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Cross-Border Reorganizations in Europe:
have the tax and legal obstacles now been removed?
MCB-Forum – Brussels
2 October 2012
Who are the speakers?
Mr. Juan Lopez Rodriguez, Senior Tax Policy Advisor of the
Directorate General ‘TAXUD’, Unit Company Taxation Initiatives
at the EU Commission
Mr. Ivo Vande Velde, Counsel at Tiberghien and co-editor of
European Cross-Border Mergers and Reorganizations, Oxford
University Press 2012
Mr. Jérôme Vermeylen, M&A partner at ALTIUS and co-editor
of European Cross-Border Mergers and Reorganizations, Oxford
University Press 2012
About ALTIUS | Tiberghien
 One team of 110 tax and business lawyers of 2 top firms that
have an operational relationship and provide seamless
legal and tax services to clients
 Partner-led approach towards client service and relationships
 Best Benelux Law Firm of 2012 (International Legal Alliance
Summit Awards)
 Experienced in cross-border work:
 often praised for its international approach to problem-solving that takes
into account global issues within a local market context
 Shared offices in Brussels, Antwerp and Luxembourg
General Introduction
 Corporate
 What are the possibilities and limitations in terms of cross-border
corporate reorganizations in Europe?
 Tax
 What are the conditions for a tax-neutral reorganization?
 Which cross-border reorganizations could have adverse tax
consequences?
 Are the Belgian tax rules on cross-border reorganizations fully
compliant with the MTD and with primary EU law?
 EU developments
 Interpretation issues relating to the MTD
 Recent developments relating to corporate migration
Corporate aspects
2/10/2012 5
Corporate – general overview: 4 topics
1. Can all EU/EEA (EU + Iceland, Norway and Liechtenstein)
companies take part in a cross-border merger?
2. What are the main difficulties encountered in the context of a
harmonized cross-border merger and how can they be
tackled?
3. Can EU/EEA companies demerge across borders?
4. Can EU/EEA companies move their registered office and/or
their head office across the EU/EEA?
Can all EU/EEA companies take part in
a cross-border merger?
Cross-border mergers: which EU/EEA companies?
 Harmonized cross-border mergers: governed by Directive
2005/56/EC (CBMD)
 Type: all limited liability companies (Art. 2(1) CBMD)
i.e. any company (i) with share capital and (ii) having legal
personality, (iii) possessing separate assets which alone serve
to cover its debts and (iv) subject under national law to the
same or similar rules as imposed under Directive 2009/101/EC
(Publicity Directive), provided they:
 are entitled to domestic mergers
 have the specific capacity to merge
 are formed according to the laws of an EU/EEA Member State
and
 have their registered office, central administration or principal
place of business in the EU/EEA
Cross-border mergers: which EU/EEA companies?
(3)
 Excluded companies (Art. 3(2) CBMD)
 Cooperative societies (optional for Member States)
 Undertakings for collective investment in transferable securities
(UCITS)
 Unclear: companies in liquidation
 “Nationality”: not for purely domestic mergers! (Art. 1 CBMD)
 at least two of them governed by the laws of another Member
State
 in principle also if from the same Member State but newly
incorporated company in another Member State
Cross-border mergers: which EU/EEA companies?
(2)
BelCo
Before
BelCo
After
New
FrenchCo
Belgian
branch
MERGER
Cross-border mergers: which EU/EEA companies?
(5)
 Can non-limited liability and excluded companies merge?
 Cooperative societies: SCE Regulation
 UCITS: UCITS IV Directive
 Extension of harmonized cross-border merger procedure to non-
limited liability companies: up to the Member States
 Other companies (provided entitled to merge under domestic
law) : non-harmonized cross-border mergers under the freedom
of establishment (SEVIC Systems)
Cross-border mergers: which Belgian companies?
 Law of 8 June 2008 introducing Art. 772/1 to 772/14 BCC
 Extension of the scope: all companies entitled to a domestic
merger except UCITS, i.e.:
 Public limited liability companies (NV/SA)
 Private limited liability companies (BVBA/SPRL)
 Partnerships limited by shares (Comm.VA/SCA)
 Ordinary limited partnerships (Comm.V/SCS)
 General partnerships (VOF/SNC)
 Cooperative societies with or without limited liability (CVBA and
CVOA/SCRL and SCRI)
 Societas europea (SE)
 Societas cooperative europea (SCE)
Cross-border mergers: which Belgian companies?
(2)
 Not included:
 Companies without a legal personality
 Belgian and European economic interest groupings ((E)EIG)
 Agricultural companies
 UCITS
 Companies in liquidation: provided distribution of assets to
shareholders not started
 Extension of scope: not limited to mergers with EU/EEA
companies
Which companies: case studies
German
GmbH
Comm.V/SCS
German law: only with other limited liability
companies
Which companies: case studies (2)
Dutch B.V.
CVBA/SCRL
Dutch law: limited specific capacity to merge
Which companies: case studies (2)
SwissCo
NV/SA
Swiss law: cross border merger procedure
Belgian law: not limited to mergers with
EU/EEA companies
Which companies: advice
 Check first legal feasibility of the planned merger
 A harmonized merger may become feasible after some
changes are made (e.g. change of legal form)
 Consider a non-harmonized merger but be aware of legal and
practical difficulties
Main difficulties encountered in the context of
a harmonized cross-border merger and
how to tackle them
2/10/2012 18
Harmonized mergers: overview of main issues
1. Employee participation procedure
2. Differences in procedures and timing
3. Languages and translations
4. Local courts and authorities
5. Duration and costs
Main issues: employee participation
 Political solution coping with differences in involvement of
employees through the EU
 Principle: participation system of country of acquiring
company BUT exceptions
 If applicable: appointment of a special negotiating body (SNB)
and negotiation procedure to reach an agreement on the
participation of employees in the acquiring company
 Complex procedure for appointing the SNB
 Negotiations during up to one year
 If applicable: often a “merger breaker”!
Main issues: differences in procedure / timing
 Principle: each company applies its own national merger rules
 Similar rules and timing in most continental Europe countries
 Sweden:
 Filing with the Companies Registration Office of common draft
terms of merger, independent expert report, annual accounts
and interim accounting statement at the same time
 Approval of the merger by the general assembly
 Notice to the company’s known creditors (unless exception)
 Application for permission to implement the merger and
verification of legality by the Companies Registration Office
 The Companies Registration Office can ask the creditors if they
oppose the merger
 The Tax Agency can suspend the merger for up to 12 months
Main issues: differences in procedure / timing (2)
 Hungary: one or two steps procedure
 First management report on the merger presented to a first
general assembly: decision to continue procedure, assessment
who wants to remain a shareholder and instructions to the board
 Board prepares common draft terms of merger, accounts, report,
second management report and a proposal for the settling of
accounts of departing shareholders
 Second general meeting approving the merger
 No notary but application for registration of the merger by the
court of registration
 UK and Ireland: no notary, court scrutinizes the merger after
the approval by the general assembly
Main issues: differences in procedure / timing (3)
 Advice: ensure good project management
 Clarify applicable procedure, requirements and timing in each
jurisdiction
 One global action plan including all companies and jurisdictions
involved with realistic timing and clear responsibilities
 Good and permanent communication between the lawyers of all
jurisdictions involved, the clients, the auditors and others
Main issues: languages and translations
 Not harmonized at EU/EEA level; each Member State is free
to apply its own rules
 Usually local language must be used; some accept English
documentation
 Translations increase costs and timing
 Advice: take translation timing and costs into account
Main issues: local courts and authorities
 Cross-border merger often viewed as an exotic novelty
 Interpretation issues and lack of established practice
 Lack of consistency of implementation and interpretation,
often even within the same jurisdiction
 Red tape
Main issues: local courts and authorities (2)
 Advice:
 start communicating with local courts and authorities early on
 regularly double-check their interpretations, requirements and
expectations
 be realistic about the timing and take delays into account
Main issues: duration and costs
 It takes time.
 If straightforward (no employee participation procedure and
no employment, regulatory, competition or other issues): 6
months is realistic.
 Costs include: lawyers, notaries, auditors, translators, filing
and publication costs, internal resources
Can EU/EEA companies demerge
across borders?
2/10/2012 28
Can EU companies demerge across borders?
 No harmonization of cross-border divisions
 Based on Sevic (CJEU case): yes provided this is a way for a
company to exercise its right of establishment
 Limitations:
 only for EU/EEA companies having their registered office,
central administration or principal place of business in the
EU/EEA
 only if entitled to a domestic division
Can EU companies demerge across borders? (2)
 Generally not specifically organized by the law of Member
States (exceptions: Luxembourg and Spain).
 Vereinigungstheorie: distributive application by each company
of domestic rules for domestic divisions and cumulative
application of domestic rules (or strictest rule) if uniform
treatment required
Can EU/EEA companies move their
registered office and/or their head office across
the EU/EEA?
Can EU/EEA companies move across borders?
General background
 Issue: can companies “move across borders” without
interruption of their legal personalities?
 What does this mean?
 Head office = place of central administration or headquarters
 Registered office = primary or official establishment (statutes)
 Move across borders = inbound or outbound transfer
 Transfer of head office = no formality, a matter of fact
 Transfer of registered office = formal decision, involving a
change of legal system, i.e. cross-border conversion
 No interruption of legal personality: legal continuity
Can EU/EEA companies move across borders?
General background (2)
 What is a company’s “nationality”, i.e. lex societatis?
 National conflicts of law rules determine the connecting factors
 Two main systems: incorporation theory vs real seat theory
 Conflicting results
 Case studies:
 Dutch company (incorporation theory state) moves its head
office to Belgium (real seat theory state)  double nationality
 Belgian company (real seat theory state) moves its head office
to the UK (incorporation theory state)  in principle stateless
company (but exception to real seat theory in Art. 110(2) CPIL:
renvoi)
Can EU/EEA companies move across borders?
General background (3)
 Impact of the incorporation theory on the mobility of
companies?
 no obstacle to inbound or outbound transfer of head office / real
seat; no impact of transfer on lex societatis
 no inbound or outbound transfer the registered office without
loss of legal personality; no change of the lex societatis
Can EU/EEA companies move across borders?
General background (4)
 Impact of the real seat theory on the mobility of companies?
 no outbound transfer the head office / real seat without loss of
legal personality
 no inbound transfer the head office / real seat without loss of
legal personality
 inbound or outbound transfer of registered office not possible
without change of head office / real seat
Can EU/EEA companies move across borders?
Impact of EU/EEA law
 No harmonization of rules for the mobility of companies
Exceptions: SEs, SCEs and EEIGs
 No harmonization of connecting factors in EU/EEA:
incorporation theory and real seat theory on the same footing
(Art 54 TFEU)
 BUT right to primary or secondary establishment in the
EU/EEA (Art 49 and 54 TFEU)
 compatibility of national rules to be assessed
Can EU/EEA companies move across borders?
Impact of EU/EEA law (2)
 Direct or indirect restrictions to the right of establishment are
prohibited except in the case of “general good exceptions”
and under specific conditions (CJEU case law):
 only non-discriminatory restrictions
 serve over-riding public interest requirements
 suitable to attain the objectives
 not beyond what is necessary to reach objectives
 complies with secondary EU law (Regulations and Directives)
 CJEU case law on the cross-border mobility of companies:
Daily Mail, Centros, Inspire Art, Überseering, Cartesio and
Vale Epitesi
Can EU/EEA companies move across borders?
Inbound transfer of registered and head offices
 Problematic under both theories
 Hungarian law: no registration of cross-border transfer and
conversion of Italian company into a Hungarian company
 CJEU in VALE Epitesi case:
 freedom of establishment applies
 host Member State entitled to determine national law applicable
to conversion (incorporation and functioning)
 no general prohibition by host Member State to convert without
interruption of legal personality
 no discrimination compared to domestic conversion
 principle of effectiveness: take into account documents of
Member State of origin
Can EU/EEA companies move across borders?
Inbound transfer of the head office but not the
registered office
 Problematic under the real seat theory, not under the
incorporation theory
 Danish authorities refused to register a branch office of an
English Ltd:
 all activities of Centros Ltd to be exercised in Denmark
 only motive is to avoid stricter Danish requirements (e.g. capital)
 CJEU in Centros case:
 freedom of establishment  EU/EEA company may not be
prevented from opening a branch office in another Member State
even if all activities are exercised by the branch office
Can EU/EEA companies move across borders?
Inbound transfer of the head office but not the
registered office (2)
 Strict application of real seat theory under German law
(meanwhile changed):
 Überseering moved its head office (not its registered office) from
the Netherlands to Germany
 German Court: no legal personality under German law  not
entitled to legal proceedings in Germany
 CJEU in Überseering case:
 freedom of establishment  EU/EEA company may not be
prevented from opening its head office in another Member State
 Germany must recognize legal personality of foreign EU/EEA
companies despite its own connecting factors
Can EU/EEA companies move across borders?
Inbound transfer of the head office but not the
registered office (3)
 Dutch law applies the incorporation theory
 BUT imposed substantive company law requirements on foreign
companies which moved their activities to the Netherlands
 CJEU in Inspire Art case:
 Member State may not impose substantive company law
requirements on an EU/EEA company with a branch office even
if the company has no longer any activities in its home Member
State
Can EU/EEA companies move across borders?
Inbound transfer of the registered office but not
the head office
 Problematic under both theories
 No CJEU case law BUT:
 Daily Mail and Cartesio cases: Member States have the power to
define the connecting factors
real seat theory countries should be able to refuse
less clear in relation to the incorporation theory but probably
same result
 does probably not qualify as the exercise of a right to a primary
or secondary establishment
Can EU/EEA companies move across borders?
Outbound transfer of registered and head offices
 Problematic under both theories
 CJEU in Cartesio case (obiter dictum):
 home Member State has not the right to refuse or hinder the
outbound transfer of both the head office and the registered
office provided the law of the host Member State permits such
transfer
Can EU/EEA companies move across borders?
Outbound transfer of the head office but not the
registered office
 Problematic under the real seat theory, not under the
incorporation theory
 CJEU in Daily Mail and Cartesio cases:
 companies are creatures of national law and national law
determines the conditions for their existence and functioning
 neutrality of EU/EEA law regarding connecting factors
 a real seat theory Member State may decide not to recognize
the continued existence of a company governed by its laws and
which broke the connecting factor by moving its head office
abroad
Can EU/EEA companies move across borders?
Outbound transfer of the registered office but not
the head office
 Problematic under both theories
 No CJEU case law BUT:
 Daily Mail and Cartesio cases: Member States have the power to
define the connecting factors
real seat theory countries should be able to refuse
less clear in relation to the incorporation theory but probably
same result
 does probably not qualify as the exercise of the right to a primary
or secondary establishment
Can Belgian companies move across borders?
Inbound transfers
 Inbound transfer of head and registered office accepted
(Lamot case):
 procedure developed by legal scholars:
 approval of transfer by competent organ of the foreign company
 meeting of shareholders before Belgian notary to approve Belgian
statutes
 filing of notarized deed and publication
 deregistration of company by authorities of member State of origin
 CJEU case law: inbound transfer of head office recognized
 Inbound transfer of registered office only: not authorized
Can Belgian companies move across borders?
Outbound transfers
 Outbound transfer of head and registered office accepted
(Vanneste case):
 procedure developed by legal scholars:
 general assembly before notary decides transfer according to
requirements for a change of statutes
 formalities performed by company in host Member State for transfer
and registration
 filing and publication of notarized deed and deregistration by Belgian
authorities
 Outbound transfer of head office  company no longer
recognized by Belgian law except if the host Member State
follows the incorporation theory (renvoi; Art. 110(2) CPIL)
 Outbound transfer of registered office only: not authorized
Can EU/EEA companies move across borders?
What in practice?
 Most countries: no national rules organizing this
 High complexity and limited awareness despite CJEU cases
 reluctance of national authorities
 Harmonization demanded by all legal scholars and
practitioners
 Draft 14th
Directive: no progress since many years
 Practical solution: reach same result through a (harmonized)
cross-border merger
Tax aspects
2/10/2012 49
Tax - general overview: reorganization types
 Outbound merger / division
 Inbound merger / division
 ‘Extra-territorial’ reorganization – Transfer of a Belgian PE
 Transfer of corporate seat
Outbound Cross-Border Merger / Division
Case 1: Base Case of outbound merger
FrenchCo
Before
BelCo
After
FrenchCo
Belgian
PE
MERGER
Shareholders Shareholders
Case 1: Base Case of outbound merger (2)
 General conditions for a tax-neutral cross-border
merger/division (Art. 211 ITC):
 Qualification of the transaction as a merger / (partial) division
 Company Code definitions prevail
 Receiving company is a company from a Member State
 Only intra-EU
 Anti-abuse test
(tax avoidance versus valid commercial reasons)
 Implementation in accordance with Company Code and similar
company law requirements in the Member State of the receiving
company
 No provisions in Company Code on cross-border partial divisions
Case 1: Base Case of outbound merger (3)
 What does ‘tax-neutrality’ mean?
 Roll-over relief for capital gains on assets that, in consequence
of the transaction, are effectively connected with a Belgian PE of
the receiving company
 Carry-over of tax-exempt reserves to the Belgian PE
 Take-over of carried-forward tax losses by the PE to the extent
that such take-over applies in a domestic reorganization
 Proportionate reduction of TLCF if the receiving company has a pre-
transaction PE in Belgium
 No taxation in the hands of the shareholders
 Roll-over relief for capital gains (Art. 45, §1 ITC – Art. 95 ITC)
 No deemed distribution of assets; no dividend taxation; no dividend
withholding tax
Case 2: Assets not connected to a Belgian PE
in consequence of the merger
 Taxation of capital gains on assets transferred
 MTD: roll-over subject to PE requirement (Art. 4)
 National Grid Indus case (C-371/10)
(exit taxation - transfer of corporate seat):
Based on Freedom of Establishment (Art. 49 TFEU):
tax claim of exit Member State on unrealised capital gains may
be preserved, but immediate recovery of tax is disproportionate.
 Sevic Systems case (C-411/03): cross-border merger is a
means of exercising the freedom of establishment
 Commission’s Communication on exit taxation (19-12-2006):
no reference to cross-border mergers
 Is PE-requirement in the MTD disproportionate?
Case 2: Assets not connected to a Belgian PE
in consequence of the merger (2)
 Subsequent ‘disconnection’ of assets from the PE
 Capital gains recognised subsequently to the assets’
disconnection from the PE, are considered ‘realised’
 No deemed liquidation – no dividend (withholding) tax issue?
Case 2: Assets not connected to a Belgian PE
in consequence of the merger (3)
 Unutilized carried-forward tax losses
 MTD: take-over of losses by a PE in the Member State of the
transferring company, i.e. relief where the losses have been
incurred (Art. 6)
 Speculative idea: relief for residual ‘terminal’ losses in the
Member State of the receiving company if (i) a take-over of
losses is allowed in a domestic merger and (ii) the activities in
the Member State of the transferring company are fully
discontinued in the Member State of the transferring company?
 ‘Terminal’ losses: see Marks & Spencer case (C-446/03)
 Request for preliminary CJEU ruling by Finnish Supreme Court
(C-123/11) – Opinion Adv.-Gen. 19 July 2012: no requirement to
give loss relief in Finland
Case 2: Assets not connected to a Belgian PE
in consequence of the merger (4)
 Dividend withholding tax – taxation in the hands of the
shareholders
 Under Belgian ITC: in principle dividend withholding tax liability
due to deemed liquidation (subject to exemption based on
Parent/Subsidiary Directive or Tate & Lyle case – C-384/11)
 Art. 8 MTD:
“(…) the allotment of securities representing the capital of the
receiving company in exchange for securities representing the
capital of the transferring company shall not, of itself, give rise to
any taxation of the income, profits or capital gains of that
shareholder”
Under the MTD, shareholders’ relief is not subject to PE
condition.
Case 2: Assets not connected to a Belgian PE
in consequence of the merger (5)
 Dividend withholding tax – taxation in the hands of the
shareholders (continued)
 Art. 7 MTD (Parent/Subsidiary merger):
“When the receiving company has a holding in the capital of the
transferring company, any gains accruing to the receiving
company on the cancellation of its holding shall not be liable to
any taxation” (without any PE requirement)
 Speculative idea: relevance of National Grid Indus case
(C-371/10)? Tax claim of exit Member State on unrealized
capital gains may be preserved, but immediate recovery of tax is
disproportionate.
 Also applicable for cross-border mergers (cfr. Sevic Systems )?
 Also preservation of tax claim and tax deferral on realized but
undistributed profits?
Case 3: Belgian transferring company has PE
in other Member State
FrenchCo
Before
BelCo
After
FrenchCo
Belgian
PE
MERGER
Shareholders Shareholders
Dutch
PE
Dutch
PE
Case 3: Belgian transferring company has PE
in other Member State (2)
 Capital gains on assets of the PE
 No roll-over relief based on Art. 4 MTD (because not “effectively
connected to a Belgian PE subsequent to the merger”)
 Art. 10, § 1 MTD:
“Where the assets transferred in a merger include a PE of the
transferring company situated in another Member State, the
Member State of the transferring company shall renounce any
right to tax that PE”
 DTT exemption – impact of ‘subject-to-tax’ clause?
Belgium-Netherlands DTT:
“income items that, in accordance with the Treaty, are taxed in
the Netherlands”
(See Circular 11-05-2006 - Court of Appeal Antwerp 21-06-
2011)
(See Advance ruling 2011.438)
Case 3: Belgian transferring company has PE
in other Member State (3)
 Recapture of PE tax losses
 ITC mechanism (Art. 206, §1 al 2)
 Tax losses incurred in a PE in a DTT country that are deducted
against Belgian profits
 Claw-back in tax year when the tax losses are deducted from profits
of the PE, or when the PE is transferred in a contribution, merger or
(partial) division
 Claw-back for the full amount of the tax losses
 Unconditional claw-back, i.e. also if the tax losses do not remain
available in the PE Member State
 Claw-back mechanism also (but unnecessarily) applies in a
domestic merger
Case 3: Belgian transferring company has PE
in other Member State (4)
 Recapture of PE tax losses (continued)
 MTD
 The Member State of the transferring company may reinstate
previously deducted tax losses (unconditional claw-back) (Art. 10,
§1 al 2)
 The Member State of the PE must allow the take-over of the tax
losses only to the extent that such take-over is allowed in a
domestic transaction (Art. 10, §1 al 3 and Art. 6)
 Potential double non-relief for the PE losses
Case 3: Belgian transferring company has PE
in other Member State (5)
 Recapture of PE tax losses (continued)
 Compatible with primary EU law?
 Marks & Spencer case (C-446/03): relief to be granted by the
Member State of the parent company for ‘terminal’ losses incurred
by a subsidiary in another Member State, i.e. “losses that cannot be
taken into account in the Member State of the subsidiary either by
the subsidiary itself or by a third party”.
 Opinion Adv.-Gen. in case C-123/11
 Krankenheim case (C-157/07) : the Member State of the head office
is entitled to reintegrate previously deducted PE tax losses when the
PE makes profits, even if the PE Member State does not allow the
PE losses to be carried-forward and utilized against PE profits.
The recapture mechanism is proportionate, because limited to the
actual PE profits.
Case 3: Belgian transferring company has PE
in other Member State (6)
 Dividend withholding tax – taxation in the hands of the
shareholders
 Under Belgian ITC: in principle dividend withholding tax liability
due to deemed partial liquidation (deemed distribution of PE
assets) - subject to exemption based on Parent/Subsidiary
Directive or Tate & Lyle case (C-384/11)
 Art. 8 MTD:
“the allotment of securities representing the capital of the
receiving company in exchange for securities representing the
capital of the transferring company shall not, of itself, give rise to
any taxation of the income, profits or capital gains of that
shareholder”
Under the MTD, shareholders’ relief is not subject to PE
condition.
Inbound Cross-Border Merger / Division
Case 4: Inbound Parent/Subsidiary merger
BelCo
Before
GermanCo
After
BelCo
German
PE
MERGER
Case 4: Inbound Parent/Subsidiary merger (2)
 Capital gain on cancellation of shareholding in Subsidiary
 Art. 7 MTD:
“When the receiving company has a holding in the capital of the
transferring company, any gains accruing to the receiving
company on the cancellation of its holding shall not be liable to
any taxation” (without any PE requirement)
 ITC mechanism
 Participation exemption (DBI/RDT)
(Tax-neutral and taxable mergers)
 No 10% participation threshold or 1-year holding requirement
provided the merger is tax-neutral and the transferring company is
resident in the EEA (Law 14 April 2011)
Case 4: Inbound Parent/Subsidiary merger (3)
 Capital gain on cancellation of shareholding in Subsidiary
 ITC mechanism (continued)
 Exemption rate:
– 100% if the merger is tax-neutral and the transferring company is
resident in the EU
– 95% if the merger is not tax-neutral
– ‘tax-neutral’ versus ‘taxable’ test in Member State of Subsidiary?
– 95% if the transferring company is outside the EU
 Basis for 5% taxation: book value or fair market value of assets
transferred?
– Book value (Art. 184ter, §2, al 1 ITC: “Capital gains on the acquired
assets are determined on the basis of their book value at the date of
the merger”)?
– Independent of ‘’tax-neutral’ versus ‘taxable’ status of the merger?
(cfr Art. 210, §2 ITC for domestic mergers)
Case 4: Inbound Parent/Subsidiary merger (4)
 Capital gain on cancellation of shareholding in Subsidiary
 ITC mechanism (continued)
 Excess participation exemption
(e.g. Parent company in loss position)
– no carry-forward under ITC (Art. 205, §3)
– Inconsistent with Art. 7 MTD
(cf Cobelfret case relating to Parent/Subsidiary Directive – C-138/07)
‘Extra-territorial’ reorganization
Transfer of Belgian PE
Case 5a: ‘Extra-territorial’ hive-down involving
contribution of Belgian PE (or PE assets)
GermanCo
Before
DutchCo
After
GermanCo
Belgian
PE
ASSET CONTRIBUTION
Shareholders Shareholders
Belgian
PE
DutchCo
Case 5b: ‘Extra-territorial’ partial division
involving spin-off of Belgian PE (or PE assets)
GermanCo
Before
DutchCo
After
GermanCo
Belgian
PE
PARTIAL DIVISION
Shareholders Shareholders
Belgian
PE
DutchCo
‘Extra-territorial’ reorganization involving
transfer of a Belgian PE (or PE assets) (3)
 Art. 10 MTD
 “Where the assets transferred in a merger, a division, a partial
division or a transfer of assets include a PE of the transferring
company which is situated in another Member State than that of
the transferring company”…
 …”the Member State of the PE shall apply the provisions of this
Directive as if it were the Member State of the transferring
company”:
 Roll-over relief for capital gains on PE assets
 Carry-over of tax-exempt reserves of the PE
 Take-over of carried-forward tax losses of the PE.
‘Extra-territorial’ reorganization involving
transfer of a Belgian PE (or PE assets) (4)
 Conditions under Belgian ITC (Art. 231, §2)
 Merger, (partial) division or transfer of branch of activity or
universality of goods
 Definitions in Company Code prevail (in principle)
(definition of ‘partial division’ is broader than under the MTD)
 Both the transferring and the receiving company qualify as a
‘company from a Member State’
 What if the transferring and the receiving companies are resident in
the same Member State?
 A Belgian PE or assets located in Belgium are part of the assets
transferred
 Also part / division of a PE? (broader than scope of MTD rule)
‘Extra-territorial’ reorganization involving
transfer of a Belgian PE (or PE assets) (5)
 Conditions under Belgian ITC (Art. 231, §2) (continued)
 Transaction qualifying, in the Member State of the transferring
company, for the tax exemption provided by the MTD
(Art. 10, §1 al 1)
 Anti-abuse test
(tax avoidance versus valid commercial reasons)
 ‘Branch of activity’ test for (a) the assets transferred and (b)
the assets remaining in the transferring company?
 Take-over of carried-forward tax losses of the Belgian PE
 Proportionately to ‘fiscal net value’ (Art. 240bis, §1, 2° ITC)
 Same effects for hive-down and partial division?
 Limitation of TLCF if receiving company has pre-transaction PE
 Interpretation issues for ‘construction PE’
Transfer of corporate seat
Case 6: Outbound transfer of corporate seat
Before
BelCo
After
Shareholders Shareholders
LuxCo
Shareholders Shareholders
TRANSFER OF SEAT
Case 6: Outbound transfer of corporate seat (2)
 Belgian ITC
 Liquidation rules apply at corporate level (Art. 210, §1, 4°)
 But arguably no withholding tax in the absence of any
“distribution” (Article 18, 2°ter) or “payment/attribution” of income
(Art. 267)
 Liquidation rules do not apply to intra-EU transfers to the extent
that the assets remain connected to a Belgian PE (Art. 214bis)
 Upon subsequent ‘disconnection’ of assets from the PE: capital
gains on disconnected assets are deemed realized, but no
withholding tax issue?
 MTD
 Only transfer of seat by SE (SCE) is covered.
Case 6: Outbound transfer of corporate seat (3)
 Primary EU law: National Grid Indus case (C-371/10)
“The transfer of the place of effective management from one
Member State to another cannot mean that the Member State
of origin has to abandon its right to tax a capital gain which
arose within the ambit of its powers of taxation before the
transfer” (principle of balanced allocation of powers of
taxation), but
“The freedom of establishment principle precludes legislation
which prescribes the immediate recovery of tax on unrealized
capital gains”
Same principles for undistributed profits?
Jérôme Vermeylen
Tel: +32 2 426 14 14
jerome.vermeylen@altius.com
Ivo Vande Velde
Tel: +32 2 773 40 00
ivo.vandevelde@tiberghien.com
Questions ?
ALTIUS | Tiberghien BRUSSELS ALTIUS | Tiberghien ANTWERP ALTIUS | Tiberghien LUXEMBOURG
Tour & Taxis building Minerva Building Valley Park
Havenlaan 86C box 414 Avenue du Port Karel Oomsstraat 47A box 4 44, rue de la Vallée
1000 Brussels – Belgium 2018 Antwerp – Belgium 2661 Luxembourg
Tel +32 2 426 14 14 (Altius) Tel +32 3 232 07 67 (Altius) Tel +352 27 47 51 51 (Altius)
Tel +32 2 773 40 00 (Tiberghien) Tel +32 3 443 20 00 (Tiberghien) Tel +352 27 47 51 11 (Tiberghien)

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Cross border reorganizations in europe-have the tax and legal obstacles now been removed

  • 1. Cross-Border Reorganizations in Europe: have the tax and legal obstacles now been removed? MCB-Forum – Brussels 2 October 2012
  • 2. Who are the speakers? Mr. Juan Lopez Rodriguez, Senior Tax Policy Advisor of the Directorate General ‘TAXUD’, Unit Company Taxation Initiatives at the EU Commission Mr. Ivo Vande Velde, Counsel at Tiberghien and co-editor of European Cross-Border Mergers and Reorganizations, Oxford University Press 2012 Mr. Jérôme Vermeylen, M&A partner at ALTIUS and co-editor of European Cross-Border Mergers and Reorganizations, Oxford University Press 2012
  • 3. About ALTIUS | Tiberghien  One team of 110 tax and business lawyers of 2 top firms that have an operational relationship and provide seamless legal and tax services to clients  Partner-led approach towards client service and relationships  Best Benelux Law Firm of 2012 (International Legal Alliance Summit Awards)  Experienced in cross-border work:  often praised for its international approach to problem-solving that takes into account global issues within a local market context  Shared offices in Brussels, Antwerp and Luxembourg
  • 4. General Introduction  Corporate  What are the possibilities and limitations in terms of cross-border corporate reorganizations in Europe?  Tax  What are the conditions for a tax-neutral reorganization?  Which cross-border reorganizations could have adverse tax consequences?  Are the Belgian tax rules on cross-border reorganizations fully compliant with the MTD and with primary EU law?  EU developments  Interpretation issues relating to the MTD  Recent developments relating to corporate migration
  • 6. Corporate – general overview: 4 topics 1. Can all EU/EEA (EU + Iceland, Norway and Liechtenstein) companies take part in a cross-border merger? 2. What are the main difficulties encountered in the context of a harmonized cross-border merger and how can they be tackled? 3. Can EU/EEA companies demerge across borders? 4. Can EU/EEA companies move their registered office and/or their head office across the EU/EEA?
  • 7. Can all EU/EEA companies take part in a cross-border merger?
  • 8. Cross-border mergers: which EU/EEA companies?  Harmonized cross-border mergers: governed by Directive 2005/56/EC (CBMD)  Type: all limited liability companies (Art. 2(1) CBMD) i.e. any company (i) with share capital and (ii) having legal personality, (iii) possessing separate assets which alone serve to cover its debts and (iv) subject under national law to the same or similar rules as imposed under Directive 2009/101/EC (Publicity Directive), provided they:  are entitled to domestic mergers  have the specific capacity to merge  are formed according to the laws of an EU/EEA Member State and  have their registered office, central administration or principal place of business in the EU/EEA
  • 9. Cross-border mergers: which EU/EEA companies? (3)  Excluded companies (Art. 3(2) CBMD)  Cooperative societies (optional for Member States)  Undertakings for collective investment in transferable securities (UCITS)  Unclear: companies in liquidation  “Nationality”: not for purely domestic mergers! (Art. 1 CBMD)  at least two of them governed by the laws of another Member State  in principle also if from the same Member State but newly incorporated company in another Member State
  • 10. Cross-border mergers: which EU/EEA companies? (2) BelCo Before BelCo After New FrenchCo Belgian branch MERGER
  • 11. Cross-border mergers: which EU/EEA companies? (5)  Can non-limited liability and excluded companies merge?  Cooperative societies: SCE Regulation  UCITS: UCITS IV Directive  Extension of harmonized cross-border merger procedure to non- limited liability companies: up to the Member States  Other companies (provided entitled to merge under domestic law) : non-harmonized cross-border mergers under the freedom of establishment (SEVIC Systems)
  • 12. Cross-border mergers: which Belgian companies?  Law of 8 June 2008 introducing Art. 772/1 to 772/14 BCC  Extension of the scope: all companies entitled to a domestic merger except UCITS, i.e.:  Public limited liability companies (NV/SA)  Private limited liability companies (BVBA/SPRL)  Partnerships limited by shares (Comm.VA/SCA)  Ordinary limited partnerships (Comm.V/SCS)  General partnerships (VOF/SNC)  Cooperative societies with or without limited liability (CVBA and CVOA/SCRL and SCRI)  Societas europea (SE)  Societas cooperative europea (SCE)
  • 13. Cross-border mergers: which Belgian companies? (2)  Not included:  Companies without a legal personality  Belgian and European economic interest groupings ((E)EIG)  Agricultural companies  UCITS  Companies in liquidation: provided distribution of assets to shareholders not started  Extension of scope: not limited to mergers with EU/EEA companies
  • 14. Which companies: case studies German GmbH Comm.V/SCS German law: only with other limited liability companies
  • 15. Which companies: case studies (2) Dutch B.V. CVBA/SCRL Dutch law: limited specific capacity to merge
  • 16. Which companies: case studies (2) SwissCo NV/SA Swiss law: cross border merger procedure Belgian law: not limited to mergers with EU/EEA companies
  • 17. Which companies: advice  Check first legal feasibility of the planned merger  A harmonized merger may become feasible after some changes are made (e.g. change of legal form)  Consider a non-harmonized merger but be aware of legal and practical difficulties
  • 18. Main difficulties encountered in the context of a harmonized cross-border merger and how to tackle them 2/10/2012 18
  • 19. Harmonized mergers: overview of main issues 1. Employee participation procedure 2. Differences in procedures and timing 3. Languages and translations 4. Local courts and authorities 5. Duration and costs
  • 20. Main issues: employee participation  Political solution coping with differences in involvement of employees through the EU  Principle: participation system of country of acquiring company BUT exceptions  If applicable: appointment of a special negotiating body (SNB) and negotiation procedure to reach an agreement on the participation of employees in the acquiring company  Complex procedure for appointing the SNB  Negotiations during up to one year  If applicable: often a “merger breaker”!
  • 21. Main issues: differences in procedure / timing  Principle: each company applies its own national merger rules  Similar rules and timing in most continental Europe countries  Sweden:  Filing with the Companies Registration Office of common draft terms of merger, independent expert report, annual accounts and interim accounting statement at the same time  Approval of the merger by the general assembly  Notice to the company’s known creditors (unless exception)  Application for permission to implement the merger and verification of legality by the Companies Registration Office  The Companies Registration Office can ask the creditors if they oppose the merger  The Tax Agency can suspend the merger for up to 12 months
  • 22. Main issues: differences in procedure / timing (2)  Hungary: one or two steps procedure  First management report on the merger presented to a first general assembly: decision to continue procedure, assessment who wants to remain a shareholder and instructions to the board  Board prepares common draft terms of merger, accounts, report, second management report and a proposal for the settling of accounts of departing shareholders  Second general meeting approving the merger  No notary but application for registration of the merger by the court of registration  UK and Ireland: no notary, court scrutinizes the merger after the approval by the general assembly
  • 23. Main issues: differences in procedure / timing (3)  Advice: ensure good project management  Clarify applicable procedure, requirements and timing in each jurisdiction  One global action plan including all companies and jurisdictions involved with realistic timing and clear responsibilities  Good and permanent communication between the lawyers of all jurisdictions involved, the clients, the auditors and others
  • 24. Main issues: languages and translations  Not harmonized at EU/EEA level; each Member State is free to apply its own rules  Usually local language must be used; some accept English documentation  Translations increase costs and timing  Advice: take translation timing and costs into account
  • 25. Main issues: local courts and authorities  Cross-border merger often viewed as an exotic novelty  Interpretation issues and lack of established practice  Lack of consistency of implementation and interpretation, often even within the same jurisdiction  Red tape
  • 26. Main issues: local courts and authorities (2)  Advice:  start communicating with local courts and authorities early on  regularly double-check their interpretations, requirements and expectations  be realistic about the timing and take delays into account
  • 27. Main issues: duration and costs  It takes time.  If straightforward (no employee participation procedure and no employment, regulatory, competition or other issues): 6 months is realistic.  Costs include: lawyers, notaries, auditors, translators, filing and publication costs, internal resources
  • 28. Can EU/EEA companies demerge across borders? 2/10/2012 28
  • 29. Can EU companies demerge across borders?  No harmonization of cross-border divisions  Based on Sevic (CJEU case): yes provided this is a way for a company to exercise its right of establishment  Limitations:  only for EU/EEA companies having their registered office, central administration or principal place of business in the EU/EEA  only if entitled to a domestic division
  • 30. Can EU companies demerge across borders? (2)  Generally not specifically organized by the law of Member States (exceptions: Luxembourg and Spain).  Vereinigungstheorie: distributive application by each company of domestic rules for domestic divisions and cumulative application of domestic rules (or strictest rule) if uniform treatment required
  • 31. Can EU/EEA companies move their registered office and/or their head office across the EU/EEA?
  • 32. Can EU/EEA companies move across borders? General background  Issue: can companies “move across borders” without interruption of their legal personalities?  What does this mean?  Head office = place of central administration or headquarters  Registered office = primary or official establishment (statutes)  Move across borders = inbound or outbound transfer  Transfer of head office = no formality, a matter of fact  Transfer of registered office = formal decision, involving a change of legal system, i.e. cross-border conversion  No interruption of legal personality: legal continuity
  • 33. Can EU/EEA companies move across borders? General background (2)  What is a company’s “nationality”, i.e. lex societatis?  National conflicts of law rules determine the connecting factors  Two main systems: incorporation theory vs real seat theory  Conflicting results  Case studies:  Dutch company (incorporation theory state) moves its head office to Belgium (real seat theory state)  double nationality  Belgian company (real seat theory state) moves its head office to the UK (incorporation theory state)  in principle stateless company (but exception to real seat theory in Art. 110(2) CPIL: renvoi)
  • 34. Can EU/EEA companies move across borders? General background (3)  Impact of the incorporation theory on the mobility of companies?  no obstacle to inbound or outbound transfer of head office / real seat; no impact of transfer on lex societatis  no inbound or outbound transfer the registered office without loss of legal personality; no change of the lex societatis
  • 35. Can EU/EEA companies move across borders? General background (4)  Impact of the real seat theory on the mobility of companies?  no outbound transfer the head office / real seat without loss of legal personality  no inbound transfer the head office / real seat without loss of legal personality  inbound or outbound transfer of registered office not possible without change of head office / real seat
  • 36. Can EU/EEA companies move across borders? Impact of EU/EEA law  No harmonization of rules for the mobility of companies Exceptions: SEs, SCEs and EEIGs  No harmonization of connecting factors in EU/EEA: incorporation theory and real seat theory on the same footing (Art 54 TFEU)  BUT right to primary or secondary establishment in the EU/EEA (Art 49 and 54 TFEU)  compatibility of national rules to be assessed
  • 37. Can EU/EEA companies move across borders? Impact of EU/EEA law (2)  Direct or indirect restrictions to the right of establishment are prohibited except in the case of “general good exceptions” and under specific conditions (CJEU case law):  only non-discriminatory restrictions  serve over-riding public interest requirements  suitable to attain the objectives  not beyond what is necessary to reach objectives  complies with secondary EU law (Regulations and Directives)  CJEU case law on the cross-border mobility of companies: Daily Mail, Centros, Inspire Art, Überseering, Cartesio and Vale Epitesi
  • 38. Can EU/EEA companies move across borders? Inbound transfer of registered and head offices  Problematic under both theories  Hungarian law: no registration of cross-border transfer and conversion of Italian company into a Hungarian company  CJEU in VALE Epitesi case:  freedom of establishment applies  host Member State entitled to determine national law applicable to conversion (incorporation and functioning)  no general prohibition by host Member State to convert without interruption of legal personality  no discrimination compared to domestic conversion  principle of effectiveness: take into account documents of Member State of origin
  • 39. Can EU/EEA companies move across borders? Inbound transfer of the head office but not the registered office  Problematic under the real seat theory, not under the incorporation theory  Danish authorities refused to register a branch office of an English Ltd:  all activities of Centros Ltd to be exercised in Denmark  only motive is to avoid stricter Danish requirements (e.g. capital)  CJEU in Centros case:  freedom of establishment  EU/EEA company may not be prevented from opening a branch office in another Member State even if all activities are exercised by the branch office
  • 40. Can EU/EEA companies move across borders? Inbound transfer of the head office but not the registered office (2)  Strict application of real seat theory under German law (meanwhile changed):  Überseering moved its head office (not its registered office) from the Netherlands to Germany  German Court: no legal personality under German law  not entitled to legal proceedings in Germany  CJEU in Überseering case:  freedom of establishment  EU/EEA company may not be prevented from opening its head office in another Member State  Germany must recognize legal personality of foreign EU/EEA companies despite its own connecting factors
  • 41. Can EU/EEA companies move across borders? Inbound transfer of the head office but not the registered office (3)  Dutch law applies the incorporation theory  BUT imposed substantive company law requirements on foreign companies which moved their activities to the Netherlands  CJEU in Inspire Art case:  Member State may not impose substantive company law requirements on an EU/EEA company with a branch office even if the company has no longer any activities in its home Member State
  • 42. Can EU/EEA companies move across borders? Inbound transfer of the registered office but not the head office  Problematic under both theories  No CJEU case law BUT:  Daily Mail and Cartesio cases: Member States have the power to define the connecting factors real seat theory countries should be able to refuse less clear in relation to the incorporation theory but probably same result  does probably not qualify as the exercise of a right to a primary or secondary establishment
  • 43. Can EU/EEA companies move across borders? Outbound transfer of registered and head offices  Problematic under both theories  CJEU in Cartesio case (obiter dictum):  home Member State has not the right to refuse or hinder the outbound transfer of both the head office and the registered office provided the law of the host Member State permits such transfer
  • 44. Can EU/EEA companies move across borders? Outbound transfer of the head office but not the registered office  Problematic under the real seat theory, not under the incorporation theory  CJEU in Daily Mail and Cartesio cases:  companies are creatures of national law and national law determines the conditions for their existence and functioning  neutrality of EU/EEA law regarding connecting factors  a real seat theory Member State may decide not to recognize the continued existence of a company governed by its laws and which broke the connecting factor by moving its head office abroad
  • 45. Can EU/EEA companies move across borders? Outbound transfer of the registered office but not the head office  Problematic under both theories  No CJEU case law BUT:  Daily Mail and Cartesio cases: Member States have the power to define the connecting factors real seat theory countries should be able to refuse less clear in relation to the incorporation theory but probably same result  does probably not qualify as the exercise of the right to a primary or secondary establishment
  • 46. Can Belgian companies move across borders? Inbound transfers  Inbound transfer of head and registered office accepted (Lamot case):  procedure developed by legal scholars:  approval of transfer by competent organ of the foreign company  meeting of shareholders before Belgian notary to approve Belgian statutes  filing of notarized deed and publication  deregistration of company by authorities of member State of origin  CJEU case law: inbound transfer of head office recognized  Inbound transfer of registered office only: not authorized
  • 47. Can Belgian companies move across borders? Outbound transfers  Outbound transfer of head and registered office accepted (Vanneste case):  procedure developed by legal scholars:  general assembly before notary decides transfer according to requirements for a change of statutes  formalities performed by company in host Member State for transfer and registration  filing and publication of notarized deed and deregistration by Belgian authorities  Outbound transfer of head office  company no longer recognized by Belgian law except if the host Member State follows the incorporation theory (renvoi; Art. 110(2) CPIL)  Outbound transfer of registered office only: not authorized
  • 48. Can EU/EEA companies move across borders? What in practice?  Most countries: no national rules organizing this  High complexity and limited awareness despite CJEU cases  reluctance of national authorities  Harmonization demanded by all legal scholars and practitioners  Draft 14th Directive: no progress since many years  Practical solution: reach same result through a (harmonized) cross-border merger
  • 50. Tax - general overview: reorganization types  Outbound merger / division  Inbound merger / division  ‘Extra-territorial’ reorganization – Transfer of a Belgian PE  Transfer of corporate seat
  • 52. Case 1: Base Case of outbound merger FrenchCo Before BelCo After FrenchCo Belgian PE MERGER Shareholders Shareholders
  • 53. Case 1: Base Case of outbound merger (2)  General conditions for a tax-neutral cross-border merger/division (Art. 211 ITC):  Qualification of the transaction as a merger / (partial) division  Company Code definitions prevail  Receiving company is a company from a Member State  Only intra-EU  Anti-abuse test (tax avoidance versus valid commercial reasons)  Implementation in accordance with Company Code and similar company law requirements in the Member State of the receiving company  No provisions in Company Code on cross-border partial divisions
  • 54. Case 1: Base Case of outbound merger (3)  What does ‘tax-neutrality’ mean?  Roll-over relief for capital gains on assets that, in consequence of the transaction, are effectively connected with a Belgian PE of the receiving company  Carry-over of tax-exempt reserves to the Belgian PE  Take-over of carried-forward tax losses by the PE to the extent that such take-over applies in a domestic reorganization  Proportionate reduction of TLCF if the receiving company has a pre- transaction PE in Belgium  No taxation in the hands of the shareholders  Roll-over relief for capital gains (Art. 45, §1 ITC – Art. 95 ITC)  No deemed distribution of assets; no dividend taxation; no dividend withholding tax
  • 55. Case 2: Assets not connected to a Belgian PE in consequence of the merger  Taxation of capital gains on assets transferred  MTD: roll-over subject to PE requirement (Art. 4)  National Grid Indus case (C-371/10) (exit taxation - transfer of corporate seat): Based on Freedom of Establishment (Art. 49 TFEU): tax claim of exit Member State on unrealised capital gains may be preserved, but immediate recovery of tax is disproportionate.  Sevic Systems case (C-411/03): cross-border merger is a means of exercising the freedom of establishment  Commission’s Communication on exit taxation (19-12-2006): no reference to cross-border mergers  Is PE-requirement in the MTD disproportionate?
  • 56. Case 2: Assets not connected to a Belgian PE in consequence of the merger (2)  Subsequent ‘disconnection’ of assets from the PE  Capital gains recognised subsequently to the assets’ disconnection from the PE, are considered ‘realised’  No deemed liquidation – no dividend (withholding) tax issue?
  • 57. Case 2: Assets not connected to a Belgian PE in consequence of the merger (3)  Unutilized carried-forward tax losses  MTD: take-over of losses by a PE in the Member State of the transferring company, i.e. relief where the losses have been incurred (Art. 6)  Speculative idea: relief for residual ‘terminal’ losses in the Member State of the receiving company if (i) a take-over of losses is allowed in a domestic merger and (ii) the activities in the Member State of the transferring company are fully discontinued in the Member State of the transferring company?  ‘Terminal’ losses: see Marks & Spencer case (C-446/03)  Request for preliminary CJEU ruling by Finnish Supreme Court (C-123/11) – Opinion Adv.-Gen. 19 July 2012: no requirement to give loss relief in Finland
  • 58. Case 2: Assets not connected to a Belgian PE in consequence of the merger (4)  Dividend withholding tax – taxation in the hands of the shareholders  Under Belgian ITC: in principle dividend withholding tax liability due to deemed liquidation (subject to exemption based on Parent/Subsidiary Directive or Tate & Lyle case – C-384/11)  Art. 8 MTD: “(…) the allotment of securities representing the capital of the receiving company in exchange for securities representing the capital of the transferring company shall not, of itself, give rise to any taxation of the income, profits or capital gains of that shareholder” Under the MTD, shareholders’ relief is not subject to PE condition.
  • 59. Case 2: Assets not connected to a Belgian PE in consequence of the merger (5)  Dividend withholding tax – taxation in the hands of the shareholders (continued)  Art. 7 MTD (Parent/Subsidiary merger): “When the receiving company has a holding in the capital of the transferring company, any gains accruing to the receiving company on the cancellation of its holding shall not be liable to any taxation” (without any PE requirement)  Speculative idea: relevance of National Grid Indus case (C-371/10)? Tax claim of exit Member State on unrealized capital gains may be preserved, but immediate recovery of tax is disproportionate.  Also applicable for cross-border mergers (cfr. Sevic Systems )?  Also preservation of tax claim and tax deferral on realized but undistributed profits?
  • 60. Case 3: Belgian transferring company has PE in other Member State FrenchCo Before BelCo After FrenchCo Belgian PE MERGER Shareholders Shareholders Dutch PE Dutch PE
  • 61. Case 3: Belgian transferring company has PE in other Member State (2)  Capital gains on assets of the PE  No roll-over relief based on Art. 4 MTD (because not “effectively connected to a Belgian PE subsequent to the merger”)  Art. 10, § 1 MTD: “Where the assets transferred in a merger include a PE of the transferring company situated in another Member State, the Member State of the transferring company shall renounce any right to tax that PE”  DTT exemption – impact of ‘subject-to-tax’ clause? Belgium-Netherlands DTT: “income items that, in accordance with the Treaty, are taxed in the Netherlands” (See Circular 11-05-2006 - Court of Appeal Antwerp 21-06- 2011) (See Advance ruling 2011.438)
  • 62. Case 3: Belgian transferring company has PE in other Member State (3)  Recapture of PE tax losses  ITC mechanism (Art. 206, §1 al 2)  Tax losses incurred in a PE in a DTT country that are deducted against Belgian profits  Claw-back in tax year when the tax losses are deducted from profits of the PE, or when the PE is transferred in a contribution, merger or (partial) division  Claw-back for the full amount of the tax losses  Unconditional claw-back, i.e. also if the tax losses do not remain available in the PE Member State  Claw-back mechanism also (but unnecessarily) applies in a domestic merger
  • 63. Case 3: Belgian transferring company has PE in other Member State (4)  Recapture of PE tax losses (continued)  MTD  The Member State of the transferring company may reinstate previously deducted tax losses (unconditional claw-back) (Art. 10, §1 al 2)  The Member State of the PE must allow the take-over of the tax losses only to the extent that such take-over is allowed in a domestic transaction (Art. 10, §1 al 3 and Art. 6)  Potential double non-relief for the PE losses
  • 64. Case 3: Belgian transferring company has PE in other Member State (5)  Recapture of PE tax losses (continued)  Compatible with primary EU law?  Marks & Spencer case (C-446/03): relief to be granted by the Member State of the parent company for ‘terminal’ losses incurred by a subsidiary in another Member State, i.e. “losses that cannot be taken into account in the Member State of the subsidiary either by the subsidiary itself or by a third party”.  Opinion Adv.-Gen. in case C-123/11  Krankenheim case (C-157/07) : the Member State of the head office is entitled to reintegrate previously deducted PE tax losses when the PE makes profits, even if the PE Member State does not allow the PE losses to be carried-forward and utilized against PE profits. The recapture mechanism is proportionate, because limited to the actual PE profits.
  • 65. Case 3: Belgian transferring company has PE in other Member State (6)  Dividend withholding tax – taxation in the hands of the shareholders  Under Belgian ITC: in principle dividend withholding tax liability due to deemed partial liquidation (deemed distribution of PE assets) - subject to exemption based on Parent/Subsidiary Directive or Tate & Lyle case (C-384/11)  Art. 8 MTD: “the allotment of securities representing the capital of the receiving company in exchange for securities representing the capital of the transferring company shall not, of itself, give rise to any taxation of the income, profits or capital gains of that shareholder” Under the MTD, shareholders’ relief is not subject to PE condition.
  • 67. Case 4: Inbound Parent/Subsidiary merger BelCo Before GermanCo After BelCo German PE MERGER
  • 68. Case 4: Inbound Parent/Subsidiary merger (2)  Capital gain on cancellation of shareholding in Subsidiary  Art. 7 MTD: “When the receiving company has a holding in the capital of the transferring company, any gains accruing to the receiving company on the cancellation of its holding shall not be liable to any taxation” (without any PE requirement)  ITC mechanism  Participation exemption (DBI/RDT) (Tax-neutral and taxable mergers)  No 10% participation threshold or 1-year holding requirement provided the merger is tax-neutral and the transferring company is resident in the EEA (Law 14 April 2011)
  • 69. Case 4: Inbound Parent/Subsidiary merger (3)  Capital gain on cancellation of shareholding in Subsidiary  ITC mechanism (continued)  Exemption rate: – 100% if the merger is tax-neutral and the transferring company is resident in the EU – 95% if the merger is not tax-neutral – ‘tax-neutral’ versus ‘taxable’ test in Member State of Subsidiary? – 95% if the transferring company is outside the EU  Basis for 5% taxation: book value or fair market value of assets transferred? – Book value (Art. 184ter, §2, al 1 ITC: “Capital gains on the acquired assets are determined on the basis of their book value at the date of the merger”)? – Independent of ‘’tax-neutral’ versus ‘taxable’ status of the merger? (cfr Art. 210, §2 ITC for domestic mergers)
  • 70. Case 4: Inbound Parent/Subsidiary merger (4)  Capital gain on cancellation of shareholding in Subsidiary  ITC mechanism (continued)  Excess participation exemption (e.g. Parent company in loss position) – no carry-forward under ITC (Art. 205, §3) – Inconsistent with Art. 7 MTD (cf Cobelfret case relating to Parent/Subsidiary Directive – C-138/07)
  • 72. Case 5a: ‘Extra-territorial’ hive-down involving contribution of Belgian PE (or PE assets) GermanCo Before DutchCo After GermanCo Belgian PE ASSET CONTRIBUTION Shareholders Shareholders Belgian PE DutchCo
  • 73. Case 5b: ‘Extra-territorial’ partial division involving spin-off of Belgian PE (or PE assets) GermanCo Before DutchCo After GermanCo Belgian PE PARTIAL DIVISION Shareholders Shareholders Belgian PE DutchCo
  • 74. ‘Extra-territorial’ reorganization involving transfer of a Belgian PE (or PE assets) (3)  Art. 10 MTD  “Where the assets transferred in a merger, a division, a partial division or a transfer of assets include a PE of the transferring company which is situated in another Member State than that of the transferring company”…  …”the Member State of the PE shall apply the provisions of this Directive as if it were the Member State of the transferring company”:  Roll-over relief for capital gains on PE assets  Carry-over of tax-exempt reserves of the PE  Take-over of carried-forward tax losses of the PE.
  • 75. ‘Extra-territorial’ reorganization involving transfer of a Belgian PE (or PE assets) (4)  Conditions under Belgian ITC (Art. 231, §2)  Merger, (partial) division or transfer of branch of activity or universality of goods  Definitions in Company Code prevail (in principle) (definition of ‘partial division’ is broader than under the MTD)  Both the transferring and the receiving company qualify as a ‘company from a Member State’  What if the transferring and the receiving companies are resident in the same Member State?  A Belgian PE or assets located in Belgium are part of the assets transferred  Also part / division of a PE? (broader than scope of MTD rule)
  • 76. ‘Extra-territorial’ reorganization involving transfer of a Belgian PE (or PE assets) (5)  Conditions under Belgian ITC (Art. 231, §2) (continued)  Transaction qualifying, in the Member State of the transferring company, for the tax exemption provided by the MTD (Art. 10, §1 al 1)  Anti-abuse test (tax avoidance versus valid commercial reasons)  ‘Branch of activity’ test for (a) the assets transferred and (b) the assets remaining in the transferring company?  Take-over of carried-forward tax losses of the Belgian PE  Proportionately to ‘fiscal net value’ (Art. 240bis, §1, 2° ITC)  Same effects for hive-down and partial division?  Limitation of TLCF if receiving company has pre-transaction PE  Interpretation issues for ‘construction PE’
  • 78. Case 6: Outbound transfer of corporate seat Before BelCo After Shareholders Shareholders LuxCo Shareholders Shareholders TRANSFER OF SEAT
  • 79. Case 6: Outbound transfer of corporate seat (2)  Belgian ITC  Liquidation rules apply at corporate level (Art. 210, §1, 4°)  But arguably no withholding tax in the absence of any “distribution” (Article 18, 2°ter) or “payment/attribution” of income (Art. 267)  Liquidation rules do not apply to intra-EU transfers to the extent that the assets remain connected to a Belgian PE (Art. 214bis)  Upon subsequent ‘disconnection’ of assets from the PE: capital gains on disconnected assets are deemed realized, but no withholding tax issue?  MTD  Only transfer of seat by SE (SCE) is covered.
  • 80. Case 6: Outbound transfer of corporate seat (3)  Primary EU law: National Grid Indus case (C-371/10) “The transfer of the place of effective management from one Member State to another cannot mean that the Member State of origin has to abandon its right to tax a capital gain which arose within the ambit of its powers of taxation before the transfer” (principle of balanced allocation of powers of taxation), but “The freedom of establishment principle precludes legislation which prescribes the immediate recovery of tax on unrealized capital gains” Same principles for undistributed profits?
  • 81. Jérôme Vermeylen Tel: +32 2 426 14 14 jerome.vermeylen@altius.com Ivo Vande Velde Tel: +32 2 773 40 00 ivo.vandevelde@tiberghien.com Questions ?
  • 82. ALTIUS | Tiberghien BRUSSELS ALTIUS | Tiberghien ANTWERP ALTIUS | Tiberghien LUXEMBOURG Tour & Taxis building Minerva Building Valley Park Havenlaan 86C box 414 Avenue du Port Karel Oomsstraat 47A box 4 44, rue de la Vallée 1000 Brussels – Belgium 2018 Antwerp – Belgium 2661 Luxembourg Tel +32 2 426 14 14 (Altius) Tel +32 3 232 07 67 (Altius) Tel +352 27 47 51 51 (Altius) Tel +32 2 773 40 00 (Tiberghien) Tel +32 3 443 20 00 (Tiberghien) Tel +352 27 47 51 11 (Tiberghien)