Merger Directive

Taxation of restructuring operations in the European Union

A common system of taxation applicable to cross-border reorganisations of companies in the EU was put in place in 1992 and improved in 2006. It aims at removing fiscal obstacles to those operations. A survey on the implementation of the system was published in 2009. Codification took place in 2009.

The main objectives of the Merger Directive

On 23 July 1990 the Council adopted Directive 90/434/EEC on a common system of taxation applicable to mergers, divisions, transfers of assets and exchanges of shares concerning companies of different Member States (the Merger Directive). The objective of the Merger Directive is to remove fiscal obstacles to cross-border reorganisations involving companies situated in two or more Member States. The Merger Directive includes a list of the legal forms to which it applies. The companies must be subject to corporate tax, without being exempted, and resident for tax purposes in a Member State.

In the case of mergers and divisions, the transferring company transfers assets and liabilities to one or more receiving companies. The Merger Directive provides for deferral of the taxes that could be charged on the difference between the real value of such assets and liabilities and their value for tax purposes. The deferral is granted provided that the receiving company continues with their tax values and effectively connects them to its own permanent establishment in the Member State of the transferring company. These rules apply to transfer of assets where the assets transferred form a branch of activity. The Merger Directive covers also triangular cases where the transaction includes a permanent establishment of the transferring company situated in a different Member State.

The exchange of shares is a transaction where a company acquires a holding majority in the capital of the acquired company. It transfers in exchange its own shares to the shareholders of the latter company.

In all these transactions, the Merger Directive provides for tax deferral of the taxes that could be charged on the income or capital gains derived by the shareholders of the transferring or the acquired company from the exchange of such shares for shares in the receiving or the acquiring company.

Directive 2005/19/EC amending the Merger Directive

On 17 October 2003 the Commission adopted a proposal (COM(2003) 613) amending Council Directive 90/434/EEC on a common system of taxation applicable to mergers, divisions, transfer of assets and exchanges of shares concerning companies of different Member States (see press release IP/03/1418 ), which was subsequently adopted after negotiations by Council on 17 February 2005 , as Directive 2005/19/EC (see press release IP/05/193 and Official Journal L 58, p. 19 of 4 March 2005 ). See also the press release issued at the time of political agreement on the modified version (IP/04/1446 ).

The main amendments introduced by Directive 2005/19/EC are the following:

• Directive 2005/19/EC adds new legal entities to this list annexed to the initial Directive and to which it applies. The benefits of the Merger Directive are thus extended to a greater number of legal entities, including the European Company (SE) (Council Regulation (EC) 2157/2001 and Council Directive 2001/86/EC) which may be created as of October 2004 (see press release IP/01/1376 ) and the European Co-operative Society (SCE) (Council Regulation (EC) 1435/2003 and Council Directive 2003/72/EC) which may be created from 2006 (see press release IP/03/1071 ).
• The current list of companies covered by the Merger Directive contains entities that are subject to corporate tax in their Member States of residence. However, in the case of some of the new entities that have been added to the list other Member States simultaneously tax their resident taxpayers which have an interest in those entities, so-called 'transparent entities'. The same tax situation can also apply to the shareholders of companies entering into the transactions covered by the Directive. Directive 2005/19/EC introduces specific provisions (new Articles 4(2) and 8(3)) to ensure that the benefits of the Merger Directive are available even in these cases, subject to certain exceptions which are set out in the new Article 10a.
• The coverage of a new type of transactions: a special division known as a "split off ", named in the Directive as partial division (new Article 2(b)(a)). The splitting company is not dissolved and continues to exist. It transfers part of its assets and liabilities, constituting one or more branches of activity, to another company. In exchange, the receiving company issues securities representing its capital. These securities are transferred to the shareholders of the transferring company.
• The directive provides for capital gains exemption when the receiving company holds shares in the transferring company. The holding threshold required to enjoy this exemption has been modified by the Directive 2005/19 to align it with that of the Parent-Subsidiary Directive. This threshold will be lowered in stages from 25% to 10% (Article 7(2)), in line with the amendments to the Parent-Subsidiary Directive introduced by Council Directive 2003/123/EC.
• Directive 2005/19/EC introduces specific provisions providing relief on the conversion of branches into subsidiaries (Article 10).
• The Directive introduces rules governing the transfer of the registered office of the European Company (SE). The title of the Merger Directive is modified to include a reference to this operation (Article 1) and the latter is defined in the text of the Directive (Article 2(j)).
  The applicable tax regime is found under a new Title IVb, Articles 10b to 10d: the SE transferring its registered office will enjoy tax deferral on capital gains where its assets remain connected with a permanent establishment situated in the Member State from which it is moving. The shareholders of the SE should not be liable to tax on this occasion. 

Codification of the Merger Directive

The EU Council of Ministers adopted Council Directive 2009/133/EC of 19 October 2009 (see Official Journal L 310 of 25 November 2009 page 34) codifying in a single text all Council Directives governing this matter. This includes the initial Directive, the amendments introduced by Council Directive 2005/19/EC and Council Directive 2006/98/EC of 20 November 2006 adding the required references following the accession of Bulgaria and Romania to the European Union.

This codification was prior to the accession of Croatia to the European Union. The required references to this Member State’s companies and taxes were included in Council Directive 2013/13/EU of 13 May 2013 (see Official Journal L 141 of 28 May 2013 page 30).

Survey on the implementation of the Merger Directive as amended in 2005

The European Commission in January 2009 published a survey on the implementation of the Directive. The survey carried out by Ernst & Young aims at providing a comprehensive overview of the implementation of the Merger Directive, as amended. It also looks at certain other related EC law aspects. The findings and conclusions of the study are those of Ernst & Young and should not be construed as reflecting the position of the European Commission and its services.