Tax Savings Strategy 204 | Purchase Loss Company

Company purchase

This strategy involves purchasing a loss-making business and taking ownership of the company structure (to access the accumulated tax losses). Clearly this is only going to make economic sense if the purchaser can restructure and improve the business to turn the current operating losses into ongoing profits. This strategy can be attractive for the following reasons:

Purchasing a loss-making business means the purchase price is low (so the business can be more easily funded).
The purchase price is often just the value of stock and equipment (with nothing for goodwill).
The business is normally very poorly managed so has the potential for rapid improvement.
Access accumulated tax losses to shelter future business profits.

As taking ownership of the company structure will involve a change of control, the purchaser must ensure the ‘similar business test’ is passed, or the accumulated tax losses will be lost. Generally, a company satisfies the similar business test if it carries on a similar business in both the year the losses are absorbed and the time immediately before the change of ownership.
When purchasing control of a company the purchaser needs to consider the risk of undisclosed liabilities, future legal action, or tax liabilities. This makes the due diligence process and vendor warranties doubly important.

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