Entstrickung und Verstrickung von Wirtschaftsgütern nach dem SEStEG (German Edition)

Furthermore, within the EU, principles resulting from EU law need to be observed. Finally, administrative aspects of taxation are taken into account in order to find feasible solutions. The following issues will be discussed here next. First, the tax effects of cross-border business reorganizations. In such reorganizations, assets and liabilities are transferred across a border from one state to another. This is, for example, the case where a company in one state is merged into another company in another state. And secondly, the crossborder tax effects of business reorganizations are examined.

In such reorganizations, the transaction itself has a national character. However, tax effects may still occur in another country in which the reorganizing company has some sort of nexus. This is, for example, the case where a national company with permanent establishments abroad is transformed into an SE. Accordingly, additional guidelines need to be defined in cross-border situations since different tax authorities are Cf.

This is of major importance for the accrued hidden reserves. This will be explored in the following passages. If more than one country is affected by a transaction, taxing rights may collide. Generally, individual states are sovereign. They are allowed to impose taxes. A personal connection is generally dependent on residence, habitual abode or citizenship if natural persons are concerned, or statutory seat or place of effective management if legal entities are considered.

Objective circumstances are given if part of a transaction is realized within the territory or if the object of the transaction is connected to the territory. If this is the case, the person or entity is called non-resident. When extending this principle to cross-border transactions, this implies that decisions to engage in cross-border business may not be hindered by taxes. The result can be, on the one hand, international double or multiple taxation.

Double taxation occurs when one taxpayer i. On the other hand, uncoordinated tax systems may also lead to minor Regarding the other aspects of reorganizations treatment of loss carry forwards, tax incentives and transaction taxes , one can refer to the guidelines established in Chapter 3. These are still valid in a cross-border context. Citizenship and statutory seat are legal criteria; residence, habitual abode and place of effective management are economic criteria. This includes material as well as formal obstacles.

From a microeconomic perspective, free competition, flow of capital and exchange of labor may be influenced or hindered. The reason is that, in case of double taxation, international transactions cause an extra tax compared to national transactions resulting in a reduced return on investment. In case of minor taxation, companies doing business internationally receive unjustified competitive advantages since they pay less taxes than companies doing business nationally and can thus increase their return on investment. Additionally, from a macroeconomic perspective, export oriented countries are interested in outbound investments of their companies in order to efficiently use manufacturing capacities and secure employment, whereas countries with high imports, like developing countries, need foreign capital to modernize and strengthen their economies.

Both double and minor taxation contradict these goals. These effects are inconsistent with international neutrality or neutrality towards competition. Otherwise the treasury would receive too little or too much income and thus would improve or worsen its fiscal position. This implies that both businesses and treasuries may not be put into a more favorable or disadvantageous position upon cross-border transaction.

Furthermore, it follows that accrued hidden reserves are only recognized and taxed when they are realized realization principle. When extending this principle to cross-border transactions, this implies from a taxpayer perspective that he still needs to be subject to tax ac- Cf. International neutrality, which shall prevent distortions to international competition, can be interpreted differently, depending on whose welfare shall be maximized. Capital export neutrality requires neutrality from the point of view of exporting countries.

Capital import neutrality requires neutrality from the point of view of the importing countries. However, these concepts do not provide guidance on how to tax unrealized gains, as they only deal with the allocation of income from recurring transactions among the involved countries. This means that they are apportioned according to the origin of the profits. Origin of profits equals the place where the profits or accrued hidden reserves are generated.

VERSTRICKUNG - Definition and synonyms of Verstrickung in the German dictionary

Genuine hidden reserves emerge due to increases in the value of the asset, whereas artificial hidden reserves are built up due to deductions for depreciations which are different from economic wear and tear of the asset. In the national context, in both cases the accrued hidden reserves are captured and taxed upon realization i. Thus, the accrual only results in interest and liquidity effects. As has been stated above, from the perspective of only one country, a taxation needs to be guaranteed since decreases in value have been tax-deductible in earlier years in the country affected. From an international perspective, it has to be pointed out that assets transferred could be depreciated more than once if they were valued at the acquisition costs in the new country without a tax on the difference between the acquisition costs and the book The ability to pay can be interpreted differently, either based on the valuations of the residence country or the source country.

In the source country his ability to pay is determined on his source income. Inter-nation equity can be interpreted differently in the context of current income, either based on the place of supply supply approach or based on the place of supply and demand supply-demand approach.

If such reserves are interpreted as future potential profits of the assets transferred, it could be argued that they should be taxed when actually realized in the future, which might occur abroad. However, when evaluating genuine hidden reserves from the perspective of one state, various reasons suggest a taxing right of the exiting country.

Otherwise, taxpayers doing business across a border would be treated more favorable than taxpayers doing business in only one country, even though they have the same ability to pay. For further details on the issue of valuation see Section 4. Recently of the same opinion German Court of Justice.

Within the context of international equity, the question can be restated in the following way: Can a tax deferral as granted in the national case still be provided in an international case or are there reasons which justify an immediate taxation? As has been defined in Chapter 3 - as a requirement for a tax deferral at the point of time of the restructuring - the taxation of accrued hidden reserves may be postponed as long as the realization and taxation of these unrealized gains is guaranteed at some later point in time. This is even though a market realization does not take place.

Otherwise, assets, companies or shareholders could be transferred without paying tax on the accrued gains i. A guarantee may not be provided when assets leave the jurisdictional sphere of a country. This includes the fear of losing the taxing right as well as the fear of not being able to effectively collect taxes upon a later point in time. Shareholders only need to be taken into account as far as the sale of shares is subject to taxation. The other alternative is to restrict the scope of the rules on reorganizations to national transactions. For companies this implies that the statutory seat and place of effective management are transferred abroad or that the company is liquidated due to a cross-border merger.

For individuals it implies that the residence and habitual abode are transferred abroad. An exit from limited taxation generally occurs when the objective nexus in the exiting country is given up i. This is, for example, the case if an unincorporated business is given up or assets are transferred across a border e. Double tax treaties do not establish a taxing right but rather restrict taxing rights, which exist according to national law, by allocating these rights primarily to one of the contracting states whereas the other contracting state will waive its right or will be limited to tax, up to only a certain amount.

According to the OECD model, the taxing right remains within a country, if a presence i. Such a presence is given if a certain de minimis connection exists and encompasses not only current income but also noncurrent income i. A taxing right may also get lost or be restricted if national tax law changes e. An exception applies to Cyprus. See Table 14 in the appendix. Here only the source state is allowed to tax due to the physical connection to the state of location situs principle.

Accordingly, the taxing rights of the source state are upheld with regard to current income as well as capital gains. Here the taxing right in the source country is limited with regard to the tax base. Generally, the business needs to be integrated in the foreign economy to a certain extent as defined in Art. In these cases current income as well as capital gains are only taxable in the country in which the place of effective management of the enterprise is situated. For general details on the OECD model see e. The other state needs to provide relief via a tax exemption or a tax credit according to Art.

If a permanent establishment exists the other contracting state state of residence of the entrepreneur has to avoid a double taxation by granting relief via a tax exemption or a tax credit according to Art. For more details on the concept of permanent establishment see Jacobs, If types of income relating to the business but separately dealt with in the OECD model are involved, Art. It states that any resulting gains or losses upon disposal are only taxable by the state of residence of the shareholder. Accordingly, the residence state has the exclusive right to tax. As has been stated above, this does not only need to be avoided from the perspective of the businesses affected, but also needs to be avoided In this case, the taxing right on noncurrent income is granted to the residence state, even though the source state has the right to tax current income e.

Furthermore, they can also not be found in specific treaties. This implies that capital gains are still taxable in the exiting country, but a credit needs to be granted for foreign taxes paid. This implies that capital gains may only be taxed in the entering country, and thus need to be exempted from tax in the exiting country. Wassermeyer is of the opinion, that in case of transfers of assets between a parent company and its permanent establishments, the taxing right remains independent of the physical location of the asset or the attribution to a certain entity upon a subsequent realization.

This is a severe burden, for example, when hidden reserves accrued up to the cross-border transaction are never realized. Accordingly, reorganization must be neutral from the perspective of the involved treasuries as well in order to respect the legitimate interest of a state in maintaining its tax base. This implies that both businesses and treasuries may neither be put into an advantageous nor a disadvantageous position upon cross-border reorganizations.

Depending on the values used - in the exiting country to assess the amount of hidden reserves and in the new country to take the asset into account in the tax balance sheet - the overall taxable amount may be equal, lower or higher than in a purely national case.

This may result in onetime, minor or double taxation. To be more precise, in case the exiting country uses the fair value and the new country uses the historical costs, hidden reserves are taxed more then once double taxation. In case the exiting country does not tax established hidden reserves and the new country uses the fair market value, the hidden reserves are taxed less than once minor taxation. For example, with regard to the book value, this could occur if different elements are included in the acquisition cost.

The other way around, if the new country attributes a lower value, the depreciable amount is lower and the taxable gain at disposal higher. Thus, the values used in the countries involved need to be aligned to each other, which implies that they are equal to each other, in order to avoid that tax effects influence business decisions. According to international equity, the taxpayer shall be taxed according to his ability to pay. Then, the relevant tax amount in a crossborder reorganization or transfer may not be based on an assessment at the crossing of the border but may only be based on the realization of hidden reserves in a market transaction e.

If the taxing right is restricted upon a cross-border reorganization due to national or treaty law, the state where the reserves have been accrued, may exercise its taxing right. This is also in compliance with Art. Of other opinion in the context of transfers between head offices and their permanent establishments: If instead of the fair market value the book value would be used in both countries, this would imply that the exiting country would need to receive part of the capital gains upon a subsequent disposal of the transferred assets.

However, it would be questionable how to appropriately allocate the gains, if the fair market value had not been determined at transfer.

The allocating of taxing rights of subsequent income and gains i. See on that issue e. Regarding the valuation, the amount to be taxed in this source state shall be based on the fair market value. This value also needs to be used by the country in which the assets or shares are transferred. Overall, the taxpayer should be taxed once according to his ability to pay. This is in compliance with the subsidiarity principle established in Art. Every individual and legal entity within the EU may refer to them when engaged in cross-border transactions.

With respect to secondary law, regulations and directives need to be followed. Furthermore, see Schaumburg, Conversely, the harmonization of indirect taxes is stipulated in Art. The freedoms do not only apply within the European Union but also to the countries of the European Economic Area i. In purely domestic cases the fundamental freedoms of the EC Treaty are not applicable. In such cases the national constitutions may provide protection. Generally, the aim is to abolish obstacles to the free movement of goods, persons, services and capital in order to achieve an internal market and thus, to establish a system that ensures that competition in the internal market is not distorted Art.

Consequently, all economic agents should have unrestricted access to any national market in the EU in both directions inbound and outbound and should be able to compete according to comparable conditions as domestic economic agents. Other fundamental freedoms like the right of residence Art. Nationals covered are companies and firms formed in accordance with the law of a member state and having their registered office, central administration or principal place of business within the Community as well as natural persons who are nationals of a member state.

An establishment is a fixed place of business through which the business of an enterprise is wholly or partly carried on agencies, branches or subsidiaries. Specifically, it covers the right to take up and pursue ac- Cf. For details on these freedoms see e. Consequently, the capital shall find its way to the most efficient investment without any obstacles. Accordingly, free movement of capital should be interpreted more narrowly as to only prohibit barriers to such flows.

Regarding the differences of both fundamental freedoms see also Lausterer, This implies that the outcome of testing both freedoms will be comparable. Such indirect discriminations occur - according to the European Court of Justice - if the disadvantageous rules, which apply independent of the Cf.

In order to determine whether the cause of a disadvantage is a discrimination or a restriction this is generally the case if the reason lies in unilateral rules or a disparity this is generally the case if the reason lies in differing tax systems of two or more countries one should imagine two equivalent tax systems.

If the disadvantage disappears in such a uniform environment, the cause is a disparity. Otherwise, if the disadvantage remains, the cause is a discrimination or a restriction. In case of the other way around, i. In favor of the application Hahn, Accordingly, in general, corporations subject to unlimited taxation and corporations subject to limited taxation are already in a similar situation if the profit is mainly determined in the same way.

Accordingly, the country of residence or domicile is prohibited from hindering cross-border transactions of its resident individuals or companies, such as the establishment of a business in another member state, or making them Cf. This implies that the result needs to be the same. It is not necessary to follow systematic guiding tax principles, though, in order to achieve this result.

The scope of justification is quite narrow though. More precisely, a measure which is liable to hinder a fundamental freedom can be allowed only if certain conditions are met. Secondly, the measure pursues a legitimate objective compatible with the EC Treaty. Thus it is justified by imperative reasons in the public interest. Third, its application is appropriate for ensuring the attainment of the objective thus pursued. Fourth, the measure does not go beyond what is necessary to attain the objective. This means that the measure is proportionate, which implies that there is no less restrictive way to achieve the goal.

Against this background, in accordance with settled case-law, diminution of tax receipts cannot be regarded as a matter of overriding general interest. Consequently, it cannot be relied upon in order to justify a measure which is, in principle, contrary to a fundamental freedom.

They are capable of justifying a restriction on the exercise of fundamental freedoms, provided that certain conditions are met. The justification based on the aim of preventing tax avoidance is only accepted if the measure concerned is specifically designed to exclude from a tax advantage purely artificial arrangements aimed at circumventing national tax law. Contrarily, if the measure covers any situation of the taxpayer independent of whether it is abusive or not, this will not suffice as justification. Skeptical towards the current efficiency of the cooperation between the treasuries and the argument itself Hey, In order to evaluate a rule, the European Court of Justice looks at the single taxpayer.

This implies that taxpayers, who form an economic unity e. It implies that the state to which the income has an economical link is mainly responsible for that income. Consequently, a balanced allocation of the taxing rights between member states may be a legitimate reason for obstacles. In this context, in earlier decisions the court just looked at the rules in one tax system. Whereas regulations are directly applicable, directives need to be transformed into national law within a certain time frame Art.

As a harmonization of direct taxes is generally not stipulated in the EC Treaty, EU-wide measures may only be adopted in compliance with Art. Consequently, directives for the approximation of such laws, regulations or administrative provisions of the member states, which directly affect the establishment or functioning of the common market, may be issued. However, a unanimous agreement is required in the Council of Ministers to decide such EU tax measures. Thus, each member state retains an effective right to veto the adoption of income tax measures that would apply across the EU, and consequently directives are rare.

Thus, the fundamental freedoms established in the EC Treaty take precedence over secondary law in place. Thus, there is a strict prohibition to establish any obstacles at the border with regard to assets, persons and capital. In the context of reorganizations the Merger Directive has been concluded. This is the prevailing opinion in tax law. In company law scholars are divided. Whereas some scholars also take the view that primary law has to be observed, others take the view that regulations may set own standards as they put the fundamental freedoms into more precise terms.

In this context, the European Court of Justice has made some judgments which may provide further guidance on how to interpret the EC Treaty. Thus, restrictions of member states on the exit of companies established in their territory were held to be in line with the freedom of establishment. A denial of the tax deferral was seen as being disproportionate in order to avoid abusive schemes.

Here, the European Court of Justice held that the levying of taxes by the residence state upon exit i. This is generally not considered in line with EU law as it Cf. In the specific case the company law perspective was directly linked to the tax perspective. Nevertheless, the predominant view in literature considers the case to be relevant in the context of company law. However, the member states may tax the hidden reserves which have been established within their territory upon a later realization of the hidden reserves.

Contrarily, with regard to tax law, member states may not be allowed to exercise their taxing right without limitations. When looking at losses of the transferring or exiting company, the European Court of Justice ruled that it is primarily the task of the source country to allow a deduction for losses which have originated in its territory territoriality principle.

However, it also violates EU law if losses get lost because they can neither be deducted in the country of source i. Thus, it is subsidiarily the task of the residence country to provide a deduction for foreign losses. Specifically, the taxpayer incurs opportunity costs as he cannot use the asset for other purposes like securing a private loan.

In detail 52 4 Taxation of European Companies during the time of restructuring in the current environment Regarding the general issue of double taxation in cross-border cases, according to Art. However, in the absence of any unifying or harmonizing community measures, member states retain the power to define, by treaty or unilaterally, the criteria for allocating their powers of taxation, particularly with a view to eliminating double taxation. Consequently, they may neither be discriminated nor restricted, unless this can be justified.

Justifications are rather narrowly defined though and national measures need to be proportionate. Within the context of reorganizations, judgments made by the European Court of Justice may provide guidance on the treatment of accrued hidden reserves transferred in assets, persons or companies across a border as well as on the treatment of losses of entities.

Feasibility In order to achieve the guiding tax principles established above, tax laws need to be enforceable in practice i. First, the complexity of the legal system needs to be low. Consequently, the rules need to be simple to understand in order to ensure that they can be easily applied and reasonable results can be derived. Further obligations for the residence state were not introduced, apparently in order to avoid a level playing field with regard to loss trafficking in the EU. Critical towards an obligation for the residence state: He points out that - as a result - the residence state is held liable if the source country restricts its loss compensation.

Simplicity, certainty and transparency are also part of the requirements established by the European Commission in the context of company taxation within the internal market. For the treasury, the costs result from the determination of the facts and circumstances of taxable events, which may be more burdensome in cross-border cases and may for example also include the costs of controlling abuse of law.

For the taxpayer, the costs do not only result from fulfilling tax reporting requirements, but also from the efforts made to determine the tax consequences of business opportunities. For this purpose, the taxable event must be sufficiently defined i. It is necessary that, in terms of content, object, aim and extent, a provision establishing grounds for taxation is determined such that the tax burden is foreseeable and calculable by the taxpayer.

With regard to the consequences for taxation, the legality of administrative practice cannot be adequately monitored if the taxable event is not clearly defined. Whilst it is not possible to exclude completely indefinite legal terms from tax legislation, these should not result in the principle of legal certainty being abandoned.

Rather, these should transfer to another level the task of defining the taxable events in statute using objective and verifiable criteria. They affect different entities and shareholders. Consequently, for the taxpayers it is important to provide simple and easily understandable rules, as far as this is possible in order to adequately regulate such transactions. Furthermore, such transactions have a cross-border dimension.

Thus, for the treasury it is crucial that the facts and circumstances of a taxable event can easily be determined and that taxing rights can be enforced. Additionally, administrative aspects are of relevance. The relative compliance costs generally decrease as the size of the enterprise increases. For reorganizations this implies that no burdensome tax charges may be levied. Based on international equity, the taxpayer shall be held liable to pay taxes according to his ability to pay.

This implies that a taxation of cross-border reorganizations should apply when hidden reserves are actually realized after the reorganization process. For the treasury, international neutrality, interpreted as fiscal neutrality, requires that the treasury may not be put in a worse position due to a specific transaction. This implies that treasuries may not worsen its own fiscal position due to a cross-border reorganization. Based on international equity, a taxing right exists for the treasury with regard to hidden reserves established within its territory. If upon a reorganization the treasury is about to lose this taxing right it may exercise it.

Thus, the perspective of the taxpayer and the treasury are contrary to each other with regard to the point of time and the amount to be taxed.

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Therefore, the task will be to design the taxing right in such a way that it combines both views. For the taxpayer, the fundamental freedoms provide that individuals and entities may not be discriminated against nor may their cross-border transactions be restricted because of the cross-border dimension. Exceptions only apply if a discrimination or restriction can be justified. For the treasury, this implies that taxing rights may not be upheld without constraints.

Consequently, the issue on when to tax accrued hidden reserves may be solved in favor of the taxpayer. Specifically, these include the entry into an SE, the transfer of the registered office and the exit out of an SE. According to the European Company Statute, there are four possible ways to establish an SE from a company law point of view: These are also the basis of the tax analysis of the entry structures: In each case the companies involved need to be formed under the law of one member state and need to have their registered office and head office within the EU. In addition, a cross-border relationship has to be given.

Depending on the type of formation, different kinds of entities may be eligible to form an SE. Regarding the scope, the companies which may establish an SE generally need to be formed under the law of a member state, with their registered office and head office within the Community. Finally, two years after registration an SE may be converted back into a public limited-liability company of the member state of its registered office. This exit out of an SE shall neither result in the winding up of the company nor in the creation of a new legal person Art.

As has been stated before, there are no specific tax provisions in the European Company Statute. Instead, general EU law, bilateral treaty law and national tax law applies as to public limited-liability companies of the member states involved, unless SE specific rules are in place. Therefore, the directive will be discussed up front and with the specific cases.

Specifically, the comparative analysis is structured in the following way. When examining the different cases, first, company law aspects are explained. Next, the general tax rules will be discussed. Here, the rules of the Merger Directive provide guidance. As the Merger Directive is not directly applicable but needs to be transposed into national law, finally, the current treatment in the member states is assessed. For the tax analysis, depending on the form of establishment of the SE different levels need to be distinguished: These may include the level of the company being acquired i.

Its aim is to create conditions analogous to those of an internal market in order to ensure the establishment and effective functioning of the common market. Thus, restructurings within the EU shall not be hampered by restrictions and especially not be distorted by As is shown below, there are some rules regarding noncurrent transactions which only apply to SEs, but mainly rules cover SEs and other corporations.

Since the Merger Directive is accompanied by a list of eligible companies this list needed to be amended at least for clarification purposes. This will be dealt with in detail in Section 4. Before examining the reorganization transactions relevant for SEs, two articles, which concern all transactions covered by the Merger Directive, shall be briefly discussed here and later on, where applicable, with the respective transactions.

The first article is Art. According to the predominant view in the literature, the Merger Directive automatically - without an amendment - applied to the SE. In case a company is deemed to reside outside the EU for tax purposes, it is not eligible for the special treatment. This may occur if the company is a dual resident company and an applicable double tax treaty with a tie-breaker rule comparable to Art. The second article is Art. It states that a member state may refuse the treatment provided in the Merger Directive if the transaction is principally driven by the objective of tax evasion or tax avoidance.

Abuse may not be presumed though in case that valid commercial reasons are given, for example the restructuring or rationalization of the activities of the companies participating in the operation. Furthermore, abuse has to be proven on a case-by case basis. General assumptions on abusive treatment are not valid. The amended Merger Directive had to be translated into national law until 1 January with regard to the rules affecting the SE extending the list of companies, regulating the transfer of the registered office of an SE and by 1 January with regard to the other amendments.

As a result, either the acquiring company may take the form of an SE merger by acquisition or a new company may be formed as an SE merger by for- Cf.

Synonyms and antonyms of Verstrickung in the German dictionary of synonyms

Furthermore, if more than one measure is available the least onerous need to be chosen. See also Figure 1. More precisely, this includes two transactions: This means that the business assets and liabilities are transferred as a whole and via a single act. Consequently, no minority shareholders will remain. Therefore, no distinction is made in the examination. In the following, the tax consequences at the entity level and the shareholder level are analyzed in detail. See also Figure 2. Regarding a proposal by the European Commission on simplification of company law requirements for mergers and divisions e.

This has been done in German company law, for example. An exception effects the treatment of prior holdings. Such holdings are only applicable to mergers by acquisition. Special tax rules apply if a foreign permanent establishment constitutes part of the assets. Thus, this situation is also examined. With regard to the receiving entity, the treatment of wholly or partly taxexempt reserves and provisions, of losses, of merging gains or losses and of transaction taxes is analyzed. Thus, instead of a taxation of the assets transferred based on the fair market value at reorganization, the present book value is used, deferring an immediate taxation.

Instead of the present book value, a lower going concern value may be the basis if this value has been tax effective prior to the merger. In Figure 1 merger by acquisition this has been depicted by leaving a permanent establishment in member state X. In Figure 2 merger by formation of a new company this equals the permanent establishments in member state X and Y.

Thus the financial interest is guaranteed. If the receiving company has the option to calculate the depreciation and capital gains and losses according to different rules and follows this for certain or all assets and liabilities, the non-taxation is waived accordingly for these specific assets and liabilities Art. On the treatment of assets and liabilities, which are not effectively connected to a permanent establishment, the Merger Directive is silent. Merger Directive, especially commentary to Art. For the EU i. For company law regarding non-SEs see also the information provided by the Euopean Commission, available at: Furthermore, see for Austria Staringer, Alternatively, absorbed company may elect to pay tax immediately at reduced rate on its long-term capital gains realized on its depreciable assets transferred.

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From a tax point of view, the cross-border merger is regulated due to the transposition of the Merger Directive in most of the countries, providing tax relief in accordance with Art. The tax rules are generally applicable not only to the SE but also to corporations in the EU member states as stated in Art.

Even though this general frame is equal, its interpretation differs throughout the member states. Especially in the new member states e. Romania, Slovak Republic, Slovenia , there is no administrative guidance on how to define an effective connection, leading to uncertainty. Furthermore, in the Slovak Republic the term tax value is not defined for nondepreciable assets which may lead to an immediate taxation of hidden reserves. In Denmark not only assets and liabilities connected to a permanent establishment are spared but also real property located in Denmark.

In Austria and Germany reference is not given to the remainder of a permanent establishment, but rather it is stated that the taxing right may not be restricted with regard to the assets and liabilities transferred. In France, deferral is provided if the future taxation of the deferred capital gains is ensured but only if approved by the ministry of finance. Regarding the interpretation of the effective connection, it is generally necessary that the assets remain physically present in the country of the transferring entity and that they are used in the conduct of the business or are the object of the business itself in case of their production or trade.

In Germany certain assets are deemed to not be effectively connected with a permanent establishment. This is the case for shares, financial assets and intangible assets like patents and goodwill. These assets are said to be connected to the whole group of entities rather than a specific permanent establishment. In Germany this requires that the foreign merger is comparable to a German merger. Exceptions exist for France and Spain, among others. In France mergers involving a receiving company outside the EU are covered provided that a double tax treaty exist which contains a mutual administrative assistance clause and the transaction is approved by the Ministry of Finance.

In Spain such transactions are covered as long as an individual or a company, which is subject to personal or corporate income tax, is involved. In Germany tax deferral is granted upon request of the taxpayer. Otherwise the transaction becomes taxable. Consequently, for example, shares of subsidiaries are covered by the deferral provisions.

In Ireland and the United Kingdom relief is explicitly also granted with regard to the capital allowance. Accordingly, there are no clawbacks of tax depreciation upon the merger. This is not the case in Latvia though with regard to production technology equipment, as depreciation has to be recaptured in case of a reorganization.

In France the tax deferral is granted to depreciable assets at the time of transfer, however, in the following five or fifteen years - depending on the asset - the deferred amount is added back to taxable income and taxed at the standard corporate tax rate at the receiving entity.

In return, depreciation is not based on the book value but on the fair market value. There is the option that, instead of the receiving company, the transferring company is immediately taxed on the accrued capital gains of depreciable assets at the reduced rate on long-term capital gains. This may, in certain cases, be favorable. If the conditions mentioned above are not met, all the member states will tax the capital gains which have accrued in the assets. This is subject to the conditions that the receiving country is located in an EU state or an EEA state provided that the applicable tax treaty includes a mutual assistance agreement.

Moreover, the taxpayer needs to apply for the preferential treatment. Under this approach, the tax is assessed at the moment of the reorganization but not levied until a subsequent disposal takes place or a further reorganization which grants the taxing right to a country outside the European Union. The taxation upon a subsequent disposal or further reorganization will only take place if it occurs within ten years after the merger. The taxable amount is limited to the realized gain. Accordingly, decreases in value between the reorganization and the sale will be taken into account to determine the tax base, unless the decrease is considered in the receiving country.

This implies that Austria may not tax at the time of the disposal as far as the loss is not taken into consideration This implicitly means that permanent establishments may not carry out financing activities, holding activities or licensing activities for the whole unit. This implies that permanent establishments may just carry out holding activities. This may be the case if hidden reserves have been allocated to Austria at the time of the merger but no gains are generated on the actual sale.

Additionally, no interest on a subsequent payment is levied. A taxation will, however, occur with regard to intangible long-term assets. If Austria loses its taxing right for intangible assets and these are capitalized in the entering country upon transfer, any expenses related to this intangible asset, which were deducted for tax purposes in Austria, are subject to tax.

Denmark, Hungary, Italy, Sweden, Spain. The same result may be affected by not following the scope of the provision for tax deferral. In Sweden the receiving company may use the fair market value for depreciable assets. This may be favorable since only then the receiving company may continue to use the declining balance method for depreciation. As a result, no hidden reserves escape taxation, while at the same time the receiving company retains its right to use the declining balance method on depreciation of the appreciated value.

Of the countries with an option for taxation, Italy combines the immediate taxation with a reduced tax rate. The choice is up to the receiving company which also has to pay the tax. This may be of interest in case of a merger deficit. A merger deficit occurs if the receiving company held shares in the absorbed company prior to the merger and the acquisition costs of the shares in the absorbed company are higher than the tax value of the assets of the absorbed company at the time of the merger.

In order to avoid abuse the assets transferred need to be held for four years. Regarding the valuation of these assets in the country of the receiving entity see also the discussion in Section 4. Belgium, on the one hand, does not offer beneficial tax rules to cross-border merger. Accordingly, a transferring Belgium company is subject to liquidation implying that accrued capital gains are included in taxable income.

Cyprus and Estonia, on the other hand, do not claim a taxing right upon a cross-border merger. In Cyprus accrued capital gains are not taxable independent of whether they are effectively connected to a permanent establishment or not. In Estonia a special tax system applies. In this system, a tax is not levied when realized at the level of the corporation but only when distributed to the shareholder.

Consequently, corporate reorganizations will not result in taxation per definition. Thus, a tax deferral is generally granted as long as the taxing right is upheld. Differences have appeared though, regarding the interpretation of the effective connection, which may lead to uncertainty or even taxable events. Furthermore, taxes are levied if the country of the transferring entity loses its taxing right with regard to specific assets due to the merger.

This is most likely the case if assets do not remain effectively connected to a domestic permanent establishment. For such cases, Art. This may also be the member state of the receiving company. In Figure 1 merger by acquisition such a permanent establishment would be covered if it exists in the member state of the SE here: The same applies to Figure 2 merger by formation of a new company. This has been clarified as part of the amendments to the Merger Directive in In general, the member states follow the principle of worldwide taxation which includes domestic and foreign profits of their taxing subjects.

In order to prevent such a double taxation, such profits may either be exempted at the parent company exemption method or a credit may be granted at the parent company for taxes paid in the source country credit method. However, as part of the restructuring the member state still has the opportunity to tax, depending on the applicable method to avoid double taxation. If the exemption method applies in the country of the transferring company, by transfer of the permanent establishment to the SE, a taxing right is not lost because the country did not have a taxing right before the merger.

According to literature, the amount of the recovery is restricted to the amount of hidden reserves which exist at the time of the merger. In general see also Jacobs ed. Consequently, the applicable double tax treaty changes. This may result in further changes, which are relevant for the ongoing taxation e.

At the same time, it has to grant a credit for fictitious taxes which would have been levied by the member state of the permanent establishment, if the tax deferral provided in the Merger Directive would not have applied to the permanent establishment. Furthermore, the member state of the transferring entity may also release and thus tax wholly or partly exempt reserves or provisions, which have been established by the transferring company for the foreign permanent establishment Art. However, this does not seem to be justified as the country of the transferring company does not lose its taxing right in such a case.

This ensures that Art. For a discussion of Art. For details see Section 4. Specifically, thirteen countries use the exemption method and fourteen countries use the credit method. When looking at the countries which use the exemption method or generally just tax the territorial income of the worldwide income, in the majority of cases ten member states no tax consequences result, if a foreign permanent establishment is transferred as part of a merger transaction.

Only in two member states Netherlands and Spain losses previously deducted are recaptured. The amount of recapture is limited to the amount of the deemed gain arising upon the merger. In Cyprus, which also has a loss recapture rule, a merger transaction is not a triggering event for recapture. Furthermore, see for Germany Englisch, For the predominant double taxation avoidance method see Table 14 in the appendix. For the general 76 4 Taxation of European Companies during the time of restructuring in the current environment since the assets and liabilities transferred are not effectively connected to a Belgian permanent establishment.

When examining the countries which use the credit method, hidden reserves established in the assets and liabilities of the permanent establishment will generally become taxable upon the merger transaction. This is also true for wholly or partly tax-exempt provisions and reserves, which are attributable to a foreign permanent establishment, if the member state of the transferring entity provides for the establishment of such items.

As the tax is not actually paid the amount may be uncertain. Therefore, two member states Italy, Portugal require that the amount to be credited is certified by the fiscal authorities of the country of the permanent establishment. In four countries a credit is not granted since Art. Finally, in one country Lithuania , no tax consequences result even though the country of the transferring company loses its taxing right with regard to future taxable income of the foreign permanent establishment.

Consequently, such a transfer also results in a taxation of accrued hidden reserves. With regard to the member states of the permanent establishment, tax deferral is generally granted, provided that the merging companies are located in the EU, the receiving company takes over the values used before and all assets of the permanent establishment remain effectively connected in the member state. Denmark grants this deferral not only for assets connected to the permanent establishment but also for real property located in Denmark. Also Germany grants relief as long as the taxing right is not restricted.

Furthermore, in Greece provisions and reserves attributable to foreign permanent establishments may not be utilized by the parent company according to domestic law. Merger Direc- 4 Taxation of European Companies during the time of restructuring in the current environment 77 sequently, relief is provided according to the general deferral rules upon cross-border mergers as has been displayed in Table 2. To summarize, taxes will generally not occur in the country of the permanent establishment as the taxing right of this country is not affected.

Furthermore, a taxation will principally not take place in the country of the transferring entity provided that the exemption method applies. However, provided that member states use the credit method to avoid a double taxation, an immediate taxation will generally result. In return, a fictitious credit will be granted but only if Art. In this case, the receiving company assumes the rights and obligations of the transferring company. Provisions and reserves shall be broadly defined thereby ensuring that items that have been treated favorably from a tax perspective can be carried over.

In case of a merger by acquisition, the SE is resident in one of the involved member states after the merger see Figure 1, here: In case of a merger by formation of a new company, the SE is resident in a new member state see Figure 2, here: On this subject see the discussion of Art. Merger - carryover of provisions and reserves Carryover allowed Carryover denied Not applicable Austria, Bulgaria, Cyprus, Denmark, France, Germany, Greece Belgium Estonia, Ireland, if reflected in separate accounts at receiving company or its Malta, United permanent establishment , Hungary, Lithuania, Luxembourg, Kingdom Netherlands, Poland, Spain Despite Belgium which has not implemented the Merger Directive, the carryover of wholly or partly tax-exempt provisions and reserves from the receiving company to the remaining permanent establishment is principally granted according to general tax deferral rules, as long as the option to establish such positions existed under the domestic law of the member states see Table 4.

In the other countries, under general tax deferral rules, not only assets and liabilities are transferred to the permanent establishment of the receiving company, but also these wholly or partly tax-exempt provisions and reserves established at the transferring entity prior to the merger.

In certain cases it may be necessary that these items are separately reflected in the accounts of the permanent establishment after the reorganization Greece, Italy. This seems to be a requirement in order to keep track of the provisions and reserves. Furthermore, in the Czech Republic and Slovenia prior approval from the treasury is required. To sum up, since the receiving company steps into the shoes of the transferring entity universal succession , in almost all countries partly or wholly tax-exempt provisions and reserves may also be carried over to the permanent establishment of the receiving entity without any tax consequences.

In such cases, a subsequent taxing right is guaranteed. According to the Merger Directive, such an obligation does not exist for the country of the SE.

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Thus, there is no necessity that these losses may be offset with taxable income of the SE. Due to the different tax system in Estonia taxation not at corporate level but only upon distribution to shareholder the loss carryover is irrelevant. The possibility to carry over losses from the transferring company to the permanent establishment of the receiving company varies significantly between the member states see Table 5. Furthermore, see for Austria Deloitte ed. Restrictions apply in Spain if the parties involved had been related prior to the merger.

In Bulgaria the loss carryover is possible in case of a cross-border merger where a permanent establishment is created in Bulgaria as a result of the merger. In a purely domestic reorganization such a carryover is denied. In ten member states a loss carryover may be allowed, subject to various conditions. In Austria and Lithuania, the business which caused the loss still needs to exist at the time when the loss shall be used to offset future taxable profits. In the Netherlands the pre-merger losses are specifically labeled restricting their amount for set off.

In Portugal, as part of the approval, the amount as well as the time frame may be restricted in order to avoid abuse. In Sweden the amount to be carried over is limited as well as the time in which the loss may be set off against future profits of the receiving company. In the Czech Republic losses may only be offset in proportion to the tax base attributable to the activity that caused the loss. In Italy losses are limited in their amount as net equity requirements need to be met. Such conditions shall generally prevent the abusive transfer of losses but may be burdensome to the taxpayer.

Thus, losses of the absorbed company will get lost due to the merger. In Germany, for example, this is justified with the prevention of abuse. The fear was that in case of an inbound merger, whereby a foreign company absorbs a German company, losses may be transported to Germany. Exceptions may apply in cases where the merging companies have holdings in each other or have been part of the same group of companies prior to the merger.

Such rules exist in Denmark, Finland, Ireland, Latvia, Sweden and the In Latvia, losses which occurred due to a sale of securities may generally not be carried over. Furthermore, in most member states additional rules exist limiting the use of losses at the receiving company. Triggering events may be a change of business activity or ownership. See for more details on these general anti-avoidance rules directed at loss trafficking Canellos, In Belgium the denial only applies to cross-border mergers.

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