Crossborder mergers and neutrality in shareholder taxation

1
Cross-border mergers and neutrality in
shareholder taxation

• 20 september 2007 Center for European Company
  Law
• Prof. dr.Ton Daniels

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Key tax issues in cross-border corporate activity

• Exit taxes upon corporate emigration
• Up-front tax cost in corporate mergers
• Taxing dividends

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Can a EU member state levy an exit tax?

• Merger Directive 17.2.2005, 2005/19/EC
• The transfer of the registered seat of an SE
  shall not give rise to taxation of capital gains
  for those assets and liabilities that remain
  effectively connected with a permanent
  establishment in the Member State from which the
  registered seat has been transferred

4
Can a EU member state levy an exit tax?

• ECJ Lasteyrie du Saillant case C 9/02
• The principle of freedom of establishment must
  be interpreted as precluding a Member State from
  establishing, as a measure against tax avoidance,
  a mechanism for taxing as yet unrealised
  increases in value where a taxpayer transfers his
  tax residence outside that State.

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Up-front tax cost in corporate mergers

• Merger directive 2005/19/EC
• No capital gains taxation of shareholders of
  Target in case of exchange of shares
• EU Bidco acquires the majority of the voting
  rights
• Maximum cash payment is 10 of nominal value of
  issued shares

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Tax free exchange of shares
EU shareholders non-EU shareholders
Shares max. 10 cash
EU Bidco
gt 50 voting rights
EU Target
Many capital markets transactions exceed the 10
cash limit
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Taxing domestic and foreign dividends

• ECJ freedom of capital implies that outbound
  investment income is not taxed differently from
  domestic investment income
• When the tax for domestic dividends is reduced
  with imputation credit to take into account
  corporate tax, then foreign dividends should
  receive same benefit
• (even though you did not collect any corporate
  tax from the foreign company)

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ECJ concept of freedom of capital forces member
states into dual income tax

• Providing tax benefit to take into account
  corporate tax is too expensive with respect to
  foreign dividends but consequences of economic
  double taxation for domestic profits must be
  cured
• Consequently, domestic and foreign dividends are
  taxed at low flat income tax rate while labor
  remains taxed at progressive rates

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The Shell corporate structure the UK exception
B-shares
A-shares
A-shares pay Dutch dividends B-shares pay Dutch
or UK dividends
Royal Dutch Shell PLC The Hague
trust
non-U.K. group
Shell U.K.
UK dividends are not subject to 15 Dutch
withholding tax UK shareholders entitled to tax
credit for UK dividends
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Conclusions for taxation

• Corporate emigrations we have not come far since
  ECJ in Daily Mail (Case 81/87 of September 27,
  1988)
• Mergers 10 cash limit to be applied per
  shareholder to allow for cash alternative
• Dual income tax major tax reforms in Member
  States caused by ECJs concept of
  Inlanderdiskriminierung of foreign dividends.