Tax structuring of merger and acquisition (M&A) transactions in Georgia rests on those norms of the Tax Code that govern the exchange of assets for shares, the reorganization of legal persons and the carryforward of losses. Applying these norms correctly when structuring an operation changes the determination of tax so that the transaction remains within lawful tax benefits.
Contributing assets in exchange for a share
The transfer of assets by a person to a legal person in exchange for a 50 percent or greater share (shares) in it, with or without debt, is not a supply of assets — such an exchange is therefore not taxed as a supply. In that case the value of the assets for the receiving party is the same as for the transferring party at the moment of transfer, and the value of the share received equals the value of the assets transferred minus the debt. Exceptions exist: assets subject to depreciation by the group method are excluded, unless all assets of a group depreciated at a single rate are transferred simultaneously — in which case the group's depreciated value balance counts as the value. A separate exception concerns assets with a legal deficiency: these requirements do not apply to their transferor where the debt exceeds the value of the assets transferred.
The tax regime of reorganization
Upon reorganization, the value of property and shares equals their value before the reorganization, transfers between the parties are not regarded as realization, and the exchange of shares likewise does not constitute realization. The distribution of a share giving rise to a similar right in another party of the reorganization is not a dividend. Reorganization comprises the merger of two or more residents, the acquisition or connection of 50 percent or more of voting shares and of a partner's share with a total value of 50 percent or more, the acquisition of 50 percent or more of the assets of a resident legal person in exchange for voting shares, and division into two or more residents. A party to the reorganization is any resident legal person directly involved in it, directly owning a person involved, or itself owned by such a person; ownership means holding 50 percent or more of the voting shares and 50 percent or more of the value of all remaining shares. Upon distribution of a share, the original value is allocated to the distributable share by a coefficient built on the ratio between the market values of the distributed and original shares. If the tax authority establishes that the purpose of the operation is the avoidance of taxes, this reorganization regime does not apply.
Non-recognition of gain and loss carryforward
A separate norm defines the cases where no gain or loss is recognized: the transfer of an asset between spouses, between former spouses upon divorce, the reinvestment of compensation into a similar asset within the following 2 years after destruction or deprivation, and the change of the registered owner of listed shares without changing the beneficial owner. Gain is likewise not recognized on the supply of a loaned security within a repo agreement, securities lending or financial pledge and its return at a predetermined price. Under the loss carryforward rule, the excess of deductions of a legal person is carried forward for up to 5 years and covered against the excess of deductions of future periods — in M&A operations this means that the choice of structure consistently affects both gain and the tax management of losses. For an individual entrepreneur, a loss from the realization of an asset is compensated only by the excess from the realization of the same type of asset, and if this is impossible in the same year, the loss is not carried to the next year.
The limits of the regime’s application matter as much as the benefits themselves: the provisions of these articles do not apply where any party to the transaction is taxed with profit tax according to different objects of taxation determined by the Tax Code — the regime of each participant of the exchange must be verified in advance. The exception for group-depreciation assets is repeated in both regimes: where the subject of the exchange consists of such assets and the group is not transferred in its entirety, the rule of value continuity does not operate, and the transfer is considered with full tax consequences. It is precisely these two checks — the parties’ regimes and the classification of the asset — that determine whether the benefit applies to the model of the transaction, and it is on these two points that the structure unfolds when the tax authority re-examines the position.
Frequently asked questions
Frequent questions on the tax structuring of mergers and acquisitions, with short answers.
When is contributing assets for shares not taxed?
Where a person transfers assets to a legal person in exchange for a 50 percent or greater share — this is not a supply of assets.
What is included in reorganization?
Merger, acquisition or connection of 50 percent or more, acquisition of 50 percent or more of assets, and division — unless the tax authority establishes tax avoidance.
When is gain not recognized?
Between spouses, upon divorce, upon reinvestment of compensation within the following 2 years, and upon re-registration of shares without changing the beneficial owner.
For what period are losses carried forward?
The excess of deductions of a legal person — up to 5 years.
When does the regime of these articles not apply?
Where a party to the transaction is taxed under different objects of taxation, or the tax authority proves a purpose of avoidance.
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