The EU Mergers Directive

1. The EU Mergers Directive What it does and why you should care! Jim Close, HMRC Pete Miller, Tax Director, Ernst & Young LLP

2. History 1978 – 3rd Company Law Directive on mergers of public companies 1990 – EU Mergers Directive 2005 – European Company statute 2005 – Amendment to EU Mergers Directive 2005 – 10th Company Law Directive on cross-border mergers

3. 3rd Company Law Directive on mergers of public companies • Required domestic law to permit mergers of public companies • Legislation at sections 425 to 427 and Sch 15B CA 1985 • Now at … • UK legislation does not appear to be restricted to public companies • Although no one seemed to know about it!

4. What is a merger? "merger by acquisition" shall mean the operation whereby one or more companies are wound up without going into liquidation and transfer to another all their assets and liabilities in exchange for the issue to the shareholders of the company or companies being acquired of shares in the acquiring company and a cash payment, if any, not exceeding 10 % of the nominal value of the shares so issued or, where they have no nominal value, of their accounting par value

5. Merger by acquisition A B B a b a b Company B issues shares to the shareholders of Company A Company A is dissolved without a winding up (cf liquidation reconstruction)

6. What is a merger? "merger by the formation of a new company“ shall mean the operation whereby several companies are wound up without going into liquidation and transfer to a company that they set up all their assets and liabilities in exchange for the issue to their shareholders of shares in the new company and a cash payment, if any, not exceeding 10 % of the nominal value of the shares so issued or, where they have no nominal value, of their accounting par value.

7. Merger by formation of NewCo A NewCo B NewCo a b a b NewCo issues shares to the shareholders of Companies A and B Companies A and B are dissolved without a winding up (cf liquidation reconstruction)

8. 2007 changes – SI 2007/3186 Schedule 1 – cross-border transfers of business Schedule 2 – European cross-border mergers Schedule 3 – Mergers, etc.: treatment of transparent entities

9. UK Mergers – 2005 tax provisions • Section 140E - merger to form UK SE • Section 140F - merger to form non-UK SE • Section 140G - shareholder relief

10. 2007 changes – section 140E • Merger to form and SE • Merger to form an SCE • Merger by acquisition • Merger to form new company Merged entity is UK resident or has UK PE No gain, no loss transfer

11. 2007 changes – section 140F • Merger to form and SE • Merger to form an SCE • Merger by acquisition • Merger to form new company UK company transfers assets of non-UK PE to non-UK transferee Aggregate gain subject to section 815A ICTA

12. Consequential amendments • Section 140G – shareholder relief • Section 209(1A) ICTA – treated as distributions in a winding up • S140 TCGA • Loan relationships / derivative contracts • Capital allowances • Intangibles

13. Partial divisions – ss140A & 140C • New provision to permit part of the business to be transferred • Part transfers treated as schemes of reconstruction to which s136 applies (new section140DA) • References to ‘trade’ changed to ‘business’ • New relief for cross-border demergers, section 213A ICTA

14. Outstanding points • Can UK companies be merged? • Is the UK wholly compliant with the Mergers Directive? (10% test) • Do UK shareholders get relief for a merger of non-UK companies? • What about mergers of EU and non-EU companies?

15. The EU Mergers Directive What it does and why you should care! Jim Close, HMRC Pete Miller, Tax Director, Ernst & Young LLP

16. Appendix Sections 140 A and 140C TCGA An overview

17. Section 140A TCGA 1992 Transfer of a UK trade • Co A resident in a Member State transfers UK trade • To Co B resident in another Member State • Consideration is wholly shares or debentures issued by B to A

18. Section 140A TCGA 1992 Conditions • Co B has a UK PE and gains chargeable in UK or • Co B is UK resident and liable to CT on UK gains Result • No gain, no loss on transfer of assets

19. Section 140A examples A A UK B UK

20. Section 140C TCGA 1992 Transfer of a non-UK trade • Co A resident in UK transfers non-UK trade (cf s140 TCGA) • To Co B resident in another Member State • Consideration is wholly or partly shares or debentures issued by B to A

21. Section 140B TCGA 1992 Result • Co A’s gains and losses aggregated • Gain taxed subject to section 815A TCGA • So credit given for tax that would have bee payable in Member State of PE had the Mergers Directive not existed NB NOT tax free

22. Section 140B examples A UK A UK Non-UK B Non-UK Non-UK