Opinion of the European Economic and Social Committee on the ‘proposal for a Council Directive amending Directive 90/434/EEC of 23 July 1990 on the common system of taxation applicable to mergers, divisions, transfers of assets and exchanges of shares concerning companies of different Member States’ (COM(2003) 613 final – 2003/0239 CNS)
Date: 2004-02-25
Institutions: European Economic and Social Committee
Subjects: demerger, merger, organisation, share, tax system

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Official Journal of the European Union

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Opinion of the European Economic and Social Committee on the ‘proposal for a Council Directive
amending Directive 90/434/EEC of 23 July 1990 on the common system of taxation applicable to
mergers, divisions, transfers of assets and exchanges of shares concerning companies of different
Member States’

(COM(2003) 613 final – 2003/0239 COD)

(2004/C 110/09)

On 28 October 2003 the Council decided to consult the European Economic and Social Committee, under
Article 262 of the Treaty establishing the European Community, on the above-mentioned proposal.

The Section for Economic and Monetary Union and Economic and Social Cohesion, which was responsible
for preparing the Committee's work on the subject, adopted its opinion on 9 February 2004. The rappor-
teur was Mr Ravoet.

At its 406th plenary session (meeting of 25 February 2004), the European Economic and Social Committee
adopted the following opinion by 114 votes to one with two abstentions.

1. The Commission's strategy on company taxation

This proposal

1.1
in the Commission's
is one element
strategy on company taxation submitted in 2001 (1), in which
it identified a certain number of fiscal obstacles to cross-border
economic activity in the internal market and announced its
short and longer-term plans to remove them.

1.2
The strategy provides for a number of targeted measures
on issues such as extending the directives on dividends, interest
and royalties and mergers, as well as cross-border loss offset,
transfer pricing and double taxation agreements.

1.3
The Commission feels that, in the longer term, compa-
nies must be offered the possibility of being taxed on the basis
of a consolidated basis of assessment
for corporation tax
covering all their activities in the European Union, so as to
escape the expensive inefficiencies which currently result from
the co-existence of 15 (soon to be 25) separate sets of tax
rules.

In its opinion on Direct Company Taxation adopted in
1.4
2002 (2),
the EESC supported the European Commission's
proposals to remove in the short term any form of double taxa-
tion or other tax obstacles faced by companies conducting
internal market.
within
cross-border

activities

the

(1) Commission Communication of 23 October 2001 Towards an
Internal Market without
tax obstacles: A strategy for providing
companies with a consolidated corporate tax base for their EU-wide
activities, COM(2001) 582 final

(2) OJ C 241, 7.10.2002

1.5
As for the longer term, the EESC endorses the aspiration
to an internal market without fiscal obstacles, believing that
common principles have to be established which would
promote an internal market with fair competition. These
common principles would also help to achieve the objectives
of simplification, competitiveness and job creation.

1.6
The strategy adopted by the European Commission in
2001 was first reviewed in November 2003 (3). The conclusion
was that, after two years' work, the Commission's two-tier
strategy on company taxation remains the best approach for
addressing the problems in the internal market and that the
promised measures and initiatives had been carried through.
This was confirmed at the European conference on company
taxation held in Rome on 5 and 6 December 2003 (4).

2. Targeted short-term measures

in the Commission

strategy

One of the short-term objectives set by the European
2.1
Commission in its October 2001 strategy for company taxation
was to adopt proposals intended in particular to update and
widen the scope of the Parent-Subsidiary and Merger Direc-
tives.

Another is to adopt and subsequently modernise the
Interest and Royalties Directive included in the ‘tax
the

2.2
draft
package’, which comprised the code of good conduct,
Savings Directive and the Interest and Royalties Directive.

2.3
The draft directive modernising the Parent-Subsidiary
Directive was adopted at the ECOFIN Council on 22 December
2003. The final text of the directive was published in the Offi-
cial Journal on 13 January 2004 (5).

(3) Communication of 24 November 2003, An Internal Market without
company tax obstacles - achievements, ongoing initiatives and
remaining challenges, COM(2003) 726 final.

(4) See:

www.europa.eu.int/comm/taxation_customs/taxation/compa-

ny_tax/conference_rome.htm

(5) Council Directive 2003/123/EC of 22 December 2003 amending
Directive 90/435/EEC on the common system of taxation applicable
in the case of parent companies and subsidiaries of different
Member States, OJ L 7, 13.1.2004.

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2.4
The Interest-Royalties Directive was adopted on 3 June
2003 (6) and must be transposed into national law by 1 January
2004. A draft directive to modernise this directive was
published by the Commission on 30 December 2003 (7). It is
intended in particular to incorporate substantial improvements
to the scope of the Parent-Subsidiary Directive.

2.5
The draft Merger Directive is thus the last of the three
proposals to be adopted by the Council. It is the fruit of an
impressive and large-scale consultation exercise which made it
possible to identify all the taxation problems associated with
cross-border restructuring.

3. Proposal modernising the directive on the common
system of taxation applicable to mergers, divisions,
transfers of assets and exchanges of shares

3.1
The directive now in force (90/434/EEC) provides for
deferred taxation of capital gains resulting from cross-border
company restructuring in the form of mergers, divisions, trans-
fers of assets and exchanges of shares.

— lowering the minimum holding required to be considered a

parent or subsidiary from 25 % to 10 %;

— updating the list of companies to which the directive
applies so as to include new types of legal entity, especially
certain cooperatives and non-capital based companies,
mutual companies, savings banks, funds and associations
with commercial activity. The new list includes the Euro-
pean Company and the European Cooperative Society
which can be set up as of 2004 and 2006 respectively.

This widening of the scope of the Merger Directive is achieved
by adding new legal forms designated by name to the list of
entities given in an appendix to the directive. It is basically the
same list as that adopted as part of the directive modernising
the Parent-Subsidiary Directive and which should be adopted as
part of the directive modernising the Interest and Royalties
Directive.

This tax deferral regime ensures the fiscal neutrality of
3.2
restructuring operations by allowing a temporary exemption:
the taxation of capital gains is deferred until subsequent
transfer of the assets received. This is why:

3.5.2
The proposal also extends the benefit of the directive
(the tax deferral regime) to companies within its scope which
are corporate taxpayers in their Member State of residence, but
are considered transparent for tax purposes by other Member
States.

— the assets and liabilities of the transferring company are
transferred to the receiving company at their tax value;

— the allotment of shares in the receiving company to share-
holders in the transferring company may not result in the
latter being taxed (otherwise there would be double taxa-
tion).

3.3
The directive of 23 July 1990 thus already provides for
a solution in certain cases to the cross-border obstacle created
by high tax costs linked to business restructurings by guaran-
teeing that a cross-border operation will not give rise to a
higher tax liability than if the operation had been done within
the same Member State.

3.5.2.1 Without modifying the arrangements on transpar-
ency, the draft directive stipulates that this other Member State
may no longer tax its resident taxpayers having an interest in
the company at the time of the transactions covered by the
Directive. These taxpayers will only be taxed on the occasion of
a later disposal of the assets transferred.

3.5.3
The draft extends the scope to include split-offs, i.e.
limited or partial divisions where the transferring company
continues to exist. The tax deferral regime will also be applic-
able to these transactions.

3.4
The proposal modernising the directive replaces a 1993
proposal which was withdrawn by the Commission. It aims to
improve the scope of the current directive and the methods for
tax deferral whilst safeguarding the financial
interests of the
Member States. It also complements a tenth draft directive on
company law aimed at facilitating mergers between companies
in different Member States.

3.5.3.1
A split-off is a transaction whereby, without being
wound up, a company transfers part of its assets and liabilities
constituting one or more branches of activity to a receiving
company. In exchange, the receiving company transfers securi-
ties representing its capital to the shareholders of the transfer-
ring company.

The key elements of the new proposal for modernising

3.5
the Merger Directive are as follows:

3.5.1
The proposal is intended to align the Merger Directive
with the amendments introduced into the Parent-Subsidiary
Directive, namely:

(6) Council Directive 2003/49/EC of 3 June 2003 on a common
system of taxation applicable to interest and royalty payments made
between associated companies of different Member States, OJ L
157, 26.6.2003, p.49.
(7) COM(2003) 841 final

3.5.4
The draft provides fiscal neutrality for the transfer of
the registered office of a European company or a European
cooperative society from one Member State to another. It also
provides for a tax deferral regime which prevents such a
transfer resulting in immediate taxation of capital gains relating
to those of its assets becoming connected with the permanent
establishment that the company transferring its registered office
will now have in the State where it had tax residence. This tax
regime will also refer to provisions or reserves constituted by
the company before transfer of the registered office, to the
possible take-over of losses and to the existence of a permanent
establishment in a third Member State.

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3.5.4.1
The possibility of transferring the registered office is
expressly provided for in the statute of these companies so as
to guarantee the right of establishment, a fundamental freedom.
It
this freedom should not be
is therefore essential
impaired by tax provisions.

that

3.5.5
The draft makes clear that the directive's tax deferral
regime may also apply in the case of companies that decide to
convert their branches into subsidiaries.

The tax deferral provided for in the directive is asso-
3.5.5.1
ciated with keeping the assets and liabilities
transferred
connected with a permanent establishment of the transferring
company, which is not the case when a branch of a foreign
company is converted into a subsidiary of the same company.
In such cases, the assets and liabilities transferred are connected
to the receiving company (the new subsidiary). Since conver-
sions of branches into subsidiaries fall within the aims of the
directive and pose no threat to Member States' taxing rights
(the assets and liabilities remaining under the same tax jurisdic-
tion), it is appropriate to specify that these operations do fall
within the scope of the directive.

3.5.6
The draft also extends the benefit of the directive to
exchanges of shares where the majority of the voting rights in
the acquired company are obtained from shareholders who do
not have tax residence in an EU Member State.

Lastly,

the draft

to
3.5.7
prevent double taxation due to different rules for valuing shares
and assets in different Member States. This applies to asset
transfers and share exchanges.

introduces appropriate

rules

3.5.7.1
Since the receiving company will subsequently be
taxed on the capital gains from the assets transferred, national
tax rules for valuing shares received as a result of an asset
transfer of share exchange had to be harmonised. It is therefore
envisaged that these shares will be ascribed the ‘real’ value that
the assets and liabilities had immediately prior to an asset
transfer or the ‘real’ value which the shares received had at the
time of an exchange of shares (one exception being when own
shares are held).

4.3
The aim of the proposal to modernise the directive is to
improve and extend the tax deferral regime for capital gains
from restructuring. A broad range of
forms of company
(including the European company (SE) and the European coop-
erative society (SCE), as well as the forms of company usually
adopted by SMEs) and restructuring operations (such as split-
offs and conversion of a branch) are now explicitly covered.

4.4
By extending the regime of tax neutrality to the SE and
including in the case of a transfer of registered office,
SCE,
which is an operation specific to the statute of those two forms
of company, the draft directive will contribute to the setting up
and management of European-scale companies free of
the
obstacles associated with the territorially limited tax and
company law of the different Member States.

4.5
All these amendments will enable companies – including
a larger number of SMEs – to benefit fully from the advantages
associated with the single market (through the balanced taxa-
tion of national and cross-border activities, which will ensure
the neutrality of investment and restructuring decisions). This
should improve their competitivity and thus have a positive
impact on job creation and the fight against unemployment.

5. Specific comments

5.1
The Committee feels that the clause stipulating that any
new form of company introduced by a Member State is auto-
matically to be added to the list of that Member State's forms
of company appended to the directive, should be made gener-
ally applicable. This would solve any problems arising from a
failure to update the list.

that

The Committee also considers it essential

5.2
the
modernisation of the Merger, Parent-Subsidiary and Interest
and Royalties Directives be done consistently, both in terms of
the scope (for example, the forms of company listed in the
appendix to the directives) and the conditions needed to qualify
for the proposed tax regime (for example, the holding require-
ment reduced to 10 % in the directive modernising the Parent-
Subsidiary Directive).

4. General comments

5.3
The Committee feels that the extended scope (including
other forms of company and other restructuring operations) is
incomplete — and therefore unsatisfactory — inasmuch as:

4.1
The Merger Directive of 23 July 1990 was designed to
guarantee vital tax neutrality for cross-border company restruc-
turing operations while at
the same time safeguarding the
Member States' financial interests.

— it does not include all types of taxation involved in restruc-
(particularly registration charges and

turing operations
transfer taxes);

4.2
The Committee welcomes the proposals for modernising
this Merger Directive drawn up by the European Commission.
These proposals make essential and appropriate improvements
to the directive of 23 July 1990 and, in principle, do not entail
any unfavourable consequences for companies as compared
with the present situation. They do not require companies to
meet any new fiscal obligation or formality in order to comply.

— the tax deferral regime in the case of transfer of the regis-
tered office is limited to SEs and SCEs, whereas the case law
established by the Court of Justice in its Centros ruling (8)
recognises
to freedom of establishment and
freedom to choose the location of the registered office for
all forms of company.

the right

(8) Case no. C 212/97 of 9 March 1999.

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5.4
Finally, the Committee insists that the fiscal neutrality of
cross-border restructuring operations should be fully guaran-
teed, particularly as regards the take-over of losses and the
immunisation of provisions and reserves.

6. Conclusions

The Committee wholeheartedly supports the proposals
6.1
to amend the Merger Directive drawn up by the European
Commission. These proposals make essential and appropriate
improvements to the directive and will enable companies —

including SEs, SCEs and a larger number of SMEs — to benefit
fully from the advantages associated with the single market,
which should improve their competitivity and thus have a posi-
tive impact on job creation and the fight against unemploy-
ment.

6.2
However, the Committee urges the Commission to re-
examine certain key aspects which remain outstanding. These
are referred to in the Committee's specific comments.

Brussels, 25 February 2004

The President

of the European Economic and Social
Committee

Roger BRIESCH