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HMRC internal manual

Company Taxation Manual

HM Revenue & Customs
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Corporation tax: company reconstructions: EU Tax Merger Directive

EU Council Directive 2009/133/EC addresses ‘the common system of taxation relating to mergers, divisions, partial divisions, transfers of assets and exchanges of shares concerning companies of different Member States and to the transfer of a registered office of an SE or SCE between different Member States’. An SE is a European Company, Societas Europea, and an SCE is a European Cooperative Society, Societas Cooperativa Europea.

The Directive consolidates a number of earlier instruments listed there, including the original Directive 90/434/EC and amending Directive 2005/19/EC. More detail, including on the various Statutory Instruments which implement the tax aspects of these provisions, may be found at CG45700. The main Directive focuses largely on chargeable gains, although loan relationships, derivative contracts, intangible fixed assets and capital allowances are also affected. CG45700 gives the references.

Council Directive 2005/56/EC addresses the legislative and administrative issues associated with cross-border mergers. It was implemented by SI2007/2974. Cross border mergers may take several forms

  • merger by absorption, where a company or companies transfer trading activities to an existing company
  • merger by new company formation, similar but with a newly formed company
  • merger by absorption of wholly owned subsidiary, where a company transfers its trade up to a parent.

The schemes may, or may not, involve the special EU entities. A novel feature for UK law is dissolution by operation of law without liquidation. No PART23/CTA10 distribution arises in these circumstances - CTA10/S1031.

Implications for the UK corporation tax system other than those mentioned above are limited. Paragraphs 87A to 87C of FA98/SCH18 (the main company administrative rules) were added by F(2)A05/S61 following provision made for the establishment of SEs and SCEs by Council Directive 2001/2157/EC and for the transfer of registered offices to an SE or SCE by Council Directive 2005/19/EC. If these transitional rules do not apply, because the merger does not involve an SE or SCE, care should be taken to ensure that a company dissolved by operation of law in the course of the merger scheme is adequately catered for in the merger terms.

Terms of Merger

The process requires the preparation of a ‘Draft Terms of Merger’ document which sets out the key terms and operative date. Shareholder approval is needed. This is generally a formality in a group reconstruction but there may be a need to protect minority interests. In some cases the approval of creditors is needed.

A ‘Pre Merger Certificate’ must be issued by the ‘competent authority’ (in England and Wales the High Court, but it may be in another State) to confirm that Directive requirements and local implementing law have been observed. Any actual or contingent liabilities should be considered in advance, and this should include the need to make returns and payments by a successor on behalf of a company which is dissolved. It may be noted that Article 15 of Directive 2009/133/EC allows a Member State to refuse to apply or withdraw the benefits of any reconstruction reliefs (Articles 4 to 14 of the Directive) where it appears that one of operations in the scheme has as its principal objective or one of its principal objectives tax evasion or avoidance.

Each UK merging company must give notice to the Registrar of Companies and the Registrar publishes notice of receipt in the London Gazette before any approval meeting.