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.