Border-Crossing Tax Designs

According to current figures of the EU Commission, at the beginning of 2020, there were approximately 24 million companies in the EU, around 80% of which are incorporated companies. 98 to 99% are small and medium-sized companies. As a result of the increasing globalisation of corporate activities, border-crossing transformation and restructuring measures play an increasingly important role for many of these companies. This is also reflected in our day-to-day consulting practice. Border-crossing restructuring measures are a frequent subject in the board meetings of German and international companies. In many cases, this is due to tax reasons.  Therefore, legal questions on border-crossing restructuring processes of companies are among the current and much discussed problems in tax and company law - especially with a view to border-crossing matters within the European Union.

Moreover, political events, like Brexit, will further exacerbate this development. Therefore, the directive (directive (EU) 2019/2121) amending the directive as regards border-crossing conversions, mergers and divisions (directive (EU) 2017/1132), which is part of the so-called EU Company Law Package, is of special importance. A press release of the Council of the European Union: “The EU is removing unjustified barriers to EU companies' freedom of establishment in the single market. Following an agreement with the European Parliament earlier this year, the Council today adopted a directive that facilitates EU companies' cross-border conversions, mergers and divisions.”

The amended directive (EU) 2019/2121 defines a border-crossing conversion as “an operation whereby a company, without being dissolved or wound up or going into liquidation, converts the legal form under which it is registered in a departure Member State into a legal form of the destination Member State and transfers at least its registered office to the destination Member State, while retaining its legal personality”, section 86b no. 2. Basically, this definition corresponds to the German legal effects of a change of legal form within the meaning of Section 202 UmwG [German Transformation Act]. More specifically, this means that the legal entity remains the same, while the legal form (“legal structure”) changes. Assets are not transferred and the asset holders do not change. As a result of the change in the legal form, the law applicable to the company also changes; the current legal form of the departure member state is replaced by the new legal form of the destination member state.

The border-crossing change of form is only to be possible for incorporated companies (section 86a sub-section 1 and section 86b no. 1). In Germany, this applies to the Societas Europaea (SE), the stock company (AG), the limited stock company (KGaA), the limited liability company (GmbH) and the entrepreneurial company (UG haftungsbeschränkt). Even though private companies, such as e.g. GmbH & Co. KG, are not covered by this in principle; however, a border-crossing change of form of a private company is exempt from the European freedom of establishment even today (EuGH, ruling dated 12th July 2012 – C-378/10).

The directive (EU) 2019/2121 provides for three types of divisions of companies: divisions, demergers and spin-offs. However, in contrast to the types of divisions known in Germany (cf. Section 123 UmwG [German Transformation Act]), the directive includes the important restriction that it only covers divisions for new establishment. It does not cover divisions for inclusion.

A divisioncomprises the distribution of the assets and liabilities of a company to two or more receiving companies in return for granting of shares or other assets in the receiving companies to the shareholders of the companies carrying out the division, accompanied by the liquidation of the company to be divided, section 160b no. 4a.

A demergerapplies if the original company applies and only transfers a part of its assets to one or several receiving companies.  Moreover, in the case of the demerger, the shareholders can be granted stocks or other shares and/or additional cash payments - in part, mutually - art. 160B no. 4b.

Moreover, the spin-offalso includes the transfer of only a part of the assets and liabilities to one or several new companies. However, the corporate shares can only be provided unilaterally to the company carrying out the division and additional cash payments are not permitted, section 160b no. 4c.

Border-crossing mergers are already provided for in the framework of Directive (EU) 2017/1132. The new directive (EU) 2019/2121 partly amends the existing law and adds some new provisions, which, as a result, leads to the standardisation of the requirements and procedures for all border-crossing projects.

A border-crossing merger can be structured either as a merger for integrationor as a merger for new establishment, art. 119 no. 2a and b. Alternatively, a subsidiary can be transferred to its parent company (so-called upstream merger) in anintragroup mergerprovided the parent company holds all shares in it, section 119 no. 2c. Moreover, the newly added section 119 no. 2d also defines two types of group mergers: on the one hand, the constellation in which a person directly and indirectly holds all shares in all companies involved in the merger and, on the other hand, the merger of sister companies whose shares are held by the same holders in the same proportion.