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
a
b
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 As 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