European Tax Issues of Mergers & Reorganizations - An Overview -

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

(c) G.M.M. Michielse - 2002 2

ReorganizationsReorganizationscovered by the Directivecovered by the Directive

Transfers of AssetsTransfers of Assets

Exchanges of SharesExchanges of Shares

MergersMergers

DivisionsDivisions

(c) G.M.M. Michielse - 2002 3

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”

(c) G.M.M. Michielse - 2002 4

Before:Before: After:After:

Sh RSh RSh TSh T Sh RSh R Sh TSh T

TransferringTransferringentityentity

ReceivingReceivingentityentity

ReceivingReceivingentityentity

TransferringTransferringentityentity

(c) G.M.M. Michielse - 2002 5

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, …”

(c) G.M.M. Michielse - 2002 6

Before:Before: After:After:

Sh AGSh AGSh ADSh AD Sh AGSh AG Sh ADSh AD

AcquiringAcquiringentityentity

AcquiredAcquiredentityentity

AcquiringAcquiringentityentity

AcquiredAcquiredentityentity

(c) G.M.M. Michielse - 2002 7

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, …”

(c) G.M.M. Michielse - 2002 8

Before:Before: After:After:

Sh RSh RSh TSh T Sh RSh R Sh TSh T

ReceivingReceivingentityentity

ReceivingReceivingentityentity

TransferringTransferringentityentity

(c) G.M.M. Michielse - 2002 9

Before:Before: After:After:

Sh RSh R Sh RSh R

ReceivingReceivingentityentity

TransferringTransferringentityentity

ReceivingReceivingentity = Sh Tentity = Sh T

(c) G.M.M. Michielse - 2002 10

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,…”

(c) G.M.M. Michielse - 2002 11

Before:Before: After:After:

Sh TSh T Sh TSh T

ReceivingReceivingentityentity

ReceivingReceivingentityentity

TransferringTransferringentityentity

(c) G.M.M. Michielse - 2002 12

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

(c) G.M.M. Michielse - 2002 13

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

(c) G.M.M. Michielse - 2002 14

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

(c) G.M.M. Michielse - 2002 15

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

(c) G.M.M. Michielse - 2002 16

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

(c) G.M.M. Michielse - 2002 17

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

(c) G.M.M. Michielse - 2002 18

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

(c) G.M.M. Michielse - 2002 19

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

(c) G.M.M. Michielse - 2002 20

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

(c) G.M.M. Michielse - 2002 21

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

(c) G.M.M. Michielse - 2002 22

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

(c) G.M.M. Michielse - 2002 23

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”

(c) G.M.M. Michielse - 2002 24

EU Transfer of AssetsEU Transfer of Assets(T = Resident)(T = Resident)

ReceivingReceivingcompanycompany

TransferringTransferringcompanycompany

PEPE

(c) G.M.M. Michielse - 2002 25

EU Transfer of AssetsEU Transfer of Assets(T = Nonresident)(T = Nonresident)

ReceivingReceivingcompanycompany

TransferringTransferringcompanycompany

PEPE

(c) G.M.M. Michielse - 2002 26

Transfer of Permanent EstablishmentTransfer of Permanent Establishment

ReceivingReceivingcompanycompany

TransferringTransferringcompanycompany

PEPE

(c) G.M.M. Michielse - 2002 27

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’.

(c) G.M.M. Michielse - 2002 28

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

(c) G.M.M. Michielse - 2002 29

EU Exchange of SharesEU Exchange of Shares(Sh AD = Resident)(Sh AD = Resident)

Sh ADSh AD

AcquiringAcquiringCompanyCompany

AcquiredAcquiredCompanyCompany

(c) G.M.M. Michielse - 2002 30

EU Exchange of SharesEU Exchange of Shares(Sh AD = EU Nonresident)(Sh AD = EU Nonresident)

Sh ADSh AD

AcquiringAcquiringCompanyCompany

AcquiredAcquiredCompanyCompany

(c) G.M.M. Michielse - 2002 31

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

(c) G.M.M. Michielse - 2002 32

EU Merger or DivisionEU Merger or Division

ReceivingReceivingcompanycompany

TransferringTransferringcompanycompany

PEPE

Sh TSh T Sh RSh R

(c) G.M.M. Michielse - 2002 33

Transfer of AssetsTransfer of Assets(Valuation Issues)(Valuation Issues)

ReceivingReceivingcompanycompany

TransferringTransferringcompanycompany

PEPE

AA BB

CCDD

(c) G.M.M. Michielse - 2002 34

Exchange of SharesExchange of Shares(Valuation Issues)(Valuation Issues)

Sh ADSh AD

AcquiringAcquiringCompanyCompany

AcquiredAcquiredCompanyCompany

EE FF

GGHH