Loan relationships: group continuity: the European Mergers Tax Directive
Formation of European company by merger and business transfers
The European Mergers Tax Directive or EMTD (90/434/EEC) came into force in 1992. It aims to enhance competition within Europe by removing taxation obstacles to cross border business re-structuring operations in member countries, allowing enterprises to participate in mergers, divisions, transfers of assets or exchanges of shares.
It facilitates the merger of a company in one EU member state with a company or companies in other EU member states by forming a type of corporate vehicle known as a ‘European company’, or ‘Societas Europaea’ (SE). An SE has its own legislative framework and its registration can easily be transferred from state to state, thereby reducing many of the legal and practical constraints arising from the widely different corporate laws throughout Europe.
Co-operative societies benefit from a similar merger structure, where the SE is replaced by a European Co-operative Society (SCE).
Tax rules first introduced in F(No 2)A 2005 ensure that a UK company’s decision to merge into an SE is not disadvantaged or driven by tax considerations. The merging companies must be resident in different EU member states and the SE must be subject to tax as a UK resident or as a UK permanent establishment of a non-resident. The rules also apply where a company in one member state transfers all or part of its business to a company or companies in other EU member states, usually wholly in exchange for shares. The legislation covers mergers or transfers on or after 1 April 2005.
CTA09/PT5/CH13 (transfers of business) and CH14 (mergers) apply to loan relationships of the UK company at the time of the event (see CTA09/S421 onwards). The transfer in the course of the merger of an asset or liability representing a loan relationship to a transferee is disregarded, except for
- determining the exchange gains and losses to be brought into account, and for determining on which company they are brought into account; and
- determining on which company any debits or credits that do not relate to the merger (for example, periodic payments under a swap) are brought into account.
The transferor and transferee companies are deemed to be the same company. In essence, the effect of these rules is to apply the intra-group transfer rules in CTA09/S625 (as they stood before the FA 2005 amendments). Where the company uses fair value or mark-to-market accounting for the loan relationship, CTA09/S628 applies as it does to conventional intra-group transfers.
CTA09/PT5/CH13 and CH14 do not apply if the merger or transfer of business is part of a scheme or arrangement in which tax avoidance is the main purpose, or one of the main purposes (CTA09/S426, S437). A company may apply to HMRC for clearance before a merger or transfer is effected. Any clearance application under this section should be sent to: Clearance and Counteraction Team, Anti-Avoidance Group, First Floor, 22 Kingsway, London, WC2B 6NR, and copied to the HMRC Customer Compliance Manager if one is acting.
The chapters also do not apply to the transfer of a business if the transferor is a ‘transparent entity’ - a company without ordinary share capital and resident in a member state other than the UK (CTA09/S438).
Where a merger or business transfer involves a transfer of loan relationships of a permanent establishment (of a UK company) in a Member State other than the UK, the UK has taxing rights on the transaction but double taxation relief is given for tax which would have been charged by the host Member State (absent the application of the Mergers Directive) in which the non-UK permanent establishment is located (TIOPA10/S116 to S119). Clearance applications under TIOPA10/S117(4) should be sent to the Anti-Avoidance Group Clearance and Counteraction Team at the above-mentioned address.