European Tax Issues of Mergers & Reorganizations - An Overview -

European Tax Issues ofMergers & Reorganizations- An Overview - Geerten M.M. Michielse Technical Assistance Advisor to the IMF Georgetown University Law Center Washington DC

Reorganizationscovered by the Directive • Transfers of Assets • Exchanges of Shares • Mergers • Divisions

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”

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

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, …”

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

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, …”

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

Before: After: Sh R Sh R Receiving entity = Sh T Receiving entity Transferring entity

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,…”

Before: After: Sh T Sh T Transferring entity Receiving entity Receiving entity

Corporate level(taxable issues) • Hidden reserves on assets / liabilities • Depreciation basis • Tax deferrals on provisions / reserves • Loss carry forward

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

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

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

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

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

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

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 T’s position

Merger into Holding Company(Article 7) • capital gains / losses accrued shall not be liable to any taxation • may be limited to 25% participations

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

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

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”

EU Transfer of Assets(T = Resident) Transferring company Receiving company PE

EU Transfer of Assets(T = Nonresident) Transferring company Receiving company PE

Transfer of Permanent Establishment Transferring company Receiving company PE

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’.

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

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

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

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

EU Merger or Division Sh T Sh R Transferring company Receiving company PE

Transfer of Assets(Valuation Issues) Transferring company D C Receiving company B A PE

Exchange of Shares(Valuation Issues) Sh AD E F Acquiring Company G H Acquired Company

European Tax Issues of Mergers & Reorganizations - An Overview -