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Entity Symbols

University of Augsburg German and European Company Law Prof. Dr. Otmar Thömmes 13 / 14 June 2014. Iconography. Entity Symbols. Corporation. Individual. Partnership. Branch. Agenda. Part A: Introduction Company Restructuring – Transactions in Practice Funding of Companies

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Entity Symbols

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  1. University of AugsburgGerman and European Company Law Prof. Dr. Otmar Thömmes13 / 14 June 2014

  2. Iconography Entity Symbols Corporation Individual Partnership Branch

  3. Agenda Part A: Introduction • Company Restructuring – Transactions in Practice • Funding of Companies • Tax Implications of Asset vs. Cash contributions • Single Asset Transfer vs. Universal Succession • Relocation of Seat Part B: Company Restructurings • Civil Law and Tax Law Issues of Company Restructurings at a Domestic Level • Civil Law and Tax Law Issues of Cross-Border Restructurings of Companies • The European Company Law Statute (SE-Statute)

  4. Part A: Introduction

  5. Part A: Introduction • Company Restructuring – Transactions in Practice • Funding of Companies • Tax Implications of Asset vs. Cash contributions • Single Asset Transfer vs. Universal Succession • Relocation of Seat

  6. I. Company Restructuring – Transactions in Practice

  7. I. Company Restructuring – Transactions in Practice • Joint Ventures • Partnerships • Joint Subsidiaries • Holding Companies • European Company – SocietasEuropaea (SE) • Further Pan-European Legal Forms of Entities • Mergers • Division

  8. I. Company Restructuring – Transactions in Practice 1. Joint Ventures A B A B 50% 50% 50% 50% Subsidiary Partnership Other forms of Joint Ventures • Contractual Joint Ventures (without formation of a partnership or subsidiary) • Silent partnerships or participations

  9. I. Company Restructuring – Transactions in Practice 1. Joint Ventures - Terminology Subsidiary: Corporation in which another corporation (parent company) owns at least a majority of the shares Wholly owned If parent owns 100% of the subsidiary: shares in the subsidiary Shareholding or Ownership of shares in a participation: subsidiary (Partnership) interest: Ownership in a partnership

  10. I. Company Restructuring – Transactions in Practice 1. Joint Ventures - Legal Terms of Subsidiaries • Generally all forms of corporations possible • In practice, most commonly: GmbH or limited liability companies e.g. • in UK Ltd Limited company • in F SARLSociété à responsabilitélimitée • in NL BVBeslotenvennootschap

  11. English Terms Civil Law Partnership General Partnership Limited Partnership Limited Partnership on shares Legal Forms in Germany GbR OHG KG (in particular GmbH & Co. KG) KGaA I. Company Restructuring – Transactions in Practice 1. Joint Ventures - Legal Terms of joined partnerships For JV most commonly GbR or OHG

  12. I. Company Restructuring – Transactions in Practice • 1. Joint Ventures - Classification (I) How to classify foreign entities in Germany – Classification Criteria according the BMF (March 19, 2004, BStBl. I 2004, 411) The foreignentityneedstobeexaminedwetheritresembles a German legal entityfromwithrespectto ist legal andeconomicstructure • Examiationofthe legal specificfeaturesundertheforeigncivillaw • Examinationwethertheassorted legal featuresresemble a German legal form or not • Eventuallytheeconomicstructuremay also betakenintoaccount New OFD Frankfurt of Februar 12, 2014, S 2241 A – 107 – St 213

  13. I. Company Restructuring – Transactions in Practice • 1. Joint Ventures - Classification (II)

  14. I. Company Restructuring – Transactions in Practice • 1. Joint Ventures - Classification (III)

  15. I. Company Restructuring – Transactions in Practice 2. Holding Companies (I) A A Holding Sub Sub Sub Sub • Joint ownership in subs through intermediary holding company • Term Holding: A company where sole or primary purpose it is to own shares in other companies (at least two) and exercise the shareholder rights. Holding can also be engaged in the financing of its subsidiaries (so-called “Finance Holding”).

  16. I. Company Restructuring – Transactions in Practice 2. Holding Companies (II) US Parent Use of Holdings for purposes of coordinating shareholder rights in regional subsidiaries, so-called regional holdings. EU Holding LACRO Hold. AP Holding Africa Hold. D FR I MEX BRA ARG CH IND MAL SA ANG KEN

  17. I. Company Restructuring – Transactions in Practice 2. Holding Companies (III) US Parent German HoldCo UK HoldCo French HoldCo Italian HoldCo German Subs UK Subs French Subs Italian Subs • Use of Holdings for purposes of coordinating shareholdings in same country subsidiaries, so-called country holdings.

  18. I. Company Restructuring – Transactions in Practice 2. Holding Companies (IV) - Tax Reasons • Alienation (e.g. sale) of shares often tax exempt at holding level • Group financing: Holding takes out a loan and provides financing to its subsidiaries • Tax consolidation – Group taxation Aggregation of profits and losses for tax purposes

  19. I. Company Restructuring – Transactions in Practice 3. European Company - SocietasEuropaea (SE) • Joint Holding Company • (see Art. 2 (2), Art. 32 et seq. SE Statute) • Joint Subsidiary Company • (see Art. 2 (3), Art. 35 et seq. SE Statute)

  20. I. Company Restructuring – Transactions in Practice 4. Further Pan-European Legal Forms of Entities • European Economic Interest Grouping (EEIG) • (Council Regulation (EEC) No 2137/85 of 25 July 1985 on the European Economic Interest Grouping (EEIG). • European Cooperative Society (SCE) • (Council Regulation (EC) No 1435/2003 of 22 July 2003 on the Statute for a European Cooperative Society (SCE). Council Directive 2003/72/EC of 22 July 2003 supplementing the Statute for a European Cooperative Society with regard to the involvement of employees.) • Not yet available: European Private Company Statute (SPE) • (Proposal for a Council Regulation of 25 June 2008 on the Statute for a European Private Company.) • Not yet available: FundatioEuropaea (FE) • (Proposal for a Council Regulation of 08 February 2012 on the Statute for a European Foundation Statute (FE))

  21. I. Company Restructuring – Transactions in Practice 5. Mergers Increasing intensity of collaboration • Joint Ventures • Holding Companies • Legal Merger

  22. I. Company Restructuring – Transactions in Practice 5. Mergers a) Terminology • The term “Merger” is in Anglo-Saxon countries often used to describe the acquisition by one company of the majority of the shares in another company • “Mergers and Acquisitions” (M&A), in these countries, means the acquisition of an enterprise by another enterprise • “Legal Merger” is frequently used to distinguish a European type of merger, i.e. the amalgamation of two companies into one, from the Anglo-Saxon type of merger by acquisition

  23. I. Company Restructuring – Transactions in Practice 5. Mergers b) Legal Mergers (I) Pre-Merger-Situation SH 3 SH 4 SH 1 SH 2 Company A Company B

  24. I. Company Restructuring – Transactions in Practice 5. Mergers b) Legal Mergers (II) Post-Merger-Situation: Merger by acquisition SH 1 SH 2 SH 3 SH 4 Company A Branch B Transferring company B ceases to exist, company A receives the assets of company B and operates the branch(es) formerly operated by company B.

  25. I. Company Restructuring – Transactions in Practice 5. Mergers b) Legal Mergers (III) Post-Merger-Situation: Merger by formation of a new company SH 1 SH 2 SH 3 SH 4 Company C Branch B Branch A Transferring company A and B cease to exist, new company C receives the assets of companies A and B and operates the branch(es) formerly operated by A and B.

  26. I. Company Restructuring – Transactions in Practice 5. Mergers b) Legal Mergers (IV) Upstream-merger Pre-merger-situation Post-merger-situation Company A Company A Company B The parent company receives the assets of the subsidiary, the subsidiary ceases to exist.

  27. I. Company Restructuring – Transactions in Practice 5. Mergers b) Legal Mergers (V) Downstream-merger Pre-merger-situation Post-merger-situation Company A Company B Company B Branch The subsidiary receives the assets of the parent company, the parent company ceases to exist.

  28. I. Company Restructuring – Transactions in Practice 5. Mergers b) Legal Mergers (VI) • Characteristics of a “legal merger” • Transferring company(ies) cease(s) to exist as legal entity(ies) • No liquidation • Absorption by the receiving company of the assets and liabilities of the transferring company • No requirement of single asset transfers • Universal succession

  29. I. Company Restructuring – Transactions in Practice • 5. Mergers c) European Company Law Measures relative to Mergers • Company Law Directive of 5 April 2011, 2011/35/EU (OJ L 110 of 29.04.2011, p. 1) concerning mergers of public limited liability companies (replacing Third Company Law Directive of 9 October 1978, 78/855/EEC (OJ L 295 of 20.10.1978, p. 36) regarding domestic merger) • Directive of 26 October 2005, 2005/56/EC (OJ L 310, of 25.11.2005, p. 1) on cross-border mergers of limited liability companies • SE-Statute of 8 October 2001 (OJ L 294 of 10.11.2001, p. 1): Formation of a SE through a merger of two public limited companies, see Art. 2 (1) of the Statute

  30. I. Company Restructuring – Transactions in Practice 6. Division (I) Pre-division-situation Post-division-situation “split-off” SH 1 SH 2 SH 1 SH 2 Company A Company B “split-up” SH 1 SH 2 Company A Company B Company C

  31. I. Company Restructuring – Transactions in Practice 6. Division (II) Two forms of Division: • Complete division of company A into two companies B and C; also called “split-up” • Incomplete division of company A, i.e. company A does not cease to exist; also called “split-off”

  32. I. Company Restructuring – Transactions in Practice 6. Division (III) • Sixth Company Law Directive 82/891/EEC of 17 December 1982 on (domestic) divisions of public limited companies (i.e. within one Member State), OJ L 378, 31.12.1982, p. 47 • No proposal yet for cross-border division i.e. concerning companies from different Member States

  33. II. Funding of Companies

  34. Part A: Introduction • Company Restructuring – Transactions in Practice • Funding of Companies • Tax Implications of Asset vs. Cash contributions • Single Asset Transfer vs. Universal Succession • Relocation of Seat

  35. II. Funding of Companies • 1. Funding of Companies - Overview • Asset Contribution versus Cash Contribution • Funding of Contributions – Equity or Cash Funding of companies Equity Debt Cash Contribution Asset Contribution - against new shares - against increase of reserves

  36. II. Funding of Companies • 1. Funding of Companies - Overview • Equity (Shareholder Capital) • Debt (loans) Equity Funding requires either increase in share capital or (deemed) contribution to the capital reserves. Debt Funding requires a loan agreement between the receiving company and the funding company.

  37. II. Funding of Companies • 2. Key features of Equity vs. Loan Financing • Equity Funding does not require the receiving company to pay interest • Loan funding requires interest to be paid by recipient company • Interest free Loans can pose severe tax issues, e.g. deemed income recognition • Hybrid Forms of Equity/Loan Financing e.g. profit participation loans, silent partnerships, jouissance rights (Genussrechte), convertible loans

  38. II. Funding of Companies • 3. Asset vs. Cash Contribution • Cash contribution is simple, quick and does not raise specific requirements • Asset contribution requires valuation of assets if made in exchange for (new) shares – Increase of stated share capital • Principle of Maintenance of Capital

  39. II. Funding of Companies • 3. Asset vs. Cash Contribution a) Company law treatment of • asset contribution (I) • Legal basis: Sec. 27, 183 AktG, Sec. 5, 56 GmbHG • In return shares are issued to the contributing company • Acquisition costs: Sec. 255 para. 1 HGB: • Acquisition costs are all expenses made to acquire assets and liabilities of a company • No specific legal provisions for the evaluation of a contribution in kind

  40. II. Funding of Companies • 3. Asset vs. Cash Contribution a) Company law treatment of • asset contribution (II) • Literature developed principles for evaluation – basis for evaluation is the value of the issued shares • Value of the issued shares and therefore acquisition costs of the shares equals the Fair Market Value (FMV) of the contributed assets • Difference between FMV and book value of asset = capital gain

  41. II. Funding of Companies • 3. Asset vs. Cash Contribution b) Company law treatment of • cash contribution (I) • Cash contribution in exchange for new shares – Increase of stated share capital • Formal requirement: Notarization under German Law (see Sec. 23 AktG, Sec. 2 GmbHG) • Cash injection requirements: complete injection (Volleinzahlung), partial injection (Teileinzahlung), Sec. 36, 36a AktG, Sec. 7 (2),(3) GmbHG

  42. II. Funding of Companies • 3. Asset vs. Cash Contribution b) Company law treatment of • cash contribution (II) • Cash contribution without issuance of new shares • No increase of stated share capital • So-called deemed contribution (verdeckteEinlage) • Mere increase of value of existing shares • No notarization required

  43. III. Tax Implications of Asset vs. Cash contributions

  44. Part A: Introduction • Company Restructuring – Transactions in Practice • Funding of Companies • Tax Implications of Asset vs. Cash contributions • Single Asset Transfer vs. Universal Succession • Relocation of Seat

  45. III. Tax Implications of Asset vs. Cash contributions • 1. Cash Contribution (I) • Receiving company receives cash payment • Cost of acquisition of the shares determined by the amount of cash contributed • Cash does not contain built-in-gains

  46. III. Tax Implications of Asset vs. Cash contributions • 1. Cash Contribution (II) Before the contribution: Company A Fixed assets: 5,0 Mio Equity: 10,0 Mio Current assets Cash: 5,0 Mio Total: 10,0 Mio Total: 10,0 Mio After the contribution: Company B (subs) (Parent) Company A Cash: 0,5 Mio Equity: 0,5 Mio Total: 0,5 Mio Total: 0,5 Mio Fixed assets: 5,0 Mio Equity: 10,0 Mio Shares in affiliated companies 0,5 Mio Cash: 4,5 Mio Total: 10,0 Mio Total: 10,0 Mio

  47. III. Tax Implications of Asset vs. Cash contributions • 2. Asset Contribution (I) Shares granted in exchange for contribution of single assets: • undisclosed reserves of assets contributed are generally subject to income taxation • acquisition costs of the shares granted are amounting to the fair market value of the assets contributed (Sec. 6 para. 6 EStG) • fair market value is determined in Sec. 9 BewG

  48. III. Tax Implications of Asset vs. Cash contributions • 2. Asset Contribution (II) Company A Before the contribution: Fixed assets: 5,0 Mio Equity: 10,0 Mio Current assets Cash: 5,0 Mio Total: 10,0 Mio Total: 10,0 Mio Contribution of assets with book value of 0,5 Mio and market value of 2,0 Mio After the contribution: Company B (subs) (Parent) Company A Assets: 2,0 Mio Equity: 2,0 Mio Total: 2,0 Mio Total: 2,0 Mio Fixed assets: 4,5 Mio Equity: 10,0 Mio Shares in affiliated Profit/Gain: 1,5 Mio companies: 2,0 Mio Cash: 5,0 Mio Total: 11,5 Mio Total: 11,5 Mio The assets contributed do not form a branch of activity/participation interest within the sense of Sec. 20 (1) UmwStG➔ disclosure of built-in-gains

  49. III. Tax Implications of Asset vs. Cash contributions • 2. Asset Contribution (III) • Shares granted in exchange for contribution of • a branch of activity • a participation interest or • shares granting a majority of voting rights to the recipient of the shares • Receiving company may choose between the book value or the fair market value if the conditions of Sec. 20 (2) s. 2 or 21 (1) s. 2 UmwStG respectively are met • Book value: contribution is tax neutral • Fair market value: undisclosed reserves are subject to corporate income tax

  50. III. Tax Implications of Asset vs. Cash contributions • 2. Asset Contribution (IV) Company A Before the contribution: Fixed assets: 5,0 Mio Equity: 10,0 Mio Current assets Cash: 5,0 Mio Total: 10,0 Mio Total: 10,0 Mio Contribution of assets with book value of 0,5 Mio and market value of 2,0 Mio After the contribution: Company B (subs) (Parent) Company A Assets: 0,5 Mio Equity: 0,5 Mio Total: 0,5 Mio Total: 0,5 Mio Fixed assets: 4,5 Mio Equity: 10,0 Mio Shares in affiliated companies 0,5 Mio Cash: 5,0 Mio Total: 10,0 Mio Total: 10,0 Mio The assets contributed form a branch of activity/participation interest within the sense of Sec. 20 (1)/21 (2) UmwStG➔ no disclosure of built-in-gains under the conditions of Sec. 20 (2) s. 2 / Sec. 21 (2) UmwStG

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