1. EU Taxation 9. Taxation of Mergers Arvind Ashta Introduction
Short-Term Tax problems of mergers
Long-term tax problems of mergers
Transactions covered
Main Features of Directive
Qualifying companies
Taxation of companies involved
Taxation of the shareholder
Contribution of a foreign branch
Transactions not covered

2. Introduction Came out in 1990, applicable from 1992 Covers
Mergers
divisions
transfer of assets
exchange of shares
Tax problems addressed if two or more Member States involved
Only one-time short-term tax problems solved

3. Short-Term Tax problems of mergers
ST problems of companies
Capital Gains
Tax-exempt reserves
Carry forward losses lost
ST problems of shareholders
Capital gains

4. ST problems of companies: Capital Gains
A transfers assets to B in return for shares, it has to pay for the capital gains on the sale of these assets. Since A has not received any cash (but only shares), it is difficult for it to pay the tax. This dissuades mergers.
Example:
Assets are bought at € 100 million.
Cumulative depreciation is € 30 million.
Net Assets are therefore € million.
At time of transfer, if market value € 90 million.
There is a capital gain of € million.
If capital gains tax is 20%
Capital Gains Tax amounts to € million
If company A does not have € million, it may not agree to the transfer of assets.

5. ST problems of companies Tax-exempt reserves
Against A's assets, there may be tax-exempt reserves. If A transfers the assets, it has to wind up such reserves and pay tax.
Example:
Investment in some less developed region € 100 million
Investment 30 %
Investment Allowance € million
Earnings before Tax € 50 million
Taxable Income (net of Inv. Allowance) € million
Tax rate 40%
Tax € million
Tax reduction (due to Inv. Allowance) € million
Capital reserves created € million
If the assets of € 100 million are transferred before a certain time, say 8 years, tax of € million has to be paid.

6. ST problems of companies Carry forward losses lost
Co. A may have carry-forward losses. These cannot be carried forward if Co A is merged into Co. B. The benefit of this therefore evaporates.
Losses in € 20 million
Profit in € 3 million
Profit after set-off of losses
Tax in 40%
Carry forward of losses for € million
These accumulated losses of € million can be set off against profits of 2001 if company A makes profits. But if Co. A merges with Co. B and there is no longer any Co. A, these losses cannot be used to offset future profits.

7. ST problems of shareholders Capital gains
The shareholder in Co. A received shares in Co. B for the transfer of his shares in Co. A. Having effectuated a transfer, he has to pay tax on capital gains, although he did not receive any cash income.
Example:
He bought 1000 shares of company A at €
Total paid €
He now gets 500 shares of company b at €
Total value received €
Capital gains €
Tax on capital 20% €
If he does not have cash, he is unlikely to agree to advantageous mergers.

8. Long-term tax problems of (share) mergers
More administrative problems
Examples
Avoir fiscal replaced by withholding tax
Dividend routed through parent company
Merger Directive is not concerned with these issues

9. Transactions covered Legal Mergers Legal Divisions Asset Mergers
Share Mergers
10% additional cash payout is allowed

10. Legal Mergers

11. Legal Divisions

12. Asset Mergers

13. Share Mergers

14. Main Features of Directive
Member States to defer taxation of gains on companies
Transferees to maintain old book values
Member States to defer taxation of gains on shareholders
Shareholders to maintain old asset values on new shares

15. Advantages to Qualifying companies
Must be companies of a Member State
Prescribed legal forms: see article 3
Prescribed fiscal status: see article 3
Advantages
Tax deferrals
Carry Forward of losses
Transfer of reserves
If activity continues in the same State

16. Taxation of the shareholder
Deferral of capital gains tax
Till he alienates the new substituted shares.
Has to assign them the same book value as that of the old shares.
If national law permits the shareholder the choice, and he opts to use a step-up tax value, obviously he pays tax now.
Attached cash payment can be taxed now.

17. Contribution of a foreign branch
Co A in State A to company B in State B transfers a branch in State C.
State A not to tax on the transfer of the permanent establishment to company B.
State A may recapture loss deductions granted to the State A activity due to losses of branch in State C.

18. Transactions not covered
Assets transferred out of Member State
Foreign branch transferred from one domestic company to another.
Foreign State is free to tax the capital gains.
Transfer of non-EC establishments of EC companies
Transfer of EC establishments of non-EC companies.
Individual assets not forming a branch of activity.