University of Augsburg German and European Company Law Prof. Dr. Otmar Thömmes 5 / 6 July 2013

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University of Augsburg

German and European Company Law

Prof. Dr. Otmar Thömmes5 / 6 July 2013

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Entity Symbols

Individual Corporation

Branch Partnership

Iconography

Part A: IntroductionI. Company Restructuring – Transactions in PracticeII. Funding of CompaniesIII. Tax Implications of Asset vs. Cash contributionsIV. Single Asset Transfer vs. Universal SuccessionV. Relocation of Seat

Part B: Company RestructuringsVI. Civil Law and Tax Law Issues of Company Restructurings at a

Domestic LevelVII.Civil Law and Tax Law Issues of Cross-Border Restructurings

of CompaniesVIII.The European Company Law Statute (SE-Statute)

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Agenda

Part A: Introduction

I. Company Restructuring – Transactions in Practice

II. Funding of Companies

III. Tax Implications of Asset vs. Cash contributions

IV. Single Asset Transfer vs. Universal Succession

V. Relocation of Seat

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1. Joint Ventures• Partnerships• Joint Subsidiaries

2. Holding Companies3. European Company – Societas Europaea (SE)4. Further Pan-European Legal Forms of Entities5. Mergers6. Division


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Other forms of Joint Ventures• Contractual Joint Ventures (without formation of a partnership or

subsidiary)• Silent partnerships or participations

A B

Partnership

50% 50%

Subsidiary

50% 50%

I. Company Restructuring – Transactions in Practice1. Joint Ventures

A B

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Subsidiary: Corporation in which another corporation (parent company) owns at least a majority of the shares

Wholly owned If parent owns 100% of the subsidiary: shares in the subsidiary

Shareholding or Ownership of shares in a participation: subsidiary

(Partnership) interest: Ownership in a partnership

I. Company Restructuring – Transactions in Practice1. Joint Ventures - Terminology

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• Generally all forms of corporations possible

• In practice, most commonly: GmbH or limited liability companies e.g.

– in UK Ltd Limited company– in F SARL Société à

responsabilité limitée– in NL BV Besloten vennootschap

I. Company Restructuring – Transactions in Practice1. Joint Ventures - Legal Terms of Subsidiaries

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English Terms

• Civil Law Partnership• General Partnership• Limited Partnership • Limited Partnership on shares

Legal Forms in Germany

• GbR• OHG• KG (in particular GmbH & Co. KG)• KGaA

For JV most commonly GbR or OHG

I. Company Restructuring – Transactions in Practice1. Joint Ventures - Legal Terms of joined partnerships

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I. Company Restructuring – Transactions in Practice1. Joint Ventures - Classification (I)

How to classify foreign entities in Germany – Classification Criteria according the BMF (March 19, 2004, BStBl. I 2004, 411)

The foreign entity needs to be examined wether it resembles a German legal entity from with respect to ist legal and economic structure

• Examiation of the legal specific features under the foreign civil law• Examination wether the assorted legal features resemble a German

legal form or not• Eventually the economic structure may also be taken into account

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I. Company Restructuring – Transactions in Practice1. Joint Ventures - Classification (II)

Structural characteristics

Corporation Partnership

1. Centralization of management in representive capacity

Centralized; Managed and represented by a non-member

Decentralized; Members manage company on their own behalf

2. Limited liability None of the members is personally liable for claims of the company´s creditors

At least one member ist personally liable

3. Free transferability of interests

Free assignment without consent of the other members

Assignment is subject to the consent of one or more members; Assignment is limited

4. Discretion to access profits

Distribution of profits is subject to a formal resolution of the members

Distribution or retention of profits allocated to the members is at the members´discretion

I. Company Restructuring – Transactions in Practice1. Joint Ventures - Classification (III)

Structural characteristics

Corporation Partnership

5. Equity contributions

The members must subscribe to the company´s share capital and make equity contributions

Equity contributions are not required; members may contribute services instead

6. Continuity of life

Unlimited life Limited life, i.e. the company is dissolved upon the occurrence of certain events without any further actions by ist members

7. Profit allocation Profit allocation based on subscribed equity

Formula for profit allocation not only based on subscribed or contributed capital/deposit

8. Formation requirements

Incorporation/registration required to create association among members

Agreement among associates creates partnership; registration relevant with respect to legal relationship vis-a-vis third parties

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• Joint ownership in subs through intermediary holding company• Term Holding: A company where sole or primary purpose it is to own

shares in other companies (at least two) and exercise the shareholder rights. Holding can also be engaged in the financing of its subsidiaries (so-called “Finance Holding”).

A

Holding

Sub Sub Sub Sub

I. Company Restructuring – Transactions in Practice2. Holding Companies (I)

A

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Use of Holdings for purposes of coordinating shareholder rights in regional subsidiaries, so-called regional holdings.

US Parent

EU Holding LACRO Hold. AP Holding Africa Hold.

D FR I MEX BRA ARG CH IND MAL SA ANG KEN

I. Company Restructuring – Transactions in Practice2. Holding Companies (II)

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US Parent

GermanHoldCo UK HoldCo French

HoldCoItalian

HoldCo

German Subs UK Subs French Subs Italian Subs

I. Company Restructuring – Transactions in Practice2. Holding Companies (III)

Use of Holdings for purposes of coordinating shareholdings in same country subsidiaries, so-called country holdings.

• Alienation (e.g. sale) of shares often tax exempt at holding level

• Group financing: Holding takes out a loan and provides financing to its subsidiaries

• Tax consolidation – Group taxation Aggregation of profits and losses for tax purposes

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I. Company Restructuring – Transactions in Practice2. Holding Companies (IV) - Tax Reasons

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• Joint Holding Company (see Art. 2 (2), Art. 32 et seq. SE Statute)

• Joint Subsidiary Company (see Art. 2 (3), Art. 35 et seq. SE Statute)

I. Company Restructuring – Transactions in Practice3. European Company - Societas Europaea (SE)

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• European Economic Interest Grouping (EEIG) (Council Regulation (EEC) No 2137/85 of 25 July 1985 on the European Economic Interest Grouping (EEIG).

• European Cooperative Society (SCE)(Council Regulation (EC) No 1435/2003 of 22 July 2003 on the Statute for a European Cooperative Society (SCE). Council Directive 2003/72/EC of 22 July 2003 supplementing the Statute for a European Cooperative Society with regard to the involvement of employees.)

• Not yet available: European Private Company Statute (SPE)(Proposal for a Council Regulation of 25 June 2008 on the Statute for a European Private Company.)

• Not yet available: Fundatio Europaea (FE)(Proposal for a Council Regulation of 08 February 2012 on the Statute for a European Foundation Statute (FE).)

I. Company Restructuring – Transactions in Practice4. Further Pan-European Legal Forms of Entities

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Increasing intensity of collaboration

• Joint Ventures

• Holding Companies

• Legal Merger

I. Company Restructuring – Transactions in Practice5. Mergers

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• The term “Merger” is in Anglo-Saxon countries often used to describe the acquisition by one company of the majority of the shares in another company

• “Mergers and Acquisitions” (M&A), in these countries, means the acquisition of an enterprise by another enterprise

• “Legal Merger” is frequently used to distinguish a European type of merger, i.e. the amalgamation of two companies into one, from the Anglo-Saxon type of merger by acquisition

I. Company Restructuring – Transactions in Practice5. Mergers a) Terminology

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Company A Company B

Pre-Merger-Situation

SH 1 SH 2 SH 3 SH 4

I. Company Restructuring – Transactions in Practice5. Mergers b) Legal Mergers (I)

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Company A

Post-Merger-Situation: Merger by acquisition

Branch B

Transferring company B ceases to exist, company A receives the assets of company B and operates the branch(es) formerly operated by company B.

SH 1 SH 2 SH 3 SH 4

I. Company Restructuring – Transactions in Practice5. Mergers b) Legal Mergers (II)

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Post-Merger-Situation: Merger by formation of a new company

I. Company Restructuring – Transactions in Practice5. Mergers b) Legal Mergers (III)

Company C

Branch B Branch A

SH 1 SH 2 SH 3 SH 4

Transferring company A and B cease to exist, new company C receives the assets of companies A and B and operates the branch(es) formerly operated by A and B.

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Upstream-merger

Company A

Company B

Pre-merger-situation Post-merger-situation

Company A

I. Company Restructuring – Transactions in Practice5. Mergers b) Legal Mergers (IV)

The parent company receives the assets of the subsidiary, the subsidiary ceases to exist.

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Downstream-merger

Company A

Company B

Pre-merger-situation Post-merger-situation

Company B

Branch

The subsidiary receives the assets of the parent company, the parent company ceases to exist.

I. Company Restructuring – Transactions in Practice5. Mergers b) Legal Mergers (V)

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• Characteristics of a “legal merger”• Transferring company(ies) cease(s) to exist as legal entity(ies)• No liquidation• Absorption by the receiving company of the assets and liabilities of

the transferring company• No requirement of single asset transfers• Universal succession

I. Company Restructuring – Transactions in Practice5. Mergers b) Legal Mergers (VI)

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• Company Law Directive of 5 April 2011, 2011/35/EU (OJ L 110 of 29.04.2011, p. 1) concerning mergers of public limited liability companies (replacing Third Company Law Directive of 9 October 1978, 78/855/EEC (OJ L 295 of 20.10.1978, p. 36) regarding domestic merger)

• Directive of 26 October 2005, 2005/56/EC (OJ L 310, p. 1) on cross-border mergers of limited liability companies

• SE-Statute of 8 October 2001 (OJ L 294 of 10.11.2001, p. 1): Formation of a SE through a merger of two public limited companies, see Art. 2 (1) of the Statute

I. Company Restructuring – Transactions in Practice5. Mergers c) European Company Law Measures

relative to Mergers

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Company A

Company B

Pre-division-situation

Company A

Post-division-situation

Company CCompany B

“split-up”

“split-off”

SH 1 SH 2

SH 1 SH 2

SH 1 SH 2

I. Company Restructuring – Transactions in Practice6. Division (I)

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Two forms of Division:

• Complete division of company A into two companies B and C; also called “split-up”

• Incomplete division of company A, i.e. company A does not cease to exist; also called “split-off”

I. Company Restructuring – Transactions in Practice6. Division (II)

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• Sixth Company Law Directive 82/891/EEC of 17 December 1982 on (domestic) divisions of public limited companies (i.e. within one Member State), OJ L 378, 31.12.1982, p. 47

• No proposal yet for cross-border division i.e. concerning companies from different Member States

I. Company Restructuring – Transactions in Practice6. Division (III)







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Funding of companies

DebtEquity

Asset Contribution

Cash Contribution

- against new shares- against increase of reserves

• Asset Contribution versus Cash Contribution• Funding of Contributions – Equity or Cash

II. Funding of Companies1. Funding of Companies - Overview

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• Equity (Shareholder Capital)• Debt (loans)

Equity Funding requires either increase in share capital or (deemed) contribution to the capital reserves.

Debt Funding requires a loan agreement between the receiving company and the funding company.

II. Funding of Companies1. Funding of Companies - Overview

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• Equity Funding does not require the receiving company to pay interest

• Loan funding requires interest to be paid by recipient company

• Interest free Loans can pose severe tax issues, e.g. deemed income recognition

• Hybrid Forms of Equity/Loan Financing e.g. profit participation loans, silent partnerships, jouissance rights (Genussrechte), convertible loans

II. Funding of Companies2. Key features of Equity vs. Loan Financing

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• Cash contribution is simple, quick and does not raise specific requirements

• Asset contribution requires valuation of assets if made in exchange for (new) shares – Increase of stated share capital

• Principle of Maintenance of Capital

II. Funding of Companies3. Asset vs. Cash Contribution

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II. Funding of Companies3. Asset vs. Cash Contribution a) Company law treatment of

asset contribution (I) • Legal basis: Sec. 27, 183 AktG, Sec. 5, 56 GmbHG

• In return shares are issued to the contributing company

• Acquisition costs: Sec. 255 para. 1 HGB:

- Acquisition costs are all expenses made to acquire assets and liabilities of a company

- No specific legal provisions for the evaluation of a contribution in kind

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• Literature developed principles for evaluation – basis for evaluation is the value of the issued shares

• Value of the issued shares and therefore acquisition costs of the shares equals the Fair Market Value (FMV) of the contributed assets

• Difference between FMV and book value of asset = capital gain

II. Funding of Companies3. Asset vs. Cash Contribution a) Company law treatment of

asset contribution (II)

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• Cash contribution in exchange for new shares – Increase of stated share capital

• Formal requirement: Notarization under German Law (see Sec. 23 AktG, Sec. 2 GmbHG)

• Cash injection requirements: complete injection (Volleinzahlung), partial injection (Teileinzahlung), Sec. 36, 36a AktG, Sec. 7 (2),(3) GmbHG

II. Funding of Companies3. Asset vs. Cash Contribution b) Company law treatment of

cash contribution (I)

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• Cash contribution without issuance of new shares

• No increase of stated share capital

• So-called deemed contribution (verdeckte Einlage)

• Mere increase of value of existing shares

• No notarization required

II. Funding of Companies3. Asset vs. Cash Contribution b) Company law treatment of

cash contribution (II)







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• Receiving company receives cash payment

• Cost of acquisition of the shares determined by the amount of cash contributed

• Cash does not contain built-in-gains

III. Tax Implications of Asset vs. Cash contributions1. Cash Contribution (I)

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Fixed assets: 5,0 Mio Equity: 10,0 MioCurrent assetsCash: 5,0 MioTotal: 10,0 Mio Total: 10,0 Mio

Company A

Fixed assets: 5,0 Mio Equity: 10,0 MioShares in affiliatedcompanies 0,5 MioCash: 4,5 MioTotal: 10,0 Mio Total: 10,0 Mio

(Parent) Company A

Cash: 0,5 Mio Equity: 0,5 Mio

Total: 0,5 Mio Total: 0,5 Mio

Company B (subs)

III. Tax Implications of Asset vs. Cash contributions1. Cash Contribution (II)

Before the contribution:

After the contribution:

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Shares granted in exchange for contribution of single assets:

• undisclosed reserves of assets contributed are generally subject to income taxation

• acquisition costs of the shares granted are amounting to the fair market value of the assets contributed (Sec. 6 para. 6 EStG)

• fair market value is determined in Sec. 9 BewG

III. Tax Implications of Asset vs. Cash contributions2. Asset Contribution (I)

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Company A

Fixed assets: 4,5 Mio Equity: 10,0 MioShares in affiliated Profit/Gain: 1,5 Miocompanies: 2,0 MioCash: 5,0 MioTotal: 11,5 Mio Total: 11,5 Mio

(Parent) Company A

Assets: 2,0 Mio Equity: 2,0 Mio


Company B (subs)

The assets contributed do not form a branch of activity/participation interest within the sense of Sec. 20 (1) UmwStG ➔ disclosure of built-in-gains

Contribution of assets with book value of 0,5 Mio and market value of 2,0 Mio



III. Tax Implications of Asset vs. Cash contributions2. Asset Contribution (II)

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• Shares granted in exchange for contribution of – a branch of activity – a participation interest or – shares granting a majority of voting rights to the recipient of the

shares

• Receiving company may choose between the book value or the fair market value if the conditions of Sec. 20 (2) s. 2 or 21 (1) s. 2 UmwStG respectively are met– Book value: contribution is tax neutral– Fair market value: undisclosed reserves are subject to corporate

income tax

III. Tax Implications of Asset vs. Cash contributions2. Asset Contribution (III)

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Company A

Fixed assets: 4,5 Mio Equity: 10,0 MioShares in affiliatedcompanies 0,5 MioCash: 5,0 MioTotal: 10,0 Mio Total: 10,0 Mio

(Parent) Company A

Assets: 0,5 Mio Equity: 0,5 Mio


Company B (subs)

The assets contributed form a branch of activity/participation interest within the sense of Sec. 20 (1)/21 (2) UmwStG ➔ no disclosure of built-in-gains under the conditions of Sec. 20 (2) s. 2 / Sec. 21 (2) UmwStG

Contribution of assets with book value of 0,5 Mio and market value of 2,0 Mio



III. Tax Implications of Asset vs. Cash contributions2. Asset Contribution (IV)







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Two forms of single asset transfers:

1. Contribution in kind

2. Share for share exchange transactions


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• Each asset has to be transferred individually • Contracts between the transferring company and a third party

concerning the assets (i.e. rental contracts) have to be adapted in order to replace the transferring company with the receiving company

• The third party of a contract may object the transfer of the obligations resulting from a contract

• Tax neutral only if the asset contributed is a partnership interest or the assets contributed form a branch of activity (Betrieb oder Teilbetrieb) according to Sec. 20 (1) UmwStG

IV. Single Asset Transfer vs. Universal Succession1. Contribution in kind

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• Acquiring company issues new shares to the transferring company in exchange for a shareholding in the acquired company

• Tax neutral only under the conditions of Sec. 21 (1) s. 2 UmwStG

• The majority of shareholders in the acquired company has to accept the offer of the acquiring company in order to achieve a qualifying shareholding (i.e. the majority of voting rights) in the acquired company

• A subsequent (legal) merger may be necessary in order to combine the undertakings of the acquired and the acquiring company

IV. Single Asset Transfer vs. Universal Succession2. Share-for-share-exchange-transactions (I)

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Company A

Company C

Company B

Before the share-for share transaction

After the share-for share transaction

Company A

Company C

Company B

Company A transfers its shareholding in company C to company B and receives (new) shares in exchange for the shareholding transferred.

IV. Single Asset Transfer vs. Universal Succession2. Share-for-share-exchange-transactions (II)

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Three forms of universal succession transactions:

• Legal merger (see above)

• Division (see above)

• Partnership collapsing into a single partner

IV. Single Asset Transfer vs. Universal Succession3. Universal Succession (I)

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Legal and tax consequences of a universal succession:

• Successor takes over the legal position of the transferring company concerning the assets that are subject to the universal succession

• As a general rule: Carry-over of book values

• All rights and obligations are transferred to the new owner

IV. Single Asset Transfer vs. Universal Succession3. Universal Succession (II)

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Partnership collapsing into a single partner (1)

• Retirement of a partner results in a partnership with only one single partner

• Partnership ceases to exist

• All assets and liabilities collapse into the remaining partner

• The remaining partner takes over the legal position of the partnership

• All rights and obligations are transferred to the single partner

IV. Single Asset Transfer vs. Universal Succession3. Universal Succession (III)

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OHG/KG

cancellation of partnership

Partnership ceases to exists, if only one partner remains. Assets are directly attributed to the partner.

Branch of Activity

Partner 1 Partner 2 Partner 1 Partner 2

IV. Single Asset Transfer vs. Universal Succession3. Universal Succession (IV)

Partnership collapsing into a single partner (2)







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• Statutory Seat or Registered Seat

• Place of Management (and Control) or Head Office

• Use of term in practice often ambiguous

• Most commonly “transfer of seat” refers to a company whose place of management is relocated to a state other than that of its incorporation

V. Relocation of Seat1. Terminology – Term “Seat”

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• Statutory Seat is determined by articles of association, Sec. 4a GmbHG; Sec. 5 AktG – must be located within Germany– no connection to the place of management and control

necessary (as it was the case prior to 1 November 2008)

• Art. 7 SE-Statute: The statutory seat of an SE shall be located in the same MS as its head office (“Hauptverwaltung”)

V. Relocation of Seat2. Determination of statutory seat

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• Sec. 45 AktG limited to relocations of statutory seat within Germany

• Change of statutes

• Decision of general meeting

• Registration

• No specific provision governing domestic relocation of GmbH and SE

V. Relocation of Seat3. Relocation of statutory seat

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• No formal decision by general meeting required

• Domestic relocation of head office does not require the company to also relocate statutory seat any more (Sec. 5 (2) AktG, 4a (2) GmbHG and 2 SEAG abolished)

• In case of an outbound transfer of the head office the “Real seat doctrine” should no longer apply

V. Relocation of Seat4. Relocation of head office

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“Real seat doctrine” • Applicable company law depends on the jurisdiction where the

actual center of administration (“headquarter”) of a company is located

• Severe consequences may arise for dual-resident companies

“Incorporation doctrine”• Determines the applicable law according to the statutory seat of a

company

V. Relocation of Seat5. “Real seat doctrine” and “Incorporation doctrine” (I)

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The “real seat doctrine” was developed for

• Fraudulent activities

It has been applied in practice for the following reasons

• Prevent the undermining of capitalization requirements• Prevent undermining of the German workers participation rules• Protection of creditors• Protection of the public

V. Relocation of Seat5. “Real seat doctrine” and “Incorporation doctrine” (II)

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Freedom of establishment and transfer of seat• Art. 49 TFEU:

“Within the framework of the provisions set out below, restrictions on the freedom of establishment of nationals of a Member State in the territory of another Member State shall be prohibited. Such prohibition shall also apply to restrictions on the setting-up of agencies, branches or subsidiaries by nationals of any Member State established in the territory of any Member State.Freedom of establishment shall include the right to take up and pursue activities as self-employed persons and to set up and manage undertakings, in particular companies or firms within the meaning of the second paragraph of Article 48, under the conditions laid down for its own nationals by the law of the country where such establishment is effected, subject to the provisions of the chapter relating to capital.”

V. Relocation of Seat6. Cross-Border Mobility of Companies and EC Law a) Art. 49 TFEU

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Freedom of establishment and transfer of seat• Art. 54 TFEU:

“Companies or 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 shall, for the purposes of this Chapter, be treated in the same way as natural persons who are nationals of Member States.‘Companies or firms’ means companies or firms constituted under civil or commercial law, including cooperative societies, and other legal persons governed by public or private law, save for those which are non-profit-making.”

V. Relocation of Seat6. Cross-Border Mobility of Companies and EC Law a) Art. 54 TFEU

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Recital 6 of the Directive 2005/19/EC of 17 February 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 of 4.3.2005, p. 19:

“The transfer of the registered office is a means of exercising freedom of establishment as provided for in Articles 43 and 48 [now: Art. 49 and 54] of the Treaty. No assets are transferred and the company and its shareholders do not derive any income, profits or capital gains from it. …”

V. Relocation of Seat6. Cross-Border Mobility of Companies and EC Law a) 2005/19/EC

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Case law of the European Court of Justice in the cases• Daily Mail

Daily Mail plc.

SubCo 1 SubCo 2 SubCo 3

Daily Mail

Place of management and control to be shifted to The Netherlands

ECJ of 27.9.1988, Case 81/07, The Queen v H. M. Treasury and Commissioners of Inland Revenue, ex parte Daily Mail and General Trust plc., ECR 1988, p. 5483

United Kingdom The Netherlands

V. Relocation of Seat6. Cross-Border Mobility of Companies and EC Law b) Daily Mail

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• Facts:Daily Mail plc., a British holding company, wanted to transfer its place of central management and control to The Netherlands and applied for permission of the British Treasury. According to the applicable UK Income and Corporation Taxes Act 1970 a corporation resident for tax purposes in the UK may cease to be resident only with the consent of the Treasury.

• Legal background:Tax residency for UK tax purposes is determined by the place of central management and control. Built-in gains in shares held by that company are no longer subject to UK corporation tax in case of cessation of the tax residency. For Dutch tax purposes, capital gains taxation is calculated on the basis of the value of the shares at the time of beginning of tax residency in the Netherlands.

• Decision:Denial of consent is compatible with the freedom of establishment. The freedom of establishment does not confer the right on a company incorporated under the legislation of a Member State and having its registered office there to transfer its central management and control to another Member State.

V. Relocation of Seat6. Cross-Border Mobility of Companies and EC Law b) Daily Mail

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• Centros

United Kingdom

Centros Ltd.

Denmark

Mr.B Mrs.B

Branch

ECJ of 9.3.1999, Case C-212/97, Centros Ltd. v Erhvervs- og Selskabsstyrelsen, ECR 1999, p. I-1459

V. Relocation of Seat6. Cross-Border Mobility of Companies and EC Law c) Centros

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• Facts: A Danish couple formed Centros Ltd. under UK law in order to avoid Danish minimum capital requirements applying on formation of a Danish private limited company. No business to be conducted in the UK.Centros Ltd. applied for registration of a branch in Denmark. The Danish authorities refused to register the branch on grounds of circumvention of national law

• Decision: Refusal of registration infringes freedom of establishment of the Centros Ltd. Avoidance of national provisions on minimum capital requirements not a valid justification for a discrimination of a company formed under the laws of another Member State.

V. Relocation of Seat6. Cross-Border Mobility of Companies and EC Law c) Centros

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• Überseering

ECJ of 5.11.2002, Case C-208/00, Überseering BV v Nordic Construction Company Baumanagement GmbH (NCC), ECR 2002, p. I-9919

The Netherlands Germany

Überseering BV

A B

NCC GmbH

Legal Proceedings

V. Relocation of Seat6. Cross-Border Mobility of Companies and EC Law d) Überseering

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• Facts:In legal proceedings between Überseering BV and NCC GmbH before a German Civil Court the latter questioned the legal capacity of Überseering BV due to a deemed transfer of the head office from The Netherlands to Germany on application of the “real seat doctrine”.

• Decision: A Member State may not disregard the legal capacity of a company that was established properly under the laws of another Member State and according to the laws of that State a transfer of the head office to abroad does not have legal consequences for that company.

V. Relocation of Seat6. Cross-Border Mobility of Companies and EC Law d) Überseering

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• Inspire Art

ECJ of 30.9.2003, Case C-167/01, Kamer van Koophandel en Fabrieken voor Amsterdam v. Inspire Art. Ltd, ECR 2003, p. I-10155

United Kingdom The Netherlands

Inspire Art Ltd.

No business activities at the place of registration

A

Branch

Sole shareholder and director of Inspire Art Dutch resident

V. Relocation of Seat6. Cross-Border Mobility of Companies and EC Law e) Inspire Art

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• Facts:The Amsterdam Chamber of Commerce and Industry wanted to subject Inspire Art. Ltd. according to the WFBV, the Dutch Law on pseudo foreign companies. The status of a pseudo foreign company would have brought about for Inspire Art Ltd. the obligation to comply with minimum capital and disclosure requirements. In case of failing to fulfill these requirements, the directors would be liable for the company’s liabilities.The single purpose for the establishment of Inspire Art und UK laws was to make use of the more liberal minimum capitalization rules under UK company law.

• Decision:According to the ECJ further requirements set up for registration of a branch and obligations for foreign corporations as contained in the WFBV infringe the freedom of establishment

V. Relocation of Seat6. Cross-Border Mobility of Companies and EC Law e) Inspire Art

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• SEVIC Systems

ECJ of 13.12.2005, Case C-411/03, SEVIC Systems AG, ECR 2005, p. I-10805

LuxembourgGermany

Application for registration of cross-border merger to German Local Court of Neuwied

V. Relocation of Seat6. Cross-Border Mobility of Companies and EC Law f) SEVIC

SEVIC Systems AG

Security Vision Concept SA

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• Facts:SEVIC applied for registration in the commercial register, in accordance with the UmwG. The German Local Court of Neuwied refused to register the merger between SEVIC and Security Vision, a subsidiary established in Luxembourg, on the ground that the German law on company restructurings provided for mergers between companies established in Germany only.

• Judgment:Articles 43 EC and 48 EC preclude Member States from restricting merger transactions to domestic entities only. A merger by dissolution without liquidation of one company and transfer of the whole of its assets to another company must be open also to entities which are established in another Member State if in a comparable domestic situation a merger would be feasible.

V. Relocation of Seat6. Cross-Border Mobility of Companies and EC Law f) SEVIC

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• Cartesio

ECJ of 16.12.2008, Case C-210/06, Cartesio Oktató és Szolgáltató bt, ECR 2008, p. I-9641

Hungary Italy

A A

Cartesio

Application to Hungarian commercial court to record new “operational headquater“ in Italy.

V. Relocation of Seat6. Cross-Border Mobility of Companies and EC Law g) Cartesio

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• Facts:Cartesio is a limited partnership constituted in accordance with Hungarian law and registered in Hungary. It submitted an application to the commercial court to amend its registration in the local commercial register so as to record an Italian address as new operational headquarters. The commercial court rejected Cartesio’s application. It hold that Hungarian law did not offer companies the possibility of transferring their operational headquarters to another Member State while retaining their legal status as a company governed by Hungarian law. In order to change its operational headquarters, Cartesio would first have to be dissolved in Hungary and then reconstituted under Italian law.

• Opinion of AG Poiares Maduro:Relocation to another MS should fall within the scope of the freedom of establishment; grounds of general public interest may justify restrictions but not dissolution of the company in each case of relocation.


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• Judgment:

MS are not prohibited from disregarding legal entities upon a mere relocation of head office to another MS.

A simultaneous relocation of head office and statutory seat in another MS falls within the scope of the freedom of establishment.

Provided that the MS where the new seat shall be located, provides for the necessary legal framework, the former home state of the relocating company may not deny the legal capacity of the entity.

Winding up of an entity upon a relocation to another company is tolerable only if is serves overriding requirements in the public interest.


85

• VALE

ECJ of 12.7.2012, Case C-378/10, VALE Építési Kft., NJW 2012, 2701

HungaryItaly

Application to Hungarian commercial court to register VALE after having been deleted from the trade registry in Italy. VALE also applied to show deleted (Italian) entity as predecessor of new Hungarian entity in trade register.

V. Relocation of Seat6. Cross-Border Mobility of Companies and EC Law h) VALE

VALE VALE

86


• Facts:VALE COSTRUZIONI S.r.l., an Italy-based entity, intended to transfer its legal and factual seat to Hungary while terminating all its activities in Italy as well as its legal existence under Italian law. By relocation to Hungary, VALE intended to become a Hungarian company operating under the name of VALE Építési Kft. and governed by Hungarian company. In its application for registration to the Hungarian company register, it requested to enter VALE COSTRUZIONI S.r.l. as legal predecessor of VALE Építési Kft. in the trade register. The court of registration rejected the application arguing that under Hungarian law the registration of a foreign company as a legal predecessor of a Hungarian company is not possible. The Hungarian Supreme Court requested a preliminary ruling from the ECJ asking whether the Hungarian company law not allowing for a conversion of a company of another MS into a Hungarian company are compatible with the freedom of establishment as set out in the former Articles 43 and 48 EC (now Articles 49 and 54 TFEU).

• Opinion of AG Jääskinen delivered on 15 December 2011AG: VALE can rely on the freedom of establishment. He indentified the transfer of seat as a ‘cross-border new establishment’ situation and held that the rejection constituted an infringement of the freedom of establishment which is not justified.

87

• Judgment:

Articles 49 and 54 TFEU must be interpreted as precluding national legislation which enables companies established under national law to convert, but does not allow, in a general manner, companies governed by the law of another MS to convert to companies governed by national law by incorporating such a company.

Articles 49 and 54 TFEU must be interpreted, in the context of cross-border company conversions, as meaning that the host MS is entitled to determine the national law applicable to such operations and thus to apply the provisions of its national law on the conversion of national companies governing the incorporation and functioning of companies, such as the requirements relating to the drawing-up of lists of assets and liabilities and property inventories. However, the principles of equivalence and effectiveness, respectively, preclude the host MS from

- refusing, in relation to cross-border conversions, to record the company which has applied to convert as the ‘predecessor in law’, if such a record is made of the predecessor company in the commercial register for domestic conversions, and

- refusing to take due account, when examining a company’s application for registration, of documents obtained from the authorities of the MS of origin.


88

• Higher Regional Court Nürnberg, 13.2.2012, Case 12 W 2361/11(The Higher Regional Court (OLG) in Nürnberg is one of three appellate courts in civil, family and criminal matters for the State of Bavaria.)

GermanyLuxembourg

Application for registration of cross-border transfer of seat to Germany to the Local Court of Fürth.

V. Relocation of Seat6. Cross-Border Mobility of Companies and EC Law i) OLG

Nürnberg

Sarl GmbH

89

V. Relocation of Seat6. Cross-Border Mobility of Companies and EC Law i) OLG

Nürnberg• Facts:

A Luxembourg limited liability company intended to relocate head office and statutory seat from Luxembourg to Germany and to take the form of a German GmbH. The German local court Fürth refused the registration of the GmbH in the commercial register.

• Judgement:German company law does not allow a relocation of head office and statutory seat under change of legal form. Sec. 4a GmbHG does not mention the transfer to Germany of a company under foreign law in Germany. Sec. 122a et seq UmwG provides for a cross-border merger only. A change of legal form is provided in Sec. 1 (1) No. 4, 190 et seq UmwG only for domestic entities. The 14th EU Company Law Directive has not been adopted. ECJ Cartesio contains requirements for the emigration State but not for the host State. Thus, no possibility for a foreign entity to relocate to Germany.

90

• National Grid Indus

ECJ of 29.11.2011, Case C-371/10, National Grid Indus BV v. Inspecteur van de Belastingdienst Rijnmond (kantoor Rotterdam), IStR 2012, 282

United KingdomNetherlands

Transfer of place of management and control of Dutch National Grid Indus to UK. No p.e. remains in The Netherlands. Immediate taxation of built-in-gains in the assets by Dutch tax authorities in line with freedom of establishment of National Grid Indus BV?

V. Relocation of Seat6. Cross-Border Mobility of Companies and EC Law j) National Grid

Indus

National Grid Indus BV

National Grid Indus BV

Place of management and control shifted to UK

91

V. Relocation of Seat6. Cross-Border Mobility of Companies and EC Law j) National Grid

Indus

• Facts:National Grid Indus (NGI) involved a Dutch resident company that transferred its place of effective management to the U.K. in 2000. At the time of the transfer, NGI held a sterling receivable with built-in gains due to an increase in the exchange rate for the British pound. Under Dutch corporate law, the move to the U.K. did not affect the company’s legal personality. After the move, NGI qualified as a U.K. tax resident under the Netherlands-U.K. tax treaty. NGI ceased to be a Dutch tax resident and the Dutch tax authorities levied an immediate exit charge on the unrealized gains on the company’s assets, i.e. on its currency gains.

• Judgement:ECJ ruled on 29 November 2011 that EU MS, in principle, may impose an exit charge on unrealized gains upon the transfer of a company’s place of effective management to another MS. However, the exit charge infringes the freedom of establishment if it is levied at the time of emigration, without offering the emigrating company the option to request a deferment of tax collection. Two statements of the Court relating to a MS’s ability to charge interest and to require a bank guarantee have caused some confusion.

92

• According to the reasoning of the ECJ in its Überseering-decision every Member State has to acknowledge the legal order of other Member States. The location of its registered office, central administration or principal business constitutes the connecting factor with the legal system of a Member State. A company established properly under the laws of that Member State and exercising the rights granted by the freedom of establishment, has to be recognized by any other Member State.

• The Member State where a company is established and registered is therefore free to apply its own legal principles determining the applicable law for the company. Other Member States (i.e. also the Member State where the central management and control is located) have to recognize that decision. Therefore only the State of incorporation is free to apply the real seat doctrine to companies incorporated under its laws. The state of the head office may apply the real seat doctrine by reference to the laws of the state of incorporation only if the state of incorporation applies the real seat doctrine. NOTE: The real seat doctrine may not prohibit legal entities to leave a Member State by relocating both its head office and its statutory seat to another Member State.

V. Relocation of Seat6. Cross-Border Mobility … k) Scope of application of the

“real seatdoctrine” after the Überseering

decision

93

Recent developments – further restrictions of the real seat doctrine’sscope?

• Regulation No 2157/2001 of 8 October 2001 on the Statute for a European company (SE), OJ L 294, of 10.11.2001, p. 1 requires in its Art. 7 an SE to keep its head office in the State where its registered office is located (see also Art. 64 of the Statute for legal consequences for an SE that does not comply with the obligation or Art. 7). Therefore, an SE may only transfer its registered office and its head office only simultaneously to another Member State. The Statute therefore does not question the real seat doctrine that may still be applied by certain Member States.

• The same is true for an European Cooperative Society (see Art. 6 of the Regulation No 1435/2003 of 22 July 2003 on the Statute for a European Cooperative Society (SCE), OJ L 207, 18.8.2003, p. 1).

• According to Art. 11 para 2 of the pre-draft of a Directive regarding the transfer of seat of companies (a German version was published in ZIP 1997, 1727) the concept of the abovementioned regulations will also be used for that Directive. However, work on proposal of the Commission has been stopped in 2007.

V. Relocation of Seat6. Cross-Border Mobility … l) Recent

developments

94

Simultaneous relocation of statutory seat and head office and its company law and tax law treatment

• Relocation from abroad– Company law treatment

According to settled German case law a relocation of registered office cannot be registered as the corporation has not been formed properly under German company law (see OLG Zweibrücken, decision of 27.6.1990, DB 1990, 1660). Such a company may invoke Art. 49, 54 TFEU to achieve registration maintenance of legal capacity.

– Tax law treatmentA relocation of a company to Germany may result in a capital gains taxation of a German PE, if any, if the identity of the corporation changes in the course of the relocation. In case of a registration of a foreign corporation in the German trade register, i.e. a cross-border conversion (already executed by some registration offices), the legal capacity of the corporation is maintained, no capital gains taxation will take place. Assets which are transferred to Germany (“Verstrickung”) are recorded in the companies tax balance sheet at fmv (sec. 4 (1)7; Sec. 6 (1) No. 5a EStG).

V. Relocation of Seat6. Cross-Border Mobility … m) Relocation from

abroad

95

• Relocation to abroad

– Company law treatment:According to settled case law the transfer of the registered office and head office of a German corporation results in a winding-up of the corporation irrespective whether the new State of residency follows the real seat doctrine or the incorporation doctrine. The decision of the general meeting is deemed to be a decision of winding-up (see, for example, decision of BayObLG of 7.5.1992, GmbHR 1992, 529). The relocating company needs to invoke the ECJ’s principles developed in the Cartesio-decision in order to maintain its legal capacity.

– Tax law treatment: The transfer of a companies registered office and head office results in a taxation of built-in-gains as far as Germany loses the right to tax profits from the alienation of assets of the relocating company, Sec. 12 para 1 KStG. In case of a relocation to a third country, liquidation taxation takes place, Sec. 12 para 3 KStG. All built-in gains are subject to capital gains taxation upon the time of the relocation. The German Federal Tax Court ruled in its decision of 17.7.2007 that Germany does not loose taxing rights upon a transfer of assets to abroad. The decision may render Sec. 12 (1) KStG inapplicable in cases where a company relocates to abroad. Germany has amended its legislation stating that a transfer of an asset to a foreign PE actually results in a loss of taxing right (Sec. 4 para 1 s. 4 EStG)

V. Relocation of Seat6. Cross-Border Mobility … n) Relocation to

abroad

96

• From 1 Jan 2006 the Amendment Directive to the Merger Directive had to be implemented by Member States in domestic law.

• The Amendment Directive covers also the transfer of the registered office. According to the new Art. 10b-d (now: Art. 12-14) of the Merger Directive in its amended version tax deferral credit is granted as far as the assets of the relocation company are still attributed to a PE in the State of former residency.

• Implementation took place (SEStEG) effective as of 1 Jan 2006.

• Note: These provisions do only apply to the transfer of the registered seat of an SE or an SCE. National kinds of companies are not covered. These companies need to invoke the freedom of establishment principle.

V. Relocation of Seat7. Future developments – abolition of “real seat doctrine”?

Part B: Company Restructurings

I. Civil Law and Tax Law Issues of Company Restructurings at a Domestic Level

1. Civil Law Treatment2. Tax Law Treatment

II. Civil Law and Tax Law Issues of Cross-Border Restructurings of Companies

1. Civil Law Treatment2. Tax Law Treatment

III. The European Company Law Statute (SE-Statute)

98

Part B: Company Restructurings


100


1. Civil Law Treatmenta) Issues to be resolved

aa) Protection of the shareholdersbb) Protection of the creditorscc) Employee rights

b) Legal provisions applying to Company Restructurings at domestic levelaa) Community Law frameworkbb) Domestic Civil Law

2. Tax Law Treatment b) Tax Issues to be resolvedc) Tax Law Provisions applying to Company Restructurings

aa) Regulations in EStG / KStGbb) Types of Reorganizations covered by the UmwStG

1. Civil Law Treatmenta) Issues to be resolved

102

I. Civil Law and Tax Law Issues of Company Restructurings at a Domestic Level1. Civil Law Treatment a) Issues to be resolved

aa) Protection of minority shareholders• Conflicting interests may exist:

Minority shareholders majority shareholders• Dilution of the portfolio due to issuing of new shares (relative

interest in the new company decreases)• Economic value of the shares may decrease due to insufficient

consideration (granted on the basis of valuation report) • Countermeasures: legal proceedings according to German

Spruchverfahrensgesetz (SpruchG)

103

I. Civil Law and Tax Law Issues of Company Restructurings at a Domestic Level1. Civil Law Treatment a) Issues to be resolved

bb) Protection of creditors• In case of restructuring with universal succession: old debtor

automatically replaced with new debtor (creditor has no say)• Assets subject to liability may be reduced• Consequence: possibly lower chances to claim the outstanding debt

cc) Employee rights• New contract partner / employer• In case of restructuring without universal succession:

– working contracts have to be individually transferred (Transfer of assets)

– Company worker participation may be endangered:• Transfer of a branch of activity• Fall below threshold values determining duty to implement

worker participation

1. Civil Law Treatment b) Legal Provisions applying to company restructurings at domestic level

105

I. Civil Law and Tax Law Issues of Company Restructurings at a Domestic Level1. Civil Law Treatment b) Legal provisions applying to company restructurings at domestic level

aa) Community Law framework

i) Company Law Directive 2011/35/EU of 5 April 2011concerning mergers of public limited liability companies, OJ L 110 of 29.04.2011, p. 1 replacing Third Council Directive 78/855/EEC of 9 October 1978 concerning mergers of public limited liability companies (OJ L 295 of 20.10.1978, p. 36), as amended by the various Acts of Accession and Directive 2007/63/EC of 13.11.2007

ii) Sixth Council Directive 82/891/EEC of 17 December 1982 concerning the division of public limited liability companies, OJ L 378 of 31.12.1982, p. 47 and Directive 2007/63/EC of 13.11.2007

iii) Council Directive 2001/23/EC of 12 March 2001

on the approximation of the laws of the Member States relating to the safeguarding of employees' rights in the event of transfers of undertakings, businesses or parts of undertakings or businesses, OJ L 82 of 22.03.2001, p. 16 (replacing Directive 77/187/EEC of 14 February 1977)

bb) Domestic Civil Law

UmwG

AktG

GmbHG

MitbestG

DrittelbG

Types of restructurings

Four Types of Restructurings (“Umwandlungen”) according to the German Reorganization Act (UmwG):• Merger • Division• Conversion• Transfer of Property

106

I. Civil Law and Tax Law Issues of Company Restructurings at a Domestic Level1. Civil Law Treatment b) Legal provisions applying to company restructurings at domestic level

1. Civil Law Treatment b) Legal Provisions applying to restructurings at domestic level

Merger

108

I. Civil Law and Tax Law Issues of Company Restructurings at a Domestic Level1. Civil Law Treatment b) Legal provisions applying …bb) Domestic Civil Law MERGER (I)

Types of restructurings: merger (“Verschmelzung”)

Transferring entity(ies) transfers all its assets to- an already existing entity (“Verschmelzung durch Aufnahme”)- a newly formed entity (“Verschmelzung zur Neugründung”).

Dissolution of the transferring company(ies) without liquidation.

Shareholding/Interest in the transferring company is eliminated and is replaced by a shareholding in the receiving company.

109

Merger by Acquisition

Pre-Merger Situation SH A SH B

SH BSH APost-Merger Situation

Corporation X

Corporation Y

Corporation X(operating also the business

of former Corp. Y)

110

Merger by forming a new entity

Pre-Merger Situation SH A SH B

SH BSH APost-Merger Situation

Corporation X

Corporation Y

Corporation Z(operating the businesses of

former Corp. Y and former Corp. X)

111

I. Civil Law and Tax Law Issues of Company Restructurings at a Domestic Level1. Civil Law Treatment b) Legal provisions applying …bb) Domestic Civil Law MERGER (IV)

Procedure:

• Merger Contract, sec. 4 UmwG

• Key features pursuant to sec. 5 UmwG

• Merger Report, sec. 8 UmwG, Art. 9 Merger Directive (2011/35/EU)

• Audit of the Merger, sec. 9 et seq. UmwG, Art. 10 Merger Directive

• Shareholders resolution, sec. 13 UmwG, Art. 7 Merger Directive

• Registration, Publication, Art. 18 Merger Directive

• Legal consequences of registration, sec. 20 UmwG, Art. 19 Merger Directive

112

I. Civil Law and Tax Law Issues of Company Restructurings at a Domestic Level1. Civil Law Treatment b) Legal provisions applying …bb) Domestic Civil Law MERGER (V)

Merger Contract, sec. 4 UmwG To be signed by the representative bodies• To be notarized• Needs approval (previously or subsequently to the signature)

of the shareholders of the entities involved in order to come into effect

Key features pursuant to sec. 5 UmwG• Name or business name and the seat of each of the entities

involved• Terms agreed regarding the transfer of assets as a whole and the

consideration in form of interest in the receiving company • The ratio of exchange of interests and, where relevant, the

consideration in cash or information about the membership in the receiving company

• Effective date of the merger

113

I. Civil Law and Tax Law Issues of Company Restructurings at a Domestic Level1. Civil Law Treatment b) Legal provisions applying …bb) Domestic Civil Law MERGER (VI)

Merger Report: sec. 8 UmwG, Art. 9 Merger Directive (2011/35/EU)

• To be drafted by the representative bodies• Aims at providing information about the merger to the shareholders• Shall explain the merger in detail• Shall especially address the ratio of the exchange of shares • Not necessary if shareholders waive it or if all shares in the

transferring company are held by the receiving company (upstream merger)

114

I. Civil Law and Tax Law Issues of Company Restructurings at a Domestic Level1. Civil Law Treatment b) Legal provisions applying …bb) Domestic Civil Law MERGER (VII)

Audit of the Merger: sec. 9 et seq. UmwG, Art. 10 Merger Directive• Independent auditors must examine the merger• Auditors are appointed by the representative bodies or upon application, by

the court where one of the involved entities has its seat• Audit report has to address (sec. 12 UmwG):

- whether the exchange ratio is appropriate- whether a possible cash consideration is sufficient- which methods were used for examination of appropriateness of the consideration

• From 2009 onwards: Shareholders may waive the audit (Directive 2007/63/EC of 13 November 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 of 17.11.2007, p. 47)

115

I. Civil Law and Tax Law Issues of Company Restructurings at a Domestic Level1. Civil Law Treatment b) Legal provisions applying …bb) Domestic Civil Law MERGER (VIII)

Shareholders’ resolution• Shareholders’ resolution has to approve the merger contract• Three-quarter majority of the shareholder meeting needed• Approval must be certified by a notary

Registration, Publication, Art. 18 Merger Directive• Representative bodies of the entities involved may apply for

registration in the commercial register where the entities are registered, Sec. 16 UmwG

• Prior to the registration of the merger in the register of the receiving entity the registration in the commercial register of the transferring entity has to take place, Sec. 19 UmwG

• Publication of the registration, Sec. 19 (3) UmwG

116

I. Civil Law and Tax Law Issues of Company Restructurings at a Domestic Level1. Civil Law Treatment b) Legal provisions applying …bb) Domestic Civil Law MERGER (IX)

Legal consequences of registration, sec. 20 UmwG, Art. 19 Merger Directive:

• Transfer of the assets as a whole takes effect (“universal succession”)

• The transferring company ceases to exist • The shareholders of the transferring company become shareholder

of the receiving company• Rights and obligations of third parties are transferred to the

receiving company


Division

118

I. Civil Law and Tax Law Issues of Company Restructurings at a Domestic Level1. Civil Law Treatment b) Legal provisions applying …bb) Domestic Civil Law DIVISION (I)

Types of restructurings: Division (“Spaltung“)

(1) Split-up (“Aufspaltung“) Sec. 123 (1) UmwG, Art. 1, 2 (1), 21 (1) Division Directive (82/891/EEC)

Transferring entity divides up its assets and transfers these assets to two or more

– already existing entities (“Aufspaltung zur Aufnahme“) and/or– newly formed entities (“Aufspaltung zur Neugründung“).

Dissolution of the transferring company without winding up.

119

Post-Division Situation

Split-up

Pre-Division Situation SH A SH B

SH BSH A

Corporation X

Corporation Z

Corporation Y

120

I. Civil Law and Tax Law Issues of Company Restructurings at a Domestic Level1. Civil Law Treatment b) Legal provisions applying …bb) Domestic Civil Law DIVISION (III)

(2) Split-off (“Abspaltung”) Sec. 123 (2) UmwG, Art. 25 Division Directive (82/891/EEC)

Transferring entity divides up its assets and transfers only one or more parts of it to

– already existing entities (“Aufspaltung zur Aufnahme”) and/or– newly formed entities (“Aufspaltung zur Neugründung“).

The receiving entity issues new shares to the shareholder of the transferring entity.

The transferring company continues to exist.

121


Split-off

Pre-Division Situation SH A SH B

SH BSH A

Corporation Y

Corporation Z

Corporation Y

122

I. Civil Law and Tax Law Issues of Company Restructurings at a Domestic Level1. Civil Law Treatment b) Legal provisions applying …bb) Domestic Civil Law DIVISION (V)

(3) Hive down (“Ausgliederung”) Sec. 123 (3) UmwG, no match in Division Directive (82/891/EEC)

Transferring entity divides up its assets and transfers only one or more parts of it to

– already existing entities (“Aufspaltung zur Aufnahme”) and/or– newly formed entities (“Aufspaltung zur Neugründung“).

The receiving entity issues new shares to the transferring entity.

The transferring company continues to exist.

123


Hive Down

Pre-Division Situation SH A

SH A

Corporation X

Corporation Y

Corporation X

124

I. Civil Law and Tax Law Issues of Company Restructurings at a Domestic Level1. Civil Law Treatment b) Legal provisions applying …bb) Domestic Civil Law DIVISION (VII)

Procedure of a Division• No differences to the procedure for a merger• Many of the provisions governing a merger apply by way of

reference • Conclusion of a division and takeover contract, Sec. 126 UmwG (or

plan in case of a division by forming a new entity) -> must determine which assets are to be transferred to which entity or remain in the transferring entity (Art. 3 Division Directive)

• Division report, Sec. 127 UmwG, Art. 7 Division Directive• Audit requirement (exception: hive down), Sec. 125 UmwG; from

2009 on shareholder may waive the audit• Approval of the shareholders’ meetings• Registration in the register and publication

125

I. Civil Law and Tax Law Issues of Company Restructurings at a Domestic Level1. Civil Law Treatment b) Legal provisions applying …bb) Domestic Civil Law DIVISION (VIII)

Legal consequences of the registration of a Division • The transfer of assets as a whole takes effect (“universal

succession”)• The transferring entity ceases to exist in case of a split-up• The interest in the receiving company is issued to its new owner

(shareholder of the transferring company or transferring company itself respectively)


Conversion

127

I. Civil Law and Tax Law Issues of Company Restructurings at a Domestic Level1. Civil Law Treatment b) Legal provisions applying …bb) Domestic Civil Law CONVERSION

Types of restructurings: Conversion (“Formwechsel”)

• The entity continues to exist but changes its legal form Identity before and after the conversion

• No transfer of property to another entity


Transfer of Property

129

I. Civil Law and Tax Law Issues of Company Restructurings at a Domestic Level1. Civil Law Treatment b) Legal provisions applying …bb) Domestic Civil Law Transfer of Property

Types of restructurings: Transfer of property (“Vermögensübertragung”)

Applicable in cases where a capital company transfers property to a public entity or property is transferred between insurance companies where one of the companies is a mutual or a public insurance company. No possibility to issue shares or a participation in the receiving company in consideration for the shares issued.


Contribution of Assets

131

I. Civil Law and Tax Law Issues of Company Restructurings at a Domestic Level1. Civil Law Treatment b) Legal provisions applying …bb) Domestic Civil Law Contribution of assets

Types of restructurings: Contribution of assets

Can be effected by way of

– a split-up, split-off or a hive-down resulting in a universal succession

– a contribution of assets by way of transfer of single assets– major importance in practice for reorganizations as especially in

cross-border situations the only feasible way to effect a tax neutral reorganization

– the exchange of shares is one form of a contribution of assets


Certain Aspects of Interest

133

I. Civil Law and Tax Law Issues of Company Restructurings at a Domestic Level1. Civil Law Treatment b) Legal provisions applying …bb) Domestic Civil Law

Certain aspects of interest: Protection of minority shareholders• Legitimate claim for cash compensation of the shareholders in case of the

change of the legal form of shares (e.g. GmbH converted into AG) - (sec. 29-31, 34, 36 (1) (1), 125, 135 (1) (1), 176 (1), 177 (1) 207-212 UmwG). A cash compensation offer must already be included in the underlying transformation contract (e.g. merger contract) and is subject to legal revision (sec. 34, 212 UmwG). Prerequisite for the legitimate claim is the raise of objections in the general meeting of the shareholders against the transformation resolution.

• Shareholder of transferring company may claim cash compensation if the conversion ratio of the shares is considered to be to low (sec. 15, 125, 176 (1) 177 (1) 196 UmwG).

• Owner of rights in transferring company must receive comparable rights in acquiring company (sec. 23, 36 (1) (1), 125, 176 (1) 177 (1), 205, 206 UmwG).

• Members of management may be hold liable for damages to shareholders due to the transformation (sec. 25-27, 36 (1), 125, 176 (1), 177 (1) 205, 206 UmwG).

134


Further factors to pay attention to• Information duties (minimum content of the transformation contract (sec. 5 (1), 126 (1), 194

UmwG); Publication duties and duties to provide access to the contracts for information and revision purposes (sec. 42, 47, 63, 216, 251 UmwG); Transformation report has to be drawn up (sec. 8, 127, 192 UmwG); Information duties concern: transformation contract, exchange ratio of the shares, amount of the cash compensation); sometimes the last three balance sheets have to be made accessible to the shareholders (sec. 49 (2), 63 (1) (2) UmwG).

• Transformation contract has to be revised by independent auditors sec. 12, 30 UmwG (from 2009 on shareholders may waive the audit, see above).

• Majority of ¾ for the transformation resolution in the general meeting of the shareholders required (sec. 50, 65 UmwG).

• Only objecting shareholders may claim cash compensation.• If the exchange ratio is not proportionate, shareholders may have the right to a claim cash

supplementary compensation.Legal protection: Legal proceedings according to sec. 246, 249 AktG (Anfechtungs- bzw. Nichtigkeitsklage) result in a registration ban for the term of the proceedings.

135


• Protection of creditors (Art. 12 Division Directive)In case of a merger, the provisions concerning the company foundation report as well as specific foundation rules (sec. 58 (1), 75 (1), 67 UmwG) are applicable.

• Creditor may demand a security deposit from debtor, if the circumstances suggest the endangerment of repayment (sec. 22, 209 UmwG).

Members of management of the transferring company may be hold jointly and severally liable (sec. 25, 205 UmwG).

Members of management of the acquiring company are as well obligated to indemnification payments in case of damages (sec. 27 UmwG).

Contribution in kind is subject to audit.

Division: jointly and severally liability of the involved companies.

136


Employee rights

Working conditions

Business transfer, sec. 613a BGB (legal background: Directive 2001/23/EC of 12 March 2001 on the approximation of the laws of the Member States relating to the safeguarding of employees’ rights in the event of transfers of undertakings, businesses or parts of undertakings or businesses, OJ L 82 of 22.3.2001 p. 16):

• Transfer of employment contracts or objection to it respectively• Collective agreement applicable prior to the transfer remains applicable

until the date of expiration or termination• Liability of the former employee for wages and salaries• Information and participation rights of the works council

137


Workers’ participation

German system of worker’s participation consists of two elements: The worker’s participation at the level of the company and at the level of the (domestic) branches of a company (“betriebliche Mitbestimmung”).

Under Germany’s “One-Third Workers’ Participation Act” and the “Participation Act 1976” German stock corporations (Aktiengesellschaften), limited liability companies (Gesellschaften mit beschränkter Haftung) and limited partnerships with share capital (Kommanditgesellschaften auf Aktien) must grant to their employees various participation rights, notably on their supervisory board (Aufsichtsrat), if the size of the individual company or group of company in terms of the number of employees is greater than laid down in the relevant act.

According to Sec. 21a German Works Constitution Act (Betriebsverfassungsgesetz, BetrVG) the works council continues to exists in case of the division of an undertaking (see also Art. 6 of the Directive 2001/23/EC of 12 March 2001).

Sec. 325 UmwG: In case of a split-off or a hive-down the provisions governing the co-determination at the company’s level basically remain applicable for a period of 5 years for the transferring entity unless the relevant number of workers at the level of the transferring company falls below a minimum number of ¼ of the minimum number required by the Co-Determination Act or the One-Third Workers’ Participation Act.

Sec. 97-99 AktG: The composition of the supervisory board has to be adapted to the new workers participation regime.

2. Tax Law Treatment –Tax Issues to be resolved

139

I. Civil Law and Tax Law Issues of Company Restructurings at a Domestic Level2. Tax Law Treatment a) Tax issues to be resolved

a) Tax Issues to be resolved

Taxation of so-called “hidden reserves” (built-in gains)

Hidden reserves: Deferred taxation of capital gains that are not yet realizedRealization principle leads to deferral of gainsAlienation of assets is one form of realization of gainsReorganizations include the transfer of assets to another entityReorganization Tax Act aims at a further deferral of taxation by continuing/maintaining book values of the transferred assetsOnly certain cases of a transfer of assets shall enjoy such preferential tax treatment as the realization principle shall not impede from an economic viewpoint reasonable company restructurings. A mere alienation of assets or shares shall not benefit. Therefore the transfer of assets that form an undertaking or a branch of activity is required.For 2002 and 2003 the alienation of shares is tax exempt according to sec. 8b para 2 KStG; as from 2004 the exemption amounts to 95%.

140


Tax loss utilization (loss carry-forward) / interest-carry forward (I)

Carry forward of tax losses are generally directly linked to the entity that has incurred the losses.

A mere transfer of assets may therefore not result in a transfer of losses of the transferring entity to the receiving entity.

A restructuring resulting in universal succession in all rights of the transferring company (i.e. merger and division) does not result in a transfer of losses.

141


Tax loss utilization (loss carry-forward) / interest-carry forward (II)

Transfer of shareholding in loss-making companies may trigger forfeiture of loss carry forwards of that entity according to sec. 8c KStG.

A direct or indirect acquisition of more than 25% up to 50% of shares in a companies triggers a pro-rata forfeiture of loss carry forwards. A transfer of more than 50% results in a forfeiture of the entire loss-carry forwards.

Exception for ailing companies has recently been qualified as illegal state aid by the Commission. Germany announced to litigate against the Commission’s decisions.

142


Tax loss utilization (loss carry-forward) / interest-carry forward (III)

Further exception exists for intra-group transactions (as of 1 January 2010).

To the extent built-in-gains in the assets of the loss-making company exist, loss carry forwards will not forfeited upon a change of ownership that would otherwise be deemed harmful (as of 1 January 2010).

Change-in-ownership-rule also affects interest carry-forward.

143


Real estate transfer tax

A transfer of assets in the course of a restructuring may include real estate.

Real estate transfer tax is generally levied on the transfer of real estate to another person or entity.

Basically a merger, division and the transfer of assets fulfill these criteria.

As from 1 Jan. 2010, an exception for certain intra-group transfers applies (Sec. 6a RETTC).

2. Tax Law Treatment – Regulations in EStG / KStG

145

I. Civil Law and Tax Law Issues of Company Restructurings at a Domestic Level2. Tax Law Treatment b) Regulations in EStG / KStG

Tax Law Provisions applying to Company Restructurings

Regulations in EStG / KStG

Exchange of shares:

– Leads to realization of hidden reserves and is subject to tax – sec. 6 para. 6 EStG in conjunction with sec. 17 para. 1 EStG

half income method, if >1% share is transferred– sec. 8b para. 2, 3 KStG: 95 % tax free for corporations

2. Tax Law Treatment – UmwStG

147

c) Types of reorganizations covered by the UmwStG

Reorganisations regulated in UmwStG

with Transfer of assets

withoutTransfer of assets

Single sucession Universal sucession

Hive-down Merger Split-up /Split-off

Conversion

2. Tax Law Treatment – UmwStG, Merger

149

I. Civil Law and Tax Law Issues of Company Restructurings at a Domestic Level2. Tax Law Treatment c) UmwStG

aa) Merger

• From a corporation to a partnership: sec. 3 – 10, 18 UmwStG• From a corporation to a corporation: sec. 11 – 13, 19 UmwStG • From a partnership to a corporation: sec. 20 – 23 UmwStG• From a partnership to a partnership: sec. 24 UmwStG

150

• Merger from a corporation to a partnershipTransferring Company:

• Closing tax balance sheet: Fair market value (Sec. 3 Para 1 UmwStG) or - under the conditions of Sec. 3 Para 2 UmwStG - lower value down to book value.

• Duty to take up fair market value if:– not assured that hidden reserves are subsequently subject to

corporation tax in the hand of the acquiring company– Germany looses its right to tax the hidden reserves– consideration in cash is granted.

• Possible gain is subject to trade tax and corporate income tax.• Deemed distribution of reserves to shareholders (§ 7 UmwStG).• Carry forward of tax losses may be offset with income from

(discretionary) step-up. Remaining tax losses cannot be transferred to acquiring partnership (sec. 4 para. 2 UmwStG).

I. Civil Law and Tax Law Issues of Company Restructurings at a Domestic Level2. Tax Law Treatment c) UmwStG (II)

151

Acquiring Partnership• Must take up the transferred assets at the values shown in the

closing tax balance sheet of the transferring company.• Transfer gain / loss: amount of the difference between the value at

which the assets transferred are to be taken up and the book value of the shares in the transferring company.

• Taxation of transfer gain:– If interest in receiving partnership is held by a corporation: 95%

tax free (sec. 4 para. 7 sentence 1 UmwStG)– If interest in receiving partnership is held as business asset of

individual person: half income method (sec. 4 para. 7 sentence 2 UmwStG).

• Taxation of transfer loss: treatment depending on origin of transfer loss; generally not taken into account for corporations and 50% deductible for individuals.

I. Civil Law and Tax Law Issues of Company Restructurings at a Domestic Level2. Tax Law Treatment c) UmwStG (III)

152

Merger of a corporation with another corporation:

• regulations comparable to merger of a corporation with a partnership

• Transferring Company:• Book values may be carried over under certain conditions.

Duty to take up higher values if:– not assured that hidden reserves are subsequently

subject to corporation tax in the hand of the acquiring company

– Germany looses its right to tax the hidden reserves– consideration in cash is granted

• Remaining tax losses carried forward cannot be transferred to acquiring company (sec. 12 para. 3 UmwStG)

I. Civil Law and Tax Law Issues of Company Restructurings at a Domestic Level2. Tax Law Treatment c) UmwStG (IV)

2. Tax Law Treatment – UmwStG, Division

154

bb) Division: Split-up and Split-off

• from a corporation to a partnership: sec. 16, 18 UmwStG

• from a corporation to a corporation: sec. 15, 19 UmwStG

• from a partnership to corporation: sec. 20 - 23 UmwStG

• from a partnership to a partnership: sec. 24 UmwStG

I. Civil Law and Tax Law Issues of Company Restructurings at a Domestic Level2. Tax Law Treatment c) UmwStG (V)

155

Split-up and Split-off from a corporation into a corporation

• Prerequisites for preferential tax treatment:- Transfer of a branch of activity - Remaining business unit must also be branch of activity

• Transferring entity and acquiring company- Reference to sec. 11 – 13 UmwStG- Tax consequences corresponding to merger case- Anti-abuse rule in sec. 15 para. 2 UmwStG

I. Civil Law and Tax Law Issues of Company Restructurings at a Domestic Level2. Tax Law Treatment c) UmwStG (VI)

156

• Split-up and Split-off from a partnership to corporation(s)– Tax neutral transfer possible under the conditions of sec. 20

Para 1, 2 UmwStG

• Hive-down– from a corporation to a partnership: sec. 24 UmwStG– from a corporation to a corporation: sec. 20 - 23 UmwStG – from a partnership to a corporation: sec. 20 – 23 UmwStG– from a partnership to a partnership: sec. 24 UmwStG

I. Civil Law and Tax Law Issues of Company Restructurings at a Domestic Level2. Tax Law Treatment c) UmwStG (VII)

2. Tax Law Treatment –UmwStG, Conversion

158

cc) Conversion

• from a corporation to a partnership: sec. 3 - 8, 10, 18 UmwStG

• from a corporation to a corporation: no tax relevance • from a partnership to a corporation: sec. 20 - 23, 25 UmwStG

• from a partnership to a partnership: no tax relevance

I. Civil Law and Tax Law Issues of Company Restructurings at a Domestic Level2. Tax Law Treatment c) UmwStG (VIII)


160


1. Civil Law Treatmenta) Special Issues of Cross-Border Reorganizations

aa) Protection of the shareholdersbb) Protection of the creditorscc) Employee rights

b) The European legal framework for cross-border mergers and divisionsaa) Community Law frameworkbb) Domestic Civil Law

2. Tax Law Treatment b) Tax Issues to be resolvedc) Tax Law Provisions applying to Company Restructurings

aa) Regulations in EStG / KStGbb) Types of reorganizations covered by the UmwStG

1. Civil Law Treatment –a) Special Issues of Cross-Border Reorganizations

162

II. Civil Law and Tax Law Issues of Cross-Border Restructurings of Companies1. Civil Law Treatment a) Special issues of cross-border-reorganizations

a) Special issues of cross-border-reorganizations: • Transferring and receiving companies belong to different jurisdictions• Cross-Border Merger Directive of 26 October 2005 (2005/56/EC)

aa) Minority Shareholders

• Will be faced by a different legal entity from a foreign jurisdiction• Enforcement of shareholders’ rights requires legal action before a

foreign court• Language can be a problem• Lack of familiarity with a foreign legal system

163

bb) Creditors

• Domestic debtor will be replaced by a foreign debtor• Enforcement of claims requires legal action before a foreign court• Different capitalization requirements in the various countries

cc) Employees

• Different levels of protection of employees • Directive 2001/86/EC of 8 October 2001 supplementing the Statute for a

European Company with regard to the involvement of employees provide for a solution for conflicting provisions on employee rights in cross-border situations

• The Cross-Border Merger Directive contains similar provisions

II. Civil Law and Tax Law Issues of Cross-Border Restructurings of Companies1. Civil Law Treatment a) Special issues of cross-border-reorganizations

1. Civil Law Treatment – b) The European Legal Framework

165

b) The European legal framework for cross-border mergers and divisions

aa) Goldman-Report

• “Draft Convention on the international merger of sociétés anonymes and Report on the Draft”

• submitted to the Council by the Commission on 29 June 1973, Bulletin of the European Communities Supplement 13/73

II. Civil Law and Tax Law Issues of Cross-Border Restructurings of Companies1. Civil Law Treatment b) The European legal framework

aa) Goldman-Report

166

bb) Draft 10th Company Law Directive

• Proposal of a 10th Company Law Directive on cross-border merger of companies of 14 December 1984, OJ C 23 of 25.1.1985, p. 11

• Scope: Only public limited companies • Status: Withdrawn in 2001 due to disagreement on the question of

worker’s participation


bb) Draft 10th Company Law Directive

167

cc) The Cross-Border Merger Directive of 26 October 2005

• Economic need: There is an increasing need today in the Community of twenty-seven for cooperation between companies from different Member States, as there will be in a future enlarged Union, not forgetting the EFTA countries.

• Purpose: to fill a significant gap in company law left by the need to facilitate cross‑border mergers of commercial companies without the national laws governing them – as a rule the laws of the countries where their head offices are situated – forming an obstacle.

• The aim: is to approximate the cross‑border merger procedure with the domestic merger procedures with which operators are already familiar through use.


cc) The Cross-Border Merger Directive

168

• Implementation: “All companies, whether they be public limited liability companies or any other type of company with share capital, must have at their disposal a suitable legal instrument enabling them to carry out cross‑border mergers under the most favourable conditions. The costs of such an operation must therefore be reduced, while guaranteeing the requisite legal certainty and enabling as many companies as possible to benefit. The scope of the Directive is therefore drawn in such a way as to cover above all small and medium‑sized enterprises, which stand to benefit because of their smaller size and lower capitalization compared with large enterprises and for which, for the same reasons, the European company Statute does not provide a satisfactory solution.”

• Scope: All companies with share capital (aimed primarily at companies which are not interested in forming a SE).



169

Article 2:For the purposes of this Directive:1) “limited liability company”, hereinafter referred to as “company”,

means: (a) a company as referred to in Article 1 of Directive 68/151/EEC, or(b) a company with share capital and having legal personality,

possessing separate assets which alone serve to cover its debts and subject under the national law governing it to conditions concerning guarantees such as are provided for by Directive 68/151/EEC for the protection of the interests of members and others;



170

II. Civil Law and Tax Law Issues of Cross-Border Restructurings of Companies1. Civil Law Treatment b) The European legal framework cc) The Cross-Border Merger Directivedd) Cross-Border Divisions

2) "merger" means an operation whereby: (a) one or more companies, on being dissolved without going into liquidation, transfer all

their assets and liabilities to another existing company ‑ the acquiring company ‑ in exchange for the issue to their shareholders of securities or shares representing the capital of that other company and, if applicable, a cash payment not exceeding 10% of the nominal value, or, in the absence of a nominal value, of the accounting par value of those securities or shares; or

(b) two or more companies, on being dissolved without going into liquidation, transfer all their assets and liabilities to a company that they form ‑ the new company ‑ in exchange for the issue to their shareholders of securities or shares representing the capital of that new company and, if applicable, a cash payment not exceeding 10% of the nominal value, or in the absence of a nominal value, of the accounting par value of those securities or shares; or

(c) a company, on being dissolved without going into liquidation, transfers all its assets and liabilities to the company holding all the securities or shares representing its capital;

dd) No EU Directive exists for cross-border divisions

2. Tax Law Treatment –Tax issues arising for cross-border restructurings

172

II. Civil Law and Tax Law Issues of Cross-Border Restructurings of Companies2. Tax Law Treatment a) Tax issues arising for cross-border

restructurings

a) Tax issues arising for cross-border restructurings Transferring and receiving company belong to different tax jurisdictions• State of transferring company may loose its subject of taxation• Termination of unlimited tax liability• Potentially loss of taxing right in case of a transfer of assets to

abroad• Solution provided by Directive 2009/133/EC (formerly: Directive

90/434/EEC): Deferral of taxation of built-in-gains based on taxation of Permanent Establishment (PE)

173

Post-merger situation

Pre-merger situation

SH X

Corporation A Corporation B

BORDER

SH Y

BORDER

SH X

Corporation B

Formerly: Corp. A

Now: PE

SH Y

2. Tax Law Treatment –The European tax framework for cross-border mergers

175

II. Civil Law and Tax Law Issues of Cross-Border Restructurings of Companies2. Tax Law Treatment b) The European tax framework- The Tax Merger Directive 2009/133/EC (I)

b) The European tax framework for cross-border mergersThe Tax Directive 2009/133/EG regarding cross-border reorganizations• Economic need: mergers, divisions, transfers of assets and exchanges of shares

concerning companies of different Member States may be necessary in order to create within the Community conditions analogous to those of an internal market and in order thus to ensure the establishment and effective functioning of the common market.

• Purpose: such operations ought not to be hampered by restrictions, disadvantages or distortions arising in particular from the tax provisions of the Member States; whereas to that end it is necessary to introduce with respect to such operations tax rules which are neutral from the point of view of competition, 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.

• The aim: an extension at the Community level of the systems presently in force in the Member States, since differences between these systems tend to produce distortions; whereas only a common tax system is able to provide a satisfactory solution in this respect.

176

Objective scope• Mergers • Divisions • Partial Divisions,• Transfer of Assets• Exchanges of Shares

Concerning companies of different Member States

• Transfer of the registered office of an SE or SCE

II. Civil Law and Tax Law Issues of Cross-Border Restructurings of Companies2. Tax Law Treatment b) The European tax framework- The Tax Merger Directive 2009/133/EC (II)

177

Article 1:

“Each Member State shall apply this Directive to the following:

(a) mergers, divisions, partial divisions, transfers of assets and exchanges of shares in which companies from two or more Member States are involved,

(b) transfers of the registered office from one Member State to another Member State of European companies (Societas Europaea or SE), as established in Council Regulation (EC) No 2157/2001 of 8 October 2001, on the statute for a European Company (SE) (1), and European Cooperative Societies (SCE), as established in Council Regulation (EC) No 1435/2003 of 22 July 2003 on the Statute for a European Cooperative Society (SCE)”

II. Civil Law and Tax Law Issues of Cross-Border Restructurings of Companies2. Tax Law Treatment b) The European tax framework- The Tax Merger Directive 2009/133/EC (III)

178

Article 2:

For the purposes of this Directive: (a) ‘merger’ shall mean an operation whereby: — one or more companies, on being dissolved without going into liquidation, transfer all their assets and liabilities to another existing company in exchange for the issue to their shareholders of securities representing the capital of that other company, and, if applicable, a cash payment not exceeding 10 % of the nominal value, or, in the absence of a nominal value, of the accounting par value of those securities, — two or more companies, on being dissolved without going into liquidation, transfer all their assets and liabilities to a company that they form, in exchange for the issue to their shareholders of securities representing the capital of that new company, and, if applicable, a cash payment not exceeding 10 % of the nominal value, or in the absence of a nominal value, of the accounting par value of those securities, — a company, on being dissolved without going into liquidation, transfers all its assets and liabilities to the company holding all the securities representing its capital;

(b) ‘division’ shall mean 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, and, if applicable, a cash payment not exceeding 10 % of the nominal value or, in the absence of a nominal value, of the accounting par value of those securities;

II. Civil Law and Tax Law Issues of Cross-Border Restructurings of Companies2. Tax Law Treatment b) The European tax framework- The Tax Merger Directive 2009/133/EC (IV)

179

Article 2:

(b)(a) ‘partial division’ shall mean an operation whereby a company transfers, without being dissolved, one or more branches of activity, to one or more existing or new companies, leaving at least one branch of activity in the transferring company, in exchange for the pro-rata issue to its shareholders of securities representing the capital of the companies receiving the assets and liabilities, and, if applicable, a cash payment not exceeding 10 % of the nominal value or, in the absence of a nominal value, of the accounting par value of those securities;(c) ‘transfer of assets’ shall mean 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; (d) ‘exchange of shares’ shall mean 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 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 or, in the absence of a nominal value, of the accounting par value of the securities issued in exchange. (j) ‘transfer of the registered office’ shall mean an operation whereby an SE or an SCE, without winding up or creating a new legal person, transfers its registered office from one Member State to another Member State.

II. Civil Law and Tax Law Issues of Cross-Border Restructurings of Companies2. Tax Law Treatment b) The European tax framework- The Tax Merger Directive 2009/133/EC (V)

180

Personal scope:

Only forms of companies • that are mentioned in the Annex of the Directive, • that are, according to the tax law of a Member State or a Double Tax

Treaty, resident in a Member State and• that are subject to a corporate tax as mentioned in the Directive.

II. Civil Law and Tax Law Issues of Cross-Border Restructurings of Companies2. Tax Law Treatment b) The European tax framework- The Tax Merger Directive 2009/133/EC (VI)

181

Article 2:

• (e) ‘transferring company’ shall mean the company transferring its assets and liabilities or transferring all or one or more branches of its activity;

• (f) ‘receiving company’ shall mean the company receiving the assets and liabilities or all or one or more branches of the activity of the transferring company;

• (g) ‘acquired company’ shall mean the company in which a holding is acquired by another company by means of an exchange of securities;

• (h) ‘acquiring company’ shall mean the company which acquires a holding by means of an exchange of securities;

• (i) ‘branch of activity’ shall mean 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.

II. Civil Law and Tax Law Issues of Cross-Border Restructurings of Companies2. Tax Law Treatment b) The European tax framework- The Tax Merger Directive 2009/133/EC (VII)

182

Technique:

Mergers, divisions, partial divisions or transfers of assets normally result either in the transformation of the transferring company into a permanent establishment of the company receiving the assets or in the assets becoming connected with a permanent establishment of the latter company. The same is true for companies relocating its statutory seat to abroadDeferral of the taxation of the capital gains relating to the assets transferred until their actual disposal, applied to such of those assets as are transferred to a permanent establishment, permits exemption from taxation of the corresponding capital gains, while at the same time ensuring their ultimate taxation by the State of the transferring company at the date of their disposal.

II. Civil Law and Tax Law Issues of Cross-Border Restructurings of Companies2. Tax Law Treatment b) The European tax framework-The Tax Merger Directive 2009/133/EC (VIII)

183

Art. 4 para. 1:

1. A merger, division or partial division shall not give rise to any taxation of capital gains calculated by reference to the difference between the real values of the assets and liabilities transferred and their values for tax purposes.

For the purpose of this Article the following definitions shall apply:(a) ‘value for tax purposes’: 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, division or partial division but independently of it;

(b) ‘transferred assets and liabilities’: those assets and liabilities of the transferring company which, in consequence of the merger, division or partial division, 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.

2. [… (transparent entities)]

II. Civil Law and Tax Law Issues of Cross-Border Restructurings of Companies2. Tax Law Treatment b) The European tax framework- The Tax Merger Directive 2009/133/EC (IX)

184

Art. 4 para. 1:

3. Paragraphs 1 and 2 shall apply only if the receiving company computes any new depreciation and any gains or losses in respect of the assets and liabilities transferred according to the rules that would have applied to the transferring company or companies if the merger, division or partial division had not taken place.

4. Where, under the laws of the Member State of the transferring company, the receiving company is entitled to have any new depreciation or any gains or losses in respect of the assets and liabilities transferred computed on a basis different from that set out in paragraph 3, paragraph 1 shall not apply to the assets and liabilities in respect of which that option is exercised.

Art. 6:Losses: If Member State would apply provisions in domestic cases allowing the receiving company to take over the losses of the transferring company which had not yet been exhausted for tax purposes, it shall extend those provisions to cover the take-over of such losses by the receiving company's permanent establishments situated within its territory.

II. Civil Law and Tax Law Issues of Cross-Border Restructurings of Companies2. Tax Law Treatment b) The European tax framework- The Tax Merger Directive 2009/133/EC (X)

2. Tax Law Treatment –Implementation of the EC Tax Directive into Domestic Law

186

II. Civil Law and Tax Law Issues of Cross-Border Restructurings of Companies2. Tax Law Treatment c) Implementation of the EC Tax Merger Directive

c) Implementation of the EC Tax Directive into Domestic Law

aa) Implementation of a Directive Any EU Directive requires implementation:

Art. 288 (2) TFEU: A regulation shall have general application. It shall be binding in its entirety and directly applicable in all Member States.

Art. 288 (3) TFEU: A directive shall be binding, as to the result to be achieved, upon each Member State to which it is addressed, but shall leave to the national authorities the choice of form and methods.

187

bb) Time requirements1.1.1992: Implementation of Directive 90/434/EEC, i.e. the merger, division, transfer of assets and exchanges of shares.

1.1.2006: Implementation of Directive 2005/19/EC of 17 January 2005 amending Directive 90/434/EEC 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 of 4.3.2005, p. 19, as far as the Directive contains SE and SCE related amendments. That are: – Transfer of registered office of an SE or SCE– Inclusion of the SE and SCE in the scope of the Merger Directive

1.1.2007: Implementation of the following features:– The “split-off” as a new operation covered by the Directive– Inclusion of further forms of companies in the scope of the Directive– Clarification, that the Directive also covers the transformation of a PE to a subsidiary– Forms of companies that are subject to corporation tax in the state of incorporation but considered as fiscally

transparent entities by other MS will also be covered by the Directive.– Further acquisition of shares exceeding a 50% shareholding in a subsidiary by way of a share-for-share deal.


188

cc) Consequences of an untimely or incorrect or incomplete implementation

i) Interpretation of national law in conformity to a directiveA national court has the obligation to interpret and to apply the legislation adopted for the implementation of a directive in conformity with the directive (“v. Colson and Kamann”)No interpretation contra legem (see “Pfeiffer”)An individual may not rely on a directive in order to claim rights against another individual (see “Faccini Dori”)

leading cases: - v. Colson and Kamann (ECJ of 10.4.1984, C-14/83, ECR 1984, p. 1891)- Faccini Dori (ECJ of 14 July 1994, C-91/92, ECR 1994, p. I-3325)- Pfeiffer (ECJ of 5.10.2004, joined cases C-397-403/01, ECR 2004, p. I-8835)


189

ii) Direct applicability of a directive

• Wording of Art. 288 TFEU: “A directive shall be binding, as to the result to be achieved, upon each Member State to which it is addressed, but shall leave to the national authorities the choice of form and methods.”

• A directive is addressed only to the Member States and therefore not directly applicable to individuals

• Direct applicability only in exceptional cases:• Requirements:

- untimely or incorrect transposition of the directive into national law- provision favorable for an individual - provision provides for rights that which can be asserted against the member state- “self-executing” character of the directive (no margin for discretion of the member state how to transpose the directive)

• leading cases: - Becker (ECJ of 19.1.1982, 8/81, ECR 1982, p. 53)- Harz ./. Deutsche Tradax (ECJ of 10.4.1984, 79/83, ECR 1984, p. 1921)


190

iii) State Liability – Compensation claims against Member States for damage caused to tax payers

• Conditions governing State liability:- the rule of law infringed must be intended to confer rights on individuals; - the breach must be sufficiently serious and - there must be a direct causal link between the breach of the obligation incumbent on the State and the loss or damage sustained by the injured parties

• In case of an untimely or incorrect transposition of a directive into national law, if the provisions are not directly applicable according to the requirement described above (“Francovich”)

• In case of conflict of national law with primary EC law (“Brasserie du Pêcheur”)• Incorrect interpretation of EC law by a national court adjudicating at last instance that does not

meets its obligation to seek for a preliminary ruling (Art. 267 TFEU), “Köbler”• Only in cases where a national court has manifestly infringed the applicable law

leading cases: - Francovich (ECJ of 19.11.1991, C-6 and 9/90, ECR 1991, p. I-5357)- Brasserie du Pêcheur/Factortame (ECJ of 5.3.1996, C-46 and 48/93, ECR 1996, p. I-1029)- Köbler (ECJ of 30.9.2003, C-224/01, ECR 2003, p. I-10239)- Test Claimants in the Thin Cap Group Litigation (ECJ of 13.3.2007, C-524/04, ECR 2007, p. I-2107)


III. The European Company Law Statute (SE-Statute)

192

III. The European Company Statute (SE-Statute)1. Applicable Law – company law

a) RegulationCouncil Regulation (EC) No 2157/2001 of 8 October 2001

on the Statute for a European company (SE), OJ L 294, of 10.11.2001, p.1

b) Directive Council Directive 2001/86/EC of 8 October 2001 supplementing the

Statute for a European company with regard to the involvement of employees OJ L 294, of 10.11.2001, p.22

c) National Implementation Law

Gesetz zur Ausführung der Europäischen Gesellschaft (SEAG) of 22.12.2004, German Law Gazette of 28.12.2004, p. 3675

d) Company Statutes

193

III. The European Company Statute (SE-Statute)2. Applicable Law – tax law

2. Applicable law – tax law a) Tax Directive in its amended version

Council Directive 90/434/EEC on the common system of taxation applicable to mergers, divisions, transfers of assets and exchanges of shares concerning companies of different Member States of 23 July 1990, OJ L 225, 20.8.1990, p. 1amended by:Council Directive 2005/19/EC of 17 February 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, of 4.3.2005, p. 19As of 15. Dec. 2009: Consolidated version of the Directive enters info force (Directive 2009/133/EG); no material changes to the Directive

194

III. The European Company Statute (SE-Statute)2. Applicable Law – tax law

b) Parent Subsidiary Directive recastCouncil Directive 90/435/EEC of 23 July 1990 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States, OJ L 225, 22.9.1990, p. 6recast: Council Directive 2011/96/EU of 30 November 2011 on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States, OJ L 345, of 29.12.2011, p. 8

c) Interest and Royalties DirectiveCouncil Directive 2003/49/EC of 3 June 2003 on a common system of taxation applicable to interest and royalty payments made between associated companies of different Member States, OJ L 157, of 26.6.2003, p. 49Proposal for a recast Council Directive of 11.11.2011, COM(2011) 714 final

195

Post-Formation situation

Pre-Formation situation Germany France

SH A

X-AG Y-S.A.

BORDER

SH B

BORDER

SH A

French-SE

SH B

Requirements:- Only public limited companies may be merged to an SE - These public limited companies must be incorporated in different Member States

III. The European Company Statute (SE-Statute)3. The various forms of formation of a European Company

a) Formation by cross-border merger, sec. 2 para 1 SE-Statute

196


Pre-merger situation Germany France SH A

X-AG Y-S.A.

BORDER

SH B

BORDER

SH A

FrenchHolding-SE

SH B

X-AG Y-S.A.


b) Formation of a Holding-SE, sec. 2 para 2 SE-Statute (I)

197

From a company law point of view the formation of a Holding-SE is executed by the contribution of shares of the shareholders in the companies taking part in the operation to the newly formed SE. The SE issues new shares to the shareholders in consideration.

Requirements:• Both public and private limited companies may take part in the

operation.• The companies must either be incorporated under the laws of different

Member States or each of the companies must have had a subsidiary or a branch in another Member State for a minimum period of 2 years prior to the operation.

• The SE must obtain a majority in the voting rights in the subsidiaries.


b) Formation of a Holding-SE, sec. 2 para 2 SE-Statute (II)

198

Post-Formation Situation

Pre-Formation Situation Germany France

X-AG Y-S.A.

BORDER

BORDER

Subsidiary-SE

X-AG Y-S.A.


c) Formation of a Subsidiary-SE, Alternative a of sec. 2 para 3 SE-Statute (I)

199

From a company law point of view the foundation of a subsidiary-SE does not differ from the formation of a joint subsidiary of two companies.

Requirements• All forms of companies mentioned in Art. 54 TFEU may take part in

the formation of a Subsidiary-SE.• The companies must either be incorporated under the laws of

different Member States or each of the companies must have had a subsidiary or a branch in another Member State for a minimum period of 2 years prior to the operation.


c) Formation of a Subsidiary-SE, Alternative a of sec. 2 para 3 SE-Statute (II)

200


Pre-Formation SituationX-AG Y-AG

Subsidiary-SE

X-AG Y-AG

Germany

France

Z-BV Branch

Z-BV Branch

Germany

France


c) Formation of a Subsidiary-SE, Alternative b of sec. 2 para 3 SE-Statute

201



X-AG

Z-S.A.

X-SE

Z-S.A.


d) Formation by conversion of an existing company

Requirements:• Only public limited companies may be converted to an

SE.• The company must either be incorporated under the

laws of different Member States or must have had a subsidiary or a branch in another Member State for a minimum period of 2 years prior to the operation.

202


Pre-merger situation Germany France

SH A

X-AG Y-S.A.

BORDER

SH B

BORDER

SH A

French-SE

SH B

III. The European Company Statute (SE-Statute)4. Tax treatment of the formation of a European Company

a) Formation by Merger

PE

• Tax neutral cross-border merger possible under German tax law?

• A merger is possible at book value under the conditions mentioned in sec. 11 Para 2 UmwStG.

• Loss of right to tax gains resulting from an alienation of assets results in taxation of built-in-gains.

203

Post-Formation situation

Pre-Formation situation Germany France

SH A

X-AG Y-S.A.

BORDER

SH B

BORDER

SH A

FrenchHolding-SE

SH B

X-AG Y-S.A.


b) Formation of a Holding SE

204

Issues:

• The formation of a Holding-SE qualifies in principle as an exchange of shares operation according to Art. 1, 2d) Merger Directive, if SE and the corporation, which is subject of the share transfer, are located in different Member States.

• According to German tax law sec. 21 UmwStG is applicable.

• Sec. 21 UmwStG applies to companies covered by the Merger Directive. The SE was included in the scope of the Merger Directive explicitly from 1 January 2006 onwards.


b) Formation of a Holding SE

205


Pre-Formation SituationX-AG Y-AG

Subsidiary-SE

X-AG Y-AG

Germany

France

Z-BV Branch

Z-BV Branch

Germany

France



206

Issues:

• Raising the capital of the Subsidiary-SE by way of a cash contribution, the formation does not give rise to any tax implications.

• Raising the capital of the Subsidiary-SE by way of a contribution in kind, the operation may trigger capital gains taxation. A tax neutral contribution requires the application of a provision granting tax deferral relief.

• SE to be formed within the EU:Contributions in kind (Sacheinlage) to a Subsidiary-SE may be executed under sec. 20 UmwStG.



207



X-AG

Z-S.A.

X-SE

Z-S.A.


d) Formation by way of Conversion

A conversion does not give rise to capital gains taxation as no transfer of assets to a new entity takes place.

208

• SE is subject to corporate income tax in Germany.• Tax treaties apply to Ses.• SE falls within the scope of EC Tax Directives and Arbitration

Convention.• Exception: The Interest and Royalties Directive currently does not

apply to the SE. An Amendment Directive has not been adopted yet.

III. The European Company Statute (SE-Statute)5. Current taxation of the European Company in its different forms

209

Deloitte & Touche GmbHWirtschaftsprüfungsgesellschaftRosenheimer Platz 481669 MunichGermany

Tel: +49 89-29036 8314

[email protected]/de

Prof. Dr. Otmar Thömmes

RechtsanwaltGeschäftsführer

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University of Augsburg German and European Company Law Prof. Dr. Otmar Thömmes 5 / 6 July 2013

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