1. The aid scheme implemented by Spain under Article 12(5) of Royal Legislative Decree 4/2004 of 5 March 2005, consolidating the amendments made to the Spanish Corporate Tax Law, unlawfully put into effect by Spain in breach of Article 108(3) of the Treaty on the Functioning of the European Union, is incompatible with the internal market as regards aid granted to beneficiaries in respect of extra-EU acquisitions.
2. Nonetheless, tax reductions enjoyed by beneficiaries in respect of extra-EU acquisitions under Article 12(5) TRLIS which are related to rights held directly or indirectly in foreign companies fulfilling the relevant conditions of the aid scheme by 21 December 2007, apart from the condition that they hold their shareholdings for an uninterrupted period of at least 1 year, can continue to apply over the entire amortisation period established by the aid scheme.
3. Tax reductions enjoyed by beneficiaries in respect of extra-EU acquisitions under Article 12(5) TRLIS which are related to an irrevocable obligation entered into before 21 December 2007 to hold such rights when the contract contains a suspensive condition linked to the fact that the operation at issue is subject to the mandatory approval of a regulatory authority and the operation has been notified before 21 December 2007, can continue to apply for the entire amortisation period established by the aid scheme for those rights held on the date on which the suspensive condition is lifted.
4. Furthermore, tax reductions enjoyed by beneficiaries under Article 12(5) TRLIS in respect of extra-EU acquisitions carried out by the date of publication of this Decision in the Official Journal of the European Union , which are related to majority shareholdings held directly or indirectly in foreign companies established in China, India or in other countries where the existence of explicit legal barriers to cross-border business combinations have been or can be demonstrated, can continue to apply over the entire amortisation period established by the aid scheme.
5. Tax reductions enjoyed by beneficiaries when realising extra-EU acquisitions under Article 12(5) TRLIS which are related to an irrevocable obligation entered into before this Decision is published in the Official Journal of the European Union , to hold such rights in foreign companies established in China, India or in other countries where the existence of explicit legal barriers to cross-border business combinations have been or can be demonstrated, when the contract contains a suspensive condition linked to the fact that the operation at issue is subject to the mandatory approval of a regulatory authority and the operation has been notified before the publication of this Decision in the Official Journal of the European Union , can continue to apply over the entire amortisation period established by the aid scheme for those rights held on the date on which the suspensive condition is lifted.
ANNEX IISupplementary provisions
ANNEX II
SUMMARY OF THE KPMG REPORT PRESENTED BY THE SPANISH AUTHORITIES
Summary Table
Country
Company law governing mergers
Are cross-border mergers prohibited by company law and subsequent legislation?
(Yes/No/Not specifically addressed)
Does case law or doctrine refer to the impossibility of a cross-border merger?
(Yes/No/Not found)
Have relevant de facto barriers been identified that impede a cross-border merger?
(Yes/No)
Have tax rules been identified which impose additional tax costs on a cross-border merger?
(Yes/No/Uncertain tax treatment)
Are there precedents of cross-border mergers in your jurisdiction?
(Yes/No/Not found)
Summary
Argentina
Law 19550
Articles 82 to 87 and 118
Not specifically addressed by either company law or the main legislation on the Trade Registry
Yes
Relevant doctrine states that cross-border mergers are not possible in Argentina
Yes
Registration issues with the relevant Trade Registry
Yes. Taxation of the target company and its shareholders, since it is considered that the Protocol to the Treaty signed by Argentina and Spain should not apply. Moreover, relevant doctrine and the Argentinian tax administration points out that the roll-over regime can apply only to domestic mergers
No
Academic authors point out that a cross-border merger is not possible
Taxation of the absorbed company and its shareholders
Australia
Corporations Act 2001 (main Sections 606, 413 and 611)
The concept of cross-border mergers is not recognised under Australian company law
Corporations Act 2001 lays down only three specific procedures with regard to mergers, none of which deals with cross-border mergers
Not found
Yes
Cross-border mergers are not possible in Australia
Uncertain tax treatment.
A roll-over regime applies only to domestic mergers
Not found
Corporations Act 2001 does not specifically deal with a cross-border merger as a permitted transaction, and is therefore not possible
Brazil
Brazilian Civil Code (Law 10.406/02) and Law 6.404/1976
Not specifically addressed
Not found
Approval by the Council of State
Approval by the register in SISBACEN is uncertain
Restrictions in certain economic sectors do not permit a cross-border merger
Uncertain tax treatment
Brazilian and non-Brazilian (i.e. shareholders in the Brazilian company) taxpayers involved in a merger transaction at market value would suffer adverse tax consequences.
No
Only one transaction has been identified but it relates to a reverse merger in which some foreign companies were absorbed by a Brazilian entity
There are major barriers which in practice prevent cross-border mergers
Canada
Canadian Business Corporations Act and applicable company law in Canadian Provinces
Yes
Both merging entities must apply Canadian legislation
Only certain types of mergers (e.g. amalgamations) are theoretically permitted in British Columbia, but there is no precedent
Not found
Yes
Yes/uncertain tax treatment
If a 100 % subsidiary is wound up, the dissolved company and its shareholder would pay tax
Not found
As a rule, cross-border mergers are not possible (only in British Columbia under certain circumstances) except for the winding-up of a 100 % Canadian subsidiary
Taxation of the dissolved company and its shareholders
Chile
Law 18.046
Article 99
Not specifically addressed
Not found
Yes
Requirement for a certificate of cessation of business activity issued by the tax authorities, which can significantly delay the merger process. Other barriers exist in the form of the rules of the Central Bank of Chile, which would require a special request in order to carry out such a merger, foreign investment rules under Decree Law 600 and the fact that in certain economic sectors a cross-border merger would not be possible
Uncertain tax treatment
There is no certainty that domestic roll-over regime can be applied in a cross-border merger to both the shareholdersand the target company
A cross-border merger would not generate tax effects other than the taxation due on retained profits to the date of the merger by the company being acquired
The winding up of a Chilean entity into its direct subsidiary is not considered similar to a merger for Chilean tax purposes. Thus, the shareholders will be subject to Chilean corporation tax to the extent that the assets transferred are stepped up
Yes
Just one, but the only precedent involved a holding entity with no Chilean activities or assets
There are relevant obstacles which may prevent a cross-border merger from being carried out
Uncertain tax treatment for shareholders and absorbed entity
China
(a)
PRC Company Law of 2005 for mergers involving only limited liability companies or joint stock limited companies established in Mainland China and
(b)
Provisions on the merger and division of foreign investment enterprises (issued in 2001) which govern mergers involving foreign investment in Mainland China
Provisions on mergers of a foreign company issued in 2009
Existing rules refer only to domestic mergers
On 22 June 2009 the Ministry of Commerce enacted a new set of provisions on mergers and acquisitions of a domestic company by foreign investors
A cross-border merger within the meaning of this document is not possible
Not found
Yes
A cross-border merger is not allowed
Uncertain tax treatment
Notice 59 (which contains the provisions on the reorganisation of corporation tax) does not apply to cross-border mergers, and hence tax neutrality will not apply, even though cross-border mergers are not allowed in China
Not found
In 2009 a new Company Law applicable to mergers by foreign investors was adopted. However, cross-border mergers (within the meaning of this document) are not allowed
Colombia
Articles 172 et seq. of the Commercial Code
Not specifically addressed. However, cross-border mergers are accepted in practice as guidelines are provided by the Companies Supervisor. A Colombian branch would have to carry on the economic activity of the foreign entity in a relevant number of economic sectors, which in practice prevents the completion of a cross-border merger
No
Yes
Foreign investment rules, principally the impossibility of a Colombian branch carrying on certain economic activities
Yes
Taxation of shareholders
Yes, but not with Spanish companies
There are relevant barriers which may delay or prevent a cross-border merger
Taxation of shareholders
Ecuador
Companies Act (R.O. 312 of 5.11.1999)
and
Articles 337 to 344 of the Act Amending the Companies Act (R.O. 519 of 15.5.2009)
Not specifically addressed
It is not possible to carry out a cross-border merger in Ecuador because the Ecuadorian entity would have to be wound up.
Not found
Yes
It is not possible to carry out a cross-border merger in Ecuador
Uncertain tax treatment
A roll-over regime exists only for domestic corporate restructurings
No
Cross-border mergers are not possible in Ecuador
India
Sections 391 to 394 of the Companies Act of 1965
Upstream mergers are prohibited under Section 394(4)(b) of the Companies Act
Not found
Yes
Upstream mergers are not possible
Yes
As regards upstream mergers, tax costs would exist for the absorbed company and its shareholders even though cross-border mergers are not allowed in India
No
There only precedents relate to reverse mergers (no precedents for upstream mergers)
Upstream mergers are not permitted
Japan
Companies Act 86 of 26 July 2005
Not specifically addressed
However, using the criterion set by the Ministry of Justice when the Companies Act was introduced in 2006, cross-border mergers should not be allowed
Yes
Relevant doctrine and the Ministry of Justice state that cross-border mergers are not possible in Japan
The Legal Affairs Bureau in Japan does not allow registration of cross-border mergers
In theory, since the Companies Act does not address cross-border mergers, tax treatment is uncertain
No
The Legal Affairs Bureau in Japan does not allow registration of cross-border mergers
Mexico
General Law on Commercial Companies
Not specifically addressed
Not found
Yes
Restrictions in certain economic sectors would not allow a cross-border merger
Yes
As regards upstream mergers, tax costs exist for the target company and its shareholders
Yes, but not with Spanish companies
Taxation of the target company and its shareholders
Morocco
Law 17-95 on Public Limited Companies. (However, all principles also apply to the Law on Private Limited Companies)
Not specifically addressed
Not found in Morocco
Yes
Foreign exchange regulations may prevent a Spanish company from taking over a Moroccan company
Uncertain tax treatment
Tax neutrality rules apply only to mergers between national entities
Not found
No specific legal provisions. The major legal, tax and de facto barriers would prevent a cross-border merger
Peru
Law 268.87 General Companies Act (GCA)
Not specifically addressed
A cross-border merger is not possible in Peru because the Peruvian entity would have to be wound up
Yes
Yes
A cross-border merger is not possible in Peru
Uncertain tax treatment
A roll-over regime exists only for domestic corporate restructuring
Not found
Cross-border mergers are not possible in Peru
United States
Company law applicable in US States
US laws do not prohibit or treat mergers differently to other business combinations with foreign entities
However, some States (e.g. Delaware) do not permit such mergers where the laws of the other jurisdiction do not permit a cross-border merger
No
Yes
Strict limitations in certain sectors under certain national security laws
Strict rules for obtaining approval for the cross-border merger process
No
However, failure to comply with tax-free rules would trigger adverse tax consequences
In practice, shareholders in US companies often oppose cross-border mergers because of the tax burdens that could result for them
Not found, but such mergers are likely to have taken place in Delaware
A cross-border merger would only be possible in certain States subject to the completion of a number of requirements
Venezuela
Commercial Code of 26 July 1955 and Article 340 of the Commercial Code
Not specifically addressed
A cross-border merger is not possible in Venezuela because the Venezuelan entity would have to be wound up
No
Yes
A cross-border merger is not possible in Venezuela
Uncertain tax treatment
A roll-over regime exists only for domestic corporate restructurings
Not found
Cross-border mergers are not feasible in Venezuela
ANNEX IIISupplementary provisions
ANNEX III
SUMMARY OF THE GARRIGUES REPORT PRESENTED BY THE SPANISH AUTHORITIES
Legal and regulatory aspects
In the following countries a cross-border merger is not possible under commercial law:
—
India , under a combination of Articles 3 and 391 to 394 of the relevant Indian legislation (1965 Companies Act),
—
Australia , because neither the Corporations Act 2001 nor the Foreign Acquisitions and Takeovers Act 1975 recognise cross-border mergers, which are therefore not possible under Australian law,
—
Japan , since, as confirmed by the Tokyo Legal Affairs Bureau (a department of the Japanese Ministry of Justice, which keeps the register of mergers carried out in Japan), the interpretation of Articles 2 and 748 of the Companies Act excludes the possibility of completing a cross-border merger,
—
Canada , as Canadian law does not recognise cross-border mergers and the only similar operation recognised is ‘amalgamation’, which requires that both companies be governed by the same Canadian legislation (Sections 2 and 181 of the Federal Canada Business Corporations Act) and therefore, it is not possible to perform a cross-border merger as defined,
—
Ecuador , in accordance with Articles 342 and 415 of the Companies Act, published in Official Register No 312 on 5 November 1999, whereby the acquiring company, in order to complete a merger, must have its domicile in Ecuador or must previously form a new company in Ecuador, precluding a cross-border merger such as the one proposed. This approach has also been confirmed by the administrative body that controls and oversees Ecuadorian companies (Companies Supervisor), which is responsible for approving company mergers and other operations in Ecuador,
—
China , as reflected in regulations governing the acquisition of local companies by non-residents (specifically, Articles 2 and 55 of the Provisions on Acquisitions of Domestic Enterprises by Foreign Investors, issued by the Chinese Ministry of Commerce on 22 June 2009.
There are other countries in which cross-border mergers are not specifically regulated but where there are legal barriers that complicate them to such an extent that, in the opinion of the law firms consulted and/or relevant administrative or academic doctrine, such mergers are in practice impossible, particularly the countries listed below:
—
Argentina , where the number of legal and practical obstacles (described in detail in the attached report on Argentina) prevent cross-border mergers being carried out. This same conclusion is drawn by most Argentinian doctrine, cited in the report, and by the Argentinian Justice Administration which, through the Pre-Classification Department of the Companies Supervisor (the body that controls legal entities in the Autonomous City of Buenos Aires), describes such mergers as ‘test cases’ for which there are no precedents,
—
Brazil , where, in the opinion of the law firm consulted, cross-border mergers are almost impossible due both to the incompatibility of Brazilian laws for the purposes of registering the merger in Brazil and the need to open a branch into which the Brazilian company would be merged, which requires a large number of authorisations from political and economic bodies that are almost impossible to obtain (particularly the specific ‘Presidential Decree’ mentioned in the Brazilian report),
—
Peru , because, according to the information provided by the local law firm, Peruvian public registers have in the past rejected the described cross-border mergers registering requests because they are reorganisation operations which do not fall under the scope of the applicable law ( Ley n o 26887 General de Sociedades ),
—
Colombia , a jurisdiction in which (i) the absence of a specific procedure for cross-border mergers; (ii) the need to open a branch in Colombia, following specific authorisation procedures; and (iii) legal and regulatory restrictions on certain activities in many business sectors, make it impossible to complete a cross-border merger in such sectors, in the opinion of the law firm whose report is attached.
Moreover, as explained in the report on Colombia, in some of the countries analysed the regulatory restrictions on foreign investments in certain business sectors prevent the completion of cross-border mergers since, if such mergers were implemented, the activities would be performed in each country directly by a non-resident, which would generate incompatibilities that would be fully outlawed or seriously restricted in those countries. Of the countries analysed, this is the case of the Latin American countries, particularly Colombia , which prohibits all investments by foreign entities in many business sectors; Brazil , with similar total prohibitions; Chile , with significant prohibitions and restrictions affecting the telecommunications industry, concession-holders, the electricity, healthcare and energy sectors, among others; Ecuador , with relevant restrictions affecting the financial and insurance sectors; Venezuela , particularly in the telecommunications industry; Mexico ; and even the United States , with certain restrictions related to national security and the financial sector.
Tax aspects
Moreover, in the majority of countries analysed there are relevant tax barriers to cross-border mergers. In this sense, if it were possible ( quod non ) to implement a cross-border merger, in the majority of the countries analysed unrealised capital gains would be taxed immediately at target-company and/or shareholder level, and indirect taxes would also be applicable as in any other completed transfer. The accompanying reports reflect this situation in detail in the following countries:
—
In Argentina , the Law on Income Tax does not allow a cross-border merger to be treated as a ‘tax-free reorganisation’, as specifically confirmed by the AFIP (Argentina’s national tax authority) in a number of rulings, meaning that the target company would be liable for income tax (and its shareholders, regardless of the provisions of the Spain-Argentina Double Taxation Treaty, as will be detailed below) on the unrealised capital gains, as well as indirect taxes applicable to the transaction in Argentina: Value Added Tax, Impuesto sobre los Ingresos Brutos, Impuesto de Sellos (stamp duty), etc.,
—
In Australia , all ‘amalgamation’ transactions are subject to Australian taxes for both the company transferring its assets and liabilities (the dissolved company) and for its shareholders,
—
In Brazil , these transactions would be subject to the general tax regime for transfers, with respect to all Brazilian taxes, for both the target company and its shareholders. The special regime provided by Article 21 of Law 9.249/95 is applicable only to mergers of Brazilian companies,
—
In Canada , the only similar operations to cross-border mergers requires the target company to be liquidated and is therefore subject to all applicable Canadian taxes,
—
In Chile , cross-border mergers would be taxed under the general tax rules for mergers. Under the Law on Income Taxes, all the profits of the dissolved company would be taxed at 35 % and its shareholders would pay 17 % or 35 % tax on the realised gain, provided they obtained an increase in value for tax purposes. The dissolution of the target company would also be previously inspected by the Chilean tax authorities, which is an additional obstacle that discourages and could significantly delay the completion of such transactions,
—
In Colombia , no merger transaction gives rise to income tax (Article 14.1 of the Estatuto Tributario ) or value added tax (Article 428.2 of the Estatuto Tributario ) for the dissolved company. However, in view of the absence of legal provisions governing the tax treatment of shareholders, the Directorate of National Taxes and Customs (Ruling number 053516, 6 July 2009) has stipulated that shareholders obtain a taxable capital gain if the market value of the shares, cash or other assets received is higher than the acquisition cost of the shares received as a result of the merger,
—
In the United States , there are certain material adverse US federal income tax consequences for a US corporation (USCo) and its US shareholders, as detailed in the US report, that could result from a merger of a USCo with and into a foreign corporation (ForCo) with the ForCo surviving. Because of concerns that the US tax authorities have about US corporations moving offshore to minimise their US federal income tax liability, the rules that allow a merger of two USCos to be tax-free are often rendered inapplicable in the case of a merger of a USCo into a ForCo. Although good business reasons may exist to undertake a cross-border merger, shareholders of US corporations often oppose such mergers because of the punitive US tax regimes that could result from the merger,
—
In Morocco , a cross-border merger gives rise to tax for the company dissolved and its shareholders, in respect of all applicable Moroccan taxes, since the special regime provided by Article 162 of the General Tax Code ( Code Général des Impôts ) is applicable only to Moroccan companies subject to income tax, as specified in the Code. Moreover, as in the case of Chile, the winding up of a Moroccan company always requires an audit to be carried out beforehand, entailing an additional obstacle to such merger that could also significantly delay execution,
—
In Mexico , the merger of a Mexican company with a foreign company will give rise to Mexican income tax for the merging company (the wording of the Mexico-Spain Double Taxation Treaty must also be considered for these purposes, as will be explained below) and to other taxes applicable to all transfers of goods or rights: flat-rate business tax ( Impuesto Empresarial a Tasa Única — IETU ), value added tax ( IVA ), local taxes on property transfers ( ISAI ), etc. Article 14-b of the Federal Tax Code allows the application of a tax neutrality regime only to mergers involving companies resident in Mexico.
As regards the target company’s shareholders, Articles 1 and 179 of the Law on Income Tax stipulate that non-residents are also required to pay this tax on assets acquired by the merging company as a consequence of the merger,
—
In Peru , if a cross-border merger could be completed, this would be treated as a sale for tax purposes and any gain would be taxed at 30 % in the dissolved company. The shareholders would pay tax on the profits on liquidation, on the portion that exceeded the par value of the shares plus the additional capital premium. The merger would also be subject to indirect taxes (basically the General Sales Tax ( IGV )) at the rate of 19 % of the transfer value. This regime has been specifically confirmed by the Peruvian Tax Administration, on a binding basis, in its Report of 229-2005-SUNAT/2B0000 (28 September 2005),
—
Finally, in Venezuela , if the merger could be completed from a commercial viewpoint, it would give rise to applicable Venezuelan taxes for the target company and its shareholders, as reported by the Venezuelan law firm in its report.
It should also be noted that none of the Double Taxation Treaties signed by Spain include additional specific advantages for cross-border mergers, as compared to other countries’ Double Taxation Treaties based on the OECD Model Convention.
However, in addition to further explanations below regarding the Double Taxation Treaties signed between Spain and Argentina and Mexico, some treaties provide for the possibility of charging tax in the State of origin of the transfer (including, for the purposes of this analysis, a transfer that is the consequence of the amortisation of shares in a merger) of significant shareholdings in companies domiciled in that State.
In this regard, Spain has departed from the OECD’s general approach to the taxation of capital gains from the sale by a resident of one Contracting State of stocks and shares in companies of another Contracting State (whether or not the sale takes place in the context of a merger). The OECD’s general approach is to assign this tax authority exclusively to the transferor’s State of residence (in this case Spain). However, in accordance with Spain’s Reservations included in the Commentary on Article 13 of the OECD’s Model Convention (point 45), and in accordance with the bilateral agreements concluded, the treaties generally stipulate shared taxation for Spain and the State of residence of the company whose shares are sold (in this case, as a consequence of the amortisation of shares in a merger), in cases in which the shareholding is ‘substantial’ (of the States analysed here, this applies to the Treaties with Argentina, Australia, Chile, India, China, United States and Morocco).
Nonetheless, in the respective Protocols to the Treaties concluded with two of these countries (specifically, the Protocols to the Treaties signed with Mexico and Argentina), one interpretation is that ( 1 ) , when the transfer forms part of a cross-border merger between companies of the same group, it is permitted to apply a tax deferral scheme to the capital gains in the State of origin.
In the case of the specific clause in the Protocol to the Double Taxation Treaty signed between Spain and Argentina, the interpretation by law firm of this country, in line with existing doctrine, is that this clause does not allow the application of the Argentinian tax deferral scheme to a cross-border merger of a Spanish and an Argentinian company.
In the case of the clause in the Protocol to the Double Taxation Treaty signed between Spain and Mexico, the law firm of this country also regards as very doubtful the interpretation that the said clause is applicable to a cross-border merger of a Spanish and a Mexican company and, if it were acceptable (which seems unlikely), this circumstance could, in some cases, even result in a tax cost that is higher than the cost to be deferred, since the ‘deferred’ tax would pay the ‘frozen’ taxes irrespective of the existence of actual economic income (and even if the transfer gave rise to a definitive loss).
In any case, it must be borne in mind that the above-mentioned Protocols to the Double Taxation Treaties do not affect the indirect taxes applicable to these transactions in each jurisdiction.
Finally, as evidence of the fact that the above-mentioned tax, legal and de facto obstacles are real, it should be noted that, in general, as described in the different reports on the countries analysed, there have been no cross-border mergers in those jurisdictions.
( 1 ) This interpretation is questionable since these clauses refer rather to mergers involving companies resident in one Contracting State that own assets in the other Contracting State and which, if the clauses did not exist, would be taxed in that State, whereas, by contrast, the taxes in the State of residence would be deferred under a tax deferral regime.
