2012. The Taxation Laws (Amendment) Act 2021 reversed that: affected persons who withdraw litigation, abandon arbitration and waive claims under domestic law and bilateral treaties have prior assessment orders deemed never to have been issued, with refunds paid without interest (PRS Legislative Research). The decision commonly cited as the trigger for the 2012 amendment — the Vodafone case — could not be verified by citation and date from an accessible primary source here, nor could the current Indian value thresholds. China operates a comparable regime for indirect transfers of Chinese taxable property by non-residents, applying a reasonable-commercial-purpose test administered by the State Taxation Administration. The text of the relevant announcement, widely referred to as Bulletin 7 of 2015, could not be opened from a primary or professional source in this pass, so its conditions and safe harbours are not set out.
Tax due diligence in a share deal targets historic exposure: filing positions, transfer pricing, VAT and payroll, validity of elections (notoriously US S corporation status), survival of losses under section 382, and latent degrouping or exit charges.
Allocation of risk. Share purchase agreements historically dealt with pre-closing tax through a tax indemnity or, in UK and Commonwealth practice, a separate tax deed: the seller pays pre-closing tax liabilities pound for pound, without the materiality and knowledge qualifiers attaching to warranties. That model has been largely displaced in competitive processes by warranty and indemnity (representation and warranty) insurance, letting the seller exit with a clean break and nominal cap. Insurers cover unknown tax exposures within the warranties, but identified risks — a known dispute, an aggressive filing position — are excluded and need a specific indemnity, escrow, price adjustment, or a standalone tax liability policy.
Pre-closing reorganisations. Carve-outs, hive-downs and F-reorganisations are often executed days before signing, to deliver the target in the form the buyer wants. Each step is a taxable event unless it fits a relief, and the reliefs — the Merger Directive, section 368, UK group relief, no gain/no loss transfers — carry clawback conditions triggered by the very sale that follows, so sequencing determines whether relief survives.
Purchase price allocation. For a US asset acquisition, or a deemed one under an election, section 1060 requires the residual method: consideration is allocated in order across seven classes, from cash (Class I) through inventory (Class IV), tangible assets (Class V) and section 197 intangibles (Class VI) to goodwill and going concern value (Class VII), with buyer and seller allocating consistently and both filing Form 8594 (IRS Instructions). It is adversarial: the buyer wants value in short-lived depreciable assets, the seller in goodwill taxed as capital gain. Earn-outs compound this — whether the consideration is sale proceeds or employment compensation, whether interest is imputed, and how it meets an already-filed allocation all differ by jurisdiction, and are among the most commonly mishandled items in cross-border deals.