Before 2016 nearly all transactions related to the acquisition of property in Poland were conducted in the form of asset deals. By now, share deals have become a popular alternative. Sylwia Toczyska, Director of Client Services at Vistra Poland talked to Property Forum about the current structure of transactions concluded in Poland.
What are the key differences between share deals and asset deals on the real estate investment market?
In general, with a share deal transaction, the purchaser acquires the company by buying all its shares. To put it simply, they buy the whole history of the company including liabilities. When it comes to the asset deal, they buy the assets of the company and in a particular case these may be real estate assets including office buildings, shopping centres, logistic parks, hotels and others. Share deal transactions are subject to civil tax which constitutes an additional cost for the buyer (transactional cost). If it comes to an asset deal transaction, it is subject to VAT taxation which means that the seller charges 23% VAT, which later on is recovered by the purchaser from the tax office. Such a procedure is supported by relevant binding tax rulings.
What is the current distribution of share deals vs asset deals on the Polish market? Has this distribution changed in recent years?
Before 2016 nearly 100% transactions (excluding some individual cases) related to the acquisition of properties in Poland were conducted in the form of asset deals. Every time such processes were secured by a binding tax ruling issued by the respective tax office. However, the VAT turbulences in the middle of 2016 had a significant impact on the structure of transactions. Tax authorities started to question closed deals and challenged the facts presented in binding tax rulings which did not reflect, in a precise and correct way, the actual standing. As a result, investors did not recover the input VAT from some transactions. This practice definitely changed the way of conducting transactions in the real estate sector on the Polish market.
Currently, most deals are closed either as business units (in different words, enterprise deals) or share deals, both subject to civil tax. This is probably also the result of the implementation of VAT fines which may be imposed on taxpayers who do not present the correct amount of VAT in their tax returns, to which the asset deals are subject. Additionally, it is visible that banks have started to limit the VAT bridge financing, which again was a milestone for asset deal transactions.
What are the key elements the buyer should consider when deciding between a share deal and an asset deal?
It is worth remembering that in share deal transactions, the buyer acquires the whole history of the company’s activity including liabilities and liability risks. That is why the decision about the transaction should be preceded by a detailed due diligence with a focus on potential tax liabilities. Depending on the result of the due diligence, a title insurance should be considered in order to cover or limit certain risk areas. Additionally, the buyer should not forget about the civil tax (not recoverable in terms of taxation with VAT) to which such a transaction is subjected. The above-mentioned aspects will definitely make closing the deal take longer, and also increase the cost of the whole transaction. On the other hand, with an asset deal, the buyer must be aware of the risk associated with challenges which may occur during the VAT recovery process. If the refund is questioned, it may change the return rate for an investor and may expose the buyer to VAT fines.
What are the key elements the seller should consider when deciding between a share deal and an asset deal?
From the seller’s point of view, a transaction conducted in the form of a share deal may be associated with additional costs such as the increased cost of transactions resulting from the detailed due diligence, the cost of title insurance / indemnities for certain areas pointed out by lawyers / advisors, an additional tax burden (the transaction is subject to civil tax), as well as the cost resulting from the company’s sale (capital gains tax). It is important to share these costs between the parties in order not to decrease the seller’s profit. Certainly, the parties must be aware that it will take longer to close a share deal in comparison to an asset deal transaction. However, at the end, the seller will not be left with an empty entity which still requires engagement in terms of being compliant with local regulations, as usually experienced in an asset deal transaction.
Is there a significant difference in terms of transaction costs?
We may definitely say that the costs associated with share deal transactions are significantly higher compared to others, due to a more sophisticated due diligence process which is usually in the buyer’s interest. Additionally, the cost of the tax burden makes the share deal transaction less attractive. Nevertheless, I believe that this trend will continue until new tools providing more comfort in the tax treatment of transactions are implemented. The implementation of split payment in VAT definitely shows the right direction of changes to limit the uncertainty. Additionally, the current changes in tax treaty legislation or General Anti-Avoidance Rules may definitely change the structure of real estate deals in the future.
