Taxation of European Companies at the Time of Establishment and Restructuring: Issues and options for reform with regard to the status quo and the proposals at the level of the European Union

Christiane Malke Taxation of European Companies at the Time of Establishment and Restructuring GABLER RESEARCH Chri...

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Christiane Malke Taxation of European Companies at the Time of Establishment and Restructuring

GABLER RESEARCH

Christiane Malke

Taxation of European Companies at the Time of Establishment and Restructuring Issues and Options for Reform with Regard to the Status Quo and the Proposals at the Level of the European Union With a foreword by Prof. Dr. Christoph Spengel

RESEARCH

Bibliographic information published by the Deutsche Nationalbibliothek The Deutsche Nationalbibliothek lists this publication in the Deutsche Nationalbibliografie; detailed bibliographic data are available in the Internet at http://dnb.d-nb.de.

Dissertation Universität Mannheim, 2009

1st Edition 2010 All rights reserved © Gabler Verlag | Springer Fachmedien Wiesbaden GmbH 2010 Editorial Office: Ute Wrasmann | Nicole Schweitzer Gabler Verlag is a brand of Springer Fachmedien. Springer Fachmedien is part of Springer Science+Business Media. www.gabler.de No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the copyright holder. Registered and/or industrial names, trade names, trade descriptions etc. cited in this publication are part of the law for trade-mark protection and may not be used free in any form or by any means even if this is not specifically marked. Umschlaggestaltung: KünkelLopka Medienentwicklung, Heidelberg Printed on acid-free paper Printed in Germany ISBN 978-3-8349-2359-2

Foreword

V

Foreword In 2004 the first legal entity applicable in all EU member states, the so-called European Company or Societas Europaea (SE), was introduced in order to strengthen the competitiveness of European companies and improve the functioning of the internal market. In order for the SE to be an alternative to existing legal forms, the establishment as well as the transfer of seat should not result in tax consequences. However, despite the rules provided by the Merger Directive, the taxation of hidden reserves is still a major concern for companies that want to reorganize themselves cross-border. As a consequence, a need for further research covering aperiodic transactions existed. The doctoral thesis of Ms. Malke provides a comprehensive contribution to fulfill this need. Ms. Malke has assessed the tax treatment of SEs at the time of establishment and restructuring based on economic and legal criteria. This is provided for all 27 EU member states. In addition, she has competently analyzed the existing literature on the subject at hand. The special merit of the doctoral thesis of Ms. Malke consists in developing reform proposals for different addressees and different levels of harmonization in the EU. More in detail, the relevant tax rules for SEs at the time of establishment and restructuring are worked out and presented in a systematic way for the 27 EU member states. Based on this, existing deficiencies are shown and solutions are elaborated in a comprehensive manner. These solutions cover changes to the national law of the member states, to EU law as well as to the proposals provided by the European Commission regarding the introduction of a Common (Consolidated) Corporate Tax Base. The reform proposals are methodically well-founded and feasible in practice. The doctoral thesis of Ms. Malke is a diversified and sound work which fulfills methodical as well as tax law requirements. It constitutes a contribution to the discussion of economic and tax implications of restructurings of companies doing business in Europe as well as to the systematic development of current rules. It is not only of importance for international researchers in this field, but also for national governments and policy makers in the European Union dealing with this issue as well as for tax advisors who need an overview of the aperiodic tax rules of SEs in the EU member states. I therefore strongly recommend the doctoral thesis of Ms. Malke to this audience.

Prof. Dr. Christoph Spengel

Preface

VII

Preface This thesis was written while I was working at the Business Administration and Taxation II Department at the University of Mannheim, in the beginning led by Prof. Dr. Dr. h.c. mult. Otto H. Jacobs and later by Prof. Dr. Christoph Spengel. It was accepted by the Faculty of Business Administration of the University of Mannheim in 2009. For supporting me during the preparation of this thesis I wish to express my thanks to various people. Foremost, I am indebted to my thesis supervisor, Prof. Dr. Christoph Spengel, for his guidance, encouragement, his constructive comments and his advice during the whole time. Moreover, I owe Prof. (em.) Dr. Dr. h.c. mult. Otto H. Jacobs a debt of gratitude for providing the second assessment of the doctoral thesis as well as for arousing my interest in international taxation. I also thank Prof. Dr. Hans-Wolfgang Arndt for providing the examination in my elective subject. Many thanks I wish to give to Andrea Kamp and Michael David for putting a lot of time and effort in reading my thesis. Andrea, I want to thank for her valuable input and for being a sympathetic listener. Michael, I want to thank for his very careful proofreading of this thesis with regard to English style and grammar. I also wish to thank Carsten Wendt for his constructive remarks in technical discussions. Furthermore, I thank my colleagues at the department and the ZEW for the pleasant environment to work in. Lastly, but most importantly, I thank my family and friends, especially Felix for his patience, invaluable support and for cheering me up as well as my parents for their continuous care, encouragement and great support in every situation.

Christiane Malke

Summary of Contents

IX

Summary of Contents 1

Introduction ................................................................................................................ 1 1.1 Motivation of the thesis ....................................................................................... 1 1.2 Aim of the thesis and object of examination ....................................................... 6 1.3 Organization of the thesis.................................................................................... 7

2 Relevance of the European Company in practice ................................................... 9 2.1 Basic features of the European Company ........................................................... 9 2.2 Examination of statistical data regarding the use of the European Company... 10 2.3 Interim conclusions ........................................................................................... 15 3 Taxation of European Companies during the time of restructuring in an ideal environment ..................................................................................................... 16 3.1 Guiding tax principles ....................................................................................... 16 3.2 Issues at reorganizations.................................................................................... 20 3.3 Application to purely national contexts............................................................. 26 3.4 Application to the ideal internal market ............................................................ 27 3.5 Interim conclusions ........................................................................................... 29 4 Taxation of European Companies during the time of restructuring in the current environment ................................................................................................ 30 4.1 Guiding tax principles ....................................................................................... 30 4.2 Comparative analysis of the treatment in the EU member states...................... 55 4.3 Issues and options for reform .......................................................................... 147 5 Taxation of European Companies during the time of restructuring in the proposed environment ........................................................................................... 191 5.1 Guiding tax principles ..................................................................................... 191 5.2 Common Corporate Tax Base ......................................................................... 192 5.3 Common Consolidated Corporate Tax Base ................................................... 195 5.4 Interim conclusions ......................................................................................... 214 6 Conclusions ............................................................................................................. 216

Table of Contents

XI

Table of Contents List of Abbreviations..................................................................................................... XV List of Figures ...............................................................................................................XIX List of Tables.................................................................................................................XXI 1

Introduction ................................................................................................................ 1 1.1 Motivation of the thesis ....................................................................................... 1 1.2 Aim of the thesis and object of examination ....................................................... 6 1.3 Organization of the thesis.................................................................................... 7

2

Relevance of the European Company in practice ................................................... 9 2.1 Basic features of the European Company ........................................................... 9 2.2 Examination of statistical data regarding the use of the European Company ........................................................................................................... 10 2.3 Interim conclusions ........................................................................................... 15

3

Taxation of European Companies during the time of restructuring in an ideal environment ..................................................................................................... 16 3.1 Guiding tax principles ....................................................................................... 16 3.1.1

Neutrality and efficiency ........................................................................... 16

3.1.2

Equity and fairness .................................................................................... 17

3.2 Issues at reorganizations.................................................................................... 20 3.2.1

General features of reorganizations........................................................... 20

3.2.2

Treatment of hidden reserves .................................................................... 21

3.2.3

Retention of unused losses ........................................................................ 24

3.2.4

Treatment of tax incentives ....................................................................... 25

3.2.5

Additional transaction taxes ...................................................................... 25

3.2.6

Scope of rules ............................................................................................ 26

3.3 Application to purely national contexts............................................................. 26 3.4 Application to the ideal internal market ............................................................ 27 3.5 Interim conclusions ........................................................................................... 29

XII

4

Table of Contents

Taxation of European Companies during the time of restructuring in the current environment ................................................................................................ 30 4.1 Guiding tax principles ....................................................................................... 30 4.1.1

Neutrality and equity in an international context ...................................... 30

4.1.1.1

International neutrality and efficiency................................................... 31

4.1.1.2

International equity and fairness ........................................................... 32

4.1.1.3

Taxing right and time of taxation at international restructurings .......... 35

4.1.1.4

Valuation at international restructurings ............................................... 39

4.1.1.5

Interim conclusions ............................................................................... 40

4.1.2

EU law ....................................................................................................... 41

4.1.2.1

Primary EU law ..................................................................................... 42

4.1.2.1.1

Decisive fundamental freedoms ....................................................... 42

4.1.2.1.2

Discriminations and restrictions of the fundamental freedoms........ 44

4.1.2.1.3

Justifications of discriminations and/or restrictions......................... 46

4.1.2.2

Secondary EU law ................................................................................. 49

4.1.2.3

Decisive judgments of the European Court of Justice in the context of reorganizations.................................................................................. 49

4.1.2.4

Interim conclusions ............................................................................... 52

4.1.3

Side condition: Feasibility......................................................................... 52

4.1.4

Interim conclusions ................................................................................... 53

4.2 Comparative analysis of the treatment in the EU member states...................... 55 4.2.1

Approach for the comparative analysis ..................................................... 55

4.2.2

Merger Directive ....................................................................................... 56

4.2.3

Entry .......................................................................................................... 58

4.2.3.1

Merger ................................................................................................... 58

4.2.3.1.1

Basics with regard to company law.................................................. 58

4.2.3.1.2

Tax consequences............................................................................. 59

4.2.3.1.2.1 4.2.3.1.2.1.1

Entity level................................................................................... 61 Transferring company/companies........................................... 61

4.2.3.1.2.1.1.1

Assets and liabilities in country of transferring company ... 61

4.2.3.1.2.1.1.2

Permanent establishments in country other than that of transferring company ........................................................... 72

4.2.3.1.2.1.2 4.2.3.1.2.1.2.1

Receiving company (SE) ........................................................ 77 Tax-exempt provisions and reserves ................................... 77

Table of Contents

XIII

4.2.3.1.2.1.2.2

Losses................................................................................. 79

4.2.3.1.2.1.2.3

Prior holdings ..................................................................... 82

4.2.3.1.2.1.2.4

Additional transaction taxes ............................................... 84

4.2.3.1.2.2 4.2.3.1.3 4.2.3.2

Shareholder level ......................................................................... 86 Interim conclusions .......................................................................... 93

Holding SE ............................................................................................ 94

4.2.3.2.1

Basics with regard to company law.................................................. 94

4.2.3.2.2

Tax consequences............................................................................. 95

4.2.3.3

Subsidiary SE ...................................................................................... 109

4.2.3.3.1

Basics with regard to company law................................................ 109

4.2.3.3.2

Tax consequences........................................................................... 109

4.2.3.3.2.1

Contributions of cash or shares ................................................. 110

4.2.3.3.2.2

Contributions of branches of activity or single assets ............... 111

4.2.3.4 4.2.4

Conversion........................................................................................... 128 Transfer.................................................................................................... 130

4.2.4.1

Basics with regard to company law..................................................... 130

4.2.4.2

Tax consequences................................................................................ 131

4.2.5

Exit .......................................................................................................... 144

4.2.6

Interim conclusions ................................................................................. 145

4.3 Issues and options for reform .......................................................................... 147 4.3.1

Company law........................................................................................... 147

4.3.2

Tax law .................................................................................................... 150

4.3.2.1

Missing or incorrect transformation of Merger Directive ................... 150

4.3.2.2

Treatment of accrued hidden reserves................................................. 152

4.3.2.2.1

Transfer of assets and companies from one member state to another ............................................................................................ 153

4.3.2.2.1.1 4.3.2.2.1.1.1

Issues ......................................................................................... 153 Taxing right and time of taxation.......................................... 153

4.3.2.2.1.1.1.1

Assessment against the background of international neutrality and equity......................................................... 154

4.3.2.2.1.1.1.2

Assessment against the background of primary and secondary EU law ............................................................ 156

4.3.2.2.1.1.2

Valuation............................................................................... 162

4.3.2.2.1.1.3

Interim conclusions............................................................... 164

XIV

Table of Contents

4.3.2.2.1.2

Options for reform ..................................................................... 164

4.3.2.2.1.2.1

Assets remaining in the former jurisdiction to tax................ 164

4.3.2.2.1.2.2

Assets leaving the former jurisdiction to tax ........................ 165

4.3.2.2.1.2.2.1 4.3.2.2.1.2.2.2

Personal, objective and territorial scope .......................... 168

4.3.2.2.1.2.2.3

Required coordination between countries involved ......... 168

4.3.2.2.1.2.2.4

Uncoordinated approaches ............................................... 172

4.3.2.2.1.2.2.5

Other options: taxation of unrealized gains or abolishment of taxing rights upon exit............................. 175

4.3.2.2.1.2.3 4.3.2.2.2

Interim conclusions............................................................... 177 Transfers of foreign permanent establishments.............................. 177

4.3.2.2.3

Transfer of shares from one member state to another .................... 178

4.3.2.2.4

Doubling of hidden reserves........................................................... 179

4.3.2.3

Retention of unused losses .................................................................. 182

4.3.2.4

Filing obligations and avoidance of abuse .......................................... 185

4.3.2.5

Additional transaction taxes ................................................................ 187

4.3.3 5

Requirements with regard to the tax base, the tax rate and the taxable event ........................................................ 165

Interim conclusions ................................................................................. 188

Taxation of European Companies during the time of restructuring in the proposed environment ........................................................................................... 191 5.1 Guiding tax principles ..................................................................................... 191 5.2 Common Corporate Tax Base ......................................................................... 192 5.3 Common Consolidated Corporate Tax Base ................................................... 195 5.3.1

Proposed rules ......................................................................................... 195

5.3.1.1

Ongoing system ................................................................................... 195

5.3.1.2

Transitional aspects ............................................................................. 200

5.3.2

Issues and options for reform .................................................................. 203

5.3.2.1

Transactions taking place within a consolidated CCCTB group......... 203

5.3.2.2

Transactions not taking place within a consolidated CCCTB group .. 208

5.4 Interim conclusions ......................................................................................... 214 6

Conclusions ............................................................................................................. 216

Appendix ........................................................................................................................ 223 List of References .......................................................................................................... 229

List of Abbreviations

XV

List of Abbreviations Art.........................Article AT.........................Austria BE .........................Belgium BFH ......................Bundesfinanzhof BFH/NV ...............Sammlung amtlich nicht veröffentlichter Entscheidungen des Bundesfinanzhofs BG ........................Bulgaria BStBl ....................Bundessteuerblatt C ...........................Case CCTB....................Common Corporate Tax Base CCCTB .................Common Consolidated Corporate Tax Base CDD......................Capital Duty Directive CDFI .....................Cahier de Droit Fiscal International Cf. .........................Confer COM .....................Communication Comp ....................Company CY ........................Cyprus CZ .........................Czech Republic DBA......................Doppelbesteuerungsabkommen DE.........................Germany DK ........................Denmark EC .........................European Community ECJ .......................European Court of Justice ECR ......................European Court Report ECS.......................European Company Statute ECT ......................EC Treaty Ed..........................Editor/Edition Eds. .......................Editors EE .........................Estonia EEA ......................European Economic Area EEC ......................European Economic Community

XVI

List of Abbreviations

EEIG .....................European Economic Interest Grouping E.g.........................Exempli gratia Einl. ......................Einleitung ES .........................Spain Et al.......................Et alii Etc.........................Et cetera ETUI-REHS .........European Trade Union Institute for Research, Training and Health and Safety EU.........................European Union FI ..........................Finland Fn..........................Footnote FR .........................France GR ........................Greece HST ......................Home State Taxation HU ........................Hungary IBFD .....................International Bureau of Fical Documentation I.e. .........................id est IE ..........................Ireland IFA........................International Fiscal Association IFRS......................International Fiancial Reporting Standards IP ..........................Press release IRAP .....................Imposta Regionale sulla Attivitá Produttive IT ..........................Italy LT .........................Lithunia LU.........................Luxembourg LV.........................Latvia MD........................Merger Directive MT ........................Malta N/a ........................Not available N/a ........................Not applicable N.B. ......................Note besides NL.........................Netherlands No. ........................Number

List of Abbreviations

OECD ...................Organisation for Economic Co-operation and Development OJ..........................Official Journal P............................page P.a. ........................per annum Para. ......................paragraph Paras. ....................paragraphs PE .........................Permanent establishment PL .........................Poland PT .........................Portugal RO ........................Romania SCE.......................European Cooperative Society SE .........................Societas Europaea SEC.......................Staff of the European Commission SE-VO ..................SE-Verordnung SK .........................Slovak Republic SL .........................Slovenia SW ........................Sweden UFO ......................Unidentified Flying Object UK ........................United Kingdom USA ......................United States of America WP ........................Working Paper Vol. .......................Volume Vs..........................Versus

XVII

List of Figures

XIX

List of Figures Figure 1: Merger by acquisition..................................................................................... 60 Figure 2: Merger by formation of a new company ........................................................ 60 Figure 3: Establishment of a holding SE through companies in different member states ............................................................................................................... 96 Figure 4: Establishment of a holding SE through companies in the same member state................................................................................................................. 97 Figure 5: Establishment of a subsidiary SE through companies in different member states ............................................................................................... 112 Figure 6: Establishment of a subsidiary SE through companies in the same member state................................................................................................. 112 Figure 7: Establishment of an SE by conversion ......................................................... 129 Figure 8: Transfer of an SE.......................................................................................... 133

List of Tables

XXI

List of Tables Table 1:

Established SEs within the EU member states ............................................... 10

Table 2:

Merger - tax consequences at transferring company ...................................... 63

Table 3:

Merger - permanent establishment abroad ..................................................... 75

Table 4:

Merger - carryover of provisions and reserves............................................... 78

Table 5:

Merger - loss carryover .................................................................................. 80

Table 6:

Merger - merging gains or losses (receiving company) ................................. 83

Table 7:

Merger - Additional transaction taxes ............................................................ 85

Table 8:

Merger - shareholders of transferring entity/entities ...................................... 88

Table 9:

Holding SE - shareholders of founding entities and level of SE .................. 100

Table 10: Subsidiary SE - Contributing entities and SE............................................... 116 Table 11: Transfer of SE............................................................................................... 135 Table 12: Double tax treaties concluded between EU member states.......................... 223 Table 13: Foreign permanent establishments - avoidance of double taxation.............. 224 Table 14: Transfer of nondepreciable assets................................................................. 225

1 Introduction

1

Introduction

1.1

Motivation of the thesis

1

Effective 8 October 2004, a legal entity which is applicable in all EU member states (the so-called European Company or Societas Europaea (SE)) has been introduced.1 The legal basis was the Council Regulation (EC) No. 2157/2001 of 8 October 2001 on the Statute for a European Company (SE) (hereinafter: European Company Statute)2 and the Council Directive 2001/86/EC of 8 October 2001 supplementing the Statute for a European Company with regard to the involvement of employees3. Whereas the regulation on the Statute for a European Company introducing the legal form of the Societas Europaea was binding in its entirety and directly applicable in all the EU member states as of 8 October 2004 due to Art. 249 (2) ECT, the directive on the involvement of employees was binding with regard to the result which should be achieved but still needed to be implemented into the national law of the member states according to Art. 249 (3) ECT.4 In 2009 - five years after the introduction of the SE - the European Company Statute shall be reviewed and amended if necessary as stated in Art. 69 (a) ECS. The aim of the introduction of the SE was to strengthen the competitiveness of European Companies and improve the functioning of the internal market.5 The internal market which shall be established within the European Community according to the EC Treaty is defined as an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured (Art. 14 ECT). Thus, the internal market is rather a national market than an international one, since the system of the market is uniform or supranational and no longer international or multinational.6 In order to complete the internal market and improve the economic and social situation within the EU, barriers to trade need to be removed and structures of production need to be adaptable to the EU dimen1

2 3 4

5

It is one of the first supranational European legal entities. Other EU-wide entities are the European Cooperative Society (SCE) which is applicable to co-operative societies and the European Economic Interest Grouping (EEIG) which may be of interest for small and medium sized enterprises or selfemployed persons and is mainly used for auxiliary functions (e.g. joint research and development projects). Cf. for example for the SCE: Selbherr/Manz (eds.), 1995; for the EEIG: Schulze (ed.), 2004. Council Regulation, 2157/2001: 1. Council Directive, 2001/86/EC: 22. Such rules need to have the status of a code or treasury regulations. Administrative interpretations are not sufficient. Cf. Reiß, 1994: 327-328. This has been done, for example, in Germany via the “SEAusführungsgesetz” and the “SE-Beteiligungsgesetz”. Cf. Lutter/Hommelhoff (eds.), 2008. Cf. Council Regulation, 2157/2001: 1.

2

1 Introduction

sion. This implies that companies which are not only doing business on a local market need to be able to plan and carry out reorganizations as needed on a Community scale. Observing the rules of competition laid down in the EC Treaty, such reorganizations should give existing companies from different member states the opportunity to combine their potential by means of new structures, mergers or similar transactions.7 Furthermore, conditions need to be established so that the management of European groups of companies can be optimized. Only then there is no need for companies to relocate their head offices to countries outside the EU which may provide them with more efficient structures.8 However, the laws of the member states in the European Union are in certain areas rather orientated towards domestic transactions than cross-border transactions. Especially in company law each nation has its own legal forms. If a company wants to change its registered office within the European Union or reorganize its company in order to do business EU-wide, such transactions may be forbidden by law or hindered because of exit charges. Such exit charges arise if the company needs to be liquidated in one country and reestablished in another country due to the reorganization. Furthermore, tax costs may apply. If a company is involved in reorganizations beyond the national borders hidden reserves which have been accrued in the assets may become taxable upon transfer.9 Within the European Union such restrictions are clearly in conflict with the idea of an internal market. Thus, one measure adopted by the Community to overcome obstacles was to introduce a legal form which will be available in every one of the member states of the EU. The council regulation and directive which govern the Societas Europaea focus on rules regarding company law and employee involvement. With regard to company law, the statute uniformly regulated for the first time that cross-border transactions shall not result in the need to liquidate and reestablish the companies involved. Thus, using an SE made it possible to use new structures, reorganize the organization and transfer the registered office within the European Union without dissolution and thus without restrictions. Accordingly, it was only with the introduction of the SE that companies could choose a legal form which was not governed by a particular national law. Thus, from the perspective of company law the conditions to complete the internal market within the EU with re-

6 7 8 9

Cf. Wenz, 1993: 175-176. Cf. Council Regulation, 2157/2001: 1. Cf. Lenoir, 2007: 79; Lenoir, 2008: 14. Hidden reserves may also be defined as appreciations in value of assets which have not been realized yet. For details on the definition and the tax charges see Chapter 3.

1 Introduction

3

spect to legal entities have been established in general.10 However, due to various options contained in the regulation, overall uniformity may not be fulfilled in detail.11 The introduction of the SE was especially important in the context of cross-border mergers and transfers of the registered office across a border since this was not possible before without the dissolution of the involved companies.12 In the meantime further developments have taken place. The Directive 2005/56/EC13 now allows national corporations from different member states to merge without any consequences due to company law. Thus, as far as the directive is transformed into national law, which had to be done by 15/12/2007, cross-border mergers are not only possible for an SE (or in order to establish an SE) but also for limited liability companies within the EU. The conditions are analogues to those which are provided for in the European Company Statute for a merger of an SE.14 Regarding the transfer of the registered office, the SE is still unique since the 14th Company Law Directive has not been passed at the Community level. Accordingly, a transfer of the registered office without dissolution of the company in one state and reestablishment of the company in another state is not possible for national corporations.15 On the subject of taxation, the European Company Statute concluded in 2001 is silent, even though former proposals regarding the introduction of an SE had included tax rules. The SE looks back at a history of over thirty years.16 In a first proposal in 197017 far reaching rules regarding the tax treatment had been included. When looking at noncurrent transactions the tax neutrality for shareholders upon the establishment of a holding SE, the definition of the registered office for tax purposes and the tax neutrality upon the transfer of the registered office were regulated. When looking at current transactions the crossborder loss transfer with subsidiaries and taxation of profits and losses of permanent establishments were addressed. The second proposal in 198918 still contained rules regarding the taxation of profits and losses of permanent establishments. In the final version of the

10 11 12 13 14 15

16 17 18

Cf. Wenz, 1993: 35-44; Council Regulation, 2157/2001: 1. Cf. Thoma/Leuering, 2002: 1450; Thömmes, 2004b: 17; Bartone/Klapdor, 2007: 7-8. Cf. Sauter/Wenz, 2002: 10; Schön/Schindler, 2004: 573. Council Directive, 2005/56/EC: 1. Cf. Chapter 2. Cf. also European Commission, COM(2003)703; Herrler, 2007, 295-300; Winter, 2008: 532-537. Cf. European Commission, XV/6002/97. The work on this issue has been officially stopped in December 2007. See http://ec.europa.eu/internal_market/company/seat-transfer/index_en.htm (date of access: 31/01/2009). Regarding the historical development of the SE see in detail Blanquet, 2002: 20-34; Diemer, 2004: 3638; Lenoir, 2008: 13-14; Schön/Schindler, 2008: paras. 1-6. Cf. European Commission, COM(70)600. Cf. European Commission, COM(89)268.

4

1 Introduction

European Company Statute of 2001 tax rules have no longer been included19 since consent among the member states was not reached.20 Instead, these complex issues should be dealt with separately in the following years.21 This has only been partly achieved in the meantime. In the European Company Statute it is only stated that member states are generally obliged to guarantee that provisions applicable to SEs do neither result in a discrimination because of an unjustified different treatment of SEs compared to other national public limited-liability companies, nor in disproportionate restrictions when an SE is formed or transfers its registered office. This also has to be respected with regard to taxes.22 In addition, Art. 9 (1) (c) (ii) ECS refers to the national law of the country in which the SE is domiciled. In addition, according to Art. 10 ECS the SE shall be treated in every member state as if it were a public limited-liability company formed in accordance with the law of the member state in which it has its registered office and head office. Accordingly, general EU law, bilateral treaty law and national tax law applies.23 With respect to current transactions, this implies that the rules applicable to any other national corporate entity are valid.24 As a result, 27 different tax systems prevail within the EU not leading to a uniform treatment of SEs or a reduction of compliance costs.25 Instead, SEs are faced with the same obstacles treated as national corporate entities when doing business cross-border.26 As ongoing activities of SEs are currently not treated differently from other corporations, the consequences of the entry into an SE, the transfer of the registered office from one member state to another one and the exit out of an SE become important when analyzing the attractiveness and effectiveness of this new European legal form. If these transactions do not result in tax consequences an SE may freely move around within the internal market and adapt its structures as required by business objectives. This puts these noncurrent 19 20 21 22 23

24 25 26

Number 20 of the preamble of the European Company Statute explicitly states that areas like taxation are not covered by the regulation. Among others, there was the fear that special tax rules could lead to distortions of competition against other legal entities. Cf. Blanquet, 2002: 54; Thömmes, 2004b: 18. Cf. Diemer, 2004: 38. Cf. Council Regulation, 2157/2001: 1; Lenoir, 2007: 71. Cf. Soler Roch, 2004: 11; Terra/Wattel, 2008: 600. For an overview of the general hierarchy for norms regulating the SE beyond taxation see Theisen/Wenz, 2005: 51; Bartone/Klapdor, 2007: 7-8, which both show that various laws need to be observed leading to a complex situation. Cf. also Diemer, 2004: 49. An exception effects the few directives on which consent has been reached (e.g. Parent-Subsidiary Directive (90/435/EEC), Interest-Royalties Directive (2003/49/EC)). For details on the obstacles as of 2001 see European Commission, SEC(2001)1681. For details on the differing tax burdens of businesses in Europe see Spengel, 2003; Jacobs (ed.), 2007: 102-149; Wendt, 2009.

1 Introduction

5

transactions into the focus of this work. In this context, as has been stated above, a major issue involves the tax treatment of hidden reserves which have been accrued in the assets which are transferred. This is also a concern upon entry into an SE since the SE may not be established by individuals via a contribution of cash or assets, but solely by reorganization or conversion of specific entities already existing. Here, the Merger Directive 90/434/EEC, which has recently been amended by Directive 2005/19/EC,27 is of great importance for the SE. It deals with cross-border reorganizations and provides guidelines on their tax treatment for the EU member states. The Merger Directive is generally applicable to national corporations but with regard to the transfer of the registered office, it only covers the SE. Additionally, the SE can be examined in a broader context. Due to the various obstacles that companies doing business in Europe face, resulting from dealing with 27 different tax systems, the European Commission has proposed to introduce a new fiscal framework in the long run in order to complete the internal market from a tax perspective. The work is aimed at introducing a common consolidated corporate tax base throughout Europe. This would provide uniform rules within the whole EU and thus limit the obstacles mentioned above more effectively than case specific measures. Such a uniform tax base would change the systems on profit determination and profit allocation of groups of companies.28 In this context, it had also been discussed to use the SE in a pilot scheme. As the European Company Statute had not provided for a fiscal framework and the SE is an entity organized EU-wide, this would have served the EU dimension of the SE. However, due to concerns that a special tax regime for the SE would discriminate other companies against the SE and would thus create distortions to competition within the EU it has been abandoned.29 Overall though, work by the Commission Services and tax experts go on in designing such a new tax system, not only for the SE but for all companies doing business on an EU-wide level.30 Thus, the SE “may prove to be a “Trojan Horse” that Member States have unwittingly allowed within their city walls and which will in time disgorge its contents to the further downfall of national corporate tax systems”.31 In such a new system certain issues need to be examined with regard to noncurrent transactions. Among others, 27 28 29 30

Council Directive, 90/434/EEC: 1; Council Directive 2005/19/EC: 19. Cf. European Commission, SEC(2001)1681. See also e.g. Diemer 2004: 49-50. Cf. European Commission, COM(2003)726; Deloitte, 2004; Diemer, 2004: 62; Herzig, 2004: 98-99. Cf. the website of the General Directorate “Taxation and Customs Union” on the progress: http://ec.europa.eu/taxation_customs/taxation/company_tax/common_tax_base/index_en.htm.

6

1 Introduction

the question arises on how to handle the entry into and exit out of such a new system. Here again the focus is on the treatment of accrued hidden reserves. Furthermore, within the ongoing system, one has to determine how to deal with reorganizations in general.

1.2

Aim of the thesis and object of examination

Against this background the aim of this work is to determine how cross-border restructurings shall be treated within the EU from a tax point of view especially with regard to unrealized gains immanent in transferred assets (i.e. hidden reserves). In order to do so, first, economic guiding tax principles (neutrality and equity) in an ideal environment (e.g. one country or one internal market) are elaborated and examined with regard to reorganizations. Secondly, additional requirements in cross-border situations are elaborated (economic principles, legal principles as well as administrative aspects). Based on these findings, the currently applicable rules in the EU member states regarding the treatment of the establishment and restructuring of SEs are compared and evaluated. The goal is to identify the main deficits of the restructuring rules and develop reform options within the current tax system. Third, within the context of the reform proposals of the European Commission to establish a common tax base, the entry into and exit out of such a system as well as restructurings within the ongoing system shall be examined and critically analyzed. This analysis serves to provide guidance on the treatment of such transactions in a new tax system which is in line with the aforementioned principles. For the purpose of the further analysis the ongoing taxation after the reorganization will be disregarded as it is not immediately relevant for the question of taxing rights at establishment or restructuring. Furthermore, the decision whether to reorganize or not will mainly be driven by impediments at the point of time of the reorganization. Finally, changes to current taxation are caused by the fact that in most countries taxation is not neutral towards legal forms. Thus, different rules apply depending on the legal form in which the business takes place. These differences, however, do not originate from the reorganization itself.32 However, aspects which are directly connected to the reorganizations - even if they affect the current taxation afterwards - are evaluated (e.g. loss carryover).

31 32

Gammie, 2004: 36. Cf. also Jacobs (ed.), 2007: 186. Cf. Herzig, 1997: 3-4; Buchheim, 2001: 69. Regarding the effects which corporate tax systems may have on the company and its shareholders after the reorganization see Herzig, 1999: 621-643. For example, in case of a merger issues which result from the taxation of legally separate entities vanish as only one legal entity survives. Cf. Wöhe, 1997: 223.

1 Introduction

1.3

7

Organization of the thesis

The thesis is organized as follows: Chapter 2 starts with a description of basic characteristics of the Societas Europaea. In this context, statistical data on the SE is assessed with regard to frequency and reasons for establishment among others. This shall show whether or not the SE has been accepted by entrepreneurs up to now and provide reasons. Then the focus shifts to taxes in different scenarios. In Chapter 3 ideal tax environments for reorganizations are examined. Ideal tax environments may be defined as areas without borders from a tax perspective. For the examinations, general guidelines for the taxation of restructurings (neutrality and equity) are presented and put into more precise terms with regard to such transactions. Then the principles are tested in ideal environments, thus in areas with a uniform tax system as is the case in a domestic reorganization or could be the case in an internal market as the European Union. Chapter 4 analyzes the currently applicable tax rules in the 27 member states of the EU, hence an area with borders from a tax perspective. In order to do so, in a first step, guidelines in such a scenario are evolved. Due to the cross-border situation, additional economic, legal and administrative aspects need to be observed compared to Chapter 3. Important criteria commonly agreed on by economists and tax experts are international efficiency and neutrality as well as international equity from the perspective of the companies involved as well as of the countries involved. Moreover, restrictions arising for transactions within the European Union due to EU law are analyzed, i.e. EC Treaty, EC Directives, decisions by the European Court of Justice. Administrative aspects of taxation are also taken into account. In a second step, the prevailing rules concerning cross-border restructurings of SEs in the EU are described and compared. The analysis looks at the entry into an SE, the transfer of the registered office of an SE from one member state to another member state and the exit out of an SE. With regard to the entry, the four options to establish an SE are assessed: the merger, the foundation of a holding, the foundation of a subsidiary and the conversion into an SE. As the Merger Directive serves as the basis for most of the relevant transactions, it will be described up front as well as with the specific cases. Furthermore, when examining the different cases, first, company law aspects are briefly described. Next, the general tax rules will be discussed (mainly based on the Merger Directive). As the Merger Directive is not directly applicable but needs to be transposed into national law, finally, the current treatment in the member states is as-

8

1 Introduction

sessed. In a third step, the main deficits of the prevailing rules in the EU member states with respect to cross-border restructurings (e.g. treatment of accrued hidden reserves, retention of unused losses) are analyzed against the background of the guiding principles established at the beginning of the chapter. Based on these findings, necessary changes to the European Company Statute, the Merger Directive and/or national law are elaborated for each issue. After focusing on short-term options to improve the treatment of cross-border restructurings, Chapter 5 deals with long-term proposals of the European Commission. In order to establish an internal market within the European Union, also with regard to direct taxes, it has been proposed to introduce a common tax base for companies doing business throughout the EU. Accordingly, in this chapter the design of the new rules is addressed and evaluated with respect to the treatment of cross-border restructurings. After elaborating the guiding tax principles for such a new environment, the chapter focuses on the two scenarios which have been the focus of the work by the European Commission. These are the Common Corporate Tax Base (CCTB) and the Common Consolidated Corporate Tax Base (CCCTB).33 In contrast to a Common Corporate Tax Base, which implies the introduction of a uniform tax base throughout Europe, the Common Consolidated Corporate Tax Base would further include a consolidation and apportionment mechanism.34 For each approach, the proposed design is outlined and critically assessed with regard to the treatment of cross-border restructurings in order to form SEs or transfer the registered office of SEs. This does not only cover issues regarding the facilitation of reorganizations and transfers of the registered office in the ongoing system but also aspects regarding the entry into and exit out of the proposed environment as - in order to change to such a new tax system - transitional aspects are a major concern. In this context, options are presented and evaluated based on the principles laid down at the beginning of the chapter. The final chapter offers a summary of the main findings.

33 34

Cf. European Commission, COM(2003)726, COM(2005)532, COM(2006)157 and COM(2007)223. Cf. European Commission, COM(2007)223.

2 Relevance of the European Company in practice

2

9

Relevance of the European Company in practice This thesis deals with the tax treatment of European Companies upon entry, subsequent

reorganization and exit. Before the taxation issue is addressed, however, basic characteristics of the SE are presented, as well as data on the use of the SE in the EU member states. This assessment shall show whether or not the SE has been accepted as a new legal entity so far and provide reasons.

2.1

Basic features of the European Company

According to the European Company Statute an SE has certain features. An SE may be a listed or unlisted company. It may either have a corporate governance structure with a board of directors (one-tier or monist structure - like in the Anglo-Saxon countries) or a structure with a supervisory and management board (two-tier or dualist structure - like in Austria or Germany).35 Additionally, in a two-tier structure of an SE (compared to a national company) employee involvement can be restricted as the number of members in the supervisory board may be lowered and trade union members of different countries (not only the country where the registered office is located) may be added in accordance with Art. 7 of the Council Directive 2001/86/EC.36 The starting share capital needs to be at least 120.000 Euros. There are four ways to form an SE: formation by merger, the establishment of a holding SE or subsidiary SE and the conversion from an existing company into an SE. Furthermore, the SE may transfer its registered office without losing its legal identity. The companies involved need to be formed under the law of a member state and need to have their registered office and head office within the EU. In addition, a crossborder relationship has to be given.37

35

36 37

Regarding the structure generally common in specific member states see Arlt/Bervoets/Grechenig/Kalss, 2002: 733-764; Hopt/Leyens, 2004: 135-168; Teichmann, 2008: Art. 38 SE-VO paras. 16-23. For more details see e.g. Köstler, 2005: 331-376; Oetker, 2005: 277-318. Cf. Section 4.2.

10

2 Relevance of the European Company in practice

2.2

Examination of statistical data regarding the use of the European Company

Table 1: Established SEs within the EU member states38 Number of SEs established

Way of establishment of normal SEs

over

mer-

hold-

sub-

con-

ger

ing

sidi-

ver-

ary

sion

all

of these: shelfa

UFOb

emptyc

normald

n/a

Austria

12

1

2

2

7

1

-

-

6

-

Belgium

7

1

6

0

0

-

-

-

-

-

Bulgaria

-

-

-

-

-

-

-

-

-

-

Cyprus

7

0

5

1

1

1

-

-

-

-

Czech Repub-

110

59

49

2

0

-

-

-

-

-

Denmark

2

0

2

0

0

-

-

-

-

-

Estonia

3

0

1

0

2

1

-

-

1

-

Finland

-

-

-

-

-

-

-

-

-

-

France

8

0

5

0

3

-

-

-

3

-

Germany

88

20

22

7

39

8

1

1

19

10

Greece

-

-

-

-

-

-

-

-

-

-

Hungary

3

0

0

2

1

-

-

-

-

1

Ireland

1

0

1

0

0

-

-

-

-

-

Italy

-

-

-

-

-

-

-

-

-

-

Latvia

3

0

1

0

2

1

-

-

-

1

Lithuania

-

-

-

-

-

-

-

-

-

-

Luxembourg

13

1

10

1

1

-

-

-

1

-

Malta

-

-

-

-

-

-

-

-

-

-

lic

38

The information has been extracted from the database of ETUI-REHS, available at: http://ecdb.workerparticipation.eu/ (date of access: 31/01/2009).

2 Relevance of the European Company in practice

11

Netherlands

30

0

19

9

2

-

-

-

2

-

Poland

-

-

-

-

-

-

-

-

-

-

Portugal

-

-

-

-

-

-

-

-

-

-

Romania

-

-

-

-

-

-

-

-

-

-

Slovak Repub-

5

0

2

1

2

-

-

-

2

-

Slovenia

-

-

-

-

-

-

-

-

-

-

Spain

1

0

0

1

0

-

-

-

-

-

Sweden

5

3

1

0

1

-

-

-

1

-

12

1

7

3

1

-

1

-

-

-

310

86

133

29

62

12

2

1

35

12

lic

United

King-

dom Sum

a) SE without operation or employees, available for sale b) SE with operations but no further information available (e.g. with regard to business purpose or number of employees) c) SE with operations but without employees d) SE with operations and employees

In order to analyze data on the use of the SE in the EU member states information has been extracted from the database of ETUI-REHS (see Table 1).39 There, SEs are classified as follows. “Normal SEs” are SEs with operations and employees, “UFO SEs” are SEs with operations but no further information is available (e.g. with regard to business purpose or number of employees), “empty SEs” are SEs with operations but without employees and “shelf SEs” are SEs without operation or employees which are available for sale. This classification is used here as well in order to adequately evaluate the data. The first SEs established were MPIT Structured Financial Services SE and SCS Europe SE in the Netherlands. They were set up on 08/10/2004, the day the SE became effective. Both are operating in the financial services sector but without employees (i.e. they are empty corporations). Prominent examples with operations and employees followed (i.e.

39

This information is available at: http://ecdb.worker-participation.eu/.

12

2 Relevance of the European Company in practice

normal SEs), among others Allianz SE (financial services and insurance),40 BASF SE (chemicals), Elcoteq SE (computer services), Fresenius SE (health care),41 MAN Diesel SE (metal industry),42 Mensch und Maschine Software SE (information technology),43 Porsche Holding SE (automobiles), SCOR SE (reinsurance) and Strabag Bauholding SE (construction).44 As of the beginning of 2009, over 300 companies have been registered as SEs in the EU (see Table 1).45 An additional 20 companies are planning on becoming an SE. This number is steadily increasing. As compiled in a study by Eidenmüller/Engert/Hornhuf46 in 2004, the year in which the SE became effective as of 08/10/2004, 8 SEs were found. In 2005 21 SEs were found, in 2006 40 and in 2007 85, summing up to 154 by the end of 2007.47 Based on this, the number has doubled in 2008 (to 310) as has been predicted by Eidenmüller/Engert/Hornhuf.48 When looking at the regional distribution, the Czech Republic and Germany are leading with 110 and 88 SEs respectively. Whereas in former studies Germany was leading in numbers,49 the Czech Republic has recently passed Germany.50 At least ten SEs are located in the Netherlands (30), Luxembourg (13), Austria (12) and the United Kingdom (12). Of the remaining 21 member states 11 member states contain less than 10 SEs. In 10 member states no SE has been established or transferred its registered office to. The number of member states without SEs is decreasing.51 A reason for the increasing spreading of SEs may be found in the fact that only now the council directive on employee involvement has been transposed in every member state.52 Before, legal certainty was missing in mem-

40 41 42 43 44 45 46 47

48 49 50 51 52

For the motives and procedure of Allianz see Hemeling, 2008, whose initial incentive was to squeeze out minority shareholders in Italy. For the motives and procedure of Fresenius see Götz, 2007: 148-158. For the motives and procedure of MAN see Höhfeld, 2007: 159-172. For the motives and procedure of Mensch und Maschine Software see Drotleff, 2007: 173-180. For detailed information see ETUI-REHS, European Company (SE) Factsheets, http://ecdb.workerparticipation.eu/ (date of access: 31/01/2009). Additional 9 SEs have been established in EEA countries (Liechtenstein: 2 (all UFO), Norway: 7 (4 normal, 3 UFO)). Cf. Eidenmüller/Engert/Hornhuf, 2008: 724 which generated their data as of June 2008 by checking the national registries. Bayer/Schmidt end up with a number of only 127 SEs as of 10/01/2008 primarily based in the entry in the official journal of the EU. Cf. Bayer/Schmidt, 2008a: 454. The reason seems to be that the registration of SEs has not in all cases been published in the official journal of the EU. Cf. Eidenmüller/Engert/Hornhuf, 2008: 723. Cf. Eidenmüller/Engert/Hornhuf, 2008: 724. Cf. Bayer/Schmidt, 2007: R196; Bayer/Schmidt, 2008: R32; Eidenmüller/Engert/Hornhuf, 2008: 724. This has also correctly been predicted by Eidenmüller/Engert/Hornhuf. Cf. Eidenmüller/Engert/Hornhuf, 2008: 724. Cf. Bayer/Schmidt, 2007: R196; Bayer/Schmidt, 2008: R32; Eidenmüller/Engert/Hornhuf, 2008: 724. Regarding the transposition date and details on the implementation see http://www.workerparticipation.eu/european_company/countries_transposition (date of access: 31/01/2009).

2 Relevance of the European Company in practice

13

ber states which had not transposed the directive in time.53 When looking at the ratio of SEs and the population of the member states,54 the rather small member state Luxembourg is leading. Here the relatively high number results mainly from SEs which have transferred their registered office to Luxembourg.55 This can probably be attributed to the fact that Luxembourg is an attractive member state from a company and tax law point of view. When analyzing the business of the established SEs it becomes obvious that a substantial part of the SEs (overall 28%) are shelf companies (in the Czech Republic (54%) but also in Germany (23%) and few other countries). This means that the SEs do not carry out an own business yet but instead have been established in order to serve as a vehicle for other companies which want to become an SE. These ready-made structures provided by advisory companies save founders of companies the administrative red tape.56 Moreover, they assure that a cross-border relationship is given as required in order to establish an SE.57 The use of such shelf companies in practice can be proven.58 Furthermore, a significant number of the SEs are involved in financial and insurance services.59 This may originate from the possibility to streamline the relationship with national supervisory authorities.60 Additionally, as is discussed below, SEs of the financial services business are rather mobile and apparently make use of different company and tax laws.61 Finally, even though the share capital is quite high and a cross-border relationship is necessary it can be shown that not only big companies use the SE but medium sized companies as well.62 One reason could be that medium-sized companies use shelf companies upon establishment bypassing the cross-border issue.63 Other reasons may be the European image associated with an SE and the positive signals which conversions of big companies send towards smaller companies.64

53 54 55 56 57 58 59 60 61 62 63 64

Cf. the assumption in Bayer/Schmidt, 2007: R196. This has been done by Eidenmüller/Engert/Hornhuf, 2008: 725. In this ranking the density in the EEA state Liechtenstein is even higher. Cf. Eidenmüller/Engert/Hornhuf, 2008: 725, and the discussion below. Cf. Lenoir, 2008: 15. Cf. Eidenmüller/Engert/Hornhuf, 2008: 726. Cf. Bayer/Hoffmann/Schmidt, 2008: R103-105; Eidenmüller/Engert/Hornhuf, 2008: 726, 729. Cf. Bayer/Schmidt, 2007: R196; Eidenmüller/Engert/Hornhuf, 2008: 726-728; Lenoir, 2008: 15. Cf. Bayer/Schmidt, 2007: R196; Lenoir, 2008: 15. Of the same opinion Eidenmüller/Engert/Hornhuf, 2008: 727. Cf. Bayer/Schmidt, 2007: R196; Bayer/Hoffmann/Schmidt, 2008a: R127-128; Eidenmüller/Engert/Hornhuf, 2008: 726. Cf. Eidenmüller/Engert/Hornhuf, 2008: 726. Cf. also Eidenmüller/Engert/Hornhuf, 2008: 729.

14

2 Relevance of the European Company in practice

The high number of businesses in Germany can be explained by two strong motives. First, the SE provides more flexibility with regard to governance as a one-tier model may be chosen. Secondly, the SE is more flexible regarding employee involvement in big companies and may even avoid or freeze employee involvement in medium-sized enterprises compared to national companies.65 Besides, the image associated with an SE seems to be a reason. This image may be described as a European corporate identity connected with this EU-wide legal entity. It may, on the one hand, support a European integration inside the company (e.g. with regard to employees from different member states) and may, on the other hand, also provide a positive signal to persons outside the company (e.g. potential investors).66 Regarding the way of formation of normal SEs (i.e. SEs which conduct a business, have employees and information is available) conversions have been the most frequent option (55%) (e.g. Fresenius SE), followed by mergers (18%) (e.g. Allianz SE).67 Establishing a holding SE or subsidiary SE has only occurred in rare instances. However, when examining shelf SEs in most cases such SEs are formed as a subsidiary SE of a domestic and foreign national company or as a subsidiary SE of an existing SE.68 Cross-border transfers of the registered office have taken place in some instances. The first company with operations and employees to transfer its registered office from one member state (Finland) to another member state (Luxembourg) took place on 01/01/2008 by Elcoteq SE.69 Furthermore, there have been transfers of companies in the financial sector from Germany to the United Kingdom as well as from the Netherlands to Luxembourg and further to the Cayman Islands among others.70 These companies are mainly UFOs, thus they are operating, but details on the business purpose or employees are not provided.71 Apparently, such companies can easily move and by this also make their way to a

65

66 67 68 69 70

71

Cf. Reichert, 2006: 822-825 with further references; Bayer/Schmidt, 2007: R196; Drotleff, 2007: 175176; Götz, 2007: 148-149; Höhfeld, 2007: 160; Eidenmüller/Engert/Hornhuf, 2008: 728; Hemeling, 2008: 6-12. Cf. Buchheim, 2001: 242-245; Wenz, 2003: 196; Götz, 2007: 148-149; Höhfeld, 2007: 160; Hemeling, 2008: 12. Equivalent result in Lenoir, 2008: 17. Cf. the proofs in Bayer/Hoffmann/Schmidt, 2008: R103; Eidenmüller/Engert/Hornhuf, 2008: 726. Cf. Stock Exchange Release of 02/01/2008, available at http://www.elcoteq.com/en/Media/Release/ 2008/1179031.htm (date of access: 02/01/2008). Cf. Bayer/Schmidt, 2007: R 196; ETUI-REHS, European Company (SE) Factsheets, http://ecdb. worker-participation.eu/ (date of access: 31/01/2009). As of June 2008 18 transfers of 16 companies have been identified. Cf. Eidenmüller/Engert/Hornhuf, 2008: 723. Cf. ETUI-REHS, European Company (SE) Factsheets, http://ecdb.worker-participation.eu/ (date of access: 31/01/2009).

2 Relevance of the European Company in practice

15

tax haven country as pointed out by Schmidt.72 The transfer to the Cayman Islands was dependent on the specific law in Luxembourg and the Cayman Islands according to which companies may exit and enter a country without losing their legal identity.73 The transfer of an SE to a member state outside the EU is not per se forbidden by the European Company Statute. Instead, it is not explicitly regulated.74 Opinions differ on the implications which follow. On the one hand, Schmidt interprets this in a way that such transactions are permitted even though outside the EU the company loses its SE identity.75 On the other hand, Heuschmid/Schmidt argue that a transfer to a country outside the EU, while keeping or losing the SE identity, is against the rules provided in the European Company Statute which shall protect stakeholder (e.g. minority shareholders and employees) and thus, against the purpose of the SE. According to them, a transfer in a third country is only possible by converting the SE back into a national company of the member state where it has its registered office as stated in Art. 66 ECS. Then the transfer needs to follow domestic law.76

2.3

Interim conclusions

The number of SEs is increasing. Due to uncertainties the number has grown very slowly in the beginning but has recently increased substantially. Motives can be found in non tax factors like the European image and the flexibility in governance and employee involvement. The predominant way of formation has been the conversion which is generally not an issue from the tax perspective.77 Furthermore, companies use the option to reorganize themselves and move around Europe. Against this background it is not only important to consider the tax issues involved in reorganizations to SEs and transfers of registered offices of SEs in order to further boost the use of this EU-wide legal form, but also to safeguard the interest of the countries involved when assets or companies are transferred from one member state to another one (or even outside the EU).

72 73 74 75 76 77

Cf. Schmidt, 2006: 2221. Also practitioners mention this according to Eidenmüller/Engert/Hornhuf. Cf. Eidenmüller/Engert/Hornhuf, 2008: 725. Cf. Schmidt, 2006: 2222 with further references. Cf. Art. 7, 8 ECS; Schmidt, 2006: 2222; Heuschmid/Schmidt, 2007: 55. Cf. Schmidt, 2006: 2222. Cf. Heuschmid/Schmidt, 2007: 55-56. Cf. Section 4.2.3.4.

16

3 Taxation of European Companies during the time of restructuring in an ideal environment

3

Taxation of European Companies during the time of restructuring in an ideal environment As has been pointed out above, a Societas Europaea may not be established by indi-

viduals via a contribution of cash or assets but solely by reorganization of entities already existing. Furthermore, a feature of the SE is the possibility to transfer the registered office from one country to another without losing the legal entity.78 Thus, in the following, the focus is on generally accepted principles which need to be observed in such transactions from a tax perspective. In this chapter an ideal environment is considered. An ideal environment may be defined as an area with a uniform tax system in which the transaction takes place, thus an area without borders. Such an environment would be provided if the transaction occurs within one country. Taking the aim of the European Company Statute into consideration, it should also be provided within the internal market of the European Union.

3.1

Guiding tax principles

3.1.1

Neutrality and efficiency

Taxes are not explicitly mentioned in the European Company Statute. It is only stated that member states may not discriminate SEs against domestic corporations for unjustified reasons or disproportionately restrict SEs when they are formed or transfers their registered offices. This implies that such reorganizations may not be hindered, which also needs to be respected with regard to taxes.79 The generally accepted principle in this context is the principle of tax neutrality. Accordingly, taxes shall not influence decisions. Ideally, in a world with taxes decisions are made in the same manner as in a world without taxes. Thus decisions would be made only with regard to profitability or other corporate aspects.80 There are two ways to put tax neutrality into more precise terms. The microeconomic perspective looks at the effects of taxation on the decision makers of single businesses (decision neutrality).81 Accordingly, on the one hand, one can analyze whether current tax systems are neutral and, on the other hand, how neutral tax systems should look 78 79 80

Cf. Chapter 1. Cf. Chapter 1. Cf. also Council Regulation, 2157/2001: 1; Lenoir, 2007: 71. Cf. Zuber, 1991: 48; Schneider, 1992: 193; Schreiber, 2009: 84-85.

3 Taxation of European Companies during the time of restructuring in an ideal environment

17

like.82 Such an approach can be justified by the following reasons. One argument is that tax planning and information costs are avoided since decisions are not influenced by taxes.83 Another argument is that the risk of incorrect business decisions is minimized since the factor “taxes” does not need to be taken into account.84 From a macroeconomic perspective, taxation shall provide allocation and production efficiency and thus avoid the misuse of resources from the point of view of the economy as a whole since this would cause a loss of welfare, i.e. an excess burden.85 Although decision neutrality and allocation and production efficiency are put into concrete terms differently, a neutral system is the basis for an efficient system. Only if decisions at the level of the entrepreneurs are not distorted by taxes, may an optimal allocation of resources within the whole economy take place.86 Neutrality and efficiency are also part of the requirements established by the European Commission in the context of company taxation within the internal market.87 3.1.2

Equity and fairness

Furthermore, the principle of equity or fairness needs to be followed in taxation. This is also one of the guiding principles established by the European Commission.88 It implies that the tax burden is distributed as evenly as possible among the taxpayers in order to finance public expenditures.89 Consequently, taxation must be aligned to the taxpayer's ability to pay.90 This applies to individuals as well as corporations.91 The commonly accepted yardstick of the ability-to-pay principle goes as follows. The income derived during one period is computed for all taxpayers according to uniform, objectified and non-arbitrary rules which are clearly and certainly defined in the tax code.92 This implies that not only

81 82 83

84 85 86 87 88 89 90 91

92

Cf. Elschen/Hüchtebrock, 1983: 253, 255; Elschen, 1991: 100-101; Zuber, 1991: 49; Wagner, 1992: 37. Cf. Heinhold, 1999: 78 with examples; Lange, 2005: 98. Cf. Wagner, 1989: 264-265; Wagner, 1992: 3-4. However, one has to mention that an entrepreneur may also favor a non-neutral system if the tax due plus tax planning and information costs are still lower compared to the tax due in a neutral system. Cf. Wagner, 1989: 265; Wagner, 1995: 737. Cf. Zuber, 1991: 51-52. Cf. Elschen/Hüchtebrock, 1983: 253-255; Zuber, 1991: 48-49; Rosen/Gayer, 2008: 331-338. Cf. McLure, 1979: 204 with further references; European Commission, SEC(2001)1681: 26; Spengel, 2003: 223-226 with further references. Cf. Schön, 2000: 191-195; European Commission, SEC(2001)1681: 26-27. Cf. Schön, 2000: 191-195; European Commission, SEC(2001)1681: 26. Cf. Kirchhof, 2002: 10; Rosen/Gayer, 2008: 367-369. Cf. Tipke/Lang, 2008: 88. Cf. Musgrave, 2001: 1339. Whereas the ability to pay of individuals contains an objective and subjective component, the ability to pay of corporations is solely determined by objective criteria. Cf. Tipke/Lang, 2008: 91-92. Cf. Jacobs, 1971: 24-27.

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3 Taxation of European Companies during the time of restructuring in an ideal environment

income or gains but also expenses or losses need to be taken into account.93 Furthermore, it follows that revenues cannot be recognized and thus taxed until the economic benefits associated with them are realized. This is called realization principle. Realization means that a market transaction has taken place. Therefore, gains and losses are only taxable when realized in a transaction with a third party and not when accrued.94 One alternative is to base taxation on unrealized values, i.e. fair market values that have not been validated in a market transaction yet. This has three major disadvantages. First, the values of all assets of individuals and businesses would need to be determined at the end of each period which seems impracticable.95 Secondly, the amount of taxable gains is uncertain since the market transaction is missing.96 Third, no cash is generated with a third party which could be used to pay taxes. Consequently, due to these liquidity problems, the substance of a person or company would be taxed instead of the profits generated in a certain period.97 This may have negative effects on business decisions.98 A fair value taxation would only be defensible if taxpayers could get money at the capital market without restrictions on the basis of the gains which will be realized in the future.99 However, due to costs of information and uncertainty this is not the case in reality.100 Moreover, as unrealized losses would immediately become tax effective, this would be an element of uncertainty and could result in a substantial burden for the treasury.101 In conclusion, a taxation of unrealized values can be rejected.102 The other alternative is to only tax current income flows but not noncurrent flows. However, this would create arbitrage options for the taxpayer. He would likely try to structure transactions in such a way that ordinary taxable income would be converted into tax-exempt capital gains, thus he would have the option to receive the net present value of income flows derived from using an asset tax free upon sale. This would result in an ero93 94

95 96 97 98 99 100 101 102

Cf. Tipke/Lang, 2008: 245, 248. Cf. Weber-Grellet, 2001: 181-182; Oestreicher/Spengel, 2007: 439; Mayr, 2008a: 88; Tipke/Lang (eds.), 2008: § 17 paras. 202, 220; Schreiber, 2009: 84. For the application of the realization principle in Europe see Oestreicher/Spengel, 2007: 439-440; for the USA see Rosen/Gayer, 2008: 387. Cf. King, 1995: 156. Cf. Mayr, 2008a: 88; Tipke/Lang (eds.), 2008: § 17 paras. 202, 220. Cf. King, 1995: 156; Homburg/Bolik, 2005: 2335; Mayr, 2008a: 88; Tipke/Lang (eds.), 2008: § 8 para. 33. Cf. Schreiber, 2009: 84-85. Cf. also Schreiber/Führich, 2007: 19-20. Furthermore, they would need to be allowed to deduct the interest on the loans received in their tax return. This should generally not be an issue though. Cf. Homburg/Bolik, 2005: 2335. Cf. Kessler, 2004: 844. Of the EU member states two (France, Greece) optionally allow including revaluation gains on tangible assets in taxable income. Cf. Oestreicher/Spengel, 2007: 440.

3 Taxation of European Companies during the time of restructuring in an ideal environment

19

sion of the tax revenues of the treasury and is therefore not likely to apply in reality either.103 Following the realization principle, the value of an asset should be reported at cost in the tax balance sheet. Costs are the acquisition or production costs, i.e. the consideration given for the acquisition or used in the production process.104 Furthermore, the cost base is the highest value possible, thus the upper limit.105 Consequently, increases in the carrying amount of an asset or revaluations which exceed the historical costs may not result in taxable income unless the value is realized in an exchange transaction with a third party (e.g. disposal).106 Moreover, subsequent reductions, depreciation or amortization exceeding the historical costs may not be included in taxable income.107 Hidden reserves which are established in the assets due to the cost principle are called genuine hidden reserves. They are calculated as market value minus investment cost and constitute the growth in value.108 If the market value is below the investment cost a tax effective write-down to this going concern value may be available in tax law provided that the decline in value is substantial. In addition, the realization principle implies that the historical costs of depreciable assets are allocated to the periods of use via depreciation in order to account for wear and tear. As the neutral course of depreciation depends on the structure of the net payments general guidelines regarding the method and rate of depreciation cannot exactly be established.109 Mainly for reasons of simplicity and certainty, depreciation rules are standardized in most countries, sometimes even providing for an accelerated depreciation in order to grant incentives for new investments.110 This may also be a source for hidden reserves, called artificial hidden reserves. They are calculated as investment cost minus book value111 and constitute a pure book profit.112 Moreover, inflation which results in higher

103 104 105 106 107 108

109 110 111

Cf. King, 1995: 157; Lange, 2005: 104. Cf. Burns/Krever, 1998: 648; Oestreicher/Spengel, 2007: 439, 442; Tipke/Lang (eds.), 2008: § 17 para. 70; Schreiber, 2009: 84. Cf. Weber-Grellet, 2001: 181; Oestreicher/Spengel, 2007: 439; Tipke/Lang (eds.), 2008: § 17 para. 68. Cf. Weber-Grellet, 2001: 337. However, the revaluation of an asset may be reflected in equity via a revaluation reserve. Cf. Oestreicher/Spengel, 2007: 439. Cf. Oestreicher/Spengel, 2007: 439. Cf. Spori, 2001: 61-62. This also includes the earning capacity of a company which is not attributable to one specific asset (i.e. goodwill). In this case the cost may be zero if the goodwill was not allowed to be capitalized in the tax balance sheet. Cf. Scheffler, 2002: 369. See the overviews on the treatment of intangible assets in the EU member states in Endres et al. (eds.), 2007: 36-40. Cf. Oestreicher/Spengel, 2007: 443. For an overview of the rules in the EU member states see Oestreicher/Spengel, 2007: 443. The book value equals the investment costs minus depreciation. It is also called adjusted basis. Cf. Burns/Krever, 1998: 648.

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3 Taxation of European Companies during the time of restructuring in an ideal environment

prices for assets as well as an overestimation of liabilities, which prolongs the balance sheet, may also cause hidden reserves.113 The realization of such hidden reserves generally occurs when the ownership of an asset changes against a consideration. The consideration may be cash (i.e. sale) or other assets (i.e. exchange). This is the case when assets are transferred to a third person who is a different taxpayer. In general, taxation is bound to legal criteria, independent of economic criteria. Accordingly, the legal form and the single legal entity are of relevance. Oppositely, when taking into account economic criteria various legal entities are regarded as one for tax purposes if they conduct a unitary business.114 The concept of disposal is to be interpreted widely as to not only include the sale (positive amount) but also the use in the sales process (e.g. due to depreciation), redemption, destruction etc. of the asset (negative amount).115 Realization also takes place when the company to which the assets belong changes (e.g. due to liquidation or termination) or the sphere of the asset changes (e.g. when the asset is transferred from the private to the business sphere or vice versa).116

3.2

Issues at reorganizations

3.2.1

General features of reorganizations

When applying the principles of neutrality and equity to reorganizations in order to form an SE or transfer the registered office, such transactions need to be defined first. In general, companies are characterized by their legal form and the participation of other shareholders (individuals, companies) in the specific company or their own participations in other companies. In order to change this structure a reorganization needs to take place. Thus, reorganizations may be defined as changes in the legal form and/or the interest of the shareholders in the company117 or more generally, as changes to the legal or economic structure of one or more companies.118 This principally covers transfers of assets between

112 113 114 115 116 117 118

Cf. Gordon, 1998: 704; Spori, 2001: 61-62; Weber-Grellet, 2001: 181; Cf. Oestreicher/Spengel, 2003: 460. Cf. Andersson, 1991; Tipke/Lang (eds.), 2008: § 17 para. 210. Cf. Weber-Grellet, 2001: 180-181; Jacobs (ed.), 2007: 1149-1150. Cf. Wöhe, 1997: 224-225; Burns/Krever, 1998: 647; Weber-Grellet, 2001: 180; Wassermeyer/Andresen/Ditz (eds.), 2006: 154-155. Cf. Weber-Grellet, 2001: 180-181, 337. Cf. Herzig, 1997: 3. Cf. Vanistendael, 1998: 897.

3 Taxation of European Companies during the time of restructuring in an ideal environment

21

different taxpayers (including shares) as well as transfers of assets between different locations.119 The parties involved in reorganizations are (1) the acquired or transferring company (i.e. transferor) which transfers its assets to another entity, (2) the acquiring or receiving company (i.e. transferee)120 which receives assets from another entity and (3) the shareholders of the involved companies (i.e. transferor and transferee). Furthermore, other persons (e.g. creditors) may be affected. Depending on the type of reorganization, however, not all of the parties need to be involved.121 One can distinguish reorganizations by determining whether or not the legal parties engaged in the transaction disappear as part of the transaction. If they disappear this generally qualifies as a reorganization (e.g. merger, conversion). Here, special cases are the conversion from one legal entity into another and the transfer of the registered office where the assets are transferred from one location to another. If they do not disappear, a transfer of assets or shares may only qualify as reorganization if a substantial part of the assets or a substantial holding is transferred (e.g. contribution of assets, exchange of shares). Otherwise, the transfer is treated as a sale.122 3.2.2

Treatment of hidden reserves

There are some tax issues with regard to reorganizations which will be discussed next. The main issue at the point of time of the reorganization concerns the taxation of gains and losses immanent in the assets transferred, thus of the hidden reserves, as they may have accrued to a substantial extent.123 These assets include the business assets of the companies involved as well as the shares of the shareholders involved.124 If legal criteria prevail a transfer of assets principally leads to a realization of gains or losses immanent in the assets provided that the assets are transferred from one single legal entity to another one.125 Of the cases discussed above this is not the case in a change from one territorial allocation to another one (i.e. transfer of the registered office). In a transfer of the registered

119 120 121 122 123 124 125

Cf. Schön, 2007: 424-425; Schön, 2008: 62. This can be the surviving or newly established entity. Cf. Vanistendael, 1998: 897-898. Cf. Vanistendael, 1998: 898-900. Cf. Dürrschmidt, 2007: 154. Cf. Lange, 2005: 99; Dürrschmidt, 2007: 155. Cf. Weber-Grellet, 2001: 180-181; Jacobs (ed.), 2007: 1149-1150; Schön, 2007: 424-425; Schön, 2008: 62.

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3 Taxation of European Companies during the time of restructuring in an ideal environment

office the assets change the location but the taxpayer stays the same. Thus, tax consequences may not result.126 In a change from one legal form to another (i.e. conversion) or from one organizational structure to another (e.g. merger, contributions of assets or shares) such a legal view may cause problems as assets are transferred from one tax subject to another one. Indeed, there are several reasons why the application of the realization principle should be restricted in such transactions.127 First, from the perspective of the equity, the economic ability to pay is decisive. Consequently, a taxation may only take place if a sufficient change in the taxpayer’s economic position has occurred. However, in instances where the corporate reorganization equals a legal restructuring of the same business such a change does not occur. This is the case where the business activity is continued and the interest of the shareholders in the company is retained.128 These conditions are most obviously fulfilled in a change of legal form, as only the legal identity changes whereas the business and shareholder remain exactly the same.129 Furthermore, this is also defensible for organizational changes provided that they economically equal such a change of legal form. This is the case if all (merger) or substantially all (contribution) assets are transferred.130 Furthermore, cash does not flow in such transactions - neither at the level of the entity nor at the level of the shareholder - since economically no gain or loss is realized in a market transaction. Accordingly, the values are uncertain and there is no money to pay any tax charges.131 Instead, liquidity would have to be generated from other sources (e.g. current business operations, sale of assets, borrowing of money from bank etc.).132 Secondly, from the perspective of tax neutrality,133 if taxes would be levied on hidden reserves which may

126 127

128 129 130 131 132 133

Cf. also Vanistendael, 1998: 900; and Endres, 1982: 212 for the conversion. In literature there are different views on whether the realization principle is restricted or does not apply at all to reorganizations. Cf. the overview provided by Lange, 2005: 112. Despite the different reasoning, both approaches come to the same result as reproduced in the text. Cf. Vanistendael, 1998: 896; Schaumburg, 2000: 510. It is even questionable whether a transfer of assets actually takes place as only the legal from is changed. Cf. Endres, 1982: 212, 214. Cf. Wöhe, 1997: 224; Vanistendael, 1998: 898-899. Cf. Reich, 1983: 167; Förster, 1991: 2; Herzig/Dautzenberg/Heyeres, 1991: 3-4; Essers/Elsweier, 2003: 84; Jacobs (ed.), 2007: 1149; Schreiber, 2009: 85. The reasoning is similar as in the context of a general taxation of unrealized gains. See Section 3.1.2 above. As pointed out by Lange there may be interactions between the tax neutrality of current and noncurrent transactions. However, even if the current tax system is neutral reorganization may still be efficient not from a tax perspective but from a business perspective. Cf. Lange, 2005: 99.

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23

have accrued to a substantial extent, such a burden could hinder restructurings134 and thus entrepreneurs’ decisions on a change of the legal form or organizational structure.135 From a microeconomic perspective it may also cause tax planning and thus costs for businesses.136 If reorganizations are not carried out because of taxes, this leads to inflexible corporate structures and the preservation of inefficient structures.137 From a macroeconomic point of view this would result in a lock-in effect since companies and shareholders would be bound to their current structures. A Pareto efficient allocation of resources would thus be distorted.138 Consequently, in order to avoid illiquidity, inflexible structures and tax planning costs, an immediate taxation upon reorganization may not take place. This is based on the requirement that a subsequent taxation of hidden reserves is guaranteed.139 Thus, ultimately hidden reserves should be taxed according to general rules. Otherwise, if the reorganization process would be exempt from tax, companies would be privileged instead of being taxed according to their ability to pay. Furthermore, this would likely cause tax planning in order to create tax-exempt capital gains instead of ordinary taxable income.140 Consequently, taxation should only be postponed and take place when hidden reserves are realized in a market transaction.141 Such a deferral of taxation can technically be accomplished by attributing the values of the assets as used by the transferor company to the transferring company (roll over relief). These values equal the tax/book value. The same should apply to shares of the shareholders involved.142

134

135 136 137 138 139

140 141

142

Cf. Herzig/Dautzenberg/Heyeres, 1991: 4; Herzig, 1997: 4; Schindler, 2004c: 425. Herzig points out, though, that there may be rare situations in which it is favorable to realize and tax hidden reserves upon a reorganization. This is the case if capital gains tax is low and the depreciable capacity is increased as part of the realization inasmuch as the benefit from the increased depreciation in later years is higher than the burden from taxing the gains. Cf. Herzig, 1997: 4. For such options in the EU member states see Section 4.2.3.1.2.1. Cf. Schön, 2007: 415; Schön, 2008: 54. Cf. e.g. Feinschreiber/Kent (eds.), 2002; IFA (ed.), 2005; PwC (ed.), 2006. Cf. Herzig, 1997: 4; Vanistendael, 1998: 896; Schindler, 2004c: 425; Jacobs (ed.), 2007: 1149. Cf. King, 1995: 158; Rosen/Gayer, 2008: 387. Cf. Herzig/Dautzenberg/Heyeres, 1991: 4; Weber-Grellet, 2001: 181 with further references; Tipke/Lang (eds.), 2008: § 17 para. 203. This taxation will take place at a legally different taxpayer but due to the continuity of the shareholders at a taxpayer who is economically the same. Cf. Endres, 1982: 243-244. Cf. Herzig/Dautzenberg/Heyeres, 1991: 4; King, 1995: 157; Jacobs (ed.), 2007: 1150. Cf. Vanistendael, 1998: 908; Canellos, 2005: 30. Thus, tax neutrality upon the reorganization implies an interest-free loan on the taxes due until hidden reserves are finally realized (positive timing effect with regard to interest and liquidity). Cf. Dautzenberg, 1997: 215; Jacobs (ed.), 2007: 1150; Rosen/Gayer, 2008: 387; Tipke/Lang (eds.), 2008: § 17 para. 211. Cf. Vanistendael, 1998: 908.

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3 Taxation of European Companies during the time of restructuring in an ideal environment

3.2.3

Retention of unused losses

Besides the issue of hidden reserves, further aspects may impede reorganizations. These include the treatment of loss carry forwards, tax incentives and transaction taxes.143 Regarding the loss carry forwards the question is whether losses of the transferring company may be used by the receiving company if the company who incurred the losses (transferring company) perishes upon reorganization.144 The equity principle as stated above implies that profits and losses are equally recognized in order to appropriately determine the taxpayer’s ability to pay. In order to answer the question of whether the receiving company may utilize the losses of the former company or not one has to determine whose ability to pay has been reduced due to the loss of the transferring company.145 From a legal view every taxpayer is considered separately from others. Consequently, losses of the transferring company can only be utilized by this company.146 This neglects, however, that the owners of the company have the burden of the loss in the end. Therefore, according to a more economic view corporation and shareholders are seen as an economic unit.147 When following this economic view, one also has to determine whether the losses of the transferring entity may actually be used within its lifetime. In most countries (also within the EU) the use of losses is restricted even for the taxpayer who suffered the loss. Restrictions may cover time and/or amount. More precisely, losses may either not be carried back at all or carried forward to only few years.148 Thus, at the end of the lifetime of the legal entity, unused losses may remain. As a result, the overall tax burden of the company will be higher than it should be according to the ability to pay.149 Consequently, in order to be treated fair, a first request is that losses can be carried back and carried forward without limitations.150 Secondly, if losses still remain at the liquidation of the company, they need

143

144 145 146 147 148

149 150

Cf. Herzig, 1997: 4-5; Jacobs (ed.), 2007: 1150-1151. These are relevant issues, as they may cause immediate tax charges (in case of a realization of tax-exempt reserves or provisions or due to transaction taxes) or negative effects in the future (in case of a denial of a loss carryover). Cf. Dürrschmidt, 2007: 155-156, 158. Cf. Herzig, 1997: 4. Cf. Maiterth/Müller, 2006: 1862. Cf. Thiel, 2005: 2320; Maiterth/Müller, 2006: 1862. Cf. Maiterth/Müller, 2006: 1862-1863; Dürrschmidt, 2007: 156. For an overview of the rules in the EU member states see Endres et al. (eds.), 2007: 80-81, 740-755. Furthermore, interest and liquidity issues arise as a carry back is generally not discounted and a carry forward not compounded. Cf. Maiterth/Müller, 2006: 1863-1685, using an example. Furthermore, in order to avoid interest and liquidity issues, a carry back would need to be discounted, a carry forward would need to be compounded. If treasuries restrict the loss carry back due to liquidity concerns, it must be possible to establish provisions in order to build up a ‘loss buffer’. Cf. Spengel, 2009: 107 with further references.

3 Taxation of European Companies during the time of restructuring in an ideal environment

25

to be allowed to be utilized via a refund of taxes. If instead the company perishes without liquidation as is the case in reorganizations, such losses need to be carried over to the successor company in order to obey the ability-to-pay principle.151 A loss carryover to the successor company would also serve neutrality, as otherwise the loss of such carryovers could hinder the restructuring process.152 Furthermore, tax planning in order to utilize losses becomes obsolete and associated costs do not occur.153 3.2.4

Treatment of tax incentives

With regard to tax incentives, again the question is whether the receiving company may use the benefits given to the transferring company (e.g. special depreciation, roll over relief for assets, investment grants). This is once more an issue of a legal vs. economic point of view. Legally, the company who was given the benefit changes, economically, it does not change. Accordingly, just looking at the legal aspects may defer restructurings until the incentive has been used by the transferring company, e.g. in order to prevent the unwinding of the grant.154 Consequently, an economic approach is given priority as long as the benefits remain with the assets, provision or reserves which is generally the case if a carryover takes place.155 3.2.5

Additional transaction taxes

Furthermore, transaction taxes may be levied. These may include capital duty tax, stamp duty taxes or real property transfer tax. Capital duty tax and stamp duty tax are levied on capital contributions. In reorganization such taxes may occur when a new company is established or the surviving company issues new shares as part of the transaction.156 Real property transfer tax is imposed by countries upon the transfer of the ownership of real estate. As long as only the legal structure changes whereas the economic substance remains the same, reorganization transactions should be exempt from these additional taxes. Moreover, as stated above, no liquidity flows to the involved companies. Thus, the necessity to pay transactional taxes may create an obstacle to economically efficient reorganizations

151 152 153 154 155 156

Accordingly, a denial of the loss carryover may not be justified by the notion of avoiding abuse Cf. Maiterth/Müller, 2006: 1866. Cf. Noll, 1999: 62-63; Maiterth/Müller, 2006: 1866. Cf. Flume, 1968: 101; Maiterth/Müller, 2006: 1865 Fn. 34. Tax planning options are e.g. that shareholders give profitable assets to the company or sell shares. Cf. also Section 4.3.2.3. Cf. Herzig, 1997: 5; Vanistendael, 1998: 921. Cf. Endres, 1982: 246. Cf. Vanistendael, 1998: 924.

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3 Taxation of European Companies during the time of restructuring in an ideal environment

(e.g. because real estate may not be reallocated as needed due to business purposes) as no cash is available to pay taxes.157 3.2.6

Scope of rules

As has been mentioned, the conditions set out above for reorganizations are dependent on the fact that the economic substance remains the same and only the legal structure changes. Thus, regarding the scope of tax neutral rules, two conditions should be observed. On the one hand, a certain degree of continuity of the business enterprise is necessary and, on the other hand, a certain degree of continuity of the shareholder interest.158 The continuity of business enterprise refers to changes in the conduct of the business and thus more precisely to the assets transferred. The continuity of shareholder interest relates to changes in the distributions of property interest of the shareholders and thus more specifically to the buyout of (minority) shareholders. Generally, if the conditions provided are too lax, opportunities for tax evasion exist. Conversely, if the conditions are too strict, little flexibility is left to the companies.159

3.3

Application to purely national contexts

When applying the principles set out above to ideal environments the following two scenarios are examined: domestic transactions and transactions in a uniform internal market. In a purely national context a reorganization process takes place in only one country and only one treasury is involved. Consequently, reorganizations in order to form an SE or transfer the registered office should not raise issues from the point of view of the neutrality or equity principle. Instead, changes to the legal form or organizational structure would not result in immediate tax consequences as long as the legal identity would change but not the economic structure (business and shareholders). This is based on the condition that a future taxation is guaranteed. This condition is not problematic in this ideal environment. As the involved companies and shareholders are located within the same country they are subject to the same tax rules before and after the reorganization. Accordingly, reorganizations are treated neutrally for tax purposes by using book values upon transfer. Different valuations will not occur since only one system is applicable. Furthermore, a taxation of 157 158

Cf. Endres, 1982: 288-289; Herzig, 1997: 4; Vanistendael, 1998: 924: Seeger/Leonard, 2000: 550; Council Directive, 2008/7/EC: 11. Within the context of German real estate transfer tax see also Seeger/Leonard, 2000: 552.

3 Taxation of European Companies during the time of restructuring in an ideal environment

27

the hidden reserves will ultimately take place when the triggering realization event, which is uniformly defined within one country, takes place at the same tax rate as at the time of deferral.160 Moreover, not only book values for the assets can be carried over, but also losses incurred prior to the reorganization as well as tax-exempt reserves and provisions. The same applies to the shares of the shareholders involved. Furthermore, changes to the territorial allocation do not cause tax consequences since the taxpayer and the tax environment stays the same, the assets are just being located from one place to another one. Consequently, transfers of assets due to the formation of a company as well as the transfer of the registered office of a company do not immediately result in taxation. Such deferral rules can generally be found in the member states for national transactions.161 To sum up, in a reorganization process which takes place in one country, neutrality and equity are followed as no negative tax consequences result.

3.4

Application to the ideal internal market

Within the single market “EU” four proposals are being discussed on how to reform the company taxation in order to reach a level playing field: Home State Taxation, Common (Consolidated) Corporate Tax Base, Single Compulsory Harmonised Tax Base and European Union Company Income Tax.162 The concept of Home State Taxation163 stipulates that groups of companies may determine their tax base uniformly according to the rules in the country of the parent company (i.e. home state), independent from where the group companies are located. The Common (Consolidated) Corporate Tax Base would establish a new set of rules optionally applicable to all companies which are doing cross-border business. The Single Compulsory Harmonised Tax Base would apply such uniform rules not only to companies doing business internationally but to all (domestic) companies within the EU. These three concepts have in common that the tax base determined is consolidated in a next step and then allocated to the involved companies according to an apportionment mechanism. Thereafter, the share is taxed with the tax rate applicable in the 159 160 161

162

Cf. Endres, 1982: 232; Vanistendael, 1998: 908-910. Unless the tax system has changed in the meantime. Cf. for the EU member states the respective country chapters in Thömmes/Fuks (eds.), EC, Part A: Merger Directive. This is, for example, also the goal of the German Reorganization Tax Act, however, it may sometimes be questionable whether this goal is achieved. Cf. Schmitt/Hörtnagl/Stratz, 2006, UmwStG Einf., para. 10; Rödder/Herlinghaus/Lishaut, 2008: V. Cf. also the analysis in Section 4.3. Cf. European Commission, SEC(2001)1681: 373-378 with an overview comparing the four models. Regarding the advantages and disadvantages of the models cf. e.g. Mintz, 2002: 6-7.

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3 Taxation of European Companies during the time of restructuring in an ideal environment

country of the companies affected. The concept of the European Union Company Income Tax goes one step further and proposes to levy the tax on an EU-wide level allocating some tax revenues to the EU.164 Summarizing, the first three concepts provide rules on the tax base, the last one also involves the tax rate. From the perspective of an internal market which equals a domestic market, Home State Taxation, Common (Consolidated) Corporate Tax Base and Single Compulsory Harmonised Tax Base are not sufficient. With Home State Taxation, different tax rules in different member states continue to exist. With Common (Consolidated) Corporate Tax Base and Single Compulsory Harmonised Tax Base uniform rules throughout the member states are introduced but tax rates remain different. The European Union Company Income Tax is the alternative which provides an EU-wide unitary corporate tax system with unitary rules for calculating the income (including among others uniform realization events) and a unitary tax rate. Therefore, it is the only approach where the reorganization processes relevant for an SE would not cause immediate tax payments since the capturing and taxation of hidden reserves could be guaranteed in any cross-border situation in the same way as in a purely national transaction. The internal market would here equal the domestic market and tax neutrality could be achieved without restrictions as in a transaction involving solely one member state. Furthermore, harmonized tax rates within the EU would guarantee an efficient allocation of resources within the internal market as incentives to shift profits or allocate capital between member states, which are mainly driven by the differing nominal tax rates,165 would vanish.166 However, at the “Conference on company taxation in the EU” in April 2002 in Brussels, participants rejected a European Union Company Income Tax. The fear was that the approach would restrict sovereignty of member states too much. As the principle of subsidiarity needs to be observed in the context of direct taxes (Art. 5 ECT), consensus between the member states did not seem likely. Instead, the concept of the Common (Consolidated) Corporate Tax Base was favored which has been the focus of the ongoing work since then.167

163 164

165 166 167

Cf. Lodin/Gammie, 2001. Cf. European Commission, SEC(2001)1681: 373-378 with an overview comparing the four models. Regarding the advantages and disadvantages of the models cf. e.g. Mintz, 2002: 6-7; Schön, 2003: 615617. Cf. this result in European Commission, SEC(2001)1681: 150-151. Cf. also Wendt, 2009: 94-99. Cf. also Spengel, 2007: 46; Wendt, 2009: 103-104. A Single Compulsory Harmonised Tax Base was rejected on the same grounds as the European Union Company Income Tax. Contrarily, Home State Taxation was disregarded due to the fact that different rules in determining the tax base would remain not leading to substantially less obstacles in Europe

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3.5

29

Interim conclusions

To summarize, reorganizations should not be hampered by taxes (principle of tax neutrality) and the taxpayers involved should only be taxed according to their ability to pay (principle of equity). In a reorganization process which takes place in a uniform tax environment (like within one country or ideally in the internal market of the European Union) this can be achieved as taxation will be deferred and the tax variables will be rolled over to the surviving entity. However, the scenarios described above are ideal scenarios which do not mirror cross-border reorganizations at this stage of time. Neither the current tax systems in the EU countries nor the proposal most developed for the EU - the CCTB or CCCTB - entails a uniform tax base with uniform realization events and a uniform tax rate at the moment, as is the case in a purely national context. Thus, the following discussion will develop guidelines for cross-border reorganizations in these environments and evaluate current tax rules applicable to SEs in the member states (Chapter 4) as well as proposed regulations in the Common (Consolidated) Corporate Tax Base (Chapter 5).

than in the current system. Cf. European Commission, COM(2003)726; Spengel/Frebel, 2003: 789; European Commission, COM(2005)532, COM(2006)157 and COM(2007)223. For an analysis of these more favored concepts see Chapter 5.

30

4 Taxation of European Companies during the time of restructuring in the current environment

4

Taxation of European Companies during the time of restructuring in the current environment When examining the rules currently applicable to the SE upon establishment and trans-

fer of the registered office in EU member states, not only one tax system is affected but at least two treasuries are involved. Such restructuring operations involving companies from different countries may not only raise legal and psychological difficulties but also significant tax issues.168 The following sections will examine how the guidelines established in Chapter 3 need to be adapted in such an environment (Section 4.1). Then, the currently applicable rules are described and compared (Section 4.2). Finally the rules are critically analyzed and - based on these findings - reform options are proposed (Section 4.3).

4.1

Guiding tax principles

When establishing tax principles which have to be observed de lege lata, domestic principles (neutrality, equity) need to be extended due to the cross-border dimension. Furthermore, within the EU, principles resulting from EU law need to be observed. Finally, administrative aspects of taxation are taken into account in order to find feasible solutions. The following issues will be discussed here next. First, the tax effects of cross-border business reorganizations. In such reorganizations, assets and liabilities are transferred across a border from one state to another. This is, for example, the case where a company in one state is merged into another company in another state. And secondly, the crossborder tax effects of business reorganizations are examined. In such reorganizations, the transaction itself has a national character. However, tax effects may still occur in another country in which the reorganizing company has some sort of nexus. This is, for example, the case where a national company with permanent establishments abroad is transformed into an SE.169 4.1.1

Neutrality and equity in an international context

If a reorganization takes place across a border, in the current EU tax environment (at least) two countries with different tax rules are of relevance. Accordingly, additional guidelines need to be defined in cross-border situations since different tax authorities are

168 169

Cf. Council Regulation, 2157/2001: 1. Following Spori, 2001: 58.

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31

affected. This is of major importance for the accrued hidden reserves.170 In this context, it needs to be determined who has the general taxing right of accrued hidden reserves, when a taxation may take place and which amount may be taxed. This will be explored in the following passages. If more than one country is affected by a transaction, taxing rights may collide. Generally, individual states are sovereign. They are allowed to impose taxes.171 This right, however, can only be exercised if there is a sufficient connection to the taxing state (principle of restricted territoriality).172 Such a genuine link (i.e. nexus) can either be established by a personal or an objective connection. A personal connection is generally dependent on residence, habitual abode or citizenship if natural persons are concerned, or statutory seat or place of effective management if legal entities are considered.173 If this connection is given, the person or entity is called resident. Objective circumstances are given if part of a transaction is realized within the territory or if the object of the transaction is connected to the territory. If this is the case, the person or entity is called non-resident.174 4.1.1.1 International neutrality and efficiency Neutrality and efficiency - as defined in the national context - require that taxes do not hamper business decisions in order to allow an efficient allocation of resources. When extending this principle to cross-border transactions, this implies that decisions to engage in cross-border business may not be hindered by taxes.175 However, a cross-border transaction may cause more than one nexus (e.g. double personal connection, double objective connection, personal and objective connection),176 thus allowing more than one country to tax the transaction. The result can be, on the one hand, international double or multiple taxation. Double taxation occurs when one taxpayer (i.e. legal double taxation) or different taxpayers (i.e. economic double taxation) are subject to tax on the same income or property more than once. On the other hand, uncoordinated tax systems may also lead to minor

170

171 172 173 174 175 176

Regarding the other aspects of reorganizations (treatment of loss carry forwards, tax incentives and transaction taxes), one can refer to the guidelines established in Chapter 3. These are still valid in a cross-border context. Cf. Rose, 2004: 27-28. Cf. Bühler, 1964: 130-132; Weber-Fas, 1979: 62-65; Vogel, 1982: 111-124, 286-301. Citizenship and statutory seat are legal criteria; residence, habitual abode and place of effective management are economic criteria. Cf. Jacobs (ed.), 2007: 6; Vogel/Lehner (eds.), 2008: Einl. para. 11. Cf. Jacobs (ed.), 2007: 6. Cf. Musgrave, 1969: 109. This includes material as well as formal obstacles. Cf. Klapdor, 2000: 63. Cf. Jacobs (ed.), 2007: 8 with examples.

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taxation.177 Both double and minor taxation is not necessarily inconsistent with international law if the law of the involved countries themselves does not contradict international law.178 However, it may have negative effects for companies and the economy. From a microeconomic perspective, free competition, flow of capital and exchange of labor may be influenced or hindered. The reason is that, in case of double taxation, international transactions cause an extra tax compared to national transactions resulting in a reduced return on investment. In case of minor taxation, companies doing business internationally receive unjustified competitive advantages since they pay less taxes than companies doing business nationally and can thus increase their return on investment. Additionally, from a macroeconomic perspective, export oriented countries are interested in outbound investments of their companies in order to efficiently use manufacturing capacities and secure employment, whereas countries with high imports, like developing countries, need foreign capital to modernize and strengthen their economies. Both double and minor taxation contradict these goals. These effects are inconsistent with international neutrality or neutrality towards competition.179 In an international context, neutrality also needs to be provided from the perspective of the treasury (i.e. fiscal neutrality). Otherwise the treasury would receive too little or too much income and thus would improve or worsen its fiscal position. This implies that both businesses and treasuries may not be put into a more favorable or disadvantageous position upon cross-border transaction.180 4.1.1.2 International equity and fairness Equity or fairness - as defined in the national context - requires that the tax burden is distributed in a fair way among the taxpayers, thus according to their ability to pay. Furthermore, it follows that accrued hidden reserves are only recognized and taxed when they are realized (realization principle). When extending this principle to cross-border transactions, this implies from a taxpayer perspective that he still needs to be subject to tax ac-

177 178 179

180

Cf. Jacobs (ed.), 2007: 3-4. Cf. Jacobs (ed.), 2007: 4; Vogel/Lehner (eds.), 2008: Einl. para. 14. Cf. Rose, 2004: 53-62; Jacobs (ed.), 2007: 4-5. International neutrality, which shall prevent distortions to international competition, can be interpreted differently, depending on whose welfare shall be maximized. Capital export neutrality requires neutrality from the point of view of exporting countries. Capital import neutrality requires neutrality from the point of view of the importing countries. However, these concepts do not provide guidance on how to tax unrealized gains, as they only deal with the allocation of income from recurring transactions among the involved countries. Cf. the proof in Lange, 2005: 102-103. Cf. Musgrave, 1969: 115-117; Wöhe, 1997: 224-225; Klapdor, 2000: 176; Spori, 2001: 61; Herzig, 2002: 125; Schmalz, 2004: 44-45; Lange, 2005: 107.

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cording to his ability to pay.181 Here again, the hidden reserves should only be taxed when realized in a market transaction.182 From a treasuries perspective, this implies that the tax burden is distributed in a fair way among the countries affected.183 This requires that the international tax base as well as the taxing rights are equitably allocated between the different countries involved.184 In order to allocate the taxing rights between different countries, income or assets and liabilities are generally distributed based on the principle of economic allegiance. This means that they are apportioned according to the origin of the profits. Origin of profits equals the place where the profits or accrued hidden reserves are generated.185 Concerning hidden reserves - as has been explained in Chapter 3 - one can distinguish genuine and artificial hidden reserves. Genuine hidden reserves emerge due to increases in the value of the asset, whereas artificial hidden reserves are built up due to deductions for depreciations which are different from economic wear and tear of the asset. In the national context, in both cases the accrued hidden reserves are captured and taxed upon realization (i.e. national coherence of a tax system). Thus, the accrual only results in interest and liquidity effects.186 In the international context, one also has to determine whether a country may capture and tax hidden reserves within the assets, shares or companies involved.187 With regard to artificial hidden reserves, a justification for the taxing right of the country in which the hidden reserves have accrued can be found in the international coherence of a tax system. As has been stated above, from the perspective of only one country, a taxation needs to be guaranteed since decreases in value have been tax-deductible in earlier years in the country affected. From an international perspective, it has to be pointed out that assets transferred could be depreciated more than once if they were valued at the acquisition costs in the new country without a tax on the difference between the acquisition costs and the book

181

182 183

184 185 186 187

The ability to pay can be interpreted differently, either based on the valuations of the residence country or the source country. In the residence country the taxpayer’s ability to pay is determined on his worldwide income. In the source country his ability to pay is determined on his source income. Cf. Jacobs (ed.), 2007: 20-21. Cf. the details in Chapter 3. Cf. Musgrave, 1969: 130; McLure, 1979: 204 with further references. Inter-nation equity can be interpreted differently in the context of current income, either based on the place of supply (supply approach) or based on the place of supply and demand (supply-demand approach). On these concepts see Musgrave/Musgrave, 1972: 63-85; Schäfer, 2006: 79-80. Cf. Schäfer, 2006: 79 with further references. Cf. Scheffler, 2002: 279-281, 351-357, 366-370; Jacobs, 2007: 579. Cf. King, 1995: 156; Lange, 2005: 104. Cf. Lange, 2005: 103.

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4 Taxation of European Companies during the time of restructuring in the current environment

value in the old country.188 Accordingly, companies should not be able to misuse tax depreciation induced subsidies in various countries while the accrued artificial hidden reserves are not taxed upon transfer.189 Otherwise, taxpayers would likely allocate depreciation expenses to high tax countries whereas capital gains would be allocated to low tax countries.190 When looking at genuine hidden reserves, a justification is not as easy but can still be found. If such reserves are interpreted as future potential profits of the assets transferred, it could be argued that they should be taxed when actually realized in the future, which might occur abroad. However, when evaluating genuine hidden reserves from the perspective of one state, various reasons suggest a taxing right of the exiting country.191 First, the potential profits have been accrued in the exiting country.192 Thus, resources of the exiting country (e.g. public and private services) have been used in order to generate the potential profits (i.e. benefit principle).193 Secondly, if hidden reserves are taxed in a national case they should also be taxed in a cross-border case. Otherwise, taxpayers doing business across a border would be treated more favorable than taxpayers doing business in only one country, even though they have the same ability to pay.194 Moreover, from an overall perspective that includes all countries involved, a taxation needs to take place so that none of the genuine hidden reserves can be transferred tax free.195 This could be the case if the new country uses the fair market value while the old country does not tax the difference between the fair market value and the acquisition costs.196 To sum up, when both kinds of hidden reserves (genuine and artificial hidden reserves) are taxable in a purely national case by the country in which the hidden reserves have accrued, this right to tax is also upheld in the international case.197 Consequently, accrued hidden reserves do not convert into foreign capital gains upon a subsequent realization abroad but remain domestic capital gains and thus taxable.198

188 189 190 191 192 193 194 195 196 197 198

For further details on the issue of valuation see Section 4.1.1.4 below. Cf. Lange, 2005: 107. Cf. Seitz, 2008: 61. Cf. Lange, 2005: 106-107. Cf. Wassermeyer, 2006: 2423-2424; Wassermeyer, 2008: 180. Cf. Vogel, 1988: 313; Tipke, 2000: 476. Cf. Wöhe, 1997: 224-225; Lange, 2005: 106-107. Cf. Staringer, 2001: 88, 96; Lange, 2005: 107; Rödder, 2005: 298. For further details on the issue of valuation see Section 4.1.1.4 below. Cf. Lange, 2005: 107. Cf. Wassermeyer, 2006: 2423-2424; Wassermeyer, 2008: 180. Recently of the same opinion German Court of Justice. Cf. BFH of 17/07/2008 (I R 77/06), BFH/NV 2008: 1941.

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4.1.1.3 Taxing right and time of taxation at international restructurings When applying the principles of international neutrality and equity to reorganizations in order to form an SE or transfer an SE from one member state to another, the main question becomes when may the taxing right with regard to the accrued hidden reserves be exercised. Within the context of international equity, the question can be restated in the following way: Can a tax deferral as granted in the national case still be provided in an international case or are there reasons which justify an immediate taxation? As has been defined in Chapter 3 - as a requirement for a tax deferral at the point of time of the restructuring - the taxation of accrued hidden reserves may be postponed as long as the realization and taxation of these unrealized gains is guaranteed at some later point in time.199 In a cross-border transaction the link between the tax deferral and the subsequent taxation may no longer be given as hidden reserves may be realized in another country than where they originated.200 If the capturing of hidden reserves can no longer be guaranteed,201 taxes should be charged. This is even though a market realization does not take place. Otherwise, assets, companies or shareholders202 could be transferred without paying tax on the accrued gains (i.e. ultima-ratio taxation).203 This shall prevent the export of hidden reserves due to a change of the taxing right from one treasury to another.204 Therefore, the question arises, through which circumstances can such a guarantee not be provided, i.e. by which circumstances may a country lose its taxing right. A guarantee may not be provided when assets leave the jurisdictional sphere of a country.205 This is the case upon a crossborder reorganization if assets or companies are transferred physically or with regard to their legal title or with respect to the shares representing the title of the assets or companies from one country to another.206 Consequently, the connection to the former country may be lost due to national law (exit from unlimited and limited taxation) or treaty law (allocation of all taxing rights to the new country) or restricted due to national law (change

199 200 201 202 203 204 205 206

Ultimately, this would be the point of time of liquidation or disposal of the business from a tax perspective. Cf. Weber-Grellet, 2001: 181. Cf. Führich, 2008: 10. This includes the fear of losing the taxing right as well as the fear of not being able to effectively collect taxes upon a later point in time. Cf. Dürrschmidt, 2007: 155. Shareholders only need to be taken into account as far as the sale of shares is subject to taxation. Cf. Entraygues, 2001. 72. Cf. Weber-Grellet, 2001: 181 with further references. Cf. Burns/Krever, 1998: 647; Schaumburg, 2005: 412. The other alternative is to restrict the scope of the rules on reorganizations to national transactions. Cf. Dürrschmidt, 2007: 155. Cf. Weber-Grellet, 2001: 180-181; Klingberg/Lishaut, 2005: 703; Schaumburg, 2005: 412. Cf. Spori, 2001: 58; Tipke/Lang (eds.), 2008: § 17 paras. 204, 231-239.

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from unlimited to limited taxation) or treaty law (allocation of some taxing rights to the new country).207 With regard to national law, an exit from unlimited taxation occurs when the personal connection in the exiting country is given up (i.e. no taxable person remains). For companies this implies that the statutory seat and place of effective management are transferred abroad or that the company is liquidated due to a cross-border merger. For individuals it implies that the residence and habitual abode are transferred abroad. An exit from limited taxation generally occurs when the objective nexus in the exiting country is given up (i.e. no taxable object remains). This is, for example, the case if an unincorporated business is given up or assets are transferred across a border (e.g. from one business to another).208 In this context, not only national rules are of relevance but also double tax treaties, which are concluded between two countries in order to facilitate international transactions by providing measures to avoid or reduce double taxation. Double tax treaties do not establish a taxing right but rather restrict taxing rights, which exist according to national law, by allocating these rights primarily to one of the contracting states whereas the other contracting state will waive its right or will be limited to tax, up to only a certain amount.209 Double tax treaties in industrial nations like in the EU are generally based on the model treaty of the OECD (OECD model).210 Since such double tax treaties are concluded between almost all European countries,211 the following analysis will focus on these rules. According to the OECD model, the taxing right remains within a country, if a presence (i.e. nexus) remains. Such a presence is given if a certain de minimis connection exists and encompasses not only current income but also noncurrent income (i.e. capital gains and losses).212 Furthermore, if the unlimited taxation is not given up in the exiting country while establishing a personal connection in the entering country, only one criterion is transferred whereas a personal connection remains in the exiting country. Here, Art. 4 OECD model provides a tie-breaker rule in order to determine the place of unlimited taxa-

207

208 209 210 211 212

Cf. Burns/Krever, 1998: 647; Herzig, 2002: 120; Rödder, 2004: 1633; Schön, 2004: 201-202; Schön, 2004a: 295; Blumenberg, 2005: 250; Klingberg/Lishaut, 2005: 704; Lange, 2005: 137; Jacobs (ed.), 2007: 256. A taxing right may also get lost or be restricted if national tax law changes (e.g. with regard to realization events) or bilateral tax law changes (e.g. conclusion of a new double tax treaty or changes to an existing treaty).Cf. Klingberg/Lishaut, 2005: 704. Cf. Thömmes, 2004b: 21; Klingberg/Lishaut, 2005: 704. Cf. Jacobs (ed.), 2007: 36-38; Vogel/Lehner (eds.), 2008: Einl. para. 43. Cf. Jacobs (ed.), 2007: 7-8, 63-64. An exception applies to Cyprus. See Table 14 in the appendix. Cf. Ulmer, 2001: 100-101.

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tion.213 When examining the taxing rights of capital gains and losses, which are the focus of reorganizations, Art. 13 OECD model is of relevance.214 Art. 13 (1) OECD model together with Art. 6 OECD model includes a rule for immovable property/real estate. Here only the source state is allowed to tax due to the physical connection to the state of location (situs principle). Accordingly, the taxing rights of the source state are upheld with regard to current income as well as capital gains.215 Art. 13 (2) OECD model together with Art. 7 and 5 OECD model establish the taxing right for entrepreneurial/business activities. Here the taxing right in the source country is limited with regard to the tax base.216 Accordingly, Art. 7 (1) OECD model provides that profits from an enterprise of a contracting state may only be taxed in that state unless the enterprise carries on its business in the other contracting state through a permanent establishment situated therein and the profits are attributable to the permanent establishment (permanent establishment principle).217 Consequently, it is important to define what constitutes a permanent establishment, because only then the source state is allowed to tax. Generally, the business needs to be integrated in the foreign economy to a certain extent (as defined in Art. 5 OECD model) for the source state to be granted a taxing right.218 If a permanent establishment exists, the taxing right of the source state is comprised of current business income as well as capital gains. Art. 13 (3) OECD model together with Art. 8 OECD model includes a specific rule for ships and aircraft operated in international traffic. In these cases current income as well as capital gains are only taxable in the country in which the place of effective management of the enterprise is situated. Art. 13 (4) OECD model includes a special rule for shares in real estate enterprises. Due to the connection of the real estate to the source state where the real estate is located, that state may tax capital gains if the enterprise derives more than 50% of the value directly or indirectly from immovable property situated in the source state. Finally, Art. 13 (5) OECD model provides a rule for

213

214 215 216

217 218

Cf. Doernberg/Hinnekens/Hellerstein, 2001: 301-302; Vogel/Lehner, (eds.), 2008: Art. 4 paras. 241280. In case of a dual resident company, the „place of effective management” is decisive (Art. 4 (3) OECD model). For general details on the OECD model see e.g. Jacobs (ed.), 2007: 64-67; Vogel/Lehner (eds.), 2008. The other state needs to provide relief via a tax exemption or a tax credit according to Art. 23 OECD model. Cf. Jacobs (ed.), 2007: 64-65. If a permanent establishment exists the other contracting state (state of residence of the entrepreneur) has to avoid a double taxation by granting relief via a tax exemption or a tax credit according to Art. 23 OECD model. Cf. Staringer, 2001: 87-88; Jacobs (ed.), 2007: 64-65. For more details on the concept of permanent establishment see Jacobs, 2007: 323-370. If types of income relating to the business but separately dealt with in the OECD model are involved, Art. 7 (7) OECD model provides that the more specific provision prevails.

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shares in corporations other than real estate enterprises (which are not part of a permanent establishment in the source state). It states that any resulting gains or losses upon disposal are only taxable by the state of residence of the shareholder. Accordingly, the residence state has the exclusive right to tax.219 Overall, the concept of alienation of property used in the OECD model treaty includes actual transfers, deemed dispositions as well as revaluations.220 Besides these general rules, specific rules which resolve double tax issues with regard to cross-border reorganizations (especially with regard to characterization and timing) cannot be found in the OECD model.221 To sum up, not only due to national law but also due to treaty law - depending on the underlying asset associated with the capital gain - the taxing right may either remain with the exiting country, may be restricted222 or may be lost. 223 In case of a loss or a restriction of the taxing right due to national or treaty law, a taxation upon a cross-border reorganization or transfer abroad is conceivable,224 even though an immediate taxation at the border would contradict the taxpayer’s ability to pay.225 When looking at international neutrality in the context of cross-border reorganizations, it can be deduced that taxes should not influence or even hinder entrepreneurs’ decisions on the change from one territorial allocation to another one.226 Otherwise, taxation may discourage economically efficient reorganizations.227 Consequently, domestic and crossborder transactions need to be treated equally in order to not influence cross-border reorganization decisions due to higher or lower taxes compared to a domestic case.228 Neither double nor minor taxation may occur. As has been stated above, this does not only need to be avoided from the perspective of the businesses affected, but also needs to be avoided 219

220 221 222 223 224

225 226 227

In this case, the taxing right on noncurrent income is granted to the residence state, even though the source state has the right to tax current income (e.g. dividends) - limited with regard to the amount according to Art. 10 OECD model. Cf. Ulmer, 2001: 101. Furthermore, they can also not be found in specific treaties. Cf. Ulmer, 2001: 100. This implies that capital gains are still taxable in the exiting country, but a credit needs to be granted for foreign taxes paid. Cf. e.g. Klingberg/Lishaut, 2005: 704. This implies that capital gains may only be taxed in the entering country, and thus need to be exempted from tax in the exiting country. Cf. e.g. Klingberg/Lishaut, 2005: 704. Wassermeyer is of the opinion, that in case of transfers of assets between a parent company and its permanent establishments, the taxing right remains independent of the physical location of the asset or the attribution to a certain entity upon a subsequent realization. Cf. Wassermeyer, 2006: 2423-2424; Wassermeyer, 2008: 180. Recently of the same opinion German Court of Justice. Cf. BFH of 17/07/2008 (I R 77/06), BFH/NV 2008: 1941. This is a severe burden, for example, when hidden reserves accrued up to the cross-border transaction are never realized. Cf. Burwitz, 2006: 594. Cf. Schön, 2007: 415; Schön, 2008: 54. Cf. Vanistendael, 1998: 896.

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from the perspective of the treasuries. Accordingly, reorganization must be neutral from the perspective of the involved treasuries as well in order to respect the legitimate interest of a state in maintaining its tax base. This implies that both businesses and treasuries may neither be put into an advantageous nor a disadvantageous position upon cross-border reorganizations.229 Consequently, there is a dilemma between providing a tax deferral for businesses and upholding the taxing right for treasuries. 4.1.1.4 Valuation at international restructurings Finally, the question arises on the amount which may be taxed. Depending on the values used - in the exiting country to assess the amount of hidden reserves and in the new country to take the asset into account in the tax balance sheet - the overall taxable amount may be equal, lower or higher than in a purely national case. This may result in onetime, minor or double taxation. To be more precise, in case the exiting country uses the fair value and the new country uses the historical costs, hidden reserves are taxed more then once (double taxation). In case the exiting country does not tax established hidden reserves and the new country uses the fair market value, the hidden reserves are taxed less than once (minor taxation).230 Differences could also occur if the countries use the same approach regarding the valuation, but calculate the value in different ways. For example, with regard to the book value, this could occur if different elements are included in the acquisition cost.231 Thus, if the new country applies a higher value than the exiting country, a higher depreciation is deductible resulting in a lower taxable gain at disposal. The other way around, if the new country attributes a lower value, the depreciable amount is lower and the taxable gain at disposal higher.232 From the point of view of international neutrality, the objective is to avoid any double as well as non-taxation. Thus, the values used in the countries involved need to be aligned to each other, which implies that they are equal to each other, in order to avoid that tax effects influence business decisions.233 This alignment does not only apply to the value recognized upon transfer but also needs to apply to the development of the value after the 228 229 230 231 232 233

Cf. Klapdor, 2000: 174; Lange, 2005: 102-103. Cf. Musgrave, 1969: 115-117; Wöhe, 1997: 224-225; Klapdor, 2000: 176; Spori, 2001: 61; Herzig, 2002: 125; Schmalz, 2004: 44-45; Lange, 2005: 107. Cf. Rödder, 2005: 298-299 with numerical examples; Benecke/Schnitger, 2005: 648; European Commission, COM(2006)825: 7. Cf. Dürrschmidt, 2007: 158. Cf. European Commission, COM(2006)825: 7. Cf. Rödder, 2005: 298; European Commission, COM(2006)825: 7.

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transaction if a taxation takes place continuously.234 Possible values are the book value, fair market value or a value in between.235 When examining the criteria of international equity, the valuation would need to equal the fair market value so that hidden reserves which originated in the exiting country are captured in the exiting country.236 Furthermore, in order to guarantee that hidden reserves are only taxed where they accrued, this fair market value should also be the basis of the assets or shares upon entry into a new jurisdiction.237 Consequently, the use of the fair market value guarantees that only those hidden reserves, which have accrued while the asset was within the particular tax system, are realized and taxed.238 If this is not guaranteed, one has to take the taxpayer’s position into account in order to find an adequate solution. According to international equity, the taxpayer shall be taxed according to his ability to pay. Then, the relevant tax amount in a crossborder reorganization or transfer may not be based on an assessment at the crossing of the border but may only be based on the realization of hidden reserves in a market transaction (e.g. disposal or similar) as only then the taxpayer’s ability to pay increases.239 4.1.1.5 Interim conclusions To conclude, both from the perspective of international neutrality and equity the general taxing right for accrued (artificial and genuine) hidden reserves within assets or shares belongs to the country in which the hidden reserves have been generated. If the taxing right is restricted upon a cross-border reorganization due to national or treaty law, the state where the reserves have been accrued, may exercise its taxing right. However, the question is how the taxing right should be designed, as an immediate taxation at the border would hinder cross-border reorganizations and is also not in line with the taxpayer’s abil234 235 236

237 238

Cf. Dautzenberg, 1997: 258; Klapdor, 2000: 181; Klingberg/Lishaut, 2005: 704. Cf. Wassermeyer, 2006: 2420. Cf. Lange, 2005: 107; Roser, 2008: 2392. This is also in compliance with Art. 7 (2) OECD model on the allocation of income between dependent businesses. Cf. Schaumburg, 1981: 252-254; Kleineidam, 2000: 579; Pohl, 2002: 42-43; Russo, 2008: 460-461; Vogel/Lehner, 2008: Art. 7 para. 70-93; Debatin/Wassermeyer, DBA, Art. 7: 314-325. Of other opinion in the context of transfers between head offices and their permanent establishments: Wassermeyer/Andresen/Ditz, 2006: 172-173; Debatin/Wassermeyer, DBA, Art. 7: 243-268. If instead of the fair market value the book value would be used in both countries, this would imply that the exiting country would need to receive part of the capital gains upon a subsequent disposal of the transferred assets. However, it would be questionable how to appropriately allocate the gains, if the fair market value had not been determined at transfer. Cf. Burns/Krever, 1998: 648, 650. Cf. Burns/Krever, 1998: 650. Cf. also Schneider/Oepen, 2009: 25. The allocating of taxing rights of subsequent income and gains (i.e. income and gains derived in the entering country) follows general international allocation rules according to double tax treaties. See on that issue e.g. Jacobs (ed.), 2007: 63-67, 70-72.

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ity to pay. Regarding the valuation, the amount to be taxed in this source state shall be based on the fair market value. This value also needs to be used by the country in which the assets or shares are transferred. Overall, the taxpayer should be taxed once according to his ability to pay. 4.1.2

EU law

For transactions within the internal market of the EU, EC law needs to be observed as it takes priority over national law.240 Principally, the EC Treaty does not stipulate that direct taxes are harmonized within the EU.241 Therefore, member states are sovereign in designing their direct tax systems. This is in compliance with the subsidiarity principle established in Art. 5 ECT.242 However, in order to guarantee the functioning of the internal market, this competence may only be exercised in accordance with the Community law (Art. 2, 3 ECT).243 Thus, primary EU law as well as secondary EU law need to be observed.244 With regard to primary law, the fundamental freedoms laid down in the EC Treaty are of relevance.245 The fundamental freedoms constitute fundamental rights. Every individual and legal entity within the EU may refer to them when engaged in cross-border transactions.246 The European Court of Justice tests whether the fundamental freedoms are respected or not.247 This implies an integration through the abolition of national law which is said to be incompatible with the EC Treaty (also called ‘negative’ integration).248 In order to examine whether national rules conform to Community law, national courts as well as the European Commission can refer cases to the European Court of Justice. With respect to secondary law, regulations and directives need to be followed. This implies an integration through a regulation at the Community level (also called ‘positive’ integra239 240 241 242 243

244 245 246

247

Cf. Chapter 3. Furthermore, see Schaumburg, 1981: 256; Kessler/Huck/Obser/Schmalz, 2004: 865; Wassermeyer/Andresen/Ditz, 2006: 172-173; Ditz, 2009: 118. Cf. Jacobs (ed.), 2007: 98; Arndt/Fischer, 2008: 74. Regarding the history of the European Community up to the conclusion of the Treaty of European Union (EC Treaty) see Arndt/Fischer, 2008: 7-15. Cf. Hey, 1997: 80; Jaeger, 2001: 24-25; Jacobs (ed.), 2007: 96; Terra/Wattel, 2008: 18. Conversely, the harmonization of indirect taxes is stipulated in Art. 93 ECT. Cf. also Hey, 1997: 80; Spengel, 2003: 245; Jacobs (ed.), 2007: 97. Cf. also settled case law: ECJ of 14/02/1995 (C-279/93, Schumacker), ECR 1995: I-225 paras. 21, 26; ECJ of 11/08/1995 (C-80/94, Wielockx), ECR 1995: I-2493 para. 16; ECJ of 27/06/1996 (C-107/94, Asscher), ECR 1996: I-3089 para. 36. Cf. Jacobs (ed.), 2007: 190-191. The freedoms do not only apply within the European Union but also to the countries of the European Economic Area (i.e. Iceland, Liechtenstein, Norway). Cf. Cordewener, 2005: 238-241. Cf. Arndt/Fischer, 2008: 119-121. In purely domestic cases the fundamental freedoms of the EC Treaty are not applicable. Cf. Wouters, 1999: 105; Reimer, 2000: 53. In such cases the national constitutions may provide protection. Cf. Schaumburg, 2005b: 1134 with further references. Cf. Jacobs (ed.), 2007: 190-191.

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tion).249 In the following passages the guidelines resulting from Community law are discussed. 4.1.2.1 Primary EU law 4.1.2.1.1 Decisive fundamental freedoms When looking at primary law, as mentioned above the fundamental freedoms laid down in the EC Treaty are relevant. Generally, the aim is to abolish obstacles to the free movement of goods, persons, services and capital in order to achieve an internal market and thus, to establish a system that ensures that competition in the internal market is not distorted (Art. 3 (c), (g) ECT). Consequently, all economic agents should have unrestricted access to any national market in the EU in both directions (inbound and outbound) and should be able to compete according to comparable conditions as domestic economic agents.250 In the context of reorganizations within the EU, the freedom of establishment (Art. 43-48 ECT) is of special interest.251 Furthermore, the free movement of capital (Art. 56-60 EC Treaty) is of relevance if countries outside the EU are affected. Other fundamental freedoms like the right of residence (Art. 18 ECT), free movement of goods (Art. 28-30 ECT), persons (Art. 39-42 ECT) and services (Art. 49-55 ECT)) are not relevant here.252 The freedom of establishment guarantees that nationals of a member state may freely choose the legal form of their undertaking (e.g. agency, branch, subsidiary) in the territory of another member state under the conditions laid down for its own nationals by the law of the country where such establishment is effected (Art. 43, 48 ECT). Nationals covered are companies and firms formed in accordance with the law of a member state and having their registered office, central administration or principal place of business within the Community as well as natural persons who are nationals of a member state. An establishment is a fixed place of business through which the business of an enterprise is wholly or partly carried on (agencies, branches or subsidiaries).253 The freedom of establishment covers cross-border transactions. Specifically, it covers the right to take up and pursue ac-

248 249 250 251 252 253

Cf. Terra/Wattel, 2008: 4. Cf. Terra/Wattel, 2008: 4. Cf. Vanistendael, 2005: 530. Cf. Jaeger, 2001: 51-52; Lange, 2005: 165; Führich, 2008: 11. For details on these freedoms see e.g. Arndt/Fischer, 2008: 132-176; Terra/Wattel, 2008: 44-62. Cf. Jacobs (ed.), 2007: 192.

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43

tivities as self-employed persons and to set up and manage undertakings in other member states provided that the parent company or shareholder exercises a substantial influence on the business undertaken.254 The free movement of capital and payments prohibits any restrictions on the flow of capital as well as on payments between member states and also payments between member states and third countries (Art. 56-60 ECT). Consequently, the capital shall find its way to the most efficient investment without any obstacles.255 The flow of capital is comprised, on the one hand, of cross-border transfers of cash (e.g. loans) as well as transfers of property in kind (e.g. shareholdings, real estate) and on the other hand, of payments resulting from the use of capital (e.g. profits).256 When comparing both freedoms, differences occur with regard to the personal, objective and territorial scope.257 With regard to the personal scope, the freedom of establishment covers the persons affected based on their nationality, whereas the free movement of capital not only covers the persons affected, but also the capital movement itself (e.g. based on the place of the investment).258 Concerning the objective scope, the freedom of establishment protects the establishment and management of an entity and the situations in which business decisions may be influenced, whereas the free movement of capital deals with direct investments in which decisions of the business may not be influenced. Accordingly, free movement of capital should be interpreted more narrowly as to only prohibit barriers to such flows.259 Finally, when looking at the territorial scope, the freedom of establishment provides the broader coverage with respect to EU countries,260 whereas the free movement of capital may provide coverage for third countries.261 Furthermore, regarding the scope of application there is a tendency in recent case law that the free movement of capital is no longer tested by the European Court of Justice if another freedom

254

255 256 257

258 259 260 261

Cf., inter alia, ECJ of 28/01/1986 (270/83, Avoir Fiscal), ECR 1986: 273 para. 13; ECJ of 29/04/1999 (C-311/97, Royal Bank of Scotland), ECR 1999: I-2651 para. 22; ECJ of 13/04/2000 (C-251/98, Baars), ECR 2000: I-2787; ECJ of 11/03/2004 (C-9/02, De Lasteyrie du Saillant), ECR 2004: I-2409; ECJ of 13/12/2005 (C-446/03, Marks&Spencer), ECR 2005, I-10837. Cf. e.g. Kischel, 2000: 453. Cf. Dautzenberg, 2000: 723-724; Jaeger, 2001: 73-74. Regarding the differences of both fundamental freedoms see also Lausterer, 2003: 20-21; Jacobs (ed.), 2007: 200-201 with further references; Panayi, 2008: 571-582; Dine/Browne (eds.), EU company law: 19[2B], 19[2D], 19[3]. Cf. Jaeger, 2001: 76; Cordewener/Kofler/Schindler, 2007: 109. Cf. Schön, 2005: 508-510, 517. This implies that the outcome of testing both freedoms will be comparable. Cf. Führich, 2008: 11. Cf. Jacobs (ed.), 2007: 200.

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predominantly applies (e.g. the freedom of establishment).262 Moreover, even if the free movement of capital is tested, any restrictions affecting transactions with third countries can more easily be justified.263 Thus, overall, the coverage of undertakings with third countries is increasingly being restricted compared to a purely EU context.264 4.1.2.1.2 Discriminations and restrictions of the fundamental freedoms The fundamental freedoms may neither be restricted nor may a discrimination of EU member states’ nationals occur.265 Contrarily, disparities due to different tax systems in the EU are not covered by the EC Treaty.266 This also applies to disadvantages resulting from the allocation rights according to double tax treaties within the EU if the reason for the differences lies in the non-harmonized national tax rules.267 The prohibition to discriminate particularly aims at ensuring that foreign nationals are treated in the same way in the host member state as nationals of that state (i.e. no disadvantageous treatment of foreigners compared to nationals).268 Accordingly, individuals may not be discriminated against because of their nationality and legal entities may not be discriminated against because of their domicile.269 Besides this direct or overt discrimination, an indirect or covert discrimination is also forbidden. Such indirect discriminations occur - according to the European Court of Justice - if the disadvantageous rules, which apply independent of the

262 263 264 265 266

267 268

269

Cf. the detailed analysis of recent case law in Panayi, 2008: 573-577. Cf. Schön, 2005: 513-519; Panayi, 2008: 579-582. Cf. also the discussion in Section 4.1.2.1.3 below. Cf. Art. 59, 60 ECT; Klingberg/Lishaut, 2005: 703. On this issue see also Cordewener/Kofler/Schindler, 2007: 107-119. On the methodology of the European Court of Justice regarding the terms see also Dine/Browne (eds.), EU company law: 19[4]. Cf. ECJ of 01/02/1996 (C-177/94, Perfili), ECR 1996: I-161; ECJ of 12/05/1998 (C-336/96, Gilly), ECR 1998: I-2793 para. 44. In order to determine whether the cause of a disadvantage is a discrimination or a restriction (this is generally the case if the reason lies in unilateral rules) or a disparity (this is generally the case if the reason lies in differing tax systems of two or more countries) one should imagine two equivalent tax systems. If the disadvantage disappears in such a uniform environment, the cause is a disparity. Otherwise, if the disadvantage remains, the cause is a discrimination or a restriction. Cf. Terra/Wattel, 2008: 69. Cf. Hohenwarter, 2007a: 109, 113, 115 with further references. Cf., inter alia, ECJ of 28/01/1986 (270/83, Avoir Fiscal), ECR 1986: 273; ECJ of 29/04/1999 (C311/97, Royal Bank of Scotland), ECR 1999: I-2651; ECJ of 13/04/2000 (C-251/98, Baars), ECR 2000: I-2787; ECJ of 12/06/2003 (C-234/01, Gerritse), ECR 2003: I-5933; ECJ of 11/03/2004 (C-9/02, De Lasteyrie du Saillant), ECR 2004: I-2409. Cf. also Cordewener: 2004: 7-8. In case of the other way around, i.e. a discrimination of nationals against foreigners, it is questionable whether the freedom of establishment applies. In favor of the application Hahn, 2005: 438 with further references; Jacobs (ed.), 2007: 195. Cf., inter alia, ECJ of 28/01/1986 (270/83, Avoir Fiscal), ECR 1986: 273; ECJ of 13/07/1993 (C330/91,Commerzbank), ECR 1993: I-4017; ECJ of 11/08/1995 (C-80/94, Wielockx), ECR 1995: I2493; ECJ of 12/06/2003 (C-234/01, Gerritse), ECR 2003: I-5933.

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45

nationality, only or regularly cover transactions which are performed by non-residents.270 They are generally caused by the differentiation between unlimited and limited taxation.271 A discrimination is only given if the persons affected are objectively in the same situation as residents with regard to the specific tax rule (i.e. tertium comparationis).272 When looking at corporations which are legal entities free of personal attributes, such a similar situation is simple to prove. Accordingly, in general, corporations subject to unlimited taxation and corporations subject to limited taxation are already in a similar situation if the profit is mainly determined in the same way.273 Thus, a different treatment with regard to objective tax attributes, like the determination of the tax base, the tax rate and tax credits, is not allowed.274 The same applies to individuals with regard to objective attributes.275 Discrimination is no longer only based on a comparison between residents and non-residents but also on a comparison between the cross-border situation and the comparable domestic situation.276 Besides the fact that rules in the EU member states may not be discriminatory, they may also not restrict the fundamental freedoms.277 Regarding the source country this requires that nationals of other member states are not hindered in any way in their establishment in the source country (e.g. due to additional formal requirements).278 Regarding the residence country this is even more far reaching. Accordingly, the country of residence or domicile is prohibited from hindering cross-border transactions of its resident individuals or companies, such as the establishment of a business in another member state, or making them

270 271

272 273 274 275 276 277

278

Cf., inter alia, ECJ of 08/05/1990 (81/87, Biehl), ECR 1990: I-1779; ECJ of 16/05/2000 (C-87/99, Zurstrassen), ECR 2000: I-3337. Cf., inter alia, ECJ of 08/05/1990 (81/87, Biehl), ECR 1990: I-1779; ECJ of 13/07/1993 (C-330/91, Commerzbank), ECR 1993: I-4017; ECJ of 14/02/1995 (C-279/93, Schumacker), ECR 1995: I-225; ECJ of 11/08/1995 (C-80/94, Wielockx), ECR 1995: I-2493; ECJ of 27/06/1996 (C-107/94, Asscher), ECR 1996: I-3089; ECJ of 12/06/2003 (C-234/01, Gerritse), ECR 2003: I-5933. Cf. Saß, 1995: 1443; Thömmes, 1997: 810; Dautzenberg, 1999: 767; Prinz/Cordewener, 2003: 81. Cf., inter alia, ECJ of 29/04/1999 (C-311/97, Royal Bank of Scotland), ECR 1999: I-2651. Cf. also Dautzenberg, 1999: 767. Cf. Schön, 2004a: 292. Cf. Jacobs (ed.), 2007: 194 with further references. Cf. ECJ of 29/04/2004 (C-224/02, Pusa), ECR 2004: I-5763; ECJ of 23/02/2006 (C-513/03, van Hiltenvan der Heijden), ECR 2006, I-1957. Cf. also Terra/Wattel, 2008: 34. Cf., inter alia, ECJ of 27/09/1988 (81/87, Daily Mail), ECR 1988: 5483; ECJ of 30/11/1995 (C-55/94, Gebhard), ECR 1995: I-4165; ECJ of 15/05/1997 (C-250/95, Futura-Singer), ECR 1997: I-2471; ECJ of 16/07/1998 (C-264/96, ICI), ECR 1998: I-4695; ECJ of 13/04/2000 (C-251/98, Baars), ECR 2000: I2787; ECJ of 14/12/2000 (C-141/99, AMID), ECR 2000: I-11619; ECJ of 08/03/2001 (C-397/98, Metallgesellschaft), ECR 2001: I-1727; ECJ of 21/11/2002 (C-436/00, X and Y), ECR 2002: I-10829; ECJ of 11/03/2004 (C-9/02, De Lasteyrie du Saillant), ECR 2004: I-2409; ECJ of 13/12/2005 (C-446/03, Marks&Spencer), ECR 2005, I-10837. Cf. also Jaeger, 2001: 61-67 Rose, 2004: 61; Arndt/Fischer, 2008: 124. Cf. ECJ of 15/05/1997 (C-250/95, Futura-Singer), ECR 1997: I-2471.

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less attractive.279 Moreover, restrictions are prohibited even if of only limited scope or minor importance.280 Overall, restrictions are based on a comparison between the crossborder situation and the comparable domestic situation.281 If such restrictions to crossborder transactions exist, they need to be removed so that the tax burden equals comparable domestic transactions. This implies that the result needs to be the same. It is not necessary to follow systematic guiding tax principles, though, in order to achieve this result.282 4.1.2.1.3 Justifications of discriminations and/or restrictions A discrimination or restriction may, however, be justified in certain cases. The scope of justification is quite narrow though. More precisely, a measure which is liable to hinder a fundamental freedom can be allowed only if certain conditions are met.283 First, there is no legislation at Community level. Secondly, the measure pursues a legitimate objective compatible with the EC Treaty. Thus it is justified by imperative reasons in the public interest. Third, its application is appropriate for ensuring the attainment of the objective thus pursued. Fourth, the measure does not go beyond what is necessary to attain the objective. This means that the measure is proportionate, which implies that there is no less restrictive way to achieve the goal. Against this background, in accordance with settled case-law, diminution of tax receipts cannot be regarded as a matter of overriding general interest. Consequently, it cannot be relied upon in order to justify a measure which is, in principle, contrary to a fundamental freedom.284 Such an objective is purely economic and cannot, therefore, constitute an overriding reason in the general interest.285 The same applies to the lack of harmonization between member states, missing reciprocal rules, additional budget-

279

280 281 282 283

284

285

Cf. ECJ of 27/09/1988 (81/87, Daily Mail), ECR 1988: 5483; ECJ of 16/07/1998 (C-264/96, ICI), ECR 1998: I-4695; ECJ of 13/04/2000 (C-251/98, Baars), ECR 2000: I-2787; ECJ of 14/12/2000 (C-141/99, AMID), ECR 2000: I-11619; ECJ of 11/03/2004 (C-9/02, De Lasteyrie du Saillant), ECR 2004: I-2409. Cf. also Cordewener, 2002: 227-233; Schön, 2003/04: 31. Cf. ECJ of 28/01/1986 (270/83, Avoir Fiscal), ECR 1986: 273 para. 21; ECJ of 15/02/2000 (C-34/98, Commission/France), ECR 2000: I-995 para. 49. Cf. ECJ of 29/04/2004 (C-224/02, Pusa), ECR 2004: I-5763; ECJ of 23/02/2006 (C-513/03, van Hiltenvan der Heijden), ECR 2006, I-1957. Cf. also Führich, 2008: 11. Cf. Lehner, 2000: 278-279; Tumpel, 2000: 328-329. Cf., inter alia, ECJ of 20/02/1979 (120/78, Rewe), ECR 1979: 649; ECJ of 30/11/1995 (C-55/94, Gebhard), ECR 1995: I-4165; ECJ of 15/05/1997 (C-250/95, Futura-Singer), ECR 1997: I-2471 para. 26 with further references; ECJ of 21/11/2002 (C-436/00, X and Y), ECR 2002: I-10829 para. 49; ECJ of 11/03/2004 (C-9/02, De Lasteyrie du Saillant), ECR 2004: I-2409 para. 50. Cf. also Dautzenberg/Gocksch, 2000: 909; Lenoir, 2007: 76. Cf., inter alia, ECJ of 16/07/1998 (C-264/96, ICI), ECR 1998: I-4695 para. 28; ECJ of 08/03/2001 (C397/98, Metallgesellschaft), ECR 2001: I-1727 para. 59; ECJ of 21/09/1999 (C-397/07, Saint Gobain), ECR 1999: I-6161 para. 51; ECJ of 21/11/2002 (C-436/00, X and Y), ECR 2002: I-10829 para. 50; ECJ of 11/03/2004 (C-9/02, De Lasteyrie du Saillant), ECR 2004: I-2409 para. 60. Cf., inter alia, ECJ of 06/06/2000 (C-35/98, Verkooijen), ECR 2000: I-4071 para. 48.

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ary burdens and administrative or legislative difficulties.286 Contrarily, the prevention of tax evasion,287 the effectiveness of fiscal supervision,288 the need to safeguard the cohesion of a tax system,289 the principle of territoriality290 and the preserving of the allocation of the power to tax between member states291 may constitute overriding requirements of general interest. They are capable of justifying a restriction on the exercise of fundamental freedoms, provided that certain conditions are met. The justification based on the aim of preventing tax avoidance is only accepted if the measure concerned is specifically designed to exclude from a tax advantage purely artificial arrangements aimed at circumventing national tax law. Contrarily, if the measure covers any situation of the taxpayer independent of whether it is abusive or not, this will not suffice as justification.292 Tax evasion or tax fraud cannot generally be inferred from the fact that the transferee company or its parent company is established in another Member State and cannot justify a fiscal measure which compromises the exercise of a fundamental freedom guaranteed by the EC Treaty.293 With regard to third countries, the conditions may be less strict.294 A justification based on the effectiveness of fiscal supervision, which is closely connected to the criterion of avoiding abuse, is also rather narrow. Within the EU, it will generally be rejected based on the Mutual Assistance Directive and Recovery of Claims Directive,295 which are in place there.296 With regard to third countries, it may be of relevance.297 A justification based on the necessity to ensure the cohesion or coherence of the national tax system (i.e. 286 287 288 289 290 291 292

293 294 295

296

Cf. in detail Jacobs (ed.), 2007: 202-210. Cf. ECJ of 16/07/1998 (C-264/96, ICI), ECR 1998: I-4695 para. 26; ECJ of 08/03/2001 (C-397/98, Metallgesellschaft), ECR 2001: I-1727 para. 57. Cf. inter alia, ECJ of 15/05/1997 (C-250/95, Futura-Singer), ECR 1997: I-2471 para. 31; ECJ of 08/07/1999 (C-254/97, Baxter), ECR 1999: I-4809 para. 18. Cf. ECJ of 28/01/1992 (C-204/90, Bachmann), ECR 1992: I-249; ECJ of 28/01/1992 (C-300/90, Commission/Belgium), ECR 1992: I-305. Cf. ECJ of 15/05/1997 (C-250/95, Futura-Singer), ECR 1997: I-2471. Cf. ECJ of 13/12/2005 (C-446/03, Marks&Spencer), ECR 2005, I-10837; ECJ of 18/07/2007 (C231/05, Oy AA), ECR 2007: I-6373. Cf., to that effect, ECJ of 16/07/1998 (C-264/96, ICI), ECR 1998: I-4695 para. 26; ECJ of 21/11/2002 (C-436/00, X and Y), ECR 2002: I-10829 para. 61. Cf. also Schön, 2003/04: 28-29, 33-35; Terra/Wattel, 2008: 747-752. Cf., to that effect, ECJ of 26/09/2000 (C-478/98, Commission/Belgium), ECR 2000: I-7587 para. 45. Cf. Schnitger, 2005: 501. Cf. Council Directive, 76/308/EEC: 18, as last amended by Council Directive, 2001/44/EC: 17; Council Directive, 77/799/EEC: 15, as last amended by Council Directive, 2004/56/EC: 70. Cf. in detail Terra/Wattel, 2008: 661-712. Cf. ECJ of 28/01/1992 (C-204/90, Bachmann), ECR 1992: I-249; ECJ of 12/04/1994 (C-1/93, Halliburton), ECR 1994: I-1137; ECJ of 21/11/2002 (C-436/00, X and Y), ECR 2002: I-10829 para. 60-62. Cf. also Schön, 2003/04: 28-29, 33-35. Skeptical towards the current efficiency of the cooperation between the treasuries and the argument itself Hey, 2005: 323; Lasars, 2006: 566-567; Brocke/Tippelhofer, 2009: 954.

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fiscal cohesion) shall ensure that rules which are directly linked are not examined separately but in their entirety. In order to evaluate a rule, the European Court of Justice looks at the single taxpayer. This implies that taxpayers, who form an economic unity (e.g. corporations and their shareholders), are not considered together.298 Furthermore, if the fiscal cohesion is secured by a bilateral convention concluded with another member state, that principle may not be invoked to justify the disadvantage, as in such a case the specific member state has voluntarily given up its taxing right in favor of the other member state.299 The justification based on the principle of territoriality, which is also a guiding principle in international taxation,300 mainly applies to the source state (not the residence state). It implies that the state to which the income has an economical link is mainly responsible for that income.301 Finally, a justification could be based on the preserving of the allocation of taxing powers, which is closely connected to the criterion of territoriality. Consequently, a balanced allocation of the taxing rights between member states may be a legitimate reason for obstacles.302 Overall, if a specific national rule is found to be incompatible with the EC Treaty, it may no longer be applied towards EU/EEA nationals.303 Furthermore, as a consistent interpretation of EU law is required within the EU, a ruling on a specific rule may have (direct or indirect) effects on comparable rules in other member states.304 In this context, the European Commission is permitted to deliver a reasoned opinion on a specific matter which it regards as not being compliant with EU law, and may even initiate proceedings to

297 298

299

300 301 302

303 304

Cf. ECJ of 18/12/2007 (C-101/05, A), ECR 2007: I-11531. Cf. also Cordewener/Kofler/Schindler, 2007: 116; Haunold/Tumpel/Widhalm, 2008: 431-436; Brocke/Tippelhofer, 2009: 954. In this context, in earlier decisions the court just looked at the rules in one tax system. Contrarily, in more recent decisions the interaction between the member states’ tax systems are taken into consideration. Cf. e.g. ECJ of 14/12/2006 (C-170/05, Denkavit), ECR 2006: I-11949. Cf. also Vanistendael, 2006: 413-414. Cf., inter alia, ECJ of 11/08/1995 (C-80/94, Wielockx), ECR 1995: I-2493 paras. 23-25; ECJ of 26/10/1999 (C-294/97, Eurowings), ECR 1999: I-7447 paras. 41-42; ECJ of 21/11/2002 (C-436/00, X and Y), ECR 2002: I-10829 para. 53. Cf. also Cordewener, 2002: 958; Vanistendael, 2005a: 216-217; Jacobs (ed.), 2007: 205-206. Cf. e.g. Jacobs (ed.), 2007: 6-7. Cf. of 15/05/1997 (C-250/95, Futura-Singer), ECR 1997: I-2471 paras. 18-22; ECJ of 07/09/2006 (C470/04, N), ECR 2006: I-7409 para. 46. Cf. also Jacobs (ed.), 2007: 207-208 with further references. However, so far the judgments of the European Court of Justice were not solely based on the allocation of taxing rights but on three reasons together in “Marks&Spencer” (additionally: danger that losses are used twice and risk of tax avoidance) and on two reasons together in “Oy AA” (additionally: risk of tax avoidance). Cf. ECJ of 13/12/2005 (C-446/03, Marks&Spencer), ECR 2005, I-10837 paras. 45-51; ECJ of 18/07/2007 (C-231/05, Oy AA), ECR 2007: I-6373 paras. 51-60. Cf. Jacobs (ed.), 2007: 191. Cf. Cordewener, 2004: 12-13.

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49

bring the matter before the European Court of Justice (infringement procedure according to Art. 226 ECT).305 4.1.2.2 Secondary EU law Besides primary law, secondary law needs to be observed (i.e. directives and regulations according to Art. 249 ECT). Whereas regulations are directly applicable, directives need to be transformed into national law within a certain time frame (Art. 249 ECT). As a harmonization of direct taxes is generally not stipulated in the EC Treaty, EU-wide measures may only be adopted in compliance with Art. 94 ECT. Consequently, directives for the approximation of such laws, regulations or administrative provisions of the member states, which directly affect the establishment or functioning of the common market, may be issued. However, a unanimous agreement is required in the Council of Ministers to decide such EU tax measures. Thus, each member state retains an effective right to veto the adoption of income tax measures that would apply across the EU, and consequently directives are rare.306 However, if they do exist,307 secondary law has to be compliant with primary law. Thus, the fundamental freedoms established in the EC Treaty take precedence over secondary law in place.308 4.1.2.3 Decisive judgments of the European Court of Justice in the context of reorganizations When examining cross-border reorganizations against the background of primary EU law, it can generally be stated that such transactions may not be restricted. Thus, there is a strict prohibition to establish any obstacles at the border with regard to assets, persons and capital.309 This also implies that business undertakings which constitute a combination of the three factors should be allowed to freely move from one member state to another.310 In

305 306 307

308

309 310

Cf., for example, European Commission, IP/08/1813. Cf. Rädler, 1994: 280; Hey, 1997: 80; Jaeger, 2001: 24; Spengel, 2003: 246. In the context of reorganizations the Merger Directive has been concluded. Cf. the details in Section 4.2.2. Furthermore, the Capital Duty Directive, the Mutual Assistance Directive and Recovery of Claims Directive are of relevance. Cf. different subsections in Section 4.2, as well as Section 4.3. Cf. ECJ of 18/09/2003 (C-168/01, Bosal), ECR 2003: I-9409 para. 43; ECJ of 23/02/2006 (C-471/04, Keller Holding), ECR 2006: I-2107 para. 45. Cf. also Rödder, 2004: 1633; Schön, 2004a: 297; Schön/Schindler, 2004: 576; Frotscher, 2006: 68; Jacobs (ed.), 2007: 258-259; Arndt/Fischer, 2008: 73; Schön/Schindler, 2008: paras. 26-33. This is the prevailing opinion in tax law. In company law scholars are divided. Whereas some scholars also take the view that primary law has to be observed, others take the view that regulations may set own standards as they put the fundamental freedoms into more precise terms. Cf. the overview of different opinions in Schön/Schindler, 2008: para. 29. Cf. Vanistendael, 2005: 534-536. Cf. Vanistendael, 2005: 539-540.

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this regard, the treatment of accrued hidden reserves is of special interest.311 If in national cases such charges are not levied on assets which are transferred between different locations or on persons or companies, which move from one place to another, then this may also not be done in cross-border situations. In this context, the European Court of Justice has made some judgments which may provide further guidance on how to interpret the EC Treaty. With regard to company law312 the court held, in the context of the transfer of a company abroad (“Daily Mail”), that a company incorporated under the legislation of a member state and having its registered office there has no right to transfer its central management and control to another member state. Thus, restrictions of member states on the exit of companies established in their territory were held to be in line with the freedom of establishment.313 This has been confirmed by the European Court of Justice in several cases (“Centros”, “Überseering”, “Inspire Art” and “Cartesio”).314 Regarding cross-border mergers, the European Court of Justice held in “Sevic” that a refusal to register inbound mergers violates the freedom of establishment if such a registration is not prohibited in domestic mergers.315 This generally implies that inbound mergers need to be treated in the same way as comparable domestic mergers.316 With regard to tax law, the court held in the context of a cross-border contribution of shares (“X and Y”) that a tax deferral provided in the national case also has to be granted in the cross-border case. A denial of the tax deferral was seen as being disproportionate in order to avoid abusive schemes.317 Further relevant decisions in tax law concerned the transfer of residence abroad of individuals. Here, the European Court of Justice held that the levying of taxes by the residence state upon exit (i.e. exit taxes) constitutes a restriction of cross-border transactions. This is generally not considered in line with EU law as it

311 312

313 314

315 316 317

Cf. Rödder, 2004: 1633; Schön, 2004a: 297. In the specific case the company law perspective was directly linked to the tax perspective. Nevertheless, the predominant view in literature considers the case to be relevant in the context of company law. Cf. e.g. Schön, 2004: 297; Jacobs (ed.), 2007: 257-258; Schön/Schindler, 2008: paras. 108-109. Cf. ECJ of 27/09/1988 (81/87, Daily Mail), ECR 1988: 5483. Cf. also Aßmann, 2006: 166-168; Kollruss, 2008: 316-317; Dine/Browne (eds.), EU company law: 19[14A]. Cf. ECJ of 09/03/1999 (C-212/97, Centros), ECR 1999: I-1484; ECJ of 05/11/2002 (C-208/00), Überseering), ECR 2002: I-9919; ECJ of 30/09/2003 (C-167/01, Inspire Art), ECR 2003: I-10 155; ECJ of 16/12/2008 (C-210/06, Cartesio), ECR 2008, I-9641. Cf. also Aßmann, 2006: 166-168; Dine/Browne (eds.), EU company law: 19[14A]. Cf. ECJ of 13/12/2005 (C-411/03, SEVIC Systems), ECR 2005, I-10805. Englisch states that this judgment may overrule “Daily Mail”. Cf. Englisch, 2007: 339. Cf. ECJ of 21/11/2002 (C-436/00, X and Y), ECR 2002: I-10829. Cf. also Schnitger, 2003: 90-92; Cf. also Aßmann, 2006: 168-169.

4 Taxation of European Companies during the time of restructuring in the current environment

51

is not proportionate (“De Lasteyrie du Saillant”, “N”).318 More precisely, it has been stated that a change of taxing rights among the member states due to a transfer of residence of an individual may not generally imply an immediate taxation of hidden reserves. However, the member states may tax the hidden reserves which have been established within their territory upon a later realization of the hidden reserves.319 Furthermore, the immediate assessment of taxes was accepted as long as this was done for information purposes only and no material burden arose until the actual realization of the hidden reserves.320 This implies that the granting of the deferment of the tax payment cannot be made conditional on the provision of guarantees as this constitutes a restrictive effect, since it deprives the taxpayer of the enjoyment of the assets given as a guarantee.321 Consequently, no further requirements are allowed given that the Mutual Assistance Directive is in place providing the treasuries involved with information.322 Moreover, it was held that reductions in value capable of arising after the transfer of residence by the person concerned have to be fully taken into account by the former country of residence if they were not taken into account by the new country of residence.323 To summarize, with regard to company law, it seems likely that member states may restrict companies which have been established in their territory. Contrarily, with regard to tax law, member states may not be allowed to exercise their taxing right without limitations. When looking at losses of the transferring or exiting company, the European Court of Justice ruled that it is primarily the task of the source country to allow a deduction for losses which have originated in its territory (territoriality principle). However, it also violates EU law if losses get lost because they can neither be deducted in the country of source (i.e. country of subsidiary or permanent establishment) nor in the country of residence (i.e. country of parent). Thus, it is subsidiarily the task of the residence country to provide a deduction for foreign losses.324

318

319 320 321

322 323 324

Cf. ECJ of 11/03/2004 (C-9/02, De Lasteyrie du Saillant), ECR 2004: I-2409; ECJ of 07/09/2006 (C470/04, N), ECR 2006: I-7409. Cf. also Thömmes, 2004a: 754-756; Aßmann, 2006: 169-170; Dine/Browne (eds.), EU company law: 19[14]. Cf. Klingberg/Lishaut, 2005: 700. Cf. ECJ of 07/09/2006 (C-470/04, N), ECR 2006: I-7409. Cf. ECJ of 11/03/2004 (C-9/02, De Lasteyrie du Saillant), ECR 2004: I-2409. Specifically, the taxpayer incurs opportunity costs as he cannot use the asset for other purposes (like securing a private loan). Cf. Martin, 2003: 129. Cf. Council Directive, 76/308/EEC: 18, as last amended by Council Directive, 2001/44/EC: 17. Cf. ECJ of 07/09/2006 (C-470/04, N), ECR 2006: I-7409. Cf. ECJ of 14/12/2000 (C-141/99, AMID), ECR 2000, I-11619; ECJ of 13/12/2005 (C-446/03, Marks&Spencer), ECR 2005, I-10837 paras. 55-56; ECJ of 18/07/2007 (C-231/05, Oy AA), ECR 2007: I-6373 paras. 54-56; ECJ of 15/05/2008 (C-414/06, Lidl Belgium), ECR 2008, I-3601. In detail

52

4 Taxation of European Companies during the time of restructuring in the current environment

Regarding the general issue of double taxation in cross-border cases, according to Art. 293 ECT, member states are to negotiate with each other, as necessary, with a view to securing for the benefit of their nationals the abolition of double taxation within the Community. However, in the absence of any unifying or harmonizing community measures, member states retain the power to define, by treaty or unilaterally, the criteria for allocating their powers of taxation, particularly with a view to eliminating double taxation.325 Thus, a duty to prevent double taxation cannot be deduced from EU law.326 4.1.2.4 Interim conclusions If a transaction is within the scope of a fundamental freedom established in the EC Treaty, this implies that cross-border transactions need to be treated in the same way as comparable domestic transactions. Consequently, they may neither be discriminated nor restricted, unless this can be justified. Justifications are rather narrowly defined though and national measures need to be proportionate. Within the context of reorganizations, judgments made by the European Court of Justice may provide guidance on the treatment of accrued hidden reserves transferred in assets, persons or companies across a border as well as on the treatment of losses of entities. 4.1.3

Side condition: Feasibility

In order to achieve the guiding tax principles established above, tax laws need to be enforceable in practice (i.e. feasibility).327 This can be specified in different ways. First, the complexity of the legal system needs to be low. Consequently, the rules need to be simple to understand in order to ensure that they can be easily applied and reasonable results can be derived.328 One way to derive a simple system is to use standardized terms.329 Sec-

325

326 327

328 329

cf. also Dine/Browne (eds.), EU company law: 19[13]. Further obligations for the residence state were not introduced, apparently in order to avoid a level playing field with regard to loss trafficking in the EU. Cf. Führich, 2008: 10. Critical towards an obligation for the residence state: Schön, 2008: 59. He points out that - as a result - the residence state is held liable if the source country restricts its loss compensation. Cf. also in detail: Mayr, 2008c: 1816-1819. Cf. ECJ of 12/05/1998 (C-336/96, Gilly), ECR 1998: I-2793 paras. 24, 30; ECR of 21/09/1999 (C397/07, Saint Gobain), ECR 1999: I-6161 para. 57; ECJ of 12/12/2002 (C-385/00, de Groot), ECR 2002: I-11819 para. 93; ECJ of 23/02/2006 (C-513/03, van Hilten-van der Heijden), ECR 2006, I-1957 paras. 47-48; ECJ of 07/09/2006 (C-470/04, N), ECR 2006: I-7409 paras. 42-44. Cf. Terra/Wattel, 2008: 170-171. Of other opinion: Beiser, 2009: 236-238. Critical Lehner, 2007: 1124; Vogel/Lehner (eds.), 2008: Einl. paras. 257-264. Cf. Neumark, 1970: 358-364; Rosen/Gayer, 2008: 369-370. Simplicity, certainty and transparency are also part of the requirements established by the European Commission in the context of company taxation within the internal market. Cf. Schön, 2000: 191-195; European Commission, SEC(2001)1681: 28. Cf. Thuronyi, 1998: 72-73; Lange, 2005: 108; Schäfer, 2006: 85. Cf. Tipke, 2003: 349; Spengel/Malke, 2008: 68-69.

4 Taxation of European Companies during the time of restructuring in the current environment

53

ondly, administrative costs need to be in reasonable proportion to the tax revenue.330 Administrative costs arise for the treasuries as well as for the taxpayers in the form of compliance costs. For the treasury, the costs result from the determination of the facts and circumstances of taxable events, which may be more burdensome in cross-border cases and may for example also include the costs of controlling abuse of law. For the taxpayer, the costs do not only result from fulfilling tax reporting requirements, but also from the efforts made to determine the tax consequences of business opportunities.331 Third, tax may only be levied if the taxpayer realizes a taxable event to which a tax liability is attached by law. For this purpose, the taxable event must be sufficiently defined (i.e. certain and clear). It is necessary that, in terms of content, object, aim and extent, a provision establishing grounds for taxation is determined such that the tax burden is foreseeable and calculable by the taxpayer.332 Imprecise legal terms that permit variations in interpretation endanger the legal certainty of taxation. With regard to the consequences for taxation, the legality of administrative practice cannot be adequately monitored if the taxable event is not clearly defined. Whilst it is not possible to exclude completely indefinite legal terms from tax legislation, these should not result in the principle of legal certainty being abandoned. Rather, these should transfer to another level the task of defining the taxable events in statute using objective and verifiable criteria.333 When looking at reorganizations, such transactions are complex by definition. They affect different entities and shareholders. Consequently, for the taxpayers it is important to provide simple and easily understandable rules, as far as this is possible in order to adequately regulate such transactions. Furthermore, such transactions have a cross-border dimension. Thus, for the treasury it is crucial that the facts and circumstances of a taxable event can easily be determined and that taxing rights can be enforced.334 4.1.4

Interim conclusions

Summarizing, as has been discussed above, the principles which need to be observed de lege lata are economic principles (international neutrality and international equity) as well as legal principles (EU law). Additionally, administrative aspects are of relevance.

330 331 332 333 334

Cf., for example, Nobes, 2004: 40. Cf. Slemrod/Sorum, 1984: 461-474; Slemrod, 1996: 355-391; Wagner, 2005: 529-530. The relative compliance costs generally decrease as the size of the enterprise increases. Cf. Whittington, 1995: 452-456. Cf. Thuronyi, 1998: 72-73; Spengel/Malke, 2008: 68. Cf. Herzig, 2002a: 164-165; Lange, 2005: 109-110.

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4 Taxation of European Companies during the time of restructuring in the current environment

With regard to the economic principles, for the taxpayer international neutrality, interpreted as neutrality towards competition, requires that taxes do not have an influence on sound economic transactions. For reorganizations this implies that no burdensome tax charges may be levied. Based on international equity, the taxpayer shall be held liable to pay taxes according to his ability to pay. This implies that a taxation of cross-border reorganizations should apply when hidden reserves are actually realized after the reorganization process. For the treasury, international neutrality, interpreted as fiscal neutrality, requires that the treasury may not be put in a worse position due to a specific transaction. This implies that treasuries may not worsen its own fiscal position due to a cross-border reorganization. Based on international equity, a taxing right exists for the treasury with regard to hidden reserves established within its territory. If upon a reorganization the treasury is about to lose this taxing right it may exercise it. Thus, the perspective of the taxpayer and the treasury are contrary to each other with regard to the point of time and the amount to be taxed. Therefore, the task will be to design the taxing right in such a way that it combines both views.335 With regard to legal principles, primary law (i.e. the fundamental freedoms established in the EC Treaty), which applies to cross-border transactions within the EU and takes precedence over the national law of the member states, has to be observed as well as secondary law (i.e. directives, regulations), which also needs to be compliant with primary law. For the taxpayer, the fundamental freedoms provide that individuals and entities may not be discriminated against nor may their cross-border transactions be restricted because of the cross-border dimension. Exceptions only apply if a discrimination or restriction can be justified. For the treasury, this implies that taxing rights may not be upheld without constraints. Consequently, the issue on when to tax accrued hidden reserves may be solved in favor of the taxpayer.336 Finally, when proposing reform options a feasible solution needs to be found which is relatively easy to administrate and is likely to be accepted by the involved parties (i.e. taxpayers as well as treasuries).

335 336

Cf. the discussion in Section 4.3.2.2. Cf. the discussion in Section 4.3.2.2.

4 Taxation of European Companies during the time of restructuring in the current environment

4.2

Comparative analysis of the treatment in the EU member states

4.2.1

Approach for the comparative analysis

55

In this chapter, the tax rules governing noncurrent transactions of European Companies in the 27 member states of the European Union are gathered and compared. Specifically, these include the entry into an SE, the transfer of the registered office and the exit out of an SE. Most of the information for this analysis was derived from a commentary by Thömmes and Fuks on the implementation of the Merger Directive into the member states’ law.337 Additional data has been extracted from a database of the International Bureau of Fiscal Documentation338 as well as other literature available. Furthermore, the study on the implementation of the Merger Directive conducted by Ernst & Young on behalf of the European Commission has been taken into consideration.339 The information provided is as of 1 January 2009. According to the European Company Statute, there are four possible ways to establish an SE from a company law point of view: These are also the basis of the tax analysis of the entry structures: the formation by merger (Art. 2 (1) and Art. 17-31 ECS), the establishment of a holding SE (Art. 2 (2) and Art. 32-34 ECS) or subsidiary SE (Art. 2 (3) and Art. 35, 36 ECS) and the conversion from an existing company into an SE (Art. 2 (4) and Art. 37 ECS). In each case the companies involved need to be formed under the law of one member state and need to have their registered office and head office within the EU. In addition, a cross-border relationship has to be given. Depending on the type of formation, different kinds of entities may be eligible to form an SE.340 An SE may not be created from scratch though. Regarding the scope, the companies which may establish an SE generally need to be formed under the law of a member state, with their registered office and head office within the Community. However, member states may opt to include companies whose head office is not in the Community, provided that the company is formed under the law of one member state, where it also has its registered office, and has a real and continuous link with one member state’s economy (Art. 2 (5) ECS).

337 338 339 340

Cf. Thömmes/Fuks (eds.), EC, Part A: Merger Directive. The database used was “Europe - Corporate Taxation”. Cf. Ernst&Young, 2009. Cf. Thömmes, 2004b: 17-18, and below.

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4 Taxation of European Companies during the time of restructuring in the current environment

When being established, an SE may transfer its registered office together with its head office within the EU member states without being dissolved and being re-established (Art. 8 ECS). Finally, two years after registration an SE may be converted back into a public limited-liability company of the member state of its registered office. This exit out of an SE shall neither result in the winding up of the company nor in the creation of a new legal person (Art. 66 ECS). As has been stated before, there are no specific tax provisions in the European Company Statute. Instead, general EU law, bilateral treaty law and national tax law applies as to public limited-liability companies of the member states involved, unless SE specific rules are in place.341 When considering EU law, the Council Directive of 23 July 1990 on the common system of taxation applicable to mergers, divisions, transfers of assets and exchanges of shares concerning companies of different Member States (so called Merger Directive)342 plays a major role with regard to noncurrent transactions. Therefore, the directive will be discussed up front and with the specific cases. Specifically, the comparative analysis is structured in the following way. When examining the different cases, first, company law aspects are explained. Next, the general tax rules will be discussed. Here, the rules of the Merger Directive provide guidance. As the Merger Directive is not directly applicable but needs to be transposed into national law, finally, the current treatment in the member states is assessed. For the tax analysis, depending on the form of establishment of the SE different levels need to be distinguished: These may include the level of the company being acquired (i.e. transferring company or transferor), the level of the acquiring company (i.e. receiving company or transferee) and the level of the shareholders of the involved companies. 4.2.2

Merger Directive

The Merger Directive was originally put into place in 1990.343 It deals with cross-border mergers, divisions of companies, transfers of assets and exchanges of shares within the EU. Its aim is to create conditions analogous to those of an internal market in order to ensure the establishment and effective functioning of the common market. Thus, restructurings within the EU shall not be hampered by restrictions and especially not be distorted by

341 342 343

As is shown below, there are some rules regarding noncurrent transactions which only apply to SEs, but mainly rules cover SEs and other corporations. Cf. Council Directive, 90/434/EEC: 1, as lastly amended by Council Directive, 2005/19/EC: 19. Cf. Council Directive, 90/434/EEC: 1.

4 Taxation of European Companies during the time of restructuring in the current environment

57

tax provisions. Instead, tax rules, which are neutral from the perspective of competition, shall apply “in order to allow enterprises to adapt to the requirements of the common market, to increase their productivity and to improve their competitive strength at the international level”.344 In order to do so, a common tax system should be created which avoids imposing a tax on such operations - as is the case in a national context - and at the same time safeguards the financial interests of the member state of the transferring or acquired company.345 Altogether, it shall be ensured that cross-border activities of companies of the EU are not hampered by negative tax effects resulting from the national tax systems of the member states.346 Effective in 2005, the Directive has been amended.347 One reason was the introduction of the SE. Since the Merger Directive is accompanied by a list of eligible companies this list needed to be amended (at least for clarification purposes).348 In addition to this, the Merger Directive now includes SE specific rules regulating the transfer of the registered office of an SE from one member state to another. This will be dealt with in detail in Section 4.2.4.349 Overall, the Directive still follows its aims as of 1990 as described above.350 With regard to the options of forming an SE, three are covered by the Merger Directive provided that entities of two member states are involved. These are the creation of merger SEs, holding SEs and subsidiary SEs.351 The conversion into an SE or out of an SE is not covered by the Merger Directive352 since this transaction involves only one company in one member state. Before examining the reorganization transactions relevant for SEs, two articles, which concern all transactions covered by the Merger Directive, shall be briefly discussed here and later on, where applicable, with the respective transactions. The first article is Art. 3 MD regulating the scope of the reorganizations covered. Accordingly, the treatment of the Merger Directive has to be granted to companies which domicile within the European

344 345 346 347 348

349 350 351 352

Council Directive, 90/434/EEC: 1. Cf. Staringer, 2001: 86-88; Diemer, 2004: 40. Cf. Staringer, 2001: 83. Cf. Council Directive, 2005/19/EC: 19. According to the predominant view in the literature, the Merger Directive automatically - without an amendment - applied to the SE. See in more detail Schön/Schindler, 2004: 573; Schindler, 2005: 552553, both with further references. For details of all amendments see Benecke/Schnitger, 2005: 606-612, 641-648; Saß, 2005: 1238-1240; Schindler, 2005: 551-557; Russo/Offermanns, 2006: 250-257. Cf. Diemer, 2004: 40; Council Directive, 2005/19/EC: 19. Cf. Herzig/Griemla, 2002: 59-61, and below. Cf. Diemer, 2004: 40.

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4 Taxation of European Companies during the time of restructuring in the current environment

Community. In case a company is deemed to reside outside the EU for tax purposes, it is not eligible for the special treatment. This may occur if the company is a dual resident company and an applicable double tax treaty with a tie-breaker rule comparable to Art. 4 (3) OECD model grants the taxing right to a country which is not located within the EU.353 A list of eligible entities is contained in the appendix to Art. 3 MD. The second article is Art. 11 MD regarding abusive actions. It states that a member state may refuse the treatment provided in the Merger Directive if the transaction is principally driven by the objective of tax evasion or tax avoidance. Abuse may not be presumed though in case that valid commercial reasons are given, for example the restructuring or rationalization of the activities of the companies participating in the operation. Furthermore, abuse has to be proven on a case-by case basis. General assumptions on abusive treatment are not valid.354 The original Merger Directive had to be put into place by 1 January 1992 by the member states. The amended Merger Directive had to be translated into national law until 1 January 2006 with regard to the rules affecting the SE (extending the list of companies, regulating the transfer of the registered office of an SE) and by 1 January 2007 with regard to the other amendments. 4.2.3

Entry

4.2.3.1 Merger 4.2.3.1.1 Basics with regard to company law The formation by merger takes place if two national public limited-liability companies (according to appendix 1 of the European Company Statute) domiciled in different EU member states merge. As a result, either the acquiring company may take the form of an SE (merger by acquisition)355 or a new company may be formed as an SE (merger by for-

353 354

355

Cf. Doernberg/Hinnekens/Hellerstein, 2001: 301-302; Vogel/Lehner, (eds.), 2008: Art. 4 paras. 241280. In most treaties the „place of effective management” is decisive. Cf. ECJ of 17/07/1997 (C-28/95, Leur-Bloem), ECR 1997: I-4161. See also Thömmes, 2005a: 229230; Dine/Browne (eds.), EU company law: 18[11]. Furthermore, if more than one measure is available the least onerous need to be chosen. Cf. Klingberg/Lishaut, 2005: 701. See also Figure 1. More precisely, this includes two transactions: the merger of the transferring and the receiving company and the conversion of the receiving company into an SE. Cf. Herzig/Griemla, 2002: 57.

4 Taxation of European Companies during the time of restructuring in the current environment

59

mation of a new company) (Art. 17 ECS).356 This distinction is drawn from the 3rd Company Law Directive.357 A merger implies a universal succession. This means that the business assets and liabilities are transferred as a whole and via a single act.358 The contributing companies are not liquidated but become permanent establishments of the SE. Consequently, no minority shareholders will remain.359 With regard to minority shareholders who oppose the merger, member states may adopt provisions which are designed to ensure an appropriate protection for such shareholders (Art. 24 (2) ECS).360 Regarding the tax implications of such a squeeze out see Section 4.2.3.1.2.2 below. 4.2.3.1.2 Tax consequences From a tax point of view, the merger by acquisition (see Figure 1) and the merger by formation of a new company (see Figure 2) do generally not differ. Therefore, no distinction is made in the examination.361 The tax consequences of a merger to an SE are generally covered by the Merger Directive. Art. 2 (a) first indent MD defines a merger by acquisition and Art. 2 (a) second indent MD defines a merger by formation of a new company. In both cases a transfer of all the assets and liabilities to another existing or newly established company may only take place in exchange for shares of the SE to the shareholders and a cash payment not exceeding 10% of the nominal value (or the accounting par value of those securities). In the following, the tax consequences at the entity level and the shareholder level are analyzed in detail.

356

357 358 359 360

361

This implies that the SE is found in another state than the merging entities. See also Figure 2. Regarding a proposal by the European Commission on simplification of company law requirements for mergers and divisions (e.g. reduction of reporting requirements) see European Commission, IP/08/1407; Teichmann, 2008a: 363. Cf. Council Directive, 78/855/EEC: 36, as lastly amended by Council Directive, 2007/63/EC: 47. Cf. Herzig/Griemla, 2002: 58; Thömmes, 2004b: 18-19; Rödder/Herlinghaus/Lishaut, 2008: § 11 para. 16. Cf. Brandes, 2005: 178. This has been done in German company law, for example. Cf. Bayer, 2008a: Art. 24 SE-VO paras. 2166. Furthermore, protection is granted, among others, in Belgium, Bulgaria, Cyprus, Denmark, Finland, France, Italy, Poland, Slovakia, Slovenia and the United Kingdom. Cf. the respective country chapters in Thömmes/Fuks (eds.), EC, Part A: Merger Directive; IBFD, Taxation: subchapter “forms of business organization”; Lenoir, 2008: 16; Ernst&Young, 2009: 219-230, points 2.2. An exception effects the treatment of prior holdings. Such holdings are only applicable to mergers by acquisition. Cf. the discussion on Art. 7 MD in Section 4.2.3.1.2.1.2.3 below.

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4 Taxation of European Companies during the time of restructuring in the current environment

Figure 1: Merger by acquisition Æ Before the merger by acquisition Member State X

Member State Y

BORDER

Shareholders of A

Company A

Shareholders of B

Company B

Æ After the merger by acquisition Member State Y Shareholders of SE

BORDER

Member State X Shareholders of SE

PE of SE

SE

(assets of former company A)

Figure 2: Merger by formation of a new company Æ Before the merger by formation of a new company Member State X

Shareholders of B

Company B

Member State Z

BORDER

Company A

Member State Y

BORDER

Shareholders of A

Æ After the merger by formation of a new company

PE of SE (assets of former company A)

PE of SE (assets of former company B)

Member State Z

BORDER

Member State Y Shareholders of SE

BORDER

Member State X Shareholders of SE

SE

4 Taxation of European Companies during the time of restructuring in the current environment

61

4.2.3.1.2.1 Entity level At the entity level, the tax consequences of the transferring company/companies and the receiving entity (i.e. the SE) have to be distinguished. With regard to the transferring entity/entities, the treatment of the assets transferred is examined. Special tax rules apply if a foreign permanent establishment constitutes part of the assets. Thus, this situation is also examined. With regard to the receiving entity, the treatment of wholly or partly taxexempt reserves and provisions, of losses, of merging gains or losses and of transaction taxes is analyzed. 4.2.3.1.2.1.1 Transferring company/companies 4.2.3.1.2.1.1.1 Assets and liabilities in country of transferring company In general, the transferring company/companies362 need to prepare a tax balance sheet in case of restructuring including all the assets and liabilities transferred.363 In this context, Art. 4 MD states that no taxation of capital gains resulting from hidden reserves (calculated by reference to the difference between the real values of the assets and liabilities transferred and their values for tax purposes) may take place upon transfer. The value for tax purposes is defined as “the value on the basis of which any gain or loss would have been computed for the purposes of tax upon the income, profits or capital gains of the transferring company if such assets or liabilities had been sold at the time of the merger […] but independently of it” (Art. 4 (1) (a) MD). Thus, instead of a taxation of the assets transferred based on the fair market value at reorganization, the present book value is used, deferring an immediate taxation.364 The transferred assets and liabilities are defined as “those assets and liabilities of the transferring company which, in consequence of the merger […], 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 the profits or losses taken into account for tax purposes” (Art. 4 (1) (b) MD).365 This passage shall ensure that the member state of the transferring company does not lose its right to tax

362 363 364 365

These are company A in Figure 1 (merger by acquisition) and company A and B in Figure 2 (merger by formation of a new company). Cf. Englisch, 2007: 341. Instead of the present book value, a lower going concern value may be the basis if this value has been tax effective prior to the merger. Cf. Englisch, 2007: 341; and Chapter 3. In Figure 1 (merger by acquisition) this has been depicted by leaving a permanent establishment in member state X. In Figure 2 (merger by formation of a new company) this equals the permanent establishments in member state X and Y.

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4 Taxation of European Companies during the time of restructuring in the current environment

hidden reserves established before the reorganization.366 Since the book values are rolled over, the tax position does not change from the perspective of the fiscal authority of the transferring country. Thus the financial interest is guaranteed.367 In addition, the nontaxation of hidden reserves is conditioned upon the same calculation of depreciation and capital gains and losses by the receiving company (SE) as would have been done by the transferring company without the merger (Art. 4 (3) MD). If the receiving company has the option to calculate the depreciation and capital gains and losses according to different rules and follows this for certain or all assets and liabilities, the non-taxation is waived accordingly for these specific assets and liabilities (Art. 4 (4) MD). Overall, the non-taxation only takes place when the cash payment is less than or equal to 10%, the transferred assets and liabilities remain effectively connected to a permanent establishment in the member state of the transferring company and the receiving entity carries over the tax values of assets and liabilities of the transferring entity. On the treatment of assets and liabilities, which are not effectively connected to a permanent establishment, the Merger Directive is silent.

366 367

Cf. Bartone/Klapdor, 2007: 118. Cf. Conci, 2004: 16.

4 Taxation of European Companies during the time of restructuring in the current environment

63

Table 2: Merger - tax consequences at transferring company368

Austria

Cross-border

Cross-border

merger in com-

merger in tax

pany law

law

Regulated for SE

Regulated for SE

and other corpo-

and other corpo-

rations

rations

Tax consequences at transferring company

Tax deferral, if -later disposal of assets subject to corporation income tax in the hands of the transferee -taxing right not restricted (given, if assets and liabilities are effectively connected to permanent establishment (assessed according to real and objective circumstances and functions of permanent establishment) Tax deferral upon request even if (partial) liquidation provided that EU country or EEA country with mutual assistance agreement

Belgium

Bulgaria

Regulated for SE

Not regulated for

Taxation of accrued capital gains, since liquida-

and other corpo-

SE and other

tion

rations

corporations

Only regulated

Regulated for SE

Tax deferral, if assets and liabilities continue to

for SE (ECS),

and other corpo-

be used in activities that are subject to corporate

not other corpo-

rations

income tax

rations

368

See the respective country chapters in Thömmes/Fuks (eds.), EC, Part A: Merger Directive, especially commentary to Art. 4 MD; IBFD, Taxation: subchapter “merger and division”; and Ernst&Young, 2009: 219-230, points 4.1-4.9. For the EU-15 (i.e. member states up to 01/05/2004) see also IBFD, 2003: 11-14, 29-30. For company law regarding non-SEs see also the information provided by the Euopean Commission, available at: http://ec.europa.eu/internal_market/company/mergers/index_en.htm (date of access: 31/01/2009). Furthermore, see for Austria Staringer, 2005: 213-224; Inwinkl/Schneider, 2007: 705-716; Hohenwarter, 2007: 501-509, 568-575; Kessler/Jehl, 2007: 19841985; for Belgium ECJ of 08/02/2008 (C-392/07, Commission/Belgium), OJ C 158: 8; Osterweil/Quaghebeur, 2008: 351; for Bulgaria Lozev, 2007: 197; for Denmark Bjrnholm/Thierson, 2008: 37-38; Rnfeldt/Werlauff, 2008: 218; for France Weier/Seroin, 2005: 726; for Germany §§ 11, 12 German Reorganization Tax Act; Bartone/Klapdor, 2007: 118; Englisch, 2007: 339-346; Kessler/Jehl, 2007: 1979-1983; PwC (ed.), 2007: 182-195; Schön/Schindler, 2008: paras. 194-244; for Hungary Erdos/Burjau/Locsei, 2004: 103; Deloitte (ed.), 2006: 297; for Italy Lobis, 2008: 8; Mayr, 2008d: 614; for the Netherlands Pijl, 2006: 352-353; Kessler/Jehl, 2007: 1985; for the Slovak Republic PwC (ed.), 2006: 441-442; for Slovenia Zorman/Janezic, 2008: 599-600.

64

Cyprus

Czech Republic

Denmark

4 Taxation of European Companies during the time of restructuring in the current environment

Regulated for SE

Regulated for SE

No taxation of accrued capital gains (no perma-

and other corpo-

and other corpo-

nent establishment required)

rations

rations

Regulated for SE

Regulated for SE

Tax deferral, if assets and liabilities are effec-

and other corpo-

and other corpo-

tively connected to permanent establishment

rations

rations

Regulated for SE

Regulated for SE

Tax deferral, if assets and liabilities are effec-

and other corpo-

and other corpo-

tively connected to permanent establishment or

rations

rations

real property located in Denmark Taxation, if fair market value is used

Estonia

Finland

France

Regulated for SE

Regulated for SE

Taxation of capital gains only when assets are

and other corpo-

and other corpo-

transferred or distributed to shareholder

rations

rations

Regulated for SE

Regulated for SE

Tax deferral, if assets and liabilities are effec-

and other corpo-

and other corpo-

tively connected to permanent establishment

rations

rations

Regulated for SE

Regulated for SE

Tax deferral upon approval of treasury, if future

and other corpo-

and other corpo-

taxation of deferred capital gains is ensured (this

rations

rations

is the case if assets and liabilities remain in France and appear on the balance sheet of branch, thus independent of effective connection) For depreciable assets, however, a taxation at standard corporate tax rate takes place over 5 or 15 years, depending on asset, by gradually adding back deferred taxes at receiving company in return for a higher depreciation (of fair market value). Alternatively, absorbed company may elect to pay tax immediately at reduced rate on its long-term capital gains realized on its depreciable assets transferred.

4 Taxation of European Companies during the time of restructuring in the current environment

Germany

Regulated for SE

Regulated for SE

and other corpo-

and other corpo-

rations

rations

65

Tax deferral at request of taxpayer, if -later disposal of assets subject to German tax in the hands of the transferee -taxing right not restricted -only shares received in exchange / no additional remuneration Option to use different value up to fair market value Taxation, if assets are attributable to parent company

Greece

Only regulated

Regulated for SE

for SE (ECS),

and other corpo-

not other corpo-

rations

rations

Tax deferral, if -establishment of permanent establishment or adding of assets and liabilities to existing permanent establishment (effectively connected if closely related to the business activities and recorded in the books of permanent establishment) -assets and liabilities contribute to taxable income of permanent establishment

Hungary

Regulated for SE

Regulated for SE

Preferential merger/tax deferral at request of

and other corpo-

and other corpo-

taxpayer, if

rations

rations

-assets and liabilities are effectively connected to permanent establishment -roll over of values (tax base as if merger had not taken place) -separate records maintained by successor company Taxation, if fair market value is used

Ireland

Regulated for SE

Regulated for SE

Tax deferral, if assets transferred are within the

and other corpo-

and other corpo-

scope of capital taxation (given, if assets are

rations

rations

used for the purpose of a trade)

66

Italy

4 Taxation of European Companies during the time of restructuring in the current environment

Only regulated

Regulated for SE

Tax deferral, if assets and liabilities are effec-

for SE (ECS),

and other corpo-

tively connected to permanent establishment

not other corpo-

rations

(given, provided that they are used in conduct of

rations

business or in case their production or trade is object of business itself; no force of attraction in relation to permanent establishment) Substitute taxation at receiving company, if fair market value is used (step-up with reduced substitute tax, required holding period of assets: 4 years)

Latvia

Only regulated

Regulated for SE

Tax deferral, if assets and liabilities are attribut-

for SE (ECS),

and other corpo-

able to permanent establishment

not other corpo-

rations

rations Lithuania

Luxembourg

However, recapture of depreciation with regard to new production technology equipment

Regulated for SE

Regulated for SE

Tax deferral, if assets and liabilities are effec-

and other corpo-

and other corpo-

tively connected to permanent establishment

rations

rations

Only regulated

Regulated for SE

Tax deferral (use of book value or going-

for SE (ECS),

and other corpo-

concern value if lower), if assets and liabilities

not other corpo-

rations

are effectively connected to permanent establishment (given, if physically there and provided

rations

that assets serve the business activity of the permanent establishment) Malta

Regulated for SE

Regulated for SE

Tax deferral, if assets and liabilities are effec-

and other corpo-

and other corpo-

tively connected to permanent establishment

rations

rations

4 Taxation of European Companies during the time of restructuring in the current environment

Netherlands

Regulated for SE

Regulated for SE

and other corpo-

and other corpo-

rations

rations

67

Tax deferral, if -same provisions apply in respect to profit determination for the transferring and receiving companies -none/neither of the merging companies are entitled to loss carry forward -future taxation is guaranteed (given, if assets and liabilities are effectively connected to permanent establishment (assessed according to functionality which is given, if assets serve the business activity; takeover of risk of relevance)) (if one of the conditions cannot be met, approval by ministry of finance is necessary)

Poland

Only regulated

Regulated for SE

Tax deferral, if assets and liabilities are effec-

for SE (ECS),

and other corpo-

tively connected to permanent establishment

not other corpo-

rations

rations Portugal

Regulated for SE

Regulated for SE

Tax deferral, if assets and liabilities are effec-

and other corpo-

and other corpo-

tively connected to permanent establishment

rations

rations

(given, if physically there, provided that assets are used in conduct of business or in case their production or trade is object of business itself)

Romania

Only regulated

Regulated for SE

Tax deferral, if assets and liabilities are effec-

for SE (ECS),

and other corpo-

tively connected to permanent establishment (no

not other corpo-

rations

rations Slovak Republic

guidance on how to interpret effective connection)

Regulated for SE

Regulated for SE

Tax deferral, if assets and liabilities are effec-

and other corpo-

and other corpo-

tively connected to permanent establishment (no

rations

rations

guidance on how to interpret effective connection) Taxation may occur for nondepreciable assets as tax value not clearly defined

68

4 Taxation of European Companies during the time of restructuring in the current environment

Slovenia

Regulated for SE

Regulated for SE

Tax deferral, if assets and liabilities belong to a

and other corpo-

and other corpo-

permanent establishment (“belonging to” may

rations

rations

provide higher threshold than “effectively connected”)

Spain

Regulated for SE

Regulated for SE

Tax deferral, if assets and liabilities are effec-

and other corpo-

and other corpo-

tively connected to permanent establishment (as-

rations

rations

sessed according to functionality) Taxation, if fair market value is used

Sweden

Regulated for SE

Regulated for SE

and other corpo-

and other corpo-

rations

rations

Tax deferral, if -assets and liabilities are effectively connected to permanent establishment -income from later disposal of assets is not taxexempt due to double tax treaty Option to use fair market value for depreciable assets

United Kingdom

Regulated for SE

Regulated for

Tax deferral, if assets are used or held for the

and other corpo-

SE, only par-

purpose of a trade carried on through a perma-

rations

tially regulated

nent establishment

for other corporations

When looking at the treatment in the member states (see Table 2) the formation of an SE via a cross-border merger is possible from the company law perspective in all member states due to the European Company Statute, which is directly applicable but may also be supplemented by national laws.369 Accordingly, company law is not an issue since the European Company Statute provides for the dissolution without winding up of the transferring entity in the cross-border situation. From a tax point of view, the cross-border merger is regulated due to the transposition of the Merger Directive in most of the countries, providing tax relief in accordance with Art. 4 MD. The tax rules are generally applicable not only to the SE but also to corporations in the EU member states as stated in Art. 3 MD and its appendix. Furthermore, the treatment of cross-border mergers will princi-

369

This has been done, for example, in Germany via the “SE-Ausführungsgesetz” or in the Slovak Republic. Cf. Lutter/Hommelhoff (eds.), 2008; Thömmes/Fuks (eds.), EC, Slovak Republic: paras. 3, 44.

4 Taxation of European Companies during the time of restructuring in the current environment

69

pally equal the treatment of domestic mergers.370 Regarding the scope, mergers with a receiving company in an EU and EEA state are covered,371 whereas the preferential treatment will mostly not be extended to receiving companies outside the EU/EEA.372 The conditions, which need to be fulfilled to receive relief, are that the assets and liabilities transferred remain effectively connected with a permanent establishment of the receiving company in the country of the transferring company and that they play a part in generating the profits or losses taken into account for tax purposes. Even though this general frame is equal, its interpretation differs throughout the member states. Especially in the new member states (e.g. Romania, Slovak Republic, Slovenia), there is no administrative guidance on how to define an effective connection, leading to uncertainty. Furthermore, in the Slovak Republic the term tax value is not defined for nondepreciable assets which may lead to an immediate taxation of hidden reserves. In Denmark not only assets and liabilities connected to a permanent establishment are spared but also real property located in Denmark. In Austria and Germany reference is not given to the remainder of a permanent establishment, but rather it is stated that the taxing right may not be restricted with regard to the assets and liabilities transferred.373 In Ireland assets and liabilities need to remain within the scope of Irish capital gains taxation. In France, deferral is provided if the future taxation of the deferred capital gains is ensured but only if approved by the ministry of finance. Regarding the interpretation of the effective connection, it is generally necessary that the assets remain physically present in the country of the transferring entity and that they are used in the conduct of the business or are the object of the business itself (in case of their production or trade). In Germany certain assets are deemed to not be effectively connected with a permanent establishment. This is the case for shares, financial assets and intangible assets like patents and goodwill. These assets are said to be connected to the whole group of entities rather than a specific permanent establishment. Accordingly, they

370 371 372

373

This is, for example, the case in Austria, Finland, Germany, Hungary, Italy, Portugal and Slovenia. In Germany this requires that the foreign merger is comparable to a German merger. Cf. Englisch, 2007: 340. Exceptions exist for France and Spain, among others. In France mergers involving a receiving company outside the EU are covered provided that a double tax treaty exist which contains a mutual administrative assistance clause and the transaction is approved by the Ministry of Finance. In Spain such transactions are covered as long as an individual or a company, which is subject to personal or corporate income tax, is involved. In Germany tax deferral is granted upon request of the taxpayer. Otherwise the transaction becomes taxable.

70

4 Taxation of European Companies during the time of restructuring in the current environment

are attributed to the parent company.374 In France such an effective connection is not necessary as relief is granted as long as a further taxation remains possible. Consequently, for example, shares of subsidiaries are covered by the deferral provisions.375 With regard to depreciable assets, certain peculiarities exist in the member states. In Ireland and the United Kingdom relief is explicitly also granted with regard to the capital allowance. Accordingly, there are no clawbacks of tax depreciation upon the merger. This is not the case in Latvia though with regard to production technology equipment, as depreciation has to be recaptured in case of a reorganization. In France the tax deferral is granted to depreciable assets at the time of transfer, however, in the following five or fifteen years - depending on the asset - the deferred amount is added back to taxable income and taxed at the standard corporate tax rate at the receiving entity. In return, depreciation is not based on the book value but on the fair market value. There is the option that, instead of the receiving company, the transferring company is immediately taxed on the accrued capital gains of depreciable assets at the reduced rate on long-term capital gains. This may, in certain cases, be favorable. If the conditions mentioned above are not met, all the member states will tax the capital gains which have accrued in the assets.376 Only Austria grants a tax deferral even if a (partial) liquidation takes place. This is subject to the conditions that the receiving country is located in an EU state or an EEA state (provided that the applicable tax treaty includes a mutual assistance agreement). Moreover, the taxpayer needs to apply for the preferential treatment. Under this approach, the tax is assessed at the moment of the reorganization but not levied until a subsequent disposal takes place or a further reorganization which grants the taxing right to a country outside the European Union. The taxation upon a subsequent disposal or further reorganization will only take place if it occurs within ten years after the merger. The taxable amount is limited to the realized gain. Accordingly, decreases in value between the reorganization and the sale will be taken into account to determine the tax base, unless the decrease is considered in the receiving country. This implies that Austria may not tax at the time of the disposal as far as the loss is not taken into consideration 374

375

This implicitly means that permanent establishments may not carry out financing activities, holding activities or licensing activities for the whole unit. Cf. Kessler/Jehl, 2007: 1980. Critical towards this: Kessler/Huck, 2006: 433-441. This implies that permanent establishments may just carry out holding activities. Cf. Weier/Seroin, 2005: 726.

4 Taxation of European Companies during the time of restructuring in the current environment

71

in another state. This may be the case if hidden reserves have been allocated to Austria at the time of the merger but no gains are generated on the actual sale. Additionally, no interest on a subsequent payment is levied. A taxation will, however, occur with regard to intangible long-term assets. If Austria loses its taxing right for intangible assets and these are capitalized in the entering country upon transfer, any expenses related to this intangible asset, which were deducted for tax purposes in Austria, are subject to tax.377 Some countries explicitly leave it to the taxpayer to use the fair market value instead of the book value which will result in a taxation of accrued capital gains (e.g. Denmark, Hungary, Italy, Sweden, Spain). In Germany it is even possible to use a value between the fair market value and the book value at the taxpayer’s disposition. The same result may be affected by not following the scope of the provision for tax deferral. In Sweden the receiving company may use the fair market value for depreciable assets. If done so, the receiving company is taxed on the difference between the fair market value and the book value of the transferring company either immediately or within three years (1/3 p.a.). This may be favorable since only then the receiving company may continue to use the declining balance method for depreciation. As a result, no hidden reserves escape taxation, while at the same time the receiving company retains its right to use the declining balance method on depreciation of the appreciated value. Of the countries with an option for taxation, Italy combines the immediate taxation with a reduced tax rate. Accordingly, a step-up is achieved implying higher depreciation expenses in the future in return for an immediate substitute tax (progressive rate of 12, 14 and 16%). The choice is up to the receiving company which also has to pay the tax. This may be of interest in case of a merger deficit. A merger deficit occurs if the receiving company held shares in the absorbed company prior to the merger and the acquisition costs of the shares in the absorbed company are higher than the tax value of the assets of the absorbed company at the time of the merger.378 It may also be advisable if the substitute tax is lower than the reduction of corporate taxes and local taxes (IRAP) in the future due to higher deprecation. In order to avoid abuse the assets transferred need to be held for four years.

376

377 378

Cf. also Ernst&Young, 2009: 219-230, point 4.5. Regarding the valuation of these assets in the country of the receiving entity see also the discussion in Section 4.2.4.2 on the valuation of assets in the entering country upon a transfer of the registered office. If the actually deducted expenses have not been documented, 65% of the fair market value is subject to tax, up to the capitalized book value at most. Cf. Thömmes/Fuks (eds.), EC: Austria para. 18a. Cf. in more detail the discussion on Art. 7 MD in Section 4.2.3.1.2.1.2.3 below.

72

4 Taxation of European Companies during the time of restructuring in the current environment

Belgium, Cyprus and Estonia constitute opposite exceptions to the rules above. Belgium, on the one hand, does not offer beneficial tax rules to cross-border merger. Accordingly, a transferring Belgium company is subject to liquidation implying that accrued capital gains are included in taxable income. Cyprus and Estonia, on the other hand, do not claim a taxing right upon a cross-border merger. In Cyprus accrued capital gains are not taxable independent of whether they are effectively connected to a permanent establishment or not. In Estonia a special tax system applies. In this system, a tax is not levied when realized at the level of the corporation but only when distributed to the shareholder. Consequently, corporate reorganizations will not result in taxation per definition.379 Summarizing, in the majority of the member states the process of merging to an SE does not result in a taxation of accrued capital gains immanent in the assets transferred at the transferring entity/entities as long as the assets and liabilities remain effectively connected with a permanent establishment in the country of the transferring company: Thus, a tax deferral is generally granted as long as the taxing right is upheld. Differences have appeared though, regarding the interpretation of the effective connection, which may lead to uncertainty or even taxable events. Furthermore, taxes are levied if the country of the transferring entity loses its taxing right with regard to specific assets due to the merger. This is most likely the case if assets do not remain effectively connected to a domestic permanent establishment. 4.2.3.1.2.1.1.2 Permanent establishments in country other than that of transferring company Upon a merger, tax consequences may also result if the transferring entity has a permanent establishment in a third country380 as the foreign permanent establishment will also be carried over to the receiving company due to the merger. For such cases, Art. 10 MD states that the country of the transferring entity shall renounce any taxing right with regard to a permanent establishment which is situated in a different member state (Art. 10 (1) MD). This may also be the member state of the receiving company.381 The issue is that the member state of the transferring entity may lose its taxing right with regard to the foreign permanent establishment. Whether such a right is lost depends on the general taxing prin-

379 380

381

For details on the Estonian tax system see Lehis/Klauson/Pahapill/Uustalu, 2008: 389-399. In Figure 1 (merger by acquisition) such a permanent establishment would be covered if it exists in the member state of the SE (here: Y) or in any other member state of the EU/EEA. The same applies to Figure 2 (merger by formation of a new company). This has been clarified as part of the amendments to the Merger Directive in 2005.

4 Taxation of European Companies during the time of restructuring in the current environment

73

ciples with regard to domestic and foreign income. In general, the member states follow the principle of worldwide taxation which includes domestic and foreign profits of their taxing subjects.382 As profits of permanent establishments are subject to tax in the source country and due to the principle of worldwide taxation also in the country of the parent company, double taxation may occur. In order to prevent such a double taxation, such profits may either be exempted at the parent company (exemption method) or a credit may be granted at the parent company for taxes paid in the source country (credit method).383 These two methods are also the basis for Art. 10 MD.384 If the transferring and the receiving company are located in different member states, the country of the transferring entity may no longer tax profits of the foreign permanent establishment because the permanent establishment will become part of the SE in the other member state.385 In order to avoid tax consequences as a result of the merger - thus, in order to ensure tax neutrality Art. 10 (1) MD obliges the country of the transferring entity to waive any existing taxing rights with regard to the permanent establishment. However, as part of the restructuring the member state still has the opportunity to tax, depending on the applicable method to avoid double taxation. If the exemption method applies in the country of the transferring company, by transfer of the permanent establishment to the SE, a taxing right is not lost because the country did not have a taxing right before the merger.386 But if in prior years the member state of the transferring company allowed losses of the permanent establishment to be offset against the taxable profits of the transferring company, which have not been recovered yet, the member state may reinstate such losses in the taxable profits of the transferring company at the time of the merger (Art. 10 (1) MD). According to literature, the amount of the recovery is restricted to the amount of hidden reserves which exist at the time of the merger.387 In case the credit method applies in the country of the transferring company, this country actually loses its taxing right upon the merger because the permanent establishment

382 383 384 385

386 387

Only territorial income is taxed in Denmark and France. Cf. IBFD, Taxation, Denmark: para. 1.3.1.; IBFD, Taxation, France: para. 1.1.1. In general see also Jacobs (ed.), 2007: 3-18, 63-82. Cf. Schindler, 2005: 554-555. Consequently, the applicable double tax treaty changes. This may result in further changes, which are relevant for the ongoing taxation (e.g. withholding tax rates may change; the question of whether a permanent establishment still exists or not may arise). Cf. Diemer, 2004: 44. Cf. Staringer, 2001: 90. Cf. Schindler, 2004: para. 71.

74

4 Taxation of European Companies during the time of restructuring in the current environment

will be attributed to the SE instead of the transferring company afterwards. Here, Art. 10 (2) MD provides that the member state may tax any profits or capital gains of the permanent establishment as a result of the merger. At the same time, it has to grant a credit for (fictitious) taxes which would have been levied by the member state of the permanent establishment, if the tax deferral provided in the Merger Directive would not have applied to the permanent establishment. Furthermore, the member state of the transferring entity may also release and thus tax wholly or partly exempt reserves or provisions, which have been established by the transferring company for the foreign permanent establishment (Art. 5 MD).388 In this context, it is unclear whether a taxation is also allowed if the SE is located in the country of the transferring entity.389 According to the wording, a taxation would be allowed. However, this does not seem to be justified as the country of the transferring company does not lose its taxing right in such a case.390 Regarding the countries where the permanent establishment and the SE are located, Art. 10 MD provides that the transfer shall be treated as if the member state, where the permanent establishment is situated, equals the member state of the transferring company. This ensures that Art. 4-10 MD also apply in this case, thereby guaranteeing for example the non-taxation of hidden reserves (Art. 10 (1) MD).391

388 389 390 391

Cf. Thömmes/Fuks (eds.), EC, Commentary on the Merger Directive: para. 177. For a discussion of Art. 5 MD see also Section 4.2.3.1.2.1.2.1 below. Cf. Bartone/Klapdor, 2007: 120. Cf. Thömmes/Fuks (eds.), EC, Commentary on the Merger Directive: para. 178. For details see Section 4.2.3.1.2.1.1.1 and 4.2.3.1.2.1.2.

4 Taxation of European Companies during the time of restructuring in the current environment

75

Table 3: Merger - permanent establishment abroad392 Exemption method in national law or treaty

Credit method in national law or treaty

No tax con-

Austria, Bulgaria, Cyprus (no recap-

No tax con-

sequences

ture of losses in merger transaction),

sequences

Lithuania

Denmark, Estonia, France, Germany, Hungary, Luxembourg, Poland Recapture of

Netherlands, Spain

losses

Taxable, but

Finland, Greece, Ireland (if Merger

fictitious

Directive applies in country of per-

credit

manent establishment and amount is certified by fiscal authority of country of permanent establishment), Italy, Malta, Portugal (amount needs to be certified by fiscal authority of country of permanent establishment), Slovenia, Sweden, United Kingdom

Taxable

Belgium

Taxable

Czech Republic, Latvia, Romania, Slovak Republic

When assessing the member states (see Table 3), the countries are almost evenly divided with regard to the method they mainly use according to national or treaty law in order to avoid the double taxation of income from permanent establishments. Specifically, thirteen countries use the exemption method and fourteen countries use the credit method. When looking at the countries which use the exemption method or generally just tax the territorial income of the worldwide income, in the majority of cases (ten member states) no tax consequences result, if a foreign permanent establishment is transferred as part of a merger transaction. Only in two member states (Netherlands and Spain) losses previously deducted are recaptured. The amount of recapture is limited to the amount of the (deemed) gain arising upon the merger. In Cyprus, which also has a loss recapture rule, a merger transaction is not a triggering event for recapture. Tax consequences result in Belgium 392

See the respective country chapters in Thömmes/Fuks (eds.), EC, Part A: Merger Directive, especially commentary to Art. 5, 10 MD; Ernst&Young, 2009: 219-230, points 5.1-5.4, 10.1-10.4. For the EU-15 (i.e. member states up to 01/05/2004) see also IBFD, 2003: 11-14, 20-22, 29-30, 34. Furthermore, see for Germany Englisch, 2007: 341; Schön/Schindler, 2008: paras. 234-238; for Italy Conci, 2004: 17. For the predominant double taxation avoidance method see Table 14 in the appendix. For the general

76

4 Taxation of European Companies during the time of restructuring in the current environment

since the assets and liabilities transferred are not effectively connected to a Belgian permanent establishment. When examining the countries which use the credit method, hidden reserves established in the assets and liabilities of the permanent establishment will generally become taxable upon the merger transaction. This is also true for wholly or partly tax-exempt provisions and reserves, which are attributable to a foreign permanent establishment, if the member state of the transferring entity provides for the establishment of such items.393 However, in the majority of cases (nine member states) a fictitious credit is granted for taxes which would have been taxable in the country of the permanent establishment if no tax deferral would have been provided. The credit is generally limited to the taxes which would have been paid in the country of the parent company had the income/capital gains been earned at home and not abroad. As the tax is not actually paid the amount may be uncertain. Therefore, two member states (Italy, Portugal) require that the amount to be credited is certified by the fiscal authorities of the country of the permanent establishment. In four countries a credit is not granted since Art. 10 MD has not been transposed in national law. Finally, in one country (Lithuania), no tax consequences result even though the country of the transferring company loses its taxing right with regard to future taxable income of the foreign permanent establishment. Furthermore, relief is generally not available if the permanent establishment is located in a country outside the EU/EEA. Consequently, such a transfer also results in a taxation of accrued hidden reserves. With regard to the member states of the permanent establishment, tax deferral is generally granted, provided that the merging companies are located in the EU, the receiving company takes over the values used before and all assets of the permanent establishment remain effectively connected in the member state. Denmark grants this deferral not only for assets connected to the permanent establishment but also for real property located in Denmark. Also Germany grants relief as long as the taxing right is not restricted.394 Con-

393

394

treatment of foreign losses see Endres et al. (eds.), 2007: 83-84, 731-739; Ernst&Young, 2009: 3431123, points 10.1-10.4; IBFD, Taxation: subchapter “international aspects”. This is not the case in Estonia, Ireland, Malta and the United Kingdom. Furthermore, in Greece provisions and reserves attributable to foreign permanent establishments may not be utilized by the parent company according to domestic law. Cf. also the discussion of Art. 5 MD in Section 4.2.3.1.2.1.2.1 below (especially Table 4). For Germany see § 11 German Reorganization Tax Act; Schön/Schindler, 2008: paras. 283-285; for other countries see the respective country chapters in Thömmes/Fuks (eds.), EC, Part A: Merger Direc-

4 Taxation of European Companies during the time of restructuring in the current environment

77

sequently, relief is provided according to the general deferral rules upon cross-border mergers as has been displayed in Table 2. To summarize, taxes will generally not occur in the country of the permanent establishment as the taxing right of this country is not affected. Furthermore, a taxation will principally not take place in the country of the transferring entity provided that the exemption method applies. However, provided that member states use the credit method to avoid a double taxation, an immediate taxation will generally result. In return, a fictitious credit will be granted but only if Art. 10 MD has been transposed into national law. 4.2.3.1.2.1.2 Receiving company (SE) In order to receive a tax deferral at the transferring entity/entities as just described, the SE395 needs to take over the book values of the assets and liabilities and calculate the depreciation, among others, in the same way as the transferring entity (Art. 4 (1), (3) MD). Furthermore, Art. 5-7 MD are relevant at the level of the SE. 4.2.3.1.2.1.2.1 Tax-exempt provisions and reserves Art. 5 MD states that partly or wholly tax-exempt provisions and reserves of the transferring company, that are not derived from permanent establishments abroad,396 may be carried over (with the same tax exemption) to the permanent establishment of the receiving company (SE). In this case, the receiving company assumes the rights and obligations of the transferring company. Provisions and reserves shall be broadly defined thereby ensuring that items that have been treated favorably from a tax perspective can be carried over.397

395

396 397

tive, especially commentary to Art. 10 MD; and Ernst&Young, 2009: 219-230, points 10.1-10.4. For the EU-15 (i.e. member states up to 01/05/2004) see also IBFD, 2003: 23-24, 35. In case of a merger by acquisition, the SE is resident in one of the involved member states after the merger (see Figure 1, here: member state Y). In case of a merger by formation of a new company, the SE is resident in a new member state (see Figure 2, here: member state Z) afterwards. On this subject see the discussion of Art. 10 MD in Section 4.2.3.1.2.1.1.2 above. Cf. Bartone/Klapdor, 2007: 119.

78

4 Taxation of European Companies during the time of restructuring in the current environment

Table 4: Merger - carryover of provisions and reserves398 Carryover allowed

Carryover denied

Not applicable

Austria, Bulgaria, Cyprus, Denmark, France, Germany, Greece

Belgium

Estonia, Ireland,

(if reflected in separate accounts at receiving company or its

Malta, United

permanent establishment), Hungary, Lithuania, Luxembourg,

Kingdom

Netherlands, Poland, Spain

Despite Belgium which has not implemented the Merger Directive, the carryover of wholly or partly tax-exempt provisions and reserves from the receiving company to the remaining permanent establishment is principally granted according to general tax deferral rules, as long as the option to establish such positions existed under the domestic law of the member states (see Table 4). Such an option does not exist in Estonia, Ireland, Malta and the United Kingdom. In the other countries, under general tax deferral rules, not only assets and liabilities are transferred to the permanent establishment of the receiving company, but also these wholly or partly tax-exempt provisions and reserves established at the transferring entity prior to the merger. In certain cases it may be necessary that these items are separately reflected in the accounts of the permanent establishment after the reorganization (Greece, Italy). This seems to be a requirement in order to keep track of the provisions and reserves. Furthermore, in the Czech Republic and Slovenia prior approval from the treasury is required. To sum up, since the receiving company steps into the shoes of the transferring entity (universal succession), in almost all countries partly or wholly tax-exempt provisions and reserves may also be carried over to the permanent establishment of the receiving entity without any tax consequences. In such cases, a subsequent taxing right is guaranteed.

398

See the respective country chapters in Thömmes/Fuks (eds.), EC, Part A: Merger Directive, especially commentary to Art. 5 MD; IBFD, Taxation: subchapter “merger and division”; Ernst&Young, 2009: 219-230, points 5.1-5.4. For the EU-15 (i.e. member states up to 01/05/2004) see also IBFD, 2003: 1114, 29-30. Furthermore, see for Austria Inwinkl/Schneider, 2007: 705-716; Hohenwarter, 2007: 501509, 568-575; for Belgium ECJ of 08/02/2008 (C-392/07, Commission/Belgium), OJ C 158: 8; Osterweil/Quaghebeur, 2008: 351; for Bulgaria Lozev, 2007: 197; for Denmark Bjrnholm/Thierson, 2008: 37-38; Rnfeldt/Werlauff, 2008: 218; for Germany §§ 11, 12 German Reorganization Tax Act; Bartone/Klapdor, 2007: 119; Englisch, 2007: 341; PwC (ed.), 2007: 193-194; Schön/Schindler, 2008: para. 246; for Hungary Erdos/Burjau/Locsei, 2004: 103; Deloitte (ed.), 2006: 297; for Italy Lobis, 2008: 8; Mayr, 2008d: 614; for the Slovak Republic PwC (ed.), 2006: 441-442; for Slovenia Zorman/Janezic, 2008: 599-600.

4 Taxation of European Companies during the time of restructuring in the current environment

79

4.2.3.1.2.1.2.2 Losses With regard to losses of the transferring company which have not been taken into account for tax purposes prior to the merger, Art. 6 MD states that these may be carried over to the remaining permanent establishment in the country of the transferring company and set off with future profits of the permanent establishment. According to the Merger Directive, such an obligation does not exist for the country of the SE. Thus, there is no necessity that these losses may be offset with taxable income of the SE.399 Furthermore, a member state only has to allow a loss carryover provided that such a rule is in place for domestic mergers.

399

Cf. Conci, 2004: 18; Klingberg/Lishaut, 2005: 714; Englisch, 2007: 342.

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4 Taxation of European Companies during the time of restructuring in the current environment

Table 5: Merger - loss carryover400 Loss carryover

Loss carryover subject to conditions

allowed

Loss carryover denied between unrelated parties

Bulgaria, Cyprus,

Subject to busi-

Malta, Slovak Re-

ness continuity

public, Spain

Austria, Lithuania

Belgiuma, Denmark, Finland,

Subject to prior

France, Hungary (starting in 4th year after

approval

loss has incurred), Netherlands (additionally limited with regard to amount), Portugal (may additionally be limited with regard to amount and time frame), Slovenia

Restrictions with

Czech Republic, Italy (additionally eco-

regard to amount

nomic/vitality test needs to be met)

Restrictions with

Sweden

Germany, Greece, Ireland, Latvia, Luxembourg, Poland, Romania, United Kingdom

regard to amount and time frame a) In Belgium a loss carryover is only possible in a domestic merger (subject to restrictions with regard to amount applicable to the transferring as well as receiving company). N.B.: Due to the different tax system in Estonia (taxation not at corporate level but only upon distribution to shareholder) the loss carryover is irrelevant.

The possibility to carry over losses from the transferring company to the permanent establishment of the receiving company varies significantly between the member states (see Table 5). Only five member states (Bulgaria, Cyprus, Malta, Slovak Republic, Spain401) allow the losses of the transferring company to be used at the permanent establishment of

400

401

See the respective country chapters in Thömmes/Fuks (eds.), EC, Part A: Merger Directive, especially commentary to Art. 6 MD; IBFD, Taxation: subchapter “merger and division”; Ernst&Young, 2009: 219-230, points 6.1-6.4; as well as the overviews in Linn/Reichel/Wittkowski, 2006: 635-636; Saïac, 2007: 556-561. For the EU-15 (i.e. member states up to 01/05/2004) see also IBFD, 2003: 11-14, 2930. Furthermore, see for Austria Deloitte (ed.), 2006: 232; Sedlaczek, 2007: 708-709; for Belgium Deloitte (ed.), 2006: 99-100, 104; Osterweil/Quaghebeur, 2008: 351; for Bulgaria Lozev, 2007: 197; for the Czech Republic PwC (ed.), 2006: 164; for Denmark Deloitte (ed.), 2006: 136; for France Tillmanns, 2005: 1422; Deloitte (ed.), 2006: 160; for Germany § 12 (3) German Reorganization Tax Act; PwC (ed.), 2007: 194; Schön/Schindler, 2008: para. 247, 280; for Greece Sedlaczek, 2007a: 154; for Hungary Deloitte (ed.), 2006: 298-299; for Luxembourg Sedlaczek, 2007b: 170; for the Netherlands Deloitte (ed.), 2006: 209-210; for the Slovak Republic PwC (ed.), 2006: 442; for Slovenia Zorman/Janezic, 2008: 600; for the United Kingdom Deloitte (ed.), 2006: 172-173, 177, 182. Restrictions apply in Spain if the parties involved had been related prior to the merger. Cf. Ernst&Young, 2009: 1048-1049.

4 Taxation of European Companies during the time of restructuring in the current environment

81

the receiving company, which has been created due to the merger in the country of the transferring entity, without meeting further conditions. In Bulgaria the loss carryover is possible in case of a cross-border merger where a permanent establishment is created in Bulgaria as a result of the merger. In a purely domestic reorganization such a carryover is denied. In ten member states a loss carryover may be allowed, subject to various conditions. In Austria and Lithuania, the business which caused the loss still needs to exist at the time when the loss shall be used to offset future taxable profits.402 In France, Hungary, the Netherlands, Portugal and Slovenia the carryover will only be provided if approved by the tax authorities a priori. In the Netherlands the pre-merger losses are specifically labeled restricting their amount for set off. In Portugal, as part of the approval, the amount as well as the time frame may be restricted in order to avoid abuse. In Sweden the amount to be carried over is limited as well as the time in which the loss may be set off against future profits of the receiving company. In the Czech Republic losses may only be offset in proportion to the tax base attributable to the activity that caused the loss. In Italy losses are limited in their amount as net equity requirements need to be met. Furthermore, losses may only be transferred if in the year before the merger the transferring company had gross proceeds and labor costs exceeding 40% of the average amount in the two years prior to the merger (economic/vitality test). Such conditions shall generally prevent the abusive transfer of losses but may be burdensome to the taxpayer.403 Finally, eleven countries (Belgium, Denmark, Finland, Germany, Greece, Ireland, Latvia, Luxembourg, Poland, Romania, United Kingdom) fully deny a carryover. Thus, losses of the absorbed company will get lost due to the merger. In Germany, for example, this is justified with the prevention of abuse. The fear was that in case of an inbound merger, whereby a foreign company absorbs a German company, losses may be transported to Germany.404 In Denmark, not only the losses of the absorbed company, but also the losses of the absorbing company will be lost. Exceptions may apply in cases where the merging companies have holdings in each other or have been part of the same group of companies prior to the merger. Such rules exist in Denmark, Finland, Ireland, Latvia, Sweden and the 402 403

In Latvia, losses which occurred due to a sale of securities may generally not be carried over. Furthermore, in most member states additional rules exist limiting the use of losses at the receiving company. Triggering events may be a change of business activity or ownership. See for more details on these general anti-avoidance rules directed at loss trafficking Canellos, 2005: 33; Endres et al. (eds.), 2007: 82-83, 740-755; Ernst&Young, 2009: 343-1123.

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4 Taxation of European Companies during the time of restructuring in the current environment

United Kingdom. In Belgium the denial only applies to cross-border mergers. In case of domestic mergers a carryover is allowed subject to restrictions with regard to the amount. This is not in line with the rule of Art. 6 MD. In certain countries losses may be used, not only at the permanent establishment in the country of the transferring entity, but also at the receiving company which is domiciled abroad (e.g. Czech Republic, Slovak Republic). This is based on the condition that such losses can no longer be used at the permanent establishment abroad. In other countries this is explicitly denied (e.g. Austria, Cyprus, Germany). Summarizing, on the one hand, in more than half of the member states losses incurred by the transferring entity can still be used at the permanent establishment of the receiving company after the merger. This may be based on various restrictions though. In a few member states it is even possible to use the losses at the receiving entity under certain circumstances. On the other hand, in 40% of the member states, losses cannot be utilized at all after the merger and thus are lost. Even though the denial is in line with the Merger Directive as long as domestic and cross-border cases are treated equally, this may create an obstacle to restructurings. 4.2.3.1.2.1.2.3 Prior holdings In the special case that the receiving company has a holding in the capital of the transferring company (at least 10% as from 2009), Art. 7 (1) MD stipulates that any gains accruing to the receiving company on the cancellation of its holding shall not be liable to any taxation. This treatment is relevant in case of mergers by acquisitions (in this context they are called upstream mergers). Only in such a merger a prior holding of the receiving entity may have existed in the acquired entity.405 A gain is calculated as the difference between the book value of the holding of the receiving company in the acquired company and the book value of the assets transferred (on a pro rata basis according to the holding).406 Especially if shares have been held for a longer time, the investment valued at cost will likely be low compared to the value of the open reserves which have been accrued since the investment has been acquired. Therefore, the investment will likely be below the book value of the assets transferred thus realizing a

404 405 406

Cf. Englisch, 2007: 342; Schön/Schindler, 2008: para. 247-248. In case a new company is established (merger by formation of a new company) no prior holding is possible. Cf. Englisch, 2007: 342.

4 Taxation of European Companies during the time of restructuring in the current environment

83

gain at the merger. This gain shall then not be taxed in order to avoid a double taxation if open reserves are distributed. This is in accordance with the aim of the Parent-Subsidiary Directive. Therefore, the holding requirements are aligned to each other.407 The treatment of a loss realized at the merger is not regulated.408 A loss may occur if the investment is above the book value of the assets transferred. This may especially apply to shares which have only been held for a short time, because then the purchase price is likely to include hidden reserves which are not realized as part of the merger.409 If the holding is below 10% the member states may derogate from non-taxation (Art. 7 (2) MD). In this case a merger gain may be treated as a capital gain which has resulted from a sale of shares.410 If the merging companies have not been connected in any way before the merger, neither a gain or loss as a result of the merger (due to a prior participation) nor a gain or loss after the merger (because of accounts receivables and/or liabilities due to prior contracts) occurs.411 Table 6: Merger - merging gains or losses (receiving company)412 Tax consequences

No tax consequences

Belgium (fully taxable)

Independent

Germany (5% taxable

of

prior

holding percentage:

Austria, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Hungary, Ireland (upon approval of treasury), Italy, Latvia, Portugal,

and tax effective reversal

Slovak Republic, Slovenia, Sweden, United King-

of prior tax deductible

dom

decreases of book value) Subject to holding percentage:

5%: Netherlands, Spain 10%: Greece, Lithuania, Luxembourg, Malta, Poland, Romania

In compliance with Art. 7 MD, there is no taxation of merger gains in almost all of the member states (see Table 6). In most cases this treatment is granted even independent of the holding percentage of 10% as provided for in the Merger Directive. In return, merger 407 408 409 410 411 412

Cf. Schindler, 2005: 555; Bartone/Klapdor, 2007: 120-121. Cf. Thömmes, 2005: 555 Cf. Bartone/Klapdor, 2007: 121. Cf. Englisch, 2007: 342. Cf. Wöhe, 1997: 229; Herzig/Griemla, 2002: 68-69; Schön/Schindler, 2008: paras. 249-253, 279. See the respective country chapters in Thömmes/Fuks (eds.), EC, Part A: Merger Directive, especially commentary to Art. 7 MD; Ernst&Young, 2009: 219-230, points 7.1-7.2. Furthermore, see for Germany Schön/Schindler, 2008: paras. 249-253, 279; Tipke/Lang (eds.), 2008: § 18 paras. 467-470.

84

4 Taxation of European Companies during the time of restructuring in the current environment

losses are not deductible. Tax consequences will, however, arise in Greece, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Romania and Spain if the holding is below the required percentage (of 5 or 10%). There are two exceptions to this general compliance with Art. 7 MD. Due to the non-implementation of the Merger Directive into Belgian law, such gains are fully taxable. In Germany 5% of the gains are taxable.413 These are taxable as they are deemed to be non-deductible expenses as provided for in the ParentSubsidiary Directive with respect to dividends. In addition, deductions from taxable income, which had been allowed in prior years in order to account for decreases in the value of the shares, are tax effectively reversed. If the assets transferred in exchange are carried over at book value this may even lead to a double taxation: first, due to a taxation of the shares upon the merger, and secondly at a later disposal of the assets.414 The rules in both countries are not in line with Art. 7 MD and cause tax payments. To sum up, in the majority of cases no tax consequences will result due to the cancellation of the holding. This includes gains as well as losses. The nonrecognition of losses is in line with Art. 7 MD as gains and losses are treated equally415 and no other treatment is provided in the Merger Directive. It may, however, discourage reorganizations in which the tax value of the shares in the transferring entity, which have been held by the receiving company prior to the merger, is lower than the tax basis of the assets transferred, as losses must then be paid with after tax money.416 Taxable gains may result if the holding requirement is not met or where member states are not in compliance with the Merger Directive. 4.2.3.1.2.1.2.4 Additional transaction taxes Corporations may be subject to additional taxes other than corporate income tax when a merger takes place (i.e. nonprofit taxes). Among these are capital duty tax, stamp duty tax and real property transfer tax. Capital duty taxes and stamp duty taxes may be levied on the raising of capital. In the EU the Capital Duty Directive, which has recently been recasted,417 regulates the full exemption of restructuring operations from capital duty. Types 413 414 415 416 417

Not only Germany corporation tax but also German trade tax is levied. Cf. Rödder/Herlinghaus/Lishaut, 2008: § 19 paras. 20-21. Cf. Schön/Schindler, 2008: paras. 249-253, 279. Cf. Bartone/Klapdor, 2007: 121. Cf. Thömmes/Fuks (eds.), EC, Sweden: para. 154. Even though the Commission had proposed to abolish capital duty taxes, the member states only agreed on a recast of the Capital Duty Directve. Cf. European Commission, IP/06/1673; Council Directive, 2008/7/EC: 11.

4 Taxation of European Companies during the time of restructuring in the current environment

85

of taxes include the capital duty (i.e. the duty chargeable on contributions of capital to companies and firms), the stamp duty on securities and the duty on restructuring operations (Art. 1 CDD). Transactions explicitly include mergers (Art. 4 and Art. 5 (1) (e) CDD). Real property transfer tax applies if immovable property is transferred in a merger.418 This tax is not regulated within the EU. Table 7: Merger - Additional transaction taxes419 Capital duty tax / Stamp duty

Real property transfer tax

No additional taxes

Austria (unless transferring com-

Austria, Belgium, Estonia,

Bulgaria, Czech Republic, Den-

pany has existed for at least 2

France, Germany, Italy, Latvia,

mark, Finland, Ireland, Lithuania,

years), Cyprus, Greece, Hungary,

Malta, Poland, Portugal, Spain,

Luxembourg, Netherlands, Ro-

Poland, United Kingdom

United Kingdom

mania, Sweden, Slovak Republic,

tax

Slovenia

When assessing the member states only six member states still levy a capital duty tax (Austria, Cyprus, Greece, Poland, Portugal, Spain).420 Just recently (as of 01/01/2009) Luxembourg abolished its capital duty tax.421 Of these, only half of these countries (Cyprus, Greece, Poland) still charge this tax in case of a merger (see Table 7). The other half of these member states exempt merger transactions. In Austria the exemption only applies provided that the transferring company has existed for at least two years. Stamp duty in the form of a fixed charge will be due in Hungary upon the registration of public corporation or SE. Furthermore, stamp duty is due in the United Kingdom on the transfer of shares and securities issued or raised by an SE. Moreover, twelve member states levy a tax on the transfer of immovable property (Austria, Belgium, Estonia, France, Germany, Italy, Latvia, Malta, Poland, Portugal, Spain, United Kingdom). In Greece mergers are exempt from real property transfer tax subject to the condition that the immovable property transferred has been held by the transferring 418 419

420

Cf. Herzig, 1997: 4-5; Jacobs (ed.), 2007: 1150-1151. See the respective country chapters in IBFD, Taxation: subchapter “other indirect taxes”; Deloitte (ed.), 2006; PwC (ed.), 2006. Furthermore, see for Bulgaria PwC (ed.), 2006a: 10; for Finland Eynatten, 2007: 565; for Germany § 1 German Real Property Transfer Tax Act; BFH of 09/04/2008 (II R 32/06), BFH/NV 2008: 1526; for Luxembourg Steichen/Heinzmann, 2009: 196-198; for Slovenia Zorman/Janezic, 2008: 600; For the capital duty tax see also Endres/Günkel, 2006: 9; European Commission, IP/08/212. Cf. European Commission, IP/08/212.

86

4 Taxation of European Companies during the time of restructuring in the current environment

company for five years prior to the reorganization and will be held by the receiving company for five years after the reorganization.422 Contrarily, in twelve member states (Bulgaria, Czech Republic, Denmark, Finland, Ireland, Lithuania, Luxembourg, Netherlands, Romania, Sweden, Slovak Republic, Slovenia) no additional taxes are levied either because additional taxes are generally not levied or because merger transactions are exempt from additional tax. To conclude, in 40% of the member states no additional taxes will be charged upon a merger transaction. In the majority of the countries, however, an additional tax like a capital duty tax, stamp duty tax and/or real property transfer tax will be imposed, increasing the costs of the merger. The levying of capital duty and stamp duty taxes this is not in compliance with the Capital Duty Directive. 4.2.3.1.2.2 Shareholder level Upon a merger the shareholders of the transferring entity/entities423 are also affected. The tax treatment of these shareholders is dealt with in Art. 8 MD. The article covers resident as well as non-resident shareholders.424 According to Art. 8 (1) MD “the allotment of securities representing the capital of the receiving […] company to a shareholder of the transferring […] company in exchange for securities representing the capital of the latter company shall not […] give rise to any taxation of the income, profits or capital gains of that shareholder.” Therefore, the merger shall not result in a taxable capital gain at the shareholder level of the transferring companies because of the exchange of current shares against shares of the SE. Consequently, the taxing right of the residence state as well as the source state is eliminated by the Merger Directive at the time of the merger. In this regard, no additional requirements (e.g. miminum holding period, minimum holding percentage, specific type of shareholder (corporate or individual)) need to be met by the shareholder.425 As a result, the value for tax purposes of the old shares is carried over to the new shares. The value for tax purposes is defined as the basis for computing any gain

421 422

423 424 425

Cf. IBFD, Taxation, Luxembourg: Latest Information. The receiving company may, however, lease the property if its principal objective remains or sell it if the proceeds are used within 2 years to acquire other fixed assets or pay bank loans, taxes or social security contributions. Cf. Ernst&Young, 2009: 674. These are the shareholders of company A in Figure 1 (merger by acquisition) and the shareholders of company A and B in Figure 2 (merger by formation of a new company). This also includes shareholder who are treated as fiscally transparent entities by one member state or by the country of residence of the partners of these transparent entities (Art. 8 (3) MD). Cf. Staringer, 2001: 97.

4 Taxation of European Companies during the time of restructuring in the current environment

87

or loss for tax purposes (Art. 8 (7) MD). However, if the shareholder uses a different value or exercises an option for a different value guaranteed under domestic law, a gain may be taxable by the member state (Art. 8 (4), (8) MD). In addition, if a cash payment is made upon the merger the member state may take this into account when taxing its shareholders (Art. 8 (9) MD).426 The cash payment in a merger has been limited to 10% of the nominal value or accounting par value in Art. 2 (a) MD. This shall provide flexibility in arrangements. In particular, minority shareholders in the transferring company who oppose the merger can be paid out.427 Furthermore, the issuance of fractions of shares to the transferring shareholders can be avoided. However, if the cash payment exceeds 10%, the whole transaction no longer qualifies for tax deferral as stated in the Merger Directive.428 Distributions from the corporation to its new shareholders which occur after the reorganization will generally not be taken into account when determining the cash payment unless there is evidence for abuse in a specific case.429 Notwithstanding the above mentioned rules guaranteeing a tax deferral, upon a subsequent transfer of the securities a gain may be taxed in the country of the transferring entity according to the Merger Directive (Art. 8 (6) MD).430 This right is granted independent of whether the country of the transferring country still has the taxing right after the merger or not.431 This is not an issue if the OECD model or an equivalent double tax agreement exists between the country of residence of the shareholder and the country of domicile of the SE. Art. 13 (5) OECD model grants the residence state of the shareholder the only right to tax. Consequently, if such a rule applies the country of residence has the right to tax capital gains resulting from the sale of shares before and after a merger.432 In case a different double tax treaty exists, this may be regulated differently and the country of residence of the shareholder may lose its taxing right. Then, the subsequent taxing right according to

426 427 428

429 430 431 432

Cf. the sample calculation in Thömmes/Fuks (eds.), EC, Commentary on the Merger Directive: para. 239. Cf. Vanistendael, 1998: 910; Thömmes/Fuks (eds.), EC, Commentary on the Merger Directive: para. 51. Instead, the whole transaction will become taxable. This has also been confirmed by the European Court of Justice. Cf. ECJ of 05/07/2007 (C-321/05, Kofoed), ECR 2007: I-5795. Cf. also Dine/Browne (eds.), EU company law: 18[11]. Cf. ECJ of 05/07/2007 (C-321/05, Kofoed), ECR 2007: I-5795. Such a taxation upon a subsequent sale shall be done in the same way, as would have been done at the time of or before the reorganization. Accordingly, no stricter rules may apply. Cf. Staringer, 2001: 97. Cf. Schön/Schindler, 2008: para. 258. Cf. Klingberg/Lishaut, 2005: 718.

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4 Taxation of European Companies during the time of restructuring in the current environment

Art. 8 (6) MD will be in conflict with existing double tax treaties, and thus public international law.433 Table 8: Merger - shareholders of transferring entity/entities434 Taxation or tax deferral for share-

Cash payment allowed up to

holders

Immediate taxation of cash payment

Austria

Tax deferral, unless taxing right is restricted (even then upon request tax

10%

No

Squeeze out not possible

deferral, provided that EU country or EEA country with mutual assistance agreement) Belgium

Taxation

n/a

n/a

Bulgaria

Tax deferral

10%

Yes

For non-resident shareholders who

Squeeze out not possible

are legal entities: tax deferral only upon annual declarations after the merger Cyprus

Tax deferral and generally no taxation upon sale of shares

Czech Repub-

Tax deferral

lic

10%

No

Squeeze out possible 10%

Yes

Squeeze out possible

Denmark

Tax deferral

100% if at least one share to

Yes

one shareholder Squeeze out possible

433 434

Cf. Schön/Schindler, 2008: para. 258. See the respective country chapters in Thömmes/Fuks (eds.), EC, Part A: Merger Directive, especially commentary to Art. 8 MD; IBFD, Taxation: subchapter “merger and division”; Ernst&Young, 2009: 219-230, points 2.1-2.2, 8.1-8.3. For the EU-15 (i.e. member states up to 01/05/2004) see also IBFD, 2003: 11-14, 29-30. Furthermore, see for Austria Staringer, 2005: 213-224; Inwinkl/Schneider, 2007: 705-716; Hohenwarter, 2007: 501-509, 568-575; for Belgium Deloitte (ed.), 2006: 89; ECJ of 08/02/2008 (C-392/07, Commission/Belgium), OJ C 158: 8; Osterweil/Quaghebeur, 2008: 351; for Bulgaria Lozev, 2007: 197; for Denmark Deloitte (ed.), 2006: 127-128; Bjrnholm/Thierson, 2008: 3839; Rnfeldt/Werlauff, 2008: 218; for France Entraygues, 2001: 80; Deloitte (ed.), 2006: 146-147; for Germany § 13 German Reorganization Tax Act; Englisch, 2007: 340, 342; PwC (ed.), 2007: 197-199; Schön/Schindler, 2008: paras. 225-228, 254-259; for Hungary Erdos/Burjau/Locsei, 2004: 103; Deloitte (ed.), 2006: 297; for Italy Lobis, 2008: 8; Mayr, 2008d: 614; for the Slovak Republic PwC (ed.), 2006: 441-442; for Slovenia Zorman/Janezic, 2008: 601.

4 Taxation of European Companies during the time of restructuring in the current environment

Estonia

Tax deferral

100% if share exchange rate is

89

No

fixed too low or if member state of acquiring company allows for such a cash payment Squeeze out possible Finland

France

Tax deferral

10%

Only if new shares are issued

Squeeze out possible

Tax deferral

10%

Only upon annual declarations after

Squeeze out not possible

Yes

Yes

the merger in order to follow up on shares Option for taxation for corporate shareholders Germany

Greece

Tax deferral at request of taxpayer

0%435

Option for taxation

Squeeze out not possible

Tax deferral

10%

n/a

Yes

Squeeze out not possible Hungary

Tax deferral

10%

Recapture upon later sale or decrease

Squeeze out possible

Yes

in value Ireland

Tax deferral

10% for SE; unclear for other

Yes

corporations, may be allowed upon approval of treasury Unclear whether squeeze out is allowed for corporations other than SE Italy

Tax deferral

10%

Yes

Squeeze out not possible

435

This is based on the fact that no cash is allowed in the tax code (§ 11 German Reorganization Tax Act). Cf. Englisch, 2007: 340; Schön/Schindler, 2008: paras. 225-228, 254-259. Other scholars argue that cash is allowed since it is provided for in the company code and this code is also relevant for the tax code (§ 1 German Reorganization Tax Act with § 54 (4) German Reorganization Act). Cf. Ernst&Young, 2009: 625, 648-649. According to them, a squeeze out is possible as well, irrespective of the 10% cap.

90

4 Taxation of European Companies during the time of restructuring in the current environment

Latvia

Tax deferral

10%

Yes

Squeeze out possible Lithuania

Tax deferral

10%

Yes

Squeeze out not possible Luxembourg

Tax deferral

10%

No

Unclear whether squeeze out possible or not Malta

Tax deferral

100%

Yes

Unclear whether squeeze out possible or not Netherlands

Tax deferral

10%

Yes

Squeeze out not possible Poland

Tax deferral

10% of nominal value in case

Yes

of merger by formation of new company or 10% of book value of allocated shares of receiving company in case of merger by acquisition Squeeze out not possible Portugal

Tax deferral

10%

Yes

Squeeze out not possible Romania

Tax deferral

10%

No

Unclear whether squeeze out possible or not Slovak

Re-

Tax deferral

public Slovenia

10%

No

Squeeze out possible Tax deferral

10%

Yes

Squeeze out possible: payment of up to 5% Spain

Tax deferral

10% Squeeze out possible

No

4 Taxation of European Companies during the time of restructuring in the current environment

Sweden

Tax deferral

100%

91

Yes

Squeeze out possible United King-

Tax deferral

dom

0%

n/a

Unclear whether squeeze out possible or not

When analyzing the member states (see Table 8), only in Belgium will the merger result in a liquidation of the transferring company and thus in a taxation at the level of the shareholders. The reason is that Belgium has not implemented the merger directive with regard to mergers. All other member states provide for a tax deferral not only at the level of the entities but also at the level of the shareholders if the book value is carried over. The tax deferral is generally applicable to resident as well as non-resident shareholders. Nonresidents are only affected, though, if they are subject to a limited taxation in the country of the transferring entity. This is not the case provided that no such tax rule exists in domestic law (e.g. Latvia, Malta and Slovenia, unless permanent establishment exists). Moreover, if the applicable double tax treaty includes a rule similar to Art. 13 (5) OECD model the source state does not receive the taxing right either (e.g. generally the case in Cypriot and German double tax treaties).436 In order to receive the deferral, certain obligations need to be fulfilled in some member states. In Austria the tax deferral is dependent on the fact that the taxing right is not restricted. But as on the level of the entities, the shareholders involved may request a tax deferral provided that the taxing right is lost to an EU country or EEA country with a mutual assistance agreement. In Bulgaria non-resident corporate shareholders only receive the tax deferral upon annual declarations after the merger. Thus, upon failure of submission, the tax will be due. In France such a declaration is requested by all taxpayers in order to follow up on shares. Moreover, in two member states shareholders have the option to be taxed independent of the treatment at the entities involved (Germany,437 France with respect to corporate shareholders).

436 437

For Cyprus see Thömmes/Fuks (eds.), EC, Cyprus: para. 60; for Germany see Vogel/Lehner (eds.), 2008: Art. 13 para. 225. In Germany tax deferral is granted upon request of the taxpayer. Otherwise the transaction becomes taxable.

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4 Taxation of European Companies during the time of restructuring in the current environment

With regard to cash payments, in all but two member states an additional cash payment is allowed. This cash payment may not exceed 10% of the nominal value of the shares as stated in Art. 2 (a) MD in the majority of the countries. Of these a smaller number (Austria, Cyprus, Luxembourg, Romania, Slovak Republic, Spain) does not tax the cash payment immediately. Instead, the acquisition costs are reduced deferring taxation to the point of time of the subsequent disposal. As no tax charge will be due, this will provide neutrality even in the case of a cash payment. The other countries (Bulgaria, Czech Republic, Finland, France, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Netherlands, Poland, Portugal, Slovenia) immediately include the cash payment in the taxable income. In Ireland the cash payment is explicitly allowed for the formation of a merger SE. For other corporations it is not clear whether a cash payment is allowed or not, but approval may be granted by the treasury. Otherwise, the whole transaction becomes taxable. Moreover, in few member states a payment of more than 10% of the nominal value of the shares is allowed (Denmark, Estonia, Malta, Sweden). Of these all but Estonia immediately tax these payments. In contrast, Germany and the United Kingdom do not allow such a payment at all but require that only shares are issued. This is not in line with the wording of Art. 2 (a) MD. In Germany only shares may be issued whereas in the United Kingdom the term “securities” includes not only shares but also debt instruments in order to prevent that relief is unduly restricted. Finally, in two member states specific aspects are different from the wording of the the Merger Directive. In Finland only newly issued shares may be received. However, Art. 2 (a) MD does not distinguish between newly issued and already existing shares. In Poland in case of a merger by acquisition, the 10% cash payment is incorrectly calculated on the basis of the book value of the allocated shares of the receiving company instead of the nominal value. When examining minority shareholders from a tax perspective,438 a squeeze out is possible in more than half of the member states (Cyprus, Czech Republic, Denmark, Estonia, Finland, Hungary, Ireland, Latvia, Slovak Republic, Slovenia, Spain, Sweden) within the 10% cap. In Ireland this applies for certain only to the SE. With regard to other countries the treatment is unclear. Consequently, the buyout will not cause the whole merger transaction to become taxable. However, the minority shareholder will have to pay a tax on its

438

For the protection of minority shareholders in company law see Section 4.2.3.1.1.

4 Taxation of European Companies during the time of restructuring in the current environment

93

capital gains. In nine other countries (Austria, Bulgaria, France, Germany, Greece, Italy, Lithuania, Netherlands, Poland, Portugal) a squeeze out is not possible while retaining the preferential treatment. Finally, in few countries (Luxembourg, Malta, Romania, United Kingdom), it is unclear according to available literature whether the squeeze out results in a taxable merger or not. Concerning the subsequent disposal of the shares, in Germany the taxing right is not restricted to the capital gains which have accrued up to the merger, but also includes later increases even if the taxing right in Germany is restricted or abandoned in the course of the merger.439 Summarizing, at the shareholder level tax deferral is generally granted to resident and non-resident shareholders of the transferring entity upon the exchange of shares in compliance with Art. 8 MD (with minor exceptions where aspects are not correctly transformed into national law). This is principally based on the condition that the taxing right is not restricted. Also if the taxing right is restricted, deferral needs to be provided. This may then result in multiple taxation of the same accrued hidden reserves upon a subsequent disposal, though the merger itself will not result in taxes. However, annual filing obligations may need to be observed. With regard to the cash payment almost all member states provide for the 10% cap. This provides flexibility either in order to achieve parity of the exchange or in order to buy out minority shareholders. Whereas the cash payment may be subject to tax then, the whole transaction will still remain non-taxable. 4.2.3.1.3 Interim conclusions In conclusion, merging two companies to form an SE is not an issue regarding company law as the European Company Statute regulates such cross-border mergers. When looking at the tax consequences, tax deferral is in general provided in almost all of the EU member states for the entities and shareholders involved under the conditions established in the merger directive (Art. 4-10 MD). This is achieved by conditioning the restructuring on the remainder of a permanent establishment in the involved member states, on the effective connection of assets and liabilities with the permanent establishment and on the continued use of the book values. If these conditions are met, a taxation of the capital gains relating to the assets transferred as part of the restructuring is deferred. However, when their actual disposal (e.g. sale of assets to third parties) takes place, resulting capital gains are taxable

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4 Taxation of European Companies during the time of restructuring in the current environment

by the member state of the transferring company since they are part of the income of the permanent establishment. This also applies to the resident shareholders, which exchange their shares, since capital gains upon a subsequent disposal will generally remain taxable in the country of residence of the shareholder. Tax consequences arise, however, when the Merger Directive has not been implemented or incorrectly transformed into national law (e.g. Belgium in general, Germany with regard to cancellation of holdings (Art. 7 MD)). This will trigger tax payments and thus not provide a neutral transaction. Furthermore, even if the rules in the member states are in compliance with the wording of the Merger Directive, taxes may accrue upon the establishment of a merger SE which will prevent the tax neutral formation. First, taxes may occur on hidden reserves accrued in assets transferred, which are not effectively connected with a permanent establishment located in the country of the transferring company. Among these, there are also foreign permanent establishments transferred, when the country of the transferring company loses its taxing right due to the merger. Secondly, losses of the transferring entity may be lost if they can no longer be utilized after the merger. Third, additional taxes, the cancellation of minor holdings prior to the merger and cash payments as part of the consideration may cause tax payments. Fourth, upon a subsequent sale of shares, double taxation may occur if taxing rights are granted to more than one country. Finally, various administrative regulations (prior approval, annual filings) need to be observed in order to receive the preferential treatment. All these issues may prevent the formation of a merger SE. Section 4.3 will analyze whether this is in line with the guiding principles established in Section 4.1. 4.2.3.2 Holding SE 4.2.3.2.1 Basics with regard to company law An SE may also be established as a holding of two national public or private limitedliability companies (according to appendix 2 of the European Company Statute) provided that they are domiciled in different EU member states440 or that each of them has held a subsidiary or branch in a different EU member state for at least two years441 (Art. 2 (2) ECS). The SE will be interposed as a holding between the shareholders and their entities 439 440 441

Cf. Gosch, 2008: 417-418. See also Figure 3. See also Figure 4.

4 Taxation of European Companies during the time of restructuring in the current environment

95

which promote the formation. The registered office of the SE may be chosen independently of the registered offices of the founding entities. In order to form the SE, the shareholders of the entities promoting the formation will exchange their shares for shares in the SE. The shareholders need to contribute their shares within three months (Art. 33 (1) MD). The entities themselves are not involved in this transaction and continue to exist (Art. 32 (1) ECS). They become subsidiaries of the SE after the transaction.442 The exchange of shares constitutes a contribution of shares in the founding entities against shares in the newly established SE. This implies that a singular succession takes place.443 It is also possible to form a holding if the shares in the founding entities are held through a permanent establishment by the shareholders.444 A holding may, however, only be established if more than 50% of the voting rights in each of the founding entities are exchanged for shares in the SE (Art. 32 (2) ECS). This shall ensure that the SE has the majority of the voting rights in the founding entities after the transaction.445 This also implies that minority shareholders may remain in the founding entities.446 Member states may adopt provisions which are designed to ensure an appropriate protection for shareholders who oppose the establishment of the holding SE (Art. 34 ECS).447 4.2.3.2.2 Tax consequences If the formation of a holding SE takes place across a border, the tax consequences are generally covered by the Merger Directive, since it constitutes an exchange of shares as defined in Art. 2 (d) MD. An “exchange of shares” is defined as “an operation whereby a company acquires a holding in the capital of another company such that it obtains a majority of the voting rights in that company, or, holding such a majority, acquires a further holding, in exchange for the issue to the shareholders of the latter company, in exchange for their securities, of securities representing the capital of the former company, and, if applicable, a cash payment not exceeding 10% of the nominal value, in the absence of a nominal value, of the accounting par value of the securities issued in exchange” (Art. 2 MD). Consequently, according to the Merger Directive a cash payment not exceeding 442 443 444 445 446 447

Cf. Brandes, 2005: 178. Cf. Schaumburg, 2005a: 322; Bartone/Klapdor, 2007: 133; Englisch, 2007: 343; Thömmes/Fuks (eds.), EC, Commentary on the Merger Directive: para. 242. Cf. Bartone/Klapdor, 2007: 131. This does not have consequences from a legal point of view but may have consequences from a tax point of view. For details see Section 4.2.3.2.2. Cf. Schindler, 2002: 34. Cf. Brandes, 2005: 178. This has been done in German company law, for example. Cf. Bayer, 2008: Art. 34 SE-VO paras. 7-43.

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4 Taxation of European Companies during the time of restructuring in the current environment

10% of the nominal value may be granted in addition to the shares exchanged. Furthermore, not only the obtaining of a majority of voting rights is covered but also the increase of such a majority.448 The merger directive covers the founding entities which are located in different member states (see Figure 3). It also covers the case where the founding entities are located in the same member state, provided that the SE is established in another member state (see Figure 4).449 If the SE were to be established in the country of the founding entities, the transaction would be a purely national one and should not cause tax issues.450 Figure 3: Establishment of a holding SE through companies in different member states Æ Before formation of the holding Member State X

>50% Company A

Member State Y

BORDER

Shareholders of A

Shareholders of B >50% Company B

Æ After formation of the holding Member State X

Member State Y

Shareholders of SE

Shareholders of SE

BORDER

448

449 450

SE

>50%

>50%

Company A

Company B

An increase of majority takes place if the SE in Figure 3 already held, for example, 90% of the shares of company A and additionally obtains the remaining 10%. As has been stated above (see Section 4.2.3.2.1), the shareholders need to contribute their shares - altogether constituting a majority of the voting rights - within three months (Art. 33 (1) ECS. However, also shareholders who contribute their shares after this period will be covered by the tax deferral as they then increase an already existing majority. Cf. Schön/Schindler, 2008: para. 316. Cf. also Herzig/Griemla, 2002: 60; Schindler, 2004: para. 56; Schön/Schindler, 2008: 296. Cf. the respective country chapters in Thömmes/Fuks (eds.), EC, Part A: Merger Directive; and also the discussion in Chapter 3.

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Figure 4: Establishment of a holding SE through companies in the same member state Æ Before formation of the holding Member State X

Member State Y

Member State Z

Shareholders of B

>50%

>50%

Company A

Company B

BORDER

BORDER

Shareholders of A

PE of Comp B

Subsidiary of Comp A

Æ After formation of the holding Member State X

Member State Y Shareholders of SE

BORDER

BORDER

SE

Member State Z

Shareholders of SE

>50%

>50%

Company A

Company B

Subsidiary of Comp A

PE of Comp B

When analyzing the tax consequences in detail, the shareholder level and the level of the SE need to be examined. Contrarily, the founding entities451 themselves - as has been stated above - are not involved in the exchange of shares.452 Therefore, no tax consequences will result at this level. This also includes any subsidiaries and permanent establishments held by these entities.453 Tax consequences could occur at the level of the shareholders454 since they exchange their shares in the founding entities against shares in the SE. The tax treatment of the shareholders is dealt with in Art. 8 MD. Therefore, comparable rules apply as to the shareholders of the transferring entities in case of a merger.455 Consequently, the exchange 451

452 453

454

455

These are company A and B in Figure 3 (Establishment of a holding SE through companies in different member states) and Figure 4 (Establishment of a holding SE through companies in the same member state). See Section 4.2.3.2.1. Due to company law the contributing entities - if they are located in the same member state - need to have a foreign subsidiary or permanent establishment in order to be allowed to form a holding SE. Cf. Section 4.2.3.2.1. These are the subsidiary of company A in member state X and the permanent establishment of company B in member state Z in Figure 4 (Establishment of a holding SE through companies in the same member state). These are the shareholders of company A and B in Figure 3 (Establishment of a holding SE through companies in different member states) and Figure 4 (Establishment of a holding SE through companies in the same member state). For details see Section 4.2.3.1.2.2.

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4 Taxation of European Companies during the time of restructuring in the current environment

of shares should generally result in a non-taxation of capital gains at the shareholder level. This is based on the condition that the value for tax purposes of the old shares is carried over to the new shares (i.e. shares in the SE). However, tax consequences may result if a different value is carried over (Art. 8 (4), (8) MD) or additional cash payments are made (Art. 8 (9) MD). Furthermore, upon a subsequent transfer of the securities, a gain may be taxed in the country of the transferring entity independent of whether the country of the transferring entity still has the taxing right after the merger or not (Art. 8 (6) MD). Overall, an exchange of shares will be covered by the Merger Directive independent of the residence of the contributing shareholders or the domicile of the SE.456 If a shareholder holds his shares in the entities promoting the formation through a permanent establishment, the question arises whether any capital gain resulting upon the formation of the holding SE is treated the same way as directly held shares. Therefore, the issue is whether the permanent establishment is a shareholder in the sense of Art. 8 MD which would guarantee a non-taxation of hidden reserves upon the exchange. According to the OECD model, the permanent establishment itself does not constitute a protected shareholder because it is not considered a legal person. Instead, the person holding the permanent establishment is covered (parent company) (Art. 1 and Art. 3 OECD model). Furthermore, a permanent establishment is not a fiscally transparent entity and is therefore also not covered by Art. 8 (3) MD. Thus, the non-taxation of hidden reserves, which occur at the formation of the SE at the level of the permanent establishment, is currently not covered by the Merger Directive.457 Instead, national rules apply. Consequently, a taxation should not occur as long as the taxing right of the country of the permanent establishment is not affected by the exchange of shares. This will generally be the case since the shares contributed have been attributable to the permanent establishment and so should the shares in the SE received in return.458 The SE459 is involved insofar as it receives shares in the founding entities from the shareholders of these companies. This in itself will not cause tax consequences.460 However, the question arises on how to value these shares at the level of the SE. As has been 456 457 458 459

Cf. ECJ of 21/11/2002 (C-436/00, X and Y), ECR 2002: I-10829; Conci, 2004: 19; Schön/Schindler, 2008: para. 332. Cf. Bartone/Klapdor, 2007: 124. Cf. Dötsch/Pung, 2006: 2763; Schön/Schindler, 2008: para. 330. In Figure 3 (Establishment of a holding SE through companies in different member states) member state Y was chosen as the state of domicile of the SE, in Figure 4 (Establishment of a holding SE through companies in the same member state) member state X was chosen.

4 Taxation of European Companies during the time of restructuring in the current environment

99

confirmed by the European Court of Justice, the value at the SE may be chosen independently from the value at which the shareholders have valued these shares before the transaction or will value the SE shares after the transaction.461 Consequently, a link between the value used at the SE and at the shareholder level is not necessary to guarantee a future taxation at the shareholder level. Furthermore, such a link may not be stipulated by law in order for the shareholder to be granted the tax deferral upon the exchange of shares. Otherwise, if the book value used at the shareholder level would need to be rolled over to the SE on a mandatory basis, a doubling of hidden reserves would result. The hidden reserves would then be preserved, on the one hand in the shares contributed to the SE (shares in the founding entities) and on the other hand in the shares received by the shareholders (shares in the SE). This would cause an economic double taxation.462 A change to the Merger Directive as proposed in 2003 in order to clarify this issue has not been adopted by the member states.463 In addition, the exchange of shares may cause additional (nonprofit) taxes (capital duty tax, stamp duty tax and in rare instances real property transfer tax). Capital duty taxes may be levied on the raising of capital due to the formation of a holding SE. Stamp duty taxes may be levied on the transfer of securities. However, in the EU the Capital Duty Directive states that restructuring operations, such as the contribution of shares which represent the majority of the voting rights of another capital company against shares (even if only partially), shall be fully exempted from capital duty tax (Art. 4 and Art. 5 (1) (e) CDD).464 Contrarily, duties on the transfer of securities may be charged by the member states (Art. 6 (1) (b) CDD).465 A real property transfer tax may only exceptionally apply if shares in real estate companies are transferred and the specific tax covers such indirect transfers of real estate. EU-wide requirements do not exist on this subject.

460 461 462

463 464 465

Cf. Diemer, 2004: 43-44. Cf. ECJ of 11/12/2008 (C-285/07, A.T.), ECR 2008, I-9329. Critical towards such a linkage e.g. Knobbe-Keuk, 1993: 825-826 with further references; Klingberg/Lishaut, 2005: 721-722; Rödder/Schumacher, 2006: 1540; Schön/Schindler, 2008: para. 334; Thömmes, 2009: 1217-1218. Cf. European Commission, COM(2003)703; Benecke/Schnitger, 2005a: 170-178. Cf. European Commission, COM(2003)703; Benecke/Schnitger, 2005a: 170-178. Cf. Council Directive, 2008/7/EC: 11. Cf. also ECJ of 25/10/2007 (C-240/06, Fortum Project Finance), ECR 2007: I-9413.

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Table 9: Holding SE - shareholders of founding entities and level of SE466

Austria

Taxation or tax deferral for

Additional conditions to be

shareholders

observed

Tax deferral, unless taxing

Valuation at SE

Book value

right is restricted (even then,

Subsequent sale of shares in

upon request, tax deferral

foreign company: full exemp-

provided that EU country or

tion

EEA country with mutual asSubsequent sale of shares in

sistance agreement)

domestic company: full taxaObtain or increase majority;

tion

25% of share capital (not voting rights) also sufficient Belgium

Taxation (including cash),

Fair market value (plus cash)

unless shares exchanged qualify for dividendsreceived exemption (applicable to corporations, no minimum holding percentage or period required) Bulgaria

Tax deferral Obtain or increase majority

For non-resident shareholders

Fair market value

who are legal entities: tax deferral only upon annual declarations after the formation

466

See the respective country chapters in Thömmes/Fuks (eds.), EC, Part A: Merger Directive, especially commentary to Art. 8 MD; IBFD, Taxation: subchapter “Restructuring and Liquidation”; Ernst&Young, 2009: 219-230, points 2.1-2.2, 2.4-2.5, 8.1-8.3. For the EU-15 (i.e. member states up to 01/05/2004) see also IBFD, 2003: 15, 31, 58. Furthermore, see for Austria Schindler, 2004: paras. 110134; Deloitte (ed.), 2006: 218-219; Furherr/Huber, 2009: 106-116; for Belgium Deloitte (ed.), 2006: 89; Osterweil/Quaghebeur, 2008: 351; Schoonvliet, 2008: 431-432; for the Czech Republic Furherr/Huber, 2009: 157-160; for Denmark Deloitte (ed.), 2006: 127-128; Bjrnholm/Thierson, 2008: 3839; for France Entraygues, 2001: 80; Deloitte (ed.), 2006: 146-147; Jüttner, 2006: 17-18, 21; for Germany §§ 21-23 German Reorganization Tax Act; Ritzer/Rogall/Stangl, 2006: 1210-1220; Rödder,/Schumacher, 2006: 1535; Englisch, 2007: 344; Fuhrmann, 2007: 111-113; PwC (ed.), 2007: 242269; Schön/Schindler, 2008: paras. 287-351; Tipke/Lang (eds.), 2008: § 18 paras. 476-478; WeberGrellet, 2009: 304-306; for Hungary Deloitte (ed.), 2006: 292-293; for the Netherlands Deloitte (ed.), 2006: 198; for Poland Deloitte (ed.), 2006: 249; for Slovenia Zorman/Janezic, 2008: 601; for Sweden Berglund, 2007: 359-360; for the United Kingdom Deloitte (ed.), 2006: 171-172, 176. For the treatment of corporate shareholders see also the respective country chapters in IBFD, Taxation: subchapter “capital gains”; Endres et al. (eds.), 2007: 22-23.

4 Taxation of European Companies during the time of restructuring in the current environment

Cyprus

Tax deferral

Book value

Obtain or increase majority

Subsequent sale of shares: full exemption

Czech Republic

Tax deferral Obtain majority

Holding period: 1 year for

Fair market value

shares which the SE received, otherwise step-up at SE is denied retroactively

Den-

Tax deferral upon approval of

mark

treasury Obtain or increase majority

For corporate shareholders:

Fair market value

- exchange becomes taxable if shares received by corporate shareholders are not held for at least 3 years -withdrawal of dividend exemption if corporate shareholder receives dividend distribution from SE that exceeds ordinary results of year prior to holding and 3 years after holding

Estonia

Tax deferral

Book value

Obtain or increase majority

Subsequent taxation only upon distribution to shareholders

Finland

Tax deferral

Fair market value

Obtain or increase majority France

Tax deferral upon approval of

Holding period: 3 years for

treasury

shares which the SE and the

Obtain or increase majority, 30% of voting rights also sufficient if acquired share is

shareholders received, otherwise tax deferral is denied retroactively

most important voting rights

Tax deferral only upon an-

share

nual declarations in order to follow up on shares

Book value Subsequent sale of shares: reduced tax rate

101

102

4 Taxation of European Companies during the time of restructuring in the current environment

Ger-

Tax deferral at request of

Holding period: 7 years for

Fair market value (in interna-

many

taxpayer

shares which the SE received,

tional cases), book value (in

otherwise retroactive taxation

national cases)

Obtain or increase majority at time of reorganization (later changes are ignored unless abuse)

of individual shareholders (taxable amount reduced by

Subsequent sale of shares: partial exemption

1/7 per year which has elapsed since contribution,

Taxation if the German taxing right is restricted or lost unless taxation not allowed due to Art. 8 (6) MD

taxable also if liquidation or dissolution of SE within 7 years, but not if another tax neutral reorganization takes place) In return: -taxable gains increase acquisition costs of SE shares at contributing shareholder (step-up) -taxable gains increase acquisition costs of shares in contributing entity at a domestic SE (step-up) Within holding period: contributing individual shareholder is obliged to provide evidence annually that SE still owns the shares received

Greece

Tax deferral

Book value

Obtain or increase majority

Subsequent sale of shares:

(may also be non-voting

full taxation

shares such as founders’ shares) Hungary

Tax deferral at request of

Further formal requirements:

taxpayer

separate records of new

Obtain or increase majority

shares by shareholder; recapture of deferred gains upon later sale or decrease in value

Book value Subsequent sale of shares: partial exemption

4 Taxation of European Companies during the time of restructuring in the current environment

Ireland

Tax deferral

Fair market value

Obtain or increase majority Italy

Tax deferral

Fair market value

Obtain or increase majority Latvia

Tax deferral

Book value

Obtain or increase majority

Subsequent sale of shares: full exemption

Lithuania

Tax deferral Obtain or increase majority of two thirds

Holding period: 3 years for

Fair market value

shares which the SE and the shareholders received (unless subsequent transfer is part of a new reorganization), otherwise tax deferral is denied retroactively

Luxembourg

Tax deferral Obtain or increase majority

If the shares contributed con-

Fair market value

stituted a nonqualifying participation whereas shares received constitute a qualifying participation, capital gains derived within 5 years of exchange may not benefit from exemption due to affiliation privilege

Malta

Tax deferral Obtain majority

Book value Subsequent sale of shares: partial exemption

Netherlands Poland

Tax deferral

Fair market value

Obtain or increase majority Tax deferral Obtain or increase majority

Book value Subsequent sale of shares: full taxation

Portugal

Tax deferral Obtain or increase majority

Fair market value

103

104

Romania

4 Taxation of European Companies during the time of restructuring in the current environment

Tax deferral Obtain majority

Unclear Subsequent sale of shares: full taxation

Slovak Republic Slovenia

Tax deferral

Fair market value

Obtain or increase majority Tax deferral

Fair market value

Obtain or increase majority Spain

Tax deferral

Book value

Obtain or increase majority

Mechanism to avoid the economic double taxation (domestic case: capital gains tax credit for shareholders for profits distributed out of income attributed to the shares transferred to SE, any resulting tax depreciation is not tax deductible at the shareholder level; international case: full exemption upon sale of shares at SE)

Sweden

Tax deferral

Fair market value

Obtain or increase majority United Kingdom

Tax deferral

Fair market value

Obtain or increase majority; 25% of share capital (not voting rights) also sufficient

When analyzing the treatment in the member states (see Table 9), only in Belgium does an exchange of shares result in a taxable event for the shareholders. The reason is that Belgium has not implemented rules covering an exchange of shares.467 In all other member states a tax deferral is granted, provided that the tax value of the shares contributed is

4 Taxation of European Companies during the time of restructuring in the current environment

105

rolled over to the shares received468 and the majority of voting rights is obtained.469 Regarding the latter requirement, in Lithuania, instead of 50% as stated in the Merger Directive, two thirds are considered a majority. Consequently, a holding SE with a majority of 50% cannot be established without paying taxes.470 Regarding the time frame, in which several contributions are treated as one in determining whether a majority is obtained, the rules are more liberal in some member states than required in European Company Statute (e.g. Austria, Bulgaria, Cyprus, Denmark, Germany, Portugal and Slovenia). In addition to shares, cash payments may generally be made. The tax consequences are comparable to the ones described in the context of mergers.471 The tax deferral will generally be granted to resident as well as non-resident shareholders, even though non-resident shareholders will in most cases not be taxable in the country of the company. This is either because there is no national rule covering this or because a rule comparable to Art. 13 (5) OECD model applies, granting the whole taxing right to the country of residence of the shareholder.472 Furthermore, the tax deferral will generally apply independent of whether the shares are contributed to a domestic SE or an SE located in another member state.473 Moreover, if a shareholder holds his shares in the entities promoting the formation through a permanent establishment, tax deferral will generally be provided as is the case for directly held shares.474

467

468

469

470

471

472 473 474

Taxation will, however, not occur under the general rules if corporate shareholders are involved who qualify for a dividends-received exemption. A minimum holding percentage or period is not required in this context. In Estonia, Germany and Finland, the shares received need to be new shares (own shares are not allowed despite the rules in the Merger Directive which do not differentiate between new and own shares). In the context of the holding SE, this is not an issue, since the SE has not existed before, but is formed in this transaction. Cf. Schön/Schindler, 2008: para. 320. Critical towards the allowance of own shares: Klingberg/Lishaut, 2005: 722 A tax deferral is also granted to an increase of a majority in all the member states, except for the Czech Republic, Malta and Romania, which have not implemented these amendments included in the Merger Directive in 2005. In Austria and the United Kingdom tax deferral is already granted if 25% of the share capital are obtained. In France tax deferral is also granted if 30% of the voting rights are obtained and the share is the most important voting rights share. These percentages do not suffice to establish a holding though as required in the European Company Statute. See Section 4.2.3.1.2.2 and Table 8. A different treatment applies in Germany, Malta, the Slovak Republic and the United Kingdom. In Germany a consideration other than new shares (i.e. other assets, cash) is allowed. The fair market value of the other consideration generally reduces the acquisition cost of the shares in the SE. However, an immediate taxation takes place if the fair market value of the consideration exceeds the book value of the shares contributed. Also in Malta the transaction will become taxable, and thus be treated as a sale, if the cash paid exceeds the value of the shares contributed. In the Slovak Republic a cash payment of up to 10% is immediately taxable. In the United Kingdom a cash payment is allowed - a limit is not explicitly provided - but immediately taxable. Cf. also Section 4.2.3.1.2.2. Among others, this is the case in Finland, Germany, Poland and Portugal. This is, for example, the case in Cyprus, the Czech Republic, Germany, Latvia and Portugal.

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4 Taxation of European Companies during the time of restructuring in the current environment

With regard to the rollover of book values, in some member states the book value of the shares contributed by the shareholders is not only rolled over to the shares received at the shareholder level, but also to the shares contributed to the SE. This is the case in eleven member states (Austria, Cyprus, Estonia, France, Germany (in domestic cases), Greece, Hungary, Latvia, Malta, Poland, Spain). In these cases, accrued hidden reserves are preserved twice: first, at the level of the shareholders, and secondly, at the level of the SE. However, the resulting double taxation of the latent gains is avoided or reduced in the majority of the cases. In Austria (in cross-border cases), Cyprus, Estonia, Germany (in domestic cases), Hungary, Latvia, Malta and Spain (in international cases) subsequent capital gains at the level of the SE are fully or at least mainly exempt from taxation.475 In Spain, in national cases, a full dividend tax credit is granted to the shareholders, who contributed their shares to the SE, for profits distributed out of income that the SE derived from the sale of the contributed shares.476 In France, a special tax rate applies which reduces the economic double taxation. Contrarily, in Austria (in domestic cases), Greece and Poland subsequent capital gains are fully taxable. In the majority of other countries, an economic double taxation is prevented by allowing a tax-free step-up for the shares contributed at the level of the SE (Bulgaria, Czech Republic, Denmark, Finland, Germany (in international cases), Ireland, Italy, Lithuania, Luxembourg, Netherlands, Portugal, Slovak Republic, Slovenia, Sweden, United Kingdom).477 Thus, in these cases the shares are valued at their fair market value at the SE at the time of the contribution. In Romania the treatment is unclear according to available literature. However, since capital gains at the corporate level are fully taxable, a doubling of latent gains occurs if there is no rule which provides for a tax-free step-up at the level of the SE. In case the taxing right with regard to the shares is restricted, Art. 8 (6) MD still provides for a tax deferral. In Austria this is granted upon request of the taxpayer provided that the taxing right is lost to an EU country or EEA country with a mutual assistance agreement. In Germany Art. 8 (6) MD is also observed. However, upon a subsequent disposal, the taxing right is not restricted to the capital gains which have accrued up to the

475 476 477

For further requirements to be observed see the respective country chapters in IBFD, Taxation: subchapter “capital gains”; Endres et al. (eds.), 2007: 22-23; Jacobs (ed.), 2007: 998-1001. In the end, the economic double taxation is avoided upon liquidation of the SE or at the sale of the shares by the shareholders. In Germany (in the international case) and Italy the carryover of the book value to the SE has previously been abolished. Cf. Rödder/Schumacher, 2006: 1540; Schön/Schindler, 2008: para. 334; Ernst&Young, 2009: 758.

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transaction, but also includes later increases even if the taxing right of Germany is restricted or abandoned in the course of the establishment of the holding SE.478 Contrarily, if a taxing right is formed for the first time or no longer restricted due to the share exchange, the shares are valued at the fair market value in Austria and Germany. This is the case if the taxing right with regard to the contributing shares did not exist or was restricted prior to the exchange, whereas the shares of the SE received in return are fully taxable. Prior approval or other formal requirements need to be observed in few member states. Approval is necessary in Denmark and France. In Bulgaria tax deferral is only granted to non-resident shareholders who are legal entities provided that they file annual declarations on the existence of the shares. In Hungary the tax deferral is dependent on the request of the taxpayer. Moreover, further formal requirements need to be followed in Hungary (e.g. separate records of new shares by shareholder; recapture upon later sale or decrease in value). More importantly, holding requirements need to be fulfilled in six member states (Czech Republic, Denmark, France, Germany, Lithuania, Luxembourg). The rules established are aimed at avoiding abuse. They differ in detail and consequences. In the Czech Republic the shareholders need to keep their shares for at least one year. Otherwise, the tax-free step-up in the basis of the acquired shares granted to the SE is denied retroactively. In Denmark the rules are only applicable to corporate shareholders. They provide that the exchange becomes taxable if corporate shareholders do not hold their shares for at least three years. Furthermore, dividends received will not be tax-exempt if the corporate shareholder receives dividend distributions from the SE that exceed the ordinary results of the year prior to the establishment of the holding and three years after the establishment of the holding. In France, both the shares which the shareholders received and the ones which the SE received need to be held for at least three years. Otherwise, the tax deferral for the shareholders and the SE will be denied retroactively. Moreover, in order for the tax authorities to follow up on the shares, annual declarations must be filed by the shareholders. In Lithuania - as in France - both the shares which the shareholders received and the ones which the SE received need to be held for at least three years, unless a subsequent transfer is part of a new tax neutral reorganization. Otherwise, the tax deferral for the shareholders will be denied retroactively. In Luxembourg the established rule applies

478

Cf. Gosch, 2008: 417-418.

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4 Taxation of European Companies during the time of restructuring in the current environment

where shares contributed constitute a nonqualifying participation, whereas shares received constitute a qualifying participation. In order to prevent that such shareholders immediately benefit from the affiliation privilege, which provides an exemption of capital gains, a sale may not occur within five years of the exchange. In Germany the holding period is seven years for shares which the SE received. Within the holding period the contributing individual shareholders are obliged to provide annual evidence that the SE still owns the shares contributed. If the SE sells the contributed shares (or is liquidated or perishes unless due to another tax neutral reorganization) within this time, the individual shareholders are retroactively taxed on the gains deferred upon the exchange. Corporate shareholders are not within the scope of this rule since capital gains are generally exempt except for 5%. The taxable amount is reduced by 1/7 for each year which has elapsed since the contribution of the shares. In return - in order to avoid an economic double taxation of accrued hidden reserves - the contributing shareholder may increase its acquisition costs of the SE shares by that amount and the domestic SE may increase its acquisition costs of the shares in the entities promoting the formation by that amount. When assessing additional taxes, of the six member states which still levy a capital duty tax,479 three states (Cyprus, Greece, Poland) still charge this tax in case of the establishment of the holding. Portugal and Spain exempt such transactions. In Austria the exemption only applies provided that the transferring company has existed for at least two years. Additionally, a transfer tax will be levied in Finland, Greece480 and Malta on the transfer of shares to a company. Real property transfer tax on the indirect transfer of immovable property applies in Germany481 and Malta. In conclusion, upon the establishment of a holding SE, tax consequences will generally not occur as a tax deferral is granted in almost all member states via a rollover of the tax value from the shares contributed to the shares received at the level of the contributing shareholder. This generally guarantees that accrued hidden reserves will be taxable in the future by the state of residence of the shareholder. However, member states have established different additional rules designed to avoid abuse. On the one hand, these rules contain holding periods for shares exchanged; on the other hand, they require that the SE uses

479 480 481

Cf. Section 4.2.3.1.2.1.2.4 and Table 7. Upon a later disposal of the shares transferred, a credit is granted for the transfer tax paid. In Germany, the charge of the real estate property tax has been found to be compliant with the Capital Duty Directive by the German Court of Justice. Cf. BFH of 19/12/2007 (II R 65/06), BStBl 2008 II: 489. Of contrary opinion: Spengel/Dörrfuß, 2003: 1059-1061.

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the book value which the shareholder used prior to the transaction. Holding requirements may cause the exchange to become taxable retroactively, whereas the carryover of the book value to the SE may cause an economic double taxation due to the doubling of hidden reserves. Finally, capital and stamp duty taxes may create a tax burden. 4.2.3.3 Subsidiary SE 4.2.3.3.1 Basics with regard to company law Eligible entities may also establish a subsidiary SE if they are domiciled in different EU member states482 or if each of them has held a subsidiary or branch in a different EU member state for at least two years483 (Art. 2 (3) ECS). Contributing entities may be companies and firms within the meaning of Art. 48 (2) ECT and other legal bodies governed by public or private law (including co-operative companies). Therefore, besides corporations, partnerships may establish a subsidiary SE, provided that more than one country is involved. Contrarily, natural persons are not within the scope of the transferring entities. In addition, an already founded SE may set up a subsidiary SE (Art. 3 (2) ECS). In this case, a cross-border relationship is no longer necessary.484 In order to form the SE, the founding companies may contribute cash and/or property. Property contributions may consist of shares, a branch of activity or single (other) assets.485 The contribution of assets constitutes a singular succession, as each business asset and liability is transferred on its own.486 Overall, forming a subsidiary SE provides more flexibility compared to a merger or holding SE from a company law point of view.487 When looking at taxes, the kind of contribution has a significant effect on determining the tax consequences, as is discussed next. 4.2.3.3.2 Tax consequences When analyzing the tax consequences in detail, the level of the contributing entities and the level of the SE need to be examined. Contrarily, the shareholders of the contributing

482 483 484 485 486 487

See also Figure 5. See also Figure 6. This can also be regarded as a fifth option to establish an SE. See Diemer, 2004: 39. Cf. IBFD, 2003: 16-19. Cf. Englisch, 2007: 343; Schön/Schindler, 2008: para. 352. Cf. Thömmes, 2004b: 26.

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4 Taxation of European Companies during the time of restructuring in the current environment

entities488 are not involved in the contributions of assets. Therefore, no tax consequences will result at this level.489 Tax consequences could occur at the level of the contributing entities490 since they contribute their assets in exchange for shares in the SE, as well as at the level of the SE491 since it receives the assets of the contributing entities. As been pointed out above, the tax consequences depend on the assets contributed. Cash contributions as well as contributions in kind can be distinguished. Moreover, contributions in kind can be divided into shares, branches and single assets. These different kinds of contributions form the basis of the following analysis. 4.2.3.3.2.1 Contributions of cash or shares If a cash contribution is made, no tax consequences will generally result,492 as there are no hidden reserves immanent in cash which could be realized due to the contribution. Consequently, a taxation does neither occur at the level of the contributing entities nor at the receiving entity (i.e. the SE).493 However, additional taxes, precisely capital duty taxes, may be levied on the formation of the subsidiary SE in six countries.494 In conclusion, upon a cash contribution, profit taxes will not be levied but capital duty taxes may arise. If a contribution in kind is made, the question arises whether accrued hidden reserves are realized due to the contribution or not.495 If the contribution in kind is comprised of shares, a holding is established. This will be covered by the Merger Directive provided that the contributed shares grant the SE the majority of the voting rights in the acquired companies (Art. 2 (d) MD). Then, the rules outlined in the context of the holding SE apply, granting a tax deferral in general.496 Contrary to the holding SE, a subsidiary SE may not be established by natural persons. Furthermore, Art. 2 (3) ECS does not require that the shares transferred grant the majority of the voting rights. Thus, a lower shareholding

488

489 490

491

492 493 494 495 496

These are the shareholders of company A and B in Figure 5 (Establishment of a subsidiary SE through companies in different member states) and Figure 6 (Establishment of a subsidiary SE through companies in the same member state). Cf. also Bartone/Klapdor, 2007: 144; Schön/Schindler, 2008: para. 352. These are company A and B in Figure 5 (Establishment of a subsidiary SE through companies in different member states) and Figure 6 (Establishment of a subsidiary SE through companies in the same member state). In Figure 5 (Establishment of a subsidiary SE through companies in different member states) and Figure 6 (Establishment of a subsidiary SE through companies in the same member state) member state Z was chosen as the state of domicile of the SE. Cf. Diemer, 2004: 43; Bartone/Klapdor, 2007: 143. Cf. Schindler, 2004: para. 135; Schön/Schindler, 2008: para. 354. These are Austria, Cyprus, Greece, Poland, Portugal and Spain. Cf. also Section 4.2.3.1.2.1.2.4. Cf. also Schön/Schindler, 2008: para. 356. For details see Section 4.2.3.2.2.

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may be transferred as well. In this case, only few member states will still grant a tax deferral.497 In the other countries the tax treatment depends on whether this shareholding constitutes a branch of activity or just a single asset.498 In conclusion, the contribution of shares generally does not result in tax consequences if a majority of the voting rights is transferred. Contrarily, if a shareholding not providing the majority is contributed, tax consequences will likely occur as is examined next. 4.2.3.3.2.2 Contributions of branches of activity or single assets If a bundle of assets is contributed this will be covered by the Merger Directive if it fulfills the definition of a transfer of assets and entities from different member states are involved. Regarding the second condition, a cross-border relationship needs to be given. This is the case when the founding entities are located in different member states (see Figure 5). It also covers the case where the founding entities are located in the same member state, provided that the SE is established in another member state (see Figure 6).499 Otherwise, in the case where the SE is established in the country of the contributing entities, the transaction would be a purely national one and should not cause tax issues.500 According to the European Company Statute, contributing entities may not only be corporations but also partnerships. These are covered by the Merger Directive as long as they are treated as legal entities for tax purposes and hence pay corporate tax in their state of domicile.501 Contrarily, if they are treated as transparent entities in their state of domicile, the Merger Directive does not apply.502

497

498 499 500 501 502

In Austria and the United Kingdom tax deferral is already granted if 25% of the share capital are obtained. In France tax deferral is also granted if 30% of the voting rights are obtained and the share is the most important voting rights share. Cf. Section 4.2.3.2.2. Cf. also Bartone/Klapdor, 2007: 150-151. Cf. Herzig/Griemla, 2002: 60; Schön/Schindler, 2008: para. 361. Cf. the respective country chapters in Thömmes/Fuks (eds.), EC, Part A: Merger Directive; and also the discussion in Chapter 3. See the appendix of Art. 3 MD for partnerships covered. Cf. Schindler, 2004: para. 57; Schön/Schindler, 2008: paras. 353, 362.

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4 Taxation of European Companies during the time of restructuring in the current environment

Figure 5: Establishment of a subsidiary SE through companies in different member states Æ Before formation of the subsidiary Member State X

Member State Y

Company A

Shareholders of B

Company B

Member State Z

BORDER

BORDER

Shareholders of A

Æ After formation of the subsidiary

Company A

Company B

Member State Z

BORDER

Member State Y Shareholders of B

BORDER

Member State X Shareholders of A

SE

PE of SE

PE of SE

(former branch of activity of company A)

(former branch of activity of company B)

Figure 6: Establishment of a subsidiary SE through companies in the same member state Æ Before formation of the subsidiary Member State X

Member State Y

Member State Z

Shareholders of B

Company A

Company B

BORDER

BORDER

Shareholders of A

PE of Comp B

Subsidiary of Comp A

Æ After formation of the subsidiary Member State X

Member State Z

Shareholders of SE

Company A

Company B

PE of SE

PE of SE

(former branch of comp A) (former branch of comp B)

BORDER

BORDER

Subsidiary of Comp A

Member State Y Shareholders of SE

SE

PE of SE (former PE of comp B)

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Furthermore, the bundle of assets needs to fulfill the definition of a transfer of assets. According to the Merger Directive a transfer of assets is defined as “an operation whereby a company transfers without being dissolved all or one or more branches of its activity to another company in exchange for the transfer of securities representing the capital of the company receiving the transfer” (Art. 2 (c) MD). Consequently, in return for the transfer of assets only shares may be granted. An additional cash payment is not covered by the Merger Directive.503 Furthermore, the Merger Directive will only apply if (one, more than one or all) branches of activity are transferred. The branch of activity is defined as “all the assets and liabilities of a division of a company which from an organizational point of view constitute an independent business, that is to say an entity capable of functioning by its own means” (Art. 2 (i) MD). Some guidance on this term has been provided by the European Court of Justice. Accordingly, a branch must be an independent part at the receiving entity. Furthermore, whether assets constitute a branch or not needs to be assessed first from a functional point of view and only second from a financial point of view.504 However, it is not clear whether the business transferred must be an active business (e.g. production) or may also be a passive business (e.g. portfolio investment).505 If a branch is given, Art. 9 MD applies, which provides that Art. 4, 5 and 6 MD are applicable to such transfers of assets. This means that the rules discussed in the context of a merger are also relevant for contributions of assets in order to form a subsidiary SE.506 Specifically, for the entities contributing the assets Art. 4 MD states that at this level a taxation of capital gains resulting from hidden reserves within the assets transferred may not take place, if the following conditions are met. A branch as defined in Art. 2 (i) MD needs to be transferred, the transferred assets and liabilities need to remain effectively connected to a permanent establishment in the member state of the transferring company and the assets need to play a part in generating the profits or losses taken into account for tax purposes (Art. 9 and Art. 4 (1) MD).507 Moreover, the tax values of assets and liabilities of the contributing entity need to be carried over to the permanent establishment of the 503

504 505 506

Moreover, if the asset transfer is made against shares based on the form, but against cash based on the substance of the transaction, this is not covered by the Merger Directive. Such a case may occur if a significant obligation is transferred with the assets, whereas the proceeds of the loan remain with the contributing entity. Cf. ECJ of 15/01/2002 (C-43/00, Andersen og Jensen), ECR 2002: I-379. Cf. also Dine/Browne (eds.), EU company law: 18[11]. Cf. ECJ of 15/01/2002 (C-43/00, Andersen og Jensen), ECR 2002: I-379. Cf. Terra/Wattel, 2008: 526. See Section 4.2.3.1.2.1.

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4 Taxation of European Companies during the time of restructuring in the current environment

receiving entity (Art. 9 and Art. 4 (3), (4) MD). Overall, no taxation of hidden reserves should generally take place, since a branch as defined in Art. 2 (i) MD will normally suffice the definition of a permanent establishment and will consequently derive taxable profits and losses in the member state of the transferring company.508 If a foreign permanent establishment509 is transferred, Art. 10 MD - as discussed in the context of mergers510 applies, requiring a tax neutral transfer with further regulations which depend on the applicable method to avoid double taxation of income from the permanent establishment. In addition, entities contributing the assets are involved insofar as they receive shares in the SE in return for the assets contributed. This in itself will not cause tax consequences.511 However, the question arises on how to value these shares at the level of the contributing entities. As has been discussed in the context of the establishment of a holding SE,512 here again the issue of the doubling of hidden reserves arises. The hidden reserves will be preserved in the assets contributed to the SE due to the rollover of Art. 4 MD. If the shares received in return also need to equal the tax value of the assets contributed, an economic double taxation occurs since the hidden reserves will then be taxed upon a sale or use of the assets at the SE as well as upon a sale of the shares at the contributing entities.513 Whereas in the case of a holding SE shares are exchanged for shares, in case of a subsidiary SE assets are exchanged for shares. Thus, the latter case may raise more concerns. The issue is that tax consequences materially change. Whereas capital gains upon the disposal or use of assets will be fully taxable in general, shares may be

507 508

509

510 511 512 513

For details on how a permanent establishment is assessed in the member states see Section 4.2.3.1.2.1.1.1 with Table 2. Cf. Bartone/Klapdor, 2007: 144; Terra/Wattel, 2008: 539. Conversely, a permanent establishment does not necessarily constitute a branch. Whereas the branch needs to be an independent business at the new entity, the permanent establishment is a part of the new entity through which this entity carries out its business in the state of the permanent establishment. Cf. Adda, 2008: 243-244; Terra/Wattel, 2008: 539. Due to company law the contributing entities - if they are located in the same member state - need to have a foreign subsidiary or permanent establishment in order to be allowed to form a subsidiary SE. Cf. Section 4.2.3.3.1. These are the subsidiary of company A in member state X and the permanent establishment of company B in member state Z in Figure 6 (Establishment of a subsidiary SE through companies in the same member state). The subsidiary will not cause tax issues upon the formation of the SE For details see Section 4.2.3.1.2.1.1.2. Cf. Diemer, 2004: 43. Cf. Section 4.2.3.2.2. Cf. e.g. Knobbe-Keuk, 1993: 825-826 with further references; Klingberg/Lishaut, 2005: 721-722; Rödder/Schumacher, 2006: 1537; Schön/Schindler, 2008: para. 385. A linkage between the tax deferral for the shares received and the rollover of the book values in a foreign permanent establishment, which is contributed to the SE, is not in line with EU law. This can be derived from ECJ of 11/12/2008 (C285/07, A.T.), ECR 2008, I-9329. Cf. Thömmes, 2009: 1217-1218.

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115

treated preferentially upon disposal which likely results in a lower tax base.514 This may result in abusive actions of the taxpayers. Due to these concerns a change to the Merger Directive as proposed in 2003 in order to regulate the valuation of the shares received in return has not been adopted by the member states.515 When looking at the SE, the assets and liabilities received need to be accorded at their tax values which they had at the transferring entity. Otherwise, the transferring entity will not be granted a tax deferral. Furthermore, Art. 5 and 6 MD are applicable regulating the treatment of tax-exempt provisions and reserves as well as losses.516 Consequently, taxexempt provisions and reserves as well as losses can be carried over to the permanent establishment of the receiving company as long as they are attributable to the contributed assets and - with regard to losses - provided that such a rule exists in the national context. Furthermore, additional (nonprofit) taxes may apply due to the contribution of assets (capital duty tax, stamp duty tax and real property transfer tax). Capital duty taxes may be levied on the formation of the subsidiary SE. Stamp duty may be levied if securities as part of the branch are transferred. Within the EU, the Capital Duty Directive states that restructuring operations as the contribution of branches against shares (even if only partially) shall be fully exempted from capital duty tax (Art. 4 and Art. 5 (1) (e) CDD).517 Contrarily, duties on the transfer of securities may be charged by the member states (Art. 6 (1) (b) CDD).518 Real property transfer tax applies if immovable property is contributed to the subsidiary SE.519 EU-wide regulations for this tax do not exist. Finally, if the contribution in kind comprises of assets which are neither shares establishing the majority of the voting rights nor assets forming a branch (i.e. single assets) the Merger Directive will not apply. Instead, national rules will govern the treatment. This will likely result in a taxation of hidden reserves immanent in the assets transferred as the transfer of single assets against shares constitutes an exchange under general rules. This will generally form a taxable event resulting in a realization of the accrued capital gains.520

514 515 516 517 518 519 520

Cf. Benecke/Schnitger, 2005a: 171; Benz/Rosenberg, 2006: 61; Rödder/Schumacher, 2006: 1535, 1537-1539. Cf. European Commission, COM(2003)703; Benecke/Schnitger, 2005a: 170-178. For details see Sections 4.2.3.1.2.1.2.1 and 4.2.3.1.2.1.2.2. Cf. Council Directive, 2008/7/EC: 11. Cf. also ECJ of 25/10/2007 (C-240/06, Fortum Project Finance), ECR 2007: I-9413. Cf. Herzig, 1997: 4-5; Jacobs (ed.), 2007: 1150-1151. Cf. Diemer, 2004: 43; Schön/Schindler, 2008: para. 359; Terra/Wattel, 2008: 539.

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Table 10: Subsidiary SE - Contributing entities and SE521 Taxation or tax deferral for assets contributed

Valuation of shares received at con-

at contributing entities

tributing entities / Additional conditions to be observed

Austria

Tax deferral, if taxation right is not restricted

Book value

which is given in case of a branch: -separate and distinct part which is to certain degree independent and able to operate on its own, also partnership share -not all assets&liabilities attributable to branch must be transferred, but assets critical to functioning of branch -contributed assets&liabilities need to have a positive fair market value Tax deferral even if taxing right is restricted -upon request- provided that EU country or EEA country with mutual assistance agreement Belgium

Tax deferral, if branch:

Book value

-totality of assets&liabilities of a division of an enterprise that is capable of functioning by its own means - assets&liabilities not essential for branch may be held back -not solely shareholding (financial fixed assets and share investments)

521

See the respective country chapters in Thömmes/Fuks (eds.), EC, Part A: Merger Directive, especially commentary to Art. 9 MD; IBFD, Taxation: subchapter “Restructuring and Liquidation”; Ernst&Young, 2009: 219-230, points 2.6, 9.1-9.3. For the EU-15 (i.e. member states up to 01/05/2004) see also IBFD, 2003: 18-19, 33, 60-61. Furthermore, see for Austria Furherr/Huber, 2009: 106-116; for Belgium Deloitte (ed.), 2006: 92-95; for the Czech Republic Furherr/Huber, 2009: 151-157; for Denmark Deloitte (ed.), 2006: 131-132; Bjrnholm/Thierson, 2008: 39-40; Rnfeldt/Werlauff, 2008: 219; for France Entraygues, 2001: 82; Deloitte (ed.), 2006: 149-151, 152; Weier, 2008: 1007; for Germany see §§ 20, 22, 23 German Reorganization Tax Act; Ritzer/Rogall/Stangl, 2006: 1210-1220; Rödder,/Schumacher, 2006: 1535-1539; Englisch, 2007: 343-344; PwC (ed.), 2007: 215-239, 250-272; Rödder/Herlinghaus/Lishaut, 2008: § 20 paras. 25-113; Schön/Schindler, 2008: paras. 352-414; WeberGrellet, 2009: 304-306; for Hungary Erdos/Burjau/Locsei, 2004: 103; Deloitte (ed.), 2006: 295; for the Netherlands Deloitte (ed.), 2006: 200-201; for Poland Deloitte (ed.), 2006: 239; for Portugal Petkevica, 2008: 374-375; for Slovenia Zorman/Janezic, 2008: 600-601; for Sweden Berglund, 2007: 359.

4 Taxation of European Companies during the time of restructuring in the current environment

Bulgaria

117

Tax deferral, if branch:

Fair market value

-aggregate of a company’s assets&liabilities by

Holding period for shares: 5 years, other-

means of which an independent business could be

wise step-up in the basis of the acquired

carried out from an organizational, functional and

shares is denied retroactively

financial point of view Cyprus

Tax deferral, if branch (even if no permanent es-

Book value

tablishment remains within Cyprus): =Art. 2 (i) MD Czech Republic

Denmark

Tax deferral, if branch:

Fair market value

-operation (business or part thereof) that consti-

Holding period for shares: 1 year, other-

tutes a separate organizational and functional unit

wise step-up in the basis of the acquired

performing one or more business activities

shares is denied retroactively

Tax deferral upon approval of treasury, if branch

Fair market value

=Art. 2 (i) MD

Holding period for shares: 3 years, other-

-not solely shareholding or partnership share

wise step-up in the basis of the acquired shares is denied retroactively (unless con-

Option to be taxed: (1) cash payments allowed, (2) higher future depreciation, (3) shares received in return accorded at higher value Estonia

Tax deferral, if branch

tributing entity can demonstrate that alienation of shares has no tax avoidance motive) Fair market value

=Art. 2 (i) MD Finland

Tax deferral, if branch = Art. 2 (i) MD

Book value

118

France

4 Taxation of European Companies during the time of restructuring in the current environment

Tax deferral upon approval of treasury, if future taxation of capital gains is ensured which is given in case of a branch: - independent business unit according to branch of industry, i.e. a unit that can operate using its own resources under conditions that can be regarded as normal for relevant sector of economy -liabilities, which are not directly and exclusively attached to branch, or liabilities, for which there is no economical or legal reason for the transfer, do not need to be transferred with branch -conditions need to be fulfilled at both the level of the receiving company and the level of the transferring company For depreciable assets, however, a taxation at standard corporate tax rate takes place over 5 or 15 years by gradually adding back deferred taxes at receiving company in return for a higher depreciation

Book value Holding period for shares: 3 years, otherwise withdrawal of relief

4 Taxation of European Companies during the time of restructuring in the current environment

Ger-

Tax deferral at request of taxpayer, if taxation

many

right is not restricted which is given in case of a branch:

119

Book value Holding period: 7 years for shares which the contributing entity received, otherwise

-separate and distinct part of business, which is to

tax deferral with regard to contributed as-

a certain degree, but not necessarily completely,

sets denied retroactively (taxable amount

independent and may operate by itself; also part-

reduced by 1/7 per year which has elapsed

nership share

since contribution, taxable also if liquida-

-all essential assets of a business need to be transferred (functional view, but also organizational independence required prior to transfer)

tion or dissolution of SE within 7 years or contributing entity emigrates, but not if another tax neutral reorganization takes place)

-assets not essential for particular business may be held back

Within holding period: contributing shareholder is obliged to provide evidence

-contributed assets&liabilities need to have a positive fair market value

annually that it still owns the shares received

In return, in order to avoid economic double taxation: -SE may account for step-up in the assets contributed equal to amount subject to taxation at contributing entity -contributing entity may account for stepup in the shares in the SE equal to amount subject to taxation at contributing entity Greece

Tax deferral, if branch:

Book value

-techno-economic whole which is able to function independently and is considered as a separate business segment Hungary

Tax deferral, if branch:

Book value

= Art. 2 (i) MD

Further formal requirements: separate records by the receiving company; recapture of deferred gains upon later sale or decrease in value

120

Ireland

4 Taxation of European Companies during the time of restructuring in the current environment

Tax deferral, if branch:

Fair market value

- Irish trade

Holding period for shares: 6 years, otherwise step-up in the basis of the acquired shares is denied retroactively

Italy

Tax deferral at request of taxpayer, if branch:

Book value

-independent part of a business, i.e. collection of assets that together enable to carry out a business activity Latvia

Tax deferral, if branch:

Unclear

-all such assets&liabilities of the company, which

Holding period for shares: 3 years, other-

from an organizational point of view constitute an

wise withdrawal of relief (unless contrib-

independent economic activity

uting entity can demonstrate that alienation of shares has no tax avoidance motive)

Lithuania

Tax deferral, if branch:

Unclear

- assets, rights and obligations which from an or-

Holding period for shares: 3 years, other-

ganizational point of view constitute an independ-

wise withdrawal of relief (unless as part

ent business, i.e. an entity capable of functioning

of a new tax neutral reorganization)

by its own means, not only based on formal requirements - assets&liabilities not essential for branch may not be held back Luxembourg

Tax deferral at request of taxpayer, if branch

Book value

-business or independent part of business (as already applicable to domestic transaction)

Malta

Tax deferral, if branch:

Book value

= Art. 2 (i) MD Nether-

Tax deferral, if future taxation is guaranteed which

lands

is given in case of a branch:

-entire business or independent part thereof (i.e. permanent organization of capital and labor) -not if (passive) investments (e.g. types of investment activities, conducted by an investment fund)

Fair market value

4 Taxation of European Companies during the time of restructuring in the current environment

Poland

Tax deferral, if branch:

Book value

-organized complex of components designed for carrying on a business activity (organizational and financial separation of major relevance) Portugal

Tax deferral at request of taxpayer, if branch:

Book value

-division of a company which from an organizational point of view constitute an independent business, i.e. an entity capable of functioning by its own means, including debt incurred in branch for its organization and functioning -not if holding or management of shareholdings Romania Slovak Republic

Tax deferral, if branch:

Book value

= Art. 2 (i) MD Tax deferral, if branch

Book value

-transfer of legal title to things, other rights and other asset values serving the operation of the business and the liabilities related to the business; separate part: independent organizational unit Taxation may occur for nondepreciable assets as tax value not clearly defined

Slovenia

Tax deferral, if branch: -certain part of an entity, including all assets&liabilities, which, from a business organizational perspective, constitutes an independent business and is capable of conducting business by its own means

Fair market value

121

122

Spain

4 Taxation of European Companies during the time of restructuring in the current environment

Tax deferral at request of taxpayer, if branch:

Book value

-economic undertaking capable of operating on its

Mechanism to avoid the economic double

own (e.g. also debt)

taxation (domestic case: capital gains tax

-conditions need to be fulfilled at both the level of the receiving company and the level of the transferring company

credit for shareholders for profits distributed out of income attributed to the assets transferred to SE, any resulting tax depreciation is not tax deductible at the shareholder level; international case: full exemption upon sale of shares at SE)

Sweden

Tax deferral at request of taxpayer, if branch:

Book value

-part of business that is suitable to be separated to form an independent business -also individual assets, provided that they can form independent business (e.g. large ships, buildings) -assets&liabilities of a division of a company not necessary to form a branch may be held back United King-

Tax deferral, if branch

Book value

-business or part of business

dom

When analyzing the member states (see Table 10), all 27 member states provide that the establishment of a subsidiary SE via a contribution of a branch of activity does not result in taxable capital gains at the contributing entities. Instead, the taxation is deferred, provided that the tax values of the assets and liabilities are carried over to the permanent establishment of the receiving entity, which remains in the country of the contributing entity. Due to the condition of the permanent establishment the taxing right of the country of the contributing entity with regard to the assets transferred is upheld. Two countries provide even more generous rules. In Cyprus the deferral is also granted in the case that no permanent establishment remains. In Austria the taxpayer may be granted a tax deferral even if the taxing right is lost, provided it is lost to an EU country or EEA country with a mutual assistance agreement. Contributing entities covered by the member states are generally corporations and partnerships treated as corporations as stated in the appendix to Art. 3 MD. However, those member states, which treat partnerships as transparent entities under

4 Taxation of European Companies during the time of restructuring in the current environment

123

their domestic law, will grant the tax deferral provided for corporate entities also to transparent entities.522 The central term in this context is the “branch of activity”. Only if the assets transferred constitute a branch of activity - and not only single assets - tax deferral is granted. Regarding the term, some member states explicitly refer to the definition provided in Art. 2 (i) MD (Cyprus, Denmark, Estonia, Finland, Hungary, Malta, Romania). The definition in the other member states may not be exactly the same, but will in general be equal to the definition in the Merger Directive. Thus, the general framework is similar throughout the member states. However, there are differences in the details. Especially in the new member states (e.g. Bulgaria, Cyprus, Estonia, Hungary, Latvia, Malta, Romania, Slovak Republic, Slovenia) details on how to interpret this term are missing. For example, it might be unclear which assets and liabilities are necessary to be capable of functioning by their own means or what part forms a branch if the part had not been clearly separated before the transaction. This may lead to uncertainty. Contrarily, in the other countries which have a term similar to the branch of activity as defined in the Merger Directive in their national law extensive administrative and judicial guidelines on what constitutes a branch, exist in the domestic context. These guidelines can serve as the basis for the interpretation of the term in a European context. This implies for Austria and Germany, for example, that partnership shares fall under this term. Contrarily, certain assets may not constitute a branch by themselves in certain member states. These may include shareholdings (Belgium, Portugal), shareholdings and partnership shares (Denmark) and passive investments (Netherlands). Furthermore, in Austria, Belgium, France, Germany and Sweden not all assets and liabilities attributable to the branch of activity need to be transferred. The ones which are critical to the functioning of the branch are sufficient. In Lithuania this is explicitly not allowed and may lead to exclusion of certain activities (e.g. lease or trading of securities). In France and Spain the conditions need to be fulfilled at both the level of the receiving company and the level of the transferring company at the date of realization of the operation, despite the interpretation by the European Court of Justice according to which the conditions only need to be fulfilled at the receiving entity.523 In Austria and Germany contributed assets and liabilities need to have a positive fair market value. Issues arise if the domestic interpretation deviates from the European term. This occurs, for example, if the 522

This is, for example the case in Austria and Germany.

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4 Taxation of European Companies during the time of restructuring in the current environment

domestic interpretation is narrower than the European interpretation (Ireland). Furthermore, the domestic interpretation may not only take into account the functions of the branch but also organizational independence (Germany, Lithuania, Poland (also financial separation of relevance)). Consequently, discrepancies arise if the domestic interpretation is followed instead of the European one. If, as part of the branch, a foreign permanent establishment is transferred, the member states apply the same rules as if the transaction was a merger.524 No consequences will generally result if the exemption method applies with regard to this permanent establishment, whereas taxes may arise when the credit method is applied (combined with a fictitious tax credit). When assessing the valuation of the shares received in return by the contributing entities, only seven member states use the fair market value of the assets transferred as the basis for the valuation (Bulgaria, Czech Republic, Denmark, Estonia, Ireland, Netherlands, Slovenia).525 In these cases, an economic double taxation, which occurs if hidden reserves are preserved at the shareholder level as well as at the level of the SE (which received the contributed assets), is avoided. In the majority of the member states however, the shares are valued at the book value of the assets transferred (Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Hungary, Italy, Luxembourg, Malta, Poland, Portugal, Slovak Republic, Spain, Sweden, United Kingdom). Consequently, a double taxation of hidden reserves is not avoided. If the contributing entities are corporations this is only a minor issue as capital gains from shares are in most cases fully or substantially exempt from taxation.526 Furthermore, in Spain in national cases, a full dividend tax credit is granted to the shareholders (who contributed the assets to the SE) for profits distributed out of income that the SE derived from the sale of the contributed assets.527 However, contributing entities may also be partnerships. Where they are treated as transparent entities, the partners behind the partnership are taxed. If these are individuals, participation exemptions (as for corporations) are not available. Consequently, the tax liability upon a disposition of the shares may be higher even though some kind of relief may still be available. This is due to 523 524 525 526

Cf. ECJ of 15/01/2002 (C-43/00, Andersen og Jensen), ECR 2002: I-379. Cf. Section 4.2.3.1.2.1.1.2 with Table 3. Of these states, three have established holding requirements for the shares. See below. For the treatment of corporate shareholders see the respective country chapters in IBFD, Taxation: subchapter “capital gains”; Canellos, 2005: 32; Endres et al. (eds.), 2007: 22-23; Jacobs (ed.), 2007: 9981001. Cf. also the discussion in Section 4.2.3.2.2 (and Table 9).

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125

the corporate tax systems which are in place in most countries to avoid or reduce the double taxation of profits with corporation and personal income tax. When looking at the member states, most countries apply a shareholder relief system which reduces the tax rate or the tax base.528 Finally, in Latvia and Lithuania the valuation is not clear. Importantly, holding requirements need to be observed in seven member states (Bulgaria, Czech Republic, Denmark, France, Germany, Latvia, Lithuania). The established rules aim at avoiding abuse. They shall prevent the conversion of assets, whose capital gains are fully taxable, into shares, which capital gains may be exempt from taxation due to participation exemption privileges, by contributing entities. The rules differ in detail and consequences. In Bulgaria, the Czech Republic, Denmark and Ireland the shares received in return will only be increased to their fair market value tax free provided that the shares are held for at least one year (Czech Republic), three years (Denmark), five years (Bulgaria) or six years (Ireland). Otherwise the step-up will be denied retroactively, resulting in a taxation of the deferred capital gain upon disposal of the shares. In France, Latvia and Lithuania the holding period for the shares is three years. If the shares are sold within this time, the tax deferral for the assets transferred is withdrawn retroactively. Furthermore, in France the capital gains are also taxed within the shares, as their basis is the book value of the assets transferred. In Latvia and Lithuania it is not clear according to available literature how the shares are valued, which may or may not result in a double taxation of hidden reserves. The longest holding period exists in Germany. Here, the shares need to be held for seven years. Otherwise, the shareholders are retroactively taxed on the gains deferred upon the contribution of the assets. The taxable amount is, however, reduced by 1/7 for each year which has elapsed since the contribution of the shares. The economic double taxation, which may arise, is avoided with two actions. On the one hand, the contributing entity may increase the tax basis of the shares disposed by an amount equal to the hidden reserves retroactively realized. On the other hand, the SE may increase the tax basis of the assets which have been contributed by the same amount. Within the holding period the contributing shareholders are obliged to provide annual evidence that the SE still owns the shares contributed. In Denmark and Latvia, the tax deferral is not withdrawn within the

527 528

In the end, the economic double taxation is avoided upon liquidation of the SE or at the sale of the shares by the shareholders. Cf. the overview and the details in Jacobs (ed.), 2007: 115-117, as well as the respective country chapters in IBFD, 2008: Individuals, subchapter “capital gains”. Only Ireland does not grant a relief at all.

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4 Taxation of European Companies during the time of restructuring in the current environment

holding period if the contributing entity can demonstrate that the disposition of the shares has no tax avoidance motive.529 In addition to shares, in a few member states cash payments or another consideration may be granted in return (Austria (10% cap), Czech Republic, France (10% cap), Germany, Italy, Malta, Spain). This will result in full taxation if the cash payment and/or fair market value of the additional remuneration exceeds the book value of the assets and liabilities transferred. When looking at the SE, the treatment of provisions and reserves as well as losses is of relevance. With regard to wholly or partly exempt provisions and reserves, the member states generally apply the same rules for mergers as for contributions of branches.530 Consequently, a carryover of such reserves and provisions to the remaining permanent establishment is generally allowed. A condition which needs to be fulfilled in order for the carryover to be allowed is that the items are connected to the business or separate parts transferred. Differences in the treatment occur in Belgium, Poland, Romania and the Slovak Republic. In Belgium a carryover is allowed as the cross-border transfer of assets is covered by Belgian law. In Poland, Romania and the Slovak Republic the carryover may cause taxes since the carryover of provisions and reserves in case of a transfer of assets is not regulated by law. With regard to losses, the member states also generally apply the same rules for mergers as for contributions of branches.531 This means that a carryover of such losses from the transferring company to the receiving company may either be allowed, restricted or disallowed. As required in the context of reserves and provisions, in order for losses to be carried over they need to be attributable to the assets transferred. Otherwise the losses remain in the transferring company. The Czech Republic provides that, in case a clear attribution to the branch of the transferring company is not possible, losses may be divided on a pro rata basis. Exceptions apply to Bulgaria, Italy, the Slovak Republic, Spain and Sweden in which a carryover is not allowed in case of a contribution. In the Slovak Republic losses may not be attributed to an asset, but only to an entity by definition. In Spain this is based on the ground that the transferring company does not cease to exist. Furthermore, such a treatment may also be justified on the ground that a contribution does not result in a uni529 530

In case shares are contributed as part of the assets, the rules (holding requirements, consequences) as described in the context of the holding SE apply. Cf. Section 4.2.3.2.2. Cf. Section 4.2.3.1.2.1.2.1 and Table 4.

4 Taxation of European Companies during the time of restructuring in the current environment

127

versal succession. Another exception applies to Latvia, which allows the carryover in case of a contribution independent of a control requirement which needs to be fulfilled in case of a merger.532 When assessing additional taxes, of the six member states which still levy a capital duty tax,533 three states (Cyprus, Greece, Poland) charge this tax in case of the establishment of a subsidiary. Portugal and Spain exempt such transactions. In Austria the exemption only applies provided that the transferring company has existed for at least two years. Stamp duty may exceptionally apply in cases where shares are contributed as part of the business assets.534 Real property transfer tax is levied if immovable property is transferred as part of the branch in the same twelve member states as the case with a merger.535 In addition, Finland, the Netherlands and Sweden levy a tax in case of a contribution whereas mergers are exempt. In the Czech Republic and Greece the exemption from real estate is based on conditions. In the Czech Republic the shares received in return need to be held for five years. In Greece the immovable property transferred needs to be held five years prior and five years after the reorganization. Consequently, additional taxes will be levied in two third of the member states. Finally, if the assets transferred do not constitute a branch of activity, tax deferral is not provided for in any of the member states. Instead, the transfer of such single or few assets between unrelated parties will be treated as a sale under general rules resulting in the realization and taxation of capital gains immanent in the assets. Furthermore, taxes may be levied on the hidden reserves accrued if assets transferred may not be attributed to the remaining permanent establishment.536 In conclusion, the formation of a subsidiary SE is constructed very liberally from a company law point of view. Regarding taxes, however, the transaction may only be carried out tax neutral if the conditions set out in the Merger Directive are fulfilled. This is the case if a majority shareholding is contributed (as pointed out in the Chapter on the holding SE) or if a business or branch of activity is transferred. With regard to the branch 531 532

533 534 535

Cf. Section 4.2.3.1.2.1.2.2 and Table 5. Here, general anti-avoidance rules directed at loss trafficking may be observed regarding the future use of the losses. Triggering events may be a change of business activity or ownership. See for more details Endres et al. (eds.), 2007: 82-83, 740-755; Ernst&Young, 2009: 343-1123. Cf. Section 4.2.3.1.2.1.2.4 with Table 7. For details see Section 4.2.3.2.2. Cf. Table 7 in Section 4.2.3.1.2.1.2.4.

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4 Taxation of European Companies during the time of restructuring in the current environment

of activity, deferral is granted in all the member states (also with regard to foreign permanent establishments transferred) even though it is not always fully clear how to determine a “branch”. This leads to uncertainty and may also result in taxes if the treasury denies that a branch has been transferred. Here, additional guidelines on the EU level would be helpful. Regarding the assets, tax deferral is based on the condition that the tax values are carried over to a permanent establishment of the receiving entity. This implies that also reserves and provisions as well as losses may be carried over as long as they are attributable to the assets transferred and provided that an equivalent national rule exists in case of losses. When looking at the valuation of the shares received in return, most member states do not avoid the doubling of accrued hidden reserves. However, the shares may be disposed of following preferential rules. Furthermore, holding requirements for the shares need to be observed, which are designed to prevent abusive actions. Thus, early disposals may also cause economic double taxation. Tax consequences will also result if additional taxes apply. More importantly, hidden reserves will generally be realized and taxed in the member states if they do not constitute a branch of major shareholding, but instead constitute just single assets. This is also applicable to assets which do not remain effectively connected to the permanent establishment. 4.2.3.4 Conversion From a company law perspective, the fourth option to create an SE is the transformation by conversion of a national public limited-liability company into an SE provided that the national company has held a subsidiary - a branch is not sufficient - in a different EU member state for at least two years (Art. 2 (4) ECS) (see Figure 7). Because solely a conversion of the former company takes place by keeping the identity of the legal entity there is no winding up or creation of a new legal person (Art. 37 (2) ECS). As part of the conversion the company may not change its place of domicile (Art. 37 (3) ECS).

536

Cf. the discussion in the context of the merger SE in Section 4.2.3.1.2.1.1.1. Regarding the valuation of these assets in the country of the receiving entity see also the discussion in Section 4.2.4.2 on the valuation of assets in the entering country upon a transfer of the registered office.

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Figure 7: Establishment of an SE by conversion Æ Before the conversion: Member State X

Company A

BORDER

Shareholders of A

Member State Y

Subsidiary of company A

Æ After the conversion: Member State X

SE

BORDER

Shareholders of SE

Member State Y

Subsidiary of SE

From a tax point of view, neither the business activity of the entity nor the structure of the owners (shareholders) changes. Contrarily, the business and the shareholder remain exactly the same. Accordingly, no transfer of assets takes place and thus no taxation should take place either at the level of the company or its shareholders, according to national law.537 Special provisions in a reorganization tax act are not necessary since hidden reserves are not affected.538 In addition, there should be no tax consequences at the level of the foreign subsidiaries since the tax situation does not change for them.539 When assessing the member states, a conversion of the national limited liability company into an SE can be carried out without any tax effects in all of the member states.540 Accordingly, the countries generally provide for a roll over relief for assets and liabilities

537 538 539 540

Cf. Vanistendael, 1998: 896; Schaumburg, 2000: 510; Diemer, 2004: 45; Bartone/Klapdor, 2007: 59. Cf. Thömmes, 2005: 575; Schön/Schindler, 2008: paras. 415-416; Tipke/Lang (eds.), 2008: § 18 para. 453. This is also true if the converting company has foreign permanent establishments. Cf. Conci, 2004: 21. Of the opinion that this needs to be proven on a case by case basis: Diemer, 2004: 45. See the respective country chapters in Thömmes/Fuks (eds.), EC, Part A: Merger Directive; IBFD, Taxation: subchapter “change of business entity”. For the EU-15 (i.e. member states up to 01/05/2004) see also IBFD, 2003: 25, 36. Furthermore, see for Austria Schindler, 2002: 104-105; for Denmark Rnfeldt/Werlauff, 2008: 211; for France Tillmanns, 2007: 655; for Germany Schön/Schindler, 2008: paras. 415-416; for Hungary see Stein/Becker, 2004: 308; Deloitte (ed.), 2006: 296.

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4 Taxation of European Companies during the time of restructuring in the current environment

affected, the assumption of rights and obligations, the carryover of partly or wholly taxexempt reserves and provisions as well as the takeover of losses. In conclusion, there are no tax consequences at the entity or shareholder level and neutrality is provided in all member states. Thus, the conversion into an SE will generally not cause tax issues. Additionally, it is a simple method to convert a national company into a legal form, which may transfer its registered office between member states, as is discussed next. 4.2.4

Transfer

Once the SE is established it is treated as a national company and may take part in reorganizations, which are provided for in national law. Furthermore, as the SE is explicitly mentioned in the appendix of the Merger Directive it may also get relief as established in the Merger Directive.541 Should the SE merge into a domestic corporation, it would be necessary that two years elapse after the establishment of the SE in order for it to be compliant with Art. 66 ECS.542 Altogether, the SE will generally be as flexible as other corporations.543 In one aspect the SE is even more flexible than national companies. The SE - once established - may transfer its registered office within the EU from one member state to another while retaining its legal identity. From a company law point of view, this is generally only possible for SEs, whereas national companies will lose their legal identity upon a transfer.544 Furthermore, regarding the tax consequences, the Merger Directive only deals with the transfer of SEs, whereas it does not regulate the transfer of national companies.545 4.2.4.1 Basics with regard to company law When assessing the company law, the European Company Statute states that the transfer of the registered office of an SE to another member state does not result in the winding up or creation of a new legal person (Art. 8 (1) ECS). Instead, the SE keeps its identity from a

541

542 543 544

545

For possible transactions see Thömmes, 2005: 588-589; Reichert, 2006: 832-835; Drinhausen/Gesell, 2006: 16. Regarding the implementation of each paragraph of the Merger Directive into the national law of the 27 member states see Ernst&Young, 2009. Cf. Thömmes, 2005: 588; and Section 4.2.5 below. Cf. Thömmes, 2005: 590. The 14th Company Law Directive, which would have regulated the transfer of national companies, has not been passed at the Community level. Cf. European Commission, XV/6002/97. The work on this issue has been officially stopped in December 2007. See http://ec.europa.eu/internal_market/ company/seat-transfer/index_en.htm (date of access: 31/01/2009). Cf. also the discussion in Section 4.3.1. Besides the SE, the rules also cover the other European legal form, the SCE.

4 Taxation of European Companies during the time of restructuring in the current environment

131

company law point of view. The transfer includes not only the registered office but also the head office (Art. 7 ECS). The registered office constitutes a formal criterion, whereas the head office constitutes a factual criterion.546 Therefore, both need to be transferred. Otherwise, enforcing measures may be taken by the member state (e.g. liquidation of the SE) according to Art. 64 ECS. Since both the registered and the head office, need to be moved a solution has been found for the SE which neither refers to the “incorporation doctrine”547 nor the “real seat doctrine”548 (the two doctrines of international private law).549 From an administrative point of view, the European Company Statute makes the following requirements: that management or an administrative organ drafts a report explaining and justifying the legal and economic aspects of the transfer, that they elucidate the implications of the transfer for shareholders, creditors and employees (Art. 8 (3) ECS), that a qualified majority of the general meeting votes in favor of the transfer (Art. 8 (6) and Art. 59 ECS), and finally that the SE is not bankrupt (Art. 8 (15) ECS). Depending on the specific national law, minority shareholders who oppose the transfer may be granted appropriate protection (Art. 18 (5) ECS). 4.2.4.2 Tax consequences As has been pointed out above, both the registered office as well as the head office need to be transferred from a company law point of view.550 Since both terms are company law terms, their counterparts in tax law need to be determined. Accordingly, the formal criterion “registered office” equals the “place of incorporation” or “statutory seat”’, whereas the factual criterion “head office” is equivalent to the “place of effective management”.551 The necessity to transfer the registered office and head office or state of incorporation and place of effective management respectively has two implications for tax purposes. First,

546 547

548

549 550 551

Cf. Soler Roch, 2004: 12. The incorporation theory, which is mainly followed by the Anglo-Saxon countries, implies that the legal identity is tied to the country of incorporation. Consequently, once incorporated, the legal identity remains, even if the company moves its place of effective management abroad. Cf. Staringer, 1999: 4047; Jacobs (ed.), 2007: 1192. The real seat theory, which is, for example, followed in central Europe, implies that the identity of a company is tied to the country of its real seat. Consequently, if the company moves its real seat abroad, the entity is liquidated in the exiting country and needs to be re-established in the entering country according to the rules there. Cf. Staringer, 1999: 40-47; Jacobs (ed.), 2007: 1192-1193. Cf. Diemer, 2004: 48; Thömmes, 2004: 22-23. Regarding the history of the SE in the context of the different theories see Schulz/Geismar, 2001: 1079; Thömmes, 2004: 22; Thömmes, 2004b: 28-29. Cf. Section 4.2.4.1. Cf. in detail Soler Roch, 2004: 11-13. Regarding the relationship of these company law terms with the applicable tax terms in the EU member states see also Ernst&Young, 2009: 343-1123, points 10b.210b.3.

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4 Taxation of European Companies during the time of restructuring in the current environment

the transfer of both implies that the unlimited tax liability of the SE will end in the former country of domicile, as there is no nexus for an unlimited taxation left. Furthermore, the unlimited tax liability will start in the new country of domicile. This implies, that secondly, there are no issues of dual residency. Dual residency could occur if the place of incorporation and the place of effective management of one company are located in different countries and both countries would tie their unlimited taxing right to the respective criterion fulfilled in their country. This does not occur with an SE, as the state of incorporation and the place of effective management need to be located in one country.552 For tax purposes, the question arises whether the move from one member state to another member state - in which case the taxpayer is a resident of the other member state afterwards - results in a taxation of the difference between the fair market value of the assets and liabilities transferred and their value for tax purposes, i.e. hidden reserves.553 In order to analyze this, one needs to distinguish between the treatments in the exiting country from which the SE transfers its registered office abroad and the entering country into which the SE transfers it registered office (see also Figure 8). As special tax rules apply if the SE has a foreign permanent establishment these are also discussed.

552 553

Cf. Schön/Schindler, 2004: 573. For details on the criteria which establish an unlimited taxing right in the member states see Ernst&Young, 2009: 343-1123, point 3.3. Cf. Essers/Elsweier, 2003: 87.

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Figure 8: Transfer of an SE Æ Before the transfer of registered and head office: Member State Y

Member State X Shareholders of SE

BORDER

SE

Æ After the transfer of registered and head office: Member State X

Member State Y

Shareholders of SE

BORDER

SE

PE of SE

Regarding the exiting country, one needs to take into account the treatment at the level of the SE as well as at the level of its shareholders.554 The Merger Directive provides for the SE, that no taxation of unrealized gains may take place upon the transfer of the registered office provided that the member state, from which the SE transfered its registered office abroad, retains its right to tax. This is the case if a permanent establishment continues to exist in the exiting country and the assets and liabilities can be allocated to the permanent establishment (Art. 10b (1) MD). This corresponds to the general treatment upon formation of a merger SE in Art. 4 MD. Therefore, mergers and transfers are treated according to the same rules.555 The treatment requires that the tax value of the assets and liabilities of the SE are carried over to the remaining permanent establishment (Art. 10b (2) MD). In addition, wholly or partly tax-exempt provisions and reserves may be carried over to the remaining permanent establishment as well as unused losses, if the respective member also allows such a loss carryover when a national company moves within the territory of this member state (Art. 10c MD). As transfers within a member state do not affect the tax status of the company, the carryover will principally be allowed in the domestic case 554

Cf. Thömmes, 2004: 23.

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4 Taxation of European Companies during the time of restructuring in the current environment

and should consequently also be allowed in the cross-border case.556 Exempt provisions and reserves do not need to be carried over, however, if they are derived from permanent establishments abroad. In this case, a tax effective reversal of the provisions and reserves may take place. Furthermore, with regard to such foreign permanent establishments of the moving SE (which are not domiciled in one of the involved member states), the rules as described in the context of the merger apply. These depend on the method used to avoid double taxation.557 As in the case of a merger, the Merger Directive is silent on the treatment if no permanent establishment remains in the exiting country or assets are not seen as effectively connected to the permanent establishment. Finally, the Merger Directive regulates that the transfer may not affect the shareholders from a tax point of view (Art. 10d (1) MD). Notwithstanding the tax deferral which needs to be provided, upon a subsequent transfer of the securities a gain may still be taxed in the country of the exiting entity (Art. 10d (2) MD). Overall, the applicable rules imply that the member states have to treat the SE as if the transfer had not taken place.558 When looking at the entering country, the transfer of the registered office to another country will generally not result in income tax consequences in the new country. Exceptions may apply if a permanent establishment or real estate had been located in the entering country before the entry.559 However, the question arises on how to value the assets and liabilities of the SE which enter the new country of residence.560 Possible values are the book value (i.e. value relevant for tax purposes), the fair market value or a value inbetween. The treatment in the entering country will generally be independent of the treatment in the exiting country. Consequently, gaps or overlaps may occur due to the transfer of assets and liabilities from one member state to another. Possible values in the exiting country are - as also in the entering country - the book value, fair market value or a value inbetween.561 Furthermore, additional (nonprofit) taxes, in particular capital duty taxes, could be charged in case of a transfer of the registered office. However, within the EU

555 556 557

558 559 560 561

Cf. Diemer, 2004: 48, 52-53. For more details on the rules see Section 4.2.3.1.2. Cf. the discussion in Chapter 3. Cf. Section 4.2.3.1.2.1.1.2. No tax effects result upon a transfer in countries, where the SE has subsidiaries or conducts its business without a permanent establishment. However, the ongoing taxation may change (e.g. change in withholding tax rates). Cf. European Economic and Social Committee, 2004: 31. Cf. Thömmes, 2004: 24-25. Cf. Thömmes, 2004: 23. Cf. Rödder, 2005: 298.

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135

capital duty tax may generally not be levied on the transfer of the registered office or effective management according to the Capital Duty Directive (Art. 5 (1) (d) (ii) CDD).562 Table 11: Transfer of SE563 Cross-border

Cross-border

Tax consequences of SE and its share-

Valuation

transfer in

transfer in tax

holders in exiting country

of assets

company law

law

& liabilities in entering country

Austria

Only regulated

Regulated for

for SE (ECS),

SE and other

not other cor-

corporations

porations

(but liquidation

Tax deferral, if -later disposal of assets subject to corpo-

Fair market value

rate income tax in the hands of remaining permanent establishment

if consequence of company law)

-taxing right not restricted Tax deferral upon request even if taxing right is restricted provided that transfer to EU/EEA country with mutual assistance agreement

Belgium

562 563

Only regulated

Not regulated

Taxation of accrued capital gains, since

Fair mar-

for SE (ECS),

for SE and

liquidation (at level of SE and sharehold-

ket value

not other cor-

other corpora-

ers)

porations

tions

This has also been confirmed by the European Court of Justice. Cf. ECJ of 08/11/2007 (C-251/06, Ing. Auer), ECR 2007: I-9689. See the respective country chapters in Thömmes/Fuks (eds.), EC, Part A: Merger Directive, especially commentary to Art. 10b-d MD; IBFD, Taxation: subchapter “emigration” and “immigration”; Ernst&Young, 2009: 219-230, points 2.6, 10b.1-10d.2. For the EU-15 (i.e. member states up to 01/05/2004) see also IBFD, 2003: 26-27, 37. Furthermore, see for Austria Schindler, 2002: 114; Schindler, 2004: paras. 217-231; Leitner/Nowotny, 2005: 463-464; Staringer, 2005: 213-244; for Belgium ECJ of 08/02/2008 (C-392/07, Commission/Belgium), OJ C 158: 8; Ernst&Young (ed.), 2008: 6; for France Tillmanns, 2005: 1421; Weier/Seroin, 2005: 726 with further references; for Germany § 12 German Corporate Income Tax Act; § 4 (1) , § 15 (1a) and § 17 (5) German Personal Income Tax Act; Englisch, 2007: 345-346; PwC (ed.), 2007: paras. 406-497; Gosch, 2008: 417; Schön/Schindler, 2008: paras. 100-190; for Luxembourg Hirte/Bücker, 2005: Art. 8 para. 32; for Sweden Berglund, 2007: 358; for the United Kingdom Dine/Browne (eds.), EU company law: 18[30]; for Cyprus, France, Lithuania, Malta and Spain see also Lenoir, 2007: 74.

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4 Taxation of European Companies during the time of restructuring in the current environment

Only regulated

Only regulated

Tax deferral, if assets and liabilities con-

for SE (ECS),

for SE, not

tinue to be used in activities that are sub-

not other cor-

other corpora-

ject to corporate income tax

porations

tions

Regulated for

Regulated for

No taxation of accrued capital gains (no

Fair mar-

SE and other

SE and other

permanent establishment required)

ket value

corporations

corporations

Czech Re-

Only regulated

Regulated for

Tax deferral, if assets and liabilities are ef-

Not clear

public

for SE (ECS),

SE and other

fectively connected to permanent estab-

not other cor-

corporations

lishment

Bulgaria

Cyprus

porations

Not clear

Otherwise taxation

Carryover of losses unclear since no rule Otherwise taxation likely (even though not clearly regulated) Treatment of shareholders unclear since no rule

Denmark

Only regulated

Regulated for

Tax deferral, if assets and liabilities remain

Fair mar-

for SE (ECS),

SE and other

under Danish taxation

ket value

not other cor-

corporations

Otherwise taxation

porations Estonia

Only regulated

Regulated for

Taxation of capital gains at resident share-

for SE (ECS),

SE and other

holders only when assets are transferred or

not other cor-

corporations

distributed

porations

Not clear

Taxation at non-resident shareholders when economic activities are terminated in Estonia

Finland

France

Only regulated

Only regulated

Tax deferral, if assets and liabilities are ef-

Fair mar-

for SE (ECS),

for SE , not

fectively connected to permanent estab-

ket value

not other cor-

other corpora-

lishment

porations

tions

Only regulated

Regulated for

Tax deferral upon approval of treasury, if

Fair mar-

for SE (ECS),

SE and other

future taxation of deferred capital gains is

ket value

not other cor-

corporations

ensured

porations

Otherwise taxation

Otherwise taxation

4 Taxation of European Companies during the time of restructuring in the current environment

Germany

Only regulated

Regulated for

for SE (ECS),

SE and other

not other cor-

corporations

porations

(but liquidation if consequence

Tax deferral, if

-later disposal of assets subject to corpo-

137

Fair market value

rate income tax in the hands of remaining permanent establishment

of company

-taxing right not restricted

law)

Otherwise taxation (e.g. if assets are attributable to parent company) Tax deferral for shareholders also if taxing right is restricted

Greece

Only regulated

Regulated for

Tax deferral, if assets and liabilities con-

for SE (ECS),

SE and other

tribute to taxable income of permanent es-

not other cor-

corporations

tablishment

porations Hungary

Ireland

Not clear

Otherwise taxation

Only regulated

Only regulated

Tax deferral, if business is continued

for SE (ECS),

for SE, not

through permanent establishment

not other cor-

other corpora-

porations

tions

Only regulated

Regulated for

Tax deferral, if assets transferred are

Fair mar-

for SE (ECS),

SE and other

within the scope of capital taxation

ket value

not other cor-

corporations

Not clear

Otherwise taxation

Otherwise taxation

porations Italy

Only regulated

Regulated for

Tax deferral, if assets and liabilities are ef-

for SE (ECS),

SE and other

fectively connected to permanent estab-

not other cor-

corporations

lishment

porations Latvia

Lithuania

Not clear

Otherwise taxation

Only regulated

Only regulated

Tax deferral, if assets and liabilities are at-

for SE (ECS),

for SE, not

tributable to permanent establishment

not other cor-

other corpora-

porations

tions

Only regulated

Only regulated

Tax deferral, if assets and liabilities are ef-

for SE (ECS),

for SE, not

fectively connected to permanent estab-

not other cor-

other corpora-

lishment

porations

tions

Not clear

Otherwise taxation

Otherwise taxation

Not clear

138

4 Taxation of European Companies during the time of restructuring in the current environment

Luxem-

Regulated for

Regulated for

Tax deferral, if assets and liabilities are ef-

Fair mar-

bourg

SE and other

SE and other

fectively connected to permanent estab-

ket value

corporations

corporations

lishment Otherwise taxation Taxation of shareholders to the extent that assets and liabilities of the SE do not stay connected to permanent establishment (then deemed liquidation)

Malta

Regulated for

Regulated for

No taxation of accrued capital gains (no

Book

SE and other

SE and other

permanent establishment required)

value

corporations

corporations

Nether-

Only regulated

Only regulated

Tax deferral, if assets and liabilities are ef-

Fair mar-

lands

for SE (ECS),

for SE, not

fectively connected to permanent estab-

ket value

not other cor-

other corpora-

lishment

porations

tions

Otherwise taxation Taxation of non-resident shareholders under certain circumstances (i.e. individual shareholders with substantial interest (5%))

4 Taxation of European Companies during the time of restructuring in the current environment

Poland

Only regulated

Not explicitly

Tax deferral, if assets and liabilities are ef-

for SE (ECS),

regulated for

fectively connected to permanent estab-

not other cor-

SE and other

lishment

porations

corporations

139

Not clear

Otherwise taxation likely (even though not clearly regulated)

Portu-

Only regulated

Regulated for

Tax deferral, if assets and liabilities are ef-

Fair mar-

gal564

for SE (ECS),

SE (for other

fectively connected to permanent estab-

ket value

not other cor-

corporations:

lishment

porations

taxation, inde-

Transfer of losses upon authorization

pendent of remaining per-

Otherwise taxation

manent

Taxation for shareholders regardless of

establishment)

whether permanent establishment remains or not, since deemed liquidation for them (however, domestic tax exemption may apply for residents)

Romania

Only regulated

Not explicitly

Tax deferral, if assets and liabilities are ef-

for SE (ECS),

regulated for

fectively connected to permanent estab-

not other cor-

SE and other

lishment

porations

corporations

Not clear

Otherwise taxation likely (even though not clearly regulated)

Slovak

Only regulated

Regulated for

Tax deferral, if assets and liabilities are ef-

Republic

for SE (ECS),

SE and other

fectively connected to permanent estab-

not other cor-

corporations

lishment

porations

Not clear

Otherwise taxation likely (even though not clearly regulated)

564

The European Commission has requested Portugal to change its restrictive exit tax provision for companies. Cf. European Commission, IP/08/1813.

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4 Taxation of European Companies during the time of restructuring in the current environment

Slovenia

Spain565

Only regulated

Only regulated

Tax deferral, if assets and liabilities belong

for SE (ECS),

for SE, not

to a permanent establishment

not other cor-

other corpora-

porations

tions

Only regulated

Regulated for

Tax deferral, if assets and liabilities are ef-

for SE (ECS),

SE (for other

fectively connected to permanent estab-

not other cor-

corporations:

lishment

porations

taxation, inde-

Not clear

Otherwise taxation likely (even though not clearly regulated) Not clear

Otherwise taxation

pendent of remaining permanent establishment) Sweden566

Only regulated

Regulated for

Tax deferral, if assets and liabilities are ef-

Fair mar-

for SE (ECS),

SE (for other

fectively connected to permanent estab-

ket value

not other cor-

corporations:

lishment

porations

taxation, inde-

Otherwise taxation

pendent of remaining permanent establishment) United

Only regulated

Regulated for

Tax deferral, if assets are used or held for

Fair mar-

Kingdom

for SE (ECS),

SE and other

the purpose of a trade carried on through a

ket value

not other cor-

corporations

permanent establishment

porations

Otherwise taxation

When looking at the treatment within the member states (see Table 11), the transfer of the registered and head office of an SE from the exiting country is possible from the company law perspective in all member states due to the European Company Statute. Accordingly, company law is not an issue since the European Company Statute provides for the cross-border transfer without the winding up and reestablishment of the SE. From a tax point of view, the cross-border transfer is regulated according to the transposition of the

565

566

The European Commission has requested Spain to change its restrictive exit tax provision for companies. Cf. European Commission, IP/08/1813. With regard to individuals, the Commission has also requested Spain to change its restrictive exit tax provisions. Cf. European Commission, IP/08/1531. The European Commission has requested Sweden to change its restrictive exit tax provision for companies. Cf. European Commission, IP/08/1362.

4 Taxation of European Companies during the time of restructuring in the current environment

141

Merger Directive in the majority of the countries, providing tax relief in accordance with Art. 10b-10d MD.567 The tax rules are mainly only applicable to the SE and not to domestic corporations. Even if the tax rules also cover domestic corporations, the transfer of such corporations will still result in a liquidation of the company and thus result in a taxable event if the company law rules do not allow such a cross-border transfer. Regarding the scope, transfers to EU and EEA states are covered, whereas the preferential treatment will usually not be extended to transfers outside the EU/EEA.568 The conditions needed to be fulfilled in order to receive relief in the exiting country are: that the assets and liabilities transferred remain effectively connected with a permanent establishment of the SE in the exiting country and that they play a part in generating the profits or losses taken into account for tax purposes.569 If no permanent establishment remains or the assets and liabilities transferred do not remain effectively connected to the remaining permanent establishment, all the member states will tax the capital gains which have accrued in the assets. In the new member states the treatment with regard to such assets and liabilities is not always fully clear according to available literature, but taxation is also likely in these countries (e.g. Czech Republic, Poland, Romania, Slovak Republic, Slovenia). Only Austria grants a tax deferral to the exiting SE (upon request of the taxpayer). This is subject to the condition that the taxing right is lost to an EU state or an EEA state provided that the applicable tax treaty includes a mutual assistance agreement.570 In case a permanent establishment remains in the exiting country, tax-exempt provisions and reserves may be carried over to this permanent establishment in all member states. The loss carryover is also allowed in almost all of the member states. Only in the Czech Republic, where no rule exists, the treatment is not clear. In Portugal, authorization of the treasury is required. If a foreign permanent establishment is affected due to the transfer, the rules as described in the context of a merger apply in the member states.571 One exception applies to Portugal. There, the gains which have accrued in the foreign permanent es-

567 568

569 570 571

Even though in Poland and Romania Art. 10b-10d MD have not explicitly been transposed, general rules apply, which should still defer taxation as long as a permanent establishment remains. Exceptions exist for Cyprus and Spain, where a transfer of a company outside of the EU/EEA is also possible. The SE, however, only exists as long as it moves within the EU/EEA. Cf. Schmidt, 2006: 2222; Heuschmid/Schmidt, 2007: 55-56. Regarding the interpretation of the terms “permanent establishment” and “effective connection”, the same issues arise as in the context of mergers. See Section 4.2.3.1.2.1.1.1. For details on this procedure see Section 4.2.3.1.2.1.1.1. Cf. Section 4.2.3.1.2.1.1.2 and Table 3.

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4 Taxation of European Companies during the time of restructuring in the current environment

tablishment will become taxable upon the transfer of the registered office, however contrary to a merger, no fictitious tax credit is granted in return. For the shareholders of the SE, the transfer of the registered office of the SE is not a taxable event in the majority of the member states. Thus, no deemed liquidation will take place. In Austria, if the taxing right is lost to an EU country or EEA country with a mutual assistance agreement, tax deferral is granted upon request of the taxpayer. In Germany, tax deferral is also granted when the taxing right is lost. However, upon a subsequent disposal not only capital gains which have accrued up to the transaction are taxed, but also subsequent increases. Exceptions to the shareholders’ tax deferral apply in the Czech Republic, Luxembourg, the Netherlands and Portugal. In the Czech Republic the treatment of the shareholders is not clear as no rule exists. In Luxembourg, shareholders are taxed upon the transfer of the SE to the extent that assets and liabilities of the SE do not stay connected to the permanent establishment in Luxembourg. Consequently, a partial deemed liquidation results. In the Netherlands non-resident shareholders, in particular individual shareholders with a substantial interest (5%), will be subject to tax under certain circumstances. In Portugal shareholders are fully taxed upon a transfer regardless of whether a permanent establishment remains or not, as the transaction is deemed to be a liquidation. Even though for resident shareholders a domestic tax exemption may apply, this is not in line with the wording of the Merger Directive. Belgium, Cyprus, Estonia and Malta constitute opposite exceptions to the rules above. Belgium on the one hand, does not offer beneficial tax rules to cross-border transfers. Accordingly, an SE moving abroad from Belgium is subject to liquidation, implying that accrued capital gains are included in taxable income at the entity level and the shareholder level. Cyprus, Estonia and Malta on the other hand, do not claim a taxing right upon a cross-border transfer. In Cyprus and Malta accrued capital gains are not taxable, independent of whether they are effectively connected to a permanent establishment or not. In Estonia a special tax system applies, according to which a tax is not levied when realized at the level of the corporation but only when distributed to the resident shareholder. However, tax consequences may result for non-resident shareholders as they are already taxed when economic activities are terminated in Estonia. When assessing the tax consequences in the entering country, differences occur with regard to the valuation of entering assets and liabilities in the EU member states. Thirteen member states will value assets, which enter their jurisdiction, at their fair market value

4 Taxation of European Companies during the time of restructuring in the current environment

143

(Austria, Belgium, Cyprus, Denmark, Finland, France, Germany, Ireland, Luxembourg, Netherlands, Portugal, Sweden, United Kingdom). Only if the countries had a prior taxing right with regard to assets and liabilities transferred (e.g. a permanent establishment existed in the entering country), the book/tax value will generally remain relevant with regard to these assets and liabilities. Furthermore, only one member explicitly states that the book value shall be used (Malta). In the other thirteen member states, the valuation is not clear as no rules exist on how to value assets upon immigration (Bulgaria, Czech Republic, Estonia, Greece, Hungary, Italy Latvia, Lithuania, Poland, Romania, Slovak Republic, Slovenia, Spain). When looking at the exiting country in order to determine whether gaps and overlaps may occur upon a transfer of assets, the valuation of assets and liabilities which exit a jurisdiction is also far from being uniform. In many member states such assets and liabilities will be valued at their fair market value. Exception applies to Cyprus and Malta, which generally use the book value. Furthermore, the valuation and thus the tax consequences are not fully clear in a majority of the new member states (Czech Republic, Malta, Poland, Romania, Slovak Republic, Slovenia). When assessing additional taxes, capital duty tax is still levied in four member states (Cyprus, Greece, Poland, Spain). In Spain the duty applies to EU-resident companies only if they were not subject to a similar duty in their country of origin. However, two of these (Greece and Spain) have been requested by the European Commission to abolish this charge when a transfer of the registered office or place of effective management of a company takes place.572 In conclusion, the transfer of an SE from one member state to another is not an issue regarding company law as the European Company Statute regulates such cross-border transfers. When looking at the tax consequences, tax deferral is in general provided in almost all of the EU member states for the SE under the conditions established in the merger directive (Art. 10b-10d MD). This is based on the following conditions: that a permanent establishment remains in the exiting member state, that assets and liabilities remain effectively connected with the permanent establishment and that the book values of the assets and liabilities are carried over to the permanent establishment. If these conditions are met, a taxation of accrued capital gains relating to the assets and liabilities is deferred. Furthermore, in most member states no tax consequences will result for the shareholders of

572

Cf. for Greece European Commission, IP/09/172; for Spain European Commission, IP/06/963.

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4 Taxation of European Companies during the time of restructuring in the current environment

the SE, as they remain taxable in the exiting country upon a subsequent disposal of the shares. Issues arise, however, when the Merger Directive has not been implemented (e.g. Belgium), has not correctly been implemented (e.g. Portugal with regard to shareholders) or has not clearly been implemented into national law (e.g. Czech Republic with regard to losses). This will cause uncertainty and may also result in taxes. Thus, the transfer may not be done in a tax neutral way. Furthermore, even if the rules in the member states are compliant with the wording of the Merger Directive, taxes may occur upon the transfer of an SE, which will prevent the tax neutral transfer. First, taxes may occur on hidden reserves accrued in assets transferred which are not effectively connected with a permanent establishment located in the exiting country. Secondly, upon a subsequent sale of shares double taxation may occur if taxing rights are granted to more than one country. Third, different valuations of assets and liabilities transferred in the exiting and entering country may lead to double or minor taxation of the accrued capital gains. Fourth, additional taxes may cause tax payments. All these issues may prevent the transfer of an SE from one member state to another or may result in negative tax consequences for the treasuries. It will be analyzed in Section 4.3 whether this is in line with the guiding principles established in Section 4.1. 4.2.5

Exit

According to Art. 66 ECS, an SE may be converted back into a public limited-liability company of the member state (of its registered office) two years after registration. This exit out of an SE shall neither result in the winding up of the company nor in the creation of a new legal person from a company law perspective. From a tax perspective - as in the case of the conversion into an SE - the conversion out of an SE neither changes the legal identity of the company nor its tax status.573 Accordingly, for the analysis of the treatment in the member states one can refer to Section 4.2.3.4. As has been shown there, such a transaction will not entail any tax consequences at the entity or shareholder level in any one of the EU member states. In conclusion, the conversion out of an SE will not cause tax issues and thus, neutrality is provided in all member states.

573

Cf. Thömmes, 2005: 588.

4 Taxation of European Companies during the time of restructuring in the current environment

4.2.6

145

Interim conclusions

In this chapter, the rules governing the entry into an SE, the transfer of an SE within the EU and the exit out of an SE in the 27 member states of the European Union have been examined. The comparative analysis has revealed that all transactions are possible from a company law perspective, as they are regulated in the European Company Statute. This is of great importance for the formation of a merger SE and the transfer of the registered office of an SE, as these transactions will not cause the winding up of the entities affected in a cross-border situation. From a tax perspective, the Merger Directive has significantly contributed to a harmonized environment for the SE. Consequently, in the majority of the member states tax consequences will not result within the framework of the Merger Directive. This generally covers the formation of an SE via merger, the formation of a holding SE and subsidiary SE and transfer of the registered office of an SE. The treatment in the Merger Directive is based on the condition that the taxing right of the country involved is not restricted. If this is fulfilled, hidden reserves accrued within the assets of the companies or shares of the shareholders will not immediately be realized and taxed. Instead, taxation will be postponed until a subsequent disposal or other realization event takes place. Furthermore, even though the conversion into and out of an SE is not covered by the Merger Directive, it does not cause tax consequences according to the domestic law of the member states as there is no economic change but solely a change of the legal identity. Despite this general uniform framework, certain areas have been identified in which tax issues arise. When articles of the Merger Directive have not been (fully or partially) transformed into national law, the preferential treatment provided in the Merger Directive does not apply. This will likely result in immediate tax consequences (e.g. Belgium which has neither transformed the rules on cross-border mergers, exchanges of shares nor cross-border transfers of the registered office). The rules in the Merger Directive are aimed at deferring taxation. If member states do not follow the wording, this will generally result in immediate taxes (e.g. Germany which levies taxes on the cancellation of a holding prior to a merger; Lithuania which requires a majority of two thirds instead of 50% in case of a holding; various member states which interpret terms (e.g. branch) according to their national law instead of in compliance with the directive).

146

4 Taxation of European Companies during the time of restructuring in the current environment

The tax deferral in the Merger Directive for assets and liabilities affected is dependent on the condition that a permanent establishment remains. This shall ensure a future taxing right of the country of the transferring or exiting entity. If no permanent establishment remains or the assets and liabilities transferred do not remain effectively connected to this permanent establishment the Merger Directive is silent. This implies that a tax deferral is not necessarily granted. Instead, the general rules on the realization of hidden reserves apply in the member states. Consequently, accrued hidden reserves will become immediately taxable in almost all of the member states. Thus, tax consequences may occur: in a merger, establishment of a subsidiary SE and transfer of the registered office of an SE. As the valuation rules for the assets transferred differ in the involved exiting and entering countries, double or minor taxation may occur upon a transfer of assets. Double taxation occurs if the assets exit a country at fair market value (resulting in a taxation of accrued hidden reserves in the exiting country) and enter the new country at book value (resulting in a taxation of the same hidden reserves upon a later disposal). Minor taxation results if the assets exit at book value (not causing a taxation of accrued hidden reserves in the exiting country) and enter at fair market value (causing only future capital gains to be taxed in the new country). Similar issues occur at the level of the shareholder if taxing rights collide with regard to the accrued capital gains due to a merger or transfer of registered office (Art. 8 (6) and 10d (2) MD). In the case of an establishment of a holding or subsidiary SE, a doubling of hidden reserves may occur. This is because the accrued hidden reserves are rolled over to the receiving entity which receives the shares or assets, on the one hand, but also to the shares which the contributing entity received in return for the shares or assets contributed, on the other hand. As the Merger Directive is silent on this issue, national rules apply which will likely cause an economic double taxation. In case of a merger, losses only need to be carried over from the transferring company to the receiving company or its permanent establishment if such a rule exists in national law (Art. 6 MD). If the carryover is denied as is the case in half of the member states, losses can no longer be used as the transferring entity perishes. Thus, negative tax consequences result.

4 Taxation of European Companies during the time of restructuring in the current environment

147

In order to avoid abuse, the member states require the taxpayers to follow certain administrative rules (prior approvals, filing duties). Furthermore, holding periods need to be observed in some member states such as with the establishment of a holding SE or subsidiary SE. If these are not fulfilled, taxes are charged immediately and additionally an economic double taxation may occur. Additional taxes like capital duty tax, stamp duty tax and real property transfer tax arise in all transactions covered (merger, formation of holding and subsidiary SE, transfers of SE) (except for conversions into and out of an SE) in various countries. Whereas the real property transfer tax is not regulated on an EU level, the Capital Duty Directive establishes limits for levying capital duty tax and stamp duty tax. The following chapter will analyze whether or not these issues are in line with the guiding principles established in Section 4.1 and, if not, which changes to the current rules need to be proposed.

4.3

Issues and options for reform

When evaluating the current tax rules, guidance is provided based on the economic, legal and administrative criteria. As has been established in Section 4.1, the criteria may cover different aspects of reorganizations. Furthermore, they may supplement each other (e.g. economic and legal criteria) or may be in conflict with each other (e.g. economic and administrative criteria). Thus, in the following sections, only the relevant criteria are discussed within the specific areas of issue. The analyzes and proposals are structured according to the main points of issue as derived at the end of the comparative analysis of the member states’ treatment of the SE.574 Firstly, general company law aspects are examined. Secondly, the focus is on taxes. Here, the transposition of the merger directive into national law is critically analyzed. Finally, the treatment of accrued hidden reserves, losses, measures to avoid abusive structures and additional (non-profit) taxes are evaluated. Proposals are made in the respective subsections. 4.3.1

Company law

The comparative analysis of the member states has revealed that the entry into, the transfer of and the exit out of an SE are regulated from a company law point of view. This

574

Cf. Section 4.2.6.

148

4 Taxation of European Companies during the time of restructuring in the current environment

is because the European Company Statute facilitates these cross-border transactions, which is especially important for mergers and transfers.575 Consequently, company law does not create obstacles for the SE. However, an SE may only be formed and transfer its registered office in accordance with the conditions set out in the European Company Statute. Accordingly, firstly, with regard to the formation of an SE, an SE may not be founded directly by individuals as other national legal entities. Thus, at the moment, the SE is not an option to start a business.576 Furthermore, only certain ways of formation are allowed. This excludes, for example, divisions577 and thus may not provide the flexibility that businesses need.578 Moreover, only companies with a cross-border background may form an SE (Art. 2 ECS). However, as has been shown in Chapter 2 this criterion may be circumvented via the use of shelf SEs. Thus, this criterion may be abolished since it does not fulfill its aim and causes costs.579 Secondly, with regard to the transfer of an SE, the European Company Statute stipulates that the registered office as well as the head office need to be transferred (Art. 7 ECS). Consequently, dual resident SEs are not allowed. From a company law perspective this criterion provides less flexibility for SEs.580 It implies that operations of the SE also need to be transferred which may make the transfer less attractive.581 However, according to the predominant view in literature Art. 7 ECS does not violate the freedom of establishment (Art. 43 ECT) because the incorporating state has the right to limit the transfer of the registered or head offices of its companies.582 Furthermore, the SE is currently

575 576 577

578

579

580

581 582

Cf. Sauter/Wenz, 2002: 10; Schön/Schindler, 2004: 573. Cf. Pakarinen, 2008: 975. However, a directive regulating cross-border divisions from a company law perspective does not exist yet. Cf. Klingberg/Lishaut, 2005: 700. Thus, it may not be a real option for companies within the EU yet. Contrarily, tax law is regulated due to the Merger Directive. Cf. Art. 2 (b) MD. Cf. Casper, 2007: 97-105; Hommelhoff/Teichmann, 2008: 900 who put the limitations down to the original circumstances of the introduction of the SE. The proposal of a European Private Company provides more flexibility. Cf. Hommelhoff/Teichmann, 2008: 899-901. Cf. also Casper, 2007: 97-105; Eidenmüller/Engert/Hornuf, 2008: 726; Hommelhoff/Teichmann, 2008a: 928 with further references. In the proposal of a European Private Company a cross-border relationship is no longer required. Cf. Hommelhoff/Teichmann, 2008: 900. It also implies that the SE may not choose the best company law by being registered in one country and having its place of effective management in another country. However, it is questionable whether the effect on the SE is substantial as company law is mainly regulated in a uniform way across Europe due to the European Company Statute. However, due to the fact that the European Company Statute does not regulate every aspect of company law but instead also refers to national law, this criterion may still be an obstacle. Cf. Hommelhoff/Teichmann, 2008: 901. Cf. also, for example, Section 4.2.3.1.1 with regard to the treatment of minority shareholders. Cf. Schindler, 2005a: 68. Cf. ECJ of 27/09/1988 (81/87, Daily Mail), ECR 1988: 5483; Schön/Schindler, 2004: 572 with further references; Thömmes, 2004: 27; ECJ of 16/12/2008 (C-210/06, Cartesio), ECR 2008, I-9641.

4 Taxation of European Companies during the time of restructuring in the current environment

149

the only legal form which - regulated under a law - may freely move around within the EU.583 Nevertheless, EU law may support a more lenient approach.584 When examining company law in a broader context, a comparison may be made between SEs and national companies of the member states. The two major aspects in this regard concern mergers and transfers as in both cases company law may create an obstacle to cross-border transactions.585 Mergers of national limited-liability companies are now facilitated via Directive 2005/56/EC.586 This directive had to be transposed by 15 December 2007. In three fourth of the member states this has been done, whereas seven member states still need to transform the directive into their national law.587 Transfers of national limited-liability companies are not yet facilitated on an EU level as the 14th Company Law Directive has not been adopted588 and are generally also not provided for in the laws of the member states.589 Accordingly, a transfer of the registered office without dissolution of the company in one state and reestablishment of the company in another state is generally not possible for national corporations. However, the question arises, does EU law provides for a different judgment. This is controversially discussed among scholars. Obstacles having an impact upon the transfer of a company from one member state to another may constitute a restriction of the freedom of establishment. However, based on the judgment of the European Court of Justice in “Daily Mail” member states are not forbidden to impose restrictions on the transfer of the central management and control of companies incorporated under their law to other member states.590

583 584

585 586 587 588

589

590

Cf. Schindler, 2005a: 68. Cf. Thömmes, 2004: 27; Lenoir, 2008: 17-18. Cf. also the discussion below concerning national companies. From a tax point of view, the separation of the statutory seat and the place of effective management is not as interesting as from a company law point of view. Contrarily, dual residency is the result, generally leading to double unlimited taxation, unless a tie-breaker rule exists. Cf. Staringer, 2005: 215; Vogel/Lehner, (eds.), 2008: Art. 4 paras. 241-280. Furthermore, if the taxing rights of the exiting country are restricted due to the tie-breaker rule, the issue of exit charges occurs comparable to the case that both statutory seat and place of effective management are transferred. Cf. the discussion below in Section 4.3.2.2. This holds true even if tax law is regulated. Cf. also Sauter/Wenz, 2002: 10; Schön/Schindler, 2004: 573. Cf. Council Directive, 2005/56/EC: 1. See Table 2 in Section 4.2.3.1.2.1.1.1. Cf. also Herrler, 2007, 295-300; Winter, 2008: 532-537. Cf. European Commission, XV/6002/97. The work on this issue has been officially stopped in December 2007. See http://ec.europa.eu/internal_market/company/seat-transfer/index_en.htm (date of access: 31/01/2009). Exceptions exist for Cyprus, Luxembourg and Malta. See Table 11 in Section 4.2.4.2. Cf. also the developments in Germany according to which a public or private limited liability company may transfer its central management abroad. However, it needs to keep its registered office in Germany. Cf. Kollruss, 2008: 316-317. Cf. ECJ of 27/09/1988 (81/87, Daily Mail), ECR 1988: 5483; and also ECJ of 16/12/2008 (C-210/06, Cartesio), ECR 2008, I-9641. Furthermore, see the details in Section 4.1.2.3.

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Contrarily, with regard to the entering country the court held that member states may not prevent a company from moving into its territory as long as this is allowed by the exiting country.591 Consequently, companies found in countries that follow the incorporation doctrine are permitted to transfer their head office without being liquidated in the exiting country. Thus, such companies can register in the country with the most favorable company law according to their needs. Conversely, companies found in countries that follow the real seat doctrine cannot move around as they will be liquidated in their home country upon transfer.592 In conclusion, even if the entering country may not create obstacles for companies moving into its territory, the exiting country is not (yet) prohibited from doing so based on the judgments of the European Court of Justice.593 To sum up, the European Company Statute facilitates cross-border transactions for SEs from a company law point of view. In order to be within the scope of the European Company Statute certain requirements need to be met. To provide more flexibility for businesses it may be advisable to loosen some of these requirements.594 The situation for national limited liability companies is different. Whereas mergers are possible due to the Directive 2005/56/EC, cross-border transfers may not be done without negative consequences. Here, future developments need to be waited for. In the meantime, the SE is the only means regulated by law to transfer a company within the EU without obstacles.595 4.3.2

Tax law

4.3.2.1 Missing or incorrect transformation of Merger Directive The original Merger Directive had to be put into place by the member states by 1 January 1992. The amended Merger Directive had to be translated into national law by 1 January 2006 with regard to the rules affecting the SE (extending the list of companies, regulating the transfer of the registered office of an SE) and by 1 January 2007 with regard to the other amendments. 591 592 593

594

Cf. ECJ of 09/03/1999 (C-212/97, Centros), ECR 1999: I-1484; ECJ of 05/11/2002 (C-208/00, Überseering), ECR 2002: I-9919; ECJ of 30/09/2003 (C-167/01, Inspire Art), ECR 2003: I-10155. Cf. Schön, 2004: 198; Schindler, 2005a: 68. Regarding the different doctrines see also Section 4.2.4.1 with further references. Cf. in detail also Kessler/Huck/Obser/Schmalz, 2004: 821-825; Lange, 2005: 22-23, 165; Terra/Wattel, 2008: 786-790; Aigner, 2009: 76-80; Thömmes, 2009a: 1219-1226. In this regard it seems that the European Parliament may take action. Cf. Kuck, 2009: 5. This could be done as part of the revision of the European Company Statute planned for 2009. Cf. Art. 69 (a) ECS.

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Even though the deadlines have passed, not every member state has transposed every rule of the merger directive into its national law (e.g. Belgium which has neither transformed the rules on cross-border mergers, exchanges of shares nor cross-border transfers of the registered office; also some new member states which have not transposed Art. 10 MD regarding the treatment of foreign permanent establishments or Art. 10b-10d MD regarding the transfer of the registered office of an SE).596 As this will likely result in immediate tax consequences, the question arises whether taxpayers can do anything about this. EC Directives are not directly binding but only with regard to the result which shall be achieved. This implies that they need to be transformed into the national law of the member states. This allows countries to choose their form and methods of implementing new rules. Nevertheless, the transformation has to suffice the aim and has to take place within a certain time period (Art. 249 (3) ECT). If the implementation date has passed, a directive can become directly applicable if two further conditions are met. First, only rules which give rights (not obligations) to an EU person may be directly applied. Secondly, the rules need to be precise enough. This means that they do not require the adoption of further measures and do not leave any discretionary power regarding the transformation, and thus can be directly applicable.597 When examining the Merger Directive, these conditions can generally be said to be fulfilled.598 Consequently, the taxpayer can directly refer to the rules established in the Merger Directive if national law has not been transposed yet.599 This not only cover cases in which a transposition is missing, but also cases in which the Merger Directly has been transposed but in an incorrect way (e.g. Germany which levies taxes on the cancellation of a holding prior to a merger and which does not allow a cash payment in case of a merger; Lithuania which requires a majority of two thirds instead of 50% in case of a holding).600 In such cases the criteria must be interpreted in conformity with the directive.601 This is

595 596 597 598

599 600 601

This is not only true from the perspective of company law, but also from the perspective of tax law. See the discussion below in Section 4.3.2.2. Cf. Section 4.2. Cf. ECJ of 04/12/1974 (C-41/74, Van Duyn/Home Office), ECR 1974: 1337. Cf. the predominant view in literature: Staringer, 2001: 91; Herzig/Griemla, 2002: 61; Campos Nave, 2005: 2663; Thömmes, 2005: 559-561; Bartone/Klapdor, 2007: 114; Schön/Schindler, 2008: para. 23; Terra/Wattel, 2008: 559; Thömmes/Fuks (eds.), EC, Netherlands: para. 74. The taxpayer may even claim damages from the respective member state provided that the breach of EU law is sufficiently serious. Cf. in more detail Terra/Wattel, 2008: 559-560. Cf. Section 4.2. Cf. ECJ of 10/04/1984 (14/83, Von Colson and Kamann), ECR 1984: 1891; ECJ of 05/07/2007 (C321/05, Kofoed), ECR 2007: I-5795; Englisch, 2007: 340-341. Conversely, of the opinion that the ref-

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also true for legal terms established in the directive. As has been shown in the comparative analysis of the member states, special problems exist with the term “branch”.602 As the term “branch” is a European term (defined in the Merger Directive and interpreted by the European Court of Justice) it needs to be interpreted based on European valuations and not based on national valuations. Consequently, parts which are capable of functioning on their own constitute a branch. Further conditions (e.g. certain independence from the transferring entity as stipulated according to German national jurisprudence) may not be stipulated.603 Nevertheless, additional guidelines on the EU level would be helpful. Overall, even if the taxpayer can directly refer to the Merger Directive, this still creates uncertainty for the taxpayer and increases his burden as he may have to argue with the tax authorities in order to receive the proper treatment. Consequently, member states should be obliged to transform and interpret the Merger Directive correctly. The European Commission has the permission to request an opinion from a member state whose law is incompliant with EU law, and can also bring such matter before the European Court of Justice (infringement procedure according to Art. 226 ECT). In the case of Belgium such a ruling of the European Court of Justice exists604 and the Belgium parliament has now proposed amendments to its national law.605 4.3.2.2 Treatment of accrued hidden reserves In the following passages, different aspects of accrued hidden reserves are examined. Specifically, this covers the treatment of transferred assets and companies, the treatment of transferred permanent establishments in third countries, the treatment of shareholders of the companies involved and the doubling of hidden reserves.

602

603 604 605

erence point of the 10% cash element in a merger cannot be interpreted in just one way Ernst&Young (ed.), 2009: 1091. See, for example, from the German perspective: Blumers, 2008: 2041-2045; from the Portuguese perspective: Petkevica, 2008: 370-376. Cf. also Section 4.2.3.3.2.2. Contrarily, fewer problems exist with the term “permanent establishment”. This is probably due to the fact that, in general, national law as well as bilateral law cover the term. Cf. Thömmes, 2000: 588-589, 600-601; Herzig, 1997: 16-17; Lange, 2005: 124-126; Jacobs (ed.), 2007: 1199 Cf. ECJ of 08/02/2008 (C-392/07, Commission/Belgium), OJ C 158: 8 Cf. Osterweil/Quaghebeur, 2008: 351 Fn. 28.

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4.3.2.2.1 Transfer of assets and companies from one member state to another 4.3.2.2.1.1 Issues When evaluating the current rules with regard to the transfer of assets or companies, the taxing right and the time of taxation are examined first, and the amount to be taxed, secondly. 4.3.2.2.1.1.1 Taxing right and time of taxation The comparative analysis of the member states has shown that an immediate taxation of accrued hidden reserves may arise in a variety of cases. Specifically, upon a merger, a contribution of assets (i.e. establishment of a subsidiary SE) and a transfer of the SE abroad, taxes arise in the majority of member states if no permanent establishment remains or the assets and liabilities transferred are not attributable to a remaining permanent establishment. This attribution is interpreted differently. It is generally given if the assets are physically transferred abroad or if the taxing right changes upon a transfer of the title of the asset.606 Moreover, whereas most member states require that a permanent establishment remains and the assets stay effectively connected to the permanent establishment, some member states more generally require that their taxing right may neither be restricted nor lost (e.g. Austria, France, Germany). Exceptions to this general treatment exist for: Cyprus, which does principally not require that a permanent establishment remain within its territory (thus, in case of a merger, formation of a subsidiary or transfer of a company), and Malta, which does not require a permanent establishment in the case of a transfer of a company. Thus, Cyprus and Malta do not secure their taxing right upon the specific transactions. Overall, it has become evident that the member states, in principal, only provide a tax neutral treatment of reorganization and transfer processes if their taxing right is guaranteed. In compliance with the rules set out in the Merger Directive this is generally based 606

This may, for example, be the result in case a double tax treaty between the involved countries is in place which includes a rule similar to Art. 8 and 13 (3) OECD model (specific rule for ships and aircraft operated in international traffic). In this case a permanent establishment cannot be established because the right to tax the income is granted to the residence state of the parent company not the source state. Cf. also Conci, 2004: 16; Bartone/Klapdor, 2007: 119. Furthermore, an effective connection to a permanent establishment may be denied if assets are deemed to be connected to the parent corporation. Such an effective connection might especially be difficult to prove in case of shares, financial assets and intangible assets like patents. In such a case, it might be advisable to leave some responsibility of the group in the countries of the transferring entities. However, this might contradict a clear and effi-

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on the condition that a permanent establishment remains and the assets and liabilities stay effectively connected to a remaining permanent establishment (Art. 4 MD for the merger SE, Art. 9 and 4 MD for the subsidiary SE and Art. 10b MD for the transfer of the SE). Thus, it can be stated that a tax deferral is only granted for functions and operating activities which are left in the country of the transferring entity or exiting entity. Contrarily, if these functions and activities are terminated, a deferral is not provided.607 Instead, many member states consider a transfer or restructuring of companies out of their territory as if the corresponding assets are alienated. Thus, they tax the gains accrued within the assets while they were effectively connected to the company resident in the member state immediately upon transfer. This implies that such assets, including any intangible assets not acquired for a consideration or self-developed, must be valued at fair market value in the closing balance sheet of the transferring company and will, in principle, be taxed. Austria poses an exception in that it secures its taxing right in case of a transfer to an EU state or an EEA state whose double tax treaty includes a mutual assistance agreement. But instead of immediately taxing the accrued hidden reserves upon transfer it grants a tax deferral. Under this approach, the tax is assessed at the moment of the reorganization but not levied until a subsequent disposal takes place or a further reorganization which grants the taxing right to a country outside the EU/EEA.608 4.3.2.2.1.1.1.1 Assessment against the background of international neutrality and equity When assessing the treatment of accrued hidden reserves in the member states, this treatment has to be compliant with economic as well as legal criteria. In the context of economic criteria, international neutrality and international equity are of relevance.609 For the treasury, based on international equity, a taxing right exists with regard to hidden reserves established within its territory. If upon a reorganization the treasury is about to lose this taxing right it may exercise it. Similarly, international neutrality interpreted as fiscal neutrality requires that the fiscal position of the treasury is not worsened due to a

607

608

cient organizational structure (as may be the aim of a formation of an SE). Cf. Bartone/Klapdor, 2007: 118-119. Prinz generally distinguishes transfers (inbound and outbound cases) in partial and full transfers depending on the intensity. Whereas in a partial transfer operating activities are shifted abroad to a permanent establishment while the main functions remain within the country, a full transfer implies that the main functions are terminated, maybe leaving activities of the permanent establishment in the country. Cf. Prinz, 2007: 966. Cf. Sections 4.2.3.1, 4.2.3.3 and 4.2.4.

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cross-border reorganization or transfer process. This also implies that the treasury may exercise its taxing right if otherwise the accrued hidden reserves leave the treasury’s jurisdictional sphere. The laws of most member states provide for a taxation in case of a loss of taxing right, thus securing the interest of the treasuries.610 In this context, a number of member states focuse on the permanent establishment. This is in line with Art. 13 (2) OECD model which grants the taxing right to the source state when such a nexus is given (Art. 7 and 5 OECD model).611 Consequently, upon the actual disposal (e.g. sale of assets to third parties) of those assets connected to a permanent establishment in the member state of the transferring or exiting company, resulting capital gains are still taxable in this member state as they are part of the income of the permanent establishment.612 However, this is not the only situation in which a taxing right is guaranteed. The taxing right is also upheld when the ownership of real estate is transferred. Since the real estate is located in the country of the transferring or exiting entity, capital gains arising in a subsequent sale are still taxable in the country of source (Art. 13 (1) and 6 OECD model).613 Therefore, an approach focusing just on the effective connection to a permanent establishment is too narrow. Instead, the tax deferral should always be granted if a taxing right remains, independent of a remaining permanent establishment.614 For the taxpayer, international equity requires that he pays taxes according to his ability to pay. This implies that a taxation of cross-border reorganizations should only take place when hidden reserves are realized in a market transaction in compliance with the realization principle. Furthermore, international neutrality - interpreted as neutrality towards competition - requires that taxes do not influence or even hinder entrepreneurs’ decisions on the change of the legal form, organizational structure or territorial allocation. If the conditions for a tax deferral are met (i.e. remaining of a permanent establishment in the member state of the transferring or exiting company, effective connection of assets and liabilities to the permanent establishment and continued use of the book values), a

609 610 611

612 613 614

For details see Section 4.1.1. Cf. also Klingberg/Lishaut, 2005: 703. Even if a permanent establishment remains, some changes - indirectly resulting from the reorganization - may occur. For example, as no corporation remains the right of source taxation upon a distribution of dividends vanishes (Art. 10 (2) OECD model). Cf. Klingberg/Lishaut, 2005: 707. Cf. Diemer, 2004: 38. Cf. Section 4.1.1. Cf. also Staringer, 2001: 95; Schmalz, 2004: 66; Hohenwarter, 2007: 505. Here, the specific double tax treaties between the member states need to be considered, which may deviate from the OECD model.

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taxation only occurs if a realization according to general rules has taken place. Then, national and cross-border restructurings are treated in the same way.615 Consequently, crossborder transactions are not hampered by taxes and the taxpayer is taxed when his ability to pay has actually changed. Contrarily, any immediate taxation of accrued hidden reserves in the member states is inconsistant with the economic position of the taxpayer. Only Austria, which postpones such an immediate taxation in an EU or EEA context, pays attention to the position of the taxpayer. There, at the moment of the reorganization or transfer of the entity abroad the tax is assessed (subject to no further conditions e.g. guarantee or interest charges), but it is not levied until a subsequent disposal takes place. This seems to be a systematic and feasible approach to take into account both the perspective of the taxpayer as well as the perspective of the treasury.616 To sum up, against the background of international neutrality and equity, most member states only adequately take into account the treasury’s position whereas the taxpayer is put into a worse situation if immediate taxes are due in the cross-border situation. 4.3.2.2.1.1.1.2 Assessment against the background of primary and secondary EU law When assessing the treatment of accrued hidden reserves in the member states against the background of legal criteria, primary and secondary EU law is of relevance.617 With regard to secondary EU law, directives and regulations need to be observed by the member states as EU law takes precedence over national law. In the context of crossborder reorganizations and transfers of the registered office across a border, the Merger Directive is of significant importance. The condition to provide a tax deferral for accrued hidden reserves if a permanent establishment remains - as stipulated in the majority of member states - is stated in the Merger Directive (Art. 4, 9, 10d MD). Conversely, the Merger Directive is silent on the treatment of assets and liabilities which are not effectively connected to a permanent establishment. This can be interpreted in two ways. On the one hand, it can be argued that the Merger Directive allows for a final taxation of hidden reserves established in these assets.618 On the other hand, it can be argued that such assets transferred are just not dealt with in the Merger Directive, thus not providing any

615 616 617 618

Cf. also Diemer, 2004: 38. For a further discussion of proposals see Section 4.3.2.2.1.2 below. For details see Section 4.1.2. Cf. Schön/Schindler 2004: 575.

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guidance.619 As has been shown above, the majority of member states interpret this silence as permission to levy an exit charge when such assets are transferred.620 Overall, even though the intention of the directive is to achieve tax neutrality from the perspective of the member states as well as the companies (and shareholders) involved,621 this is not fully achieved for the taxpayers. Nevertheless, the treatment to grant a tax deferral only when a permanent establishment remains can be found to be compliant with the wording of the Merger Directive and thus with secondary EU law. However, primary EU law takes precedence over secondary EU law.622 Thus, it also has to be examined whether the treatment of accrued hidden reserves is compliant with the fundamental freedoms established in the EC Treaty. In general, tax barriers and heterogeneity in national law do not serve the needs within an internal market to cooperate with other companies in other markets and/or reorganize their own companies.623 Consequently, the question is whether primary EU law provides for a greater scope of safeguarding rights for taxpayers than secondary EU law.624 More precisely, the main question is whether such cross-border reorganization or transfer of registered office transactions are restricted in any way and, if so, whether this may be justified or not. As has been stated in Section 4.1.2, regarding the personal scope, companies and firms formed in accordance with the law of a member state and having their registered office, central administration or principal place of business within the Community, for example SEs,625 as well as individuals who are nationals of a member state are covered by the fundamental freedoms of the EC Treaty. Furthermore, regarding the objective scope, the freedom of establishment is of predominant importance for business transactions within the EU. It establishes the right to set up and manage undertakings in other member states provided that the parent company or shareholder exercises a substantial influence on the business undertaken. As this is given in cross-border reorganizations and transfers of companies, the transfers of assets as well as whole companies from one member state to another are generally cov-

619 620 621 622

623 624 625

Cf. Schön, 2004: 202. Cf. Sections 4.2.3.1, 4.2.3.3 and 4.2.4. Cf. Staringer, 2001: 97. In the context of the Merger Directive see e.g. Kessler/Huck/Obser/Schmalz, 2004, 860-861; Aßmann, 2006: 183-187; Jacobs (ed.), 2007: 168-169; Schön/Schindler, 2008: para. 33 who point out that the Merger Directive is aimed at improving the fundamental freedoms for the involved companies. Thus, restrictions of the freedoms cannot be derived from the directive. Cf. Lenoir, 2007: 76. Cf. Schön/Schindler, 2004: 575. Cf. also Helminen, 2004: 30; Schindler, 2004: para. 30; Schön, 2004: 199; Schön/Schindler, 2008: paras. 18-19.

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ered.626 As the fundamental freedoms apply, it has to be tested next whether a discrimination or restriction of the taxpayers and/or transactions can be found. A restriction could occur with regard to the accrued hidden reserves.627 In national cases, charges are, in general, not levied on assets which are transferred between different locations or on companies which move from one place to another.628 Contrarily, it has been shown that most member states levy charges if assets or companies are transferred across a border. Thus, such charges can be found to constitute an obstacle to the free movement of persons and entities like SEs within the EU.629 This is because a taxpayer, which is moving its tax residency, is charged earlier and maybe even more heavily630 than a taxpayer who stays within one territory.631 Therefore, it is evident that cross-border transactions and comparable domestic transactions are treated differently. The different treatment not only arises with regard to the immediate charges, but also with regard to the condition that a permanent establishment has to remain in the cross-border case. In a domestic case there is no such condition to be fulfilled.632 Overall, cross-border reorganization and transfer processes are restricted as a tax deferral is only granted if the conditions set out in the Merger Directive are fulfilled. Such conditions do not exist in comparable domestic cases.633 Next, it has to be analyzed whether such a restriction can be justified. As has been stated above, the member states may not justify a restrictive measure on grounds of a simple loss of tax receipts,634 lack of harmonization between member states, missing reciprocal rules, additional budgetary burdens or administrative or legislative difficulties.635 A justification based on the aim of preventing tax avoidance also does not apply as the rules in the member states are not specifically aimed at preventing purely artificial arrangements. Instead, any taxpayer who is engaged in a cross-border reorganization is immediately taxed on accrued hidden reserves provided that the member state fears losing its tax-

626

627 628 629 630 631 632 633 634 635

For cross-border mergers see specifically ECJ of 13/12/2005 (C-411/03, SEVIC Systems), ECR 2005, I-10805. More generally see also Schön, 2004: 203; Benecke/Schnitger, 2006: 778-779; Schön/Schindler, 2008: para. 240. Cf. Rödder, 2004: 1633; Schön, 2004a: 297. Cf. Chapter 3. Cf. also Linn/Reichel/Wittkowski, 2006: 637 Cf. Essers/Elsweier, 2003: 87; Diemer, 2004: 47. Regarding the issue of valuation see Section 4.3.2.2.1.1.2 below. Cf. European Commission, COM(2006)825: 6. Cf. also Hohenwarter, 2007: 506. This second difference may be of lower material importance, but is still a difference. Cf. Rose, 2004: 61; Schön/Schindler, 2004: 576; Blumenberg, 2005: 258, 260; Rödder, 2005: 297; European Commission, COM(2006)825: 5; Schön/Schindler, 2008: para. 153. Cf. also ECJ of 11/03/2004 (C-9/02, De Lasteyrie du Saillant), ECR 2004: I-2409 para. 60. Cf. Section 4.1.2.

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ing right.636 Furthermore, a justification based on the effectiveness of fiscal supervision can be neglected within the EU as the Mutual Assistance Directive and Recovery of Claims Directive637 are in place so that the treasuries of the member states can derive necessary information from each other and recover tax bills across a border.638 Contrarily, a justification could be based on the necessity to ensure the cohesion or coherence of the national tax system. Since the member state of the transferring or exiting entity allowed the building up of hidden reserves (due to the cost principle with regard to genuine hidden reserves and depreciation charges with regard to artificial hidden reserves)639 one can argue that it should also be allowed to tax these accrued hidden reserves if they are about to leave the country.640 Thus, an immediate taxation upon exit may constitute a means of a member state to safeguard its taxing rights with regard to these accrued hidden reserves.641 However, if the fiscal cohesion is secured by a bilateral convention concluded with another member state, that principle may not be invoked to justify the disadvantage, as then the taxing right is voluntarily given up.642 This argument may not be used here though, as the bilateral level only covers the situation after the reorganization or transfer process.643 Furthermore, an immediate taxation upon exit could be justified based on the principle of territoriality and allocation of taxing powers. The reason is that the tax of the member state is levied on hidden reserves which were established in this state while the taxpayer had been a resident there.644

636 637 638

639 640

641

642 643 644

Cf. also ECJ of 21/11/2002 (C-436/00, X and Y), ECR 2002: I-10829 para. 61. Cf. Council Directive, 76/308/EEC: 18, as last amended by Council Directive, 2001/44/EC: 17; Council Directive, 77/799/EEC: 15, as last amended by Council Directive, 2004/56/EC: 70. Cf. also ECJ of 21/11/2002 (C-436/00, X and Y), ECR 2002: I-10829 paras. 60-62; ECJ of 07/09/2006 (C-470/04, N), ECR 2006: I-7409 paras. 52-53. Nevertheless, this can be regarded as a substantial burden for the treasuries. Cf. Schön, 2003/04: 33-34; Hahn, 2006: 802-803. Cf. Chapter 3 and Section 4.1.1. National coherence is questionable, though, if a member state does not value entering assets at their fair market value as then the entering country would not only take possession of hidden reserved accrued within its territory but also of hidden reserves accrued outside its territory. Cf. Kessler/Huck, 2005: 214. This is also true for national rules which waive the taxing right after a certain time in case a taxpayer leaves the country but not when the taxpayer stays. Cf. Rijkers, 2005: 328. Skeptical also Seitz, 2008: 64-66. Cf. Essers/Elsweier, 2003: 87-88; Schön, 2004: 201-202; Kessler/Huck, 2005: 209-210; Lange, 2005: 172-176; Seitz, 2008: 61. This is also the basis of the Merger Directive. Cf. Council Directive, 90/434/EEC: 1, which states that the financial interest of the state of the transferring or exiting entity shall be safeguarded. Cf. also ECJ of 21/11/2002 (C-436/00, X and Y), ECR 2002: I-10829 para. 59; ECJ of 11/03/2004 (C-9/02, De Lasteyrie du Saillant), ECR 2004: I-2409 paras. 65, 67; ECJ of 07/09/2006 (C-470/04, N), ECR 2006: I-7409 para. 59. Cf. also ECJ of 21/11/2002 (C-436/00, X and Y), ECR 2002: I-10829 para. 53; Schön/Schindler, 2008: para. 154. Cf. in detail Lange, 2005: 175. Cf. ECJ of 07/09/2006 (C-470/04, N), ECR 2006: I-7409, para. 46. Cf. also Seitz, 2008: 62-64.

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Thus, it seems likely that a justification can be found, which means that the measure pursues a legitimate objective compatible with the EC Treaty. Consequently, the taxing right of the hidden reserves established within the territory of the country of the exiting or contributing company is upheld.645 This also applies if the exiting country loses its taxing right afterwards (for example, because a double tax treaty allocates the taxing right to the entering country), because the hidden reserves have been accrued within the exiting country until the time of transfer.646 Nevertheless, a rule can only be applied to the taxpayers if the measure does not go beyond what is necessary to attain the objective of the rule. This means that it needs to be proportionate. Thus, there may be no less restrictive way to achieve the goal. Consequently, any measures to preserve the taxing right need to be strictly proportional to its aim and may not be disadvantageous for the taxpayer compared to a taxpayer who did not move.647 Therefore, the question to be answered is whether there is a less onerous measure than an immediate taxation. Within the context of individuals (contribution of shares, transfer of residence), an immediate taxation has not been found to be the least restrictive measure.648 Instead, a less restrictive measure would be to only assess the tax upon transfer while deferring the tax payment until the gain is actually realized.649 Thus, the next question is whether this reasoning may also be applied to transfers of assets or companies. There are some counterarguments in literature. First, the monitoring of the assets of companies may result in a substantially higher burden for the treasuries than the monitoring of the few assets of individuals (mostly shares).650 Secondly, the taxpayer has the advantage of higher depreciation expenses and a lower subsequent capital gain in the entering country due to the step-up of the assets.651 Third, within the context of losses, the European Court of Justice has argued that less restrictive measures may only be

645

646 647

648 649 650 651

Cf. Knobbe-Keuk, 1994: 83; Thömmes, 1997/98: 90-98; Schön, 1998/99: 74-76; Schön, 2003/04: 50; Schön, 2004a: 295-296; Klingberg/Lishaut, 2005: 700; Rödder, 2005: 298; Jacobs (ed.), 2007: 256; Schön/Schindler, 2008: paras. 154, 177. Denying the right to tax: Birk 1999: 171-172. Schön also points out that otherwise member states would be punished for their generous taxing procedures and forced to introduce a taxation based on unrealized fair values in order to prevent the emergence of hidden reserves. Cf. Schön, 2003/04: 51. Cf. Thömmes, 1997/98: 90-98; Schön, 1998/99:74-76; Essers/Elsweier, 2003: 84-85; Schön, 2004a: 296; ECJ of 07/09/2006 (C-470/04, N), ECR 2006: I-7409, para. 46. Cf. Essers/Elsweier, 2003: 84-85; Rödder, 2004: 1633; Blumenberg, 2005: 255; Kessler/Huck, 2005: 208-209; European Commission, COM(2006)825: 4; Jacobs (ed.), 2007: 256; Schön/Schindler, 2008: para. 154. Cf. Section 4.1.2. Cf. e.g. Körner, 2004: 429; Schindler, 2004a: 309; Schön/Schindler, 2004: 571-576; Hahn, 2006: 803. Of opposite opinion: Seer, 2006: 472. Cf. Seer, 2006: 472; Führich, 2008: 13. Cf. Kessler/Huck, 2005: 210; Seitz, 2008: 61.

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achieved via a harmonization within the EU.652 Despite these counterarguments, the majority of scholars take the view that the reasoning established in the context of the transfer of residence of individuals can also be applied to the transfer of assets or companies.653 This view is also taken here due to the following reasons. First, even if administrative issues for the treasury are high, due to the Mutual Assistance Directive and the Recovery of Claims Directive within the EU, information may be obtained by the treasury. Furthermore, the taxpayer may be required to assist to some extent.654 Secondly, higher depreciation expenses and a lower subsequent capital gain in the entering country cannot outweigh the disadvantage of an immediate taxation of accrued hidden reserves.655 Third, in the context of losses the question was whether losses may be offset immediately between countries or only if they can no longer be used in the source country. Here, the court held - due to the lack of harmonization within the EU - that the residence state only has to provide a setoff if the losses can no longer be used in the source state (thus resulting in negative interest effects for the taxpayer). Contrarily, in the context of exit taxes an immediate taxation of accrued hidden reserves will result in a substantial tax burden for the taxpayer656 even though the member state is allowed by EU law to tax the hidden reserves upon actual realization. Furthermore, any advantages of the taxpayer due to valuation mismatches between the member states cannot outweigh the disadvantage of an immediate taxation.657 Thus, also in the context of transfers of assets or companies, the treasury may only assess the tax upon transfer while it has to defer the tax payment until the hidden reserves are actually realized. With regard to the member states, this implies that cross-border restructurings and transfers of companies in other member states may not be restricted. As a result, formal and material restrictions to cross-border transactions need to be removed so that the tax burden

652 653

654 655 656

657

Cf. ECJ of 13/12/2005 (C-446/03, Marks&Spencer), ECR 2005, I-10837 para. 58. Cf. also Führich, 2008: 10. Cf. Kleinert/Probst, 2004: 674-675; Rödder, 2004: 1633; Schön, 2004a: 295; Schön/Schindler, 2004: 575; Campos Nave, 2005: 2664; Klingberg/Lishaut, 2005: 700; Schaumburg, 2005: 413; European Commission, COM(2006)825: 5; Jacobs (ed.), 2007: 258; Lenoir, 2007: 77; Dine/Browne (eds.), EU company law: 19[14]. Doubtful Franz, 2004: 272; Körner, 2004: 430-431; Wassermeyer, 2004: 615616; Frotscher, 2006: 69-70; Führich, 2008: 10. Cf. also Hahn, 2006: 803. Furthermore, see also the discussion in Section 4.3.2.4. Cf. Kessler/Huck, 2005: 210. Cf. also ECJ of 14/12/2000 (C-141/99, AMID), ECR 2000: I-11619 para. 27; ECJ of 12/09/2006 (C-196/04, Cadbury Schweppes), ECR 2006: I-7995 para. 49. Cf. Seitz, 2008: 70. Especially when the value of hidden reserves decreases in the future this is an unjustified burden for the taxpayer (not only resulting in liquidity effects due to the early payment). Cf. Stadler/Elser, 2006: 22. Regarding the issue of valuation see Section 4.3.2.2.1.1.2 below.

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equals that of comparable domestic transactions.658 Consequently, hidden reserves may not be taxed at the time of transfer, independent of whether they are effectively connected to a remaining permanent establishment or not.659 Thus, member states (i.e. the majority) who restrictively interpret the silence in the Merger Directive regarding such nonconnected assets and levy exit taxes likely violate EU law.660 To sum up, according to primary EU law, the taxing right for hidden reserves which have accrued within a certain member state is upheld in case of a cross-border transfer or reorganization process. However, the taxing right may not be exercised in such a way such that an immediate taxation at the border arises. Instead, a taxation may only take place upon a realization as would be the case in a national context. Furthermore, additional guidelines established by the European Court of Justice need to be observed to neither materially nor formally hinder such cross-border transactions. The options for a design of such a tax environment are assessed below. However, before this is done, the issue of valuation is still examined. 4.3.2.2.1.1.2 Valuation The comparative analysis of the member states has shown that assets or companies which are transferred abroad and leave the taxable sphere of one member state are in most cases valued at their fair market value in order to capture the accrued hidden reserves. However, there are also a few member states where the book value is used which implies that accrued hidden reserves are not captured upon a transfer abroad. Finally, especially in the new member states the final taxation upon transfer is not always clearly stated in the law. Then uncertainty arises on the valuation. The situation in the country into which an asset or company is transferred is even less clear. In most member states the fair market value is used which implies that former hidden reserves are not captured. However, in a few member states the valuation is based on the book value which implies that a double capture of hidden reserves is likely to occur. In the new member states it is often unclear

658

659 660

Cf. ECJ of 21/11/2002 (C-436/00, X and Y), ECR 2002: I-10829 para. 59; ECJ of 11/03/2004 (C-9/02, De Lasteyrie du Saillant), ECR 2004: I-2409; ECJ of 07/09/2006 (C-470/04, N), ECR 2006: I-7409. Cf. also Lehner, 2000: 278-279; Tumpel, 2000: 328-329. In this context, the European Court of Justice assesses all member states together (i.e. overall view). Consequently, the taxpayer may not be put in a worse situation solely because he is doing business in more than one member state. Cf. ECJ of 07/09/2006 (C-470/04, N), ECR 2006: I-7409 para. 55. Cf. also Schön, 2004: 202; Schön/Schindler, 2004: 576; Blumenberg, 2005: 258, 260; Rödder, 2005: 297; European Commission, COM(2006)825: 5. Cf. also Lenoir, 2007: 74.

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at which value an asset enters the country. Austria is an exception as it assesses the value of the hidden reserves upon exit but takes into account the development of the assets after the transfer.661 When assessing these valuation rules, international neutrality and equity provide guidance.662 As has been discussed in Section 4.1.1, the objective of international neutrality is to avoid double as well as non taxation. Consequently, it has been stated that the values used in the countries involved need be directly linked to each other. This linkage also needs to take into account the development of the value after the transaction in order to achieve a one-time taxation as has also been deduced from EU law.663 Furthermore, in order to guarantee that only those hidden reserves, which have accrued while the asset was within the particular tax system, are realized and taxed - as is the objective of international equity - the fair market value of the asset needs to be the basis in the “old” country upon exit as well as in the “new” country upon entry. The different values used in the member states upon exit and entry (fair market value, book value) combined with uncertainties on the valuation in some member states clearly show that double as well as double non-taxation may likely occur upon a transfer of assets from one member state to another in the course of a reorganization or transfer of a company abroad.664 In this context, it can also not be said with any degree of certainty that member states will only tax the hidden reserves accrued within their country. Indeed, they may either go beyond their own taxing right or may give up some of their taxing rights. In addition, the values used in the exiting and the entering country are generally not linked to each other. Consequently, it is not guaranteed that a value relevant in one country equals the value used in the other country. This may also be a reason for double as well as minor taxation.665 Only Austria - in addition to granting a tax deferral in assets transferred within the EU or EEA - also takes into account the further development of the asset abroad. Accordingly, the taxable amount is limited to the gain realized upon the subsequent disposal. Thus, decreases in value between the reorganization and the sale are generally taken into account to determine the tax base, unless the decrease is considered in the receiving country. This seems to be a systematic approach towards the valuation of hidden reserves from 661 662 663 664

Cf. Sections 4.2.3.1, 4.2.3.3 and 4.2.4. Contrarily, EU law does not provide guidance as a duty to prevent double taxation cannot be deduced. Cf. the discussion in Section 4.1.2. Cf. Section 4.1.2; and also ECJ of 07/09/2006 (C-470/04, N), ECR 2006: I-7409. Cf. also European Commission, COM(2006)825: 7.

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the perspective of one member state.666 Overall, due to the exercising of the taxing right by the treasury upon exit and the different valuation rules between the member states, mismatches are likely. Consequently, a one time taxation will be rare, instead double or minor taxation may frequently result. 4.3.2.2.1.1.3 Interim conclusions Summarizing, the analysis of the treatment of accrued hidden reserves in the member states has shown that an immediate taxation of the hidden reserves accrued up to the exit from the former jurisdiction - as may occur in most member states upon a transfer of assets - is neither compliant with international neutrality and equity from a taxpayer perspective nor with primary EU law. Furthermore, double or minor taxation may occur due to different valuations of such assets in the exiting and entering country. An exception applies to Austria which provides a general right for tax deferral for the taxpayer. Based on these results, in the majority of member states changes to the current treatment of accrued hidden reserves in reorganization and transfer processes are necessary. Consequently, in the following passages solutions for the member states are developed and examined. 4.3.2.2.1.2 Options for reform 4.3.2.2.1.2.1 Assets remaining in the former jurisdiction to tax With regard to assets which remain within the taxable sphere of the exiting country, an immediate taxation is not justified. Consequently, not just with regard to permanent establishments but also with regard to other assets connected to the exiting country (e.g. immovable property) a tax deferral has to be provided until the actual realization. From an administrative point of view this should not cause issues as the assets can be traced due to the fact that a connection to the exiting country remains.667 In this context, if there are different definitions of what constitutes a permanent establishment from the perspective of the treasury where the permanent establishment is located and the perspective of the treasury where the head office is located (e.g. which assets may be allocated to the head office versus the permanent establishment), double or minor taxation may result.668 Consequently, general guidelines should be followed to determine the term. It seems reasonable 665 666 667

Cf. also Dürrschmidt, 2007: 158. For a discussion of proposals see Section 4.3.2.2.1.2 below. Cf., to that effect, Lange, 2005: 138-140. Cf. also Spori, 2001: 63-64; Staringer, 2001: 88, 90.

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and feasible to use the definition established by the OECD, as the OECD model is generally the basis for double tax treaties within the EU and there are detailed guidelines in the OECD model and commentary with regard to Article 5. Accordingly, the function of the permanent establishment should be the benchmark. Thus, assets should be allocated to the parent company and its permanent establishment according to the functions which are carried out. This allocation should occur at the disposition of the owner as he knows the business. Contrarily, any compulsory allocation is not acceptable unless the disposition is obviously evasive.669 4.3.2.2.1.2.2 Assets leaving the former jurisdiction to tax The more problematic area covers assets which leave the taxable sphere of the exiting country. This is the focus of the following passages. In an ideal environment, based on the principles of equity and neutrality, taxes may not be assessed upon a reorganization or transfer process (as this would not be neutral) but only upon a realization in a market transaction (realization principle).670 This also has to be upheld in the current system in order to achieve an EU conform solution and results in a systematic compromise between the interests of the taxpayers and the treasuries in a cross-border transaction. The general framework is that the country of the exiting or transferring entity upholds its taxing right with regard to hidden reserves which have accrued within its territory. But instead of immediately exercising this taxing right and thus taxing the accrued hidden reserves, the country may only assess the hidden reserves upon exit and then may only tax any hidden reserves once they are actually realized (which will occur abroad).671 4.3.2.2.1.2.2.1 Requirements with regard to the tax base, the tax rate and the taxable event Specifically, with regard to the tax base, double or minor taxation would need to be prevented in order to tax hidden reserves just once. Consequently, the value assessed in the exiting country upon exit would need to be used as the entry value in the entering country

668 669

670 671

Cf. in more detail Piltz, 1996: 457-462; Ditz, 2005: 37-43. Cf. Wassermeyer/Andresen/Ditz (eds.), 2006: 199. Cf. also the judgments of the German Court of Justice: BFH of 29/07/1992 (II R 39/89), BStBl 1993 II: 63; BFH of 19/11/2003 (I R 3/02), BStBl 2004 II: 932. Cf. Chapter 3 and Section 4.1.1. Cf. also Thömmes, 1997/98: 97; Essers/Elsweier, 2003: 88; European Commission, COM(2006)825: 6.

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in order to avoid any mismatches.672 As the exiting country assesses the hidden reserves accrued within its territory, the value will equal a fair market value of the assets upon transfer.673 This implies that the hidden reserves assessed upon exit will be taxed in the exiting country whereas the entering country is responsible for the development of the asset after the entry into its territory.674 Thus, the overall taxable result will be equal to the national case from a taxpayer’s perspective.675 With regard to the tax rate, the tax rate upon realization would be the relevant one in the exiting as well as the entering country.676 Furthermore, the taxable event is of significance as only upon a realizing event may the tax be levied by the country of the exiting or transferring entity. This implies that the value assessed upon exit is neutralized until a realization takes place (e.g. via a revaluation reserve).677 Furthermore, the situation in the entering country needs to be taken into account. Thus, only when a value is realized in a market transaction678 resulting in an increase of the taxpayer’s ability to pay and thus in liquidity for the taxpayer, should he pay his tax bills in the exiting country.679 With regard to nondepreciable assets, the realization will

672

673

674 675

676 677

678 679

Cf. to that precondition already the Proposal for a Directive on the Harmonization of Rules for the Determination of Taxable Profits of Enterprises in 1998: European Commission, XV/27/88. Cf. also, more recently again, European Commission, COM(2006)825: 8; Council of the European Union, 2008. Cf. Section 4.1.1. Of other opinion: Kessler/Huck/Obser/Schmalz, 2004: 865 who reallocate the overall taxable gain or loss upon a decrease in value in such a way that the exiting country may only tax hidden reserves which it would have also have taxed in a purely national case. However, if the entering country bases his tax treatment on the value used by the exiting country, another treatment in the exiting country as proposed by Kessler/Huck/Obser/Schmalz would lead to double or minor taxation for the taxpayer. Cf. also Case A3 in Table 16 in the appendix. Cf. also Pach-Hanssenheimb, 1989: 1584; Burns/Krever, 1998: 650; Kessler/Huck, 2005: 214; Beiser, 2008: 2725-2728; Beiser, 2008a: 59-63. For numerical examples see Case A1 (hidden reserves assessed at transfer remain until realization), A2 (hidden reserves assessed at transfer increase until realization) and A3 (hidden reserves assessed at transfer decrease until realization) in Table 16 in the appendix. Here, the overall tax burden for the taxpayer equals the national case and gains are allocated to the involved countries based on the value assessed at exit. Thus, the relevant rate for the exiting country would not equal the one that exists upon exit of the assets. Cf. Schindler, 2004b: 713. Cf. Pach-Hanssenheimb, 1989: 1583 Fn. 16; Jacobs (ed.), 2007: 624; Roser, 2008: 2392. The treatment is equivalent if an asset has decreased in value but has not been tax-effectively taken into account in the exiting country (e.g. via a write-down) (i.e. accrued losses). Cf. Herzig, 1990: 214 Fn. 67. With regard to other realization events see the discussion below. Cf. also Herzig, 1990: 215; Dautzenberg, 1997: 258-259. This implies that realization may occur substantially later compared to a national case if an asset is transferred from a country with a depreciation scheme based on individual assets (e.g. Germany) to a country with a pool depreciation scheme (e.g. United Kingdom) because then the taxation of the capital gain in the entering country is effectively postponed as long as the asset is replaced. Cf. Spengel/Malke, 2008: 83. For an overview of the treatment in the member states see Endres et al. (eds.), 2007: 62. Contrarily, realization may also occur earlier than in a national case. This is, for example, the case if research and development costs are capitalized and amortized in the exiting country (e.g. Denmark) whereas the entering country does not capitalize such items but immediately expenses the associated costs (e.g. Germany). For the treatment in the member states see the overview in Endres et al. (eds.), 2007: 55.

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generally680 take place once the asset leaves the sphere of the taxpayer (e.g. via disposal or retirement of the asset).681 With regard to depreciable assets, a realization should occur on a pro rata basis in compliance with depreciation charges in the entering country (up to the hidden reserves assessed at the time of transfer).682 Due to the step-up resulting in increased depreciation expenses compared to a domestic transfer of assets where a step-up would not be granted, hidden reserves assessed in the exiting country are tax effectively depreciated in the entering country. Consequently, an amount equivalent to the advantage to the taxpayer from transferring an asset abroad would need to be taxed in the exiting country. Otherwise, the transfer of assets abroad would be subsidized by the exiting country.683 Furthermore, such a realization would correspond to the benefits a company receives from using the asset (provided that the respective income from the use of the asset is earned in transactions with third parties).684 Accordingly, the amount to be taxed in the exiting country each year until the accrued capital gains have all been subject to tax would equal the difference between the actual depreciation charges in the entering country minus the depreciation that would have been charged in the exiting country had the asset not been transferred.685 As a result, the liquidity gained by the taxpayer due to the increased tax effective deduction in the entering country is used to pay the tax bill in the exiting country.686 Furthermore, with regard to other realization events687 (e.g. subsequent restructurings, transfers without compensation i.e. gifts, replacement reserves) once again one needs to determine whether the taxpayer’s position has gained in value and therefore increased his ability to pay. This will not be the case if a taxation is deferred abroad (via the transfer at book value). Then the realization has to be postponed until a market realization takes place (even if by a different taxpayer and/or in a different country). 680

681 682 683 684 685 686

An exception exists when the asset is extraordinary written-off (in part or full) prior to the disposal. Then, this has to be taken into account in the same way as depreciations of depreciable asset. Thus, regarding the treatment one can refer to the situation of depreciable assets which is discussed next. Cf. also Herzig, 1990: 214. Cf. Case B (retirement of an asset) in Table 16 in the appendix. Cf. Klingberg/Lishaut, 2005: 706; Jacobs (ed.), 2007: 624; Schön/Schindler, 2008: para. 155; Schreiber, 2009: 86. Cf. also Herzig, 1990: 214. Cf. Oestreicher, 2008: 541; Schreiber, 2009: 86-87. Cf. also Herzig, 1990: 214 in the context of the Proposal XV/27/88 by the European Commission; and Dautzenberg, 1997: 255-258; Klapdor, 2000: 177-178 on a comparable former French rule. In this context, an issue arises when the increased depreciation abroad cannot immediately be used due to a loss at the foreign company. Then the depreciation will increase the loss but an offset against profits may only be possible in future years. Cf. Pach-Hanssenheimb, 1989: 1585. As Herzig points out this is not an issue resulting from the transfer of the asset but from a general denial of a carryover of losses across a border and would need to be solved in that context. Cf. Herzig, 1990: 216.

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4.3.2.2.1.2.2.2 Personal, objective and territorial scope Regarding the personal and objective scope, such an approach would need to cover the cross-border (also foreign) reorganization transactions relevant for the SE (merger, forming of holding or subsidiary SE) as well as the transfer of the SE within the EU as in these cases a realization does not take place. Instead, the business activity of the entity and the structure of the owners remain the same from an economic point of view. Consequently, comparable economic transactions need be treated in a comparable way from a tax point of view.688 Furthermore, it would need to be made available for reorganization transactions once the SE is established (including further ways of reorganization in addition to the ones given in the European Company Statute e.g. divisions) provided that the business activity of the entity and the structure of the owners does not change. Moreover, not only reorganization and transfer transactions of SEs may be covered but also comparable transactions of companies other than SEs.689 For the above mentioned transactions, the treatment would need to be made available independent of whether a nexus remains within the exiting country (e.g. permanent establishment) or not. Furthermore, it needs to cover cross-border (also foreign) transfer of assets within a unitary business (i.e. head office and permanent establishment or subsidiary).690 Regarding the territorial scope, from an economic point of view, different treatments depending on the final location of the assets are not justified. Thus, the above stated approach would need to be applied to reorganization and transfer processes within the EU as well as with regard to countries outside the EU.691 4.3.2.2.1.2.2.3 Required coordination between countries involved Overall, if such a systematic approach would be introduced, neither the taxpayer nor the treasuries would be put into an advantageous or disadvantageous situation due to the

687 688 689

690

691

Cf. Klingberg/Lishaut, 2005: 705; and Rödder, 2005: 298-299, pointing to that issue. Cf., to that effect, the discussion in Chapter 3. For companies other than SEs company law may constitute an obstacle though. Cf. the discussion in Section 4.3.1. Furthermore, so far the tax deferral for transfers of registered office is only regulated for the SE in the Merger Directive (Art. 10b-d MD). However, as has been shown in Table 11 in Section 4.2.4.2, half of the member states’ tax rules cover SEs as well as companies other than SEs. Cf. Schön, 2003/04: 52; Kessler, 2004: 846; Lishaut, 2004: 1306; Rödder, 2004: 1633; Klingberg/Lishaut, 2005: 704. Of the opinion that a different measure other than an allocation based on the fair market value needs to be found for transfers between head offices and their permanent establishments: Wassermeyer/Andresen/Ditz, 2006: 172-173. Regarding the ongoing discussions at the OECD on the treatment of the transfer of functions see e.g. Baker&McKenzie, 2009: 86-146; Baumhoff/Puls, 2009: 73-81; Oestreicher, 2009: 80-95; Oestreicher/Hundeshagen, 2009, 145-151; Werra, 2009: 81-87. Similar: Herzig, 2002: 130, 150; Englisch, 2007: 340; Tipke/Lang (eds.), 2008: § 18 paras. 453, 483.

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cross-border transfer of assets with regard to the tax base.692 For the taxpayer this is because a one time taxation can be guaranteed. For the treasuries this is because they are allocated the gains (or losses) which have accrued within their territory.693 Furthermore, the taxing rights would be clearly ring fenced for the member states. However, in order to introduce such a system it is apparent that member states are dependent on each other’s treatment and need to work together closely.694 Specifically, it implies that the values used in one country need to form the basis of taxation in the other country. Furthermore, in order to realize assessed accrued hidden reserves the treasury of the exiting country needs to be informed on the treatment of the asset in the entering country. This includes the depreciation schedule, the undertaking of extraordinary write-offs, the disposal date and the change of location or responsible taxpayer.695 Regarding the linkage of the values, the countries involved have different aims. Whereas the exiting country generally has an incentive to assign a high value to exiting assets in order to increase its tax revenues, the entering country has an incentive to assign a low value to entering assets in order to grant only low depreciation charges and receive higher taxable gains or lower taxable losses upon disposal.696 However, as the objective is to provide a onetime taxation for the taxpayer the entering country should generally be bound to the value of the exiting country (i.e. mutual recognition). If there is a dispute on the value the treasuries would need to be obliged to agree on a value in a timely manner.697 This would be achieved via a binding dispute resolution mechanism as is, for example, provided for in the EU Arbitration Convention698.699 Concerning the gathering of the information, within the EU the treasuries will generally be required to cooperate with each other based on the Mutual Assistance Directive and the

692

693 694 695 696 697 698 699

Of the same opinion: Herzig, 1990: 215. Nevertheless, differences due to differing tax rates among member states would remain and thus incentives for tax planning. However, member states regard the rate as a key feature of their tax systems and thus seem reluctant to provide any harmonization in this area. Cf. European Commission, COM(2003)726. Cf. also Section 4.1.1. Cf. also Pach-Hanssenheimb, 1989: 1585. Cf. also Herzig, 1990: 215 who points out that such an system requires that assets need to be traced twice, in the entering country as well as in the exiting country. For issues on how to determine an appropriate fair market value see e.g. Baumhoff/Puls, 2009: 78-79; Oestreicher, 2009: 84-95; Oestreicher/Hundeshagen, 2009, 145-151; Werra, 2009: 84-87. Cf. Herzig, 1990: 215. Cf. Convention, 90/436/EEC: 10. Cf. Dautzenberg, 1997: 258-259; Klapdor, 2000: 221, European Commission, COM(2006)825: 7-8; Council of the European Union, 2008; Beiser, 2008a: 63.

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Recovery of Claims Directive.700 The Mutual Assistance Directive allows a member state to request from the appropriate authorities of another member state all the information enabling it to ascertain the correct amount of income tax.701 The Recovery Directive provides that a member state may request the assistance of another member state in the recovery of debts relating to specified taxes like those on income and capital.702 Accordingly, member states shall rely on these directives to retrieve the necessary information from other treasuries in order to preserve their taxing right.703 The gathering of information from the taxpayer is limited within the EU based on the judgments of the European Court of Justice. Consequently, the taxpayer can be requested to file a tax declaration upon exit (in order to adequately allocate taxing rights)704 and furthermore once the asset is actually disposed of, as such a declaration would generally also have to be filed in a national case.705 Further obligations (e.g. annual statements regarding the status of the asset) may only be set up if they do not unduly burden the taxpayer.706 For countries outside the EU, the threshold for justifiable measures regarding the treatment of hidden reserves is lower from the perspective of EU law. This is due to different reasons. First, third countries may only be covered by the free movement of capital, not the freedom of establishment. However, if the freedom of establishment applies, which is the case for restructurings as has been shown above,707 this freedom may supersede the application of the free movement of capital. Second, even if the free movement of capital applies, this freedom only covers flows from direct investments where business decisions are not influenced. Finally, even if the free movement of capital is found to be restricted, such a restriction cannot be criticized based on the Mutual Assistance Directive and the Recovery of Claims Directive as these directives do not apply to third countries. Thus, the effectiveness of fiscal supervi-

700

701

702

703 704 705 706 707

Cf. e.g. ECJ of 28/10/1999, (C-55/98, Vestergaard) ECR 1999: I-7641, para. 26; ECJ of 26/06/2003 (C-422/01, Skandia und Ramstedt), ECR 2003: I-6817, para. 42; ECJ of 07/09/2006 (C-470/04, N), ECR 2006: I-7409, para. 53. Cf. also Benecke/Schnitger, 2007: 28; Brocke/Tippelhofer, 2009: 952954. Cf. Council Directive, 76/308/EEC: 18, as last amended by Council Directive, 2001/44/EC: 17. Currently, there is a proposal pending to further improve the mutual assistance between member states. Cf. European Commission, COM(2009)29; European Commission, IP/09/201. Cf. Council Directive, 77/799/EEC: 15, as last amended by Council Directive, 2004/56/EC: 70. Currently, there is a proposal pending to further improve the recovery of claims between member states. Cf. European Commission, COM(2009)28; European Commission, IP/09/201. Cf. ECJ of 11/03/2004 (C-9/02, De Lasteyrie du Saillant), ECR 2004: I-2409, paras. 47-48, 56-57; ECJ of 07/09/2006 (C-470/04, N), ECR 2006: I-7409, paras. 51-53. Cf. ECJ of 07/09/2006 (C-470/04, N), ECR 2006: I-7409, para. 49. Cf. Schindler, 2004b: 713. Cf. the discussion in Section 4.3.2.4. Cf. Section 4.3.2.2.1.1.1.2.

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sion may not be guaranteed. Consequently, companies in such countries do not need to be given the same treatment as companies resident within the EU.708 Accordingly, one may differentiate. If a double tax treaty exists between the member state and the third country which includes articles on a mutual agreement procedure, exchange of information and assistance in the collection of taxes (similar to Art. 25, 26, 27 OECD model), the same treatment as within the EU should be granted.709 In this context, it would also seem sound to put an administrative burden on the taxpayer710 and even require a guarantee or the designation of a representative.711 Contrarily, if administrative cooperation is lacking between the involved countries, even an immediate taxation seems to be justifiable by reason of general interest and proportionate in order for member states to ensure an effective fiscal supervision and prevent tax evasion.712 When looking at the feasibility of the above established approach to the treatment of accrued hidden reserves in cross-border situations, it becomes apparent that - even though systematic - such an approach cannot be adequately transformed into the national law of the member states with regard to third countries with whom no cooperation exists (e.g. regulated in a double tax treaty). With regard to such countries, the necessary information will be difficult to acquire and such a far reaching approach is also not requested based on current EU law. With regard to third countries with whom a mutual agreement procedure and enhanced cooperation exist, such a treatment could be provided in combination with an enhanced cooperation of the taxpayer. However, it is not fully clear whether the treasuries are actually obliged to provide such a treatment based on current EU law. Contrarily, with regard to transactions within the EU, it is clear that member states need to take action from an EU point of view.713 Most appropriately, the above established approach should be introduced via coordinated action at the EU level.714 In this context, a directive or regulation should be proposed.715 In order to introduce a regulation or directive, the area cov-

708 709 710 711 712 713 714 715

Cf. Section 4.1.2; and also Entraygues, 2001: 71; Klingberg/Lishaut, 2005: 703; Schön, 2005: 489-521; Hohenwarter, 2007: 508; Schön/Schindler, 2008: para. 110. Cf. Schnitger, 2004: 813; Cordewener/Kofler/Schindler, 2007: 116; Schön/Schindler, 2008: paras. 188190, 264, 267. Cf. Cordewener, 2002: 539-540; Schindler, 2004: para. 39; Seitz, 2008: 73 in the context of nonresidents who may, otherwise, easily cut the link to a jurisdiction. Cf. Rubbens/Baaijens, 2004: 2*-3*; Lange, 2005: 148. Cf. European Commission, COM(2006)825: 8-10; European Commission, COM(2007)785: 8-9; Schön/Schindler, 2008: paras. 188-190, 267. Cf. e.g. Jacobs (ed.), 2007: 260. Also in favor of coordinated action: Cf. Essers/Elsweier, 2003: 88; Lishaut, 2004: 1307; Kessler/Huck, 2005: 215; Klingberg/Lishaut, 2005: 705-706; Seer, 2006: 472; Führich, 2008: 10. Cf. Schnitger, 2004: 813; Blumenberg, 2005: 260.

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ered would need to promote the functioning of the common market (Art. 94, 249 ECT).716 This would hold true for exit taxes. Such an EU-wide regulation or directive would guarantee that taxing rights of the EU member states are allocated in a uniform way among each other (e.g. granting the taxing right of accrued hidden reserves to the country of source by basing the value on the fair market value upon exit and entry).717 Furthermore, it would guarantee that member states cooperate as otherwise they may not be aware of the need to provide information or may not be willing to provide information. Consequently, both the exiting and the entering country would be taken into consideration and uniformity would be provided which would make the tracing of hidden reserves easier for taxpayers as well as the administration.718 However, in order to introduce a regulation or directive, a unanimous agreement is required in the Council of Ministers. Even though the European Commission as well as the Council of the European Union support an EU-wide approach,719 it is doubtful whether such action will be proposed in the near future keeping in mind that regulations and directives are rare in the area of direct taxation.720 4.3.2.2.1.2.2.4 Uncoordinated approaches If there is no agreement on coordinated action member states still need to act in order to comply with EU law. Consequently, they would need to provide a solution by either changing their national law combined with an adjustment of the double tax treaties with countries within the EU721 or by solely changing their national laws. Various topics would need to be regulated.722 Specifically, they would need to abolish exit tax rules resulting in an immediate taxation of capital gains of assets leaving the taxable sphere. Furthermore, they would need to introduce rules securing their taxing right of hidden reserves accrued

716 717

718 719 720 721

722

Cf. Section 4.1.2. In this context, it also seems conceivable that member states could agree on another allocation or clearing mechanism provided that they see their taxing right safeguarded and find an agreement. Lishaut, for example, proposes to allocate the taxing right according to the time an asset (here: shares) was located in a certain member state. Cf. Lishaut, 2004: 1304; Klingberg/Lishaut, 2005: 706. This would avoid the determination of a fair market value upon exit. Nevertheless, all member states would need to agree on this. Cf. also Kessler/Huck, 2005: 215. Cf. also Klingberg/Lishaut, 2005: 706. Cf. European Commission, COM(2006)825; Council of the European Union, 2008. Cf. Rädler, 1994: 280; Hey, 1997: 80; Jaeger, 2001: 24; Spengel, 2003: 246. Cf., to that effect, also Kemmeren, 2001, who proposes to introduce an origin-based system in double tax treaties in order to abolish exit tax issues. For approaches in German double tax treaties with regard to the transfer of residence of indivuals see Lüdicke, 2008: 144-147. In the following passages the most urgant topics are covered. For further issues which may need to be considered from a unilateral perspective see, among others, Kessler/Huck/Obser/Schmalz, 2004: 863868; Lishaut, 2004: 1304-1307; Klingberg/Lishaut, 2005: 698-723; Rödder, 2005: 297-299.

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within their territory upon a subsequent disposal in the entering country.723 This implies that the value of the assets is determined upon transfer as this will be the basis for the exiting country to claim a share of the gains realized upon the subsequent disposal.724 In this context, the countries involved would need to prevent a double taxation of gains as well as a double non-taxation of losses of the taxpayer. Thus, on the one hand, they could commit themselves to use the relevant value of the other member state. On the other hand, in order to avoid a double taxation of gains, they could provide credits for taxes paid in the other country.725 And, in order to avoid a double non-taxation of losses, they could limit their effectively taxable amount (despite of the amount that had been assessed upon transfer) by considering decreases in value which have not been taken into account by the new country.726 Moreover, national authorities would need to make sure that they receive the information they need from the foreign authorities to enforce their taxing right. Contrarily, further conditions could not be attached to the deferral (interest charges, guarantees or the designation of a representative).727 The granting of the tax deferral may also not be subject to approval by the treasury.728 Overall, there are various disadvantages to uncoordinated approaches. First, if the taxing right is secured unilaterally this may cause a treaty override.729 Contrarily, if it is secured on a bilateral basis it would require that all double tax

723

724 725 726

727

728 729

Cf. e.g. Kessler/Huck/Obser/Schmalz, 2004: 865; Schnitger, 2004: 813. Of the opinion that this is not explicitly necessary: Wassermeyer, 2006: 2423-2424; Wassermeyer, 2008: 180. In this context member states may also want to introduce a realization event to cover the subsequent transfer out of the EU/EEA if information deficits justify an immediate taxation. Cf. Rödder, 2005: 298. Furthermore, member states could grant companies the truly voluntary and even-handed option to not use the deferral but instead pay the tax immediately (as is already done by some member states - see Section 4.2.3.1.2.1.1.1.). This would provide flexibility for the taxpayer (e.g. with regard to the use of accrued losses) and would not put the treasury into a worse position. Cf. Schneider, 2002: 220-221; Kessler/Huck/Obser/Schmalz, 2004: 863; Lange, 2005: 133-134; European Commission, COM(2006)825: 6-7; Führich, 2008: 15. Cf. Schnitger, 2004: 813; Vogel/Lehner, 2008: Art. 7 para. 45. Cf. also Klingberg/Lishaut, 2005: 704; European Commission, COM(2006)825: 7-8; Zimmer, 2008: 193 on a proposal including a tax credit to the Norwegian tax law. Cf. ECJ of 07/09/2006 (C-470/04, N), ECR 2006: I-7409, paras. 54-55. Cf. also Schön, 2003/04: 51; Rödder, 2004: 1633; Schindler, 2004a: 309; Schnitger, 2004: 813; European Commission, COM(2006)825: 7. Critical towards this requirement: Terra/Wattel, 2008: 785. Cf. ECJ of 11/03/2004 (C-9/02, De Lasteyrie du Saillant), ECR 2004: I-2409; ECJ of 07/09/2006 (C470/04, N), ECR 2006: I-7409. Cf. also Rödder, 2004: 1633; Schindler, 2004a: 308; Schön, 2004a: 296. However, Schindler points out that it would also be proportionate for the member states to ask for a guarantee provided that they pay interest on the guarantee at market conditions. Cf. Schindler, 2004a: 309. However, this may not be a feasible approach for the authorities from a fiscal point of view. Cf. Schindler, 2004a: 308. It is questionable though whether this has any consequences for the treasury or taxpayer. Cf. e.g. Lüdicke, 2008: 34-36, who is of the opinion that this is “harmless” as long as the treasury only secures a taxing right which it has, for example, due to an EU directive (e.g. the Merger Directive) and which is not allocated to the other treaty member. Critical: Gosch, 2008: 413-421. Cf., to that issue, also below Section 4.3.2.2.3.

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treaties are revised.730 Such a revision of all double tax treaties within the EU (i.e. 26 from the perspective of one member state) would be difficult and time-consuming. Secondly, from the perspective of just one member state, it seems impossible to gather all the required information in order to keep track of the asset (e.g. owner of asset, location of asset, time of realization) as the taxpayer can only to a limited extent be obliged to an enhanced cooperation.731 For example, if the treasury wants to realize hidden reserves of depreciable assets it would need to find out for each asset whether the asset is valued with a step-up and what the exact depreciation expense is in order to determine whether the taxpayer’s ability to pay has increased compared to a purely national case. Any approximation (i.e. general rules based on, for example, the remaining useful life) would not reflect reality, since it would not correspond to market realization.732 Consequently, such an approximation could generally not be introduced from an EU perspective as there is the potential that the taxpayer is treated worse than in a national case and thus is discriminated against.733 It may only be conceivable to use such a standardized procedure provided that the taxpayer has the opportunity to receive a different treatment if he can show that the standardized rule does not lead to an appropriate result. Furthermore, the tracing of an asset may still be manageable provided that some kind of presence of the former taxpayer remains in the exiting country after the cross-border reorganization or transfer transaction (e.g. a permanent establishment). Then, the permanent establishment can be used as a point of reference (e.g. by establishing a revaluation reserve there based on the fair market value of transferred assets).734 However, the deferral would also need to be provided if there is no presence afterwards (e.g. closing down of any activity in the exiting country). Consequently, in such cases the administrative burden to gain information and collect the tax is much higher.735 Overall, unilateral tax deferral rules imply a trade off. The more sophisticated the rules and thus the higher the administrative burden for the treasuries and the dependence from other member states, the more exact the outcome for taxpayer and treasury. Conversely, the more general the rules and thus the lower the administrative burden for the treasuries 730 731 732 733 734

Cf. Seitz, 2008: 72, 74. Cf. e.g. Benz/Rosenberg, 2006: 60; Schön, 2008: 62-63. Cf. also the discussion in Section 4.3.2.4. Cf. Herzig, 1990: 215; Kleineidam, 2000: 580. Cf. also Section 4.1.2. Furthermore, see Rödder/Schumacher, 2007: 372; Ditz, 2009: 120; Schneider/Oepen, 2009: 28. Cf. Klapdor, 2000: 177-178; Beinert/Werder, 2005: 1486.

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and the dependence from other member states, the more likely it is that the treasury will loose tax revenues. This is due to two factors. Even with more general rules, from an EU point of view taxpayers engaged in cross-border transactions may incur neither material nor procedural disadvantages because of the deferral compared to a national case.736 Consequently, unilateral solutions would at least need to provide rules that prevent a double taxation for the taxpayer. Thus, in either way, the treasury in the exiting country is held liable for a different treatment in the entering country. Furthermore, due to mismatches in a general treatment the taxpayer may likely have benefits (e.g. due to a tax-free step-up).737 Thus, from the perspective of just one member state it seems impossible to establish an approach which never favors or worsens the position of the treasury or the taxpayer.738 4.3.2.2.1.2.2.5 Other options: taxation of unrealized gains or abolishment of taxing rights upon exit Despite providing a tax deferral for assets leaving the jurisdiction, the member states could also extend the rules applicable to cross-border transactions to comparable domestic situations (taxing unrealized capital gains) or abolish the rules currently applicable to cross-border transactions (abolish taxing right upon exit) in order to end up at an EU conform solution. Specifically, first, national legislators could change their tax systems from taxing realized capital gains to taxing unrealized capital gains.739 Then, the national case and the cross-border case would be treated equally as in both cases unrealized gains would be taxed (not only in the case of an exiting company).740 Furthermore, such a valuation would align the determination of taxable income with International Financial Reporting Standards (IFRS),741 which are of factual relevance within the EU as listed EU parent companies are obliged to draw up their consolidated accounts in accordance with IFRS according to a Regulation from 2002.742 However, such an approach would not be in line

735 736 737 738

739 740 741 742

Cf. Klapdor, 2000: 177-178; Adda, 2008: 242. Of the opinion that this justifies an immediate taxation: Seitz, 2008: 66. Cf. Schön, 1997/98: 98; Thömmes, 1997/98: 97; Schön, 2004a: 296-297, Klingberg/Lishaut, 2005: 705. Cf. also European Commission, COM(2006)825: 8. Cf. also the numerical examples in Rödder, 2005: 298-299, as well as in the appendix: Case C (fair market value upon exit > value upon entry) and D (fair market value upon exit < value upon entry) in Table 16. Of the same opinion also: Beiser, 2008: 2725. Cf. Kessler/Huck, 2005: 214; Klingberg/Lishaut, 2005: 705. Cf. also Führich, 2008: 14. Cf. Klingberg/Lishaut, 2005: 705. Cf. Council Regulation, 1606/2002. The Commission has also recommended providing the application of IFRS both on consolidated accounts of non-listed parent companies and on individual financial ac-

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with guiding tax principles due to uncertainties in valuation and liquidity issues for both the taxpayers and the treasuries as has been pointed out in Chapter 3.743 This is also true for IFRS in this regard.744 Thus, such a system should not be introduced by the member states as it results in conflicts with the national tax system and may also put domestic companies at a disadvantage.745 Secondly, member states could abolish their taxing rights upon the exit of hidden reserves. Then, cross-border cases would also not be treated disadvantageous compared to national cases, as a realization would not occur upon exit but only when the assets are actually sold (or a similar taxable event takes place).746 The realization would then occur abroad though. If hidden reserves imported would equal hidden reserves exported no tax revenues would get lost due to such an approach.747 This scenario, however, is currently not likely. As long as the tax rates differ between the countries, it is advantageous to transfer assets from high tax countries to low tax countries and thus it is probable that high tax countries will lose tax revenues.748 Furthermore, as long as the valuation of assets between the exiting and entering country is not linked, it is advantageous to transfer an asset if a tax-free step-up can be achieved.749 Thus, it is unlikely that single member states (especially with high tax rates) change to such a system as long as the tax systems (especially the tax rates) differ among the countries as this would give multinational enterprises too much room for strategic tax planning.750

743 744

745

746 747 748

749

750

counts in the member states. Regarding this see, for example, the developments in Germany. Cf. Herzig, 2008a: 1-10. Cf. also the discussion in Section 4.1.1; and Kessler/Huck/Obser/Schmalz, 2004: 865; Klingberg/Lishaut, 2005: 705. Cf. Spengel/Malke, 2008: 71, 80. Kessler/Huck point out though that the issue of hidden reserves would also decrease if the book values established for tax purposes would be closer to the real values by abolishing certain tax induced depreciations or bans on the capitalization of certain assets. Cf. Kessler/Huck, 2005: 214. In general, see also Spengel, 2008: 24-25; Wendt, 2009: 101. A general mandatory system based on the taxation of unrealized capital gains can currently not be found in any of the member states (exceptions exist for France with regard to fixed assets - but not intangibles - and in Greece with regard to immovable property). Cf. the overviews in Endres (ed.), 2007: 32-34; for Bulgaria and Romania see IBFD, Taxation, Bulgaria: 1.7.3. and Romania: 1.7.3. Cf. e.g. Soler Roch, 2004: 15. Cf. also Schindler, 2004b: 715. Cf. Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, 2004: para. 765, who points out that this would likely increase the tax competition among the member states; Lenoir, 2007: 75, Führich, 2008: 13. In the context of a transfer of residence of an individual: Klapdor, 2000: 176 Fn. 718. Führich points out that anti-abuse legislation could also not adequately prevent the tax planning with hidden reserves due to the strict conditions established by the European Court of Justice. Cf. Führich, 2008: 13-14. To this regard, see also the discussion in Section 4.3.2.4. In general, see also Klingberg/Lishaut, 2005: 705; Spengel, 2008: 24-25; Wendt, 2009: 101. So far, such a system is only found in Cyprus and Malta (see Section 4.2), both small member states, where the transfer of assets abroad may not have been a major issue yet. Moreover, in some other new member states it is likely that the taxing right is secured but uncertainties arise due to low experience.

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4.3.2.2.1.2.3 Interim conclusions To sum up, a systematic approach to solve the exit tax issue would be to defer the tax payment until realization. This implies that the values in the exiting and entering country are linked and that a realization in the exiting country takes place in accordance with a realization in the entering country. Thus the taxpayer is subject to tax once from an overall perspective as he would have been in a purely domestic case. This approach further implies that member states agree on a transfer value and cooperate closely with each other to receive the relevant information to exercise their taxing right. If there is no agreement on coordinated action the member states still need to act. Unilateral approaches will, on the one hand, put a high administrative burden on the treasuries and, on the other hand, likely result in mismatches which the taxpayers can use. In this context, the treasuries are in a dilemma. The more precisely they want to trace the asset, the higher the administrative burden and vice versa.751 Furthermore, if each member state decides on a different solution (resulting in different conditions for tax deferral or even abolishment of the taxing right upon exit), this would increase tax planning opportunities by the taxpayers which is not in the interest of the treasuries. Thus, coordinated action is advisable. As coordinated action as proposed above is far reaching, an option, which member states should consider, are the proposals made by the European Commission on a harmonization of the tax base throughout Europe.752 4.3.2.2.2 Transfers of foreign permanent establishments The comparative analysis of the member states has revealed that an immediate taxation will generally result when a foreign permanent establishment is transferred as part of a reorganization or transfer transaction, provided that the member state of the transferring or exiting entity uses the credit method to avoid a double taxation with regard to the profits of the permanent establishment. This is the case in half of the member states. The reason for this is that the taxing right towards the profits of the permanent establishment is transferred from the country of the transferring or exiting entity to the country of the receiving

751

752

In this context, Austria has decided to follow a pragmatic and feasible approach as it provides an unrestricted and unconditional tax deferral for hidden reserves accrued within its country for reorganizations, transfers of companies and transfers of assets between head offices and permanent establishments until the asset is disposed of. Furthermore, the assets are only traced within the following 10 years. Then any tax claims are dismissed. Cf. e.g. Schindler, 2004b: 711-714; Staringer, 2005: 213244; Hohenwarter, 2007: 501-509. Cf., to that effect, Chapter 5.

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or entering entity. In order to prevent a double taxation, a fictitious credit is granted in return compliant with Art. 10 (2) MD in two thirds of these countries.753 When examining this treatment, an immediate taxation with a fictitious credit in return is compliant with the Merger Directive and thus secondary law. However, as has been stated in detail above in Section 4.3.2.2.1.1, an immediate taxation is neither in line with primary law nor with international neutrality and equity from the taxpayer’s perspective. The granting of a credit in return to reduce a double taxation can also not change this judgment. However, it at least reduces the burden for the taxpayer, even though only as an approximation since the tax burden in the source country of the permanent establishment does not arise until a taxable event takes place there.754 Nevertheless, an approach to defer the taxation of hidden reserves until realization as proposed above in Section 4.3.2.2.1.2 would also need to include such foreign permanent establishments.755 From an EU law perspective this is at least required if the permanent establishments are located within the EU. In order to prevent the double taxation upon a subsequent realization the credit can then be based on the taxes actually paid, not a fictitious amount.756 Furthermore, from the perspective of the country of the permanent establishment, member states could grant the taxpayer an option for revaluation and thus taxation in order to enable the foreign tax credit if the foreign transferor of the permanent establishment is subject to an immediate taxation.757 To conclude, an appropriate solution to exit tax issues also has to cover permanent establishments in third countries. 4.3.2.2.3 Transfer of shares from one member state to another The comparative analysis of the member states’ treatment with regard to the shareholders - this is relevant for mergers, formation of holding SEs as well as transfers of SEs abroad - has shown that member states generally follow the Merger Directive which provides a tax deferral. Despite the treatment of assets, in the context of shareholders, a tax deferral not only needs to be provided as long as the taxing right is upheld with regard to

753 754

755 756 757

Cf. Section 4.2.3.1.2.1.1.2. Thus, double or minor taxation may result if the fictitious credit is lower or higher than the actually paid taxes upon realization. Cf. Förster/Lange, 2002: 588. Furthermore, the calculation of this credit may also raise administrative issues with regard to the amount since no tax assessment is actually made by the member state of the permanent establishment which could serve as the basis for the calculation of the amount of this credit. Cf. Bartone/Klapdor, 2007: 124. Of the same opinion: Lange, 2005: 151-152, 178-179; Schön/Schindler, 2008: para. 241. Cf., to that effect, Schön/Schindler, 2008: para. 241. Austria provides such a treatment. Cf. Ernst&Young, 2009: 358.

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the shares but also if the taxing right is restricted or lost. In return, the Merger Directive explicitly states that the affected treasuries can tax a gain arising out of the subsequent disposal of the shares (Art. 8 (6) MD for mergers and the formation of holdings, Art. 10d (2) MD for transfer of registered offices). This subsequent taxing right may be interpreted as to not only include capital gains which have accrued up to the merger, but also later increases even if the taxing right is restricted or abandoned in the course of the reorganization or transfer (e.g. in Germany).758 When assessing this treatment, the granting of an unrestricted tax deferral for shareholders can be found to be in line with guiding tax principles (legal and economic) as an immediate taxation does not occur. The allocation of the subsequent taxing right to the treasury providing the tax deferral may, however, result in a double or multiple taxation of the same accrued hidden reserves if taxing rights collide upon a subsequent disposal due to double tax treaties already in place.759 Thus, in order to prevent such a double or multiple taxation upon a subsequent sale of the respective shares, Art. 8 (6) and 10d (2) MD should be worded more narrowly.760 In addition, the member states should independently either restrict their taxing right towards capital gains which have accrued up to the moment their taxing right is lost - thus not taking possession of subsequently accrued hidden reserves - or grant a tax credit.761 Overall, also with regard to shares of the shareholders, member states may only exercise their taxing right towards hidden reserves which have accrued within their territory. 4.3.2.2.4 Doubling of hidden reserves The comparative analysis of the member states has shown that a doubling of hidden reserves may take place upon the establishment of a holding SE as well as a subsidiary SE. In the case of a holding SE, a doubling of hidden reserves occurs if both the shares contributed to the SE and the shares received by the shareholders in return need to be valued at the book value of the contributed shares. The treatment of the contributing shareholder is regulated in the Merger Directive and generally followed by the member states. Accord-

758 759 760 761

Cf. Sections 4.2.3.1, 4.2.3.2 and 4.2.4. Cf. Lishaut, 2004: 1306; Bartone/Klapdor, 2007: 122, 137; Schön/Schindler, 2008: paras. 170-172. This may also cause a treaty override. Cf. Gosch, 2008: 417-418; Lüdicke, 2008: 36. Cf. Bartone/Klapdor, 2007: 155. Cf. also the proposals in Section 4.3.2.2.1.2; as well as European Commission, COM(2006)825: 4; Lüdicke, 2008: 145, 147. Furthermore, see Entraygues, 2001a: 54; Staringer, 2001a: 52-53; Ulmer, 2001: 112-113 providing examples of comparable existing rules in specific double tax treaties.

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ingly, taxpayers are granted relief as long as they roll their book values of the old shares over to the new shares. Contrarily, the valuation of the shares received at the SE is not dealt with. Here, the analysis has shown that one third of the member states require a valuation at book value. Nevertheless, an economic double taxation is fully or partially prevented in the majority of these member states as subsequent capital gains are fully or partially tax-exempt due to participation exemptions available for corporations selling shares in other corporations.762 When assessing this treatment, it becomes apparent that no immediate tax consequences result for the taxpayer upon the reorganization. However, a double taxation of the same hidden reserves may result upon a subsequent disposal of the shares by the SE as well as the contributing shareholders. Against the background of international neutrality and equity any double taxation is not in line with economic principles as it may hinder reorganization transactions and unduly burden the taxpayer. Moreover, from the perspective of the treasury of the shareholder, the situation does not change as it can exercise its taxing right with regard to the new shares based on the old book value.763 Consequently, it seems appropriate to implement a rule into the Merger Directive which states that the shares received by the SE shall be valued at the fair market value as had already been proposed in 2003 as an amendment to the Merger Directive.764 This would prevent the doubling of hidden reserves. In this context, agreement among the member states should be possible as this solution is already today the overall result in most member states as has been shown above.765 When considering a subsidiary SE, a doubling of hidden reserves occurs if both the assets contributed to the SE and the shares received by the contributing entities in return need to be valued at the book value of the contributed assets. The treatment of the contributed assets is regulated in the Merger Directive and generally followed by the member states. Accordingly, the contributing entities receive a relief as long as the SE continues to value the assets received at their book values. Contrarily, the valuation of the shares in the SE received by the contributing entities in return is not dealt with. Here, the analysis has shown that only one fourth of the member states allows a valuation at fair market value. In

762 763 764 765

Cf. Section 4.2.3.2.2. Cf. European Commission, COM(2003)703: 8; Benecke/Schnitger, 2005a: 171; Rödder/Schumacher, 2006: 1535, 1540. Cf. proposed Art. 8 (10) in: European Commission, COM(2003)703. Cf. also Schmalz, 2004: 256. Cf. Table 9 in Section 4.2.3.2.2.

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all other member states a valuation at book value is required. Depending on the contributing entity, in these countries an economic double taxation either will in most cases be fully or partially prevented - this is the case for corporations as contributing entities - or will likely occur - this is the case for individuals holding a share in a partnership treated as a transparent entity.766 When assessing this treatment, it becomes apparent that a double taxation of the same hidden reserves may likely result due to a subsequent disposal of the assets by the SE as well as the shares by the contributing entities. However, from the perspective of the treasury, the assets will remain within the taxable jurisdiction due to the requirement that a permanent establishment needs to remain in order to receive the tax deferral.767 Contrarily, with regard to the contributing entity, the situation changes due to the fact that the entities contribute assets and receive shares in return. Whereas the capital gains upon disposal or use of the assets will be fully taxable in general, shares may be treated preferentially upon disposal which likely results in a lower tax base.768 Thus, there is the risk that the taxpayer will use this approach to get rid of his business activity in a tax-reducing way by selling the shares after contribution into a company instead of selling the business activity itself.769 Consequently, the question is whether this risk of abuse may justify a risk of economic double taxation. Even though from a legal perspective two taxpayers are involved (contributing entity and SE), from an economic perspective one unit is affected as long as the business activity and the ownership continue to exist as part of the reorganization.770 Thus, if this is given double taxation needs to be prevented as it is neither in line with international neutrality nor equity. Consequently, it seems appropriate to implement a rule into the Merger Directive which states that the shares received by the contributing entity shall be valued at the fair market value as had already been proposed in 2003 as an amendment to the Merger Directive.771 Another result may only be realized if the owner-

766 767 768 769 770 771

Cf. Section 4.2.3.3.2.2. Cf. European Commission, COM(2003)703: 7; Blumers/Kinzl, 2005: 974. Cf. Benecke/Schnitger, 2005a: 171; Benz/Rosenberg, 2006: 61; Rödder/Schumacher, 2006: 1535, 1537-1539. Cf. Lishaut, 2004: 1302; Benecke/Schnitger, 2005a: 175-176 on tax planning opportunities with hybrid entities; Lange, 2005: 141. Cf. Chapter 3. Cf. proposed Art. 9 (2) in: European Commission, COM(2003)703. Cf. also Dautzenberg, 1997: 243246; Blumers/Kinzl, 2005: 974. Of different opinion: Lange, 2005: 141-142. He sees the use of the book value as a result of the ownership continuity required in reorganizations. Of different opinion also Lishaut, 2004: 1302-1303. Differentiating Schmalz, 2004: 254-255 who supports the valuation at fair market value for contributing corporations but stipulates the valuation at book value for contributing individuals.

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ship continuity is not upheld. If the shareholder uses the reorganization only to finish his engagement in the economic unit (partially or fully) tax-free and economic reasons for a resale are missing.772 Thus, a tax deferral may be denied on the basis of preventing tax fraud. However, in this context, the strict interpretations of (primary and secondary) EU law need to be observed by national authorities.773 In conclusion, in order to avoid a doubling of hidden reserves, the shares received by the SE in case of the formation of a holding SE or the shares received by the shareholders in return for the assets contributed in case of the formation of a subsidiary SE respectively should be valued at their fair market value. The risk of tax avoidance is a different issue and should be solved in this context.774 4.3.2.3 Retention of unused losses Within the context of mergers, the comparative analysis of the member states has revealed that 40% of the member states do not allow the carryover of losses from the transferring entity to the permanent establishment of the receiving entity which remains in the country of the transferring entity. In contrast, upon a transfer of the registered office of an SE, the losses may be used by the remaining permanent establishment in almost all member states. Furthermore, member states are generally reluctant (with few exceptions) to allow losses from other member states to be used within their territory.775 When assessing this treatment, both a denial as well as an allowance of a loss carryover is in line with Art. 6 and 10c MD, and thus secondary law, which only regulates that the cross-border treatment needs to equal the domestic treatment of a loss carryover.776 However, a denial in case of a merger may conflict with economic principles as well as guidelines established according to primary EU law. From an economic point of view, a merger implies that the receiving company steps into the shoes of the transferring company via universal succession. This should not only apply to the assets and liabilities as well as provisions and reserves of the transferring entity, but should also include losses.777 The continued use of the losses would guarantee that losses can be taken into account once, as

772 773 774 775 776 777

For example, an indication may be a resale which occurs within a short time after the reorganization. Cf. ECJ of 17/07/1997 (C-28/95, Leur-Bloem), ECR 1997: I-4161 paras. 38-45; Schön, 2004: 204. Cf. also Saß, 2004: 1232; Blumers/Kinzl, 2005: 974. On that issue see in more detail Section 4.3.2.4 below. Cf. Sections 4.2.3.1.2.1.2.2 and 4.2.4.2. Cf. also Thömmes, 2005: 554. Similar Werra/Teiche, 2006: 1460.

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is systematically correct.778 Otherwise, in case losses get lost, the taxpayer is put into a worse situation than without the merger.779 This in itself creates an obstacle for carrying out reorganizations. Furthermore, tax planning becomes necessary. By forfeiting the tax neutral treatment and realizing hidden reserves the resulting gains may be used to offset forfeited losses. If an intermediate value could be used,780 this would enable the taxpayer to realize only that part of the hidden reserves that is needed for the loss set off.781 However, if the gains exceed the losses (which is the more likely scenario)782 one has to trade the extra gains against the forfeited losses in order to make a reasonable decision.783 This need for tax planning results in an inefficient allocation of resources from a macroeconomic perspective.784 The continued use of losses not only needs to be guaranteed if a nexus remains (i.e. permanent establishment) but also if no nexus remains. In the latter case, the country where the loss occurred should still be held liable for the loss offset. If no nexus remains, a tax deferral rule needs to be provided from a systematical perspective for assets leaving the country.785 Upon a realization of these deferred gains, a loss set off should be provided by the source country.786 This would also be an appropriate solution in case the SE transfers it registered office abroad without leaving a permanent establishment in the exiting country. From an EU law point of view, domestic mergers and cross-border mergers need to be treated equally. Thus, if the loss carry forward is restricted or denied in the same manner for national cases as well as cross-border cases there is no discrimination. However, crossborder transactions are impeded if they do not take place due to the potential loss of accrued losses. Thus, this may hinder the free movement of companies in the EU.787 Furthermore, the country in which the losses have accrued is responsible for allowing a tax

778

779 780 781 782 783 784 785 786 787

Cf. Chapter 3. Another finding may only be deduced if a transaction implies abuse. However, if the business is continued and the shareholders remain - as is generally the case in the reorganization and transfer processes considered here - this should generally not be the case. In any way such transactions should be filtered via anti-abuse rules. Cf. Section 4.3.2.4; as well as Vanistandael, 1998: 921-922. Cf. also Körner, 2006a: 470; Klingberg/Lishaut, 2005: 716; Werra/Teiche, 2006: 1460; Schön/Schindler, 2008: para. 248. This is, for example, the case in Germany. See Table 2 in Section 4.2.3.1.2.1.1.1. Cf. Englisch, 2007: 341; PwC (ed.), 2007: 186-188. Cf. Klingberg/Lishaut, 2005: 716; Benecke/Schnitger, 2006: 774; Körner, 2006: 112; Rödder/Schumacher, 2006: 1533; Jacobs (ed.), 2009: 752-754. Cf. also Linn/ Reichel/Wittkowski, 2006: 637. Cf. also Chapter 3. Cf. in detail Section 4.3.2.2.1. Cf. Lange, 2005: 158-161. Cf. Dautzenberg, 1997: 243; Körner, 2006a: 470; Werra/Teiche, 2006: 1460.

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deduction for these losses (intraterritorial loss transfer).788 Accordingly, if a permanent establishment remains in the country of the transferring company, such losses should be transferrable.789 The losses would simply be carried over from the domestic corporation to the domestic permanent establishment.790 This would guarantee that losses are used once.791 Thus, a justification for a denial of a carryover within one member state cannot be found.792 Contrarily, a carryover of losses to the receiving company itself (thus to another member state) cannot generally be demanded based on EU law as this would imply that losses that have accrued in one country put a burden on another country. Only in cases where losses may no longer be used in the country of source, could there be a basis for an obligation of the country of residence of the receiving entity to provide a loss set off due to the judgments of the European Court of Justice.793 However, such situations need to be interpreted restrictively in order to avoid abusive actions of the taxpayers as well as specific actions by foreign treasuries at the expense of other treasuries.794 Thus, from an EU law perspective it is questionable that the loss of a carryover in case of mergers may result in a use of the losses in the new member state. This is because the losses could be used in the source state if the transferring entity would realize hidden reserves. Thus, based on a restrictive interpretation of the judgments of the European Court of Justice, a carryover of such losses to another member state would not result.795 In conclusion, the denial of a loss carryover within one member state is neither in line with economic (neutrality and equity) nor legal (EU law) principles and should thus be abolished in the relevant member states. From both perspectives, the source state is liable for the set off of losses and should provide appropriate rules. In case of a remaining permanent establishment, the losses should be used there. If no permanent establishment re-

788 789 790 791 792

793 794 795

Cf. Körner, 2006: 112. Without explicit reference to a permanent establishment of the same opinion: Körner, 2006: 112. Cf. also Werra/Teiche, 2006: 1460. Cf. Klingberg/Lishaut, 2005: 716. Cf. Körner, 2006: 112. An exception could apply in case loss trafficking shall be prevented. This may, however, not justify a general denial of the loss carryover but the issue may only be solved according to the strict rules established by EU law in the context of preventing fraud. Cf. Körner, 2006: 112. On the avoidance of abuse see Section 4.3.2.4. Cf. Section 4.1.2. Cf. also Körner, 2006a: 470; Werra/Teiche, 2006: 1460; Englisch, 2007: 342. Cf. Mayr, 2008c: 1816-1819. Skeptical towards a far reaching interpretation also Benecke/Schnitger, 2006: 774; Schön/Schindler, 2008: paras. 181, 248. Cf. Mayr, 2008c: 1818; Schön/Schindler, 2008: para. 181. Of other opinion: Scheunemann, 2006: 149; Körner, 2006a: 470, who both support a carryover unless abuse is given.

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mains, losses should be allowed to be set off against taxable capital gains arising in the future as a result of a provided tax deferral upon the reorganization or transfer process. 4.3.2.4 Filing obligations and avoidance of abuse The comparative analysis of the member states has revealed that, in order to receive the tax deferral granted in the Merger Directive, in some member states prior approval of the treasury is required as well as filings of annual declarations in order for the tax authorities to follow up on affected shares. Furthermore, in case of the establishment of a holding SE and subsidiary SE, holding periods need to be observed in one fourth of the member states. Even though the details differ, the rules are not case specific but apply to all taxpayers. Furthermore, a disposal of the shares involved within the holding period either results in an immediate taxation of the whole transaction, or at least in a reversal of a granted tax-free step-up which will cause an economic double taxation once the shares are sold. Only in Denmark and Latvia a tax deferral is not withdrawn within the holding period, provided that the contributing entity can demonstrate that the disposition of the shares is not driven by tax avoidance.796 When assessing these rules, EU law provides guidance. Even if member states’ rules apply to domestic as well as cross-border transactions, they constitute a restriction towards cross-border transactions. Consequently, such transactions may not be carried out by the taxpayer or may result in negative tax consequences if the taxpayer does not comply with the rules established by the member state. Thus one has to determine next whether such restrictions may be justified. Whereas prior approvals and filing requirements are generally in place for administrative purposes, the holding requirements shall prevent abusive actions.797 Both arguments will only hold up to a limited extent. Based on primary EU law and more precisely on the judgments of the European Court of Justice, neither material nor procedural disadvantages may generally occur for the taxpayer who is engaged in a crossborder transaction.798 This implies that a taxpayer may not be unduly burdened (e.g. with regard to time and cost). However, a reasonable administrative burden in cross-border

796 797 798

Cf. Section 4.2. Cf. on the issue of economic double taxation also Section 4.3.2.2.4. Cf. also Section 4.3.2.2.4, as well as Vanistandael, 1998: 915; Englisch, 2007: 343; Schön/Schindler, 2008: para. 397. Cf. ECJ of 07/09/2006 (C-470/04, N), ECR 2006: I-7409. Cf. also Schön, 2004a: 296-297.

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situations may be justified.799 Against this background, prior approvals can be regarded as disproportionate disadvantages.800 In this context, the Merger Directive supports this finding, as prior approvals are not included there as preconditions for a tax deferral.801 Regarding filing obligations, tax declarations upon exit as well as realization are seen as proportionate as they are necessary to allocate the taxing right or are also required in a national case.802 Further filing obligations can also be set up if they do not burden the taxpayer in an unreasonable way. In this context, the filing of annual statements on the status of the assets is generally considered to be reasonable.803 Beyond that, the European Court of Justice will likely require that treasuries directly contact the foreign treasury based on the Mutual Assistance Directive to receive the necessary information.804 Finally, concerning the avoidance of abuse, measures are only justified if they are specifically designed to exclude purely artificial arrangements aimed at circumventing national tax law. Contrarily, if they cover any situation of the taxpayers independent of whether it is abusive or not, this will not be allowed.805 This is also in line with the rules in the Merger Directive which do not preclude the consequences of the Merger Directive unless Art. 11 MD applies.806 According to Art. 11 MD (as interpreted by the European Court of Justice) member states may only deny the treatment if an abuse is proven in a specific case. General indications are not sufficient because such a general rule cannot be said to be the least burdensome to avoid abuse.807 Thus, anti-abuse rules need to be accurately targeted at abusive schemes

799

800 801 802 803

804

805 806 807

Cf. ECJ of 26/06/2003 (C-422/01, Skandia und Ramstedt), ECR 2003: I-6817. Furthermore, see Cordewener, 2002: 539-540; Schindler, 2004: para. 39; Seitz, 2008: 73 in the context of non-residents who may, otherwise, easily cut the link to a jurisdiction; Brocke/Tippelhofer, 2009: 951-952. Cf. Schindler, 2004a: 308. Cf. also Gille, 2007: 195. Cf. ECJ of 07/09/2006 (C-470/04, N), ECR 2006: I-7409, para. 49. Cf. also Schindler, 2004b: 713. Cf. Martin, 2003: 129; Thömmes, 1997/98: 95; Kessler, 2004: 844; Schindler, 2004a: 309; European Commission, COM(2006)825: 6; Seitz, 2008: 73. Of different opinion: Schnitger, 2004: 813; Führich, 2008: 14. In Austria an annual statement is not required due to uncertainties with regard to EU law. Cf. Schindler, 2004: para. 46. Cf. ECJ of 21/11/2002 (C-436/00, X and Y), ECR 2002: I-10829 para. 60-62; ECJ of 07/09/2006 (C470/04, N), ECR 2006: I-7409 para. 52-53. Cf. also Lang, 2007: 125-126 on the development of judgments of the European Court of Justice in this context. Furthermore, see Lausterer, 2006: 85-86 who follows that a taxpayer may, for example, not be obliged to show how the foreign treasury has treated the gain or loss upon the disposal. Some scholars further argue that this implies that treasuries may not impose negative tax consequences if a taxpayer fails to follow any annual filing obligations. Cf. Lishaut, 2004: 1304; Schindler, 2004a: 308; Ernst&Young, 2009: 430. Cf., to that effect, ECJ of 16/07/1998 (C-264/96, ICI), ECR 1998: I-4695 para. 26; ECJ of 21/11/2002 (C-436/00, X and Y), ECR 2002: I-10829 para. 61. Cf. also Schön, 2003/04: 28-29, 33-35. Cf. also Gille, 2007: 195. Cf. ECJ of 17/07/1997 (C-28/95, Leur-Bloem), ECR 1997: I-4161. See also European Commission, COM(2003)703: 7; Thömmes, 2005a: 229-230.

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and not be generally applicable.808 Furthermore, if more than one measure is available the least onerous needs to be chosen.809 In most of the member states the holding obligations need to be fulfilled by the taxpayers independent of whether a transaction within this time is abusive or not. Therefore, these holding requirements can generally not be regarded to be in line with EU law as they are not proportionate.810 A proportionate treatment for this issue could be to include a rule which gives taxpayers the opportunity to make the case that a transaction had sound business reasons - as stated in Denmark and Latvia. Then negative tax consequences will only result if the taxpayer cannot prove appropriate reasons for the transaction.811 This does not mean that the burden of proof may fully be shifted to the taxpayer.812 Thus, such a rule may only apply within a reasonable time frame. In this context, a time frame of two years is discussed as this is also the holding period in other EU directives (e.g. Art. 3 (2) of the Parent-Subsidiary Directive, Art. 3b of the Interest-Royalties Directive).813 Overall, as a result of such rules, a tax deferral may only be denied if the fiscal authorities show that the transfer had tax abusive reasons.814 Thus, generalizing treatments are not allowed. However, targeted measures may be introduced provided that - as a result - only fraudulent transactions are caught.815 4.3.2.5 Additional transaction taxes The comparative analysis of the member states has shown that in almost all reorganization and transfer transactions relevant for the SE (merger, formation of holding and subsidiary SE, transfers of SE - except for conversions into and out of an SE) additional transaction taxes will be levied. Whereas capital duty tax and stamp duty tax is levied in only few member states (in case of merger, formation of holding and subsidiary SE, transfers of SE), real property transfer tax applies in half of the member states (mainly upon merger and formation of subsidiary SE).816

808 809 810 811 812 813 814 815 816

Cf. European Commission, COM(2007)785: 5. Cf. Klingberg/Lishaut, 2005: 701; European Commission, COM(2007)785: 2-4. Cf. also the predominant view in literature: Körner, 2006: 112; Rödder/Schumacher, 2006: 1537-1538; Englisch, 2007: 343-344; Gille, 2007: 198; Schön/Schindler, 2008: para. 397 with further references. Cf. Hahn, 2006: 805; European Commission, COM(2007)785: 4-5. Cf. European Commission, COM(2007)785: 5; Broe, 2008: 145-146. Cf. Hahn, 2006: 805; Körner, 2006a: 471. In support for a three year period: Lange, 2005: 161-163. Without an exact time frame: Schön/Schindler, 2008: para. 397. Cf. ECJ of 11/03/2004 (C-9/02, De Lasteyrie du Saillant), ECR 2004: I-2409, para. 54. Cf. also Saß, 2004: 1232; Blumers/Kinzl, 2005: 974. Cf. Section 4.2.

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When assessing these rules, it is obvious that these taxes cause an immediate tax burden and thus may hinder reorganization transactions. This is not in line with international neutrality as only the legal situation changes in these transactions but not the economic one.817 With regard to the capital duty tax, the Capital Duty Directive constitutes the basis for a level playing field as it states that restructuring operations (in line with the Merger Directive) shall be fully exempt from capital duty in the member states (Art. 4 and Art. 5 (1) (e) CDD).818 So far, not all member states comply with this though. In this regard, the taxpayer should refer directly to the directive. Furthermore, the European Commission has also already taken action against some of these member states.819 Concerning the stamp duty tax, even though this tax is also included in the Capital Duty Directive it may still be levied on the transfer of securities in reorganization transactions (Art. 6 (1) (b) CDD). This should be stopped in order to not unduly burden such transactions. Furthermore, it would increase the attractiveness of a country.820 However, despite such a proposal by the European Commission, member states have not come to an agreement towards the full abolishment of such taxes yet.821 Finally, real property transfer taxes are not regulated on an EU level. However, they cause a burden in the majority of the member states. Here, the same reasoning as in the context of the stamp duty applies. Consequently, member states should exempt reorganization transactions from real property transfer tax as the transfer of the real property does not occur between economically different taxpayers.822 In conclusion, in order to not hamper and unduly burden reorganizations and transfers of companies such transactions should be fully exempt from transaction taxes provided that the transactions occur within an economic unit. 4.3.3

Interim conclusions

The comparative analysis of the member states’ rules applying to the formation and the transfer of the registered office of an SE has revealed that tax issues and thus obstacles may occur in certain areas. Against the background of the (economic, legal and administrative) principles established in Section 4.1 the examination of theses issues has revealed the following.

817 818 819 820 821 822

Cf. Chapter 3. Cf. Council Directive, 2008/7/EC: 11. Cf. also the discussion in Section 4.3.2.1 Cf. on the general trend to abolish additional non-profit taxes in Europe: Jacobs (ed.), 2007: 129. Cf. European Commission, IP/06/1673; Council Directive, 2008/7/EC: 11. Of the same opinion: Krebühl, 2003: 609.

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According to current law, the formation of an SE (even though quite regulated) is the only way to transfer a seat abroad without the negative consequences from a winding up of a company as long as a permanent establishment remains in the exiting country. The formation and transfer of an SE is mainly regulated by the Merger Directive. If member states have not or incorrectly transformed the Merger Directive, the taxpayers can directly refer to the rules provided in the directive. The granting of a tax deferral upon a reorganization or transfer only when transferred assets and liabilities remain effectively connected to a permanent establishment is neither in line with economic nor legal principles. Thus, an immediate taxation, in case no permanent establishment remains or in case the assets and liabilities transferred do not remain effectively connected to this permanent establishment needs to be abolished. Instead, even though the country of the exiting or transferring entity retains its taxing right, it may only be exercised upon a subsequent realization of the accrued hidden reserves. A systematic approach implies that member states agree on a transfer value and cooperate closely with each other to receive the relevant information to exercise their taxing rights. Only then, is it guaranteed that the taxpayer is subject to taxation once from an overall perspective, as if he would have been in a purely domestic case, since a realization in the exiting country would take place in accordance with a realization in the entering country. Such an approach would also need to take into account foreign permanent establishments and shares belonging to the shareholders. However, it would require coordinated action at an EU level in order to be enacted in a feasible way. Contrarily, if member states act independently from each other, mismatches will likely remain. The doubling of hidden reserves during the establishment of a holding or subsidiary SE can be avoided if the shares received by the SE - in case of a holding SE - or by the shareholders - in case of a subsidiary SE - are valued at the fair market value. Any risk of tax avoidance in this context may not be solved via general rules but only on a caseby case basis. The denial of a loss carryover due to a reorganization or transfer transaction is neither in line with economic nor legal principles. Instead, the country of the source of the losses needs to guarantee that the losses can be used (e.g. at the remaining permanent establishment or via a set off with capital gains accrued within exiting assets upon a subsequent realization).

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In order to avoid abuse, member states may not exclude taxpayers from the beneficial treatment of the Merger Directive via general rules (e.g. requesting a prior approval). Instead, fraud needs to be proven on a case-by case basis. Additional transaction taxes constitute an undue burden for taxpayers. Thus, reorganization and transfer processes should generally be exempt from these taxes provided that the business activity and ownership continue to exist. Overall, the analysis reveals that negative tax consequences may currently result upon the entry into and/or transfer between member states. Even if they are abolished, based on the proposals established here, a general diversity between the member states’ rules remains. Thus, even if the member states agree on a coordinated action in case of reorganizations and transfers of registered offices with regard to the values used, differences continue to exist due to the differing tax rates among member states. Consequently, incentives to structure transactions in such a way that low tax rates can be utilized do not vanish. Furthermore, a system based on the fair market value for transactions across borders may have constraints if it covers a high number of relevant transactions and thus the need for appropriate valuation. Therefore, the European Commission has proposed to introduce a Common (Consolidated) Corporate Tax Base in order to reduce the current differences between member states with regard to current and noncurrent transactions. Such a uniform tax base would change the systems for profit determination as well as profit allocation of groups of companies. In the next chapter it will be examined whether such an approach would solve current issues, and thus would provide a more suitable tax framework for SEs than the current environment.

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5

191

Taxation of European Companies during the time of restructuring in the proposed environment As has been pointed out above, the focus of the ongoing work at the level of the Euro-

pean Commission is on introducing a Common (Consolidated) Corporate Tax Base throughout Europe, as this is regarded to be a systematic way for companies to overcome the tax obstacles in the internal market and an acceptable way for member states to come to an agreement.823 Despite the option to not change the current system (“no change” scenario),824 the European Commission distinguishes between the concept of a Common Corporate Tax Base and the concept of a Common Consolidated Corporate Tax Base. In the following analysis the emphasis is placed on aspects which specifically concern reorganization and transfer processes. The examination is based on the work carried out by the working groups established by the European Commission. A critical discussion of the proposed change in the tax system in general is beyond the subject of this thesis.825 Before explaining and examining the proposed concepts from the perspective of reorganization and transfer processes, the relevant guidelines from this perspective will be assessed.

5.1

Guiding tax principles

From the perspective of forming an SE and transferring the registered office of an SE in the proposed environment, the general economic guidelines established in Chapter 3 would still need to be observed. Thus, reorganization or transfer processes should not be hampered by taxes (principle of tax neutrality) and the taxpayers involved should only be taxed according to their ability to pay (principle of equity).826 To maintain the tax neutrality principle and to create a business-friendly tax environment is also a goal of the European Commission which shall be achieved in such a new system.827 Specifically, tax neutrality shall comprise a carryover of the tax values for assets and liabilities including preexisting (fully or partly) tax-exempted provisions and reserves as well as the carryover of pre-existing losses by the acquiring entity according to the European Commission.828 Fur823 824 825 826 827 828

Cf. Chapters 1 and 3. The “no change” scenario would mean that one sticks to the rules of the current environment. However, as has been shown in detail in Section 4.3, even in the current environment changes are necessary. Cf., to that regard, the contributions in Lang/Pistone/Schuch/Staringer (eds.), 2008 and Schön/Schreiber/Spengel (eds.), 2008; as well as Mayer, 2008; Wendt, 2009. Cf. also Schreiber, 2004: 224; Herzig, 2008: 551-552, Wendt, 2009: 155. Cf. European Commission, WP039: 4-5. Cf. also Schreiber, 2009: 84-85. Cf. European Commission, WP039: 4-5.

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thermore, EU law and feasibility constitute constraints which need to be observed.829 Despite that, the change into a new system requires that this is pursued in a fair way (i.e. transitional equity). Thus, the transition into a new system needs to be eased considering the interests of the taxpayers and treasuries affected.830 More precisely, if a new system is introduced, transitional measures are necessary to avoid that gains that have accrued prior to the entry into the new system, are taxed according to the new system.831 Consequently, “from a theoretical perspective, the ideal rule is one that sets the cost of assets previously outside the tax base as their market value at the time the new tax reform comes into effect.”832 Next, the concepts proposed by the European Commission will be explained and examined from the perspective of reorganization and transfer processes. In this context, first, the introduction of a Common Corporate Tax Base is assessed, and secondly, the introduction of a Common Consolidated Corporate Tax Base will be examined.

5.2

Common Corporate Tax Base

According to a Common Corporate Tax Base (CCTB), a new uniform set of rules would be established to determine the tax base optionally applicable to all companies which are doing cross-border business. The tax base would then be allocated according to current rules (i.e. based on fair market values) and taxed with a member states’ tax rate. Regarding the personal scope, the uniform tax base would apply to EU companies (listed in an appendix) which are subject to corporate income tax in a member state as well as permanent establishments of eligible companies of third countries.833 This would also cover 50% directly or indirectly owned subsidiaries (according to voting rights). The approach would be optionally available to the above mentioned entities (i.e. eligible entities). However, if a company has exercised the option (which shall be valid for a period of five years at first with automatic renewals for another three years), the adoption of the uniform tax base would be mandatory for all companies of the group as well as companies joining the group (so called “all-in” or “all-out” principle). Contrarily, if an opting entity is taken over by a 829 830 831 832 833

Cf. Sections 4.1.2 and 4.1.3. Cf. also Freedman/Mcdonald, 2008: 232. Cf. Rosen/Gayer, 2008: 368. Cf. Burns/Krever, 1998: 655; Dürrschmidt, 2007: 174; Herzig, 2008: 560. Burns/Krever, 1998: 655. This would include companies of third countries which have a similar form to EU companies and are subject to corporate income tax in a member state. Cf. European Commission, WP057: 5-6. Cf. also Staringer, 2008: 127-130.

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non-opting group or company, the option for the uniform tax base would still be valid for the remainder of the validity period. This shall prevent that entities are able to opt out early via a reorganization.834 In a possible outline of the principles of such a harmonized tax base the structural elements of a uniform tax base have been elaborated by different working groups established by the European Commission and brought together into a coherent set of rules in July 2007.835 In this outline, many important elements regarding the determination of an EUwide common tax base are included. For most of these elements, IFRS serve as a reference point. However, there will be no strict dependency of IFRS for the determination of taxable income. Instead, in many cases a distinct set of tax accounting rules either modifies IFRS or addresses special tax issues where financial accounting offers no feasible solution with regard to the fundamental taxation principles.836 Specifically, among others, the taxable income would be assessed via the profit and loss method which is preferred over the tax balance sheet method. In order to determine the taxable income, the realization principle shall be followed. Thus, despite IFRS, revaluation gains or losses will not be included in the tax base.837 Furthermore, assets (e.g. tangible and intangible assets) shall be capitalized whereas research and development costs shall be directly expensed. With regard to assets, the costs would be uniformly calculated. Furthermore, depreciation is regulated. Consequently, long-term assets shall be depreciated individually on a straight line basis (buildings: 2.5% p.a., intangible assets: useful life or 6.67% p.a., other assets: 6.67% p.a.). Short-term and medium-term assets shall be depreciated on a pooled basis using the declining balance method at a rate of 20%. Moreover, if the value of inventory or nondepreciable assets decreases, the difference between the cost and the decreased value (non-depreciable assets only if decrease is permanent) would be tax effectively written off. Conversely, unjustified write-offs would need to be reversed.838 Finally, capital gains real-

834 835

836 837

838

Cf. European Commission, WP057: 5-6. Cf. European Commission, WP057. Even though a legislative proposal on a CCCTB was supposed to be presented in 2008 by the European Commission (see European Commission, COM(2006)157: 3, 8 and COM(2007)223: 7), such a proposal has been postponed, probably due to the objections of the member states, especially with regard to the apportionment mechanism. Cf., also for the following part, in more detail Spengel/Malke, 2008: 75-87; Wendt, 2009: 121-127. Cf. also European Commission, WP010: 6. An exception applies to long-term contracts whose gains or losses shall be recognized with reference to the stage of completion. Thus, unrealized income would be taxed. However, the total taxable income would remain the same. Even though the treatment of permanent decreases of depreciable assets has not been determined yet, it should be treated the same way as non-depreciable assets. Cf. European Commission, WP057: 10, 19; Spengel/Malke, 2008: 83-84.

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ized on the sale of shares and the disposal of assets shall receive a tax relief.839 Gains realized on the sale of major shareholdings ( 10% of voting rights or capital) shall be taxexempt. This shall ensure tax neutrality with regard to different ways of financing (i.e. profit distribution and sale of underlying shares).840 Gains realized on the disposal of assets shall receive a roll-over relief. Accordingly, the relief granted for pooled assets lasts as long as a pool exists, whereas the relief for individual assets lasts as long as replacements assets are bought.841 When examining these rules with regard to reorganization and transfer processes, the introduction of a uniform tax base for companies doing business in Europe would simplify the procedure for companies and treasuries as only one set of rules would be relevant. Thus, it would imply that uniform rules (not 27 different rules) exist with regard to the realization of gains and losses, the determination of the costs of assets and the structure of depreciation and amortization. With regard to accrued hidden reserves, this would imply that the treasury of the exiting country would know how the entering country treats the transferred asset. Consequently, the exiting country could base its own calculations on when to realize part or all of the assessed hidden reserves upon exit on these rules (combined with an option for the taxpayer to prove that the relevant asset is treated differently or has developed in a different way). However, the member states would still need to agree on a fair market value of the asset upon transfer and would still need to inform each other about the time of disposal or retirement of an asset. Furthermore, the approach does not include rules on the other subjects that have been identified as issues in the current system (e.g. doubling of hidden reserves, treatment of shareholders, carryover of losses, additional taxes).842 Moreover, the tax rates are still set by the involved member states. In conclusion, the introduction of a harmonized tax base would ease the proposed approach in the current environment843 with regard to the treatment of assets which have been accrued until the exit. Thus, compliance costs resulting from dealing with 27 different tax codes in the EU could be reduced.844 In addition, one would still need to refer to the

839 840 841 842 843 844

Cf. European Commission, WP057: 10, 19. Cf. Canellos, 2005: 31; Endres et al. (eds.), 2007: 22; Wendt, 2009: 126. As this puts individually depreciated assets at a disadvantage, the conditions on replacement assets should be very liberal. Cf. Spengel/Malke, 2008: 83-84. Cf. Section 4.3. See for the proposed approach Section 4.3.2.2.1.2. Cf. also Wendt, 2009: 106-107.

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Merger Directive for further details for reorganization and transfer processes, which has its merits as outlined in Section 4.3.

5.3

Common Consolidated Corporate Tax Base

5.3.1

Proposed rules

5.3.1.1 Ongoing system In contrast to a Common Corporate Tax Base, the Common Consolidated Corporate Tax Base (CCCTB) would not only determine a uniform tax base, but would also consolidate the income of a group of companies and allocate it back to the involved companies according to an apportionment mechanism. Thereafter, the share would be taxed with the tax rate applicable in the country of the companies affected.845 Thus, the member states would preserve the right to individually set the tax rate. Specifically, this implies that the CCCTB looks at the economic unity of a group of companies, not just the single legal entities.846 Thus, a group of companies which forms an integrated economic entity is the focus of taxation as the income of the group is consolidated beyond national borders. Such a group is established if a company (EU resident parent company847) has a qualifying subsidiary or a permanent establishment in another state in the EU. This implies that permanent establishments remain as a nexus for member states. They shall generally be defined in accordance with the OECD model.848 A subsidiary qualifies if its voting rights are owned directly or indirectly (i.e. through a chain of participation) up to 75% or more.849 Even though companies may opt to be taxed accord-

845 846 847

848 849

Cf. European Commission, COM(2007)223: 5. Cf. also Fülbier, 2006: 112; Herzig, 2008: 550-551. It is irrelevant whether this EU resident parent company is controlled by a non-EU resident parent company or not. Moreover, two or more EU resident subsidiaries and/or permanent establishments under the common control of a non-EU resident parent company would also constitute a group. Cf. the examples in WP057: 22-23. Cf. European Commission, WP057: 7. Regarding the calculation see European Commission, WP057: 23-24. Regarding changes in the ownership during the year see European Commission, WP057: 24-25. In this context, a taxpayer would not be included in a group unless the ownership conditions are met for at least 6 months. Furthermore, a taxpayer (e.g. including a taxpayer’s subsidiaries) would leave the group on the day when the ownership of voting rights either falls below 50% at any moment or falls below 75%, provided that it remains below 75% until the end of the tax year. This shall guarantee stability for the group and reduce manipulations. Critical towards the coexistence of different thresholds for the application of the harmonized tax base (50%) and consolidation (75%): in detail Hohenwarter, 2008: 157-193; as well as Staringer, 2008: 130; Tenore, 2008: 476-477. For possible changes to the threshold see also Dine/Browne (eds.), EU company law: 18[32]

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ing to the rules of a CCCTB (and not to domestic rules) once they have made the decision in favor of the CCCTB, consolidation would be mandatory for all these companies (so called “all-in” or “all-out” principle). Consolidation would start on the day a company enters the CCCTB and would end on the day a company leaves the CCCTB. Thus, transitional tax years would be split into parts.850 Furthermore, the income to be consolidated would equal the entire tax base of all taxpayers of a group (i.e. 100%).851 After having determined the income at the individual group companies according to uniform rules, the income would be consolidated in order to calculate the group income.852 Due to this consolidation,853 profits and losses can be set off against each other within a group of companies. Thus, a cross-border loss compensation would be guaranteed, resulting in a one-time use of the accrued losses.854 Furthermore, latent gains and/or losses on intra-group transfers of assets would be deferred until they are realized in a market transaction. Consequently, expenses and corresponding income on intra-group transactions would be netted out. As a result, transfer pricing issues arising from separate accounting would be eliminated or practically disappear.855 Moreover, tax charges on cross-border restructuring operations or the cross-border relocations of functions and risks could be prevented. As these activities would no longer constitute taxable events, but rather transfers of assets or shares within a taxable entity, they would be eliminated under a consolidation approach. Instead, accrued hidden reserves would only be included in the consolidated tax base once they are realized outside the economic unity (e.g. with third parties or entities which do not form part of the economic unity).856 With regard to the neutralization of intra-group transactions, two different approaches are suggested.857 On the one hand, such transactions could be completely ignored from a tax perspective. Nevertheless, in intra-

850

851 852 853

854 855 856 857

The splitting of the tax year may also have effects on the calculation of the factors in the apportionment formula. Cf. European Commission, WP057: 26; and also below. The other option to start and end consolidation at the beginning/end of a tax year is not preferred by the European Commission. Cf. European Commission, WP057: 22-25. Supporting this view: Herzig, 2008: 559-560. Cf. also Herzig, 2008: 554, 555. Regarding the determination of the income see the discussion in the context of a CCTB in Section 5.2 above. For more details on the general consolidation options see Oestreicher, 2008: 517-546; as well as Herzig, 2008: 547-572, who both compare IFRS consolidation measures based on the balance sheet with simplified procedures based on the profit and loss accounts as proposed by the European Commission. Cf. Herzig/Wagner, 2005: 9; Oestreicher, 2008: 533. Cf. also European Commission, WP057: 21; Führich, 2008: 16; Herzig, 2008: 557-558, 568; Oestreicher, 2008: 532-533; Dine/Browne (eds.), EU company law: 18[35]. Cf. also Scheffler, 2005: 322; Schön/Schindler, 2008: para. 12. Cf. European Commission, WP057: 28-29. On the treatment of inventory see in detail Herzig, 2008: 567-568.

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group transactions involving depreciable assets, the assets would still need to be recorded at their tax write off value in order to determine subsequent depreciation charges. As the basis in the depreciable asset would be carried over from one group member to another group member, the overall depreciation charge would equal the case where no intra-group transfer had occurred. Furthermore, any subsequent realized gain or loss would be based on the historical value determined without the intra-group transaction. This implies that hidden reserves which have accrued until the intra-group transfer are not documented for tax purposes.858 On the other hand, such intra-group transactions could be included by each group company and netted off via the consolidation mechanism. According to this approach, the intra-group transfer would be based on the fair market value of the asset. Consequently, the transferring as well as the receiving group company would use this fair market value. As this value is not yet realized in a transaction with a third party though, any gain or loss at the transferring entity as well as any depreciation charges at the receiving company would need to be adjusted. This is necessary to derive the consolidated tax base of the group on the basis of the individual tax bases within the group companies. Thus, on the one hand, gains or losses resulting from intra-group transactions need to be eliminated. On the other hand, depreciation for the group may not be based on the fair market value but only on the book value of the asset transferred. Consequently, higher (fair market value > book value) or lower (fair market value < book value) depreciation charges need to be eliminated. Overall, this implies that, in a first step, the taxable income of each group member is determined as if intra-group transaction would occur between unrelated parties. Only in a second step, the economic unity is taken into account. This can be achieved by adjusting the accounts of the transferring and the receiving entity or by eliminating the transaction in a separate combined report.859 Therefore, in contrast to the first approach, hidden reserves which accrue until an intra-group transfer are traceable.860 Of these two approaches, Commission Services seem to favor the first approach as it would be less complex than the second approach.861

858 859 860 861

Cf. also Herzig, 2008: 566-567; Oestreicher, 2008: 533-536; Wendt, 2009: 175-176, both including numerical examples. Cf. also Herzig, 2008: 566; Oestreicher, 2008: 539; Wendt, 2009: 175-178 including a numerical example. Cf. Wendt, 2009: 176. Cf. European Commission, WP057: 28-29 as well as the numerical examples 1 to 4 in the appendix of WP057. See also there as well as Herzig, 2008: 567-568 for the more problematic issue of stock valuation.

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In a next step, the consolidated tax base including the realized gains and losses would be allocated to each group member. Thus, the currently applicable international tax system which is based on the arm’s length principle would be replaced for transactions within the EU by an apportionment mechanism.862 This implies that the income of a group is allocated based on apportionment factors. The formula shall be uniform throughout the EU863 in order to prevent double or minor taxation and shall be comprised of weighted firmspecific factors.864 Commission Services favor a three factor formula including labor (measured by means of payroll and the number of employees), capital (measured by means of assets) and sales by destination. Within the factor “labor”, payroll would include all salaries, wages as well as other compensation of a taxable entity for its employees valued at cost. “Assets” would include all fixed tangible business assets (e.g. land, buildings, plant, machinery, financial assets and current assets) owned or rented/leased by the taxable entity, valued865 at historical cost or tax write off value.866 The “sales” factor would comprise of the total sales of a taxable entity (i.e. all proceeds of sales of goods and supplies of services (net turnover)) based on the destination of the sales (i.e based on the place to which the goods are ultimately delivered)867.868 The weighting has not been ultimately 862

863

864

865

866

867

868

Regarding the systematic and administrative advantages and disadvantages of formulary apportionment compared to separate accounting based on transfer pricing see e.g. Agúndez-García, 2006; Frebel, 2006: 19-29; Schäfer, 2006: 113-131; Jacobs (ed.), 2007: 585-603; Mayer, 2008: 5-28; Wendt, 2009: 87-102. Sector-specific formulae may, however, be introduced. Furthermore, a safeguard or escape clause may be introduced in exceptional cases in order to correct an allocation that leads to an unfair result (on request of the company or on request of all concerned tax administrations. Cf. European Commission, WP060: 17. A macro-based approach (e.g. based on the gross domestic product) as well as a micro-based approach based on the value added have been discarded. For the reasons see in detail: European Commission, WP052, Frebel, 2006: 122-177; Schäfer, 2006: 182-186. It has not been determined yet whether this value shall be an average value (including the value at the beginning and ending of the tax year). The average value may be useful to reflect the fluctuation of assets (e.g. due to the purchase or sale of assets). Cf. European Commission, WP060: 10-11. In order to avoid the manipulation of the asset factor - this can be achieved as assets can be shifted within the group without immediate tax consequences due to the consolidation process - Commission Services suggest including an anti-abuse provision. Accordingly, the transferred asset shall continue to be included in the asset factor of the transferring entity and not in the asset factor of the receiving entity, provided that the receiving entity sells an asset, which has been transferred to it by the transferring entity in the same or previous tax year, outside the consolidated group or when the receiving entity itself leaves the group due to a reorganization transaction. The taxpayer may, however, demonstrate that the transfer was made for bona fide commercial reasons. Cf. European Commission, WP060: 12 and WP065: 10. Sales measured at origin, thus based on the place from which the goods are shipped, is not favored by Commission Services due to the fear of easy manipulation of the place of origin, among others. Cf. European Commission, WP060: 12. If there is no taxable entity of the group (permanent establishment or subsidiary) (i.e. nexus) in the country of destination or sales and services are made to a country outside the EU, these sales and services would be included in the sales factor of all taxable entities of the group in proportion to their labor and asset factors (“spread throw-back”). Cf. European Commission, WP060: 14-15. See in detail

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defined as this shall be left to the member states to agree on. Accordingly, the formula to determine the taxable share of the single taxable entity (TE) out of the consolidated taxable income of the group (G) has the following form: Tax baseTE = Tax base (CCCTB)G * (DA (AssetsTE/AssetsG) + DS (SalesTE/SalesG) + DP (1/2*(PayrollTE/PayrollG) + 1/2*(Number of employeesTE/Number of employeesG)) ) DA, DS and DP represent the weights of the factors assets (A), sales (S) and payroll (P). In order to achieve a tax base that is shared once, in sum these factors need to equal one. The income to be shared shall comprise of the whole consolidated tax base calculated in accordance with the CCCTB rules.869 Furthermore, the share of the tax base could either be apportioned to each individual entity or directly to the taxing jurisdictions. Commission Services prefer to allocate the share to the taxpayer so that each entity knows its tax base in order to calculate its specific tax liability (e.g. taking into account possible tax credits). Finally, it is suggested that only a positive consolidated tax base (net profit) is shared immediately, whereas a negative consolidated tax base (a net loss) is carried forward at the level of the group and offset against future consolidated profits.870 As a result of formula apportionment, all member states receive part of current as well noncurrent income (e.g. capital gains) and can tax that part.871 Furthermore, as the consolidated tax base is apportioned to each group member, the single legal entity remains liable to tax with its share in the consolidated tax base (not the economic unity).872 This also implies that a member state only receives a share if there is a physical presence there (e.g. permanent establishment, subsidiary). An economic nexus, i.e. the significant presence of at least one of the factors of the apportionment formula (thus asset, labor or sales) in a certain jurisdiction, is

869

870 871 872

on the scope, location and valuation of the chosen factors: European Commission, WP060: 7-15. Regarding the optimal choice of company specific factors see in more detail e.g. Agúndez-García, 2006: 32-85; Frebel, 2006: 143-165; Schäfer, 2006: 171-181; Mayer, 2008: 137-146; Wendt, 2009: 190-194. The other alternative to divide the consolidated income into “business income” (income earned in the ordinary course of trade and business), which is shared, and “non-business income” (mainly passive income such as interest, royalties and dividends), which is directly allocated to country of source, is not preferred, as such a differentiation may be difficult to administer and may also give rise to tax planning. Cf. European Commission, WP060: 7 The alternative option to carry forward the overall losses at the level of the group companies is not favored. Cf. European Commission, WP057: 26 and WP060: 5-7. Cf. also Oestreicher, 2008: 533. Cf. Scheffler, 2005: 323-324; Schreiber, 2009: 86. Cf. Schön, 2003: 619-620; Kahle, 2006: 1405; Herzig, 2008: 554.

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not considered to be sufficient by the European Commission.873 Additional items such as local taxes and incentives via a tax credit shall not be taken into account by the CCCTB according to Commission Services but shall apply after apportionment, and thus to the apportioned share of the tax base subject to tax in the single member state.874 5.3.1.2 Transitional aspects Despite these general rules applicable within the system of a CCCTB, the discussions carried out in the working groups have also covered the entry into and exit out of the new system CCCTB. This covers the transitional period (entry into and exit out of the proposed system) as well as ongoing transactions if entities opt out or are forced to leave the CCCTB regime in the course of a business reorganization (e.g. because their participation is sold or because they no longer meet the requirements of an eligible entity). Regarding the objective scope of business reorganizations, it is being discussed to either introduce a list of eligible reorganization transactions or to provide that all restructuring operations involving transfers of business assets or shares are covered (including any kind of transformations, liquidations and transfers of the registered office, but excluding transfers of single assets).875 Regarding the transitional period as well as business reorganizations within the ongoing CCCTB system, one can distinguish the situation when a company enters a CCCTB group from the situation when it exits a CCCTB group. In both cases the treatment of accrued hidden reserves in assets and shares and the treatment of unused losses are discussed. Concerning the entry, several questions have been subject to discussion in the context of hidden reserves. First, one needs to determine the value at which an asset enters the CCCTB. In this context, two approaches are examined. On the one hand, assets could enter with their tax write off values calculated in accordance with domestic tax law. On the other hand, assets could enter with their fair market values. Commission Services currently prefer the first approach. Second, one needs to determine the treatment of hidden reserves which have accrued in a certain jurisdiction before the entry into the CCCTB group. Here, three approaches are focused. According to one approach, such accrued hidden reserves could not be subject to a special treatment. Thus, once they are realized (which occurs within the CCCTB) they would be included in the consolidated income and 873 874

Cf. European Commission, WP060: 15. Cf. European Commission, WP057: 29 and WP066: 4.

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allocated among the member states according to the apportionment formula. According to another approach, the accrued hidden reserves could be assessed upon entry into the CCCTB and remain subject to the tax of the country of departure (i.e. the country of source, not the CCCTB) once they are realized (i.e. system of tax deferral). This implies that the realized capital gain or loss, which has been allocated to the country of source, needs to be eliminated from the CCCTB tax base as it is taxed at the level of the single member state. According to a third approach, the capital gains could be taxed at a pro-rata basis over a given period (with no direct relation to the realization of the respective asset and/or liability) upon request of the affected company. Commission Services prefers the second alternative. Third, one has to decide how to handle situations in which assets and/or liabilities are treated differently with regard to the recognition, qualification and/or valuation according to domestic tax law and CCCTB tax law. Differences may likely occur with regard to assets. This may cover the qualification as an asset or not (e.g. cost of research and development), the depreciation on an individual or pooled basis, long-term contracts (realization of full amount or at a pro rata temporis basis) or provisions (different recognition or valuation).876 In the context of unused losses, it is proposed that preCCCTB losses (i.e. losses incurred by a taxpayer before entering a CCCTB group) are not included in the consolidated income of the group. Instead, such losses shall be ring-fenced in the country of source and offset according to national rules with the apportioned share of the consolidated tax base attributable to the respective taxpayer.877 Regarding the exit, Commission Services distinguishes the level of the company selling the shares of its subsidiary and the level of the leaving entity in the context of hidden reserves. When examining the level of the company selling its subsidiary (via a sale of shares), due to the participation exemption for major shareholding (t 10% of either capital or voting rights) such transactions would be tax-exempt. However, it is suggested to include an anti-abuse provision. Accordingly, the exemption of the gains (or losses) realized on the disposal of shares shall be denied to the extent that the assets were transferred to the leaving company within the present or previous tax year and their disposal would have triggered a gain. It is further proposed to calculate the asset factor in such a way that asset transferred in the same or previous tax year of a sale shall continue to be included in the 875 876

Cf. European Commission, WP039: 3. Cf. European Commission, WP066: 3.

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asset factor of the transferring entity and not in the asset factor of the receiving entity. This implies that the realized gain would be primarily allocated to the previous owner. These anti-abuse provisions shall be accompanied by a rule which guarantees a different treatment for the taxpayer provided that he can demonstrate valid commercial reasons (i.e. two years test). Furthermore, these anti-abuse rules shall also cover those cases where a company leaves the group (or the group terminates) without a sale of shares. This is, for example, the case where a group of companies does not renew its CCCTB option or is subject to a reorganization. Consequently, instead of an exemption, an immediate taxation of the unrealized capital gains on assets that were transferred to the exiting company within the present or previous tax year and whose disposal would have triggered a gain would be the result.878 In case of a sale of portfolio shareholdings (< 10%), a taxation of the capital gains would occur according to general rules of the CCCTB.879 When examining the level of the leaving company, questions equivalent in context to those of the entry have to be answered. Thus, first, it needs to be decided at which value an asset shall exit from the CCCTB. In this context, the additional question arises how a pooled asset shall be treated if a pooling method is not available in the domestic tax law. Second, it needs to be decided how to treat hidden reserves which, on the one hand, had accrued in a certain jurisdiction before the entry into the CCCTB group and have not been realized yet and, on the other hand, have accrued during the CCCTB time. With regard to pre-consolidation hidden reserves it is still suggested to transfer these unrealized gains back to the member state of source (based on the assumption that no transfer of seat of the company has taken place). With regard to the CCCTB hidden reserves, it is proposed to assess the underlying capital gains and/or losses as well as the respective tax liabilities and tax repayments upon exit. Such hidden reserves shall be allocated to the respective countries based on the apportionment formula at the date of the exit. However, the actual taxation shall not occur until a realization takes place (e.g. sale). The information which needs to be exchanged between the member states in order to guarantee a subsequent taxation shall include the location of an asset, the (former) principal tax authority as well as the subsequent realization event.880 In the context of unused losses, two scenarios are distinguished. In case a company leaves 877 878 879

Cf. European Commission, WP048: 4, WP053: 6, WP057: 26. For alternative approaches which are not favored though see European Commission, WP053: 6; Wendt, 2009: 188. Cf. European Commission, WP057: 27-28, WP060: 12, WP065: 10 and WP066: 3. Regarding the other alternative which are not favored though see European Commission, WP057: 27-28. Cf. European Commission, WP066: 3.

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the group, CCCTB losses (i.e. losses incurred within the CCCTB group) shall not be attributed to this single company. Instead, unrelieved losses carried forward at the group level shall remain within the group in order to take into account the economic unity of the CCCTB group. The alternative to attributing losses to exiting companies, which would require that the exiting losses are calculated in accordance with the sharing mechanism at the date of exit, seems not to be favored by Commission Services. Conversely, if a CCCTB group terminates, unused group losses shall be attributed to the taxpayers who belong to the consolidated group at the moment of termination in accordance with the sharing mechanism at the date of termination. This is due to the fact that the single economic unity vanishes.881 5.3.2

Issues and options for reform

When examining these rules with regard to reorganization and transfer processes, two scenarios are distinguished in the following discussion. On the one hand, transactions of entities which are all subject to CCCTB rules and included in one consolidated group are assessed. On the other hand, transactions with entities outside the consolidated group are looked at. This covers transactions with entities which are subject to harmonized rules but which are either not eligible for being included in the consolidated group882 or belong to another consolidated group. In addition, it covers transactions with entities not covered by CCCTB rules at all, thus with entities which are subject to national member states’ or third countries’ rules.883 5.3.2.1 Transactions taking place within a consolidated CCCTB group Regarding the first scenario, within a consolidated CCCTB group reorganization and transfer processes would not trigger taxes, as the transfer of assets (in case of mergers, establishment of subsidiary SEs, transfers of SEs) and/or shares (establishment of holding

880 881 882

883

Cf. European Commission, WP066: 3-4. Cf. European Commission, WP057: 26-27. This case only falls in the second scenario as long as a double threshold (different threshold for adoption of uniform tax base compared to consolidation) is upheld. Otherwise, this case would vanish and transactions would be subject to rules within the first scenario. In order to reduce complexity, it seems reasonable to agree on one threshold for the entry into the harmonized tax base as well as consolidation. Cf. Hohenwarter, 2008: 187-188. Transactions in which none of the involved entities is subject to CCCTB rules are no longer focused on here. Such transactions may occur within the EU if entities or transactions are involved which are not covered by the CCCTB or if not all member states agree to apply the CCCTB (nonparticating member states). In such cases the Merger Directive would still be of relevance which has been analyzed in detail in Section 4.3.

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SEs) between corporations of this economic unit would be regarded as intra-group transactions. Consequently, they would be neutralized due to the consolidation. Taxation of hidden reserves immanent in the assets or shares would be deferred until the respective hidden reserves would be realized in a transaction with a third party.884 As a result, crossborder reorganizations within a group of companies or transfers of registered offices would no longer result in a realization of hidden reserves.885 This would imply that taxpayers are only taxed according to their ability to pay as the realization principle is observed.886 Furthermore, since all member states in which the hidden reserves have been established, based on the factors in the formula, receive part of the capital gains or losses as taxable share, cross-border reorganization transactions would be treated neutrally from a tax point of view. This would also cover the transfer of single assets as well as the transfer of functions and risks within the economic unity.887 Moreover, such a coordinated approach would release taxpayers as well as the national fiscal authorities from keeping up on the development of hidden reserves established in transferred assets.888 It would, of course, not only cover business reorganization and transfer processes of SEs but any entities eligible for being part of the consolidated CCCTB group.889 However, it would only cover transactions within the EU as only there the CCCTB is applicable. Even though the intra-group business reorganization and transfer processes do not result in immediate tax consequences due to the consolidation, such transactions may have an effect on the apportionment of profits depending on the factors and the weighting of the factors in the apportionment formula. In essence, the corporate income tax under the formula apportionment is a tax on the factors included in the formula.890 This is not an issue as long as activities are not actually moved from one member state to another, but remain connected to the country of the transferring or exiting entity via a nexus (e.g. permanent establishment), and book values are carried over, which is proposed under CCCTB at consolidation.891 Contrarily, if activities are indeed shifted abroad this may affect the appor-

884 885 886 887 888 889 890

891

Cf. also Dürrschmidt, 2007: 175; Wendt, 2009: 174. Cf. European Commission, WP039; Dürrschmidt, 2007: 173, who points out that this abolished issues of valuation; Jacobs (ed.), 2007: 290. Of the same opinion: Wendt, 2009: 155. Cf. Scheffler, 2005: 322-328; Spengel, 2006: G37-G38; Spengel/Oestreicher, 2009: 779-780. Cf. Schön, 2007: 425. Cf. also Dürrschmidt, 2007: 170; Hohenwarter, 2008: 187-188. Cf. McLure, 1980: 327-346; Gordon/Wilson, 1986: 1357-1373; Mintz, 1999: 406-407; Weiner, 1999: 13-15; Wellisch, 2004: 268-269; Agúndez-García, 2006: 59-69; Dürrschmidt, 2007: 163; Wendt, 2009: 156-157. Cf. also Dürrschmidt, 2007: 170.

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tioned share and thus the taxable income in a member state. The currently proposed formula includes assets, payroll and sales. Of these factors, especially assets may be changed due to business reorganizations and transfers of registered offices. This holds true as the location of an asset is a determining factor for the apportionment formula.892 Thus, the transfer of assets from one member state to another one may create distortions.893 The issue is reduced insofar as very mobile assets (intangible assets,894 financial assets and inventory) shall not be included in the asset factor according to Commission Services as has been pointed out above. Furthermore, the location of an asset would be determined by the effective place of its use. This would also limit artificial planning techniques.895 In addition, an anti-avoidance rule shall be included for intra-group transfer of assets accompanied with an exit of these assets within two years. Nevertheless, the actual shift of fixed assets (e.g. machinery) is still of relevance.896 Furthermore, not only the asset factor may be affected but also the factor “payroll”. This could be the case, for example, if a branch is transferred abroad implying that employees would no longer be paid in the transferring country but instead in the receiving country.897 The factor “sales” is the one least subject to manipulation in the context of restructurings.898 However, even this factor may create tax planning opportunities. For example, it may be advantageous from a tax point of view to set up a company via a reorganization process in the country of the main consumers or by transferring the registered office there. Then, a nexus is established and due to the sales factor which is based on the destination of the sales part of the taxable income is allocated to the country of the consumer. Conversely, without a nexus, thus prior to such a transaction, a spread throw-back rule applies apportioning the income to all taxable entities based on a certain ratio. Overall, this implies that business reorganizations are not neutral from a treasury’s perspective.899 The issue of changes to the apportionment formula is even more severe if no nexus remains due to a reorganization or transfer process (e.g. if all activities

892 893 894

895 896 897 898 899

Cf. also Dürrschmidt, 2007: 175-176; Führich, 2008: 18. Cf. also Dürrschmidt, 2007: 175. Towards the advantages and disadvantages of omitting or including intangible assets in an apportionment formula see: Schreiber, 2004: 221; Schäfer, 2006: 173-177; Dürrschmidt, 2007: 175, Mayer, 2008: 148-150. Cf. European Commission, WP060: 11. Cf. also Weiner, 1999: 22-23; McLure/Weiner, 2000: 255; Hellerstein/McLure, 2004: 211-212. Contrarily, shifts of shares as part of a reorganization transaction are of no relevance as they do not influence the currently proposed formula. Cf. also Dürrschmidt, 2007: 176. Cf. Dürrschmidt, 2007: 176. Cf. also Dürrschmidt, 2007: 176.

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are closed down).900 Then, the country of the transferring or exiting entity would loose any right to receive an apportioned share of future capital gains as Commission Services has proposed to hold on to current nexus rules. This would imply that a country only receives part of the tax base if there is a taxable entity in the member state. Thus, even though at first sight the condition, that a permanent establishment has to remain in the country of the transferring or exiting country, seems to become unnecessary901 this may not hold true with regard to the apportionment formula. In order to solve this issue one could argue that shifts of assets, payroll or sales can be ignored as they affect the apportionment only to a limited extent. By using a three factor formula as currently proposed the change of one factor counts less than once depending on the weighting (e.g. if the factors would be equally weighted, one factor would only count for one third of the apportioned tax base).902 This would be the simpliest approach. If substantially all assets are shifted or no nexus remains it is not likely though that member states agree on such an approach due to the effects on their taxing rights. In order to guarantee the taxing rights of the treasuries, one would need to assess the share of accrued hidden reserves (or losses) which a member state would be entitled to tax upon the reorganization or transfer process (thus, based on the assets, payroll and sales up to this time). This share could then be taxed at the respective member state upon a subsequent realization event (e.g. disposal).903 This would imply that intra-group transfers could not only be made at cost or tax write off value but that hidden reserves (i.e. fair market values) would still need to be assessed. Accordingly, the approach of the Commission Services to only net out intra-group transfers would not be sufficient. Instead, intra-group transactions would need to be included by each group company and only netted off via the consolidation mechanism.904 This approach would not only be more complex but one major advan-

900 901 902 903

904

Cf. also European Commission, WP039: 4. Cf. also Hohenwarter, 2008: 189. Cf. Riecker, 1997: 210; Hellerstein/McLure, 2004: 213 including an example; Rädler, 2008: 750. Cf. Dürrschmidt, 2007: 179-180. Alternatively, Dürrschmidt proposes to distinguish CCCTB income as apportionable and directly allocated income and to allocate accrued hidden reserves (or losses) upon reorganization or transfer processes to the member state of source (even within a CCCTB system). Cf. Dürrschmidt, 2007: 177-180. This differentiating approach is not favored by Commission Services though. Of the same opinion also: Spengel, 2008: 38. Of the same opinion: Spengel, 2008: 37; Wendt, 2009: 174-178. This would also be the appropriate approach to adequately treat minority shareholders. Cf. also Oestreicher, 2008: 539-540 who points out that the advantages of the simplified consolidation methods as proposed by Commission Services (i.e. based on the profit loss account compared to a balance sheet) seem to be limited due to the fact that the book value of group assets needs to be identifiable in any way. This may be particularly complex if depreciable assets are involved.

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tage of an introduction of a CCCTB (i.e. the abolishment of transfer pricing issues) would also vanish which may make the new system unattractive.905 Alternatively, if agreement is reached, one could allocate realized hidden reserves based on the time an asset or employee had been located or worked within one member state. This might be a feasible compromise as hidden reserves would not need to be assessed upon an intra-group transfer and all member states where an asset was located during the time of the CCCTB group would at least get a share of the tax base. This would imply that also a country in which no nexus remains should still be allowed to tax a subsequently apportioned share.906 Despite the general treatment of hidden reserves in assets, further aspects may hinder reorganization and transfer processes.907 The doubling of hidden reserves (in case of the establishment of a holding or subsidiary SE) is counteracted insofar as the sale of shares in major shareholdings ( 10%) is tax-exempt. Furthermore, in order to avoid abusive actions a holding period of two years shall be introduced (unless the taxpayer is able to show valid commercial reasons). This solves the issue only to a limited extent though as the sale of smaller shareholdings would still be subject to tax and only sales of shares by corporations would be tax-exempt. Consequently, the proposals made in the current environment should still be taken into consideration in order to fully avoid the doubling of hidden reserves (i.e. valuing shares received at fair market value in any case).908 When looking at losses which accrued prior to such transactions, they would still be available for offset within the group due to the general rules of consolidation of profits and losses at group level. Thus, they would generally not vanish due to a reorganization or transfer process within one CCCTB group and negative tax consequences would not result.909 Furthermore, the CCCTB only covers corporations. There are no rules for individuals as well as transparent entities involved in business reorganizations or transfers of registered offices. 905

906

907 908 909

As Dürrschmidt points out, an apportionment based on the value added would not raise these issues as accrued gains or losses could be assessed via the value added tax and taxation could be deferred until realization. Cf. Dürrschmidt, 2007: 180. As an approach based on value added tax would imply that transfer prices are still needed to be determined (which shall be overcome with the introduction of a CCCTB) (see e.g. Jacobs (ed.), 2007: 599; Spengel, 2008: 42) it is, however, also not favorable which is also the opinion of Commission Services. Furthermore, approaches based on macro-based factors are not preferable. Cf. Mintz, 1999: 407; Weiner, 2002: 525; Hellerstein/McLure, 2004: 211; Wellisch, 2004: 11-12 including an example. A similar approach is taken in the context of avoiding abuse as there the asset factor shall not follow the physical shift of assets. Cf. Section 5.3.1.1 above as well as European Commission, WP060: 12 and WP065: 10. See the discussion of issues in the current environment in Section 4.3.2.2.4. Cf. the details in Section 4.3.2.2.4. This had also been discussed in the working groups. Cf. European Commission, WP039: 5. Cf. Dürrschmidt, 2007: 170-174.

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Individuals and transparent entities may need to be taken into account though in case of mergers, exchanges of shares or transfers of companies. Consequently, in this context, the Merger Directive needs to apply granting a tax relief.910 Furthermore, additional transaction taxes may still be levied as the CCCTB only covers corporate tax whereas the levying of other taxes is left to the member states’ discretion. Thus, a rule exempting business and transfer transactions would still be needed at the national levels in order to not hinder such transactions.911 To sum up, within a consolidated CCCTB group cross-border reorganization and transfer processes are easier to carry out than in the current environment as such transactions would not result in immediate tax consequences due to the consolidation process and furthermore could generally be carried out at cost (not fair market value) due to the fact that member states will participate in subsequently realized capital gains in accordance with the agreed apportionment formula. Issues may occur though if the transaction has an effect on the sharing mechanism such that member states would loose some of their taxing rights. This would need to be solved by still determining fair market values, unless member states agree on some other mechanism (e.g. accepting shifts, including a time factor in the apportionment formula). Furthermore, additional issues may arise (e.g. treatment of individuals, transaction taxes) which should be solved via additional rules (within the CCCTB, in the merger directive or in national law). 5.3.2.2 Transactions not taking place within a consolidated CCCTB group Regarding the second scenario, if reorganization or transfer processes occur which do not fully take place within a consolidated CCCTB group, questions arise due to the necessity of delimitating taxing rights and avoiding tax planning. This covers transactions which imply that an entity enters or exits the CCCTB system (e.g. transactions with nonconsolidated companies within the same group, with companies of another CCCTB group or with companies in third countries).912 It is not only relevant in the case of reorganization or transfer processes within the ongoing system, but also tackles the question how to

910 911 912

Cf. Section 4.3.2. Cf. also Dürrschmidt, 2007: 170-171. Cf. also the proposal in the current environment in Section 4.3.2.5. Cf. also Dürrschmidt, 2007: 171; Hohenwarter, 2008: 191-192.

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treat the entry into and the exit out of a different system, thus the treatment in the transitional period.913 Upon entry as well as upon exit, one needs to determine how to treat hidden reserves which have accrued prior to the entry (i.e. pre-entry hidden reserves) or within the CCCTB prior to the exit (i.e. CCCTB hidden reserves). Commission Services proposes to treat entry and exit in an equivalent way. Consequently, pre-entry hidden reserves and CCCTB hidden reserves shall be assessed and the subsequently realized capital gains and losses shall be allocated upon realization back to the country or group of departure prior to the entry or the CCCTB group prior to the exit. The approach to allocate hidden reserves, which have accrued until the entry into or exit out of a CCCTB group, back to their source as opposed to letting them being realized in their new environment (e.g. according to the apportionment formula after entry into the CCCTB) is adequate in order to safeguard the taxing rights of the countries where the hidden reserves have accrued (source countries).914 This differentiating treatment would also be compliant with other proposed regulations (e.g. split of tax year according to the date of entry/exit, treatment of CCCTB and preentry losses915).916 As is correctly stated by Commission Services it implies that fair market values need to be determined at entry or exit.917 Furthermore, a subsequent taxation may only take place upon realization.918 Contrarily, an immediate taxation of these hidden reserves upon entry or exit would neither be in line with guiding economic or legal principles, nor would it encourage the entry into the new system919 or provide flexibility for businesses, which is a goal by Commission Services with regard to the introduction of the CCCTB. Commission Services has proposed to use the tax write off value as the value which shall be carried over from the old system to the new system (i.e. as entry and exit value). This implies that subsequently realized capital gains or losses would need to be eliminated from the current tax base (i.e. the consolidated tax base after entry or the national or consolidated tax base after exit). Consequently, in order to ensure that hidden reserves assessed upon exit are only taxed by the former treasuries and thus in order to avoid 913 914 915 916 917 918

An exit occurs when a group does not renew its option for a CCCTB at the end of the suggested 5 year minimum term. Cf. also Dürrschmidt, 2007: 181; Herzig, 2008: 560; Hohenwarter, 2008: 185, 188-189; 191-192; Oestreicher, 2008: 542; Spengel, 2008: 40-41; Schreiber, 2009: 86; Wendt, 2009: 188-189. Cf. below for an assessment of these loss rules. Cf. Oestreicher, 2008: 540. Cf. also Oestreicher, 2008: 540-541. Cf. also Dürrschmidt, 2007: 181; Hohenwarter, 2008: 188-189; 191-192; Oestreicher, 2008: 542; Spengel, 2008: 40-41; Wendt, 2009: 188-189.

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that a double taxation occurs, a tax-free step-up to the fair market value would need to be provided upon consolidation (after an entry into a CCCTB group or exit from the CCCTB group to another CCCTB group).920 Contrarily, if an exit occurs and CCCTB rules are no longer applicable, the use of tax write off values would not guarantee this. Thus assets should enter at the assessed fair market value.921 The use of the fair market value upon exit and entry would provide that there is a clear cut between the development of hidden reserves prior to the entry or exit and between the development of hidden reserves after the entry or exit. Accordingly, different calculations of the subsequent gains would be irrelevant. This is because the former treasury would tax the assessed value upon entry or exit whereas the new treasury would also base its calculations on this assessed value.922 Decreases in value would be taken into account by the new treasury. Due to the inherent stepup the treasury would be allowed to tax hidden reserves in accordance with increased depreciation charges. This requires that it receives the appropriate information.923 Overall, separate accounting would still be necessary to adequately treat pre-entry hidden reserves upon entry as well as CCCTB hidden reserves upon exit.924 This implies that accrued hidden reserves need to be assessed upon entry or exit and treated separately until the realization. As long as entities are involved which follow the harmonized tax base this would at least ease the administration.925 Nevertheless, such a treatment would be complex.926 This could only be prevented if member states agree to give up some of their taxing right upon entry into the CCCTB due to the change from separate accounting to formula apportionment.927 In return, they may also increase their taxing rights if a company exits from the CCCTB into their jurisdiction. This might be an acceptable approach for member states.

919 920

921

922 923 924 925 926

927

Cf. this point in Wendt, 2009: 188-189. Cf. also Schreiber, 2009: 86. Cf. Oestreicher, 2008: 541. This can be achieved by following IFRS consolidation rules with minor adjustments, and also by following the simplified consolidation methods proposed by Commission Services. Cf. Oestreicher, 2008: 542. Cf. also the proposal in Section 4.3.2.2.1.2 for details. Furthermore see Herzig, 2008: 563; Hohenwarter; 2008: 192; Oestreicher, 2008: 541. Otherwise, a complicated consolidation mechanism would be necessary in order to adequately take into account the interests of the member states. Cf., to that regard, Oestreicher, 2008: 538-540. Cf. also Schreiber, 2009: 87. For simplification purposes one may consider to evenly realize hidden reserves based on the remaining useful life of the assets. Cf. Oestreicher, 2008: 541. Cf. also Spengel, 2008: 40-41; Wendt, 2009: 189; Dine/Browne (eds.), EU company law: 18[35]. Cf. Section 5.2. Cf. Herzig, 2008: 560 who further points out that such a separate system may not be easy to implement; Hohenwarter, 2008: 185 who states that “this could turn out to be a major obstacle for forming a group under the CCCTB regime”. Critical also Simonis, 2009: 28 from a Dutch perspective; Schreiber, 2009: 86. Cf. Schreiber, 2009: 90-91.

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Then, the hidden reserves would not need to be assessed upon entry or exit and subsequently realized capital gains and losses would be shared according to the rules in the new environment.928 This would be simpler to administer and thus reduce compliance costs. It may, however, also create tax planning opportunities for the taxpayers,929 especially as long as the entry into the CCCTB is optional.930 Despite the general treatment of hidden reserves in assets, further aspects may raise issues with regard to the entry into and exit out of the CCCTB.931 Regarding the treatment of losses which have been incurred but not used to offset profits prior to the business reorganization or transfer, a rule should be included as to guarantee the utilization of such losses.932 The same has to apply to the entry and exit in the transitional period. In this context, one needs to differentiate between losses that have accrued prior to the entry into a CCCTB (i.e. pre-CCCTB losses) and losses that have accrued within the CCCTB (i.e. CCCTB losses). Regarding such losses, Commission Services favors an approach which treats entering and exiting taxpayers differently. Whereas losses accrued until the entry shall be ring-fenced in the country of source and set off with future shares of the tax base, losses accrued until the exit shall remain within the CCCTB group unless the whole group terminates. The approach to not include pre-CCCTB losses in the CCCTB income but instead leave it to the country of the transferring or exiting entity to provide the set off is compliant with the economic as well as legal principles that the country where the losses accrued (i.e. country of source) is responsible for this loss.933 If a group member is liquidated prior to the full use of these pre-CCCTB losses, there could be the option to carry over such losses to the parent company if they constitute ultimate losses in the meaning established by the European Court of Justice.934 Concerning CCCTB losses, the approach by Commission Services should not be followed. Instead, such losses should be netted out via consolidation in the year they occur. This treatment can be supported by different arguments. First, this would imply that all group members would equally participate in gains

928 929 930 931 932 933

934

Cf. also Herzig, 2008: 560; Oestreicher, 2008: 541. Cf. also Schreiber, 2009: 88-89 who specifically points to distortions based on whether a tax-free share deal or a merger is carried out. Cf. also Hohenwarter, 2008: 186. See the discussion of issues in the current environment in Section 4.3. Cf. Section 4.3.2.3. Of the same opinion: Hohenwarter, 2008: 189. Cf. also Section 4.3.2.3. Furthermore, Dürrschmidt, 2007: 181; Herzig, 2008: 560-561; Hohenwarter, 2008: 190 in the context of business reorganization; Oestreicher, 2008: 537; Wendt, 2009: 188. Of different opinion in the context of transitional rules: Hohenwarter, 2008: 179. Cf. Section 4.3.2.3. Cf. also Hohenwarter, 2008: 179-180.

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and losses according to the apportionment formula.935 Thus, gains as well as losses would be shared to the single taxpayers, where they can be set off, resulting in a systematic treatment of positive and negative tax bases. Furthermore, the sharing mechanism would always be based on the formula applicable in the year of the gain or loss, not in the year in which a loss can be offset against gains at the group level.936 Second, as a consequence, losses could then also be shared appropriately upon dissolution. Otherwise, issues could arise if the apportionment formula changes or companies enter and exit the group prior to dissolution. Finally, according to this approach losses could also be allocated to a leaving group member, thus treating losses of entering and exiting companies equally.937 With regard to avoiding abuse, the consolidation of intra-group transfers of assets may solicit transactions according to which assets are transferred from one group member to another and shares in the receiving group member are subsequently sold. This would imply that accrued hidden reserves would not be subject to tax as intra-group transactions do not result in a realization and taxation of unrealized gains and major shareholdings in other corporations are exempt from taxation. The same result can be achieved via the establishment of a subsidiary SE if the SE is subsequently sold.938 Furthermore, if a group terminates (e.g. as a group does not renew its CCCTB option), hidden reserves may also remain untaxed. In order to avoid that assets of taxpayers exit the CCCTB world without being subject to tax, Commission Services has proposed to immediately tax any unrealized capital gains of assets that were transferred to the exiting company within the present or previous tax year, primarily at the previous owner (as the asset factor shall not follow the physical intra-group shift of the asset). An exception to this treatment applies when the taxpayer can demonstrate that the exit has been carried out based on valid business reasons. In general, this rule can be regarded as being appropriate as it is specifically targeted at an abusive scheme, looks at the substance instead of the form of a transaction and only covers a period of two years. Furthermore, it gives the taxpayer the option to prove that the transaction is not carried out solely in order to avoid taxes.939 However, it may not

935 936 937

938 939

Cf. also Herzig, 2008: 561. Cf. Spengel/Wendt, 2007: 32. Cf. Hohenwarter, 2008: 180-184 providing examples. Furthermore, see Mayer, 2008: 150-151; Spengel, 2008: 40-41; Wendt, 2009: 189. If member states agree to not trace hidden reserves in assets upon entry and exit as has been discussed above, they should also agree to allow that losses can be used in the system which applies after entry or exit. Cf. the discussion in Section 4.3.2.4. Cf. also the discussion in Section 4.3.2.4. Furthermore see Wendt, 2009: 189. Supporting a longer holding period: Simonis, 2009: 30-31.

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only be targeted at the receiving companies which exit but also needs to apply when transferring companies exit the CCCTB. Otherwise, tax planning may be possible by joining a group (e.g. via a tax-free share exchange), transferring assets to other group members and subsequently leaving the group (e.g. via a tax-free share exchange). Consequently, upon exit of the transferring company, hidden reserves which have accrued within the CCCTB upon the intra-group transfer need to be taxed at the exiting entity according to formula apportionment. Furthermore, hidden reserves which have accrued until the company entered the CCCTB need to be taxed at the former country of source. This again implies that hidden reserves also need to be assessed in purely intra-group transactions.940 Finally, in case the CCCTB rules do not cover a certain issue with regard to crossborder reorganization or transfer processes (e.g. concerning individuals and transparent entities) the Merger Directive or national law will apply (e.g. concerning additional taxes). Here again, proposals as established for the current environment should be observed.941 To conclude, transactions which do not only take place within the consolidated CCCTB group will likely require that taxing rights are allocated based on the source of hidden reserves and/or the unused losses in order to safeguard the interests of the member states. Consequently, pre-CCCTB hidden reserves and unused losses shall remain outside the CCCTB (and taxed upon realization or used for offsetting against gains there) whereas CCCTB hidden reserves and unused losses are allocated to the CCCTB group and apportioned to the group member based on the applicable apportionment formula. With regard to unused losses, this implies that they are set off with gains at the level of the single taxpayers. With regard to hidden reserves, this implies that fair market values still need to be determined and realization still needs to be traced. Thus, the proposals elaborated with regard to the current environment in Section 4.3 would continue to be relevant. This is valid upon entry into as well as exit out of the proposed system, thus in the transitional period, as well as in reorganization and transfer processes crossing the border of the CCCTB world and the separate accounting world. A less complex system could only be established if member states agree to give up some of their taxing rights.

940 941

Cf. Spengel, 2008: 41; Wendt, 2009: 189-190 with further details. Moreover see Schreiber, 2009: 8990. Cf. Section 4.3.

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5 Taxation of European Companies during the time of restructuring in the proposed environment

Interim conclusions

Even though a legislative proposal on a CCCTB was supposed to be presented in 2008 by the European Commission,942 such a proposal has been postponed probably due to the objections of the member states, especially with regard to the apportionment mechanism. Currently, it seems more likely that in a first step a CCTB could be a workable option, thus providing uniform rules for determining the tax base, and postponing the consolidation and apportionment to a later stage.943 Furthermore, it seems more likely that such a system is based on an enhanced cooperation since according to this approach only eight member states need to agree on the introduction (Art. 11 ECT), whereas in case of the introduction of a regulation or directive unanimity would need to be achieved among the twenty seven member states (Art. 94 ECT). This would, however, increase the issues at the border already within the EU (between participating and non-participating member states).944 From the perspective of business reorganization and transfer processes it has been shown that the introduction of a uniform tax base would simplify such transactions as only one set of rules would need to be observed for the determination of income within the EU. However, a real relief would only be available if a CCCTB would be introduced providing that transactions within a group would not be subject to tax until a realization with a third party takes place. Nevertheless, it has also been shown that the assessment and tracing of hidden reserves would continue to be necessary at the border of the CCCTB world and the current environment as long as taxing rights need to be delimited. Furthermore, even within the CCCTB system, hidden reserves may be of relevance due to the effect of shifts of activities (especially assets) on the apportionment formula. Tax driven effects would only vanish if tax rates would also be harmonized.945 Nevertheless, it seems advisable to support the introduction of a CCTB as well as a CCCTB. This is due to the fact that the proposed environment would not only provide advantages with regard to noncurrent transactions but also with regard to current transactions

942 943 944 945

Cf. European Commission, COM(2006)157: 3, 8 and COM(2007)223: 7. Cf. Faith, 2008: 12-15; Mayr, 2008b: 288-290; Oestreicher/Spengel, 2008: 302-304; Spengel, 2009: 104; Spengel/Oestreicher, 2009: 777. Cf. also Dürrschmidt, 2007: 163; Mayer, 2008: 161-163; Dine/Browne (eds.), EU company law: 18[31]. Cf., to that regard, McLure, 1980: 345; Weiner, 1999: 34-35; Gérard, 2002: 533-554; Weiner, 2002: 525; Wellisch, 2004: 272-273; Spengel, 2003: 354-357, 2004: 5 and 2008: 46 who proposes to at least establish a minimum corporate tax rate among the EU member states.

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due to the harmonization of tax rules within Europe, and thus would significantly reduce compliance costs of cross-border transactions. In this context, it may even seem appropriate to use the SE as a pilot scheme for the CCTB or CCCTB as had been proposed in earlier years.946 On the one hand, this would provide a good basis to see how the system works in reality by involving a low number of companies at first. On the other hand, it would foster the attractiveness of SEs and would help to achieve the EU dimension of this legal entity also with regard to taxes. Overall, independent of whether the SE is used as a pilot scheme or not, in the long run harmonization should be available for all companies in Europe as this would reduce the diversity with regard to direct taxes and thus would reduce current tax obstacles for cross-border transactions.

946

Cf. European Commission, SEC(2001)1681: 406-407 and COM(2003)726: 24-25. Of the same opinion: Diemer, 2004: 57; Lenoir, 2007: 71, 79; Lenoir, 2008: 14, 20-21. Against a preferential treatment of SEs due to issues of discriminations against other entities: Schön, 2002: 280-281; Spengel/Frebel, 2003: 789-790.

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6 Conclusions

Conclusions Effective 8 October 2004, the first EU-wide available legal entity, the so-called Euro-

pean Company or Societas Europaea (SE), has been introduced via the European Company Statute. The aim of the introduction of the SE was to remove barriers to trade and facilitate the adaptation of structures of production to the EU dimension in order to strengthen the competitiveness of European companies and to improve the functioning of the internal market. This was regarded as necessary since the laws of the member states in the European Union (e.g. company law, tax law) are orientated towards domestic transactions rather than towards cross-border transactions. Whereas the European Company Statute regulates cross-border transactions (formation and transfer of the registered office within the EU) from the perspective of company law, tax law has not been included in this Statute. Instead, the SE is bound to existing laws. With regard to the above mentioned cross-border restructurings, the Merger Directive is of major importance regarding the facilitation of such transactions. Furthermore, it has been proposed to use the SE as a pilot scheme in approaches further harmonizing the direct tax systems in the EU in order to achieve an internal market from a tax perspective. Against this background the aim of this work was to determine how cross-border restructurings shall be treated within the EU from a tax point of view, especially with regard to unrealized gains immanent in transferred assets (i.e. hidden reserves). This implied that economic, legal and administrative tax principles for reorganizations had to be developed. Furthermore, reorganization had to be assessed and critically analyzed in an ideal environment (e.g. one country or one internal market), the currently applicable environment in the EU, which is based on 27 differing tax systems, and the proposed environment of a common (consolidated) corporate tax base throughout Europe. In each case, the goal was to identify the main deficits of the restructuring rules and provide guidance with regard to reform options. Before the tax issues were examined, it was first analyzed how the distribution of the SE throughout Europe has developed. The evaluation of available statistical data revealed that the SE had only rarely been used at the beginning but is becoming increasingly attractive for companies doing business within the EU. Thus, companies use the option to reorganize themselves and move around Europe via an SE.

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217

The further assessment of the tax issues of reorganization and transfer transactions in order to form an SE and move around between member states revealed the following. In an ideal environment such transactions may not be hampered by taxes (principle of tax neutrality) and the taxpayers involved may only be taxed according to their ability to pay (principle of equity). This can be achieved in a uniform tax environment (like within one country or ideally in the internal market of the European Union) as there is only one tax system involved. This implies that taxing rights are not at risk. Instead, a tax deferral with regard to hidden reserves which have been accrued prior to the reorganization can be granted as the book values are carried over and subsequently realized capital gains or losses remain subject in the tax system. Consequently, also other tax variables (e.g. loss carry forwards) can be rolled over to the surviving or moving entity and further used. Furthermore, the evaluation revealed that the ideal scenario neither mirrors the currently applicable nor the proposed rules. Regarding the current environment in the EU, at least two treasuries are involved when a cross-border transaction takes place. Thus, in addition to the principle of neutrality and equity from the taxpayer’s perspective, the perspective of the treasuries needs to be taken into account. In this regard, the analysis revealed that the jurisdiction in which hidden reserves immanent in assets had accrued should also be allowed to tax these hidden reserves upon realization notwithstanding the jurisdiction in which the actual realization takes place. The same applies to accrued losses. Furthermore, in order to delimit the taxing rights between the involved treasuries, the fair market value needs to be assessed upon the reorganization or transfer process. This value needs to constitute the basis for the country of the transferring or exiting entity in order to determine taxable gains or losses, as well as for the country of the receiving or entering entity in order to determine depreciation if applicable or future capital gains or losses. EU law which furthermore needs to be observed for transactions within the EU supported these findings. Finally, any approach would need to be feasible in order to be acceptable. Against the background of these guiding principles, the comparative analysis of the rules currently governing the entry into an SE (formation by merger, establishment of a holding SE, establishment of subsidiary SE and conversion), the transfer of an SE within the EU and the exit out of an SE in the 27 member states of the European Union showed the following results. First, from a company law perspective all these transactions involving an SE are possible as they are regulated in the European Company Statute. This is particularly important for the formation of a merger SE and the transfer of the registered of-

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fice of an SE. Whereas a cross-border merger is now also possible for corporations other than the SE due to Directive 2005/56/EC, the transfer of the registered office of a company without the negative consequences from a winding up and re-establishment of the company, is so far only available according to law by using an SE. However, the formation of an SE is quite narrowly regulated and should be adjusted to provide more flexibility (e.g. with regard to the cross-border relationship). Second, from a tax law perspective, the Merger Directive has significantly contributed to a harmonized environment for the SE. Consequently, in the majority of the member states tax consequences will not result within the framework of the Merger Directive. This generally covers the formation of an SE via merger, the formation of a holding SE and subsidiary SE and transfer of the registered office of an SE. Contrarily, the conversion into and out of an SE is not covered by the Merger Directive. This is not a problem as it does not cause tax consequences according to the domestic law of the member states as there is no economic change but solely a change of the legal identity. The treatment in the Merger Directive is based on the condition that the taxing right of the country involved is not restricted. If this is fulfilled, hidden reserves accrued within the assets of the companies or shares of the shareholders will not immediately be realized and taxed. Instead, taxation will be postponed until a subsequent disposal or other realization event takes place. However, despite this general uniform framework, certain areas have been identified in which tax issues arise. First, not all member states have fully transformed the Merger Directive into their national law - as is recquired by an EU directive - even though transposition deadlines have passed. Furthermore, some member states do not fully follow the wording of the directive. Despite the fact that (proper) transformation is due, taxpayers may thus directly refer to the rules stated in the directive in order to receive the preferential treatment provided in the Merger Directive and to not incur negative tax consequences. Second, the tax deferral in the Merger Directive for assets and liabilities affected is dependent on the condition that a permanent establishment remains. This shall ensure that a future taxing right of the country of the transferring or exiting entity is guaranteed. If no permanent establishment remains or the assets and liabilities transferred do not remain effectively connected to this permanent establishment, the Merger Directive is silent and member states generally interpret this as being allowed to levy immediate tax charges on accrued hidden reserves. Furthermore due to non harmonized valuation rules, values of assets assessed upon exit and values at which the same assets enter the books in the new

6 Conclusions

219

country will likely not equal each other resulting in double or minor taxation. Neither the immediate taxation nor resulting double or minor taxation is in line with economic or legal principles. Thus, such consequences need to be abolished. Consequently, the country of the exiting or transferring entity retains its taxing right, but it may only exercise it upon a subsequent realization of the accrued hidden reserves. A systematic approach implies that member states agree on a transfer value and cooperate closely with each other to receive the relevant information to exercise their taxing rights. Only then, can it be guaranteed that the taxpayer is subject to tax once from an overall perspective as he would have been in a purely domestic case since a realization in the exiting country would take place in accordance with a realization in the entering country. Such an approach would also need to take into account foreign permanent establishments and shares of the shareholders. Furthermore, it would require that coordinated action at an EU level is taken in order to be transformed in a feasible way. Contrarily, if member states act independently from each other, mismatches will likely remain. Third, in the case of an establishment of a holding or subsidiary SE, a doubling of hidden reserves may occur due to the fact that accrued hidden reserves are rolled over to the receiving entity which receives the shares or assets, on the one hand, but also to the shares which the contributing entity received in return for the shares or assets contributed, on the other hand. In this regard, the Merger Directive is silent and the national rules of many member states currently do not avoid this economic double taxation. However, as such a double taxation is not in line with tax neutrality or equity, it needs to be prevented. This can be achieved if the shares received by the SE - in case of a holding SE - or by the shareholders - in case of a subsidiary SE - are valued at their fair market value. Any risk of tax avoidance needs to be treated via a specifically targeted antiavoidance measure. Fourth, in case of a merger, losses only need to be carried over from the transferring company to the receiving company or its permanent establishment if such a rule exists in national law (Art. 6 MD). If the carryover is denied, as is the case in half of the member states, negative tax consequences result since losses can no longer be used as the transferring entity perishes. The denial of a loss carryover due to a reorganization or transfer transaction is, however, neither in line with economic nor legal principles. Thus, it is the obligation of the country of the source of the losses to guarantee that the losses can be used (e.g. at the remaining permanent establishment or via a set off with capital gains accrued within exiting assets upon a subsequent realization). Fifth, in order to avoid abuse, the member states require taxpayers to follow certain administrative rules (e.g. prior ap-

220

6 Conclusions

provals, filing duties). Furthermore, holding periods need to be observed in some member states, such as with the establishment of a holding SE or subsidiary SE. If these are not fulfilled, taxes are charged immediately and additionally an economic double taxation may occur. Against the background of EU law, member states may not exclude taxpayers from the beneficial treatment of the Merger Directive via general rules (e.g. requesting a prior approval) though. Instead, measures need to be appropriate and targeted so that only fraudulent transactions are caught. Sixth, additional taxes like capital duty tax, stamp duty tax and real property transfer tax arise in all transactions covered (except for conversions into and out of an SE) in various countries. Whereas the real property transfer tax is not regulated on an EU level, the Capital Duty Directive establishes limits for levying capital duty tax and stamp duty tax. As additional transaction taxes constitute an unduly burden for taxpayers, member states should exempt reorganization and transfer processes from these taxes provided that the business activity and ownership continue to exist. This would facilitate such transactions and foster the attractiveness of a country. As a result, in the current environment further amendments to the Merger Directive and/or national law are necessary in order to not hamper cross-border business reorganization or transfer transactions. However, even if the proposals established are transposed the general diversity between the member states’ rules remains. Consequently, high compliance costs and general distortions to cross-border transactions (e.g. due to differing tax rates among member states) will likely remain. Finally, the assessment of the proposed environment has revealed that the proposals developed by the European Commission (introduction of a Common Corporate Tax Base or Common Consolidated Corporate Tax Base) still imply that at least two treasuries are involved upon a cross-border transaction. Consequently, also in these scenarios it is necessary to delimit taxing rights between the involved member states. Furthermore, due to the implication that a change of tax system would take place, rules need to be established which guarantee that the interests of the taxpayers as well as the treasuries are adequately taken into account during transition. If a Common Corporate Tax Base were to be introduced, regulating the determination of the corporate tax base throughout Europe in a uniform way, this would simplify business reorganization and transfer processes as only one set of rules regarding the tax base would need to be observed. Consequently, compliance costs could be reduced. Beyond that one would still need to agree on a fair market value of the asset upon transfer and would still need to inform each other about the time of the dis-

6 Conclusions

221

posal or retirement of an asset. Thus, the proposals made in the current environment should still be observed in order to facilitate cross-border reorganization and transfer transactions without immediate or subsequently negative tax effects. If a Common Consolidated Corporate Tax Base were to be introduced, the system of the allocation of taxing rights between countries would be changed for economic units (i.e. CCCTB groups). Consequently, taxing rights would no longer be assessed at the single legal entity and allocated based on fair market values (i.e. separate accounting) but instead would be assessed at the economic entity (via consolidation) and allocated based on weighted allocation factors (i.e. formula apportionment). The analysis of this approach has revealed that cross-border reorganization and transfer transactions within this system would generally not result in immediate tax consequences due to the consolidation of intra-group transactions. Furthermore, upon realization all member states would equally participate in the taxation of capital gains or losses based on the apportionment formula. A loss of taxing right of the country of the transferring or exiting entity may still occur, though, if a nexus does not remain in this country. This would be the case, given that assets are a factor in the formula (as is currently proposed) and tax rates are not harmonized. Even though Commission Services has acknowledged this with some measures regarding the tax base and the apportionment formula (e.g. excluding intangibles from the asset factor, introducing specific antiavoidance measure) member states may still see their taxing rights at risk. Nevertheless, it seems not advisable to safeguard these taxing rights by assessing fair market values as this would counter the goals of the proposal. Instead, another agreement should be found (e.g. allocation based on time). The assessment of taxing rights would, however, still be relevant in order to adequately allocate taxing rights between the proposed system and the current system. Thus, hidden reserves would need to be assessed and traced if reorganization and transfer transactions involve entities or countries not participating in the CCCTB system or not being eligible to participate. The same applies to losses which should also be allocated to their source and offset there. Furthermore, upon entry into the system and exit out of the system, thus in the transitional period, hidden reserves as well as losses are also of relevance in order to safeguard the taxing rights of the treasuries and the taxpayers. Consequently, separate accounting would still be necessary in addition to formula apportionment as long as the proposed system is of limited scope (with regard to persons, transactions and territories) and member states require that their taxing rights are safeguarded. Currently, it seems more likely that member states (at least under enhanced cooperation)

222

6 Conclusions

may at first only agree to introduce a Common Corporate Tax Base and based on that, later on introduce a Common Consolidated Corporate Tax Base. In any way, harmonization at the EU level should to be supported as it would further boost the use of the SE as then an EU-wide legal form would face an EU-wide tax system.

Appendix

223

Appendix Table 12: Double tax treaties concluded between EU member states947 AT

BE

BG

CY

CZ

DE

DK

EE

ES

FI

FR

AT

-

X

X

X

X

X

X

X

X

X

X

GR HU X

X

IE

IT

LT

LU

LV

MT

NL

PL

PT

RO

SE

SK

SL

UK

X

X

X

X

X

X

X

X

X

X

X

X

X

X

BE

X

-

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

BG

X

X

-

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

CY

X

X

X

-

X

X

X

-

-

-

X

X

X

X

X

-

-

-

X

-

X

-

X

X

X

X

X

X

CZ

X

X

X

X

-

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

DE

X

X

X

X

X

-

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

DK

X

X

X

X

X

X

-

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

EE

X

X

X

-

X

X

X

-

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

ES

X

X

X

-

X

X

X

X

-

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

FI

X

X

X

-

X

X

X

X

X

-

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

FR

X

X

X

X

X

X

X

X

X

X

-

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

GR

X

X

X

X

X

X

X

X

X

X

X

-

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

HU

X

X

X

X

X

X

X

X

X

X

X

X

-

X

X

X

X

X

X

X

X

X

X

X

X

X

X

IE

X

X

X

X

X

X

X

X

X

X

X

X

X

-

X

X

X

X

X

X

X

X

X

X

X

X

X

IT

X

X

X

X

X

X

X

X

X

X

X

X

X

X

-

X

X

X

X

X

X

X

X

X

X

X

X

LT

X

X

X

-

X

X

X

X

X

X

X

X

X

X

X

-

X

X

X

X

X

X

X

X

X

X

X

LU

X

X

X

-

X

X

X

X

X

X

X

X

X

X

X

X

-

X

X

X

X

X

X

X

X

X

X

LV

X

X

X

-

X

X

X

X

X

X

X

X

X

X

X

X

X

-

X

X

X

X

X

X

X

X

X

MT

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

-

X

X

X

X

X

X

X

X

NL

X

X

X

-

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

-

X

X

X

X

X

X

X

PL

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

-

X

X

X

X

X

X

PT

X

X

X

-

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

-

X

X

X

X

X X

RO

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

-

X

X

X

SE

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

-

X

X

X

SK

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

-

X

X

SL

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

-

X

UK

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

-

“x”: double tax treaty in place; “-“: no double tax treaty in place

947

See for all countries IBFD, 2008. Furthermore, see for Estonia http://www.fin.ee/?id=11738; for Ireland http://www.revenue.ie/en/practitioner/law/tax-treaties.html; for Lithuania http://www.finmin.lt/c/ portal/layout?p_l_id=PUB.1.66; for Luxembourg http://www.gouvernement.lu/publications/informations_gouvernementales/rapports_activite/rapport-activite-2007/11finances/rapport-finances.pdf; for Malta http://www.foreign.gov.mt/ Library/Newsletters/August.pdf (date of access: 02/01/2009).

224

Appendix

Table 13: Foreign permanent establishments - avoidance of double taxation948

Exemption Method

Credit Method

Austria, Belgium, Bulgaria, Cyprus, Denmark, Es-

Czech Republic, Finland, Greece, Ireland, Italy,

tonia, France, Germany, Hungary, Luxembourg,

Lithuania, Latvia, Malta, Portugal, Romania, Slo-

Netherlands, Poland, Spain

vak Republic, Slovenia, Sweden, United Kingdom

948

Cf. Endres et al. (eds.), 2007: 731-739; Ernst&Young, 2009: 343-1123, points 10.1-10.4; IBFD, Taxation: subchapter “international aspects”. The predominant method is shown.

Appendix

225

Table 14: Transfer of nondepreciable assets949

A)

fair market value upon exit = value upon entry

A1) same hidden reserves at exit as at disposal historical costs fair market value upon exit Sales price

100 200 200

national case =

Sales price historical costs taxable gain/loss

200 100 100

=

exiting country fair market value upon exit historical costs taxable gain/loss

200 100 100

-->

overall taxable gain/loss:

100

cross-border case entering country sales price - value upon entry = taxable gain/loss

200 200 0

A2) increase of hidden reserves (i.e. lower hidden reserves at exit as at disposal) historical costs fair market value upon exit Sales price

100 200 300

national case =

Sales price historical costs taxable gain

300 100 200

cross-border case

=

exiting country fair market value upon exit historical costs taxable gain/loss

200 100 100

-->

overall taxable gain/loss:

200

949

Own calculations.

entering country sales price - value upon entry = taxable gain/loss

300 200 100

226

Appendix

A3) decrease of hidden reserves (i.e. higher hidden reserves at exit as at disposal) historical costs fair market value upon exit sales price

100 200 150

national case =

sales price historical costs taxable gain/loss

150 100 50

=

exiting country fair market value upon exit historical costs taxable gain/loss

200 100 100

-->

overall taxable gain/loss:

50

B)

retirement of asset in new member state (i.e. no disposal) (fair market value upon exit = value upon entry)

cross-border case

historical costs fair market value upon exit value upon retirement

entering country sales price - value upon entry = taxable gain/loss

150 200 -50

100 200 0

national case =

value upon retirement historical costs taxable gain/loss

0 100 -100

=

exiting country fair market value upon exit historical costs taxable gain/loss

200 100 100

-->

overall taxable gain/loss:

-100

cross-border case entering country value upon retirement - value upon entry = taxable gain/loss

0 200 -200

Appendix

C)

227

fair market value upon exit > value upon entry (same hidden reserves at exit as at disposal) historical costs fair market value upon exit value upon entry Sales price

100 200 100 200

national case =

sales price historical costs taxable gain/loss

200 100 100

cross-border case

=

exiting country fair market value upon exit historical costs taxable gain/loss

200 100 100

-->

overall taxable gain/loss:

200

D)

fair market value upon exit < value upon entry (same hidden reserves at exit as at disposal) historical costs fair market value upon exit value upon entry sales price

entering country sales price - value upon entry = taxable gain/loss

200 100 100

100 200 300 200

national case =

sales price historical costs taxable gain/loss

200 100 100

cross-border case

=

exiting country fair market value upon exit historical costs taxable gain/loss

200 100 100

-->

overall taxable gain/loss:

0

entering country sales price - value upon entry = taxable gain/loss

200 300 -100

List of References

229

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Judgments of the European Court of Justice (ECJ) 04/12/1974

41/74 (Van Duyn/Home Office)

ECR 1974, 1337

20/02/1979

120/78 (Rewe)

ECR 1979, 649

10/04/1984

14/83 (Von Colson and Kamann)

ECR 1984, 1891

28/01/1986

270/83 (Avoir Fiscal)

ECR 1986, 273

27/09/1988

81/87 (Daily Mail)

ECR 1988, 5483

08/05/1990

81/87 (Biehl)

ECR 1990, I-1779

28/01/1992

C-204/90 (Bachmann)

ECR 1992, I-249

28/01/1992

C-300/90 (Commission/Belgium)

ECR 1992, I-305

13/07/1993

C-330/91 (Commerzbank)

ECR 1993, I-4017

12/04/1994

C-1/93 (Halliburton)

ECR 1994: I-1137

14/02/1995

C-279/93 (Schumacker)

ECR 1995, I-225

11/08/1995

C-80/94 (Wielockx)

ECR 1995, I-2493

30/11/1995

C-55/94 (Gebhard)

ECR 1995, I-4165

01/02/1996

C-177/94 (Perfili)

ECR 1996: I-161

List of References

263

27/06/1996

C-107/94 (Asscher)

ECR 1996, I-3089

15/05/1997

C-250/95 (Futura-Singer)

ECR 1997, I-2471

17/07/1997

C-28/95 (Leur-Bloem)

ECR 1997, I-4161

12/05/1998

C-336/96 (Gilly)

ECR 1998, I-2793

16/07/1998

C-264/96 (ICI)

ECR 1998, I-4695

09/03/1999

C-212/97 (Centros)

ECR 1999, I-1484

29/04/1999

C-311/97 (Royal Bank of Scotland)

ECR 1999, I-2651

08/07/1999

C-254/97 (Baxter)

ECR 1999, I-4809

21/09/1999

C-397/07 (Saint Gobain)

ECR 1999, I-6161

26/10/1999

C-294/97 (Eurowings)

ECR 1999, I-7447

28/10/1999

C-55/98 (Vestergaard)

ECR 1999, I-7641

15/02/2000

C-34/98 (Commission/France)

ECR 2000, I-995

13/04/2000

C-251/98 (Baars)

ECR 2000, I-2787

16/05/2000

C-87/99 (Zurstrassen)

ECR 2000, I-3337

06/06/2000

C-35/98 (Verkooijen)

ECR 2000, I-4071

26/09/2000

C-478/98 (Commission/Belgium)

ECR 2000, I-7587

14/12/2000

C-141/99 (AMID)

ECR 2000, I-11619

08/03/2001

C-397/98 (Metallgesellschaft)

ECR 2001, I-1727

15/01/2002

C-43/00 (Andersen og Jensen)

ECR 2002, I-379

05/11/2002

C-208/00 (Überseering)

ECR 2002, I-9919

21/11/2002

C-436/00 (X and Y)

ECR 2002, I-10829

12/12/2002

C-385/00 (de Groot)

ECR 2002, I-11819

12/06/2003

C-234/01 (Gerritse)

ECR 2003, I-5933

26/06/2003

C-422/01 (Skandia und Ramstedt)

ECR 2003, I-6817

18/09/2003

C-168/01 (Bosal)

ECR 2003, I-9409

30/09/2003

C-167/01 (Inspire Art)

ECR 2003, I-10155

11/03/2004

C-9/02 (De Lasteyrie du Saillant)

ECR 2004, I-2409

29/04/2004

C-224/02 (Pusa)

ECR 2004, I-5763

13/12/2005

C-411/03 (SEVIC Systems)

ECR 2005, I-10805

13/12/2005

C-446/03 (Marks&Spencer)

ECR 2005, I-10837

23/02/2006

C-471/04 (Keller Holding)

ECR 2006, I-2107

23/02/2006

C-513/03 (van Hilten-van der Heijden)

ECR 2006, I-1957

07/09/2006

C-470/04 (N)

ECR 2006, I-7409

12/09/2006

C-196/04 (Cadbury Schweppes)

ECR 2006, I-7995

264

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14/12/2006

C-170/05 (Denkavit)

ECR 2006, I-11949

05/07/2007

C-321/05 (Kofoed)

ECR 2007, I-5795

18/07/2007

C-231/05 (Oy AA)

ECR 2007, I-6373

25/10/2007

C-240/06 (Fortum Project Finance)

ECR 2007, I-9413

08/11/2007

C-251/06 (Ing. Auer)

ECR 2007, I- 9689

18/12/2007

C-101/05 (A)

ECR 2007, I-11531

08/02/2008

C-392/07 (Commission/Belgium)

OJ C 158, 21/06/2008, 8

15/05/2008

C-414/06 (Lidl Belgium)

ECR 2008, I-3601

11/12/2008

C-285/07 (A.T.)

ECR 2008, I-9329

16/12/2008

C-210/06 (Cartesio)

ECR 2008, I-9641

Judgments of the German Court of Justice (BFH) 29/07/1992

II R 39/89

BStBl 1993 II, 63

19/11/2003

I R 3/02

BStBl 2004 II, 932

19/12/2007

II R 65/06

BStBl 2008 II, 489

09/04/2008

II R 32/06

BFH/NV 2008, 1526

17/07/2008

I R 77/06

BFH/NV 2008, 1941

Conventions, Directives and Regulations of the European Council Convention 90/436/EEC on the elimination of double taxation in connection with the adjustment of profits of associated enterprises, OJ L 225, 20/08/1990, p. 10 Council Directive 76/308/EEC of 15/03/1976 on mutual assistance for the recovery of claims resulting from operations forming part of the system of financing the European Agricultural Guidance and Guarantee Fund, and of the agricultural levies and customs duties, OJ L 73, 19/03/1976, p. 18 Council Directive 77/799/EEC of 19/12/1977 concerning mutual assistance by the competent authorities of the Member States in the field of direct taxation, OJ L 336, 27/12/1977, p. 15 Council Directive 78/855/EEC of 09/10/1978 based on Article 54 (3) (g) of the Treaty concerning mergers of public limited liability companies, OJ L 295, 20/10/1978, p. 36

List of References

265

Council Directive 90/435/EEC of 23/07/1990 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States, OJ L 225, 20/08/1990, p. 6 Council Directive 2001/44/EC of 15/06/2001 amending Directive 76/308/EEC on mutual assistance for the recovery of claims resulting from operations forming part of the system of financing the European Agricultural Guidance and Guarantee Fund, and of agricultural levies and customs duties and in respect of value added tax and certain excise duties, OJ L 175, 28/06/2001, p. 17 Council Directive 2001/86/EC of 08/10/2001 supplementing the Statute for a European company with regard to the involvement of employees, OJ L 294, 10/11/2001, p. 22 Council Directive 2003/49/EC of 03/06/2003 on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States, OJ L 157, 26/06/2003, p. 49 Council Directive 2003/123/EC of 22/12/2003 amending Directive 90/435/EEC on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States, OJ L 7, 13/01/2004, p. 41 Council Directive 2004/56/EC of 21/04/2004 amending Directive 77/799/EEC concerning mutual assistance by the competent authorities of the Member States in the field of direct taxation, certain excise duties and taxation of insurance premiums, OJ L 127, 29/04/2004, p. 70 Council Directive 2005/19/EC of 17/02/2005, amending Directive 90/434/EEC 1990 on the common system of taxation applicable to mergers, divisions, transfers of assets and exchanges of shares concerning companies of different Member States, OJ L 58, 04/03/2005, p. 19 Council Directive 2005/56/EC of 26/10/2005 on cross-border mergers of limited liability companies, OJ L 310, 25/11/2005, p. 1 Council Directive 2007/63/EC of 13/11/2007 amending Council Directives 78/855/EEC and 82/891/EEC as regards the requirement of an independent expert’s report on the occasion of merger or division of public limited liability companies, OJ L 300, 17/11/2007, p. 47

266

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Council Directive 2008/7/EC of 12/02/2008 concerning indirect taxes on the raising of capital, OJ L 46, 21/02/2008, p. 11 Council Regulation 2157/2001 of 08/10/2001 on the Statute for a European company (SE), OJ L 294, 10/11/2001, p. 1 Council Regulation 1606/2002 of 19/07/2002 on the application of International Accounting Standards, OJ L 243, 11/09/2002, p. 1