The Inland Revenue Authority of Singapore has published an updated e-Tax Guide, Tax Framework for Corporate Amalgamations (Fourth Edition). The tax framework was introduced under section 34C of the Income Tax Act (ITA) in 2009 to minimize the tax consequences arising from corporate amalgamations. Background information and the income tax treatment of corporate amalgamations before and after the introduction of the tax framework are provided in the e-Tax guide as follows:

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Background

Since 30 January 2006, companies have been able to carry out voluntary amalgamations without having to first obtain court approval. This form of amalgamation (hereinafter referred to as "statutory voluntary amalgamations") is provided for in sections 215B to 215G of the Companies Act 1967.

A statutory voluntary amalgamation envisages the continuation of the amalgamating companies as one single company, which may be a new company or one of the amalgamating companies (hereinafter referred to as "amalgamated company"). The significant legal implication upon such an amalgamation is that all property, rights, privileges, liabilities and obligations, etc. of each of the amalgamating companies will be transferred to and assumed by the amalgamated company. Shareholders of the amalgamating companies may or may not become shareholders of the amalgamated company.

A statutory voluntary amalgamation takes effect on the date specified in the Notice of Amalgamation issued by the Registrar of Companies. On that day, all the assets, liabilities, property, rights, powers and privileges of the amalgamating companies are vested in the amalgamated company. The amalgamated company will have its name registered (if it is newly incorporated) and all of the amalgamating companies (except the surviving company, where applicable) will be removed from the register of companies.

A statutory voluntary amalgamation is different from the two basic methods of mergers and acquisitions -

• acquisition of assets in a target company where the target company remains after the disposal of its assets; and
• acquisition of shares in a target company where the shareholders of the target company sell their shares to the purchasing company and the target company becomes a subsidiary of the purchasing company thereafter.

In a statutory voluntary amalgamation, only one company remains or is formed upon the completion of the amalgamation process.

Income Tax Treatment for Corporate Amalgamations

Prior to 22 January 2009

Prior to the introduction of the tax framework for qualifying corporate amalgamations in 2009, for income tax purposes, amalgamating companies are treated as having ceased their businesses and disposed of their assets and liabilities and the amalgamated company is treated as having acquired or commenced a new business. This treatment may give rise to taxable gains in the hands of the amalgamating companies because revenue assets are subject to tax based on either the transfer price or open market value ("OMV"). Balancing allowance or charge on plant and machinery or industrial buildings will also have to be accounted for upon disposal, unless the companies involved in the amalgamation are eligible to make an election under section 24 of the ITA.

From 22 January 2009

To minimise the tax consequences arising from amalgamations, the tax framework for specified statutory amalgamations (hereinafter referred to as "qualifying amalgamations"), was introduced in 2009 under Section 34C of the ITA.

This tax framework is intended to give tax effect to qualifying amalgamations as if there is no cessation of the existing businesses by the amalgamating companies (and hence no acquisition of new businesses by the amalgamated company) and all risks and benefits that exist prior to the merger are transferred and vested in the amalgamated company. In other words, qualifying amalgamations will be treated as a continuation of the existing businesses of the amalgamating companies by the amalgamated company. On the date of amalgamation, i.e. the date shown in a notice of amalgamation or a court order, the amalgamated company will be treated as having "stepped into the shoes" of the amalgamating companies and continued with the businesses seamlessly.

This tax framework ensures that most of the tax consequences of a continuing business will apply to the amalgamated company. Hence, the tax treatment of provisions, trading stocks, capital allowances, accruals, prepayments etc., transferred to the amalgamated company is ascertained on the basis that the businesses of the amalgamating companies that have been taken over entirely have not ceased upon amalgamation but continue in the amalgamated company, as part of the business (or enlarged business) of the amalgamated company.