Asset deal, share deal, organised part of an enterprise: three models for buying or selling an IT business and their tax consequences

The sale of an IT business can take many different forms. Sometimes the buyer wants to acquire only selected assets, such as software rights, domains, trademarks, a customer base and equipment. Sometimes the buyer wants to acquire shares in a company in order to take over the entire business together with its history, team, contracts and risks. In other cases, the parties choose an intermediate solution, namely the sale of an organised part of an enterprise, often referred to in Poland as ZCP.

For the owner of a software house, a software as a service company, an IT agency or an implementation company, the choice of transaction structure is important not only from a legal and business perspective. It may directly affect value added tax, tax on civil law transactions, income tax, the buyer’s ability to depreciate the acquired assets, liability for historical obligations and the level of formalities involved in closing the transaction.

Importantly, the same transaction model may be viewed differently by the seller and the buyer. The seller usually focuses on the net proceeds from the sale, after taking tax into account, the level of liability after the transaction and the simplicity of the settlement. The buyer, on the other hand, looks at the scope of the risks being assumed, the possibility of recognising the purchase price for tax purposes, continuity of contracts and the security of acquiring rights to the product, code, team and customers.

1. Asset deal, or the sale of selected assets

An asset deal means that the buyer does not acquire the company itself, but specific business assets. In the IT sector, these may include, in particular, copyrights to source code, applications, technical documentation, domains, trademarks, repositories, equipment, licences, customer contracts, know-how, databases or selected elements of the team.

The advantage of this model is flexibility. The buyer may choose only those elements that it actually needs and limit the assumption of the seller’s historical risks. This is often an attractive solution where the selling company also has other projects, disputes, liabilities or tax risks that the buyer does not want to take over.

From a tax perspective, an asset deal usually means that the seller recognises revenue from the sale of individual assets. The tax-deductible cost may be their non-depreciated tax value or other costs recognised under the rules applicable to a given asset. For the buyer, the price paid for the assets may, as a rule, form the basis for tax recognition, for example through depreciation of acquired rights or fixed assets.

For value added tax purposes, the sale of individual assets is generally analysed separately. The sale of equipment may be treated differently from the sale of property rights, and the transfer of certain services or licences may be treated differently again. However, if the package of assets being sold in fact constitutes an enterprise or an organised part of an enterprise, the transaction may be excluded from value added tax.

In practice, the biggest challenge in an asset deal is not the tax itself, but the proper “transfer of the business”. It is necessary to verify whether the copyrights to the code actually belong to the seller, whether programmers and subcontractors have effectively transferred their rights, whether the use of open source components does not restrict the commercialisation of the product and whether customer contracts allow assignment. In IT companies, intellectual property is often the most important asset, and at the same time one of the most commonly underestimated areas of risk.

2. Share deal, or the sale of shares

A share deal means that the buyer acquires shares in the company operating the IT business. From an operational perspective, this is often simpler than an asset deal. The company continues to exist, keeps its contracts, employees, bank accounts, settlement history, licences and customer relationships. The owner changes, but not necessarily the day-to-day functioning of the business.

This model is particularly attractive where the value of the company lies in long-term contracts, a stable team, a recognised brand, certifications, technology partner status or a history of cooperation with enterprise clients. In such cases, transferring each asset separately could be time-consuming and sometimes impossible without the consent of counterparties.

From the seller’s perspective, a share deal is often the simplest form of exiting an investment. The seller sells shares, not individual assets of the company. As a result, the company itself continues to operate, and most contracts, permits, customer relationships and settlements formally remain within the same entity.

From the buyer’s perspective, however, a share deal requires particular caution, especially a thorough due diligence review. The buyer acquires the company together with its history, including potential tax, employment, accounting, contractual and regulatory risks. If the company has incorrectly settled value added tax, corporate income tax, withholding tax, tax reliefs, business-to-business arrangements or programmers’ remuneration in the past, those risks remain within the company.

For a seller who is an individual, the sale of shares is, as a rule, subject to 19% tax on income from capital gains. If the seller is a company, the gain on the sale of shares may be classified as capital gains, for which the corporate income tax rate is generally also 19%. In certain cases, tax exemptions may apply, for example for holding companies or family foundations.

On the buyer’s side, tax on civil law transactions is important. In the case of the sale of shares in a Polish company, the buyer should account for tax on civil law transactions at the rate of 1% of the market value of the property rights.

A disadvantage of a share deal from the buyer’s perspective is the lack of a simple step-up in the tax value of the company’s assets. The buyer pays the price for the shares, but the assets within the company generally retain their existing tax value. Therefore, in a share deal, protective mechanisms are particularly important, such as the seller’s representations and warranties, tax indemnities, escrow, price adjustment, earn-out and a properly conducted tax due diligence review.

3. Organised part of an enterprise, or the sale of a separated business unit

An organised part of an enterprise is an intermediate solution between an asset deal and a share deal. The whole company is not sold, but neither is the transaction merely a random list of assets. The subject of the transaction is a separated part of the business that is capable of operating independently as a standalone business activity.

In the IT sector, an organised part of an enterprise may include, for example, a specific business line, a software as a service product, an implementation department, a maintenance team or a separated unit responsible for a particular platform. A list of assets alone is usually not sufficient to qualify as an organised part of an enterprise. Organisational, financial and functional separation is required. In other words, it must be shown that the relevant part of the business has its own resources, people, processes, revenues, costs and the ability to operate independently.

From the seller’s perspective, an organised part of an enterprise may be a good solution where the objective is to sell a standalone part of the business without selling the entire company. It allows the seller to retain the remaining business while transferring to the buyer a complete, functioning part of the enterprise.

From the buyer’s perspective, an organised part of an enterprise may be attractive because it allows the buyer to acquire an organised business rather than only individual assets. The buyer may take over the team, customers, rights, processes and tools needed to continue the business. At the same time, compared with a share deal, the buyer generally does not acquire the entire company together with its full history. In particular, acquiring an organised part of an enterprise may allow the buyer to limit certain risks, such as potential errors in historical tax settlements.

The most important tax consequence concerns value added tax. The sale of an organised part of an enterprise, like the sale of an enterprise, is not subject to value added tax. However, this does not mean that the transaction is tax-neutral. Since there is no value added tax, it is necessary in practice to analyse tax on civil law transactions. The rates depend on the assets being transferred: generally 2% for movable property and 1% for property rights.

For the seller, the sale of an organised part of an enterprise generally results in taxable revenue. For the buyer, it is important to allocate the price properly to the assets being acquired. This may affect future tax-deductible costs, depreciation and the treatment of any goodwill. In practice, valuation and price allocation are among the key elements of transaction documentation.

An organised part of an enterprise may also have employment consequences. If the business unit being transferred includes a workplace or part of a workplace, the new entity may become a party to the existing employment contracts by operation of law.

The biggest risk in the case of an organised part of an enterprise is the incorrect classification of the transaction. If the parties assume that they are selling an organised part of an enterprise and do not charge value added tax, but the tax authorities later conclude that the transaction was an ordinary asset deal, a dispute may arise over overdue value added tax, interest and potential penalties. Therefore, before the transaction, it is worth preparing a tax analysis, a description of the separation of the organised part of the enterprise, business documentation and, in significant cases, considering an application for an individual tax ruling.

Key differences between an asset deal, share deal and organised part of an enterprise

Which model should be chosen?

There is no single best model for every sale of an IT business. The choice depends on what is actually to be transferred.

An asset deal works well where the buyer wants to acquire selected assets and limit historical risks. It is suitable for the sale of a specific product, application, intellectual property rights or customer portfolio. However, it requires the proper transfer of rights, contracts and data.

A share deal is convenient where the buyer wants to acquire the entire operating business together with the company, its history, team and contracts. It is simpler operationally, but requires more detailed due diligence because the risks remain within the acquired company.

An organised part of an enterprise may be the best solution where a standalone part of the business is being sold, such as a separated product line or service department. It allows an organised business to be transferred without selling the entire company, but requires strong tax and organisational justification.

What should the parties pay attention to before the transaction?

Before starting discussions with an investor, the seller should first verify whether the company has full rights to the code, documentation, graphics, databases and other product elements. It is also worth analysing whether contracts with customers and suppliers allow a change of owner, assignment or reorganisation, and whether arrangements with business-to-business programmers, employees and subcontractors do not generate tax or social security risks.

The buyer should verify whether it is acquiring exactly what it is paying for: intellectual property rights, the team, customers, data, technology, documentation, processes and the ability to continue the business after the transaction. Depending on the transaction model, tax due diligence, intellectual property analysis, review of customer contracts, verification of business-to-business arrangements and assessment of whether the price can be effectively recognised for tax purposes will be particularly important.

A common area for both parties is the proper description of the price. It should be determined whether the price covers assets, shares, goodwill, a non-compete undertaking, earn-out, remuneration for transitional services or other elements. This may affect both the taxation of the seller and the buyer’s ability to recognise the expenditure for tax purposes.

In practice, taxes should not be analysed only at the end, once the parties have already agreed on the price and signed a letter of intent. The transaction structure affects the economics of the sale from the very beginning. The same gross price may result in a different net outcome for the seller and a different cost for the buyer, depending on whether the parties choose an asset deal, a share deal or the sale of an organised part of an enterprise.

A well-planned transaction helps avoid surprises: unexpected value added tax, tax on civil law transactions, depreciation issues, disputes over intellectual property or liability for historical settlements. In the IT sector, where the greatest value often lies not in desks and computers, but in code, the team, contracts and know-how, the right sale structure may determine the success of the entire transaction.