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3.2 EC Merger Directive

Antes de la enmienda:  Mergers
Three different subcategories of merger are contemplated
by the Directive.16 In each case, all the assets and liabilities
of at least one “acquired” company are transferred to one
or more “acquiring” companies. The acquired company
(ies) is dissolved without any winding-up process and
ceases to have any independent existence. Except in the
case of the acquisition of a wholly owned subsidiary by its
parent (the third example below), the shareholders in the
acquired company receive shares and possibly a cash payment
up to 10% of the nominal value of those shares, from
the acquiring company.
Division (demerger)
A division represents the opposite of a merger, but bears
the same legal hallmarks.17 The acquired company is split
into two or more parts so that its assets and liabilities are
transferred to two or more acquiring companies. The
acquired company is dissolved without liquidation and
ceases to exist. As in the case of a merger, the acquired
company’s shareholders receive shares in the acquiring
companies (and may receive a small cash payment again
up to 10% of the nominal value of the shares).
Transfer of assets (business transfers)
A transfer of assets involves the transfer of a “branch of
activity” (essentially, all the assets and liabilities of a divisional
business, normally on a going-concern basis) from
one company to another in exchange for shares in the
transferee.18 The transferor is not wound-up or dissolved.

Share exchange
The Directive covers share exchanges whereby one company
acquires a shareholding in another, such that the
acquiring company obtains voting control of the acquired
company.19 The former shareholders in the acquired company
receive shares in the acquiring company (and may
receive cash up to 10% of the nominal value of the consideration
shares).
For the Directive to apply to one of the transactions
described above, each of the companies concerned must
take one of the legal forms specified in the Directive.20
Furthermore, the companies must be tax resident in a
Member State and not resident anywhere outside the Community
by virtue of an applicable income tax treaty.21
Finally, the companies must be subject to (and not exempt
from) one of the taxes listed in the Directive.22
Accordingly, if the transaction in question and the companies
concerned meet the conditions laid down in the
Directive, a range of tax reliefs becomes available.
Although the objective of the Directive is to establish
equally favourable conditions for cross-border mergers
within the European Union as for domestic mergers within
the individual Member States, it does not require Member
States to apply their domestic rules to cross-border transactions.
As noted in the Recitals, this would not achieve
the objective of eliminating the disadvantages for crossborder
mergers, as differences between the domestic systems
tend to produce distortions. Instead, the Directive
provides for a common basis for taxing the transactions
listed in the Directive, which common basis is applicable
across the European Union (as described below).
5. RELIEFS FROM TAX ON CAPITAL GAINS
The principal relief provided by the Merger Directive is
the deferral of tax on capital gains on the assets transferred
in a qualifying transaction.23 In order for this relief to be
available, the assets must, as a consequence of the transaction,
become connected with a permanent establishment of
the transferee in the home state of the transferor. In other
words, the assets must be situated within the taxing jurisdiction
of that state. In this way, the state of the transferor,
while foregoing tax on gains built up on the assets up to
the time of the transaction, retains the right to tax such
gains and future gains on a subsequent disposal of the
assets. Indeed, that state will generally tax the permanent
establishment’s business profits.
This tax relief is conditional on the transferee company
computing any future depreciation and gains or losses for
tax purposes in relation to the assets concerned in accordance
with the rules that would have applied if the merger
etc. had not taken place. In broad terms, the transferee
must therefore take over the tax basis that the transferor
previously had in the assets rather than benefiting from an
uplift to market value as a consequence of the transaction.
Special provision is made in Art. 10 of the Directive for
cases where the assets transferred in a qualifying merger,
division or transfer of assets include a foreign permanent
establishment of the transferor company. Freedom of
movement of capital dictates that the state of the transferor
should not tax the transaction. But in most cases that state
will have no future jurisdiction to tax the permanent establishment.
For example, if a UK company transfers its German
branch to a French company, the branch and its assets
will become owned by a non-UK resident and will be
physically situated outside the United Kingdom. The
Directive offers some measure of compensation in permitting
the state of the transfer (the United Kingdom in the
above example) to “reinstate” in the transferor’s taxable
profits any losses of the foreign permanent establishment
which had previously been set against the company’s taxable
profits. Thus if the German branch had incurred
losses that had reduced the UK company’s taxable profits
in past years, such losses may be written back, thus
increasing the tax charge in respect of prior years
(although it is not completely clear from the Directive how
this should operate as a timing matter or as regards the
identification of losses).
An alternative regime is offered to Member States that
apply a system of taxing the worldwide profits of companies
(as the United Kingdom does). Those Member
States may choose to tax the merger, division or transfer of
assets, but in doing so must give a form of “tax sparing”
relief for the (notional) tax charge that would have arisen
in the Member State where the permanent establishment is
situated if the Directive had not applied and tax had therefore
been payable. The Directive also prohibits the imposition
of tax in these circumstances by the Member State in
which the permanent establishment is located.

OTHER TAX RELIEFS
Several other important tax reliefs are prescribed by the
Directive, namely:
– tax-exempt provisions and reserves may be carried
over from the transferor company to the permanent
establishment of the transferee which is or becomes
situated in the state of the transferor company;24
– loss carry-forwards may be assumed by the transferee
company on the same basis as they could have been
had the transaction occurred wholly within the state of
the transferor. The Directive thus demands parity with
domestic tax treatment for cross-border transactions;25
– when an acquiring company has a holding in the capital
of the acquired company, gains accruing on the
cancellation of that holding are exempt from tax.26
Member States may choose to impose a 25% + minimum
capital holding requirement for this relief; and
– the receipt of consideration shares on a qualifying
merger, division or exchange of shares is not to be
taxed as income or gains of the recipient, provided that
the recipient rolls over at least the tax basis attributable
to the recipient’s former holding into the new holding.
27
One important limitation on the tax reliefs afforded by the
Directive is that they may be deemed inapplicable where
the transaction has a principal objective of tax evasion or
avoidance.28 Furthermore, the tax reliefs under the Directive
may be withdrawn if the transaction causes a company
no longer to fulfil applicable conditions for worker participation
in management.29
Taxation of restructuring operations in the European Union
A common system of taxation applicable to cross-border reorganisations of companies in the EU was put in place in 1992 and improved in 2006. It aims at removing fiscal obstacles to those operations.  

((EC Directive No. 2005/56/EC on cross-border mergers of limited liability
companies, adopted on October 26, 2005, (the “Directive”) lays down, for the first time,
a set of rules aimed at facilitating cross-border mergers between various types of limited
liability company governed by the laws of different EU Member States. The Directive is
based on the principle that the Member States must allow the cross-border merger of a
national limited liability company with a limited liability company from another Member
State, if the national law of the relevant Member States permits domestic mergers
between such types of company)) ((the EU Merger Directive 2005/19/EC (the “Second Merger
Directive” revising the EU Directive 90/434/EEC (both referred to as the “Merger Directive”))) 

Directive 2005/19/EC amending the Merger Directive
On 17 October 2003 the Commission adopted a proposal amending Council Directive 90/434/EEC on a common system of taxation applicable to mergers, divisions, transfer of assets and exchanges of shares concerning companies of different Member States, which was subsequently adopted after negotiations by Council on 17 February 2005 , as Directive 2005/19/EC.  

Types of Operations Covered

In general, ‘merger’ means an operation whereby one or more companies, on being dissolved
without going into liquidation, transfer all their assets and liabilities to another existing
company in exchange for the issue to their shareholders of securities representing the
capital of that other company and, in certain circumstances, a cash payment not exceeding
certain value. For example, the transfer of all a Spanish company’s assets and liabilities to its
sister company in German would be a ‘merger’ within the meaning of the Merger Directive,
provided that shareholders of the Spanish company receive securities in the German
company in return and the Spanish company ceases to exist and a number of other
conditions are met. According to the Merger Directive, a ‘merger’ would also be a
transaction where an UK company, on being dissolved without going into liquidation,
transfers all its assets and liabilities to the company holding all the securities representing
its capital, which in this case could be its parent company incorporated, say, in Luxembourg.
A ‘merger’ would also be the transfer of assets and liabilities of two or more companies,
being dissolved without going into liquidation, to a new company that they both establish in
exchange for the issue to their shareholders of securities representing the capital of that
new company and, in certain circumstances, certain amount of cash payment in addition to
securities. This would be a case where an Italian company and an Austrian company, on being
dissolved without going into liquidation, would transfer all their assets and liabilities to a
new company, say, in the Netherlands where their shareholders would receive securities in
this Dutch company in return.
Another type of the operation covered by the Merger Directive is ‘division’. Broadly, a
‘division’ is an operation whereby a company, on being dissolved without going into
liquidation, transfers all its assets and liabilities to two or more existing or new companies in
exchange for the pro rata issue to its shareholders of securities representing the capital of
the companies receiving the assets and liabilities and, if applicable, a cash payment of
certain amount. For example, a ‘division’ would be an operation where all assets and
liabilities of a  German company are split in two parts and transferred to its two sister
companies in Belgium and Hungary.
Also, a ‘transfer of assets’ falls within the scope of the Merger Directive and is defined as an
operation whereby a company transfers without being dissolved all or one or more branches
of its activity to another company in exchange for the transfer of securities representing the
capital of the company receiving the transfer. This would be a case where, for example, a
Spanish company transfers a branch of activity to a sister company in Rumania and receives
securities representing the capital of that company in return.
Finally, the Merger Directive defines ‘exchange of shares’ (see bellow) as an operation whereby a
company acquires a holding in the capital of another company such that it obtains majority
of the voting rights in that company in exchange for the issue to the shareholders of the
latter company, in exchange for their securities, of securities representing the capital of the
former company, and, if applicable, a particular amount of cash payment in addition. For
example, an ‘exchange of shares’ would be an operation where a parent company in Belgium
transfers shares held in its Portuguese subsidiary to a company in Poland in return for shares
of that Polish company.  

The main objectives of the Merger Directive
On 23 July 1990 the Council adopted Directive 90/434/EEC on a common system of taxation applicable to mergers, divisions, transfers of assets and exchanges of shares concerning companies of different Member States (the Merger Directive). The objective of the amending Merger Directive is the same: to remove fiscal obstacles to cross-border reorganisations involving companies situated in two or more Member States. The Merger Directive includes a list of the legal forms to which it applies. The companies must be subject to corporate tax, without being exempted, and resident for tax purposes in a Member State.  

In the case of mergers and divisions, the transferring company transfers assets and liabilities to one or more receiving companies. The Merger Directive provides for deferral of the taxes that could be charged on the difference between the real value of such assets and liabilities and their value for tax purposes. The deferral is granted provided that the receiving company continues with their tax values and effectively connects them to its own permanent establishment in the Member State of the transferring company. These rules apply to transfer of assets where the assets transferred form a branch of activity. The Merger Directive covers also triangular cases where the transaction includes a permanent establishment of the transferring company situated in a different Member State.  

The exchange of shares is a transaction where a company acquires a holding majority in the capital of the acquired company. It transfers in exchange its own shares to the shareholders of the latter company.  

In all these transactions, the Merger Directive provides for tax deferral of the taxes that could be charged on the income or capital gains derived by the shareholders of the transferring or the acquired company from the exchange of such shares for shares in the receiving or the acquiring company.  

 The overall aim of the Merger Directive is to set out a common tax system ought to avoid
the imposition of tax in connection with the outlined types of transactions, while at the same
time safeguarding the financial interests of the State of the transferring or acquired
company. The Merger Directive sets out a number of conditions that have to be met for
these operations to be tax exempt. The most important principle is that the tax deferral is
subject to the condition that assets remain connected to a permanent establishment of the
transferring company or permanent establishment of the receiving company. Effectively,
this means that assets should remain within the jurisdiction of the Member State of the
transferring company for the tax deferral to be applicable.   

Extension to the European Company and the European Cooperative Society  

The scope of the Merger Directive was extended to apply to an European Company (SE)
and European Cooperative Society (SCE). These types of companies were introduced in the
EU in 2001 and 2003, respectively to enhance company cross-border mobility within the
EU (see the respective chapter in this book). One of the advantages of establishing an SE or SCE is the possibility to transfer its
registered office between Member States without winding up or the creation of a new legal
person. Accordingly, the Merger Directive was amended to ensure that the transfer of the
registered office of an SE or SCE, or an event connected with that transfer, does not give
rise to some form of taxation in a case where the assets of an SE or SCE remain effectively
connected with a permanent establishment situated in the Member State from which the
registered office was transferred.  

 
Extension of Annex I
Annex I of the Merger Directive lists companies that may enjoy the benefits of the Directive.
In 2005 the list was extended considerably to cover more types of entities established
under national laws of Austria, Belgium, Denmark, Germany, Greece, France, Ireland, Italy,
Luxembourg, the Netherlands and Sweden, including several types of entities which are
considered as fiscally transparent. The aim of these amendments was to improve the
coverage of the Merger Directive. Although the initial proposals aimed at extending the
Merger Directive to all enterprises resident and subject to corporation tax in the Member
States, (which is still a reivindication from several lobbists) the Commission concluded that it could not be achieved due to asymmetries found
in commercial law governing the legal types of entities and the diversity of tax
arrangements applicable to them in various Member States.  

The list of companies covered by the Merger Directive contains entities that are subject to corporate tax in their Member States of residence. However, in the case of some of the new entities that have been added to the list other Member States simultaneously tax their resident taxpayers which have an interest in those entities, so-called ‘transparent entities’. The same tax situation can also apply to the shareholders of companies entering into the transactions covered by the Directive. The Directive introduces specific provisions (new Articles 4(2) and 8(3)) to ensure that the benefits of the Merger Directive are available even in these cases, subject to certain exceptions which are set out in the new Article 10a.  

Tax Deferral 
The Directive provides for two main forms of tax deferral (plus one “special” form). It provides for deferral at asset level on merger or division while Article 9 applies the tax deferral to transfers of assets.  

1.Tax deferral at Asset level 
At the asset level the Mergers Directive provides for a deferral of tax on assets, which are transferred as part of one of the transactions set out in the Directive. In some Member States law prior to the Directive, the transfer of such assets would be a disposal for the purposes of corporation tax on chargeable gains and would usually give rise to a capital gain or loss which might be contrary to the Mergers Directive.  

2.Tax Deferral at Shareholder Level 
The Directive allows for a slightly different form of tax deferral at shareholder level. The tax deferral at shareholder level in the Directive covers “any taxation of the income, profits or capital gains of that shareholder”. In some Member States tax law prior to the Directive, the transfer of such shares or securities would be regarded as a “disposal” for the purposes of capital gains tax which might be contrary to the Mergers Directive.  

3.Special Case: Transfer of a Trade or Permanent Establishment Situated in a Member State Other than the State of Residence of the Transferring Company 
The Directive has a special rule regarding the transfer of a trade. Where a company (the “transferor”) carries on a trade through a permanent establishment in another member state and transfers that trade to a company in that or another member state, then the deferral rules will not apply to the transferor. However the transferor must be given relief for any tax that has been paid on the transfer of the assets, or would have been paid if the merger directive did not apply, in the member state in which the permanent establishment is located. 

Partial divisions or ‘split-offs’
According to Directive 2005/19/EC, the Margers Directive, the scope of the Directive was extended to cover a partial division or ‘splitoff’.

In general, a ‘split-off’ is defined as an operation whereby a company transfers, without
being dissolved, one or more branches of activity, to one or more existing or new
companies, leaving at least one branch of activity in the transferring company. In exchange,
the receiving company issues securities representing its capital (and, if applicable, a cash
payment not exceeding 10% of the nominal value or, in the absence of a nominal value, of
the accounting par value of the securities issued in exchange) and these securities are
transferred to the shareholders of the transferring company. The amendments also ensured
that a split-off is a tax neutral transaction provided that the assets and liabilities so
transferred remain connected with a permanent establishment of the receiving company in
the Member State of the transferring company.  

The splitting company is not dissolved and continues to exist. It transfers part of its assets and liabilities, constituting one or more branches of activity, to another company. In exchange, the receiving company issues securities representing its capital. These securities are transferred to the shareholders of the transferring company.   

Conversion of a branch into a subsidiary
Before 2005 it was argued by some specialists that no tax can be deferred upon conversion of a
branch into a subsidiary of the same foreign entity. Such argument was possible because
the Merger Directive required that, in order to apply it, assets should remain connected to a
permanent establishment, however, upon the conversion into a local subsidiary company,
the assets ceased to be connected to a permanent establishment. The 2005 amendments
made it clear that the Merger Directive covers situations where the assets connected to a
permanent establishment (and constituting a ‘branch of activity’) are transferred to a
newly set up company – a subsidiary of the same company whose permanent establishment
transfers the assets.  

Definition of ‘exchange of shares’
The definition of ‘exchange of shares’ was amended to cover further acquisitions beyond
that granting a simple majority of voting rights. The amendment was inserted as it was
rather common for company statutes and voting rules to be drafted in such a way that
further acquisitions were needed before the acquirer can obtain complete control over the
target company. The amendments clarified the applicability of the Merger Directive to such
transactions.  

The Merger Directive and the Parent-Subsidiary Directive
Article 7 of the Merger Directive was amended to link the provisions of it with the provisions of the Parent-Subsidiary Directive. The article was amended to provide
that no tax liability arises to the receiving company when it cancels its holding in the capital
of the transferring company, provided that the holding exceeds 15% as of 1 January 2007
and 10% as of 1 January 2009. Similarly, the Parent-Subsidiary Directive allows deriving
distributions tax exempt from the transferring company, subject to the same levels of
minimum holding percentage. Before the amendments the threshold in the Merger Directive
was 25% and thus the tax treatment was more disadvantageous than the one available
under the Parent-Subsidiary Directive.  

Fiscally transparent entities
Articles 4(2), 8(3) and 10a were inserted in the Merger Directive with the aim to provide
that Member States may apply tax deferral if they consider non-resident corporate
taxpayers or shareholders of companies entering into the transactions within the scope of
the Merger Directive as fiscally transparent. In particular, Article 4(2) prevents a Member
State to tax its resident taxpayers having an interest in the fiscally transparent company of
another Member State at the time of the transactions covered by the Merger Directive.

Similarly, Article 8(3) defers taxation on the taxpayers having an interest in fiscally transparent shareholders of companies entering into the transactions included within the scope of the Merger Directive. However, the Council decided to depart from the Commission’s proposed rules in Articles 4(2) and 8(3) and inserted Article 10a in the Merger Directive. This article allows Member States not to apply the regime in Articles 4(2) and 8(3) where transparent entities are involved.  

Applicability of the Merger Directive
Member States were obliged to implement the Merger Directive and amendments within a
particular timeline; however the application of the Merger Directive was often seen as
impracticable by many until December of 2007 as until that point many Member States only
provided for mergers (if at all) in a domestic context. Since companies encountered many
legislative and administrative difficulties if they wished to merge with a company in another
Member State, a number of Community level measures have been designed to assist
companies in this regard. The European Company (SE) Statute was adopted in 2001,
and this was followed by the European Cooperative Society (SCE) Statute in 2003.  

Broadly, these regulations created a legislative framework which would allow certain
companies incorporated in different Member States to merge or form a SE or SCE while
avoiding the legal and practical constraints arising from the existence of different leg
systems.  

Interpretation of the Merger Directive
Particular provisions of the Merger Directive have been interpreted by the ECJ in three
cases: ‘Leur-Bloem’, ‘Andersen og Jensen’ and ‘Kofoed’. These cases discuss the meaning
‘transfer of assets’, ‘exchange of shares’ and ‘branch of activity’ as defined by Article 2 of
the Merger Directive.
‘Ernst & Young Deutsche Allgemeine Treuhand AG v Finanzamt Stuttgart-
Körperschaften’ (the case reference number is C-285/07). The ECJ is asked to interpret
Articles 8(1) and (2) of the Merger Directive, in particular, whether these provisions
preclude the taxation rules of a Member State under which, on the transfer of shares in on
EU company limited by shares to another, the transferring party may maintain the book
value of the shares transferred only if the receiving company has itself valued the share
transferred at their book value (‘double book carry-over’).

……………………….. 

Scope for improvement 

  • Required shareholding retention periods. Groups are often left with a complex multiple
    shareholding structure for sometimes between three
    and seven years because of the different retention requirements
    in Member States in order to enjoy exemption
    from capital gains on shares obtained during/at
    the time of the restructuring.
  • Certain transfer and other taxes are not covered by the
    Directive. The Directive of July 17, 1969 concerning indirect
    taxes on the raising of capital does not allow capital
    duty to be levied in the case of mergers. The Merger
    Directive does not, however, prevent Member States
    from levying various transfer taxes, real estate transfer
    taxes, capital gains taxes and stamp duties.
  • These taxes can result in substantial costs on restructuring
    or on rationalising a group following an acquisition.
    As a consequence groups often have to consider less straightforward ways of achieving structural and
    operational rationalisation. For example, in the United Kingdom certain asset
    transfers were subject to 0.5 percent stamp duty if
    the registered office of the acquiring company is
    in the United Kingdom but was subject to a superior stamp duty if the registered office is in another
    State.

 

Future

However, the question remains as to whether the Merger
Directive will now achieve its aim of eliminating the high
tax costs and international double taxation associated with
business restructurings in which companies of different
Member States are involved. As noted above, not even the
Commission considers such initiatives to be a complete
solution; specific targeted measures such as the Merger
Directive are seen as an interim measure to the perceived
panacea for all tax obstacles to the internal market, namely
a common consolidated tax base for the EU-wide activities
of companies. The question remains if they will work
even in the short term.
Looking first at the proposed amendments to the Merger
Directive:
– the 1993 proposal to extend the Merger Directive to all
entities resident and subject to corporation tax in the
Member States floundered because of the asymmetries
found in commercial law governing the legal types of
entities and the diversity of tax arrangements applicable
to them created considerable problems. These
problems led to the suspension of discussions. It may
be inferred from the explanatory memorandum to the
present proposal that it is thought that these problems
will be avoided by naming the entities to which the
Directive is to be extended. However, it is clear that
there still are going to be difficulties because some of
these new entities will be regarded as transparent in
other Member States. The Directive states that these
Member States should extend the benefits of the
Directive to their residents where they regard the profits
of a transparent entity to be the profits of their residents
but this may be difficult to achieve in practice,
especially because under the applicable EU company
law (assuming that the proposal for a Directive on this
is adopted),58 each Member State will be applying its
own company law to the mechanics of the merger or
other operation. Will such law recognize that there is a
merger, and if so, a cross-border merger in a case
including a transparent entity?
– the alignment of the minimum shareholding requirement
with that of the Parent-Subsidiary Directive
takes no account of the fact that in the Merger Directive
the minimum shareholding requirement is
optional for Member States and indeed is described as
a derogation. Moreover, the power in Art. 7(2) to
impose such a minimum shareholding requirement
does not replicate the option in the Parent-Subsidiary
Directive of allowing Member States to replace the
criterion of a holding with that of a holding of voting
rights or to require that the necessary holding must be
maintained for an uninterrupted period of at least two
years. Accordingly, the proposed amendment does not
necessarily ensure that the Merger Directive will
dovetail with the Parent-Subsidiary Directive; and
– there is no definition of the “real” value to be
attributed to shares received on an exchange of shares
or for a transfer of assets.
Moreover, the Merger Directive (even after amendment)
will remain limited in a number of other respects. For
example it seems clear that the reference throughout to
“securities” applies only to shares and therefore not to any
other type of securities (e.g. loan notes) that are a common
feature of company reorganizations. In addition, it is not
clear how the Directive would apply where a merger or
division etc. involves both companies “from Member
States” as well as other companies. Arguably, the Directive
would apply only to the companies that are “from a
Member State”, although it might be possible to apply it
both to these companies and to other companies involved
to the extent that the latter carry on business through a permanent
establishment in a Member State. Moreover, companies
probably qualify if they are listed in the Annex but
are subject to one of the taxes levied by a Member State
other than that under the company law of which they are
established or recognized. In addition dual residence
resolved by tax treaties between EC Member States also
does not prevent access to the Directive. However, in both
cases it is not immediately clear which Member State the
company is “from”. This is relevant because in Art. 1 the
Directive applies only to mergers etc. involving companies
from two or more Member States.
The success of the Merger Directive is likely to be at least
to some extent dependent on the success of the company
law with which it is inextricably linked. Whether the SE
will take off or not is a moot question. It will still face the
same problems faced by any company engaged in crossborder
activities. As regards tax, these include complying
with all the tax regimes under which it operates, possible
difficulties in setting-off losses outside the jurisdiction in
which they are incurred,59 dual residency concerns (which
are likely to be heightened in the case of an SE which is
centrally managed and controlled in a state other than that
of its registered office) and transfer pricing issues.
It is also unclear whether the proposal for a company law
directive on cross-border mergers will really facilitate
company reorganizations in practice. At the time that the
Third Directive was proposed in 1970,60 through to its
adoption on 9 October 1978,61 and again when the proposal
for a Tenth Directive was presented on 14 December
1984,62 the Commission, European Parliament and Economic
and Social Committee were clearly of the view that
the protection of the interests of members and third parties
required that the laws of the Member States relating to
mergers be coordinated and that common provision for
mergers be made in the laws of all the Member States.
The notion of each Member State applying its own laws to
cross-border mergers was rejected, as these laws were so
different to one another. Indeed, this theme that diversity
of laws promotes obstacles to company reconstructions is
echoed in the recitals to the Merger Directive (as noted
above) and is cited in the press release accompanying the
proposal for a new company law directive as the reason
why cross-border mergers are so costly and difficult at
present. Yet that is now the very basis of the current company
law proposal. Moreover, the new proposal covers
126 DFI MAY/JUNE 2004
© 2004 International Bureau of Fiscal Documentation
58. It is unlikely that this issue will arise in connection with the formation of an
SE but if it does then the same difficulties will arise.
59. Subject to the outcome of the Marks & Spencer decision referred to above.
See note 7.
60. OJ C89 14.7.1970, at 20.
61. Id.
62. Id.

only mergers and not, for example demergers. Finally the
insistence in this proposal and in the European Company
Statute on preserving employee participation rights may
prove to be its downfall, as it did for the proposal for a
Tenth Company Law Directive.
It is also difficult to see how the Merger Directive and the
new proposal for a company law directive on cross-border
mergers will interact. The Merger Directive was clearly
drafted on the basis that there would be common company
law rules in each of the Member State permitting all of the
transactions for which it was setting down common tax
rules. As noted above, the Tenth Company Law Directive
was never adopted so this has not happened. It is difficult
to see how the Merger Directive can be applied where the
domestic law of a Member State does not provide for a
merger or one of the others transactions as defined in the
Merger Directive. The Third Company Law Directive may
be of some assistance in this respect in the case of a merger
involving a public limited liability company in that the
domestic corporate laws of the Member States ought to
provide for such a transaction. However, it seems likely
that there will be discrepancies between the individual
corporate laws of the Member States and the scope of the
Merger Directive.
Given that the amendments to the Merger Directive
include its extension to the SE and given that there appears
to be considerable political support within the European
Union, it seems likely that the proposal will be adopted.
Although, as a direct tax measure such adoption is far from
automatic (and it may be the case that not all the amendments
are approved). As noted at the outset of this article,
the progress of direct tax harmonization has been erratic.
Moreover, there is a certain amount of antipathy from the
Member States towards the Commission’s growing enthusiasm
for a common consolidated EU tax base which may
impact negatively on the desire of the Member States to
progress specific targeted harmonization measures such as
improving the Merger Directive.
Ultimately, whether or not the amendments are adopted,
the success of the Merger Directive will depend on its
implementation and application by the Member States.
History does not bode well in this respect.