Part 1.4: Mergers and Impact of EU law on reorganizations

Question 1

What is a merger? What forms of mergers are there? (2)

Answer 1

the amalgamation (samensmelting) of one or more enterprises or businesses into a single operating unit.

1. A merger may involve each contributing party obtaining a share holding in a new enterprise
   => Comp A and Comp B form new company AB
2. One party transferring shares or assets to Bid Co and obtaining a share holding in Bid Co.
   => B is merged into A

Question 2

On what elements may the choice of the form of merger depend on? (5)

Answer 2

1. The previous history or other operating features of the contributing entities
2. The geographic location and operating parameters of the joint venture entity
3. The availability of tax and other concessions/incentives to a particular enterprise
4. The management of the merged entity
5. Tax issues

Question 3

What are the tax issues with a merger? (4)

Answer 3

1. Availability of capital gains tax rollover relief:
2. Availability of tax losses in both entities
3. Application of asset transfer taxes
4. Amortization of premium paid on acquisition (parent or holding/subsidiary merger)

Question 4

What is the major tax problem in international mergers ?

Answer 4

The major tax problem in international mergers is that they frequently involve the disposal of share holdings or assets. Absence of special relief provisions, may give rise to taxable capital gains or transfer taxes based on the market value of the assets

Question 5

Under what conditions can these tax liabilities with mergers be eliminated or reduced in some countries? (2)

Answer 5

• In some cases: such favorable merger provisions apply only to mergers between 2 domestic corporations
• In addition: favorable relief provisions may be dependent on a prescribed level of common ownership between companies for a specified period of time

Question 6

What is a tax free merger?

Answer 6

If a transaction qualifies as a tax free reorganization, the gain or loss realized by Target or its shareholders is generally not recognized. Because the tax basis and the holding period of the property transferred in a reorganization remain the same in the hands of the transferee (overnemer), as they were in the hands of the transferor (overdrager), the gain or loss realized is, in essence, deferred until there is a final disposition of property.

Question 7

what are the conditions for a tax free merger? (4)

Answer 7

Tax free merger:

• Capital gains are put on the balance sheet of A
• Tax free reserves are reserves which have not yet been subject to capital income tax. They can be moved untouched into A.
• In the case that A and B are in a tax free merger: only 2/3 of those tax losses can be used. In Belgium: pro rata rule (in de zelfde verhouding)
• Exemption of transfer taxes

Question 8

What is a demerger?

Answer 8

Demergers
= the splitting out of one or more business from a single enterprise where continuity of share holding may be maintained or different groups of share holders elect to take an interest in one of the two new entities formed.
=> These seperate organizations are also calles spin-offs or divisions
- Same points should be considered as with merger.

Question 9

The EU corporate taxation has 3 kind of directives?

Answer 9

1. The parent-subsidiary directive
2. The directive on interest and royalties
3. The merger directive

Question 10

What is the aim of the merger directive?

Answer 10

The merger directive
Aim is to introduce a common tax system to avoid the imposition of tax in connection with mergers, divisions, transfers or assets or exchange of shares while, at the same time, safeguard the financial interests of the state of the transferring or acquired company

Question 11

What sort of reliefs does the merger directive provide?

Answer 11

The directive provides the following reliefs:
1. Merger or division - Reliefs apply to the transfer of assets and liabilities of the transferring company which, after the demerger or division are effectively connected with a permanent establishment of the receiving company in the member State of the transferring company and play a part in generating profits or losses subject to tax. (article 4)

2. No immediate capital gains tax liability arises on the transfer of the assets (defer capital gains) (article 4)
3. Reserves or provisions established by the transferring company which are tax exempt may retain their tax exemption on being carried over to the receiving company (carry over transferee’s tax exempt provisions) (article 5)
4. The carry over of losses from the transferring company to the receiving company shall be permitted where this would have taken place if the transfer was between companies from the same member state (carry over of losses) (article 6)
5. Gains accruing to the receiving company on cancellation of shares in the transferring company shall not be liable to tax. Member states may derogate where the receiving company’s holding in the transferring company does not exceed 25%. (article 7)

Question 12

What are the learning points of the Merger and acquisitions chapter?

Answer 12

1. Corporate acquisitions may take the form of share or asset purchase – the tax and commercial implications of these will differ
2. The detailed tax implications must be considered separately for the vendor, purchaser and target companies – the rules in each jurisdiction must be reviewed for the impact on the proposed transaction
3. The ultimate structure of the acquisition must also be considered in terms of the choice of entity and how the new acquisition integrates effectively within the existing group structures
4. Care must be taken to avoid double duty or taxes on consequent transactions or rationalizations
5. (Tax) effective funding of the acquisition must be considered as part of the transaction
6. Mergers and demergers are also methods of reorganization
7. Non-tax issues may be crucial and override the tax implications of certain transactions
8. There are also other methods of corporate reorganization – EU directives may impact on the tax implications of reorganizations within the EU.