26 June 2009

Legal and Tax Considerations of Asset Purchase Agreements

Argentina has specific legislation that covers the transfer of assets from one business to another and places various restrictions on the transfer. Both parties to the transfer are also subject to procedures designed to protect creditors. The goal is to prevent debtors from transferring assets from one person or company to another, thus depriving creditors from the assets they hold as a guarantee against the debtor.

Obviously as a purchaser, executing a properly prepared asset purchase agreement allows you to take ownership of a business without any of the hidden liabilities that can arise from a stock purchase agreement. The problem is in the execution of the asset purchase agreement, however. It takes longer than a stock purchase and there are various formalities to be followed.

Special Case For Labor-Related Liabilities
Argentine law provides for joint liability in the case of labor-related liabilities (i.e. employee wages, social security payments, severance, etc). There is no way to execute an asset purchase agreement and rid yourself of the seller's labor-related debts. Therefore, it is imperative that the buyer ensure that the seller has everything in order with regard to their employees. It is common in many Argentine companies to have employees classified as independent contractors, undeclared, or with an official salary lower than the real salary paid.

It is also important to note that employees cannot be obligated to change from one employer to another. Employees who do not wish to be transferred will need to be laid off and paid severance.

Executing the Transfer
To execute an asset purchase agreement, the transfer must be announced in the Official Bulletin and creditors of the seller will have the chance to oppose the transfer unless full payment is received for their debts. If this announcement is not made and creditors are not given a chance to respond, the buyer becomes liable for all debts of the business.

Tax Debts
When transferring a business, AFIP should be notified by the buyer. AFIP has three months from the date the transfer takes place (not the date of notification) to investigate and impose any unassessed taxes. After the three month window, the buyer is in the clear and is not liable for back taxes owed.

Again, this shows the importance of structring the purchase agreement with payments over a long period of time rather than a large upfront payment. In the asset purchase transaction I participated in, an upfront payment for half the purchase price was made with follow-up payments over a 6 month period. Undeclared tax liabilites were discovered and we retained one of the follow-up payments until proof of payment of the tax liability was presented.

Tax Consequences of Asset Purchases
The seller will be liable for payment of 21% VAT on the sale of all goods (included would be the business' inventory, machinery, etc., but not any real estate) and income tax on any profits that are generated as a result of the sale.

Due to all these condiserations, it is always much easier to to execute share purchase agreements rather than asset purchase agreements if the goal is to acquire an existing business. The seller will almost always wish to use the share purchase method. However, if there is a particular concern about hidden liabilities the buyer may want to consider the asset purchase method to ensure that their operations begins with a clean slate.

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