Abstract
Mergers reveal hidden capital gains of merging companies and most jurisdictions exempt such revealed capital gains from taxation. But cross-border mergers are by far more significant for taxation, since, among other, they (a) cause an indirect relocation of the corporate seat and, consequently, of the jurisdiction to which taxation of the corporate world income is assigned; (b) cause, under circumstances, relocation of hidden reserves and hidden capital gains, in the sense that taxation of such capital gains is assigned to a different jurisdiction; (c) change the payer of dividends and, consequently, the source taxation on dividends.
The full effect of a cross-border merger can be understood only under the light of the applicable Double Taxation Agreement rules; especially of the rules corresponding to art. 7 (business profits), to art. 13 (capital gains) and to art. 10 (dividends) OECD-Model-DTA—the latter combined with the Parent-Subsidiary Directive. For example, clever use of the rules of art. 13 of Model-DTA can be used for tax planning purposes, in order to achieve effective relocation of the taxing jurisdiction of capital gains.
EU member States had been, thus, for a long time reluctant to allow cross-border mergers. They were preventing effective applicability of the Tax Mergers Directive by preventing cross-borders mergers themselves. Now that cross-border mergers are allowed since the Cross-Border Mergers Directive applies, national and transnational laws focus on anti-abuse measures. Major challenge is to find a balance between legitimate use and abuse of cross-border mergers.
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Notes
- 1.
The Directive that became known as the EU Cross-Border Mergers Directive has been Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on cross-border mergers of limited liability companies (OJ L 310, 25.11.2005, pp. 1–9). This Directive has been repealed by Articles 118–134 of Directive 2017/1132/EU of the European Parliament and of the Council of 14 June 2017 relating to certain aspects of company law (OJ L 169, 30.6.2017, pp. 95–102). Although technically no “Cross-Borders Mergers Directive” exists anymore, this paper will refer, for reasons of brevity, to the provisions in force about the cross-border mergers as “Cross-Border Mergers Directive”. This happens not only because the title of the conference refers directly to “Cross-Border Mergers Directive”, but also because in the consciousness of the European academic community this set of EU-law provisions is more easily understandable as “Cross-Border Mergers Directive”.
- 2.
Today, Council Directive 2009/133/EC of 19 October 2009 on the common system of taxation applicable to mergers, divisions, partial divisions, transfers of assets and exchanges of shares concerning companies of different Member States and to the transfer of the registered office of an SE or SCE between Member States (OJ L 310/34, 25.11.2009). The first Directive that was known as Tax Mergers Directive was Council Directive 90/434/EEC of 23 July 1990 (OJ L 225, 20.8.1990), which has been replaced by Directive 2009/133/EC and repealed by Art. 17 of the latter. As both Directives have similar structure, a referral to the “Tax Mergers Directive” or simply to the “Directive” will refer mainly to Directive 2009/133/EC, but will notionally include also Directive 90/434/EEC.
- 3.
Especially German scholars produce highly sophisticated analyses for the relationship between commercial accounting law and tax accounting law, within the framework of the so-called in German “ Maßgeblichkeitsprinzip”. Instead of newer discussions and in order to understand the fundaments of such concepts, cf. Knobbe-Keuk (1993), pp. 17–33.
- 4.
Cf. in Greek tax law the provision of Art. 42 (2) of Income Tax Code.
- 5.
The Tax Mergers Directive itself provides in its Art. 2(a)(i) and (ii), Art. 2(b), Art. 2(c) and Art 2(e) that it is applicable only if payments in cash do not exceed 10% of the value of the operation. Even this limited amount of cash can be included in the taxable base of the shareholders, according to Art. 8 (9) of the Directive.
- 6.
Cf. the case of Greece. The Greek legislation offers two distinct and different tax regimes for exempting mergers from which the taxpayer may choose. On one hand, Legislative Decree No 1297/1972 provides directly for exemption of capital gains arising because of a merger. On the other hand, Law No 2166/1993 provides for a simple and straightforward unification of the balance sheets of the merging companies. The latter method does not lead to any determination and to any formal disclosure of hidden values and of capital gains at all. Although the latter method is seemingly a different one, the underlying idea is always that hidden capital gains will not be taxed.
- 7.
See the detailed analysis and the sources of Reimer (2015), pp. 1033–1084.
- 8.
- 9.
In order to avoid confusion, it has to be clarified that “corporate tax” is the income tax imposed on the profits of a corporation. Often, when tax experts refer to “income tax”, they also mean and include corporate tax. In some countries corporate tax is a tax formally different than income tax, while in other countries (like Greece), there is no distinct corporate tax and both taxes are formally named “income tax”.
- 10.
As a matter of fact both DTCs as well as domestic provisions on the relief of international double taxation use not only exemption, in order to avoid double taxation, but also the so-called “credit method”. The latter means that the taxpayer is allowed to deduct in his/her State of Residence the amount of tax paid in the Source State, but only to the extent that such tax credit does not exceed the amount of tax that would have to be paid in the State of Residence. If this is the case, then double taxation is in practice not fully removed. Nonetheless, both methods (exemption and credit method) are generally considered to be more or less equivalent.
- 11.
Now repealed by Council Directive 2011/96/EU of 30 November 2011 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States (OJ L 345/8, 29.12.2011).
- 12.
Directive 90/434/EC of 23 July 1990. Cf. fn. No 2.
- 13.
“Cross-border conversion” as formally mentioned in Commission Document No COM(2018) 241 final of 25 April 2018, “Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions”.
- 14.
Cf. the provisions of Art. 2(a)(i) and (ii), of Art. 2(b), of Art. 2(c) and of Art 2(e) of the Directive.
- 15.
At that time, Directive 90/434/EEC, together with the so-called Parent-Subsidiary Directive (No 94/435/EEC) and the Arbitration Convention (No 90/436/EEC).
- 16.
According to non-official reports of the early 1990s, only low tax jurisdiction Luxembourg among 12 EC/EU Member States of that time was allowing cross-border mergers in its domestic company law.
- 17.
See Knobbe-Keuk (1993), pp. 838–842 and 929–934.
- 18.
Cf. today Art. 2(d) of Directive 2009/133/EC, where the technical term “transfer of assets” is used to describe the transfer of a branch.
- 19.
Cf. today Art. 2(e) of Directive 2009/133/ED.
- 20.
See above, footnote no 1.
- 21.
Cf. above, Sect. 3.3.
- 22.
Cf. above, Sect. 2.2.
- 23.
Case C-28/95, Judgment of 17 July 1997, ECR 1997, p. I-4161. The case was about a domestic operation, because the Netherlands had transposed the Directive in a way to be applicable also on purely domestic situations.
- 24.
Paragraph 41, op.cit. (fn. 23).
- 25.
Paragraph 7 of the Preamble of Directive 2009/133/EC.
- 26.
The idea of tax deferral for such operations was suggested as a general solution for the balance between applicability and anti-abuse by Matsos (2001), pp. 47–51. As the ECJ judgment of 7 September 2006 in case N, C-470/04 shows, the idea of tax deferral was not unknown in domestic laws. However, until 2006 and the case N the idea of tax deferral had not been brought forward as a solution for the type of problems generated by cross-border operations that lead to a change of jurisdiction for the taxation of capital gains. Today, most Member States use tax deferral in order to ensure both applicability of the internal market principles and of the anti-abuse clauses.
- 27.
Cf. above, Sect. 3.3.
References
Knobbe-Keuk B (1993) Bilanz- und Unternehmenssteuerrecht, 9th edn. Dr Otto Schmidt, Cologne
Matsos G (2001) Investitionen deutscher Steuersubjekte in griechische Kapitalgesellschaften. PCO-Verlag, Bayreuth
Reimer E (2015) Article 13 OECD-MTC. In: Reimer E, Rust A (eds) Klaus Vogel on double taxation conventions, 4th edn. Wolters Kluwer, Alphen aan den Rijn, pp 1033–1084
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Matsos, G. (2019). Tax Mergers Directive: Basic Conceptualisation. In: Papadopoulos, T. (eds) Cross-Border Mergers. Studies in European Economic Law and Regulation, vol 17. Springer, Cham. https://doi.org/10.1007/978-3-030-22753-1_10
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