EU Commission Proposes Update To Tax Rules In Merger Directive

by Ulrika Lomas, Tax-News.com, Brussels

23 October 2003

The European Commission has made a proposal to update, clarify and broaden the scope of the European Community's Directive that provides for tax deferral in the case of cross-border mergers and divisions of companies, transfers of assets and exchanges of shares.

In particular, the Commission proposes to broaden the Directive's scope to cover a larger range of companies including the European Company and the European Co-operative Society; to provide for a new tax neutral regime for the transfer of the registered office of a European Company or of a European Cooperative Society between Member States; to clarify that the Directive applies in the case of the conversion of branches into subsidiaries; and to introduce rules to prevent double taxation due to different valuations of shares and assets by different Member States.

"This proposal is an important element of our strategy to remove all forms of double taxation and other tax obstacles currently encountered by companies exercising their freedom to operate across borders within the Internal Market" commented Taxation Commissioner Frits Bolkestein. "This proposal, combined with the forthcoming proposal for a Tenth Company Law Directive facilitating mergers between companies from different Member States, would increase the efficiency of business and support the objective of making the EU the most competitive economy in the world by 2010".

The main elements of the Commission proposal to improve the operation of the ‘Mergers’ Directive are as follows:

First, the proposal would update the list of companies to which the Directive applies to cover new, specified, legal entities, including certain co-operatives and non-capital based companies, mutual companies, savings banks, funds and associations with commercial activity.

Second, the proposal would ensure that the transfer of the registered office of a European Company or of a European Co-operative Society from one Member State to another would not result directly in taxation of capital gains.

Third, the proposal would clarify that the tax deferral regime in the Directive can apply where a company decides to convert its foreign branch into a subsidiary.

Fourth, the proposal would ensure that the values of securities and assets exchanged in cross-border mergers and divisions are calculated the same way for tax purposes in different Member States when they are ultimately subjected to tax.

The proposal replaces a previous 1993 proposal to amend the Mergers Directive and the Commission has, consequently, now withdrawn the previous proposal. Member States could not agree to the wide scope of the earlier proposal because of the asymmetries in their commercial laws governing the types of legal entities and in the tax arrangements applicable to these entities.

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