Mergers, March 3 rd 2011

1. Mergers, March 3rd 2011 Mergers - Tax Law in Iceland

2. Mergers • The general rule is that taxable gain is calculated when shareholders exchange their shares for shares in another company • Art. 51 par 1 of the Income Tax Act (90/2003) contains an exemption from that principle • “If a public limited company is liquidated by completely merging it with another public limited company and the shareholders of the former company are only paid with shares in the latter company as payment for their share in the liquidated company, then the change as such does not constitute taxable income for the shareholder giving up shares..” Mergers - Tax Law in Iceland

3. Mergers cont. • Art. 51 only applies to Icelandic companies • The shareholders may be natural or legal persons and they may be residents in any state • Art. 51 is only applicable when shareholders are paid in full with shares in the receiving company • In such mergers of public limited companies the receiving company assumes all legal tax obligations and rights of the liquidated company Mergers - Tax Law in Iceland

4. Mergers cont. • Must be a complete merger and the shareholders of the transferring company may only be paid with shares • Art. 51 applies to: • Mergers with an existing company • Mergers into a new company • Merger of a subsidiary merging into its parent company. No consideration is required in the case of a subsidiary merging into its parent company since the receiving company holds 100% of the shares in the merging company Mergers - Tax Law in Iceland

5. Mergers cont. • Art. 51 also applies to cooperatives. When cooperatives merge or when public limited companies merge with cooperative enterprise the merged company assumes all legal tax obligations and rights of the former enterprise or company • If a cooperative enterprise is liquidated by changing it into a public limited company and the members of the cooperative enterprise are only given shares in the public limited company as payment for their privately owned part of the cooperative enterprise, then the change, as such, will not bring about with it taxable income for the person giving up their privately owned part Mergers - Tax Law in Iceland

6. Divisions • Art. 52 of the Income Tax Act contains provisions concerning divisions of company • If a public limited company is split up so that more than one public limited companies take over all assets and debts, and the shareholders in the company being split up are only given shares in the receiving companies as payment for their shares in the split up company, then the exchange does not, as such, form taxable income for the shareholders Mergers - Tax Law in Iceland

7. Divisions cont. • Ownership divided between shareholders in the companies being split up are to be in the same ratio as the ownership was in the split up company • Assets and liabilities are to be transferred on book value Mergers - Tax Law in Iceland

8. Partial divisions • The provisions also apply when a public limited company is split up in such a way that more than one public limited companies take over in part the assets and liabilities of the original company • Tax obligations and rights are divided between the companies proportionally according to the book value of assets, after deduction of transferred liabilities. Mergers - Tax Law in Iceland

9. Transfer of assets • According to Art. 13 of the Income Tax Act, profits from the sale of depreciable assets, and rights connected to such assets, are considered as fully taxable income in the year of the sale. According to Art. 14 of the Act the taxable person is entitled to depreciate depreciable assets according to Art. 33 of the Act for an amount corresponding to the taxable profits. In cases where the taxable person does not possess such depreciable assets at that time he can apply for a deferral of the taxation for two tax years, on the condition that within that time he acquires depreciable assets and depreciates them for an amount corresponding to the taxable profits Mergers - Tax Law in Iceland

10. Exchange of shares • There is no special provision for the exchange of shares in Icelandic tax law • However, point 9a of Art. 31 of the Income Tax Act stipulates that capital gains of legal entities with limited owner liability, inter alia, limited companies and limited liability companies, from the sale of all kinds of equities, are deductible from income if the seller of the shares had at least 10% stake in the company at the date of sale Mergers - Tax Law in Iceland

11. Tax treatment of mergers and divisions • Deferral of taxation on assets of the liquidated company • Deferral (not exemption) until subsequent disposal of asset by receiving company • Receiving company takes over tax values of the assets of the transferring company (book value roll-over) • Receiving company takes over tax rights, such as carry forward losses • Receiving company takes over tax obligations, such as deferred capital gains Mergers - Tax Law in Iceland

12. Tax treatment of mergers and divisions cont. • There is no taxation on capital gains for the shareholders. Capital gains taxation is deferred to the moment of a subsequent transfer of the shares • According to Art. 18 the purchase price of shares, which were acquired through a merger of public limited companies, that met the conditions set forth in Art. 51, is to be set as equal to the purchase price of the shares given up in the liquidated company • There is no taxation on a receiving company that owned shares in a liquidated company, and those shares were cancelled as a result of a merger according to Art. 51 Mergers - Tax Law in Iceland

13. Tax treatment of mergers and divisions cont. • Conditions, in Art. 54, that have to be met so that operating losses are transferable in mergers and divisions: • The receiving company or companies are in similar line of business as the liquidated company • The liquidated company was in operation • Assets of the liquidated company were not negligible • Mergers or split-ups of companies must be for ordinary and normal business purposes • The transferred loss must have originated in a similar line of business as that of the receiving company, or companies, operate in Mergers - Tax Law in Iceland

14. Tax treatment of mergers and divisions cont. • Remnants of operating losses from the last ten years prior to the income year can be deducted from income according to Art. 31 Point 8. Still, operating losses can not be used for deduction from income if the operations in question have changed significantly, such as with a legal entity’s change of ownership or business purpose, except when proven that the change in question has been made for normal and regular business purposes • According to Art. 54 special conditions must be met so that operating losses, including remnants of accrued operating losses from past years of the company being liquidated are transferable in mergers and divisions Mergers - Tax Law in Iceland

15. Relief for restructuring • Art. 53 allows for a tax free merger of a general partnership company with another general partnership company or a public limited company if the owners of the transferring company are only given stakes or shares in the receiving company as payment for their stake in the transferring company • The receiving company assumes all legal tax obligations and rights of the liquidated company • Art. 53 also allows for a general partnership company to be changed into a public limited company without taxable income for the owners of the general partnership company or the company itself • After such a change the public limited company takes over all legal tax obligations and rights of the general partnership company Mergers - Tax Law in Iceland

16. Relief for restructuring cont. • Art. 56 of the income tax act has a relief for restructurings in case of transfer of a sole proprietorship to a private limited company • Should an individual engaged in business activity establish a private limited company that takes overall assets and obligations of the business activity and carries on in the same line of business, then that transfer does not constitute taxable income for the owner or the company, provided that certain conditions are met Mergers - Tax Law in Iceland

17. Relief for restructuring cont. • When sole proprietorship is transferred to a private limited company the following conditions must be met: • a. The owner of the business is to have unlimited tax liability in Iceland • b. The company taking over the business is to be registered in Iceland and is to have unlimited tax liability • c. That the owner of the business only receives shares in the company as payment for the transferred assets and obligations of the business • d. With the notice to the Register of Limited Companies certain documents must be handed in Mergers - Tax Law in Iceland

18. Joint taxation • Icelandic companies can apply for joint taxation • Joint taxation is allowed upon the condition that no less than 90% of the shares in subsidiaries are held by the parent company wishing to be jointly taxed, or other subsidiaries included in the joint taxation • The public limited companies must also all have the same fiscal year and have been under the same ownership for the whole fiscal year, except in instances of newly formed subsidiaries or subsidiaries that were liquidated Mergers - Tax Law in Iceland

19. Gap analysis • Icelandic Tax Law does allows tax free mergers and divisions of Icelandic companies but it does not cover cross-border merger or divisions • Shareholder may not receive any cash in a tax free merger, they may only receive share in the receiving company • Transfer of a sole proprietorship into a company is limited to Icelandic private limited company • Joint taxation only applies to Icelandic companies • Icelandic Tax Law has no special provisions for transfer of assets • Icelandic Tax Law has no special provisions for the exchange of shares Mergers - Tax Law in Iceland