1. European Tax Issues of Mergers & Reorganizations - An Overview - Geerten M.M. Michielse Technical Assistance Advisor to the IMF Georgetown University Law Center Washington DC

2. (c) G.M.M. Michielse - 20022 Reorganizations covered by the Directive Transfers of Assets Transfers of Assets Exchanges of Shares Exchanges of Shares Mergers Mergers Divisions Divisions

3. (c) G.M.M. Michielse - 20023 Transfers of Assets “an operation whereby a company (transferring company) transfers without being dissolved all or more branches of its activity to another company (receiving company) in exchange for the transfer of securities representing the capital of the company receiving the transfer”

4. (c) G.M.M. Michielse - 20024 Before:After: Sh R Sh T Sh R Sh T Transferringentity Receivingentity Receivingentity Transferringentity

5. (c) G.M.M. Michielse - 20025 Exchange of Shares “an operation whereby a company (acquiring company) acquires a holding in the capital of another company (acquired company) such that it obtains a majority of the voting rights in that company 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, …”

6. (c) G.M.M. Michielse - 20026 Before:After: Sh AG Sh AD Sh AG Sh AD Acquiringentity Acquiredentity AcquiringentityAcquiredentity

7. (c) G.M.M. Michielse - 20027 Mergers “an operation whereby one or more companies (transferring companies), on being dissolved without going into liquidation, transfer all their assets and liabilities to another … company (receiving company) in exchange for the issue to their shareholders of securities representing the capital of that other company, …”

8. (c) G.M.M. Michielse - 20028 Before:After: Sh R Sh T Sh R Sh T ReceivingentityReceivingentityTransferringentity

9. (c) G.M.M. Michielse - 20029 Before:After: Sh R Receivingentity Transferringentity Receiving entity = Sh T

10. (c) G.M.M. Michielse - 200210 Divisions “an operation whereby a company, on being dissolved without going into liquidation, transfers all its assets and liabilities to two or more existing or new companies, in exchange for the pro rata issue to its shareholders of securities representing the capital of the companies receiving the assets and liabilities,…”

11. (c) G.M.M. Michielse - 200211 Before:After: Sh T ReceivingentityReceivingentityTransferringentity

12. (c) G.M.M. Michielse - 200212 Corporate level (taxable issues) Hidden reserves on assets / liabilities Hidden reserves on assets / liabilities Depreciation basis Depreciation basis Tax deferrals on provisions / reserves Tax deferrals on provisions / reserves Loss carry forward Loss carry forward

13. (c) G.M.M. Michielse - 200213 Corporate level (tax deferrals on provisions / reserves) Provisions / Reserves which have resulted in a permanent tax exemption: Provisions / Reserves which have resulted in a permanent tax exemption: –no taxable event for either T or R Provisions / Reserves which have resulted in a tax deferral: Provisions / Reserves which have resulted in a tax deferral: –provision / reserve has to be disclosed and included into operational profit of T

14. (c) G.M.M. Michielse - 200214 Corporate level (loss carry forward) Losses can be carried over to future tax periods, if future tax liability arises Losses can be carried over to future tax periods, if future tax liability arises - with same taxpayer who suffered loss - within same business activities as loss has occurred - within a limited number of tax periods - within a limited number of tax periods

15. (c) G.M.M. Michielse - 200215 Shareholders’ level (capital gains - individual shareholders) Portfolio Investor Portfolio Investor –speculative transactions: taxable at normal rates –others: tax exempt Substantial Shareholder Substantial Shareholder –taxable at reduced rates Entrepreneur Entrepreneur –taxable at normal rates

16. (c) G.M.M. Michielse - 200216 Shareholders’ level (capital gains - corporate shareholders) Qualifying subsidiary Qualifying subsidiary –credit systems: taxable –exemption systems: mostly taxable, except when participation exemption is extended to capital gains / losses (e.g. in NL) Others Others –taxable

17. (c) G.M.M. Michielse - 200217 Roll Over Relief (#1) (Article 4 - Same Assets / Different Owner ) Transaction “shall not give rise to any taxation of capital gains …” Transaction “shall not give rise to any taxation of capital gains …” Conditional upon the requirement that R continues tax practice of T regarding calculation of depreciation / capital gain Conditional upon the requirement that R continues tax practice of T regarding calculation of depreciation / capital gain

18. (c) G.M.M. Michielse - 200218 Provisions / Reserves (Article 5) Transfer of tax deferred provisions / reserves from T to R Transfer of tax deferred provisions / reserves from T to R at book value at book value all rights / obligations are assumed to be transferred all rights / obligations are assumed to be transferred

19. (c) G.M.M. Michielse - 200219 Loss Carry Forward (Article 6) “To the extent that, … [in domestic situations], the EU Member State would apply provisions allowing [R] to take over losses of [T] …” “To the extent that, … [in domestic situations], the EU Member State would apply provisions allowing [R] to take over losses of [T] …” Transfer of loss: R continues T’s position Transfer of loss: R continues T’s position

20. (c) G.M.M. Michielse - 200220 Merger into Holding Company (Article 7) capital gains / losses accrued shall not be liable to any taxation capital gains / losses accrued shall not be liable to any taxation may be limited to  25% participations may be limited to  25% participations

21. (c) G.M.M. Michielse - 200221 Roll Over Relief (#2) ( Article 8 - Same Owner / Different Assets ) Transaction “shall not give rise to any taxation of the income, profits or capital gains …” Transaction “shall not give rise to any taxation of the income, profits or capital gains …” Conditional upon the requirement that value new shares  value of original shares Conditional upon the requirement that value new shares  value of original shares Any subsequent transfer of the new shares may be taxed Any subsequent transfer of the new shares may be taxed Cash payment may be taxed Cash payment may be taxed

22. (c) G.M.M. Michielse - 200222 Taxation of Cash Payment (Article 8, paragraph 4) “10% of the nominal value or, …, of the accounting par value of [the securities in the Receiving Company]” “10% of the nominal value or, …, of the accounting par value of [the securities in the Receiving Company]” Pro rata over the new securities Pro rata over the new securities Used for ‘buy-out’ of minority shareholders Used for ‘buy-out’ of minority shareholders

23. (c) G.M.M. Michielse - 200223 EU Conditions (Article 3) Company that takes the form as mentioned in the Annex; Company that takes the form as mentioned in the Annex; Not being treated as a resident of a third country outside the EU by DTA; and Not being treated as a resident of a third country outside the EU by DTA; and Subject to a corporate income tax “without having an option to be or being exempt” Subject to a corporate income tax “without having an option to be or being exempt”

24. (c) G.M.M. Michielse - 200224 EU Transfer of Assets (T = Resident) Receivingcompany Transferringcompany PE

25. (c) G.M.M. Michielse - 200225 EU Transfer of Assets (T = Nonresident) Receivingcompany Transferringcompany PE

26. (c) G.M.M. Michielse - 200226 Transfer of Permanent Establishment Receivingcompany Transferringcompany PE

27. (c) G.M.M. Michielse - 200227 Transfer of Permanent Establishment (Article 10) Basic rules: Basic rules: –State T shall renounce any right to tax that permanent establishment; –Any losses that has been taken into account may be recovered; –State PE and State R shall apply the Directive is if State PE is State T. Derogation: Derogation: –State T may include capital gains in worldwide tax base, but has to give relief for ‘fictitious foreign tax’.

28. (c) G.M.M. Michielse - 200228 EU Exchange of Shares (international principles) Art. 13 OECD (Capital Gains) Para. 2 (business property) Para. 2 (business property) –State where the permanent establishment to which capital gain can be allocated, is located Para. 4 (securities) Para. 4 (securities) –State where the alienator is a resident

29. (c) G.M.M. Michielse - 200229 EU Exchange of Shares (Sh AD = Resident) Sh AD AcquiringCompany AcquiredCompany

30. (c) G.M.M. Michielse - 200230 EU Exchange of Shares (Sh AD = EU Nonresident) Sh AD AcquiringCompany AcquiredCompany

31. (c) G.M.M. Michielse - 200231 EU Exchange of Shares (Conditions) Shareholder AD should be Shareholder AD should be a) a resident; or b) hold shares through a permanent establishment Companies should be resident in EU member state Companies should be resident in EU member state  Tax claim on capital gains rolled over will remain in the member state

32. (c) G.M.M. Michielse - 200232 EU Merger or Division Receivingcompany Transferringcompany PE Sh T Sh R

33. (c) G.M.M. Michielse - 200233 Transfer of Assets (Valuation Issues) Receivingcompany Transferringcompany PE A B C D

34. (c) G.M.M. Michielse - 200234 Exchange of Shares (Valuation Issues) Sh AD AcquiringCompany AcquiredCompany E F G H