European Tax Issues ofEuropean Tax Issues ofMergers & ReorganizationsMergers & Reorganizations
- An Overview -- An Overview -
Geerten M.M. MichielseGeerten M.M. Michielse
Technical Assistance Advisor to the IMFTechnical Assistance Advisor to the IMF
Georgetown University Law CenterGeorgetown University Law Center
Washington DCWashington DC
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ReorganizationsReorganizationscovered by the Directivecovered by the Directive
Transfers of AssetsTransfers of Assets
Exchanges of SharesExchanges of Shares
MergersMergers
DivisionsDivisions
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Transfers of AssetsTransfers of Assets
““an operation whereby a company an operation whereby a company
(transferring company) transfers (transferring company) transfers without without
being dissolvedbeing dissolved all or more all or more branches of its branches of its
activityactivity to another company (receiving to another company (receiving
company) in company) in exchange for the transfer of exchange for the transfer of
securitiessecurities representing the capital of the representing the capital of the
company receiving the transfer”company receiving the transfer”
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Before:Before: After:After:
Sh RSh RSh TSh T Sh RSh R Sh TSh T
TransferringTransferringentityentity
ReceivingReceivingentityentity
ReceivingReceivingentityentity
TransferringTransferringentityentity
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Exchange of SharesExchange of Shares
““an operation whereby a company an operation whereby a company (acquiring company) acquires a (acquiring company) acquires a holding in holding in the capitalthe capital of another company (acquired of another company (acquired company) such that it obtains a company) such that it obtains a majority of majority of the voting rightsthe voting rights in that company in that company in in exchange for the issueexchange for the issue to the shareholders to the shareholders of the latter company, in exchange for their of the latter company, in exchange for their securities securities of securitiesof securities representing the representing the capital of the former company, …”capital of the former company, …”
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Before:Before: After:After:
Sh AGSh AGSh ADSh AD Sh AGSh AG Sh ADSh AD
AcquiringAcquiringentityentity
AcquiredAcquiredentityentity
AcquiringAcquiringentityentity
AcquiredAcquiredentityentity
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MergersMergers
““an operation whereby an operation whereby one or more one or more companiescompanies (transferring companies), (transferring companies), on on being dissolved without going into being dissolved without going into liquidationliquidation, transfer , transfer all their assets and all their assets and liabilitiesliabilities to to another … companyanother … company (receiving (receiving company) company) in exchange for the issuein exchange for the issue to their to their shareholders shareholders of securitiesof securities representing the representing the capital of that other company, …”capital of that other company, …”
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Before:Before: After:After:
Sh RSh RSh TSh T Sh RSh R Sh TSh T
ReceivingReceivingentityentity
ReceivingReceivingentityentity
TransferringTransferringentityentity
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Before:Before: After:After:
Sh RSh R Sh RSh R
ReceivingReceivingentityentity
TransferringTransferringentityentity
ReceivingReceivingentity = Sh Tentity = Sh T
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DivisionsDivisions
““an operation whereby a an operation whereby a companycompany, , on being on being dissolved without going into liquidationdissolved without going into liquidation, , transfers transfers all its assets and liabilitiesall its assets and liabilities to to two two or more existing or new companiesor more existing or new companies, , in in exchange for the pro rata issueexchange for the pro rata issue to its to its shareholders shareholders of securitiesof securities representing the representing the capital of the companies receiving the capital of the companies receiving the assets and liabilities,…”assets and liabilities,…”
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Before:Before: After:After:
Sh TSh T Sh TSh T
ReceivingReceivingentityentity
ReceivingReceivingentityentity
TransferringTransferringentityentity
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Corporate levelCorporate level(taxable issues)(taxable issues)
Hidden reserves on assets / liabilitiesHidden reserves on assets / liabilities
Depreciation basisDepreciation basis
Tax deferrals on provisions / reservesTax deferrals on provisions / reserves
Loss carry forwardLoss carry forward
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Corporate levelCorporate level(tax deferrals on provisions / reserves)(tax deferrals on provisions / reserves)
Provisions / Reserves which have resulted Provisions / Reserves which have resulted in a in a permanent tax exemptionpermanent tax exemption::– no taxable event for either T or Rno taxable event for either T or R
Provisions / Reserves which have resulted Provisions / Reserves which have resulted in a in a tax deferraltax deferral::– provision / reserve has to be disclosed and provision / reserve has to be disclosed and
included into operational profit of Tincluded into operational profit of T
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Corporate levelCorporate level(loss carry forward)(loss carry forward)
Losses can be carried over to future tax Losses can be carried over to future tax periods, if future tax liability arisesperiods, if future tax liability arises
- with same taxpayer who suffered loss- with same taxpayer who suffered loss- within same business activities as loss has - within same business activities as loss has
occurredoccurred - within a limited number of tax periods- within a limited number of tax periods
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Shareholders’ levelShareholders’ level(capital gains - individual shareholders)(capital gains - individual shareholders)
Portfolio InvestorPortfolio Investor– speculative transactions: taxable at normal ratesspeculative transactions: taxable at normal rates– others: tax exemptothers: tax exempt
Substantial ShareholderSubstantial Shareholder– taxable at reduced ratestaxable at reduced rates
EntrepreneurEntrepreneur– taxable at normal ratestaxable at normal rates
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Shareholders’ levelShareholders’ level(capital gains - corporate shareholders)(capital gains - corporate shareholders)
Qualifying subsidiaryQualifying subsidiary– credit systems: taxablecredit systems: taxable– exemption systems: mostly taxable, except exemption systems: mostly taxable, except
when participation exemption is extended to when participation exemption is extended to capital gains / losses (e.g. in NL)capital gains / losses (e.g. in NL)
OthersOthers– taxable taxable
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Roll Over Relief (#1)Roll Over Relief (#1)(Article 4 - (Article 4 - Same Assets / Different OwnerSame Assets / Different Owner))
Transaction “shall not give rise to any Transaction “shall not give rise to any taxation of capital gains …”taxation of capital gains …”
Conditional upon the requirement that R Conditional upon the requirement that R continues tax practice of T regarding continues tax practice of T regarding calculation of depreciation / capital gaincalculation of depreciation / capital gain
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Provisions / ReservesProvisions / Reserves(Article 5)(Article 5)
Transfer of tax deferred provisions / reserves Transfer of tax deferred provisions / reserves from T to Rfrom T to R
at book valueat book value all rights / obligations are assumed to be all rights / obligations are assumed to be
transferredtransferred
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Loss Carry ForwardLoss Carry Forward(Article 6)(Article 6)
““To the extent that, … [in domestic To the extent that, … [in domestic situations], the EU Member State would situations], the EU Member State would apply provisions allowing [R] to take over apply provisions allowing [R] to take over losses of [T] …”losses of [T] …”
Transfer of loss: R continues T’s positionTransfer of loss: R continues T’s position
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Merger into Holding CompanyMerger into Holding Company(Article 7)(Article 7)
capital gains / losses accrued shall not be capital gains / losses accrued shall not be liable to any taxationliable to any taxation
may be limited to may be limited to 25% participations25% participations
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Roll Over Relief (#2)Roll Over Relief (#2)((Article 8Article 8 - - Same Owner / Different AssetsSame Owner / Different Assets))
Transaction “shall not give rise to any Transaction “shall not give rise to any taxation of the income, profits or capital taxation of the income, profits or capital gains …”gains …”
Conditional upon the requirement that value Conditional upon the requirement that value new shares new shares value of original shares value of original shares
Any subsequent transfer of the new shares Any subsequent transfer of the new shares may be taxedmay be taxed
Cash payment may be taxedCash payment may be taxed
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Taxation of Cash PaymentTaxation of Cash Payment(Article 8, paragraph 4)(Article 8, paragraph 4)
““10% of the nominal value or, …, of the 10% of the nominal value or, …, of the accounting par value of [the securities in the accounting par value of [the securities in the Receiving Company]”Receiving Company]”
Pro rata over the new securitiesPro rata over the new securities Used for ‘buy-out’ of minority shareholdersUsed for ‘buy-out’ of minority shareholders
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EU ConditionsEU Conditions(Article 3)(Article 3)
Company that takes the form as mentioned Company that takes the form as mentioned in the Annex;in the Annex;
Not being treated as a resident of a third Not being treated as a resident of a third country outside the EU by DTA; andcountry outside the EU by DTA; and
Subject to a corporate income tax “without Subject to a corporate income tax “without having an option to be or being exempt” having an option to be or being exempt”
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EU Transfer of AssetsEU Transfer of Assets(T = Resident)(T = Resident)
ReceivingReceivingcompanycompany
TransferringTransferringcompanycompany
PEPE
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EU Transfer of AssetsEU Transfer of Assets(T = Nonresident)(T = Nonresident)
ReceivingReceivingcompanycompany
TransferringTransferringcompanycompany
PEPE
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Transfer of Permanent EstablishmentTransfer of Permanent Establishment
ReceivingReceivingcompanycompany
TransferringTransferringcompanycompany
PEPE
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Transfer of Permanent EstablishmentTransfer of Permanent Establishment(Article 10)(Article 10)
Basic rules:Basic rules:– State T shall renounce any right to tax that permanent State T shall renounce any right to tax that permanent
establishment;establishment;– Any losses that has been taken into account may be Any losses that has been taken into account may be
recovered;recovered;– State PE and State R shall apply the Directive is if State State PE and State R shall apply the Directive is if State
PE is State T.PE is State T.
Derogation:Derogation:– State T may include capital gains in worldwide tax State T may include capital gains in worldwide tax
base, but has to give relief for ‘fictitious foreign tax’.base, but has to give relief for ‘fictitious foreign tax’.
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EU Exchange of SharesEU Exchange of Shares(international principles)(international principles)
Art. 13 OECD (Capital Gains)Art. 13 OECD (Capital Gains)
Para. 2 (business property)Para. 2 (business property)– State where the permanent establishment to State where the permanent establishment to
which capital gain can be allocated, is locatedwhich capital gain can be allocated, is located
Para. 4 (securities)Para. 4 (securities)– State where the alienator is a residentState where the alienator is a resident
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EU Exchange of SharesEU Exchange of Shares(Sh AD = Resident)(Sh AD = Resident)
Sh ADSh AD
AcquiringAcquiringCompanyCompany
AcquiredAcquiredCompanyCompany
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EU Exchange of SharesEU Exchange of Shares(Sh AD = EU Nonresident)(Sh AD = EU Nonresident)
Sh ADSh AD
AcquiringAcquiringCompanyCompany
AcquiredAcquiredCompanyCompany
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EU Exchange of SharesEU Exchange of Shares(Conditions)(Conditions)
Shareholder AD should beShareholder AD should be
a) a resident; ora) a resident; or
b) hold shares through a permanent establishmentb) hold shares through a permanent establishment
Companies should be resident in EU member stateCompanies should be resident in EU member state
Tax claim on capital gains rolled over will Tax claim on capital gains rolled over will
remain in the member stateremain in the member state
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EU Merger or DivisionEU Merger or Division
ReceivingReceivingcompanycompany
TransferringTransferringcompanycompany
PEPE
Sh TSh T Sh RSh R
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Transfer of AssetsTransfer of Assets(Valuation Issues)(Valuation Issues)
ReceivingReceivingcompanycompany
TransferringTransferringcompanycompany
PEPE
AA BB
CCDD
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Exchange of SharesExchange of Shares(Valuation Issues)(Valuation Issues)
Sh ADSh AD
AcquiringAcquiringCompanyCompany
AcquiredAcquiredCompanyCompany
EE FF
GGHH