Tax benefits and practical considerations when merging wholly owned subsidiaries

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A merger is a legal procedure in which two or more companies are combined into one according to the Commercial Act, and the rights and obligations of the merged corporation are comprehensively transferred to the merging corporation. At this time, the merging corporation that transfers its net assets and disappears may face corporate tax issues on the transfer gains and losses, the merging corporation that acquires its net assets may face corporate tax issues on the merger purchase gains and losses, and the shareholders of the merging corporation that return their old shares and receive the consideration may face income tax or corporate tax on dividends.

However, in the case of a qualified merger that satisfies certain requirements under tax law, it is considered that economic identity is maintained despite the merger, so tax benefits such as tax deferral can be received at the time of the merger and the tax burden can be reduced.
In order to be recognized as a qualified merger, it must be a merger between domestic corporations that have been in business for more than one year prior to the merger, and at the time of the merger, more than 80% of the shares must be transferred and allocated and held, the succeeded business must be continued, and more than 80% of the employees must be succeeded and retained. However, in the case of a merger between a wholly owned subsidiary in which the parent company owns 100% of the subsidiary's shares, it is recognized as a qualified merger under the Corporate Tax Act even if the requirements are not met.

Therefore, in the case of a merger of wholly owned subsidiaries, the special taxation on transfer profits and losses, etc. can be applied at the time of the merger. In other words, in the case of the merged corporation, the transfer price received from the merging corporation is considered to be the same as the book value of the net assets of the merged corporation, so there is no transfer profit and loss, and accordingly, no corporate tax is imposed on the transfer income. In addition, from the perspective of the merging corporation, the assets inherited from the merged corporation are considered to have been transferred at the book value, so no merger purchase profit or loss occurs.

Meanwhile, in the case of a merger of wholly owned subsidiaries, the general post-merger management requirements for qualified mergers are not required, which means that there are no additional conditions such as maintaining business or employment after the merger. In addition, there is an advantage in that the subsidiary's carryforward losses or carryforward tax deductions can be transferred to the parent company and deducted later.

However, there are some things to be careful about when deducting inherited losses or tax deductions. In order for the merging corporation to deduct carried-forward losses, etc., the inherited business and other businesses must be recorded separately in separate accounts. In other words, since the carried-forward losses and carried-forward tax deductions inherited from the merged corporation can only be deducted for the income amount generated from the business inherited from the merged corporation during the remaining period, the inherited business and other businesses must be separately accounted for.

However, in exceptional cases of mergers between corporations conducting the same business or between small and medium-sized enterprises, separate accounting may not be performed, and in this case, the income amount generated from the business inherited from the merged corporation is calculated by apportioning the total income amount according to the business asset value ratio of the merging corporation and the merged corporation as of the date of merger registration. In other words, in this case, two methods of separate accounting and apportionment calculation can be selected, and at this time, a decision must be made by comprehensively considering whether separate accounting is possible in practice, the expected future income amount from the business inherited from the merged corporation, and the business asset value ratio.

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