European Tax Issues of Mergers

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European Tax Issues ofMergers
Reorganizations- An Overview -

• Geerten M.M. Michielse
• Technical Assistance Advisor to the IMF
• Georgetown University Law Center
• Washington DC

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Reorganizationscovered by the Directive

• Transfers of Assets
• Exchanges of Shares
• Mergers
• Divisions

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Transfers of Assets

• an operation whereby a company (transferring
  company) transfers without being dissolved all or
  more branches of its activity to another company
  (receiving company) in exchange for the transfer
  of securities representing the capital of the
  company receiving the transfer

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Before
After
Sh R
Sh T
Sh R
Sh T
Transferring entity
Transferring entity
Receiving entity
Receiving entity
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Exchange of Shares

• an operation whereby a company (acquiring
  company) acquires a holding in the capital of
  another company (acquired company) such that it
  obtains a majority of the voting rights in that
  company in exchange for the issue to the
  shareholders of the latter company, in exchange
  for their securities of securities representing
  the capital of the former company,

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Before
After
Sh AG
Sh AD
Sh AG
Sh AD
Acquiring entity
Acquiring entity
Acquired entity
Acquired entity
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Mergers

• an operation whereby one or more companies
  (transferring companies), on being dissolved
  without going into liquidation, transfer all
  their assets and liabilities to another company
  (receiving company) in exchange for the issue to
  their shareholders of securities representing the
  capital of that other company,

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Before
After
Sh R
Sh T
Sh R
Sh T
Receiving entity
Receiving entity
Transferring entity
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Before
After
Sh R
Sh R
Receiving entity
Receiving entity Sh T
Transferring entity
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Divisions

• an operation whereby a company, on being
  dissolved without going into liquidation,
  transfers all its assets and liabilities to two
  or more existing or new companies, in exchange
  for the pro rata issue to its shareholders of
  securities representing the capital of the
  companies receiving the assets and liabilities,

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Before
After
Sh T
Sh T
Receiving entity
Receiving entity
Transferring entity
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Corporate level(taxable issues)

• Hidden reserves on assets / liabilities
• Depreciation basis
• Tax deferrals on provisions / reserves
• Loss carry forward

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Corporate level(tax deferrals on provisions /
reserves)

• Provisions / Reserves which have resulted in a
  permanent tax exemption
• no taxable event for either T or R
• Provisions / Reserves which have resulted in a
  tax deferral
• provision / reserve has to be disclosed and
  included into operational profit of T

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Corporate level(loss carry forward)

• Losses can be carried over to future tax periods,
  if future tax liability arises
• - with same taxpayer who suffered loss
• - within same business activities as loss has
  occurred
• - within a limited number of tax periods

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Shareholders level(capital gains - individual
shareholders)

• Portfolio Investor
• speculative transactions taxable at normal rates
• others tax exempt
• Substantial Shareholder
• taxable at reduced rates
• Entrepreneur
• taxable at normal rates

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Shareholders level(capital gains - corporate
shareholders)

• Qualifying subsidiary
• credit systems taxable
• exemption systems mostly taxable, except when
  participation exemption is extended to capital
  gains / losses (e.g. in NL)
• Others
• taxable

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Roll Over Relief (1)(Article 4 - Same Assets /
Different Owner)

• Transaction shall not give rise to any taxation
  of capital gains
• Conditional upon the requirement that R continues
  tax practice of T regarding calculation of
  depreciation / capital gain

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Provisions / Reserves(Article 5)

• Transfer of tax deferred provisions / reserves
  from T to R
• at book value
• all rights / obligations are assumed to be
  transferred

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Loss Carry Forward(Article 6)

• To the extent that, in domestic situations,
  the EU Member State would apply provisions
  allowing R to take over losses of T
• Transfer of loss R continues Ts position

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Merger into Holding Company(Article 7)

• capital gains / losses accrued shall not be
  liable to any taxation
• may be limited to ?25 participations

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Roll Over Relief (2)(Article 8 - Same Owner /
Different Assets)

• Transaction shall not give rise to any taxation
  of the income, profits or capital gains
• Conditional upon the requirement that value new
  shares ? value of original shares
• Any subsequent transfer of the new shares may be
  taxed
• Cash payment may be taxed

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Taxation of Cash Payment(Article 8, paragraph 4)

• 10 of the nominal value or, , of the
  accounting par value of the securities in the
  Receiving Company
• Pro rata over the new securities
• Used for buy-out of minority shareholders

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EU Conditions(Article 3)

• Company that takes the form as mentioned in the
  Annex
• Not being treated as a resident of a third
  country outside the EU by DTA and
• Subject to a corporate income tax without having
  an option to be or being exempt

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EU Transfer of Assets(T Resident)
Transferring company
Receiving company
PE
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EU Transfer of Assets(T Nonresident)
Transferring company
Receiving company
PE
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Transfer of Permanent Establishment
Transferring company
Receiving company
PE
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Transfer of Permanent Establishment(Article 10)

• Basic rules
• State T shall renounce any right to tax that
  permanent establishment
• Any losses that has been taken into account may
  be recovered
• State PE and State R shall apply the Directive is
  if State PE is State T.
• Derogation
• State T may include capital gains in worldwide
  tax base, but has to give relief for fictitious
  foreign tax.

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EU Exchange of Shares(international principles)

• Art. 13 OECD (Capital Gains)
• Para. 2 (business property)
• State where the permanent establishment to which
  capital gain can be allocated, is located
• Para. 4 (securities)
• State where the alienator is a resident

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EU Exchange of Shares(Sh AD Resident)
Sh AD
Acquiring Company
Acquired Company
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EU Exchange of Shares(Sh AD EU Nonresident)
Sh AD
Acquiring Company
Acquired Company
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EU Exchange of Shares(Conditions)

• Shareholder AD should be
• a) a resident or
• b) hold shares through a permanent establishment
• Companies should be resident in EU member state
• ?Tax claim on capital gains rolled over will
  remain in the member state

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EU Merger or Division
Sh T
Sh R
Transferring company
Receiving company
PE
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Transfer of Assets(Valuation Issues)
Transferring company
D
C
Receiving company
B
A
PE
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Exchange of Shares(Valuation Issues)
Sh AD
E
F
Acquiring Company
G
H
Acquired Company