How are intangible assets treated in a share deal vs an asset deal?

Full Explanation

The structure of an acquisition — share purchase versus asset purchase — has significant implications for intangible asset treatment, particularly for tax purposes. In a share deal, the acquirer purchases the target company's shares and the target continues as a legal entity. For financial reporting purposes, IFRS 3 requires a full PPA: all intangible assets are identified and measured at fair value on the consolidated balance sheet. However, for tax purposes, the target's historical tax basis in its intangible assets is typically preserved — there is no step-up in tax basis, meaning the acquirer cannot claim additional tax amortisation deductions on the difference between fair value and existing tax basis. In an asset deal, the acquirer purchases individual assets and assumes selected liabilities. The purchase price is allocated across all acquired assets (including intangible assets) for both financial reporting and tax purposes. This creates a stepped-up tax basis: intangible assets are recorded at fair value for tax purposes, and the acquirer can claim tax amortisation deductions on the full fair value. In the UK, this step-up is available for qualifying intangible assets acquired from unrelated parties. In the US, Section 197 provides 15-year straight-line tax amortisation for most intangible assets acquired in an asset deal. The tax benefit of an asset deal can be substantial: if £50M of intangible assets are acquired with a 25% tax rate and 15-year amortisation, the present value of the tax savings (tax amortisation benefit) could be £8-12M. Sellers generally prefer share deals to avoid double taxation (corporate-level gain on the asset sale plus shareholder-level gain on liquidation), while buyers prefer asset deals for the tax step-up. The negotiation between these preferences is a fundamental element of M&A deal structuring.

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