Buying a Business in China: Asset Deal or Share Deal?
When acquiring a business in China, choosing the right transaction structure is one of the first key decisions that can terminate the success of the deal. Whether an acquisition is structured as an asset deal or a share deal directly affects the tax burden, risk exposure, closing timeline and, ultimately, the return on investment.
Many difficulties in M&A transactions do not arise from the target company itself, but from choosing the wrong transaction structure at the outset.
Neither structure is inherently better than the other. However, the wrong choice can lead to hidden liabilities, significant tax exposure, or the loss of essential licenses and permits. Understanding the key advantages and disadvantages of both structures is therefore essential.
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1. Speed and Complexity
Asset Deal | More complex and time-consuming
Each individual asset, contract, license and permit must be identified, valued and transferred separately. Supply agreements, employment contracts and technology licenses do not automatically transfer together with the assets and may need to be renegotiated and entered into individually. This can significantly extend the transaction timeline.
Share Deal | Faster and more efficient
Only the ownership of the company changes, while the legal entity itself remains unchanged. Existing contracts, licenses and permits generally remain in effect, avoiding the need to renegotiate and re-execute a large number of agreements.
2. Tax Considerations
Asset Deal | Benefit from a step-up in tax basis
Acquired assets can be recognized based on the actual transaction price, allowing the buyer to benefit from future tax deductions through depreciation and amortization. This can provide significant long-term tax advantages.
However, if the assets have substantially increased in value, the seller may face a significant tax burden on the transfer. This additional cost is likely to become a factor in the negotiation of the purchase price.
Share Deal | Lower transaction taxes at closing, but long-term tax risks require attention
Transaction taxes at the closing stage are generally lower, and the consideration is based on the company’s net assets, making the transaction appear less costly initially.
However, the buyer does not benefit from a step-up in the tax basis of the underlying assets and therefore cannot claim additional depreciation or amortization deductions. Any risks associated with unrealized appreciation within the target company are subsequently borne by the buyer.
3. Risk and Liability
Asset Deal | Greater risk isolation from historical liabilities
As a general principle, the buyer does not assume the target company’s historical liabilities. Previous litigation, historical tax risks and legacy debts remain separate from the buyer. This can reduce the scope of due diligence and provide clearer and more manageable risk boundaries.
Share Deal | The company and its historical risks are acquired as a whole
In a share deal, the buyer acquires the target company together with its existing history and liabilities. Even previously undisclosed liabilities, historical disputes or legacy tax issues may subsequently become the responsibility of the new shareholder.
Comprehensive and detailed due diligence is therefore not optional in a share deal, but essential.
4. Licenses, Permits and Commercial Contracts
Asset Deal | Licenses and permits generally do not transfer automatically
In China, many government approvals and licenses are tied to the legal entity rather than to the underlying assets. As a result, they generally do not automatically transfer as part of an asset deal.
If a significant part of the target’s value lies in licenses or permits that are scarce or difficult to obtain again, this can become a major disadvantage of an asset deal.
Share Deal | Existing licenses and contracts generally continue
Because the legal entity remains unchanged, existing operating licenses, special permits and commercial contracts generally remain legally valid and continue in effect.
5. Employee Arrangements
Asset Deal
Since there is no succession of the legal entity itself, and asset deal will often require arrangements for transferring or re-entering into employment contracts with existing employees. Certain positions may also not be continued. This can involve statutory employee settlement procedures, calculations of economic compensation and extensive communication with employees.
Share Deal
The target company remains the same legal entity and existing employment contracts generally continue to be valid and performed as before. As a result, a share deal will normally not trigger large-scale employee settlement procedures or compensation obligations, and the impact on the workforce is comparatively limited.
6. Deal Financing
Asset Deal
The buyer acquired clearly identifiable tangible assets. From the perspective of financial institutions, credit approval and financing arrangements for this type of transaction are generally more straightforward.
Share Deal
Financing a share acquisition may be subject to stricter regulatory requirements and more extensive review by financial institutions. This is particularly relevant in cross-border transactions.
Which Structure Is Right?
There is no one-size-fits-all-answer. The appropriate transaction depends on the buyer’s key objectives, the actual circumstances of the target company and the negotiations between the buyer and seller.
In practice, the interests of buyers and sellers are often fundamentally different. At the same time, rules relating to controlled foreign companies, transfer pricing and profit distributions by foreign-invested enterprises continue to evolve. As a result, the compliance risks underlying an M&A transaction can be considerably more complex than they initially appear.
High-quality due diligence is therefore a critical first step in avoiding potential M&A risks. If the review remains superficial, hidden liabilities, historical tax issues and risks relating to licenses and contracts may only become apparent after closing, when remedial action can be significantly more costly.
How ECOVIS Can Support Your M&A Transaction
ECOVIS can provide integrated due diligence services for domestic and cross-border M&A transactions, covering financial, tax and legal due diligence, specialized loss verification due diligence and compliance risk reviews. Our teams can help identify historical liabilities and potential tax risks and prepare professional due diligence reports.
We can also assist in reviewing key provisions of performance-based agreements, monitor and support their implementation, and coordinate related legal procedures and employment documentation.
If you are currently considering an acquisition or an asset disposal, the ECOVIS team can support you in assessing the transaction in depth, identifying potential risks at an early stage and establishing a solid foundation for a secure M&A investment.
FAQ
In an asset deal, the buyer acquires individual assets, contracts, and licenses of the target company, while the legal entity itself remains with the seller. In a share deal, by contrast, the buyer acquires the shares in the company itself — the legal entity, along with existing contracts, licenses, and liabilities, remains unchanged.
There is no blanket answer. An asset deal allows the buyer to step up the tax basis of the acquired assets, enabling future depreciation and amortization benefits, but it can trigger significant tax liabilities for the seller. A share deal typically involves lower transaction taxes at closing, but carries long-term tax risks for the buyer.
Yes. In a share deal, the buyer takes over the company along with its entire history, including undisclosed liabilities, prior litigation, or legacy tax risks. Thorough due diligence is therefore essential.
Since many administrative licenses and permits in China are tied to the legal entity rather than to the underlying assets, they generally do not transfer automatically to the buyer in an asset deal. This can become a significant drawback for companies whose value depends heavily on hard-to-obtain licenses.
There is no one-size-fits-all answer — the right structure depends on the buyer’s objectives, the specific situation of the target company, and the negotiations between buyer and seller. High-quality due diligence is the critical first step to properly assess the opportunities and risks of both structures.
