TAX MANAGEMENT INTERNATIONAL FORUM Comparative Tax Law for the International Practitioner >>>>>>>>>>>>>>>>>>>>>>>>>>>>

VOLUME 34, NUMBER 1 >>> MARCH 2013 www.bna.com

INCOME TAX TREATMENT BY HOST COUNTRY OF A CORPORATE EXPATRIATION Facts HCo, a entity formed under the law of Host Country (HC) and treated as a for HC income tax purposes, is the parent corporation of a multinational group of doing business around the world. The group consists of both HC subsidiaries and foreign subsidiaries. In order to achieve a more tax-effi cient corporate structure, HCo is interested in restructuring its multinational group so that the parent corporation is a Foreign Country (FC) corporation (and not an HC corporation) for HC income tax purposes. HCo is considering the following scenarios relating to the creation of an FC corporation as the new parent corporation of the multinational group: 1. HCo remains the same business entity but effects a change (of some type) that changes it from an HC corporation into an FC corporation for HC income tax purposes. 2. A limited liability business entity formed under the law of FC and treated as a corporation for HC income tax purposes (“FCo”) is created with a nominal shareholder. HCo then merges into FCo, with FCo surviving. The shareholders of HCo receive stock in FCo. 3. FCo is created with a nominal shareholder. The shareholders of HCo then transfer all of their stock in HCo to FCo in exchange for stock in FCo. HCo then liquidates. 4. HCo creates FCo as a wholly owned subsidiary. HCo then merges into FCo, with FCo surviving. The shareholders of HCo receive stock in FCo. 5. FCo is created with a nominal shareholder. The shareholders of HCo then transfer all of their stock in HCo to FCo in exchange for stock in FCo. 6. FCo is created with a nominal shareholder and in turn creates HMergeCo, a wholly owned limited liability business entity formed under the law of HC and treated as a corporation for HC income tax purposes. HMergeCo then merges into HCo, with HCo surviving. The shareholders of HCo receive stock in FCo. 7. FCo is created with the same corporate structure as HCo, and with the same shareholders with the same proportional ownership. HCo then sells all of its assets (and liabilities) to FCo and then liquidates. Questions 1. Discuss the viability of each scenario under HC’s (or one of its political subdivision’s) business law and how the scenario would be treated for HC income tax purposes. 2. Are there any other scenarios that HCo might consider and how would they be treated for HC income tax purposes? 3. What difference does it make for HC income tax purposes whether HCo has a “business purpose” for the restructuring? 4. What would be the treatment for HC income tax purposes if FCo were an existing, unrelated foreign corporation, and HCo merged into FCo, with FCo surviving?

FORUM0313_members.indd 1 07-Mar-13 3:55:55 PM THE TAXMANAGEMENT INTERNATIONAL FORUM is designed Contents to present acomparative study of typical international tax law problems by FORUM members who are distinguished practitioners in major industrial countries. Their scholarly discussions focus on the operational questions posed by afact pattern under CONTENTS the statutory and decisional laws of their respective FORUM country,with FACTS and QUESTIONS practical recommendations whenever 4 appropriate. ARGENTINA THE TAXMANAGEMENT 5 Manuel M. Benites INTERNATIONAL FORUM is Pere´z Alati, Grondona, Benites, Arntsen &Martı´nez de Hoz, Buenos Aires published quarterly by Bloomberg BNA, 38 Threadneedle Street, London, BELGIUM EC2R 8AY, England. Telephone: (+44) Jacques Malherbe and Henk Verstraete (0)20 7847 5801; Fax (+44) (0)20 7847 9 5858; Email: [email protected] Liedekerke Wolters Waelbroeck Kirkpatrick, Brussels ௠ Copyright 2013 TaxManagement International, adivision of Bloomberg BRAZIL BNA, Arlington, VA.22204 USA. 21 Gustavo MBrigaga˜o and Antonio Luis H. Silva, Jr. Reproduction of this publication by UlhoˆaCanto, Rezende eGuerra Advogados any means, including facsimile transmission, without the express permission of Bloomberg BNA is 23 Richard J. Bennett prohibited except as follows: 1) Borden Ladner Gervais LLP,Vancouver Subscribers may reproduce, for local internal distribution only,the CHINA highlights, topical summary and table 30 Stephen Nelson, Peng Taoand Richard Tan of contents pages unless those pages DLA Piper,Hong Kong and Beijing are sold separately; 2) Subscribers who have registered with the Copyright DENMARK Clearance Center and who pay the 33 Nikolaj Bjørnholm and Tilde Hjortshøj $1.00 per page per copy fee may Hannes Snellman, Copenhagen reproduce portions of this publication, but not entire issues. The Copyright FRANCE Clearance Center is located at 222 Thierry Pons Rosewood Drive, Danvers, 38 Massachusetts (USA) 01923; tel: (508) FIDAL, Paris 750-8400. Permission to reproduce Bloomberg BNA material may be GERMANY requested by calling +44 (0)20 7847 44 Jo¨rg-Dietrich Kramer 5821; fax +44 (0)20 7847 5858 or e-mail: Bruhl [email protected]. INDIA www.bna.com 48 Vandana Baijal &Zainab Bookwala Deloitte, Haskins &Sells, Mumbai Board of Editors

Publishing Director IRELAND Andrea Naylor 55 Peter Maher and Philip McQueston Bloomberg BNA A&L Goodbody,Dublin London ITALY Technical Editor Giovanni Rolle Nicholas C. Webb 60 WTS R&A Studio Tributario Associato, Milano Editor Alex Miller JAPAN Bloomberg BNA 66 Yuko Miyazaki London Nagashima Ohno &Tsunematsu, Tokyo Production Manager Nitesh Vaghadia MEXICO Bloomberg BNA 72 Terri L. Grosselin London Ernst &Young LLP,Miami

THE NETHERLANDS 75 Maarten J.C. Merkus and Bastiaan L. de Kroon KPMG Meijburg &CoTax Lawyers, Amsterdam

2 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 SPAIN 79 A´ lvaro de Lacalle and Luis Briones Baker &McKenzie, Madrid

SWITZERLAND 84 Dr.Silvia Zimmermann and Jonas Sigrist Pestalozzi Attorneys at Law Ltd, Zu¨rich

UNITED KINGDOM 91 Charles EV Goddard Rosetta TaxLLP,London

UNITED STATES 97 Herman B. Bouma, Esq. Buchanan Ingersoll &Rooney PC, Washington, DC 106 Forum Members and Contributors

02/13 TaxManagement International Forum BNA ISSN 0143-7941 3 Income tax treatment by Host Country of a corporate expatriation

FACTS 5. FCo is created with anominal shareholder.The shareholders of HCo then transfer all of their stock Co, alimited liability business entity formed in HCo to FCo in exchange for stock in FCo. under the law of Host Country (HC) and 6. FCo is created with anominal shareholder and in treated as acorporation for HC income tax H turn creates HMergeCo, awholly owned limited li- purposes, is the parent corporation of amultinational ability business entity formed under the law of HC group of corporations doing business around the and treated as acorporation for HC income tax pur- world. The group consists of both HC subsidiaries and poses. HMergeCo then merges into HCo, with HCo foreign subsidiaries. In order to achieve amore tax- surviving. The shareholders of HCo receive stock in efficient corporate structure, HCo is interested in re- FCo. structuring its multinational group so that the parent 7. FCo is created with the same corporate structure as corporation is aForeign Country (FC) corporation HCo, and with the same shareholders with the (and not an HC corporation) for HC income tax pur- same proportional ownership. HCo then sells all of poses. its assets (and liabilities) to FCo and then liqui- HCo is considering the following scenarios relating to the creation of an FC corporation as the new parent dates. corporation of the multinational group: 1. HCo remains the same business entity but effects a change (of some type) that changes it from an HC QUESTIONS corporation into an FC corporation for HC income tax purposes. 1. Discuss the viability of each scenario under HC’s(or 2. Alimited liability business entity formed under the one of its political subdivision’s) business law and law of FC and treated as acorporation for HC how the scenario would be treated for HC income income tax purposes (‘‘FCo’’) is created with a tax purposes. nominal shareholder.HCo then merges into FCo, 2. Are there any other scenarios that HCo might con- with FCo surviving. The shareholders of HCo re- sider and how would they be treated for HC income ceive stock in FCo. tax purposes? 3. FCo is created with anominal shareholder.The 3. What difference does it make for HC income tax shareholders of HCo then transfer all of their stock purposes whether HCo has a‘‘business purpose’’for in HCo to FCo in exchange for stock in FCo. HCo the restructuring? then liquidates. 4. What would be the treatment for HC income tax 4. HCo creates FCo as awholly owned subsidiary. purposes if FCo were an existing, unrelated foreign HCo then merges into FCo, with FCo surviving. The corporation, and HCo merged into FCo, with FCo shareholders of HCo receive stock in FCo. surviving?

4 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 Host Country ARGENTINA

Manuel M. Benites Pere´zAlati, Grondona, Benites, Arntsen &Martı´nez de Hoz, Buenos Aires

I. Introduction II. Forum questions

rgentine income tax applies on aworldwide For purposes of the discussion below,HCwill be re- basis to resident entities; nonresident entities ferred to as Argentina and HCo will be referred to as A are subject to tax only on their Argentine- ArgeCo. source income. Similarly,Argentina imposes atax on the assets of resident entities on aworldwide basis, A. Viability under Argentine .Treatment for while nonresident entities are subject to this tax only Argentine income tax purposes with respect to certain assets located in Argentina. 1. ArgeCo remains the same business entity but In this context, the jurisdiction in which acorpora- effects achange (of some type) that changes it tion has its domicile has significant consequences for from an Argentine corporation into an FC taxation in Argentina, in particular where the corpo- corporation for Argentine income tax purposes ration, like the one envisaged here, holds participa- tions in subsidiaries located both in Argentina and ArgeCo may become aforeign corporation by moving abroad. By way of example, where the parent of amul- its domicile to FC. Under the Argentine Business Enti- tinational group is acompany resident in Argentina, it ties Law (BEL), such achange of domicile does not will be subject to Argentine income taxation on the entail the of ArgeCo or its liquidation. In dividends it receives from its foreign subsidiaries and fact, ArgeCo will remain the same business entity if FC’slaws accept the change of domicile by way of con- any gains it derives from the sale or other disposition tinuation of the legal existence of ArgeCo. of its participations in foreign subsidiaries, and also to the tax on assets with respect to its participations in The decision to move the domicile of an Argentine foreign subsidiaries. No such taxation will apply to a corporation to aforeign jurisdiction must be adopted by an extraordinary shareholders’ meeting requiring a nonresident holding similar assets. quorum of 60 percent of all the voting stock, and must The Income TaxLaw (ITL) provides that corpora- be adopted by the affirmative vote of amajority of all tions organised under Argentine law are residents of the shares with voting rights issued by the corpora- Argentina for tax purposes. The ITL does not contain tion. Dissenting shareholders have aredemption right any specific provision dealing with the expatriation of entitling them to be reimbursed for the value of their shares. Argentine corporations, but it may be said that when acorporation ceases to be organised under Argentine If ArgeCo is registered in the City of Buenos Aires, it law because it changes its domicile to aforeign juris- must comply with the rules of Resolution 7/2005 of diction that also allows the corporation to continue its the Inspeccio´n General de Justicia in order to obtain deregistration as alocal corporation. The most impor- existence under its own laws, the corporation ceases tant requirements laid down by Resolution 7/2005 to be atax resident of Argentina. There are no negative with respect to achange of domicile are that the cor- tax consequences to an expatriation under Argentine poration changing its domicile must: tax law: if the continued legal existence of the expatri- s make public for three days notices inviting the ating corporation is accepted in the foreign country creditors of the corporation to file oppositions to concerned, the expatriation is not treated as aliquida- the change of domicile. Even though the opposi- tion and realisation of the assets of the corporation. tions will not stop the change of domicile process, From acorporate law perspective, moving the domi- the change of domicile will not be able to be regis- cile of an Argentine corporation to aforeign country is tered with the Inspeccio´n General de Justicia until specifically provided for in the Argentine Business En- 20 days have elapsed since the date of the last pub- tities Law (BEL), despite which redomiciling is not a lication, so that creditors may obtain judicial at- common operation in Argentina. tachments to secure their claims;

02/13 TaxManagement International Forum BNA ISSN 0143-7941 5 02/13 TaxManagement International Forum BNA ISSN 0143-7941 5 s file financial statements from which it must be clear tax if the corporate existence of ArgeCo is preserved in that the corporation has sufficient assets to pay all the new jurisdiction, as there are no exit provisions or its liabilities existing on the date of the decision to exit taxes in the Argentine tax legislation, except the change domicile, as well as those liabilities gener- requirement that afinal tax filing be made as of the ated up to the day of deregistration of the corpora- date of deregistration of the entity in Argentina. As the tion; change of domicile that ArgeCo is planning does not s appoint an agent to pay the liabilities referred to in entail its dissolution or liquidation, the Argentine the previous bullet who must establish adomicile in Income TaxLaw does not treat the change of domicile the City of Buenos Aires; as adeemed realisation of ArgeCo’sassets. However, s present proof of the filing of anotice with the this treatment is conditioned on the acceptance of the Buenos Aires City tax authorities informing them of continuation of the legal existence and legal personal- the cessation of the activities of the corporation for ity of ArgeCo under the laws of FC after the change of purposes of the local gross turnover tax; domicile. s file acertificate of compliance relating to social se- On the other hand, if the laws of FC do not recog- curity contributions; file acertificate to the effect nise the continuation of the existence of ArgeCo, the that the corporation is not the subject of debt reor- change of domicile will be treated as the liquidation of ganisation proceedings; ArgeCo and the realisation of all its assets at fair s file acertificate of registration of the entity in the market value, with the tax consequences described in registry of its new jurisdiction of domicile. If the 3., below. laws of the new jurisdiction of domicile require the prior cancellation of the registration in Argentina, 2. FCo is created with anominal shareholder. the corporation must file with the Inspeccio´n Gen- ArgeCo then merges into FCo, with FCo surviving. eral de Justicia proof of the request for registration The shareholders of ArgeCo receive stock in FCo in the foreign jurisdiction and the opinion of an at- torney or notary public stating that the previous This transaction is not possible under Argentine law, deregistration in Argentina is needed to obtain reg- because the BEL only allows mergers of two Argen- istration in the new jurisdiction of domicile. tine entities, not amerger between an Argentine entity The Inspeccio´n General de Justicia may deny the re- and aforeign entity.Therefore, the only possible way quest for deregistration if it considers that the main to achieve this result is first to move the domicile of purpose of ArgeCo is to be accomplished in Argentina. ArgeCo to FC and then to merge it with FCo. Such adenial would be based on Section 124 of the BEL and the regulations enacted thereon. Section 124 3. FCo is created with anominal shareholder.The provides that aforeign corporation whose main pur- shareholders of ArgeCo then transfer all their pose is to be accomplished in Argentina or that has its stock in ArgeCo to FCo in exchange for stock in place of management in Argentina is subject to the FCo. ArgeCo then liquidates provisions of the BEL. Resolution 7/2005 provides that Section 124 applies to foreign corporations Under Section 2ofthe Income TaxLaw,the exchange whose assets located, or activities carried on, outside of shares issued by ArgeCo for shares issued by FCo is Argentina are insignificant as compared to its assets treated as atransfer for consideration, so that the located in, or activities carried on, in Argentina. In gross gain or loss will be arrived at by comparing the such acase, the foreign corporation may be required value of the shares received with the tax basis of the to change its domicile to Argentina and adapt its by- shares transferred to FCo. laws to Argentine law,which means, among other In cases like that under analysis here, where the things, that the corporation would have to adapt its shares of FCo do not have their own market value, the organisation and administration to comply with the shareholders of ArgeCo will have to treat the market rules of the BEL and adopt one of the legal forms value of their shares in ArgeCo as the price at which specified in the BEL. The same requirement may be they realise them. Market value may also result from imposed if the effective place of management of the public listing, expert appraisals or book value, de- foreign corporation is located in Argentina. pending on the circumstances of the transaction. The Applying the rules set forth in Section 124 of the tax basis is normally the purchase price for which the BEL and Resolution 7/2005 on areverse basis, the In- shareholders acquired the shares. However,shares re- speccio´nGeneral de Justicia may refuse to allow an Ar- ceived as adividend-in-kind have azero tax basis and gentine corporation to change its legal domicile to a shares distributed by acorporation to shareholders foreign country if its assets located, or activities car- other than as adividend-in-kind have atax basis equal ried on, outside Argentina are insignificant as com- to the par value of the shares received. pared to its assets located, or activities carried on, in The tax treatment of the gain from the transfer of Argentina, or if it does not move its effective place of the shares of ArgeCo to FCo depends on the nature management to the foreign country concerned. and domicile of the transferring shareholders. Argen- Only after ArgeCo obtains deregistration in Argen- tine resident individuals are not subject to tax with re- tina, will it become aforeign corporation under the spect to any gain derived from the transfer of shares, BEL. unless they engage in buying and selling stock on a The Public Registry of Commerce of the 23 prov- regular basis. Foreign and nonresident in- inces of Argentina all have their own rules regarding a dividuals are exempt from income tax on the disposal change in the domicile of acorporation. of shares in an Argentine corporation, whether or not For purposes of Argentine income tax, the change of they engage in buying and selling shares on aregular domicile to aforeign jurisdiction is not subject to any basis. Finally,Argentine business entities are subject

6 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 to income tax on any gain derived from the sale or the sale of its assets to FCo, thus reducing or eliminat- transfer of shares. If the transaction results in aloss, ing its exposure to the equalisation tax. the law allows the loss to be set offonly against gains derived from the sale of shares, i.e., such losses are 4. ArgeCo creates FCo as awholly owned ‘‘ring-fenced.’’ subsidiary.ArgeCo then merges into FCo, with The liquidation of ArgeCo is treated as the realisa- FCo surviving.The shareholders of ArgeCo receive tion of all ArgeCo’sassets at fair market value on their stock in FCo distribution to FCo. The excess of the fair market value of the assets, which in the case of ArgeCo are For the reasons explained in 2., above, the merger of shares in Argentine and foreign subsidiaries, over the ArgeCo and FCo is not possible under the BEL. tax basis in the shares will be taxable income in the hands of ArgeCo. 5. FCo is created with anominal shareholder.The The rules for determining the tax basis of shares shareholders of ArgeCo then transfer all their issued by Argentine subsidiaries are as explained stock in ArgeCo to FCo in exchange for stock of above. The tax basis of shares in foreign subsidiaries FCo must be determined in Argentine currency,atthe rate of exchange of the foreign currency in force on the The tax consequences of the transfer by the share- date of acquisition of, or subscription for,the shares. holders of ArgeCo of all their shares to FCo were ex- Current Argentine law does not allow for indexation plained in the first part of the answer at 3., above. of the tax basis. Unlike in the case described in 3., above, in this Under the BEL, afinal distribution on liquidation is case, ArgeCo, which will not liquidate, will continue possible only after all the liabilities of the liquidating to hold shares in its Argentine and foreign subsidiar- entity have been paid. The BEL does, however,permit ies. This structure may involve the taxation in Argen- partial distributions if the liabilities that are still out- tina of dividends distributed by foreign subsidiaries, standing are sufficiently guaranteed. which will have to be distributed first to ArgeCo and Distributions made to shareholders as aresult of then by ArgeCo to FCo. ArgeCo will have to declare the liquidation of acorporation may be subject to the such dividends as foreign-source taxable income, and ‘‘equalisation tax.’’This is aspecial tax that represents will be allowed to take atax credit for income or simi- an exception to the general rule that provides that lar taxes paid by the foreign subsidiary on the profits dividends and distributions of profits made by Argen- out of which the dividends are distributed, as well as tine corporations are not taxable in the hands of the any withholding tax on those dividends. recipient shareholders. The equalisation tax, which is Dividends paid to ArgeCo by its Argentine subsidiar- imposed at arate of 35 percent and is paid by means ies are, as ageneral rule, not subject to tax, except that of withholding by the corporation making the distri- the equalisation tax may apply,asexplained in 3., bution, applies when the amount of the dividend or above. It should also be noted that ArgeCo will have to profits paid to shareholders exceeds the amount of the pay the minimum presumed income tax of 1percent taxable income of the entity accumulated at the end of of the value of its shares in its foreign subsidiaries at the previous taxable year.The income tax regulations the end of each taxable year. provide that, in the case of liquidation, the equalisa- In summary,this structure may: (1) cause dividends tion tax will apply to the excess of the commercial from foreign subsidiaries to be subject to income tax profits accumulated at the date of the distribution in Argentina; (2) entail the possible application of the over the taxable profits. equalisation tax to distributions of dividends by For income tax purposes, ArgeCo will continue to ArgeCo to FCo; and (3) subject ArgeCo to the annual 1 be an Argentine taxpayer until the final distribution of percent presumed minimum income tax on the value its assets to the shareholders. Once the final distribu- of its shares in its foreign subsidiaries. tion is made, ArgeCo will have to file afinal tax return determining its taxable income and income tax pay- 6. FCo is created with anominal shareholder and able up to the date of the final distribution. in turn creates ArgeMergeCo, awholly owned Distributions-in-kind may present aproblem that is limited liability business entity formed under the not resolved by the text of the Income TaxLaw or its law of Argentina and treated as acorporation regulations. The making of adistribution-in-kind to for Argentine income tax purposes. ArgeMergeCo the shareholders is also arealisation event for tax pur- then merges into ArgeCo, with ArgeCo surviving. poses. The difficulty is that, at the time of the The shareholders of ArgeCo receive stock in FCo distribution-in-kind, the taxable profits of the corpo- ration accumulated at the end of the previous taxable This transaction does not have any particular advan- year will not include the income realised as aconse- tage in Argentina as compared with that described in quence of the distribution, which may result in the 5., above. The creation of ArgeMergeCo and its subse- amount of the distribution exceeding the accumu- quent merger with ArgeCo will not qualify as atax- lated taxable profits, which in turn may give rise to an free reorganisation because ArgeMergeCo will not equalisation tax liability.Apossible way of dealing have any activities or assets, other than its legal capi- with this issue is for ArgeCo to sell all its assets to FCo tal, at the time of the merger.The subsequent ex- against apromissory note, wait until the close of the change of shares of ArgeCo for shares in FCo by the taxable year of ArgeCo and then liquidate ArgeCo by shareholders of ArgeCo will be subject to the tax treat- distributing the promissory note to FCo. In this case, ment described in 3., above. at the time of the distribution, the accumulated tax Moreover,the tax-free regime, if applicable, will not profits of ArgeCo will include the gain derived from be of any assistance in the context of such an ex-

02/13 TaxManagement International Forum BNA ISSN 0143-7941 7 change of shares, which will still be subject to the tax its domicile to FC, which is possible and which will treatment described in 3., above. not have any negative tax consequences, all the other scenarios will either not be possible under Argentine 7. FCo is created with the same corporate law or will give rise to income taxes on the transfer of structure as ArgeCo, and with the same ArgeCo’sshares or assets. shareholders with the same proportional ownership. ArgeCo then sells all of its assets (and liabilities) to FCo and then liquidates C. Difference for Argentine income tax purposes if ArgeCo has a‘‘business purpose’’ for the restructuring This transaction is very similar in its tax treatment to that described in 3., above. It should be noted that the As Argentine law does not require abusiness purpose transaction does not qualify as atax-free transfer of assets between entities in the same group of corpora- for arestructuring such as that discussed above, the tions, which applies only to entities subject to taxation tax treatment of each of the alternatives will be the as residents of Argentina. same whether or not there is abusiness purposes for The gross profit realised by ArgeCo from the sale to the restructuring. However,under the BEL, achange FCo will be the amount of the net payment received of domicile may be denied to acorporation whose for- from the sale plus the value of the liabilities trans- eign assets or foreign activities are insignificant as ferred to FCo. The valuation of the assets for purposes compared to its Argentine assets or activities, or if the of the transfer must take into account their fair corporation’splace of management continues to be lo- market value, as explained at 3., above. cated in Argentina. The final distribution on liquidation to the share- holders of ArgeCo may be subject to the equalisation tax, as described in 3., above. D. Treatment for Argentine income tax purposes if FCo were an existing, unrelated foreign corporation, and B. Other scenarios that ArgeCo might consider and their ArgeCo merged into FCo, with FCo surviving treatment for Argentine income tax purposes

There are no other scenarios that ArgeCo might con- As explained above, such atransaction is not possible sider.Asdiscussed above, except for ArgeCo moving under Argentine law.

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8 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 Host Country BELGIUM

Jacques Malherbe and Henk Verstraete1 Liedekerke Wolters Waelbroeck Kirkpatrick, Brussels

I. Introduction2 liability companies, creating alegal instrument to fa- cilitate cross-border mergers between limited liability any of the scenarios described in the companies in the EU, was transposed into Belgian Forum questions will be subject to atax- company law by the Law of June 8, 2008. neutral regime provided for in the EC M 3 The EC Merger Directive (as amended by Directive Merger Directive, as implemented in Belgian domes- tic law.Most of the remaining scenarios will be 2005/19/EC of February 17, 2005) was implemented equated with aliquidation for corporate income tax into Belgian law by the Law of December 11, 2008. purposes. These two regimes are therefore discussed The Belgian legislature chose to integrate the tax below,before the Forum questions are addressed in regime applicable to cross-border transactions under detail. Because the ‘‘dividends received deduction’’ the EC Merger Directive into the existing tax provi- regime will apply in many of the scenarios, the intro- sions applicable to domestic transactions (basically duction will also provide an outline of the relevant the tax provisions introduced by the Law of August 6, rules. Finally,the introduction will briefly consider 1993 —see above), rather than to design aseparate, the value added tax (VAT)and registration tax regimes specific framework for cross-border transactions. At applicable to mergers and split-ups. the same time, the Law of December 11, 2008 adapted the existing tax provisions applicable to domestic transactions to bring them in line with the require- A. Mergers and split-ups under European law4 ments of the EC Merger Directive and EU case law. Common features of domestic and EU cross-border 1. Legislative framework mergers and split-ups are that: (1) the company (or companies) that cease(s) to exist is (are) wound up or Belgium implemented the Third Company Law Direc- dissolved without going into liquidation; and (2) all tive, 78/855/EEC of October 9, 1978, concerning the assets and liabilities of that company (or those 5 mergers of public limited liability companies and the companies) are transferred by universal succession Sixth Company Law Directive, 82/891/EEC of Decem- and by operation of law to one or more other Belgian ber 17, 1982, concerning the division of public limited or intra-EU companies. liability companies6 by way of the Law of June 29, 1993, on the modification of the (then) Coordinated 2. Concepts Laws on Commercial Companies with respect to 7 mergers and split-ups of companies. The Law of Amerger by way of acquisition is an operation August 6, 1993, relating to tax provisions with respect whereby one or more companies are wound up or dis- to mergers and split-ups transposed this new com- solved without going into liquidation, and transfer to pany law framework, including the defined concepts another company all their assets and liabilities in ex- 8 of ‘‘merger‘‘and ‘‘split-up’’, into Belgian tax law. The change for the issue, to the shareholders of the com- preparatory works relating to the Law of August 6, pany or companies being acquired, of shares in the 1993 repeat at various places that the Law of August acquiring company and, possibly,acash payment not 6, 1993 is not designed to implement Council Direc- exceeding 10 percent of the nominal value of the tive, 90/434/EEC of July 23, 1990, on the common shares so issued or,where they have no nominal value, system of taxation applicable to mergers, divisions, of their fractional value.10 Amerger by way of acquisi- transfers of assets and exchanges of shares concern- tion may also be effected where one or more of the ing companies of different Member States (the ‘‘EC companies being acquired is/are in liquidation or 9 Merger Directive’’). The scope of the Law of August 6, bankruptcy,provided it has not/they have not yet 1993 was thus limited to domestic mergers and split- begun to distribute their assets to its/their sharehold- ups, i.e., transactions in which only Belgian compa- ers or partners. An operation whereby one or more nies are involved. companies are dissolved without going into liquida- The Tenth Company Law Directive, 2005/56/EC of tion and all their assets and liabilities are transferred October 26, 2005, on cross-border mergers of limited to another company that is the holder of all their

02/13 TaxManagement International Forum BNA ISSN 0143-7941 9 02/13 TaxManagement International Forum BNA ISSN 0143-7941 9 shares and other securities conferring the right to vote recognised as aresult of amerger or split-up and that at general meetings is also equated with amerger by the liquidation distribution would be equated to a acquisition.11 It is important to note that, in the latter dividend. Obviously,such tax treatment would consti- case, the merger is not realised by the mere reunion of tute afundamental impediment to many mergers and all the shares of acompany in the hands of asingle split-ups. Articles 211 to 214 of the Income TaxCode, shareholder. therefore, provide for atax neutrality regime for Amerger by way of formation of anew company is mergers, split-ups and operations equated to amerger an operation whereby anumber of companies are dis- where the following three cumulative conditions are solved without going into liquidation and all their fulfilled:16 assets and liabilities are transferred to acompany that (1) the acquiring or receiving company must be ado- they set up in exchange for the issue to their share- mestic company or an intra-EU company.Ado- holders of shares in the new company and, possibly,a mestic company is acompany that: (a) is cash payment not exceeding 10 percent of the nomi- constituted according to Belgian or foreign law; nal value of the shares so issued or,where the shares (b) has its registered seat, its principal establish- have no nominal value, of their fractional value.12 A ment or its seat of management or administration merger by way of the formation of anew company in Belgium; and (c) is not exempted from corpo- may also be effected where one or more of the compa- rate income tax.17 An intra-EU company is acom- nies that cease(s) to exist is/are in liquidation or in pany that: (a) is not adomestic company; (b) has a bankruptcy provided it has not/they have not yet legal form listed in the annex to the EC Merger Di- begun to distribute its/their assets to their sharehold- rective (as amended); (c) is considered to be atax ers or partners. resident of an EU Member State (other than Bel- Asplit-up by way of acquisition is an operation gium) and is not considered to be tax-resident out- whereby,after being dissolved without going into liq- side the EU under atax treaty concluded with a uidation, acompany transfers to two or more compa- third state; and (d) is subject to atax analogous to nies all its assets and liabilities in exchange for the corporate income tax and cited in Article 3, c) of allocation, to the shareholders of the company being the EC Merger Directive, without there being a split up, of shares in the companies receiving contri- possibility of its opting out of such taxation and 18 butions as aresult of the split-up and, possibly,acash without its enjoying an exemption; payment not exceeding 10 percent of the nominal (2) the transaction concerned must be realised in value of the shares allocated or,where the shares have compliance with the provisions of the Belgian no nominal value, of their fractional value.13 The Company Code or,asthe case may be, in accor- company being split-up need not be a‘‘going con- dance with the company law provisions of the cern,’’but must not yet have begun to distribute its same nature that are applicable to the acquiring or assets to its shareholders or partners. receiving intra-EU company; Asplit-up by way of the formation of new compa- (3) the operation concerned may not have as its prin- nies is an operation whereby,after being dissolved cipal objective, or as one of its principal objectives, without going into liquidation, acompany transfers to tax evasion or tax avoidance. Where the operation two or more newly-formed companies all its assets is not carried out for valid economic reasons, such and liabilities in exchange for the allocation to the as the restructuring or rationalisation of the activi- shareholders of the divided company of shares in the ties of the companies participating in the opera- recipient companies and, possibly,acash payment tion, this may constitute apresumption, in the not exceeding 10 percent of the nominal value of the absence of proof to the contrary,that the operation has tax evasion or tax avoidance as its principal shares allocated or,where the shares have no nominal 19 value, of their fractional value.14 The company being objective or as one of its principal objectives. divided need not be agoing concern, but must not yet If the above conditions are fulfilled, the transaction have begun to distribute its assets to its shareholders falls automatically within the scope of application of or partners. the tax neutrality regime. In other words, the tax neu- trality regime is mandatory and the taxpayer cannot Amixed split-up means an operation whereby,after opt for ataxable transaction. How serious the viola- being dissolved without going into liquidation, acom- tion of the (applicable) company law rules would have pany transfers all its assets and liabilities, partly to to be for the tax authorities to be able to deny the ap- one or more pre-existing companies and partly to one plication of the tax neutrality regime is open to or more newly-formed companies, in exchange for the debate.20 allocation to its shareholders of shares in the recipient companies (and, possibly,acash payment not exceed- 4. Taxneutrality regime —domestic mergers and ing 10 percent of the nominal or par value of the split-ups shares so allocated).15

3. Conditions for tax neutrality —European a. Taxtreatment of the acquired or split-up company Union cross-border mergers and split-ups The acquired or split-up company is exempt from cor- Article 210, paragraph 1, 1° of the Income TaxCode porate income tax on the capital gains realised on the subjects mergers, split-ups and similar transactions to occasion of the merger or split-up, as well as on exist- the tax regime applicable to the liquidation of compa- ing gains/profits that have merely been booked (with- nies, as set out in Articles 208 and 209 of the Income out being taxed) and on gains that have been rolled- TaxCode. It follows that, in principle, corporate over subject to the condition that the proceeds of the income tax would apply to all capital gains realised or sale are reinvested. The tax exemption may,however,

10 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 not be afull exemption if the acquired or split-up iary.27 Article 7, paragraph 1ofthe EC Merger Direc- company has previously untaxed reserves and if the tive provides that, where the receiving company has a contribution of its assets and liabilities is not remu- participation in the capital of the transferring com- nerated solely by newly-issued shares of the acquiring pany,any gains accruing to the receiving company on or receiving company or companies. The latter will be the cancellation of its participation will not be liable the case if: (1) additional cash payments are made by to any taxation. For this reason, Article 204, second the acquiring or receiving company (or companies); paragraph of the Income TaxCode provides that the (2) the acquiring or receiving company (or compa- dividend received will benefit from a100 percent divi- nies) own(s) shares in the acquired or split-up com- dends received deduction, and not from the regular 95 pany at the time of the contribution; or (3) the percent dividends received deduction. The ‘‘quantita- acquired or split-up company owns shares represent- tive application’’conditions for the dividends received ing its own capital. In such circumstances, the portion deduction do not apply in this case.28 If the capital of the contribution that is not remunerated by newly- gain realised is higher than the dividend received, the issued shares is in principle first allocated to the taxed surplus is exempt from tax under Article 192 of the reserves and then to the previously untaxed reserves Income TaxCode. In the case of acapital loss, the loss and, hence, taxation may occur if the taxed reserves will be allocated —tothe extent possible —tothe are insufficient.21 However,aspecial regime is pro- assets that have ahigher fair market value than the vided for to ensure that no taxation arises if a(partial) value for which these assets were accounted for in the subsidiary is merged into its parent. accounts of the subsidiary (thus requiring arevalua- tion of such assets). Any surplus can be accounted for b. Taxtreatment of the acquiring or receiving company as goodwill or as acapital loss on shares.29 From a (or companies)22 fiscal point of view,the revaluation of assets or the ac- counting for goodwill is characterised as arecorded If the contribution is remunerated solely by shares, but unrealised capital gain. Such again is exempt the neutrality principle applies for purposes of com- from tax provided it is booked and maintained in a puting future gains and annual depreciation on the separate blocked reserve account (the ‘‘intangibility assets of the dissolved company.Inother words, de- condition’’).30 Acapital loss on shares is not tax de- preciation allowances, investment deductions, no- ductible.31 To the extent that acapital loss is reflected tional interest deduction (NID) carryforwards, capital in the profit and loss account, the capital loss should, gains and capital losses relating to the assets contrib- however,betax deductible to the extent of the loss of uted must be determined in the hands of the acquiring the fiscal capital of the subsidiary. or receiving company (or companies) as if the reor- 23 In the case of mergers and split-ups carried out ganisation had not taken place. The capital of the under the tax exemption regime, the previous losses of dissolved company is carried over to the subsisting both the acquired or split-up company and the acquir- company (or companies) as the basis for computing ing or receiving company (or companies) remain de- future liquidation gains. The rules applicable to write- ductible following the transaction, albeit only in the downs, provisions, over-valuations and under- proportion that the net fiscal value of the dissolved, valuations, subsidies, receivables and reserves that the acquiring or the receiving company (or compa- were part of the acquired or split-up company remain nies), as the case may be, bears to the net fiscal value applicable to the acquiring or receiving company (or of the subsisting company.Inthe case of taxable companies), provided those elements are comprised 24 mergers or split-ups, the losses that the acquired or in the assets contributed. split-up company had at the time of the transaction In the case of asplit-up, the receiving companies are may never be transferred to the acquiring or receiving deemed to have received the paid-up capital as well as company (or companies), while the previous losses of the taxed and previously untaxed reserves of the the latter company (or companies) in principle con- split-up company in proportion to the fiscal net asset tinue to be deductible from any future profits (i.e., in- value (i.e., the fiscal value of the assets less the fiscal cluding any profits relating to the assets contributed, value of the liabilities) of the contributions made by although certain specific anti-abuse provisions may the split-up company to each of the receiving compa- result in the losses not being deductible from the prof- 25 nies. its generated by the contributed assets). If the contribution made to the acquiring or receiv- ing company (or companies) is not remunerated c. Taxtreatment of shareholders of acquired or split-up solely in newly-issued shares, the paid-up capital and company32 reserves of the acquired or split-up company are re- duced by the portion of the contribution that is remu- Resident individual shareholders holding shares in nerated in cash or consideration other than shares. the acquired or split-up company as aprivate invest- In the case of the merger of asubsidiary into its ment are, in principle, not taxable on the capital gains 33 parent, the participation that the parent held in the realised on such shares, even if they owned asignifi- subsidiary is replaced by the proportional part of the cant shareholding in the acquired or split-up com- 34 net assets of the subsidiary.26 Accordingly,the parent pany. Conversely,any losses on their shares are not may realise acapital loss or acapital gain on the tax deductible for such resident individual sharehold- shares that it held in the subsidiary that are replaced ers. by the net assets of the subsidiary.The capital gain re- Belgian corporate shareholders will in principle not alised on the shares will be characterised as adivi- realise acapital gain (or loss) on their shares in the dend received to the extent of reserves that are context of amerger/split. Indeed, Belgian accounting deemed to be distributed at the level of the subsid- law provides that the shares in the acquired company

02/13 TaxManagement International Forum BNA ISSN 0143-7941 11 are exchanged for shares in the acquiring company at to these practices using the ‘‘sham transaction,’’‘‘fraus the same value.35Accordingly there is no capital gain legis’’ and ‘‘economic reality’’doctrines proved unsuc- or loss for accounting purposes and thus also no capi- cessful,40 alegislative response was required. This tal gain/loss for tax purposes. If there were neverthe- was achieved by the Law of August 6, 1993,41 which less acapital gain, such gain would be exempted amended former Article 206 of the Income TaxCode. based on Article 45, §1 of the Income TaxCode The current version of Article 206, §2of the Income (rather than on the general exemption for capital TaxCode reads as follows: gains on shares in Article 192 of the Income Tax 36 Code)). In the case of atax-free contribution of adivision, a Any cash payment received by the shareholders of branch of activity or auniversality of goods, or in the the acquired or split-up company in addition to case of atax-free merger or split-up, the losses of the newly-issued shares of the acquiring or receiving com- acquiring or the receiving company are only deduct- pany (or companies) is considered to be adividend, in ible following the transaction in the proportion that 37 principle, subject to a25percent withholding tax. If the fiscal net asset value of that company (as deter- it is received by aBelgian resident individual who held mined prior to the transaction) bears to the fiscal net the shares as aprivate investment, such acash pay- asset value of the contributed or acquired assets in- ment will not trigger any further individual tax liabil- creased by the fiscal net asset value of the acquiring or ity.ABelgian corporate shareholder will be taxable on receiving company (as determined prior to the trans- such acash payment, but will in principle benefit action). There is no transfer of losses if the fiscal net from the dividends received deduction. If, however, asset value of the acquiring or receiving company the conditions for the dividends received deduction before the transaction is nil. are not met, the resulting dividend will be taxable. Capital gains realised at the time of the subsequent In the case of atax-free merger,the losses incurred disposal by aBelgian resident individual of the new by the absorbed company prior to the merger con- shares received on the occasion of amerger or split-up tinue to be deductible in the hands of the absorbing are tax exempt, unless the disposal is considered to be company in the proportion that the fiscal net asset outside the normal management of aprivate estate (in value of the former company (as determined prior to which case they are taxed at aflat rate of 33 percent the transaction) bears to the total fiscal net value of plus local taxes) or the shares form part of asignifi- both the absorbing and absorbed companies (as deter- cant qualifying shareholding and the buyer is acom- mined prior to the transaction). In the case of atax- pany located in the European Economic Area free split-up, the aforementioned rule applies to that (EEA)(in which case they are taxed at aflat rate of part of the relevant losses that is determined as the 16.5 percent plus local taxes). Capital gains realised proportion that the fiscal net asset value of the ac- on subsequent disposals by Belgian corporate share- quired assets bears to the total net asset value of the holders of their shares in the acquiring or receiving acquired company. company (or companies) are generally exempt from The second paragraph above) is not applicable if the corporate income tax, while any loss will not be tax fiscal net asset value is nil. deductible, with the exception of liquidation losses, which are deductible up to the amount of the paid-up The first paragraph above) applies equally in the capital of the acquiring or receiving company.The case of amerger,asplit-up, or acontribution of assets subsequent sale of the shares may,however,result in or auniversality of goods if the absorbed, split-up or the merger or split no longer being tax neutral, as the contributing company is an intra-European company tax authorities may argue that the merger or split was and the reorganisation is tax neutral. effected in order to enable the shares to be sold subse- With respect to areorganisation as provided for in quently while benefiting from the exemption for capi- Article 231, §2or §3,the losses of the acquiring or re- tal gains on shares. ceiving company before the reorganisation are only Where individual shareholders hold their shares as deductible in the proportion that the fiscal net asset abusiness investment —which is an exceptional situ- value of the acquiring or receiving company before ation —they are exempt from tax on their gains sub- the reorganisation bears to the fiscal net asset value ject to the same conditions as corporate before the reorganisation of this company and of the shareholders.38 Belgian establishment present in Belgium before the d. Transferability of previous losses reorganisation and other assets located in Belgium of the acquired, split-up or contributing company.

With respect to reorganisations as provided for in (i). General Article 231, §2or §3,the second indent is only appli- The doctrine of the Supreme Court according to cable with respect to the losses of the acquired, which losses may only be deducted by the company split-up or contributing company generated before that sustained the losses39 led in the past to the wide- the reorganisation within the Belgian establishment, spread phenomenon of ‘‘reverse‘‘mergers, under and the proportion referred to in the second indent is which aloss-making company absorbs aprofitable calculated only with reference to the fiscal net asset company.Analternative device consisted in the con- value of the Belgian establishment before the reor- tribution of aprofitable division to aloss-making ganisation, as aproportion of the total fiscal net asset company,thus enabling the previous losses of that values, also before the reorganisation, of the acquiring company to be offset against the profits of the divi- or receiving resident company and those of the ab- sion. Because the tax authorities’ efforts to put an end sorbed or acquired Belgian establishment.

12 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 (ii). Tax-exempt contribution of adivision, abranch previous losses that remains deductible following the of activity or auniversality of goods merger is EUR 30,000, i.e.:

An exemption regime applies where acompany,with- 100,000 × out being dissolved, transfers one or more of its divi- 300,000 sions or branches of activity (branches d’activite´s/ 1,000,000 takken van werkzaamheid), or the universality of its If, in this example, the fiscal net asset value of Ahad goods (universalite´des biens/algemeenheid van goede- been negative (and therefore deemed to be equal to ren)inexchange for shares of the receiving com- nil45), none of A’sprevious losses would have re- pany.42 mained available following the merger. If the exemption regime applies, the receiving com- Absorbing company is profitable and absorbed com- pany is not allowed to take over the losses of the con- pany is loss-making: where Bisthe absorbing com- tributing company.Inaddition, the losses incurred by pany and Athe absorbed company,B’s previous losses the receiving company prior to the contribution will remaining available following the merger are deter- be deductible following the contribution only in the mined in accordance with the following formula: proportion that the fiscal net asset value (before the L(A) × FV(A) transaction) of the receiving company bears to the FV(A,B) fiscal net asset value (before the transaction) of the re- ceiving company increased by the fiscal net asset Where: value (before the transaction) of the contributed L(A) =previous losses of A assets. The fiscal net asset value is equal to the ac- FV(A) =fiscal net asset value (before the transac- counting net asset value, amended for fiscal pur- tion) of A poses.43 Accordingly,corrections to the accounting FV(A,B) =total fiscal net asset value (before the net asset value must be made to take into account the transaction) of Aand B non-tax deductible depreciation, capital gains that are When the formula is applied to the figures used in not taxable, and valuations of assets or debts that are the example above, it follows that the ‘‘reverse’’merger not made in accordance with accounting law.Anega- phenomenon has become moot, i.e., the loss limita- tive fiscal net asset value equals nil. Thus, if the fiscal tion rules lead to the same result regardless of net asset value of the receiving company is negative whether Aabsorbs Borvice versa. (and is therefore deemed to be equal to nil), the previ- Both absorbing company and absorbed company are ous losses of the receiving company will no longer be loss-making: where the absorbing company (A) and deductible following the contribution of the division, the absorbed company (B) are both loss-making, the etc.44 formulae set out above need to be combined. In the case of the taxable contribution of adivision, Example: etc., the receiving company is entitled to offset its Ahas previous losses in the amount of EUR 100,000 losses fully against any profits generated by the assets and afiscal net asset value of EUR 300,000. Bhas pre- transferred. In certain cases, therefore, it may be vious losses amounting to EUR 40,000 and afiscal net more beneficial not to opt for the exemption regime. asset value of EUR 700,000. Limitation of A’sprevious losses: EUR 30,000, i.e.:

(iii). Tax-exempt merger 100,000 × 300,000 In the case of atax-free merger,i.e., amerger imple- 1,000,000 mented in accordance with the provisions laid down in Article 211, §1of the Income TaxCode, the losses Limitation of B’sprevious losses: EUR 28,000, i.e.: of both the absorbing and the absorbed company con- 40,000 × 700,000 tinue to be available after the transaction, subject to 1,000,000 certain limitations. Adistinction must be made among the following three scenarios. Total amount of previous losses available in the hands of the absorbing company following the Absorbing company is loss-making and absorbed merger: EUR 30,000+ EUR 28,000 =EUR 58,000. company is profitable: the following formula must be Again, it makes no difference whether Aabsorbs B used to determine what portion of the absorbing com- or vice versa. pany’s(A’s) previous losses will remain deductible fol- lowing the merger: (iv). Tax-exempt split-up L(A) × FV(A) ÷ FV(A,B) Where: In the case of atax-free split-up, i.e., asplit-up carried out in accordance with Article 211, §1of the Income L(A) =previous losses of A TaxCode, the previous losses of the de-merging com- FV(A) =fiscal net asset value (before the transac- pany (A) must be attributed to each of the receiving tion) of A companies (B and C) on the basis of the following for- FV(A,B) =total fiscal net asset value (before the mulae: transaction) of Aand B Previous losses of Aremaining available in the Example: hands of B:

The previous losses of Aamount to EUR 100,000 L(A) × FV(As) FV(A) and its fiscal net value to EUR 300,000. The fiscal net × asset value of Bamounts to EUR 700,000. Bmerges FV(A) FV (As) +FV(B) with and into A, i.e., Aabsorbs B. The portion of A’s Where:

02/13 TaxManagement International Forum BNA ISSN 0143-7941 13 L(A) =previous losses of A The fiscal value of the elements allocated to aBel- FV(As) =fiscal net asset value of assets (before the gian establishment on the occasion of atax neutral transaction) contributed to B merger or split-up remains unchanged in the hands of FV(A) =fiscal net asset value (before the transac- the establishment. Thus, depreciation, investment de- tion) of A ductions, capital subsidies, and capital losses or gains FV(B) =fiscal net asset value (before the transac- in relation to such elements are determined as if the tion) of B merger or split-up had not occurred.47 Previous losses of Aremaining available in the The tax rules applicable to write-downs, provisions, hands of C: under-orovervaluations, capital subsidies, receiv- ables, capital gains and reserves existing at the level of L(A) × FV(As)’ FV(As)’ × the absorbed or split-up company continue to be ap- FV(A) FV (As)’ +FV(C) plicable, subject to the same modalities and condi- Where: tions, insofar as such elements form part of the assets L(A) =previous losses of A of the Belgian establishment of the absorbing or re- 48 FV(As)’ =fiscal net asset value (before the transac- ceiving company. tion) of assets contributed to C In the case of the appropriation by the head office of FV(A) =fiscal net asset value (before the transac- assets that thus are no longer maintained in the Bel- tion) of A gian establishment, any capital gain or loss deter- FV(C) =fiscal net asset value (before the transac- mined on the occasion of such transfer is considered, tion) of C by virtue of afiscal fiction, to be realised and, hence, Example: becomes fully taxable.49 The previous losses of the de-merging company A Previous tax losses remain deductible after the amount to EUR 100,000; its fiscal net asset value is merger or split-up operation, as follows: EUR 300,000, which is contributed to the receiving s if the acquiring or receiving intra-EU company did companies Band Cinthe amounts of EUR 120,000 not have aBelgian establishment prior to the opera- and EUR 180,000, respectively.The fiscal net asset tion, the previous losses of the absorbed or split-up value of Bamounts to EUR 200,000 and that of Cto company transfer in full to the Belgian establish- EUR 495,000. ment of the absorbing or receiving company.Inthe Previous losses of Aremaining available in the case of asplit-up, the previous losses are allocated hands of B: EUR 15,000, i.e.: between the receiving companies in the proportion that the fiscal net value of the elements allocated to 100,000 × 120,000 120,000 × each of them bears to the total fiscal net value of the 300,000 120,000 +200,000 split-up company; or Previous losses of Aremaining available in the s if the acquiring or receiving intra-EU company al- hands of C: EUR 16,000, i.e.: ready had aBelgian establishment prior to the merger or split-up, the previous losses of the ab- 100,000 × 180,000 180,000 sorbed or split-up company remain deductible in × 300,000 180,000 +495,000 the hands of the Belgian establishment of the ab- sorbing or receiving company in an amount arrived 5. Taxneutrality regime —outbound European at by multiplying the amount of such losses by the following fraction: Union cross-border mergers and split-ups fiscal net value of the transferred elements prior to the The tax neutrality regime described in 4., above, in re- operation lation to domestic mergers, split-ups and assimilated fiscal net value of the Belgian establishment plus the operations applies, mutatis mutandis,tooperations transferred elements prior to the operation whereby adomestic company is absorbed by or The previous losses of the Belgian establishment of split-up to the benefit of an intra-EU company.How- the absorbing or receiving company remain deduct- ever,tax neutrality is only available if and to the ible after the operation in an amount arrived at by extent: (1) the components being transferred are allo- multiplying the amount of such losses by the follow- cated to and maintained in aBelgian establishment of ing fraction: the acquiring or receiving intra-EU company; and (2) the previously untaxed reserves of the absorbed or fiscal net value of the Belgian establishment prior to split-up company,other than the untaxed reserves the operation connected to aforeign establishment, form part of the fiscal net value of the Belgian establishment plus the ‘‘equity’’ofsuch Belgian establishment. These require- transferred elements prior to the operation ments are aimed at preventing any taxable base in Bel- If the absorbed or split-up domestic company has gium disappearing on the occasion of such set offbusiness losses incurred by aforeign establish- operations.46 ment against its Belgian profits, such losses must be The concept of ‘‘equity of aBelgian establishment’’ added to its taxable income when the foreign estab- refers to the ‘‘equity’’ofanonresident taxpayer within lishment is transferred to anonresident company the meaning of Article 227, 2° of the Income TaxCode (whether intra-EU or not) as aresult of amerger or and comprises the following components: untaxed re- split-up, even if the operation is carried out under the serves; taxed reserves; and the capital appropriation tax neutrality regime.50 (dotation en capital/kapitaaldotatie)placed at the dis- If acash payment of 10 percent or less of the value posal of the Belgian establishment by the foreign com- of the issued shares is made to the shareholders of the pany. absorbed or split-up company,the equity of the ab-

14 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 sorbed or split-up company is reduced accordingly at distributions are deemed to result, successively,from: the level of the Belgian establishment of the absorbing (1) paid-up capital, ultimately revalued; (2) taxed re- or receiving company.Such reduction is first set serves (including any capital gains realised or recog- against the taxed reserves and, if such reserves are in- nised on the occasion of the distribution of the sufficient, against the untaxed reserves transferred to liquidating company’sassets); and (3) previously un- the Belgian establishment and, finally,against the taxed reserves.54 capital appropriation (dotation en capital/ kapitaaldotatie). c. Shareholder taxation B. Liquidation51 With effect from January 1, 2002 (but with an excep- tion for liquidations completed prior to March 25, 1. General 2002), liquidation surpluses are in principle subject to 10 percent personal property income withholding tax, Acompany may be dissolved on the expiration of its unless an exemption is available. Liquidation gains re- term, by shareholders’ votes at aspecial general share- alised by corporate shareholders subject to Belgian holders’ meeting or on the transfer of its seat of effec- corporate income tax will generally qualify for the tive management abroad. As of January 1, 1985, the dividends received deduction and, hence, be 95 per- collection of all the shares of ajoint stock corporation cent deductible from the tax base.55 Capital losses sus- (socie´te´ anonyme/ or SA/NV) or aprivate limited liability company (socie´te´ prive´e a` tained by corporate shareholders on their shares (i.e., responsabilite´limite´e/ met where the liquidation proceeds are lower than the beperkte aansprakelijkheid or SPRL/BVBA) in the fiscal value of their shareholding in the liquidating hands of asingle shareholder no longer constitutes a company), are tax deductible, but only up to the cause for automatic dissolution. Under Belgian com- amount of the paid-up capital represented by their 56 pany law,commercial companies that are dissolved shares. are deemed to continue in existence during the liqui- dation period. The liquidation of acompany means d. Operations equated to liquidation the realisation of its assets and liabilities, followed by the distribution of the liquidation surplus, if any,to The tax legislation equates the following operations to the shareholders. The liquidation surplus is the differ- aliquidation:57 ence between the amount distributed and the par value of the paid-up capital (multiplied, where appli- s merger by way of acquisition or the formation of a cable, by astatutory coefficient to take account of cur- new company,split-up by way of acquisition or the rency devaluation). formation of new companies, and transactions equated to amerger of companies (i.e., the dissolu- 2. Taxtreatment tion without liquidation of acompany whose shares are held by another company), where such transac- tions are carried out under the ‘‘taxed regime;’’ a. Application of corporate income tax s dissolution without the distribution of acompany’s Companies entering into liquidation on or after Janu- assets in cases other than those referred to above ary 1, 1990 remain subject to ordinary corporate (i.e., the liquidation by way of or following the col- income tax on their annual profits between the date of lection of all the shares of acompany in the hands their dissolution and the date of completion of their of asingle shareholder; and the continuation of a liquidation.52 Such profits include any capital gains company beyond the term set forth in its articles of realised or recognised on the occasion of the distribu- association, although this is generally construed by tion of the company’staxable capital gain correspond- case law as an ordinary distribution of acompany’s ing to the difference between the real value of the assets);58 corporate assets distributed and their fiscal value. As s change in the corporate form, except in the cases re- the company remains subject to the ordinary corpo- ferred to in Articles 775 through 787 of the Com- rate income tax rules during the liquidation period, it pany Code; and may continue to apply the loss carryforward and divi- s transfer of the statutory seat, the principal estab- dends received deductions and all applicable tax cred- lishment or the seat of management or direction its in the same manner as prior to its dissolution. abroad, except in the case of the intra-EU emigra- tion of aBelgian company,(provided: (1) the com- b. Liquidation distributions ponents of the emigrated company are allocated to For corporate income tax purposes, liquidation distri- and maintained in aBelgian establishment of the butions are treated as arepayment of capital up to the acquiring or receiving intra-EU company,and con- amount of the paid-up capital (multiplied, where ap- tribute to the Belgian taxable profits of the estab- plicable, by the statutory revaluation coefficient to lishment; and (2) the previously untaxed reserves of take into account currency devaluation) and, to that the emigrated company,other than the untaxed re- extent, are not subject to any taxation. Any amounts serves connected to aforeign establishment, form distributed in excess of the (revalued) paid-up capital part of the ‘‘equity’’ofsuch Belgian establishment), are treated as dividends.53 Hence, corporate income aEuropean Company ( or SE) or tax is due to the extent that the distribution proceeds aEuropean Company Societas Coop- consist of previously untaxed reserves. Liquidation erativa Europaea or SCE —see II.A.1., below).

02/13 TaxManagement International Forum BNA ISSN 0143-7941 15 C. Dividends received deduction law of the European Court of Justice (ECJ), the mini- mum holding period requirement does not necessarily have to be met at the time of the dividend distribution, 1. General meaning that the period before and after the payment Belgium implemented EC Council Directive 90/435/ of the dividends may be taken into account in calcu- EEC of July 23, 1990, on the common system of taxa- lating the holding period. The full ownership require- tion applicable in the case of parent companies and ment was not found to be contrary to EC law by the subsidiaries of different Member States59 (the ‘‘EC ECJ —indeed, the EC Parent-Subsidiary Directive ap- Parent-Subsidiary Directive’’) by means of the Law of plies to aparent company that receive dividends by October 23, 1991. The current discussion confines reason of its capacity as ashareholder,incontrast, for itself to the tax treatment of dividends received by a example, to ausufruct holder,which obtains divi- Belgian company. dends based on its usufruct.61 Ninety-five percent of adividend received from a Belgian or foreign source by acompany subject to 3. Deduction limited to 95 percent Belgian resident (or nonresident) corporate income tax is exempted from income tax if the dividend quali- Only 95 percent of the qualifying dividend income is fies as ‘‘definitively taxed income’’(revenus de´finitive- tax exempted. The remaining five percent is deemed ment taxe´s/definitief belaste inkomsten). The excess of to correspond to the acquisition expenses and man- the repurchase price in the case of ashare redemption agement costs relating to the shareholding. The divi- by aBelgian resident company or the excess of the liq- dends received deduction that cannot be effectively uidation proceeds of aBelgian company over the tax deducted, may be carried forward to subsequent cost basis of the holding also fall within the dividends years. received deduction regime. Gains made on the repur- chase of its own shares by aforeign company or on the liquidation of aforeign company are also subject to D. Value added tax and registration tax on mergers and the regime, if these operations are subject to aforeign split-ups income tax similar to that imposed under the Belgian system.60 1. Registration tax 2. Eligibility conditions Contributions of movable or immovable property to Four conditions must be met for acompany to benefit companies having their seat of management in Bel- from the dividends received deduction: (1) the distrib- gium or having their statutory seat in Belgium and uting company must be subject to corporate income their seat of management outside the EU are subject tax or,ifthe distributing company is aforeign com- to a0percent (the rate was 0.5 percent through De- pany,toatax similar to Belgian corporate income tax cember 31, 2005) registration tax.62 (the ‘‘subject-to-tax test’’or‘‘taxation requirement’’); (2) the shareholding of the recipient company in the Mergers and split-ups are considered to be contri- distributing company must amount to at least 10 per- butions for tax purposes. Article 117 of the Registra- cent of the latter company’scapital or have an invest- tion TaxCode exempts such contributions when a ment value of at least EUR 2.5 million (the ‘‘minimum company passes the totality of its assets to one or sev- shareholding requirement’’); and (3) the shares with eral new or preexisting companies as aresult of a respect to which the dividend is distributed must be merger or split-up. The following conditions need to held in full ownership for an uninterrupted period of be fulfilled to be able to enjoy this exemption: (1) the at least one year (which period does not necessarily contributing company must have its seat of manage- have to have expired at the time the dividend is dis- ment or statutory seat in an EU Member State; and (2) tributed —the ‘‘minimum holding period require- the contribution may only be remunerated by shares ment’’). representing shareholder rights and amaximum of The minimum shareholding requirement was ini- 1/10 of the nominal value of the shares in cash.63 tially introduced by the Law of December 28, 1992. The Law of December 24, 2002 tightened this require- 2. Value added tax ment by increasing the percentage threshold from 5 percent to 10 percent (while maintaining the alterna- Articles 11 and 18, §3of the Value Added TaxCode ex- tive threshold of EUR 1.2 million). The alternative clude the transfer of the totality of the assets of acom- threshold is EUR 2.5 million for dividends attributed pany or one of its subdivisions (a branch) from VAT. or made payable on or after January 1, 2010. No mini- For this exclusion to be available, two conditions mum shareholding requirement applies with respect must be met: (1) the totality of the assets of the com- to dividends received by financial institutions, insur- pany or abranch of the company must be transferred; ance companies, stock exchange companies and in- and (2) the receiving company must have been able to vestment companies, except for investment deduct (a part) of the VAThad it been due. companies, as of assessment year 2010. The minimum holding period requirement was in- When the assets and liabilities cannot be character- troduced by the Law of December 24, 2002. The ised as constituting abranch, the transferred assets shares with respect to which the dividends are distrib- will be subject to VATunder the appropriate rules. The uted must be held in full ownership for an uninter- receiving company can deduct such VATwhen the ap- rupted period of at least one year.Inline with the case plicable conditions are fulfilled.64

16 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 II. Forum questions 1. BCo remains the same business entity but effects achange (of some type) that changes it from aBelgian corporation into an FC A. Viability under Belgian corporate law.Treatment for corporation for Belgium income tax purposes Belgian income tax purposes The transfer of the statutory seat, the principal estab- The scenarios in 1. to 5. and 7., below are feasible lishment or the seat of management or administration under Belgian business law.The applicable business of BCo out of Belgium is equated to aliquidation68for legislation on cross-border mergers is set out below, corporate income tax purposes.69 before each scenario is analysed in detail. An exception applies as regards the emigration of a Domestic merger and split-offoperations, i.e., Belgian company to another Member State of the EU. merger and split-offoperations involving only compa- The tax neutrality regime available in such cases is nies incorporated under Belgian law,are governed by similar to that applicable to outbound EU mergers Articles 671 to 759 of the Company Code.65 and split-ups, although the anti-abuse provision does Across-border merger,i.e., amerger or similar op- not apply (i.e., there is no requirement that the opera- eration involving companies under at least two differ- tion concerned may not have as its principal objective, ent leges societatis,one of them being Belgian law,are or as one of its principal objectives, tax evasion or tax governed by Book XI, Title V bis of the Company avoidance).70 Code, pursuant to the Law of June 8, 2008, imple- On November 29, 2011, the ECJ ruled on acase that menting the provisions of the Directive of October 26, may have asignificant impact on Belgian income tax 2005 of the European Parliament and of the Council as it is known today.InNational Grid Indus,the ECJ on cross-border mergers of limited liability compa- ruled that the immediate taxation of the unrealised nies. capital gain on the emigration of acompany is adis- The Company Code establishes the following four proportionate measure with regard to the power of a principles: state to tax the capital gain that built up before the s the operation must involve, on the one hand, one or transfer.The ECJ suggested that, in order to achieve more companies (to be merged or split-off) and, on compliance with EU legislation, companies be given a the other hand, one or more existing companies or choice between making an immediate payment of the 71 companies to be incorporated; relevant tax and deferring the payment of such tax. s the operation must entail the transfer of all the assets and liabilities of the dissolved company as 2. FCo is created with anominal shareholder.BCo well as the continuation of the activities of the dis- then merges into FCo, with FCo surviving. The solved company by the beneficiary company; shareholders of BCo receive stock in FCo s the operation must entail the dissolution, without liquidation, of the merged or split-offcompany; and If the conditions for the application of the EC Merger s new shares must be issued and attributed to the Directive are fulfilled, the tax neutrality regime dis- shareholders of the dissolved company.Abalance cussed in I.A., above will apply.Ifthese conditions are in cash may be paid, but may not exceed 1/10 of the not fulfilled (for example, because FC is not an EU par value or nominal value of the newly issued member state, the assets of BCo are not maintained in shares. This limitation does not apply in the case of aBelgian establishment, or the principal objective of across-border merger if the other lex societatis the merger is tax evasion or tax avoidance), the allows for ahigher amount.66 merger will be equated to aliquidation for corporate 72 In the case of across-border merger,the merger income tax purposes. proposals of the absorbing and merged companies It is important to note that if FCo is created imme- must include the same information and thus comply diately before the merger and has no activities or cumulatively with the Company Code and other lex assets, and FCo was created for the sole purpose of societatis requirements. Such proposals must contain merging it with BCo, under principles established by additional information regarding the involvement of Belgian case law,the transaction would not qualify as the employees in defining their participation rights in amerger.For the transaction to qualify as amerger, the company resulting from the cross-border merger. FCo would have to have other assets in addition to the assets transferred to it by BCo.73 Articles 670 to 759 of the Company Code comply with the third and sixth EC Directives on mergers and divisions of companies. 3. FCo is created with anominal shareholder.The shareholders of BCo then transfer all of their The Company Code distinguishes between three stock in BCo to FCo in exchange for stock in FCo. types of mergers of companies: BCo then liquidates s merger by way of acquisition; s the concentration of all the shares in the hands of In the case of ashareholder of BCo that is aBelgian one shareholder; and company,the capital gain arising on the transfer of s merger by way of the formation of anew company. the shareholder’sBCo shares is excluded from taxa- The Company Code attaches certain specific conse- tion only if the shareholder meets the requirements quences to mergers realised by way of the procedures for entitlement to benefit from the dividends received laid down in the Company Code. One important such deduction regime.74 In the case of ashareholder of consequence is that the legal personality of the merg- BCo that is aBelgian individual not holding the shares ing companies passes to the acquiring or newly as part of his professional estate, the capital gain aris- formed company without interruption.67 ing on the transfer of the shareholder’sBCo shares is

02/13 TaxManagement International Forum BNA ISSN 0143-7941 17 not taxed only if the exchange of stock qualifies as the ability of ahigher depreciation deduction for FCo. ‘‘normal management of aprivate estate.’’75 Thus, the losses set offbyBCo are effectively con- If the transaction is considered to go beyond the verted into adepreciation deduction in the hands of normal administration of his or her private estate, he FCo.79 or she will be taxed on any capital gain arising on the Capital gains from the sale of shares are exempt transfer of his/her BCo shares at the rate of 16.5 per- from taxation if the dividends received deduction re- 76 cent or 33 percent, though atemporary exemption quirements are met. If the requirements are met, but 77 may be available. the sale of the shares takes place within one year of When BCo is liquidated, the liquidation regime set the date on which the shares were acquired, any capi- out in I.B., above will apply. tal gain is taxed at the rate of 25.75 percent.80 When BCo is liquidated, the liquidation regime de- 4. BCo creates FCo as awholly owned subsidiary. scribed in I.B., above will apply. BCo then merges into FCo, with FCo surviving.The shareholders of BCo receive stock B. Other scenarios that BCo might consider and their in FCo treatment for Belgian income tax purposes

If the conditions for the application of the EC Merger No other scenarios would achieve the same tax results Directive are fulfilled, the tax neutrality regime dis- as those set out in A.1. to 7., above. cussed in I.A., above will apply.Ifthese conditions are not fulfilled (for example, because FC is not an EU C. Difference for Belgian income tax purposes if BCo has Member State, the assets of BCo are not maintained a‘‘business purpose’’ for the restructuring in aBelgian establishment, or the principal objective of the merger is tax evasion or tax avoidance), the The Belgian legislature has, over many years, intro- merger will be equated to aliquidation for corporate duced specific anti-abuse provisions targeted at spe- income tax purposes. cific abuses. These provisions have greatly increased However,FCo will receive its own shares and how in number since the beginning of the 1990s. The Law this is treated will depend on the applicable rules in of July 22, 1993 introduced ageneral anti-abuse of law FC. provision in the area of income taxation. Anew gen- eral anti-abuse provision was introduced in 2012. This 5. FCo is created with anominal shareholder.The general anti-abuse provision can be found in Article shareholders of BCo then transfer all of their 344 §1of the Income TaxCode.81 stock in BCo to FCo in exchange for stock in FCo Paragraph 1ofArticle 344 of the Income TaxCode The position will be the same as that set out in 3., has recently been amended and, as the amended pro- above, the only difference being that, as BCo is not liq- vision only began to apply from tax year 2013, many uidated after the transfer of its assets, the comment in questions as to its practical implications are as yet un- 3., above relating to liquidation does not apply here. answered. That being said, the new rule can be sum- marised as follows: the tax administration is not 6. FCo is created with anominal shareholder and obliged to accept alegal act or aseries of legal acts in turn creates BMergerCo, awholly owned that result in one transaction, when the administra- tion can demonstrate, even by way of presumption, limited liability business entity formed under the that the legal act(s) lead(s) to tax abuse. There is tax law of BC and treated as acorporation for BC abuse when, due to its legal act(s), the taxpayer places income tax purposes. BMergerCo then merges itself outside the scope of arule in the Income Tax into BCo, with BCo surviving. The shareholders Code or when the taxpayer enjoys atax benefit al- of BCo receive stock in FCo though its enjoyment of the benefit is contrary to the 82 When BMergerCo merges into BCo, the BMergerCo objective of the rule. To avoid the application of shareholder (i.e., FCo) will receive BCo stock. This op- paragraph 1, the taxpayer must prove that its choice eration may be tax neutral if the neutrality require- of the particular legal act concerned was prompted by ments are met. reasons other than the evasion of tax —there must, therefore, be important non-tax driven reasons for the 7. FCo is created with the same corporate choice of the particular legal act. If the taxpayer fails structure as BCo, and with the same shareholders to provide such proof, the legal act will be recharacter- with the same proportional ownership. BCo then ised and the taxable base and tax calculation will be sells all of its assets (and liabilities) to FCo and reinstated as if the abuse had not taken place. The general anti-abuse measure contained in paragraph 1 then liquidates is a‘‘last resort,’’tobeapplied when no other,specific Capital gains from the sale of assets are taxable as anti-abuse measure can be applied.83 business profits at the normal rate of 33.99 percent.78 Article 183bis of the Income TaxCode contains a Temporary exemptions are available but are usually specific anti-abuse measure that applies to reorgani- subject to an intangibility condition (see I.A.4.b., sations. Article 183bis was inserted into the Income above). BCo may be able to offset the tax on the capi- TaxCode in connection with the implementation into tal gains from the sale of the assets with any available Belgian law of the EC Merger Directive and is based losses carried forward or other tax attributes. on the general anti-abuse provision in that Direc- On acquiring the assets, FCo will book them at their tive.84 The new provision applies to reorganisation acquisition price and not at their previous book value transactions carried out on or after January 12, 2009 with BCo. This step-up in value results in the avail- and replaces the former anti-abuse provision, which

18 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 provided that such transactions had to meet legiti- 4 J. Kirkpatrick and D. Garabedian, Le re´gime fiscal des so- mate financial and economic needs. cie´te´ senBelgique,Brussel, Bruylant, 2003, 339-348, 356, Under the new anti-abuse provision, amerger,adi- 360-366; A. Haelterman, Vennootschapsbelasting doorgel- vision, atransfer of assets or an exchange of shares icht :een inzichtelijk handboek,Brugge, Die Keure, 2012, cannot have as its principal objective, or as one of its 283-30, 326-327; T. Blockerye, Acquisitions, fusions et re´organisations de socie´te´ s ,Limal, Anthemis, 2012, 255- principal objectives, tax evasion or tax avoidance. The 264, 319-425; B.J.M. Terra and P. J. Wattel, European Tax fact that an operation is not carried out for valid com- Law,Deventer,Wolters Kluwer,2012, 653-702. mercial reasons, such as the restructuring or ratio- 5 The Official Journal of the European Union, Legislation nalisation of the activities of the companies 295 of Oct. 20, 1978. participating in the operation, may give rise to apre- 6 O.J., L. 378 of Dec. 31, 1982. sumption that the operation has tax evasion or tax 7 Belgian Official Journal of July 21 1993; J. Kirkpatrick avoidance as its principal objective or as one of its and D. Garabedian, Le re´gime fiscal des socie´te´ senBel- principal objectives. Under the new provision, the tax gique,Brussel, Bruylant, 2003, 331-332. authorities have the burden of proving that tax eva- 8 Belgian Official Journal of Aug. 31 1993. sion or tax avoidance is the principal objective of the 9 O.J., L225. 85 operation concerned. 10 Company Code (CC), Art. 671; B.J.M. Terra and P.J. Alongside these anti-avoidance measures, Belgium Wattel, European TaxLaw 5th ed., Deventer,Wolters law also contains asimulation doctrine.86 Although Kluwer,2012, 667. not an anti-avoidance measure per se,the simulation 11 CC, Art. 676. 12 or sham transaction doctrine, which is well- CC, Art. 672. 13 established in Belgian tax law,isinreality directed at CC, Art. 673. 14 tax evasion or tax fraud. ‘‘Simulation’’refers to asitu- CC, Art. 674. 15 ation in which the parties to atransaction establish, CC, Art. 675. 16 with fraudulent intent or with the intention of causing Income TaxCode (CIT), Art. 211, §1,para. 2, 1° -3°. 17 damage, an apparent act given civil or legal effect that CIT,Art. 2, §2,2°. 18 CIT,Art. 2, §1,5°, b) bis; B.J.M. Terra and P.J. Wattel, disguises the actual act not given civil or legal effect, European TaxLaw,5th ed.,Deventer,Wolters Kluwer, to which only the parties are privy.Simulated acts 2012, 671. cannot be upheld against third parties. In private law 19 CIT,Art. 183bis. relations, third parties confronted with asimulation 20 A. Huyghe, ‘‘National and international tax conse- may freely choose to rely either on the apparent act or quences of demergers, Belgium report’’inStudies on In- on the real act. Because tax law is apublic policy ternational Fiscal Law,Vol. LXXIXb, IFA,Kluwer,1994, matter and because of the principle that tax is based 50. on legal reality,the tax authorities are denied that 21 J. Kirkpatrick and D. Garabedian, Le re´gime fiscal des choice and, hence, are required to assess tax based on socie´te´ senBelgique,Brussel, Bruylant, 2003, 343; B.J.M. the real act. Terra and P.J. Wattel, European TaxLaw,Deventer,Wolt- According to well-established case law of the Su- ers Kluwer,2012, 673. preme Court, there is no simulation and, hence, no tax 22 J. Kirkpatrick and D. Garabedian, Le re´gime fiscal des fraud when ataxpayer uses the freedom of socie´te´ senBelgique,Brussel, Bruylant, 2003, 344-346. to perform legal acts with aview to benefiting from a 23 CIT,Art. 212, para. 1. 24 more favorable tax regime, even if the legal form se- CIT,Art. 212, para. 2. 25 lected for such acts is not the normal one, provided CIT,Art. 213. 26 those acts do not infringe on alegal obligation and the Decree executing the Company Code, Art. 78, para. 6. 27 taxpayer accepts all the consequences of those acts.87 CIT,Art. 202, para. 1, 2° and Art. 209. 28 I.e., it is not required that the shareholding of the re- cipient company in the distributing company amounts to D. Treatment for Belgian income tax purposes if FCo at least 10 percent of the capital or have an investment were an existing, unrelated foreign corporation, and BCo value of at least EUR 2.5 million (the ‘‘minimum share- merged into FCo, with FCo surviving holding requirement’’). 29 Decree executing the Company Code, Art. 78, para. 7, The consequences of this scenario would be the same a). as those discussed in relation to the scenario at A.2., 30 CIT,Art. 212, third indent. above. 31 CIT,Art. 198, 7°. 32 J. Kirkpatrick and D. Garabedian, Le re´gime fiscal des socie´te´ senBelgique,Brussel, Bruylant, 2003, 346-348. NOTES 33 CIT,Art. 90, 1°. 1 The authors would like to thank Laura Migalski, associ- 34 CIT,Art. 95. ate with Liedekerke Wolters Waelbroeck Kirkpatrick, for 35 35 Royal Decree on Accounting Law,Art. 41, §1,para. her assistance in writing this article. 2; J. Kirkpatrick and D. Garabedian, Le re´gime fiscal des 2 The introduction is very largely taken from Malherbe, socie´te´ senBelgique,Brussel, Bruylant, 2003, 339. Malherbe, Faes and Verstraete, 953-3rd. T.M., Business 36 36 J. Kirkpatrick and D. Garabedian, Le re´gime fiscal operations in Belgium,pp. A125-A128 and A144-A153. des socie´te´ senBelgique,Brussel, Bruylant, 2003, 346-347. 3 Council Directive of July 23, 1990 on the common 37 CIT,Art. 18, 1°. system of taxation applicable to mergers, divisions, trans- 38 CIT,Art. 45. fers of assets and exchanges of shares concerning compa- 39 Cass. May 17, 1926, Pas., 1926, I, 378; Cass. June 8, nies of different Member States (90/434/EEC) (the ‘‘EC 1936, Pas., 1936, I, 282. Merger Directive’’), as amended by the Council Directive 40 See, e.g., Cass. 22 March 1990, FJF 1990, 90/210 anno- 2005/19/EC of Feb. 17, 2005 (2005/19/EC). tated by S. VanCrombrugge.

02/13 TaxManagement International Forum BNA ISSN 0143-7941 19 41 Belgian Official Journal of Aug. 31 1993. T. Blockerye, Acquisitions, fusions et re´organisations de 42 CIT,Art. 46, §1,2°. socie´te´ s ,Limal, Anthemis, 2012, 265-268. 43 CIT,Art. 184ter,para. 3. 71 A. Autenne, ‘‘Arreˆt‘National Grid Indus’: les taxes de 44 CIT,Art. 206, para. 2, first indent. sortie a` l’e´preuve de la liberte´d’e´tablissement,’’ Journal de 45 CIT,Art. 206, para. 2, first indent. Droit Europe´en 4/2012, 188, 109; T. Biermeyer,F.Elsener 46 B.J.M. Terra and P.J. Wattel, European TaxLaw,5th ed., and F. Timba, ‘‘The Compatibility of Corporate Exit Taxa- Deventer,Wolters Kluwer,2012, 674-677. tion with European Law,’’ ECFR 1/2012, 101; C.HJI 47 CIT,Art. 229, §4,para. 5. Panayi, ‘‘National Grid Indus BV vInspecteur van de Be- 48 CIT,Art. 229, §4,para. 8. lastingdienst Rijnmond/kantoor Rotterdam: exit taxes in 49 CIT,Art. 228, §2,3°bis,second indent. the European Union revisited,’’ British TaxReview 1/2012, 50 CIT,Art. 206, §1,para. 2. 41; B.J.M. Terra and P.J. Wattel, European TaxLaw,De- 51 J. Kirkpatrick and D. Garabedian, Le re´gime fiscal des venter,Wolters Kluwer,2012, 962-974. socie´te´ senBelgique,Brussel, Bruylant, 2003, 311-321; A. 72 A. Haelterman, Vennootschapsbelasting doorgelicht: een Haelterman, Vennootschapsbelasting doorgelicht :een in- inzichtelijk handboek,Brugge, Die Keure, 2012, 307-310. zichtelijk handboek,Brugge, Die Keure, 2012, 274-280; T. 73 Administrative commentaries on CIT,n°211/22. Blockerye, Acquisitions, fusions et re´organisations de so- 74 CIT,Art. 192, §1and art. 203. cie´te´ s ,Limal, Anthemis, 2012, 254-255. 75 CIT,Art. 90, 9° acontrario. 52 CIT,Art. 208, para. 1; J. Kirkpatrick and D. Garabedian, 76 Le re´gime fiscal des socie´te´ senBelgique,Brussel, Bruylant, CIT,Art. 90, 9°. 77 2003, 313-315. CIT,Art. 95. 53 CIT,Art. 209. 78 CIT,Art. 24, first sentence, 2°. 54 CIT,Art. 209, para. 2. 79 T. Blockerye, Acquisitions, fusions et re´organisations de 55 J. Kirkpatrick and D. Garabedian, Le re´gime fiscal des socie´te´ s ,Limal, Anthemis, 2012, 23-38. socie´te´ senBelgique,Brussel, Bruylant, 2003, 317-321. 80 CIT,Art. 192, §1,first sentence, 2°. 56 CIT,Art. 198, 7°. 81 J. Malherbe and H. Verstraete, Belgium, Host Country 57 CIT,Art. 210, §1. Taxation of Tax–Motivated Transactions: The Economic 58 Cass. May 24, 1985,RW1985-86, 1489. Substance Doctrine, TMIF 2010, nr.2,8. 59 O.J., No. L225/6 of Aug. 20, 1990. 82 T. Blockerye, Acquisitions, fusions et re´organisations de 60 CIT,Art. 202, para. 1, 2°. socie´te´ s ,Limal, Anthemis, 2012, 60-76; A. Haelterman, 61 ECJ, Dec. 22 2008, Case C-48/07, Belge vLes Verg- Vennootschapsbelasting doorgelicht: een inzichtelijk hand- ers du Vieux Tauves SA. boek,Brugge, Die Keure, 2012, 13-18; 43-51. 62 Registration TaxCode, Arts. 115 and 115bis. 83 Verslag namens de commissie van Financie¨n en Be- 63 T. Blockerye, Acquisitions, fusions et re´organisations de groting Parl. St. Kamer 2011-12, 2081/016, 70; Memorie socie´te´ s ,Limal, Anthemis, 2012, 427-430. van toelichting, Parl. St. Kamer 2011-12, 2081/001, 112; 64 T. Blockerye, Acquisitions, fusions et re´organisations de Circ. Anti-misbruikbepaling, AFZ nr.3/2012, AAF nr.17/ socie´te´ s ,Limal, Anthemis, 2012, 430-433. 2012, AAPD nr.4/2012. 65 Malherbe, Malherbe, Faes and Verstraete, 953-3rd. 84 T.M., Business operations in Belgium,pp. A67-A69. EC Merger Directive, Art. 11, 1, a). 85 66 CC, Art. 772/2. T. Blockerye, Acquisitions, fusions et re´organisations de 67 J. Malherbe, Y. De Cordt, P. Lambrecht and P. Mal- socie´te´ s ,Limal, Anthemis, 2012, 275-285; J. Malherbe and herbe, Droit des socie´te´ s ,Brussel, Bruylant, 2011, 1036. H. Verstraete, Host Country Taxation of Tax–Motivated 68 J. Kirkpatrick and D. Garabedian, Le re´gime fiscal des Transactions: The Economic Substance Doctrine, TMIF socie´te´ senBelgique,Brussel, Bruylant, 2003, 314. 2010, nr.2,8. 69 For Belgian company law purposes, BCo will maintain 86 A. Haelterman, Vennootschapsbelasting doorgelicht: een its legal personality when transferred to FC. inzichtelijk handboek,Brugge, Die Keure, 2012, 10-13, 44- 70 A. Haelterman, Vennootschapsbelasting doorgelicht: een 45. inzichtelijk handboek,Brugge, Die Keure, 2012, 280-283; 87 Cass. 6June 1961, Pas., 1961, I, 1082.

20 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 Host Country BRAZIL

Gustavo MBrigaga˜o and Antonio Luis H. Silva, Jr. Ulhoˆ aCanto, Rezende eGuerra Advogados

Brief comments on corporate expatriation in the Another aspect worth noting is that the transfer of context of the Brazilian legal system assets between taxpayers in the context of acorporate reorganisation can generally6 be performed at book razilian legislation does not contain any rules value for Brazilian tax purposes and thus will not gen- that would govern a‘‘corporate expatriation,’’ erate any taxable gain for either party.7 This is pre- B understood as the transformation of aBrazil- cisely why groups of companies are able to achieve the ian group of companies (i.e., agroup of affiliated com- goal of rearranging their corporate structure in atax- panies headed by aBrazilian parent) into aforeign free manner,without there being aneed for specific multinational group (i.e., agroup of affiliated compa- rules granting atax exemption for corporate reorgani- nies headed by aforeign parent). Nor are there any sations. rules that specifically provide for nontaxable combi- In any event, in view of the absence of express pro- nations or rearrangements of entities —i.e., ‘‘tax-free visions that disallow the ‘‘redomiciliation’’ofBrazilian reorganisations.’’1 entities and any express prohibition on Brazilian enti- Acorporate outbound migration, which may or ties merging with foreign companies, it might be may not be arranged as atax-free reorganisation, is argued that the outbound migration of aBrazilian usually devised with aview to avoiding or mitigating company is theoretically possible, as far as the legal taxation in the country where the company to be expa- Brazilian system is concerned. However,the use of the triated was originally established. However,certain word ‘‘theoretically’’inthe context of such an expa- aspects of the Brazilian tax and legal system would triation is key,because an entity no longer wishing to appear to make any discussion of the expatriation of remain aBrazilian resident for tax purposes will find Brazilian companies moot. no practical means of achieving its objective. As ageneral rule, residence status determines the Even though there is one national business body of basis for the taxation of any given person. Currently, law,Boards of Trade are organised in each of the Bra- Brazil uses aworldwide income base for purposes of zilian States and are responsible for establishing pro- the income taxation of resident legal entities2 —i.e., cedures relating to the setting up and continuing resident entities are subject to taxation in Brazil all operation of business entities. In the case of an expa- 8 their income, irrespective of whether it is derived triation, the relevant Board of Trade would likely not from domestic or foreign sources.3 Ordinary income acknowledge the continuity of the business enterprise and capital gains are subject to taxation on anet overseas and would thus require the Brazilian entity basis.4 to cease its existence by means of aliquidation and ex- tinction procedure.9 On the other hand, nonresidents of Brazil are sub- The Boards of Trade would interpret national busi- ject to taxation only on their Brazilian source income ness law as forbidding such transactions, on the by way of withholding (by the payor), on agross basis. grounds that outbound migrations of Brazilian com- Capital gains obtained from the transfer or disposal of panies may be to the benefit of shareholders, but may any Brazilian rights or assets are subject to taxation in equally impede the collecting of claims by local credi- Brazil, regardless of whether either party (the acquir- tors and tax (or other relevant administrative or judi- ing or transferring person) is resident in Brazil — cial) authorities, in the event there are no longer what is relevant for this purpose is simply that the persons/assets/activities in Brazil to account for po- 5 right or asset is considered to be located in Brazil. tential outstanding liabilities. Thus, liquidating and Although it is true that acorporate expatriation extinguishing the Brazilian entity would represent the could allow aBrazilian entity to escape Brazilian ‘‘last resort’’for creditors and authorities wishing to worldwide taxation of its income, the entity would have their interests satisfied.10 still be subject to Brazilian withholding tax on its Bra- By way of afinal comment on the set of facts pre- zilian source income, whether ordinary income or sented for analysis, it should be pointed out that Bra- capital gains accrued in connection with adisposal of zilian legislation does not allow ataxpayer —whether Brazilian rights or assets. an individual or abusiness entity —toelect to be

02/13 TaxManagement International Forum BNA ISSN 0143-7941 21 02/13 TaxManagement International Forum BNA ISSN 0143-7941 21 treated as adisregarded person for Brazilian tax pur- 9,249/95, Art. 3, §1and Federal Law no. 7,689, dated Dec. poses, i.e., there is no option to be treated as a‘‘trans- 15, 1988, Art. 3, item II. parent’’entity.Ingeneral, every legal entity is 5 Capital gains are taxed at aflat rate of 15 percent. This considered to be aseparate and autonomous taxpayer, rate can be increased to up to 25 percent if the beneficiary and is taxed on the income it accrues, regardless of its of the capital gains is resident or domiciled in atax haven. chosen corporate form (whether that of a per se corpo- Federal Law no. 9,249/95, Art. 18; Federal Law no. ration, alimited liability company etc.). For that 10,833, dated Dec. 29, 2003, Arts. 26 and 47. 6 matter,Brazil does not have any ‘‘check-the-box’’regu- Some provisions may require transactions to be carried lations that allow an entity ‘‘to enjoy treatment’’differ- out on an arm’slength basis, such as the provisions relat- ing to transfer pricing and disguised distributions of prof- ent from that appropriate to its default status for tax its. purposes. 7 In this sense, the transfer of the stock of aBrazilian This is particularly relevant because Brazil does not company to aforeign entity,inexchange for stock of the 11 have a‘‘classical’’tax system under which income latter (i.e., acapital contribution), should not be subject earned by acompany is taxed once at the corporate to withholding income tax if the transfer is made at book/ level and then again at the shareholder level. Rather, cost value, though it may trigger the financial transac- in deference to the fact that earnings will already have tions tax (Imposto sobre Operac¸o˜esFinanceiras or IOF). been subject to tax at the corporate level, i.e., at the 8 The authors are aware of one legal opinion (Opinion no. level of the distributing Brazilian entity,the distribu- 73, issued on May 27, 1994), issued by the Board of Trade tion of dividends is currently exempt from taxation of the State of Sa˜o Paulo (Junta Comercial do Estado de (irrespective of the shareholder’scountry of resi- Sa˜o Paulo or JUCESP) that did not authorise aBrazilian dence).12 entity to be merged with its parent located in the Baha- mas. In conclusion it can be noted that it is only relatively 9 The liquidation and consequent extinction of alegal recently that Brazil has become a‘‘global player.’’ entity is acomplex procedure that is regulated by Federal While developed countries have had numerous multi- Law no. 10,406, dated Jan. 10, 2002, the Brazilian Civil national groups for many years and have conse- Code (Co´digo Civil Brasileiro), Art. 1,102 and Federal Law quently evolved the tax rules to deal with them, most no. 6,404, dated Dec. 15, 1976, Arts. 208 to 219. The pro- of Brazil’stax rules were enacted when the country cedure requires the appointment of aliquidator,anoffi- had no need to address such complex issues. One cer who will oversee the winding-up of the entity,the would, therefore, expect Brazil to be still in the pro- realisation of assets and the payment of any outstanding cess of adapting its legislation to the current trends liabilities. As such, the procedure represents aguarantee and to the new challenges the country will increas- to creditors that they may claim what is owed to them in ingly face. the order prescribed by law.The final act of the liquida- tion is the distribution of any remaining property to the liquidating entity’sshareholders according to their equity interests, after the satisfaction of all other creditors. NOTES 10 1 The United States, for instance, has aspecific body of This was the reasoning behind JUCESP Opinion no. law containing numerous provisions that determine 73/94 —see fn. 8, above. 11 whether companies that are party to acorporate reor- Under a‘‘classical’’system, income earned by acom- ganisation, as well as their shareholders, are supposed to pany is taxed once at the corporate level and then again recognise gain and have such gain taxed accordingly. at the personal (shareholder) level when adividend is paid. Xavier,Alberto, Direito Tributa´rio Internacional do 2 With the enactment of Federal Law no. 9,249, dated Brasil: Tributac¸a˜o das Operac¸o˜esInternacionais.5th. ed., Dec. 26, 1995. Until that date, Brazilian entities were sub- Rio de Janeiro: Forense, 1998, at. 463; Cavalcanti, Fla´via, ject to income tax only on their income derived from Bra- ‘‘AIntegrac¸a˜o da Tributac¸a˜o das Pessoas Jurı´dicas edas zilian sources (i.e., aterritorial regime). Pessoas Fı´sicas –uma Ana´lise Calcada na Neutralidade, 3 The Brazilian regime also lays down rules and proce- Equidade eEficieˆncia,’’ Revista Direito Tributa´rio Atual n. dures to be followed by Brazilian legal entities for the en- 24/2010. Sa˜o Paulo: Diale´tica, 2010, at 258. joyment of foreign tax credits. 12 This is true with regard to profits earned and distrib- 4 At aconsolidated rate of approximately 34 percent, uted on or after Jan. 1, 1996, in accordance with Federal comprising aflat corporate income tax rate of 15 percent, Law no. 9,249/95, Art. 10. Profits accrued on or before plus a10percent supplementary income tax and a9per- Dec. 31, 1995 are subject to tax at a15percent rate, under cent social contribution on net profits. Federal Law no. Federal law no. 8,383, dated Dec. 30, 1991, Art. 77.

22 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 Host Country CANADA

Richard J. Bennett Borden Ladner Gervais LLP,Vancouver

I. Introduction Last, Canadian corporate statutes generally permit the ‘‘continuation’’ofacorporation to aforeign juris- diction. The usual legal effect is that the corporation, A. Relevant Canadian corporate principles once continued, will cease to be governed by its origi- anadian provinces and the federal govern- nal governing statute and will become subject to the ment each have their own comprehensive cor- governing corporate statute of the foreign jurisdic- C porate legislation under which acorporation tion. may be formed and governed. With the exception of that of , all these statutes are ultimately rooted B. Relevant Canadian tax principles primarily in English corporate law.They are broadly similar in shared corporate concepts, but differ mate- 1. Residence rially in their details. The usual means by which two or more Canadian cor- Canada taxes based on residence: aresident of porations may formally ‘‘merge’’are by amalgamation Canada is taxable on its worldwide income, subject to and winding-up. applicable treaty relief, if any. Generally,any corporation incorporated in Canada Under all Canadian corporate statutes, two or more is deemed to be resident in Canada for purposes of the corporations may amalgamate and continue as a Income TaxAct (Canada) (the ‘‘TaxAct’’).4 single corporate entity.Itisclear in the Canadian ju- Acorporation that is not incorporated in Canada risprudence of such ‘‘continuation’’style amalgama- will also be resident in Canada under Canadian tions that the juridical existence of each common law principles if its central management and amalgamating entity ‘‘continues’’(i.e., survives) in the control is exercised in Canada. Typically this will 1 amalgamated entity. The concept of a‘‘surviving’’cor- occur if the directors of the corporation meet and poration and one or more others which do not survive make board decisions in Canada.5 the merger,common in the ‘‘absorptive mergers’’ The common law rule may be overridden if the cor- recognised by many foreign jurisdictions (including, poration is incorporated in acountry with which notably,the United States), is by and large unknown Canada has atax treaty,and the treaty includes an ap- 2 in Canadian amalgamation law. Further,itisare- propriate tie-breaker rule. For example, the Canada- quirement under nearly all Canadian corporate stat- United States and Canada-Australia tax treaties tie- utes that all amalgamating corporations be governed break to the state under whose laws the corporation is by the statute whose amalgamation rules are being incorporated.6 Acorporation that tie-breaks to an- 3 used. Consequently,asageneral rule it is not possible other jurisdiction under aCanadian tax treaty is under to amalgamate aCana- deemed for Canadian tax purposes not to be resident dian corporation with anon-Canadian corporation, in Canada.7 Thus, the fiscal residence of an Australian except possibly by way of a‘‘plan of arrangement’’— corporation whose central management and control i.e., ashareholder approved series of transactions that is exercised in Canada would tie-break to Australia are deemed by court order to occur in law in precisely under the Canada-Australia treaty,8 and the corpora- the manner set out in the plan. As apractical matter,it tion would be deemed not to be resident in Canada. is quite unlikely that aCanadian court would grant Not all of Canada’streaties, however,include such a such an order. tie-breaker rule, and often will tie-break dual corpo- On awinding-up the assets of acorporation are dis- rate residence by competent authority reference.9 tributed to its shareholder(s) and the corporation is Aspecial rule provides that acorporation that is for- then formally dissolved. There is no requirement that mally continued to another jurisdiction is deemed to the corporation and its shareholder(s) be governed by be incorporated in the other jurisdiction from the the same corporate statute or that the shareholder(s) time of the continuation.10 Consequently,ifaCana- be abody corporate. Therefore awind-up may occur dian resident corporation continues to ajurisdiction across provincial or national borders. outside Canada, its fiscal residence for Canadian tax

02/13 TaxManagement International Forum BNA ISSN 0143-7941 23 02/13 TaxManagement International Forum BNA ISSN 0143-7941 23 purposes will, from the time of continuation, be deter- dition, Canada’sforeign affiliate rules contain a mined by reference to its place of central management comprehensive set of rules that permit many types of and control and applicable treaty tie-breaker rules, if reorganisation within agroup of foreign affiliates any.11 without the triggering of current Canadian tax in the Canadian parent. 2. Rates Canada’srelatively benign approach to foreign af- filiate taxation has been clouded by the recent enact- Canadian corporate income tax rates vary somewhat ment of the draconian FADrules.16 While ageneral depending on the applicable provincial tax rate, but discussion of these rules is well beyond the scope of generally are in the 25-27 percent range. Only 50 per- this article,17 readers should note that they may apply cent of capital gains are taxed, resulting in effective in any structure in which aCanadian corporation that corporate rates on capital gains in the range 12.5-13.5 is controlled by aforeign corporation makes an ‘‘in- percent. vestment’’(very broadly defined) in asecond foreign corporation and, immediately after the investment, 3. Non-arm’slength transactions and corporate the second corporation is aforeign affiliate of the Ca- emigration nadian corporation. Where the rules apply,they func- tion by deeming the Canadian corporation’s The default rule in the TaxAct is that non-arm’slength investment in its foreign affiliate (i.e., adownstream parties are deemed to transact at fair market value in investment) to be adividend paid by it to its foreign the absence of an applicable deferral or non- parent corporation (i.e., an upstream payment) sub- recognition rule.12 In addition, §247 of the TaxAct ject to Canadian dividend withholding tax. Further,if sets out acomprehensive transfer pricing regime ap- the foreign parent makes an equity investment in the plicable to non-arm’slength cross-border transac- Canadian corporation that relates to the downstream tions. Canada generally follows the OECD Transfer investment, no corresponding increase in the paid-up Pricing Guidelines when applying its transfer pricing capital (PUC) of the Canadian corporation’sshares rules. will be permitted, thus limiting the Canadian corpora- Not surprisingly,given the residence basis of Cana- tion’sability to distribute funds to its foreign parent da’stax system, ceasing to be resident in Canada is a by way of atax-free return of capital. The FADrules taxable event under Canadian rules. Generally,emi- are expected to discourage foreign corporations from gration triggers ataxation year-end, and the e´ migre´, if acquiring Canadian corporations that themselves acorporation, is deemed to have disposed of all of its have foreign affiliates as they will preclude or inhibit assets immediately before the year-end at fair market many forms of internal financing of those affiliates. value.13 This, of course, forces the recognition of all The FADrules are mentioned here because all of the accrued gains and losses over or under cost with re- transactions proposed by the fact pattern would result sulting Canadian taxes accordingly. in astructure to which the FADrules could subse- Moreover,there is only one deferral or non- quently apply.For that reason alone, it is likely that recognition rule —§85.1(3) —that is expressly appli- the various scenarios contemplated would very often cable to the disposition of property by aCanadian not be implemented without some strategy to manage resident to anonresident with which it does not deal the potential future adverse consequences of the FAD at arm’slength. The rule is narrow in scope –itapplies rules. solely to the disposition of shares of one foreign affili- ate of aCanadian resident14 to another corporation that is also aforeign affiliate of the Canadian resident II. Forum questions for consideration that includes shares of the trans- For the purpose of the following discussion, HC is as- feree foreign affiliate. Even in this limited case, the sumed to be Canada, and HCo will be referred to as rule will often not be available if the transferred share CanCo. It is assumed that FCo (and CanCo after any is sold to an arm’slength person, and that sale is part formal continuation to FC) will exercise its central of aseries of transactions that includes the original management and control in FC and so be considered 15 inter-affiliate share transfer. resident in FC for Canadian tax purposes. It is as- sumed that no taxable Canadian corporation will hold 4. Foreign affiliate rules 90 percent or more of the issued CanCo shares and that all such shares will be held as capital property. Canada has had, until the recent advent of new for- Last, it is assumed that all cross-border transactions eign affiliate dumping (FAD) rules discussed in the fol- will occur on fair market value terms. lowing paragraph, agenerous foreign affiliate system under which the Canadian resident corporation pays A. Viability under Canada’s(or aprovince’s) corporate no Canadian tax on the active business income of its law.Treatment for Canadian income tax purposes foreign subsidiaries until that income is paid to the Canadian parent. Even then, foreign business income earned in ajurisdiction with which Canada has atax 1. CanCo remains the same business entity but treaty or atax information exchange agreement effects achange (of some type) that changes (TIEA) can generally be returned to the Canadian it from aCanadian corporation into an FCo for parent in Canada without Canadian corporate income Canadian income tax purposes tax. Business income earned in other foreign jurisdic- tions will be subject to Canadian tax when returned to This transaction is legally possible as acontinuation the Canadian parent, but with an appropriate deduc- under the corporate law of Canada and its provinces, tion in respect of underlying foreign tax, if any.Inad- provided that the laws of FC permit continuation into

24 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 FC. Typically continuation requires approval by spe- 3. FCo is incorporated with nominal capital. The cial shareholders’ resolution and is prohibited unless shareholders of CanCo then transfer all of their FC law provides for continuity of assets, liabilities, stock in CanCo to FCo in exchange for stock civil and criminal proceedings and enforcement of in FCo. CanCo then liquidates judgements of or against the continued entity.18 CanCo’sshareholders would be considered to have Assuming that on continuation CanCo ceases to be disposed of their CanCo shares for proceeds of dispo- aresident of Canada and becomes aresident of FC for sition equal to the fair market value of the FCo shares Canadian income tax purposes (see the discussion in received in exchange and would realise acapital gain I.B.1., above), it will be deemed to have aCanadian (or capital loss) equal to the amount by which those taxation year end immediately before its continua- proceeds exceed (or are less than) the adjusted cost tion, and will be deemed to have disposed of all of its base (ACB) of their CanCo shares. Canadian resident assets and property for fair market value immediately shareholders would be required to include one half of any resulting capital gain in income as a‘‘taxable capi- before its deemed year end.19 Consequently it will be tal gain’’and would be entitled to deduct one half of required to file afinal tax return as aCanadian resi- any resulting capital loss against taxable capital gains dent in which it will recognise all accrued gains and as an ‘‘allowable capital loss.’’Nonresident sharehold- losses over (or under) cost, and pay Canadian income ers would only be subject to Canadian income tax in tax under Part Iofthe TaxAct on any net taxable respect of any resulting taxable capital gain if their income so computed. CanCo shares were ‘‘taxable Canadian property’’ CanCo will also be subject to an additional depar- (TCP) and not ‘‘treaty-protected property’’(TPP) at the time of the exchange.25 Anonresident shareholder ture tax under Part XIV of the TaxAct based on the whose CanCo shares were TCP and not TPP would be fair market value of its assets immediately before its required to include the taxable capital gain, if any,in continuation, less the total of the PUC of its issued its ‘‘taxable income earned in Canada’’and pay tax ac- shares as computed for Canadian tax purposes20 and cordingly.26 Similarly,itwould be entitled to deduct all of its outstanding debts and liabilities (other than any resulting allowable capital loss against taxable in respect of dividends on its shares and the Part XIV capital gains that it included in its taxable income 21 tax). The statutory rate of Part XIV tax is 25 percent. earned in Canada. If Canada has atax treaty with FC, the statutory rate will be reduced to the withholding rate under the Allowable capital losses that are not deductible in the year in which they are incurred may generally be treaty that applies to dividends paid to acorporate deducted against taxable capital gains realised in any resident of FC by awholly-owned Canadian resident of the three preceding taxation years, or any subse- corporation.22 quent taxation year.27 The (CRA) is of the view FCo would acquire the CanCo shares at acost equal that acorporate emigration by continuance where to the fair market value of the FCo shares that it issues there is no change in the juridical identity of the cor- on the exchange. CanCo shareholders would acquire poration does not involve adisposition by the corpo- shares of FCo at acost equal to the same fair market 23 ration’sshareholders of their shares. value. Anonresident whose CanCo shares are TCP will be 2. FCo is created with anominal shareholder. required to apply to the CRA for aclearance certificate CanCo then merges with FCo, with FCo surviving. within 10 days of the share exchange unless the The shareholders of CanCo receive stock in FCo CanCo shares are listed on a‘‘recognised share ex- change’’atthe time of the share exchange.28 Further, As the concept of an absorptive merger (i.e., amerger FCo would be liable to pay to the CRA an amount in which one of the merging entities survives and the equal to 25 percent of its cost of the CanCo shares if a other does not) is not generally known in Canadian clearance certificate is not obtained.29 corporate law,itisvery unlikely that this sort of For purposes of computing its income, CanCo will merger would or could be undertaken in Canada.24 be considered to have disposed of its assets to FCo at However,onthe assumption that ameans could be fair market value immediately before CanCo’sliquida- 30 devised to implement it, perhaps by way of an appro- tion and will be required to pay Part Itax accord- priately worded ‘‘plan of arrangement,’’the Canadian ingly.Itwill also be considered to have paid adividend tax consequences would depend very directly in the (a ‘‘winding-up dividend’’) to FCo equal to the amount by which the fair market value of its assets distributed first instance on the actual wording of the court order. to FCo exceeds the amount by which the PUC of the Based on the wording of the question, however,the CanCo shares is reduced (the ‘‘PUC Reduction’’) on the most likely result is that, for Canadian income tax pur- distribution.31 The portion of the winding-up divi- poses, the transaction would be regarded as the ex- dend equal to CanCo’s‘‘capital dividend account’’ change by CanCo shareholders of their CanCo shares (CDA) will be deemed to be aseparate dividend.32 If for FCo shares, followed by the wind-up and liquida- CanCo is a‘‘private corporation’’asdefined for pur- tion of CanCo into FCo. In this case, the Canadian tax poses of the TaxAct, it may elect to treat the deemed consequence to CanCo, its shareholders’ and FCo separate dividend as a‘‘capital dividend.’’33 The re- would be as described in relation to the scenario in 3., mainder of the winding-up dividend, if any,will be below. deemed to be aseparate ‘‘taxable dividend.’’34

02/13 TaxManagement International Forum BNA ISSN 0143-7941 25 The entire winding-up dividend, if any,will be sub- 6. FCo is created with anominal shareholder and ject to 25 percent Canadian withholding tax, unless a in turn creates CanMergeCo, awholly owned lower rate is provided by an applicable tax treaty.35 corporation formed under the law of Canada. CanMergeCo then merges with CanCo, with FCo will acquire CanCo’sassets at acost equal to CanCo surviving. The shareholders of CanCo their fair market value.36 receive stock in FCo FCo’sACB in its CanCo shares will be reduced by As already noted, the concept of an absorptive merger the amount of the PUC Reduction,37 if any,and FCo with asurviving corporation is generally unknown in will be deemed to have realised acapital gain from the Canadian corporate law outside, possibly,ofaplan of disposition of its CanCo shares equal to the amount, if arrangement. This part of the response to this sce- any,bywhich the ACB of those shares is thereby nario assumes, therefore, that CanMergeCo and driven negative and its ACB in those shares would CanCo will amalgamate and continue as asingle cor- then be reset to nil.38 However,itwill only be required poration (CanAmalCo) under Canadian amalgama- to include one half of the gain in its taxable income tion rules on terms that all assets and liabilities of earned in Canada as described above if the CanCo each amalgamating corporation would continue as shares are TCP and not TPP at that time of the wind- assets and liabilities of CanAmalCo, and that CanCo ing up dividend. FCo will realise acapital loss on its shareholders would exchange all of their CanCo disposition of the CanCo shares when they are can- shares, and FCo would exchange its CanMergeCo celled on CanCo’sliquidation equal to any positive shares, for CanAmalCo shares. Thereafter CanA- malCo shareholders other than FCo would exchange balance of its ACB in those shares at that time. The their CanAmalCo shares for FCo shares. On these re- capital loss will be irrelevant for Canadian tax pur- vised facts, for Canadian income tax purposes CanCo poses unless the CanCo shares are TCP and not TPP at and CanMergeCo would be deemed to have ataxation that time. If they are TCP and not TPP,FCo would be year-end immediately before the amalgamation and entitled to deduct the resulting allowable capital loss be required to file stub year returns and pay tax ac- against any taxable capital gains included in its tax- cordingly,CanAmalCo would be deemed to be anew able income earned in Canada as described above. taxpayer with ataxation year beginning at the time of the amalgamation and generally would inherit Can- If the CanCo shares were TCP at the time of the liq- Co’stax characteristics,41 and the CanCo shareholders uidation, FCo would be required to apply for a§116 39 would be deemed to dispose of their CanCo shares for clearance certificate from the CRA. proceeds of disposition equal to the ACB of those shares such that they would not realise any gain or 4. CanCo creates FCo as awholly owned loss on the exchange, and to acquire their CanAmalCo 42 subsidiary.CanCo then merges into FCo with FCo shares at the same ACB. Thereafter,the exchange of CanAmalCo shares for FCo shares would, from aCa- surviving.The shareholders of CanCo receive nadian tax perspective, be identical to the scenario en- stock in FCo visaged in 5., above, and would have the same From aCanadian perspective this scenario is subject consequences for CanAmalCo, its shareholders, and FCo. to the same caveats and analysis as the scenario in 2., above. On the other hand, if it were possible as amatter of corporate law to devise across-border triangular merger technique by which on, and as aresult of, the 5. FCo is created with anominal shareholder.The merger of CanCo and CanMergeCo, CanCo sharehold- shareholders of CanCo then transfer all of their ers exchanged their CanCo shares for FCo shares, the stock in CanCo to FCo in exchange for stock results again would be as in the scenario at 5, above. in FCo The following two additional comments should be noted: The consequences to CanCo’sshareholders would be s first, although Canada has comprehensive tax defer- the same as those discussed in relation to the scenario ral rules for amalgamations, including triangular in 3., above. amalgamations, the facts set out in this scenario would not meet their requirements because FCo is CanCo would continue to be aresident of Canada not a‘‘taxable Canadian corporation.’’43 for all Canadian income tax purposes, and so would s second, since CanCo will be the surviving entity,no remain subject to Canadian income tax on its world- disposition of its assets will be considered to have wide income. Unless the transaction is timed to coin- occurred for Canadian tax purposes.44 cide with its existing year end, the transaction would likely trigger ayear end in CanCo,40 thereby accelerat- 7. FCo is created with the same corporate ing CanCo’sobligation to file aCanadian tax return for structure as HCo, and with the same the deemed taxation year ending right before the shareholders with the same proportional share exchange. CanCo would then be free to set a ownership. CanCo then sells all of its assets (and new taxation year end. liabilities) to FCo and then liquidates

FCo would acquire the CanCo shares at acost equal CanCo would dispose of its assets for proceeds of dis- to the fair market value of the FCo shares that it issues position at fair market value and would be required to on the share exchange. compute its income and pay income tax on its result-

26 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 ing taxable income accordingly.Itwould acquire the B. Other scenarios that CanCo might consider and their assets received from FCo as consideration at acost treatment for Canadian income tax purposes equal to their fair market value. In the absence of any applicable deferral mechanism It is assumed that, as part of its liquidation, CanCo under the TaxAct, it will be observed from the forego- would then distribute its net assets received from FCo ing that virtually any form of expatriation of CanCo in to its shareholders. Since CanCo will receive those which CanCo or its assets are transferred out of assets at acost equal to their fair market value, it Canada will potentially result in material Canadian should not realise any further gain or loss on that dis- tax at either or both the CanCo and shareholder levels. tribution. It will be deemed to pay awinding-up divi- Any transaction undertaken to get around this will dend to its shareholders on the distribution equal to normally be very fact specific, and likely rely on an ex- the excess, if any,ofthe fair market value of the assets isting tax shelter of one form or another at the CanCo distributed over any PUC Reduction in respect of the or shareholder level, or both. CanCo shares arising on the distribution.45 As dis- cussed in relation to the scenario in 3., above, the por- C. Difference for Canadian income tax purposes if CanCo tion of the winding-up dividend equal to CanCo’sCDA has a‘‘business purpose’’ for the restructuring will be deemed to be aseparate dividend.46 If CanCo is a‘‘private corporation,’’asdefined for purposes of Canada does not have ageneral business purpose test the TaxAct,47 it may elect to treat the deemed separate per se.Indeed, the general rule in Canada is that, dividend as a‘‘capital dividend.’’48 The remainder of absent fraud or abusive tax avoidance, Canada taxes the winding-up dividend, if any,will be deemed to be based on the actual legal relationships created, rather aseparate ‘‘taxable dividend.’’49 than on any underlying economic substance, and without regard to (or to the absence of) any underly- CanCo’sshareholders will be deemed to receive the ing business purpose.56 In any event, as the exporting various dividends that make up the winding-up divi- transactions are, as discussed above, likely to trigger dend as separate dividends. The Canadian taxation of material Canadian income tax, the presence or ab- the receipt of those dividends will depend on the fiscal sence of abusiness purpose will probably not be ama- residence and juridical nature of the recipient, and on terial consideration.57 whether CanCo is aprivate corporation. Canadian resident shareholders will not be required to include D. Treatment for Canadian income tax purposes if FCo any deemed capital dividend in income.50 Canadian resident corporations will generally be required to in- were an existing, unrelated foreign corporation, and clude any deemed taxable dividend in income, but will CanCo merged into FCo, with FCo surviving be allowed to deduct the same amount, so that no 51 Whether FCo is unrelated to CanCo should not affect income tax is payable. Canadian resident individu- the basic Canadian tax analysis of the foregoing sce- als will be required to include any deemed taxable narios. dividend in income plus agross-up amount, and be entitled to claim acorresponding tax credit.52 The amount of the gross-up and associated tax credit will NOTES depend on whether the taxable dividend is considered 1 Black and Decker Manufacturing Company,Limited, an ‘‘eligible dividend.’’ [1975] 1SCR 411. Nonresident shareholders will be subject to Cana- 2 Bill C-48, tabled in the House of Commons on Nov.21, dian withholding tax equal to 25 percent of the full 2012, will add §87(8.2) to the Income TaxAct (Canada). amount of any winding-up dividend, whether capital This rule will integrate absorptive mergers of foreign cor- or taxable, paid to them, unless alower treaty rate ap- porations into Canada’s‘‘foreign merger’’rules, which, in plies.53 defined circumstances, govern the Canadian income tax consequences of mergers of foreign corporations. Cana- The ACB of ashareholder’sCanCo shares will be re- da’sforeign merger rules, like its tax rules in respect of duced by the amount of the PUC Reduction arising on amalgamations,were premised on Canadian, the distribution of CanCo’sassets to its sharehold- continuation-type amalgamation concepts rather than ers.54 If this causes the ACB of the shares to go nega- absorptive merger concepts. This has resulted in uncer- tive, the shareholder will be deemed to have realised a tainty in the application of Canada’sforeign merger rules corresponding capital gain on the disposition of the to absorptive foreign mergers. New §87(8.2) should shares, and the ACB will then be restored to nil.55 The eliminate those uncertainties in many situations. tax consequences of any resulting capital gain will be 3 One notable exception is the Business Corporations Act as discussed in relation to the scenario in 3., above, (BC) (BCBCA), which permits the amalgamation of a with respect to the exchange of CanCo shares for FCo company into aforeign jurisdiction in shares. some circumstances. However,tothe writer’sknowledge this provision is rarely,ifever,used. On the final cancellation of CanCo shares on Can- 4 §250(4) (unless otherwise indicated, all statutory refer- Co’sliquidation, each CanCo shareholder will realise a ences are to the TaxAct as proposed to be amended to capital loss equal to the amount, if any,bywhich the Jan. 25, 2013). There are some very limited exceptions to PUC of the shareholder’sCanCo shares exceed their this rule in respect of corporations incorporated in ACB to the shareholder at that time. Any resulting al- Canada before April 27, 1965. These are ignored for pur- lowable capital loss will be deductible against taxable poses of this article. capital gains as discussed in relation to the scenario in 5 The seminal English case on central management and 3., above, with respect to the exchange of CanCo control, DeBeers Consolidated Mines,[1906] AC 455 (HL), shares for FCo shares. has been followed in Canadian tax jurisprudence: Bir-

02/13 TaxManagement International Forum BNA ISSN 0143-7941 27 mount Holdings Ltd. [1978] CTC 358 (FCA); Gurd’sProd- ing it were possible to achieve that as amatter of Cana- ucts Co.,[1985] 2CTC 85(FCA). dian corporate law. 6 Canada-Australia tax treaty,Art. 4(4)(a) and Canada- 25 Shares of CanCo that are not listed on a‘‘designated United States tax treaty,Art. IV(3)(a). Canada-United stock exchange’’will not be TCP unless, at any time in the States tax treaty,Art. IV(3)(b) provides acorporate tie- 60 months preceding the merger,they derived more than breaker rule by competent authority reference that can 50 percent of their value from, or from any combination apply where acorporation is considered to be ‘‘created’’ of, Canadian real property,‘‘Canadian resource property’’ under both Canadian and U.S. law at the same time. This or ‘‘timber resource property,’’orany right or option with rule is intended to apply to acorporation that continues respect to such property.For listed shares, there is an ad- from one Contracting State to the other if its corporate ditional requirement that the shareholder or any one or charter is not cancelled in the state from which it is con- more persons with whom the shareholder does not deal tinued, but that is nonetheless considered to be created in at arm’slength held 25 percent or more the shares of any the state to which it continues: Technical Explanation to class of CanCo shares at any time in that 60 month the Fifth Protocol to the Treaty.Normally this would not period. See §248(1), ‘‘taxable Canadian property.’’A be the case for continuations out of Canada to the United CanCo share will be TPP of ashareholder if the terms of States, since Canadian continuation provisions generally an applicable tax treaty exempt the shareholder from Ca- call in one way or other for the cancellation of the Cana- nadian income tax on any gain on the disposition of the dian charter or equivalent. See, e.g., Canada Business CanCo share: §248(1), ‘‘treaty-protected property.’’Inline Corporations Act (CBCA), §188(9), or BCBCA, §311. with the OECD Model Convention, Canada’streaties gen- 7 §250(5). erally exempt capital gains on the disposition of shares of 8 Canada-Australia tax treaty,Art. 4(4)(a). aCanadian corporation that do not derive their value 9 See, e.g., Canada-Germany tax treaty. principally from Canadian real property. 26 10 §250(5.1). §115(1)(a)(iii) and (b). 27 §111(1)(b). 11 Note that this rule merely deems there to be anew 28 place of . Its application does not, in and of §116(3) and (6)(b)(i). 29 itself, result for Canadian tax purposes in adisposition of §116(5). This rule may not apply if FCo reasonably be- assets by the corporation. See CRA Document #2005- lieves that the nonresident shareholder is atreaty resi- 0147131R3. dent in acountry with which Canada has an income tax treaty and the CanCo shares would be TPP under that 12 §69(1). treaty and FCo gives the CRA notice (§ 116(5.01)). 13 §128.1(4). 30 §69(5)(a). 14 Aforeign affiliate of aCanadian resident may roughly 31 §84(2). be thought of as aforeign corporation in which the Cana- 32 §88(2)(b)(i). The capital dividend rules are discussed dian resident has a10percent direct or indirect equity in- in more detail in relation to the scenario in II.A.7. at fn. terest: §95(1), ‘‘foreign affiliate.’’ 48 below,asthe distinction between taxable and non- 15 §85.1(4). taxable dividends would not be significant for anonresi- 16 The new rules are set out in §212.3 and apply generally dent shareholder such as FCo. to transactions that occur after March 28, 2012, subject to 33 §83(2). very limited grandfathering. 34 §88(2)(b)(iii). 17 Readers are referred to S. Suarez, ‘‘New Foreign Affili- 35 §212(2). ate ‘Dumping’ Rules Constitute Major TaxPolicy 36 §69(5)(b). Change,’’ TaxNotes International,Vol. 68, #12 (Dec. 17, 37 §53(2)(a)(ii). 2012) at 1145 for abrief but comprehensive assessment 38 §40(3) and 53(1)(a). of the FADrules. 39 For abrief discussion of the awkward way in which 18 See, e.g., CBCA, §188, and BCBCA, §308-311. §116(5) can apply in this and similar circumstances, see 19 §128.1(4). Monaghan et al, Taxation of Corporate Reorganisations 20 PUC is computed under rules set out in the TaxAct and (Thomson Reuters Canada: 2010) at 516-518. is not necessarily the same as the stated capital of the 40 §249(4). shares determined under corporate law.Inparticular, 41 §87(2). various rules prevent the artificial increase of PUC in 42 §87(4). many transactions where shares are issued on atax- 43 It is arequirement of Canada’stax deferral rules appli- deferred basis. The PUC of aclass of shares is averaged cable to the amalgamation of taxable Canadian corpora- across the entire class, regardless of the amount for tions that all the shareholders of the amalgamating which any particular share was issued. See §89(1), taxable Canadian corporations receive shares of the ‘‘paid-up capital.’’ merged entity (§ 87(1)(c)). Aspecial deeming rule in 21 §219.1(1). §87(9) would deem this requirement to be satisfied in the 22 §219.3. The reduced treaty rate will not be available if facts of the scenario if FCo were ataxable Canadian cor- it can reasonably be concluded that one of the main rea- poration. Since FCo is not incorporated in Canada, it will sons for CanCo’semigration to FC was to reduce the not satisfy this requirement. amount of tax payable under Part XIII or XIV of the Tax 44 CRA Doc. #2000-0034951. Act. 45 §84(2). 23 CRA Doc. #2005-0147131R3. 46 §88(2)(b)(i). 24 As discussed at fn. 2, above, Bill C-48 will add anew 47 In general terms, any corporation that is resident in rule, §87(8.2), to the TaxAct that will assimilate certain Canada and is not a‘‘public corporation,’’asdefined, will absorptive mergers to Canadian-styleamalgamations for be aprivate corporation, subject only to very limited ex- certain Canadian income tax purposes. Those rules, how- ceptions: §89(1), ‘‘private corporation’’. ever,would only apply to absorptive mergers of nonresi- 48 §83(2). The capital dividend rules are amechanism dent corporations. They would not apply to an absorptive that permits a‘‘private corporation’’todistribute certain merger of aCanadian and aforeign corporation, assum- amounts earned by the corporation that are generally not

28 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 taxed in Canada to its Canadian resident shareholders lationships created and assess taxpayers in such manner free of tax. These amounts (principally one half of the cor- as ‘‘is reasonable in the circumstances’’todisallow any poration’snet capital gains, and certain life insurance tax benefit arising from the abuse. The Canadian juris- proceeds and capital dividends that it receives, minus prudence interpreting the GAAR is now well developed, capital dividends that it pays out) are aggregated in the including several decisions of the Supreme Court of corporation’sCDA: §89(1), ‘‘capital dividend account.’’ Canada. It is now settled that athree-part test must be The corporation may elect to treat the whole amount of satisfied before the GAAR will be applied. There must be: any dividend that it pays out, up to its CDA balance, as a (1) a‘‘tax benefit’’(i.e., areduction or avoidance of tax) re- tax-free ‘‘capital dividend.’’Such adividend is not re- sulting from (2) an ‘‘avoidance transaction’’(i.e., any quired to be included in the recipient’sincome for Part I transaction that results in the tax benefit, whether on its purposes. own or as part of aseries of transactions, unless the trans- 49 §88(2)(b)(iii). action is undertaken primarily for bona fide non-tax pur- 50 §83(2)(b). poses), and (3) the resulting tax benefit must be abusive 51 §82(1) and §112(1). (i.e., it frustrates the purpose, object and spirit of the very 52 §82(1) and §121. Adiscussion of the eligible dividend provisions relied upon to achieve the benefit.) The onus is regime is beyond the scope of this paper.Inbroad terms, on the taxpayer to prove the absence of atax benefit and the regime was originally intended to integrate corporate avoidance transaction, and is on the CRA to prove the and personal tax rates in order to eliminate tax as a presence of abuse in the required sense. As apractical reason to structure abusiness in incorporated or unincor- matter,inmost GAAR litigation, the presence of atax porated form. In theory,eligible dividends are those paid benefit and avoidance transaction is admitted, and most out of corporate income that has been subject to non- cases turn on whether the CRA has proven abusive tax preferential rates of corporate tax, and therefore taxed at avoidance. It was thought at one time that the GAAR, and lower effective rates when paid to individuals than are in particular the concept of avoidance transaction, might non-eligible dividends. In practice, the integration is be equivalent to abusiness purpose test. The Supreme breaking down as provincial governments struggle to bal- Court of Canada has made it clear,however,that this is ance budgets. The rates vary widely by province, with the not the case: to disprove the presence of an avoidance average effective rate on eligible and non-eligible divi- transaction, the onus is on the taxpayer to prove the ab- dends currently being around 28 percent and 34 percent sence of aprimary tax purpose, not prove the presence of respectively. abusiness purpose (Canada Trustco Mortgage Company, 53 §212(2). [2000] 5CTC 215, (SCC) at paras. 32-33. Further,the CRA 54 §53(2)(a)(ii). is required to prove abusive tax avoidance by proving the 55 §40(3). policy that underlies the provisions of the TaxAct utilised 56 Shell Canada,[1999] 4CTC 313 (SCC). by the taxpayer to achieve the tax benefit and that the tax- 57 It should be noted in any discussion of abusiness pur- payer’sparticular use of those provisions somehow frus- pose test that §245 of the TaxAct sets out ageneral anti- trates that underlying policy.The presence or absence of avoidance rule (GAAR) that authorises the CRA, in cases abusiness purpose is generally irrelevant in proving this of abusive tax avoidance, to disregard the actual legal re- underlying policy or its frustration.

02/13 TaxManagement International Forum BNA ISSN 0143-7941 29 Host Country CHINA

Stephen Nelson, Peng Taoand Richard Tan DLA Piper,Hong Kong and Beijing

I. Introduction Under the EIT Law and its Implementation Regula- tions, the general rule for corporate reorganisations is hina does not have aconcept of ‘‘corporate ex- that gain or loss should be recognised at the time patriation’’ per se for either corporate or tax when the corporate reorganisation transaction takes C purposes. This is partly because China is a place, subject to the limited availability of tax deferral highly regulated jurisdiction and relies heavily on the for certain types of corporate reorganisations. various corporate and tax registrations of acompany The Notice on Certain Issues of Enterprise Income in order to maintain the regulations concerned. Thus, TaxTreatment of Corporate Reorganisations (‘‘Notice when there is any change of corporate registration 59’’) was issued shortly following the EIT Law to ad- from China to an offshore jurisdiction, China may dress the EIT treatment of corporate reorganisations, treat such a‘‘corporate expatriation’’asaliquidation which include the following six types: of the PRC domestic company and the creation of a (1) change of legal form; foreign company. (2) ; Before assessing any tax considerations, it is neces- (3) share acquisition; sary to determine in what form aforeign investor may (4) asset acquisition; invest in aChinese entity and what percentage foreign (5) merger; and investment is subject to PRC regulatory approval and (6) de-merger. registration. In the case of certain specific industries, To qualify for tax deferral treatment, the following majority foreign control will not be approved. For dis- conditions must be met: cussion purposes, it is assumed that there is no regu- latory barrier in any of the scenarios discussed here. s the reorganisation has areasonable business pur- Under current tax rules, across-border merger will pose, and the reduction, exemption or deferral of not qualify for tax exemption or deferral treatment. taxes is not amajor purpose of the reorganisation; Hence, it seems that none of the suggested scenarios s the assets or shares transferred in the acquisition as discussed under the fact pattern here would work, are no less than 75 percent of the total assets or assuming one of the key intended benefits for suggest- shares of the target; ing the ‘‘corporate expatriation’’istoachieve PRC tax s there is no change to the key business activities exemption or deferral treatment. Rather,because within 12 months after the reorganisation; China has adopted the place of effective management s consideration in the form of equity is not less than as the criterion for determining the residence status of 85 percent of the total consideration; and acompany,itseems that changing the place of effec- s the original shareholder(s) that receive(s) equity tive management may be the direction for acorporate consideration under the reorganisation do not expatriation to take (if it is ever workable). However, transfer the equity interest(s) for aperiod of at least this is not atopic to be discussed in this paper. 12 months following the reorganisation. Also, depending on the status of the taxpayer (i.e., In the case of cross-border share acquisitions and whether an individual or acompany), the Chinese asset acquisitions (not including mergers or de- income tax payable may be the individual income tax mergers), only the following scenarios will qualify for or the enterprise income tax (EIT). For simplicity’s tax deferral: sake, it is assumed that only corporate taxpayers are s anonresident enterprise transfers the shares of a involved and only the EIT treatment will be discussed resident enterprise to another nonresident enter- in this paper. prise over which the transferor has ‘‘direct 100 per- cent share control;’’the transfer does not change II. Notice 59 on reorganisations the withholding tax burden on capital gains that may arise from the transfer of the shares in the The Enterprise Income TaxLaw of the People’sRe- future; and the transferor undertakes in writing to public of China (the ‘‘EIT Law’’) and its Implementa- the competent tax bureau that it will not transfer tion Regulations (the ‘‘Implementation Regulations’’) the shares received as consideration for aperiod of set out the basic legal framework for EIT. at least three years following the reorganisation;

30 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 s anonresident enterprise transfers the shares of a payable on the difference if ChinaCo’sshareholders resident enterprise to another resident enterprise were nonresidents. over which the transferor has ‘‘direct 100 percent share control;’’ 3. FCo is created with anominal shareholder.The s Aresident enterprise invests assets or shares in a shareholders of ChinaCo then transfer all of nonresident enterprise over which it has ‘‘direct 100 their stock in ChinaCo to FCo in exchange for percent share control;’’and stock in FCo. ChinaCo then liquidates s The situation is another situation approved by the State Administration of Taxation and the Ministry The transfer of stock in ChinaCo by ChinaCo’sshare- of Finance. holders to FCo in exchange for stock in FCo will be considered across-border share acquisition. As discussed above, across-border share acquisi- III. Forum questions tion transaction may qualify for tax deferral treatment when there is ‘‘direct 100 percent share control.’’Be- A. Viability under Chinese corporate law.Treatment for cause ChinaCo’sshareholders did not directly own Chinese income tax purposes FCo, ChinaCo’sshareholders must recognise gain or loss from the equity transfer to FCo. For purposes of the discussion below,HCwill be re- In the meantime, when ChinaCo liquidates, Chi- ferred to as China and HCo will be referred to as Chi- naCo may have to pay EIT on any liquidation income, naCo. as well as dividend withholding tax as applicable.

1. ChinaCo remains the same business entity but 4. ChinaCo creates FCo as awholly owned effects achange (of some type) that changes it subsidiary.ChinaCo then merges into FCo, with from aChinese corporation into an FC FCo surviving.The shareholders of ChinaCo corporation for Chinese income tax purposes receive stock in FCo

This scenario is not feasible under China’scurrent tax As in the scenario discussed in 2., above, no tax defer- regime. If ChinaCo remains the same business entity, ral treatment will be available for the merger of Chi- ChinaCo will still be regarded as acompany incorpo- naCo into FCo under China’scurrent corporate and rated in China. tax regimes. Rather,this transaction would be treated Under the EIT Law,aChinese tax resident enter- as if ChinaCo had sold its assets to FCo at their fair prise refers to: (1) an enterprise incorporated in market value (with ChinaCo having to recognise gain China; or (2) an enterprise that is incorporated in a or loss from the sale of its assets), and then ChinaCo foreign jurisdiction but whose place of effective man- had liquidated (with ChinaCo perhaps having to pay agement is located in China. Therefore, as long as Chi- EIT on any liquidation income). Moreover,itseems naCo remains acompany incorporated in China, very unlikely that the PRC approval authorities would ChinaCo will be regarded as aChinese tax resident en- approve the creation of FCo for purposes of acquiring terprise and cannot become an FC corporation for ChinaCo by means of amerger or asset sale. Chinese income tax purposes. 5. FCo is created with anominal shareholder.The 2. FCo is created with anominal shareholder. shareholders of ChinaCo then transfer all of ChinaCo then merges into FCo, with FCo their stock in ChinaCo to FCo in exchange for surviving. The shareholders of ChinaCo receive stock in FCo stock in FCo This is similar to the scenario described in 3., above, It is not feasible to merge ChinaCo into FCo on atax- except that ChinaCo will not ultimately be liquidated. free basis under the current corporate and tax regime Because ChinaCo’sshareholders did not have direct of China. For Chinese tax purposes, this transaction 100 percent share control of FCo, ChinaCo’sshare- will be treated as if ChinaCo has sold all its assets to holders must recognise gain or loss from the equity FCo at their fair market value and ChinaCo will then transfer to FCo. realise gain or loss on the sale. PRC regulatory ap- proval also would be required for the transaction. This 6. FCo is created with anominal shareholder and would not be granted unless FCo were to cease to op- in turn creates ChinaMergeCo, awholly owned erate the assets in China or ChinaCo were in one of the limited liability business entity formed under the limited areas of investment (primarily the financial law of China and treated as acorporation for and insurance industries) in which foreign companies Chinese income tax purposes. ChinaMergeCo are permitted to operate in China through abranch then merges into ChinaCo, with ChinaCo registration. If approval could be obtained, the sale surviving. The shareholders of ChinaCo receive would be followed by the liquidation of ChinaCo. stock in FCo On the liquidation of ChinaCo, ChinaCo may have to pay EIT on any ‘‘liquidation income,’’which is The current rules in China do not address areverse tri- equal to the balance of the realisable value or transac- angular merger,inparticular when the merger is a tion price of its assets minus the net book value of cross-border merger as in the scenario envisaged here. such assets, liquidation expenses and related taxes. In If the transaction is analysed based on its different addition, to the extent the post-tax liquidation income elements: is greater than the shareholder’sbasis in the shares, it s as regards the merger of ChinaMergeCo into Chi- is likely that dividend withholding tax also would be naCo, the merged entity,i.e., ChinaMergeCo, will be

02/13 TaxManagement International Forum BNA ISSN 0143-7941 31 treated as having sold its assets at their fair market Chinese authorities would agree that the substantive value and as then having liquidated. However,since activities remain the same unless such assets are ChinaMergeCo was anewly created company,itis solely investment assets. In addition, ChinaCo would unlikely that it would have substantive assets or li- have to retain the shares of FCo for aperiod of at least abilities or that there would be any substantive gain 12 months. When ChinaCo is ultimately liquidated, or loss on the sale; the value of the shares in FCo would be assessed and s as regards the shareholders of ChinaCo receiving tax would then be payable if there has been again (i.e., stock in FCo, this will be treated as if the sharehold- if the value of the shares exceeds ChinaCo’stax basis ers of ChinaCo have sold their equity in ChinaCo to in the assets that it transferred). Dividend withholding FCo for consideration in the form of stock in FCo. tax would also be payable if ChinaCo’sshareholders The shareholders of ChinaCo will need to realise were nonresidents. gain or loss on the sale of their equity in ChinaCo. Another potential scenario is amuch-simplified ver- sion of the scenario described in A.6, above, in which 7. FCo is created with the same corporate ChinaCo’sshareholders establish FCo and then simply structure as ChinaCo, and with the same sell the shares of ChinaCo to FCo in exchange for ad- shareholders with the same proportional ditional shares. This could be atax-deferred transac- ownership. ChinaCo then sells all of its assets tion if ChinaCo’sshareholder(s) are Chinese resident (and liabilities) to FCo and then liquidates enterprises and if the transaction meets the require- ments for tax deferral. This transaction does not result This scenario constitutes across-border asset transfer in atrue expatriation, however,asChinaCo’sbusiness for cash, rather than shares. Hence the restructuring remains in aChinese resident company (ChinaCo) – will likely be ataxable event, in which case ChinaCo FCo has simply been interposed as aforeign holding will need to recognise gain or loss based on fair company. market value when selling its assets (and liabilities) to FCo. When ChinaCo liquidates, it may have to pay EIT It is important to note that ChinaCo would have to on any ‘‘liquidation income.’’ justify the reasons for either of these transactions in order to secure approval for the investment in FCo B. Other scenarios that ChinaCo might consider and their from the relevant PRC approval authorities, which treatment for Chinese income tax purposes could be challenging.

It seems that atax-deferred cross-border corporate ex- C. Difference for Chinese income tax purposes if patriation is not currently available under the EIT ChinaCo has a‘‘business purpose’’ for the restructuring Law.The current rules generally limit tax deferral treatment to domestic transactions and to limited ‘‘Business purpose’’isone of the key conditions that cross-border equity or asset acquisitions involving must be satisfied in order to qualify for atax-deferred direct 100 percent-controlled affiliates where the Chi- corporate reorganisation. In reality,abusiness pur- nese tax authorities retain the ability to tax any future pose first would have to be presented to secure ap- capital gains on the ultimate disposal or liquidation of proval for the cross-border transaction from the the Chinese entity.However,inthe expatriation sce- relevant PRC approval authorities. In the revised sce- narios outlined in A., above, the Chinese corporate nario presented in B., above (i.e., the amended version entity no longer remains in place so that the Chinese of the scenario described in A.7, above), it could be tax authorities no longer retain the right to tax. problematic to secure approval —both for the trans- If the scenario described in A., 7, above is amended action itself and for tax deferral. such that ChinaCo itself establishes FCo and does not sell its assets to FCo, but rather invests its assets in ex- D. Treatment for Chinese income tax purposes if FCo change for shares, that would seem to satisfy the cri- were an existing, unrelated foreign corporation, and teria for tax deferral. Effectively,ChinaCo has moved ChinaCo merged into FCo, with FCo surviving its business offshore into FCo. If there is abusiness purpose for this movement, then it could be carried As discussed above, China currently does not have a out on atax-deferred basis, provided the substantive regime that allows for atax-deferred cross-border business activities remain the same. As the assets are merger,regardless of whether the surviving entity is a effectively moved offshore, it is unclear whether the related or an unrelated company.

32 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 Host Country DENMARK

Nikolaj Bjørnholm and Tilde Hjortshøj Hannes Snellman, Copenhagen

I. Introduction ropean Company,anSEmust register and have its head office in the same Member State). An SE regis- orporate expatriation, which is generally tered in Denmark is subject to full Danish tax liability recognised under Danish tax law,allows a and is treated as an A/S. company (for example, the Danish parent C All other companies that are either registered in company of amultinational group) to migrate to afor- Denmark or have their place of effective management eign tax jurisdiction in certain circumstances. in Denmark are also, generally speaking, fully tax In order to offset the loss to Denmark’stax base, a liable in Denmark.3 company resident in Denmark will be subject to ‘‘exit’’ taxation on the expatriation of either the company In the following discussion, the word ‘‘corporation’’ itself or any of its assets to aforeign jurisdiction. Such refers to the Danish limited liability companies men- exit taxation generally applies regardless of the expa- tioned above (A/S and ApS), which are subject to full triation strategy chosen. The choice of exit strategy Danish tax liability.Unless otherwise specifically when leaving the Danish tax jurisdiction should there- stated, the discussion relates only to such corpora- fore be made on the basis of broader considerations tions. than purely the taxation consequences. The rationale for the exit taxation is that Denmark B. Corporate expatriation has the right to tax any gains accumulated by acom- Under Danish legislation, corporate expatriation can pany while it is subject to Danish taxation and that, be effected in anumber of ways. For example, acor- without the exit taxation, Denmark would lose the poration may change its country of tax residence by right effectively to tax any capital gains that have ac- changing its place of effective management, and an crued to, but have not yet been realised by,anexpatri- SE may change its place of registration and thereby its ating company at the time of expatriation. country of tax residence: in both cases, the corporate entity remains the same. Corporate expatriation can A. Corporations and companies subject to Danish also be effected by means of across-border merger,a taxation contribution of assets, ashare exchange, or asale or Corporations and companies subject to Danish taxa- distribution of assets and liabilities before or in con- tion include all Danish corporations and companies nection with liquidation: in these cases, the corporate registered with the Danish Business Authority,aswell entity may change. as certain non-registered companies that are consid- As already noted, when acorporation leaves Den- ered residents for tax purposes. Companies incorpo- mark’staxing jurisdiction, exit taxation will apply — rated under the laws of other jurisdictions may be generally regardless of the expatriation strategy considered resident in Denmark where their effective chosen. Danish tax legislation applies an ‘‘asset-based’’ management and control is exercised in Denmark. approach to expatriation entailing, as ageneral rule, Under the Corporate Income TaxAct,1 alimited li- the inclusion of any gains arising from the cross- ability company ( or ApS, and aktiesel- border transfer of assets and liabilities in the Danish skab or A/S) registered with the Danish Business tax base, with the consequence that any decrease in Authority is considered aresident company and is the Danish tax base will be subject to Danish exit taxa- therefore subject to full Danish tax liability. tion. Based on the relevant, European Council regula- Danish exit taxation is governed by Section 5ofthe tion,2 Denmark also recognises the public limited Eu- Corporate Income TaxAct. Section 5(7) provides that ropean company (Societas Europaea or SE). Unlike a when acorporation ceases to be subject to full Danish Danish corporation, an SE can transfer its registered tax liability,this will be treated as asale, at market office between EU Member States while remaining value, of the corporation’sassets and liabilities — the same entity.AnSEisconsidered to be resident in unless the assets and liabilities continue to be subject the EU Member State in which it has its registered to Danish taxation (i.e., they remain part of ataxable head office (under Article 7ofthe EU Statute for aEu- permanent establishment (PE) in Denmark).

02/13 TaxManagement International Forum BNA ISSN 0143-7941 33 02/13 TaxManagement International Forum BNA ISSN 0143-7941 33 In addition to the regular exit taxation, controlled Shares8 that govern certain tax issues relating to cor- foreign company (CFC) exit taxation may apply if any porate expatriation by way of across-border corpo- of the subsidiaries of the transferring corporation are rate reorganisation. The Merger TaxAct is based on CFCs. Under the Danish CFC rules, aDanish company the EC Merger Directive.9 is taxed on certain fictional capital gains when dispos- The Merger TaxAct and the Act on Capital Gains on ing of aCFC, i.e., the capital gains that the CFC would Shares define anumber of corporate reorganisations have realised if the CFC had disposed of all its assets in which –inspecified circumstances –the reorganis- and liabilities. As the termination of full Danish tax li- ing corporation is allowed to maintain its tax base in ability on acorporation’sdeparture from Denmark’s the assets that remain subject to Danish tax jurisdic- taxing jurisdiction is treated as adisposal of all the tion and the shareholders are granted succession assets and liabilities (including shares in CFCs) of the treatment with respect to the shares received as remu- departing corporation, it is necessary to make acalcu- neration on the reorganisation. lation of any possible CFC exit taxation together with The Merger TaxAct and the Act on Capital Gains the regular exit taxation. cover the following forms of cross-border corporate The exit tax liability arises at the time of exit and the reorganisation: tax is payable immediately,irrespective of whether the s mergers;10 gain to which it relates is in fact realised. There is cur- s demergers;11 rently no regime in Denmark for deferring the pay- s contributions in kind;12 and ment of exit tax until the realisation of capital gains. s share exchanges.13 This is expected to change —atleast in relation to cor- At the level of the corporation, the possibility of porate expatriation within the European Union —as taking advantage of the above rules is in practice lim- the European Commission has brought an action ited to corporate reorganisations within Denmark, against Denmark in this regard.4 The European Com- since the general rule of exit taxation when assets are mission claims that by introducing and retaining leg- transferred out of Danish tax jurisdiction applies islation providing for the taxation of unrealised gains alongside these rules. The ability of the successor cor- on the exit of aDanish company to another EU poration to inherit the tax base of the predecessor cor- Member State, when there is no such taxation of cor- poration is therefore limited to assets remaining porations remaining in Denmark, Denmark has failed within Denmark’staxing jurisdiction. to fulfill its obligation to secure the freedom of estab- At the level of the shareholders, succession treat- 5 lishment. Alikely outcome of the case is that Den- ment is available to the extent that the shareholders mark will introduce rules allowing for adeferral of receive only shares by way of remuneration and do taxation and taking into account any subsequent de- not receive cash. crease in value of the assets concerned. E. Danish capital gains taxation and dividend taxation C. Exit taxation as aresult of achange of residence under atax treaty ADanish corporation is generally exempt from capital gains tax on the disposal of shares in asubsidiary (i.e., ADanish corporation may become resident for tax acompany in which it has ashareholding of more purposes in aforeign jurisdiction as aresult of the ap- than 10 percent), if the subsidiary is domiciled in Den- plication of atie-breaker rule in atax treaty between mark, another EU member state or astate with which Denmark and that foreign jurisdiction. The tie- Denmark has atax treaty.Thus, the impact of exit breaker rule determines in which Contracting State a taxation on aDanish parent corporation that only corporation is to be considered tax resident in the holds shares in subsidiaries (that are not CFCs) will be event that each of the two Contracting States consid- limited. ers the corporation atax resident, i.e., because the cor- Foreign shareholders are generally exempt from poration has its registered office in one state and its Danish capital gains tax on the disposal of shares in a place of effective management in the other state. Danish company.Where shares in asubsidiary are In the majority of Denmark’stax treaties (as in the transferred to another group company and the remu- OECD Model Convention), the tie-breaker rule states neration for the transfer is anything other than shares that when acorporation has its registered office in one in the acquiring company,the transaction will be re- state and its place of effective management in the classified as adividend distribution to the sharehold- other state, the corporation is to be considered tax ers of the transferring company unless the resident in the state in which it has its place of effec- shareholders are entitled to receive tax-exempt divi- tive management.6 dends under Section 2D of the Corporate Income Tax The transfer of its place of effective management by Act. Dividends are exempt from Danish tax when: acorporation registered in Denmark, with the result s the shareholder receiving the dividends is alegal that Denmark loses its taxing rights under atax treaty, entity holding at least 10 percent of the shares of the triggers exit taxation under Section 5(7) of the Corpo- dividend distributing corporation; rate Income TaxAct. s the shareholder qualifies for the elimination or are- duction of Danish withholding tax under the EC D. Exit taxation as aresult of across-border corporate Parent-Subsidiary Directive or atax treaty between reorganisation Denmark and the country in which the receiving corporation resides; and Alongside the general exit taxation rule in Section 5of s the distributing corporation is not amere conduit the Corporate Income TaxAct, there are provisions in company through which dividends flow from other the Merger TaxAct7 and the Act on Capital Gains on group companies.

34 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 II. Forum questions 2. FCo is created with anominal shareholder. DKCo then merges into FCo, with FCo surviving. For purposes of the discussion below,HCwill be re- ferred to as Denmark and HCo will be referred to as The shareholders of DKCo receive stock in FCo DKCo. Under Danish corporate law,DKCo may participate in across-border merger only where FCo is domiciled in A. Viability under Denmark’s(or one of its political another EU or European Economic Area (EEA) subdivision’s) corporate law.Treatment for Danish Member State. income tax purposes The merger of DKCo into FCo will be treated as a sale at market value of DKCo’sassets and liabilities 1. DKCo remains the same business entity but (unless they continue to be subject to Danish taxation) effects achange (of some type) that changes under Section 5(7) of the Corporate Income TaxAct. it from aDanish corporation into an FC Section 15 of the Merger TaxAct exempts merger corporation for Danish income tax purposes transactions from tax, subject to certain conditions. DKCo may change into an FC corporation for Danish The exemption only applies with respect to assets and income tax purposes by transferring its place of effec- liabilities that remain subject to Danish taxation. tive management to acountry with which Denmark The shareholders of DKCo will be able to take a has atax treaty if the following requirements are met: ‘‘carryover basis’’inthe shares received in FCo and s the tax treaty has atie-breaker rule granting the thus realise no gain or loss on the exchange. On asub- right of taxation to the state in which the place of ef- sequent disposal of the shares in FCo, the shares in fective management is located; and FCo will be considered acquired at the same price as s the treaty partner country considers DKCo aresi- the original shares in DKCo and any capital gain will dent for tax purposes after the transfer of its place be calculated on that basis. of effective management. DKCo will remain subject to Danish taxation but, under the treaty tie-breaker rule, all its shares in sub- 3. FCo is created with anominal shareholder.The sidiaries will for Danish tax purposes be considered to shareholders of DKCo then transfer all of their be owned by FCo and thus be subject to taxation in the stock in DKCo to FCo in exchange for stock in treaty partner country.Under most of Denmark’stax FCo. DKCo then liquidates treaties, non-transferable assets, such as property and PEs remaining in Denmark, will remain subject to The shareholders of DKCo may carry out an exchange Danish taxation. Assets remaining within Denmark’s of their shares in DKCo for shares in FCo and then liq- taxing jurisdiction will not be subject to Danish exit uidate DKCo. All the assets and liabilities of DKCo taxation. Assets leaving Denmark’staxing jurisdiction will then transfer to FCo as liquidation proceeds. as aresult of the provisions of atax treaty are re- garded as realised for Danish tax purposes under Sec- As astarting point, ashare exchange is considered a tion 5(7) of the Corporate Income TaxAct, and are disposal of shares. Section 36 of the Capital Gains on thus subject to Danish exit taxation. Shares Act will provide for atax-exempt share ex- Provided DKCo has no assets other than shares in change if FCo is acorporation similar to aDanish lim- its subsidiaries, Danish exit taxation will be limited to ited liability company (i.e., an A/S or an ApS), subject such shares. Shares in subsidiaries are generally to certain conditions. Generally,permission to carry exempt from Danish capital gains taxation. DKCo will out atax exempt share exchange must be obtained therefore be able to perform acorporate expatriation from the Danish tax authorities. Permission will be in the above scenario without paying any Danish exit granted only if the exchange of shares is deemed to taxes, provided none of its subsidiaries are CFCs. have abusiness purpose and is not purely the result of If DKCo moves its place of effective management to taxation considerations. It is, however,possible to anon-tax treaty state or to astate whose treaty with carry out atax-exempt share exchange without ob- Denmark contains no tie-breaker rule, DKCo will taining permission if further requirements are met. In remain subject to full tax liability in Denmark. that case, the liquidation of DKCo immediately after If DKCo is an SE resident in Denmark (or aDanish the share exchange will defeat the tax exemption for A/S that converts to an SE), DKCo may become tax the shareholders, as there is amandatory three-year resident in another EU Member State by registering holding period. with that Member State and migrating its head office The tax exemption entails the shareholders of DKCo to that Member State. DKCo will remain the same taking a‘‘carryover basis’’inthe shares received in entity regardless of its change of residence, but for FCo and thus realising no gain or loss on the ex- Danish tax and corporate law purposes will be re- change. On asubsequent disposal of the shares in garded as aforeign corporation. DKCo’smigration FCo, the shares in FCo will be considered acquired at will trigger exit taxation in Denmark as described in the same price as the original shares in DKCo and any I.B., above. capital gain will be calculated on that basis. DKCo will not be able to effect any other transfor- mation that changes it from aDanish corporation into The liquidation of DKCo is treated as asale of all its an FC corporation for Danish income tax purposes assets and liabilities, regardless of whether such while remaining the same business entity. assets remain subject to Danish taxation.

02/13 TaxManagement International Forum BNA ISSN 0143-7941 35 4. DKCo creates FCo as awholly owned 7. FCo is created with the same corporate subsidiary.DKCo then merges into FCo, with FCo structure as DKCo, and with the same surviving. The shareholders of DKCo receive shareholders with the same proportional stock in FCo ownership. DKCo then sells all of its assets (and liabilities) to FCo and then liquidates See 2., above. The sale of DKCo’sassets to FCo will be subject to regular Danish capital gains taxation regardless of 5. FCo is created with anominal shareholder.The whether the assets remain within Denmark’staxing shareholders of DKCo then transfer all of their jurisdiction. Provided DKCo only owns shares in its stock in DKCo to FCo in exchange for stock in subsidiaries, Danish capital gains taxation will be lim- FCo ited to the gains arising on the disposal of these shares. However,the sale may be re-classified as a The shareholders of DKCo may carry out an exchange dividend distribution under Section 2D of the Corpo- of their shares in DKCo for shares in FCo. As astart- rate Income TaxAct, if DKCo was not entitled to re- ing point, ashare exchange is considered adisposal of ceive tax exempt dividends from the subsidiaries it shares. Section 36 of the Capital Gains on Shares Act transfers to FCo. will provide for atax-exempt share exchange if FCo is acorporation similar to aDanish limited liability B. Other scenarios that DKCo might consider and their company (i.e., an A/S or an ApS), subject to certain treatment for Danish income tax purposes conditions. Generally,permission to carry out atax- Given the nature of the Danish exit taxation regime, exempt share exchange must be obtained from the other possible scenarios would also be subject to exit Danish tax authorities. Permission will be granted taxation as described above. The scenarios described only if the exchange of shares is deemed to have a in A., above therefore represent acomplete picture of business purpose and is not purely the result of taxa- the Danish taxation consequences in the event of a tion considerations. It is, however,possible to carry corporate expatriation. out atax-exempt share exchange without obtaining permission if further requirements are met. C. Difference for Danish income tax purposes if DKCo The tax exemption entails the shareholders of DKCo has a‘‘business purpose’’ for the restructuring taking a‘‘carryover basis’’inthe shares received in Danish exit tax is levied regardless of the existence of FCo and thus realising no gain or loss on the ex- aspecific business purpose for the restructuring. In change. On asubsequent disposal of the shares in the case of ashare exchange, as described in A.3. and FCo, the shares in FCo will be considered acquired at 5., above, abusiness purpose is required for the ex- the same price as the original shares in DKCo and any change to be carried out on atax-exempt basis with- capital gain will be calculated on that basis. out prior approval from the Danish tax authorities.

If FCo is resident in anon-EU Member State that D. Treatment for Danish income tax purposes if FCo were has atax treaty with Denmark, DKCo might be con- an existing, unrelated foreign corporation, and DKCo sidered aconduit company for Danish tax purposes merged into FCo, with FCo surviving with the result that FCo would not be entitled to ex- emption from dividend withholding tax. In that case, Under Danish corporate law,DKCo is able to partici- dividends paid by DKCo to FCo would be subject to pate in across-border merger only where FCo is domi- withholding tax at the maximum rate allowed under ciled in another EU or EEA Member State. the applicable tax treaty.Dividends paid by DKCo to The merger of DKCo into FCo will be treated as a FCo would also be subject to Danish withholding tax sale at market value of DKCo’sassets and liabilities at arate of 27 percent if FCo is resident in anon-treaty (unless they continue to be subject to Danish taxation) country. under Section 5(7) of the Corporate Income TaxAct. Section 15 of the Merger TaxAct exempts merger transactions from tax subject to certain conditions. 6. FCo is created with anominal shareholder and The exemption only applies with respect to assets and in turn creates DKMergeCo, awholly owned liabilities that remain subject to Danish taxation. The limited liability business entity formed under the shareholders of DKCo will be able to take a‘‘carryover law of Denmark and treated as acorporation basis’’inthe shares received in FCo and thus realise for Danish income tax purposes. DKMergeCo no gain or loss on the exchange. On asubsequent dis- then merges into DKCo, with DKCo surviving. posal of the shares in FCo, the shares in FCo will be The shareholders of DKCo receive stock in FCo considered acquired at the same price as the original shares in DKCo and any capital gain will be calculated This operation is not viable under Danish law,since on that basis. the merging of DKMergeCo into DKCo would entail the shareholders of FCo receiving shares in DKCo as compensation for the merger of DKMergeCo into NOTES DKCo. The arrangement would not produce any com- 1 Consolidated Act No. 1082 of Nov.14, 2012. pensation for FCo: instead DKCo would receive both 2 Council Regulation (EC) No 2157/2001 of Oct. 8, 2001 DKMergeCo itself and shares in its parent (i.e., FCo). on the Statute for aEuropean Company.

36 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 3 Before the introduction of Act No. 1254 of Dec. 18, 2012, poses of the treaty,where ataxpayer is resident in both which amends the Corporate Income TaxAct, it was un- Contracting States under their respective domestic laws. clear to what extent companies registered in Denmark Current OECD Model Convention, Art. 4(3) provides that: that had their place of effective management outside ‘‘Where by reason of the provisions of paragraph 1a Denmark were subject to full Danish tax liability.Asof person other than an individual is aresident of both Con- Jan. 1, 2013, the amendment determines that full tax li- tracting States, then it shall be deemed to be aresident ability arises where acompany has either its place of ef- only of the State in which its place of effective manage- fective management in Denmark or its registered office in ment is situated.’’ Denmark. 7 Consolidated Act No. 1120 of Nov.14, 2012. 4 ECJ Case C-261/11, European Commission vs. Denmark, 8 Consolidated Act No. 796 of June 20, 2011. brought on May 26, 2011. 9 Council Directive 90/434/EEC. 5 See Treaty on the Functioning of the European Union 10 Merger TaxAct, Sec. 15. (TFEU), Art. 49 and ECJ Case C-371/10, National Indus 11 Grid vs. the Netherlands. Merger TaxAct, Secs. 15 aand 15 b. 6 The Residence Article in modern tax treaties provides 12 Merger TaxAct, Secs. 15 cand 15 d. ‘‘tie-breaker’’rules for determining residence for the pur- 13 Act on Capital Gains on Shares, Sec. 36.

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02/13 TaxManagement International Forum BNA ISSN 0143-7941 37 Host Country FRANCE

Thierry Pons FIDAL, Paris

I. Introduction in France. As aconsequence, even in the case of a French resident company,only its French-source or anumber of years there has been discussion income, as defined in Article 209 of the French Tax about how corporate expatriation may be Code (FTC), is taxable in France. Income attributable F achieved and, if achieved, what consequences to aFrench resident company’sforeign branch or, it should trigger.The issue has become even more sen- where the foreign country concerned is atreaty part- sitive over the last two years, due to the coming to- ner of France, foreign PE (for simplicity’ssake, the gether of two factors: significant tax rises in France term ‘‘PE’’will be used in this discussion in both con- and the handing down of certain European court de- texts) is ignored. This has anumber of consequences cisions. The former has piqued the curiosity of some that have the effect of limiting the tax impact of an ex- taxpayers as to the tax treatment they might enjoy in patriation. another country and what the exit cost of their depar- First, as regards the assets attributed to aforeign PE ture from France might be. The latter has seemed to of aFrench company,the territorial approach signifi- indicate that, as far as expatriation to another EU cantly reduces the potential tax impact of acorporate Member State is concerned, EU principles do not expatriation since income and gains from such for- allow the freedom of establishment to be interfered eign assets of an expatriating French company are with by the imposition of aprohibitive tax cost on exit. never taxable in France (before, after or at the time of As will become clear in the discussion that follows, expatriation). This represents amarked contrast to the position of the French tax administration has the position in countries that tax their resident com- always been that, as amatter of principle, any trans- panies on aworldwide basis, where expatriation has a fer of assets abroad triggers the taxation of underlying substantial effect on the taxation treatment of the ex- gains with respect to the assets transferred. It will also patriating company’sforeign income. emerge, however,that recent changes in the law con- Second, as regards the assets before the expatria- cerning the transfer of aFrench head office to another tion, in some situations (which will be discussed EU Member State provide for the deferral of tax on below), the French tax administration accepts that any gains arising, allowing payment of the tax to be unrealised gains should not be taxed, where the assets spread over five years. In addition, in the case of the remain taxable in France by virtue of being attributed transfer of ahead office or amerger involving a to aFrench PE that the expatriating company retains French company,the tax administration considers in France, allowing it to be taxed after the expatria- that gains with respect to the assets that remain tax- tion. There is therefore aclear incentive to transfer able in France as aresult of their being attributed to a only those assets that are necessary to the expatriating permanent establishment (PE) in France are not sub- company’sforeign activity,since unrealised gains on ject to immediate French taxation (i.e., immediate assets transferred out of French taxing jurisdiction taxation is limited to gains on assets transferred out of are subject to French tax. Besides, the assets that are France’staxing jurisdiction). necessary to the remaining French activity would Before the treatment of transactions allowing for have to remain in France, so that the ability to choose corporate expatriation is discussed in II. (transfer of a how to allocate assets between the French PE and the head office) and III. (cross-border mergers), below,it new foreign head office only arises with respect to is necessary to consider whether the residence status assets whose allocation admits of some flexibility, of acorporation has any significance for French tax such as intangible assets and securities. purposes and what taxation charge potentially applies on the expatriation of aFrench corporation. Despite the limited effects of atransfer of corporate residence, the reasons typically advanced by parties A. Significance of the residence of acompany for its contemplating expatriation is that, although such a taxation in France transaction may not achieve much in terms of the ex- isting activities and assets of an expatriating company, Unlike most other countries, France applies aterrito- it may allow the company to select another State that rial approach to determining what profits are taxable is more fitted to the company’soperational organisa-

38 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 tional needs and affords the company better treat- imposition of atemporary surcharge, applicable until ment for tax, social or regulatory purposes. 2015). Aparticipation exemption regime applies to Otherwise, French PEs of foreign corporations and long-term (the minimum holding period is two years) French corporations are in substance treated in avery capital gains arising from the transfer of shares repre- similar manner for both corporate and other tax pur- senting more than 5percent of the financial and poses, this similarity of treatment being reinforced by voting rights in asubsidiary.The exemption, however, non-discrimination rules contained both in France’s is limited to 88 percent of such gains and, under tax treaties and in EU Directives. recent amendments introduced in the 2013 Finance While it is not exhaustive in this respect, the follow- Bill, capital losses cannot be offset for purposes of ing list highlights anumber of areas in which there computing the 12 percent taxable gain. Profits arising remain some differences between the treatment of a on the transfer of patents can benefit from areduced resident corporation and that of aFrench PE of afor- 15 percent tax rate. eign corporation: Again as discussed in II.C, below,the exit tax can be s aFrench PE of aforeign corporation can be subject avoided only in specific situations, under the control to abranch tax on the deemed distribution of its of the tax administration, which limits the ability of income, while aFrench corporation is, in principle, an expatriating French corporation to avoid immedi- taxable only on the effective distribution of its ate exit taxation to situations in which the corpora- income. In most cases, however,the provisions of tion’sactivities and assets are attributed to aPEin France’stax treaties allow the imposition of French France, thus allowing France to retain the right to tax branch tax to be avoided (French domestic law pro- its future income and gains. vides an exemption for PEs of EU corporations); There are also anumber of other tax consequences s with effect from 2012, income that is distributed is that will not be discussed in any detail in this paper subject to a3percent tax payable by the distribut- but that can represent asignificant cost for corpora- ing company.This tax is not treated as awithhold- tions wishing to expatriate from France (there are al- ing tax, but as acomplementary corporate tax ready several examples of such situations, some of borne by the distributing company (not the benefi- which even concern listed corporations). Among ciary of the distribution). According to recent indi- these, it is worth noting the following: cations (a draft statement of practice) given by the French tax administration, this tax should not be s carried forward losses can be forfeited on expatria- imposed on the repatriation of income by French tion, the ability to transfer carried forward losses to PEs of EU corporations. Further clarification is ex- another entity being subject to the obtaining of a pected on the scope of this new tax, the scope of ruling from the tax administration, which has been which and the available exemptions from which taking an increasingly strict approach to this have been the subject of considerable controversy; matter.Recent Finance Bills have also significantly s France’scontrolled foreign company (CFC) rules increased the number of situations in which carried allow the tax administration to tax foreign-source forward losses must be relinquished; income, in adeparture from France’sterritoriality s some expatriation operations can be equated to a principle. The scope of the rules extends to French liquidation (of the expatriating company), which companies that hold CFCs through foreign PEs. can have significant consequences for the share- The rules may also apply to aforeign entity that has holders, depending on whether they are French aPEinFrance, but only if the PE has aCFC on its residents or nonresidents (for whom an applicable tax balance sheet (which rarely happens); tax treaty may significantly reduce the impact of a s achange of acompany’sresidence will directly deemed liquidation distribution) and whether,if affect the application of France’stax treaties. While they are French residents, they are corporations — France has avery wide network of treaties, an expa- which can benefit from aparticipation exemption triating company will have to rely on the treaty net- (95 percent) with respect to adeemed liquidation work of its new State of residence, which may affect distribution —orindividuals —who cannot so ben- the treatment of some cross-border flows. More im- efit; portantly,should the assets generating foreign s France has anumber of different registration duty income remain attributed to aFrench PE and regimes, the applicable regime depending on the remain subject to foreign withholding taxes in the transaction concerned. Most transactions involving source country,such atriangular situation may give corporations are subject to nominal duties, but rise to questions and difficulties both in France and some transactions involving the transfer of assets abroad (which treaty applies? can the branch avail can generate substantial costs, for example, the liq- itself of atax credit?). uidation of acorporation, which is subject to a2.5 percent duty,and the sale of goodwill which is sub- B. Taxation consequences of expatriation ject to a5percent duty.

As will be discussed in more detail in II.C, below,the main tax issue relating to expatriation is the potential II. Article 221-2 and the transfer of ahead office immediate taxation of the untaxed income and unre- alised gains of the expatriating corporation (i.e., the A. Corporate residence ‘‘exit tax’’). Generally,the income and gains of acorporation Before discussing the consequences of the transfer of are subject to tax at anormal rate of 34.1 percent acorporation’sresidence, it is necessary to establish (which is currently increased to 36.1 percent by the how the residence of acorporation is defined.

02/13 TaxManagement International Forum BNA ISSN 0143-7941 39 The FTC does not provide aclear definition of resi- C. The French exit tax dence, essentially because of France’sterritorial ap- proach to taxation, under which residence has limited Article 201 of the FTC provides that in the case of the significance, residents and nonresidents basically sale or cessation of all or part of acompany’sbusiness, both being taxed only on their French-source income. all income of the company,including unrealised gains The notion of residence is, however,important for and income that has benefitted from adeferral regime purposes of the application of France’stax treaties. In (‘‘deferred income’’), becomes immediately taxable. principle, in determining whether acorporation is a Article 221-2 of the FTC defines situations that are to resident of France, reference is made to the place be treated in the same way as the interruption of ac- where it has its registered head office. The tax admin- tivity contemplated in Article 201. The combination of istration can also refer to the corporation’splace of ef- these two provisions meant that, before the handing fective management, if the place of the official head down of the two CJEU decisions discussed in B., office is considered ‘‘fictitious.’’ above, France’stax law effectively provided for the im- According to the OECD Commentary on the Model position of an exit tax: Convention, as amended in 1998, ‘‘the place of effec- s the first paragraph of Article 221-2 provides that the tive management is the place where key management transfer of the head office of acompany or of an es- and commercial decisions that are necessary for the tablishment out of France is an event that triggers conduct of the entity’sbusiness as awhole are in sub- the application of Article 201, as does the dissolu- stance made. All relevant facts and circumstances tion of acompany,the transformation of acom- must be examined to determine the place of effective pany,the contribution of abusiness or amerger; management. An entity may have more than one place s the second paragraph of Article 221-2 provides that of management, but it can have only one place of ef- the consequences of Article 201 are also to apply fective management at any one time.’’ when acompany entirely ceases to be subject to France has made acomment to the OECD on this French corporate tax; amended definition, in which it states that France s Article 221 bis provides that, except where an en- considers that the place of effective management ‘‘will tirely new entity is created, when acompany par- generally correspond to the place where the person or tially or entirely ceases to be subject to French group of persons who exercises [sic] the most senior corporate tax, unrealised gains and deferred functions (for example aboard of directors or man- income are not immediately taxed to the extent that agement board) makes its [sic] decisions. It is the the company’sassets remain unchanged in the bal- place where the organs of direction, management and ance sheet and that its gains and income remain control of the entity are, in fact, mainly located.’’ taxable; This particular emphasis on the place where the s the third paragraph of Article 221-2, which was in- board of directors makes its decisions has not, how- serted into the FTC in 2004, provides that where the ever,been repeated by the tax administration in its head office of aFrench company is transferred to subsequent comments on newly signed tax treaties, another EU Member State, the transfer should not probably because the absence of clarification on this be equated to the interruption of activity,irrespec- matter allows the administration to retain the ability tive of whether the transfer entails the loss of the to challenge sham situations on acase-by-case basis company’slegal existence in France; and —tothe detriment of taxpayers who must struggle to s Article 221.3 of the FTC theoretically provides that understand what are the relevant criteria. the transfer of the head office of acorporation out- side the EU should escape immediate taxation B. European case law on exit taxes under Article 221.2, when it is decided by the share- holders in the circumstances set down in Article As will be discussed in C., below,two decisions L225-97 of the Commerce Code. However this text handed down by the Court of Justice of the European refers to treaties signed with other States to allow Union (CJEU) have forced the French tax administra- and regulate such transfers, and no such treaty has tion to amend France’sexit tax rules. yet been signed by France. It seems, therefore, that In its landmark decision of November 29, 2011, in transfer of ahead office outside the EU is unlikely National Grid Indus BV (Case C371/10), the CJEU to escape the immediate taxation of unrealised stated that Article 49 of the Treaty on the Functioning gains (if any) under Article 221-2. of the European Union (TFEU), which protects the Based on these provisions, the tax administration freedom of establishment within the EU, ‘‘must be in- considers that where the head office of aFrench com- terpreted as precluding legislation of aMember State pany is transferred out of France, the consequences of which prescribes the immediate recovery of tax on un- Article 201 of the FTC (i.e., immediate taxation of de- realised capital gains relating to assets of acompany ferred income and unrealised gains) can be avoided transferring its place of effective management to an- only if the transfer is made within the EU and does not other Member State at the very time of that transfer.’’ entail the transfer of all the company’sassets and ac- More recently,the European Commission has also tivities, in which latter case the second paragraph of challenged Portugal’sdomestic tax rule requiring non- Article 221-2 would still operate to impose immediate resident taxpayers to appoint arepresentative in Por- taxation under Article 201. Also, the administration tugal. This rule was denounced by the CJEU on allows the benefit of relief from immediate taxation September 6, 2012, in European Commission, v. Portu- under Article 221 bis only with respect to assets that guese Republic (Case C-381/11). remain attributed to aFrench PE. Assets transferred

40 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 abroad to the other state are taxable under normal applicable to individuals, which had to be repealed principles, the transfer being equated to asale of the and then redrafted, but this will not be explored in any assets. further detail here. As the position taken by the tax administration has meant that an expatriating French company would be subject to immediate French taxation on its deferred III. Treatment of cross-border mergers: Articles income and on unrealised gains on the assets trans- 210 A, 210 Band 210 Cofthe French TaxCode ferred, the consequence has been that few companies While cross-border mergers raise significant legal dif- have contemplated expatriation out of France by way ficulties, such difficulties have been greatly reduced as of astraightforward transfer of their head office. regards intra-EU cross-border mergers, by the EU Di- The CJEU decisions discussed in B., above, seemed rective dated October 26, 2005 (the ‘‘EU Merger Direc- clearly to indicate that France’staxation immediately tive’’), which provides for cross-border consolidations on the exit of aFrench company could be considered involving entities resident in different EU Member prohibited as an unjustified limitation of the freedom States and has been implemented into the laws of all of establishment principle as defined in the TFEU. EU Member States. The 2001 EU Directive on the Eu- This consideration led the French tax administration ropean Company (Societas Europaea or SE) also in- to believe that the existing law would have to be modi- cludes specific provisions allowing for across-border fied and this was achieved by an amendment, albeit of merger by way of the constitution of an SE. French asomewhat limited nature, introduced in Article 30 of corporate law also allows for adissolution without liq- the Third Amended Finance Bill for 2012, which was uidation, when the dissolved entity is 100 percent- passed on December 29, 2012. owned by another entity,which has consequences The new provisions were inserted as part of existing similar to amerger. Article 221-2 of the FTC and apply only to transfers to For tax purposes, amerger normally falls within Ar- another EU Member State, plus Norway and Iceland. ticle 221-2 of the FTC (see II.C., above) and potentially While they confirm that the transfer of the head office triggers the taxation of unrealised gains and deferred of aFrench company triggers the immediate taxation income, as well as untaxed reserves and provisions. of unrealised capital gains when assets are transferred Mergers can, however,benefit from adeferral regime out of France —i.e., when they do not remain attrib- provided for under Articles 210 A, Band Cofthe FTC. uted to aFrench PE —(without making any distinc- In summary,the regime allows the gains of the entity tion between depreciable and non-depreciable assets), absorbed in the merger to escape immediate taxation, they also provide that the company concerned may subject to the absorbing entity undertaking to com- opt to defer the payment of corporate tax due on such pute future gains based on the historic tax value of the gains by spreading the payment over five years by assets of the absorbed entity.Gains on depreciable paying annual instalments of 20 percent of the assets are added back to the taxable income of the ab- amount due. The benefit of the deferral ceases to be sorbing entity over five years (or 15 years in the case available if the assets are disposed of during the five- of assets comprising real estate). The shareholders of year period after the transfer,ifthe assets are trans- the absorbed entity receive shares in the absorbing ferred to anon-EU state or if the company fails to entity but the taxation of the gain arising on the trans- make its annual instalment payment. Nor does the fer of their shares in the absorbed entity is deferred law make it clear whether the transfer of all of acom- until alater disposal of their shares in the absorbing pany’sassets would trigger more severe taxation con- entity,even if the benefit of Article 210 Aisnot re- sequences based on the second paragraph of Article quested. 221-2 (i.e., the immediate taxation, in addition, of un- taxed reserves and provisions, and the taxation of the While cross-border mergers can also benefit from company’sshareholders on adeemed distribution). the above deferral regime, Article 210 Cofthe FTC re- The impact of this change in the law is, therefore, quires that, where amerger is across-border merger, limited and the parties concerned may still bear asub- aprior ruling be obtained from the tax administra- stantial tax cost as aresult of the transfer of assets out tion. Dissolution without liquidation of awholly- of France, even if the tax payments that have to be owned subsidiary can also benefit from the deferral made over the following five years can, hopefully, regime. Except in the case of amerger involving a partly be compensated by depreciation taken on a French entity and an entity resident in another EU step-up basis in the state to which the transfer is Member State, the consequences of which are deter- made. mined by the EU Merger Directive as implemented in It remains to be seen whether the provision of the French domestic law,Article 210-0 Aprovides that the option to spread the payment of tax over five years will favourable deferral regime is not available when the be sufficient to make France’srules compatible with foreign entity involved in across-border merger is lo- EU Directives and there is ongoing debate over cated in acountry that has not signed atax treaty with whether the requirement that assets be attributed to a France providing for administrative assistance in French PE is acceptable and whether adistinction combating tax avoidance. In order for the benefit of needs to be made between depreciable and other the tax deferral to be granted, the tax administration assets. It is, perhaps, worth mentioning that France requires that France should be able to tax future gains already has along history with the collision between on the assets transferred in amerger by virtue of the exit tax and EU principles and has already been cen- allocation of such assets to aFrench PE of the absorb- sured by the European Court of Justice (ECJ —asthe ing company.Unrealised gains on assets that are not CJEU was known before 2009) (De Lasteyrie du Sail- so allocated and are transferred abroad are immedi- lant,Case C9/02, March 11, 2004) for its exit tax rules ately taxed.

02/13 TaxManagement International Forum BNA ISSN 0143-7941 41 Thus, subject to the obtaining of aruling from the The merger with the FCo, irrespective of whether French tax administration, the impact of across- FCo is located in or outside the EU, will have limited border merger can be limited to the taxation of the un- tax consequences to the extent that FrenchCo’sassets realised gains on the assets transferred abroad. It is and activities remain attributed to aPEinFrance and also worth mentioning that another tax advantage of that aruling is obtained from the French administra- the merger regime is that it provides for the applica- tion. The PE will need to have enough substance and tion of reduced registration duties. activity in order to be recognised as such, and the tax administration will check that the purpose of the IV.Forum questions merger is not to avoid tax. For purposes of the discussion below,HC(i.e., Home Country) will be referred to as France and HCo will be 3. FCo is created with anominal shareholder.The referred to as FrenchCo. Foreign country will be re- shareholders of FrenchCo then transfer all of ferred to as FC and Foreign Corporation as FCo. their stock in FrenchCo to FCo in exchange for stock in FCo. FrenchCo then liquidates A. Viability under French corporate law.Treatment for French income tax purposes This scenario is also viable from aFrench corporate law point of view,but either of the two ways in which the operation can be structured will have adverse tax 1. FrenchCo remains the same business entity but consequences. effects achange (of some type) that changes it The dissolution without liquidation of awholly- from aFrench corporation into an FC owned subsidiary is technically the primary method corporation for French income tax purposes for achieving amerger,especially in anon-EU context This scenario is viable from aFrench corporate law where aplain merger can be difficult to implement point of view,although the transfer of ahead office (problems of compatibility between the legal systems can give rise to significant legal and social difficulties. to which the merging companies are subject, the re- From atax perspective, the ‘‘favourable’’exit tax quirement that there be an agreement of all share- regime for the transfer of ahead office will apply only holders, etc.). The straightforward liquidation of if the new head office is located in an EU Member FrenchCo would trigger the immediate taxation of all State, in which case French tax will only be imposed income and unrealised gains under paragraph 2ofAr- on unrealised gains on assets transferred abroad and ticle 221-2 and FCo would be taxable on any benefits the payment of the tax will be able to be spread over received as aresult of the liquidation of FrenchCo (30 five years (see II.C., above). Such atransfer should percent withholding tax, potentially reduced under give rise to only limited consequences if no assets or the terms of an applicable tax treaty). activities are transferred out of France, but will be of The transaction would, therefore, preferably be little benefit since achange in corporate residence will structured as adissolution without liquidation, in not significantly affect the method of taxation due to which case it could be treated in the same way as a France’sterritoriality rules (see I., above). merger and could benefit from the deferral regime, The allocation of assets to aFrench PE requires that subject to the requirement imposed by Article 210 Cof such aPEshould effectively exist. The tax administra- the FTC that aruling be obtained from the tax admin- tion could, for example, challenge asituation in which istration (see III, above). shares owned by FrenchCo were transferred to a French PE but the PE had no substance or activity in France. In the latter case (i.e., where the PE had no 4. FrenchCo createsFCo as awholly owned substance), the administration would likely regard the subsidiary.FrenchCo then merges into FCo, with shares as having been transferred to FCo and would FCo surviving. The shareholders of FrenchCo seek to tax the gain on the shares transferred accord- receive stock in FCo ingly. This reverse merger scenario is subject to the same There seems to be no indication that the tax admin- technical analysis as that applying in the scenario de- istration wishes to extend the favourable deferral scribed in 2., above. regime to the transfer of ahead office to anon-EU country (see II.C., above). 5. FCo is created with anominal shareholder.The 2. FCo is created with anominal shareholder. shareholders of FrenchCo then transfer all of FrenchCo then merges into FCo, with FCo their stock in FrenchCo to FCo in exchange for surviving. The shareholders of FrenchCo receive stock in FCo stock in FCo The transfer of the control of aFrench corporation This scenario also is viable from aFrench corporate does not trigger any French tax consequences for the law point of view.Byway of apreliminary remark, corporation whose stock is transferred. The corpora- however,itisworth pointing out that the usual struc- tion’sshareholders will be taxable on any gain on the turing for such atransaction is to have the foreign cor- disposal of their shares. The gain on the transfer of a poration (here, FCo) incorporated by existing controlling interest in aFrench corporation by anon- shareholders rather than by anominal shareholder.It resident shareholder can attract French withholding is assumed in this scenario and those that follow that tax, but France’stax treaties generally eliminate such this is the way in which the structuring is effected. taxation.

42 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 6. FCo is created with anominal shareholder and tion will only deliver after checking that the main pur- in turn creates FrenchMergeCo, awholly owned pose of the restructuring is not to avoid tax. limited liability business entity incorporated It should also be clear from the discussion above under the laws of France and treated as a that, in the case of all the transactions envisaged, the corporation for French corporate tax purposes. availability of tax-neutral treatment on expatriation FrenchMergeCo then merges into FrenchCo, with depends on the expatriating company’sassets and ac- FrenchCo surviving. The shareholders of FCo tivities continuing to be attributed to aPEinFrance, receive stock in FrenchCo which allows France to retain the right of taxation with respect to such activities, unrealised gains on all The merger of FrenchMergeCo into FrenchCo can be assets transferred out of France being taxed in any included under the merger regime. This scenario does event. This obviously reduces the scope for negotia- not affect the residence of French co and should have tion with the tax administration. limited consequences since it does not affect the loca- Mergers apart, the tax administration has anumber tion of assets and income. of ways available to it in which it can challenge trans- actions that are purely tax-driven, including under the 7. FCo is created with the same corporate general anti-avoidance provision contained in Article structure as FrenchCo, and with the same L64 of the TaxProcedure Code. shareholders with the same proportional As ageneral comment on this matter,itishowever ownership. FrenchCo then sells all its assets and worth noting that the ECJ held, in Cadbury Schweppes liabilities to FCoand liquidates (September 12, 2006 aff. 196/04, at paragraph 37), that ‘‘the fact that [the] company was established in a This scenario is viable under French corporate law, Member State for the purpose of benefiting from but triggers the taxation of unrealised gains on the more favourable legislation does not in itself suffice to assets transferred by FrenchCo to FCo. Capital gains constitute abuse of that freedom’’(i.e., the freedom of on the sale of participations that qualify for the establishment). The practical consequences of the French participation exemption are 88 percent principle of freedom of establishment and the distinc- exempt and the transfer of patents can benefit from a tion between tax optimisation and tax avoidance is an reduced rate, but the other assets will be taxed at the open matter that, by definition, allows of no resolu- full rate (currently 36.1 percent). tion without an examination of the facts of each par- B. Other scenarios that FrenchCo might consider ticular case. and their treatment for French income tax D. Treatment for French income tax purposes if purposes FCo were an existing, unrelated foreign Other scenarios can involve asplit-up or apartial corporation, and FrenchCo merged into FCo, transfer of abusiness, either of which gives rise to the with FCo surviving same questions and issues as does amerger. The fact that the merger is realised with an existing C. Difference for French income tax purposes if unrelated corporation with an existing business does FrenchCo has a‘‘business purpose’’for the not change the technical analysis above concerning restructuring the treatment of mergers, but will, of course, make a favourable impression on the tax administration As noted in III., above, the favourable regime appli- when it is asked to deliver the ruling that must be ob- cable to cross-border mergers is conditioned on the tained in to benefit from the favourable merger obtaining of aruling that the French tax administra- regime.

02/13 TaxManagement International Forum BNA ISSN 0143-7941 43 Host Country GERMANY

Jo¨rg-Dietrich Kramer Bruhl

I. Introduction A. Viability under German corporate law.Treatment for German income tax purposes he reorganisation of corporations is governed by the Reorganisation Act1 and its tax conse- T quences are provided for by the Reorganisa- 1. GermanCo remains the same business entity tion TaxAct.2 Both acts contain provisions that but effects achange (of some type) that changes convert the EU Merger Directive3 into domestic law. it from aGerman corporation into an FC corporation for German income tax purposes An extensive explanation of the Reorganisation Tax Act is contained in the administration’sReorganisa- GermanCo would remain the same business entity if it tion TaxDecree.4 Under §1UmwG, mergers are pos- were possible to transfer the seat and management of sible only between corporations that have their seat in GermanCo to FC. Except in the case of an SE, this is Germany.Under §122a UmwG, however,amerger in- apparently not possible under German corporate law. volving acorporation that has its seat in Germany and Nevertheless, German tax law provides for the conse- acorporation that does not have its seat in Germany quences of the transfer of the seat and management of is also possible if the latter corporation is subject to aGerman corporation to aforeign country. the law of another EU Member State. Moreover,under If aGerman corporation moves its seat and man- the EU Statute for aEuropean Company (Societas Eu- agement to aforeign country,its unlimited German ropaea or SE),5 it is possible to effect amerger as a corporation tax liability,which is linked to its seat or result of which an SE is established. management being in Germany,ceases. If the corpo- ration’sseat and management are transferred to a Consequently cross-border reorganisations involv- country outside the EU, the transfer is treated as an ing German corporations and corporations of other immediate liquidation: ataxable capital gain equal to EU Member States are treated differently from cross- the difference between the book value of GermanCo’s 7 border reorganisations involving German corpora- assets and their market value is realised and taxed. tions and corporations of countries that are not EU The mere transfer of aGerman corporation’sman- Member States. The provisions of the UmwStG on agement to aforeign country does not normally termi- mergers apply only if the corporations participating in nate its unlimited German corporation tax liability, the merger are EU corporations, i.e., if they are estab- because the fact that acorporation’sseat is in Ger- lished under the law of an EU Member State.6 many by itself makes the corporation aresident of Germany for tax purposes and, therefore, subject to All provisions concerning the reorganisation of cor- unlimited German corporation tax liability.8 However, porations are generally governed by the goal of guar- if the corporation’smanagement is moved to acoun- anteeing that Germany ultimately does not lose its try with which Germany has atax treaty,the corpora- right to tax reserves hidden in the assets of German tion normally loses its domestic residence under the corporations. Where across-border merger or other treaty,because the tie-breaker rule normally con- 9 cross-border reorganisation is viable, hidden reserves tained in Germany’stax treaties prescribes that the place of management determines the corporation’s must be disclosed and gains must be realised where residence. In that case also, the transfer of the corpo- Germany would otherwise ultimately lose the right to ration’smanagement gives rise to acapital gain and tax those reserves. the immediate liquidation of the corporation.10 If acorporation’sseat and management —orwhere II. Forum questions there is an applicable tax treaty between Germany and the other country concerned, its management alone For purposes of the following discussion, HC is re- —are moved to another EU Member State, §12(3) ferred to as Germany and HCo is referred to as Ger- KStG does not apply.Itisthe general view that, in this manCo. case, §12(1) KStG applies,11 although the wording of

44 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 this provision does not actually suggest that it should granted, however,insofar as the capital gains corre- so apply.§12(1) KStG mainly concerns the transfer of spond to earlier depreciation of the value of the the assets of aGerman corporation to apermanent es- shares. tablishment (PE) in aforeign country and prescribes GermanCo’sshareholders are considered to have that such atransfer is to be treated as asale. The capi- disposed of their shares at market value in exchange tal gain from this notional sale may be allocated to the for shares in FCo22 and consequently will realise capi- 12 current year and the four following years. tal gains. The realisation of capital gains may be Capital gains from the disposition of shares are tax avoided if alater realisation of capital gains would be exempt.13 However,5percent of such capital gains are subject to German taxation. To the extent the share- treated as nondeductible expenses and added to tax- holders are German residents, eventual capital gains able income.14 from the sale of their shares in FCo will be subject to After emigration to FC, GermanCo may merge into German taxation, unless they hold their shares in aPE FCo under foreign law,which will be subject to FC in aforeign country with which Germany has atax taxation. treaty,under which the capital gains are tax exempt. This, however,isunlikely.Tothe extent the new shares 2. FCo is created with anominal shareholder. in FCo are held by foreigners resident in acountry GermanCo then merges into FCo, with FCo that has no tax treaty with Germany,such sharehold- surviving.The shareholders of GermanCo receive ers will not be able to avoid realising capital gains for stock in FCo German tax purposes, because Germany will lose the right to tax capital gains realised on afuture disposal This scenario is viable only if FC is another EU of the new shares in FCo: such capital gains do not Member State and FCo is acorporation established qualify as domestic income, whereas capital gains under the law of that EU Member State and having its from the sale of shares in GermanCo would have 15 seat and management in that EU Member State. qualified as domestic income.23 If the foreign share- Moreover,FCo must be acorporation that, applying holders are resident in acountry with which Germany German standards, corresponds to aGerman corpora- has atax treaty,the realisation of capital gains for tion. German tax purposes may be avoided, however,be- On its final tax balance sheet, GermanCo must enter cause Germany would not have had the right to tax the market value of its assets, i.e., its shares in its sub- capital gains from the disposal of shares in Ger- sidiaries.16 In other words, GermanCo must realise a manCo24 and, therefore, does not lose any taxing final capital gain, equal to the difference between the rights as aresult of the merger of GermanCo into FCo. book value and the market value of its assets. To the Consequently,shareholders of GermanCo that extent the capital gain is attributed to the transfer of become shareholders of FCo and that are resident in shares to FCo, it is tax exempt.17 However,5percent Germany or atax treaty country may file arequest to of such capital gain must be added back to the trans- acquire the shares in FCo at the book value or the fer income as non-deductible expenses.18 original acquisitions cost of the shares in GermanCo Exceptionally,where three conditions are fulfilled, and may thus avoid realising an immediate capital GermanCo may enter the book value of its assets or a gain. value between the book value and the market value of its assets:19 3. FCo is created with anominal shareholder.The s the assets must subsequently be subject to FC cor- shareholders of GermanCo then transfer all of poration tax; their stock in GermanCo to FCo in exchange for s Germany must not lose its right to tax any subse- stock in FCo. GermanCo then liquidates quent capital gains from the disposal of the assets; and Since GermanCo’sshareholders may transfer their s the consideration for the transfer to FCo must con- shares to whomever they choose, this scenario is sists of shares in FCo. viable with respect to all foreign countries. Both the 25 Germany will normally lose its right to tax subse- transfer of shares to FCo and the liquidation of Ger- 26 quent capital gains if the assets are moved to FC. This manCo will normally give rise to income for will be the case if FC is an EU Member State, as under German tax purposes. Income from the disposal of 27 Germany’stax treaties with other EU Member States, shares is tax exempt if the shareholder is itself acor- Germany is required to exempt from German tax capi- poration. If the shareholder is an individual taxpayer, tal gains realised by foreign corporations in such such income is taxable. The liquidation income will be Member States. Exceptionally,ifthe assets remain in tax exempt to the extent it may be attributed to Ger- aPEthat FCo has in Germany,Germany will not lose manCo’sshares in its subsidiaries. its right to tax such gains. As far as GermanCo’sshares In certain circumstances, the realisation of capital in other corporations are concerned, it is difficult to gains may be avoided. These circumstances are pro- imagine that they would remain in aGerman PE. It is vided for in §21UmwStG, which applies only where normally assumed that shares are held at the head the corporation to which the shares are transferred is office of the corporation, i.e., here, FCo’shead office in an EU corporation.28 If this is the case (i.e., if FCo is FC.20 Only exceptionally may shares belong to aPE, an EU corporation), FCo may,upon request, enter on i.e., if they serve the function of the PE. However,this its balance sheet the acquired shares in GermanCo at is apparently not the case here. Consequently the re- their book value or,inthe absence of book value alisation of capital gains is mandatory.The gains are, where the original shareholders of GermanCo hold however,tax exempt to the extent that they arise from their shares as private property (as opposed to busi- the transfer of shares.21 The tax exemption is not ness property), at their original acquisition cost. This

02/13 TaxManagement International Forum BNA ISSN 0143-7941 45 is permissible, if on acquiring the shares in Ger- KStG. Thus an individual shareholder will realise a manCo, FCo holds the majority of the voting shares in taxable retroactive capital gain, equal to the difference GermanCo.29 between the original market value of the shares in For GermanCo’soriginal shareholders who transfer GermanCo and the value assumed as the acquisition their shares to FCo, the values entered on FCo’sbal- cost of the shares in FCo, reduced by one seventh for ance sheet represent the transfer price of the shares in each year since the acquisition of the shares.34 If the GermanCo and the acquisition cost of the shares in sale occurs seven or more years after the acquisition, FCo.30 However,ifGermany’sright to tax afuture no such retroactive capital gain will arise. capital gain from the sale of the shares in GermanCo or from the sale of the shares in FCo is precluded or 4. GermanCo creates FCo as awholly owned restricted, the market value of the shares in Ger- subsidiary.GermanCo then merges into FCo, with manCo represents the transfer price of the shares in FCo surviving. The shareholders of GermanCo GermanCo and the acquisition cost of the shares in receive stock in FCo FCo.31 There is, however,acounter-exception to this rule: the shareholders may,upon request, choose the This is adownstream merger,which is treated like the original book value of the shares in GermanCo as the merger discussed in 2., above. transfer price of the shares in GermanCo and the ac- quisition cost of the shares in FCo, if Germany’sright 5. FCo is created with anominal shareholder.The to tax afuture capital gain from the sale of the shares shareholders of GermanCo then transfer all of in FCo is not precluded or restricted.32 If the share- their stock in GermanCo to FCo in exchange for holders are German residents, Germany’sright to tax stock in FCo their capital gains would not be precluded. Conse- quently,such shareholders may ask to have the book The consequences of this scenario will be the same as value of their shares in GermanCo considered to be those discussed in 3., above. the transfer price of their shares in GermanCo and the acquisition cost of their shares in FCo. This possibil- 6. FCo is created with anominal shareholder and ity exists independently of the treatment of the acqui- in turn creates GermanMergeCo, awholly owned sition of the shares in GermanCo by FCo. limited liability business entity formed under Consequently,the shareholders may avoid realising a the law of Germany and treated as acorporation capital gain on the transfer of their shares in Ger- for German income tax purposes. manCo to FCo. GermanMergeCo then merges into GermanCo, An illustrative example, similar to the scenario en- with GermanCo surviving. The shareholders of visaged here, is provided in the Reorganisation Tax GermanCo receive stock in FCo Decree:33 A, aGerman resident, is the sole shareholder of In merging GermanMergeCo into GermanCo, FCo as A-GmbH, acorporation, resident in Germany.Atrans- GermanMergeCo’sshareholder would receive shares fers his shares in A-GmbH to the U.K. X-ltd in ex- in GermanCo. GermanCo’sshareholders, however, change for shares in X-ltd. would retain their shares, and GermanCo would keep Since the X-ltd. is an EU corporation, §21UmwStG its shares in its subsidiaries. In order to receive new applies. Normally X-ltd would acquire the shares in shares in FCo, GermanCo’sshareholders may act as A-GmbH at their market value. But since X-ltd. ac- described in the scenario described in 3., above. quires the majority of the voting stock in A-GmbH, X-ltd may show the lower book value or any value be- 7. FCo is created with the same corporate tween the market value and the book value as its ac- structure as GermanCo, and with the same quisition cost. The value assumed by X-ltd. represents shareholders with the same proportional for Athe transfer price for the shares in A-GmbH and ownership. GermanCo then sells all of its assets the acquisition cost for the shares in X-ltd. By way of (and liabilities) to FCo and then liquidates exception, the market value of the shares in A-GmbH is deemed to represent A’stransfer price for the shares If the sale is made for money,GermanCo will realise a in HCo and his acquisition cost for the shares in X-ltd. capital gain equal to the difference between the book By way of counter-exception, Amay request to have value of the shares transferred and their transfer price the book value deemed to represent his transfer price as would be agreed upon between unrelated persons. and acquisition cost, if Germany’sright to tax acapi- As noted at 3., above, that capital gain would be tax tal gain from afuture sale of the shares in X-ltd. is not exempt under §8b(2) KStG, although 5percent of the excluded or restricted. Under Germany’stax treaty capital gain would be deemed to be anon-deductible with the United Kingdom, Germany has the unre- expense. stricted right to tax such capital gains. Therefore, A If the shares held by GermanCo are transferred to may,upon request, treat the shares in X-ltd. as being FCo in exchange for shares in FCo and if FCo is an EU acquired at acost equal to the original book value of corporation, §21UmwStG will apply.Asdiscussed at the shares in A-GmbH. 3., above, GermanCo may avoid realising an immedi- If FCo sells the shares in GermanCo within seven ate capital gain, to the extent FCo acquires the major- years after acquiring them, this is treated as aretroac- ity of the voting stock in the corporations whose tive realisation event for the (previous) shareholders, shares are transferred to it. Aretroactive capital gain if they are not corporations themselves for whom a will be realised however,ifFCo sells the shares within capital gain realised at the time of the exchange of seven years of acquiring them. Of course, the liquida- shares would have been tax exempt under §8b(2) tion of GermanCo will give rise to capital gains35 that

46 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 are tax exempt, however,tothe extent they are attrib- 5 Ordinance No.2157/2991 of Oct.8, 2001, ABl.EG L294 utable to the shares in FCo.36 of Nov.10, 2001. 6 Cf. note 01.49 UmwStErl. B. Other scenarios that GermanCo might consider and 7 §12(3) 1st sentence Ko¨rperschaftsteuergesetz (KStG – their treatment for German income tax purposes Corporation TaxAct). 8 §1KStG. GermanCo might consider transferring the shares in 9 Cf. OECD Model Convention, Art.4(3). its subsidiaries to aPEinFCand then transferring the 10 §12(3) 2nd sentence KStG. PE to FCo. However,the attribution of shares to aPE 11 Ro¨dder/Schumacher,DStR 2006, 1489; Eickmann/ rather than the head office is permitted only if the Stein,DStZ 2007, 725. shares serve the function of the PE. Moreover,the 12 §4gEinkommensteuergesetz (EStG –Income TaxAct). transfer would be arealisation event. 13 §8b(2) KStG. 14 §8b(3) KStG. C. Difference for German income tax purposes if 15 §1(2) No.1 UmwStG. GermanCo has a‘‘business purpose’’ for the 16 §11(1) UmwStG. 17 restructuring §8b(2) KStG. 18 §8b(3) KStG. Normally,there is no consideration of the purpose of 19 §11(2) UmwStG. areorganisation. 20 BMF,letter of Dec.24, 1999, BStBl.I 1999, 1076, note 2.4. D. Treatment for German income tax purposes if FCo 21 §8b(2) KStG. were an existing, unrelated foreign corporation, and 22 §13(1) UmwStG. 23 GermanCo merged into FCo, with FCo surviving §49(1) No.2 eEStG. 24 OECD Model Convention, Art.13(5). The provisions with respect to mergers and to the ex- 25 §20(2) No.1 EStG. change of shares discussed above apply with respect 26 §11KStG. to both related and unrelated corporations. 27 §8b(2) KStG. 28 §1(3) and (4) No.1 UmwStG. 29 §21(1) 2nd sentence UmwStG. 30 NOTES §21(2) 1st sentence UmwStG. 1 Umwandlungsgesetz (UmwG). 31 §21(2) 2nd sentence UmwStG 2 Umwandlungssteuergesetz (UmwStG). 32 §21(2) 3rd sentence UmwStG. 3 Directive 90/434/EWG of Feb.17, 2005, ABl.EG Nr.L 58. 33 Note 20.15 UmwStErl. 4 Umwandlungsteuererlasz (UmwStErl), Bundesministe- 34 §22(2) UmwStG. rium der Finanzen (BMF –Federal Ministry of Finance), 35 §11KStG. letter of Nov.11, 2011, BStBl.I 2011, 1314. 36 §8b(2)KStG.

02/13 TaxManagement International Forum BNA ISSN 0143-7941 47 Host Country INDIA

Vandana Baijal &Zainab Bookwala Deloitte, Haskins &Sells, Mumbai

I. Introduction arrangement. Some of the factors that may compel an enterprise to migrate its from one he Indian economy has undergone aradical jurisdiction to another are: transformation —inthe past typecast as s achange in the customer base or the geography of ‘‘closed’’and ‘‘dull,’’itisnow seen as one of the T the customer base; world’smost ‘‘open’’and ‘‘exciting’’economies. Corpo- s plans to expand into new jurisdictions; rate restructuring and s achange in applicable regulatory laws; (M&A) have been integral to this development and s achange in ownership at the group level; growth. The key principle behind corporate restruc- s adesire to lower the effective tax cost for the group turing in the Indian context has been to ‘‘upsurge’’ as awhole; shareholder value and provide ahigher return on in- s the perceived complexities resulting from an oner- vestment than that achievable in other emerging mar- ous tax regime; and kets. Due to the intense competitive pressures arising s the availability of an investor friendly regime in the from globalisation, there has been asignificant in- target country crease in the number of cross-border mergers and ac- quisitions. B. Meaning of the term ‘‘corporate inversion/migration’’ ‘‘Corporate restructuring’’isacomprehensive term encompassing mergers, acquisitions, consolidations, The term ‘‘corporate inversion’’isnot in common use liquidations, inversions/migrations and various other in India. However,corporate inversion would gener- forms of rearrangement. In India, corporate restruc- ally be regarded as falling within the concept of corpo- turing is governed by atight tax and regulatory frame- rate restructuring, which includes situations in which work, and the guidelines regarding cross-border there is achange in the location of the ultimate hold- mergers and restructuring, which are designed to con- ing company of agroup for tax purposes. Unlike the trol the outflow of investments and funds from India, United States, India does not have any specific provi- are even more stringent than those applying to domes- sions governing corporate inversions. However,provi- tic restructuring. sions such as the restriction on the merger of an Indian company with aforeign company under the II. Corporate inversion/migration Companies Act 1956, and the fact that tax neutrality is not available under the Income-tax Act 1961 (the Situations such as achange in business plan/ ‘‘Act’’) in cases in which the transferee/demerged strategies, tax laws, etc. may necessitate astructural entity is aforeign company,toalarge extent reduce change, which may sometimes be achieved by ‘‘mi- the scope for corporate inversions. grating’’acompany to another,favorable jurisdiction. In general terms, an inversion/migration is aprocess C. Types of corporate inversion/migration by which acorporate entity established in the home country is moved/transferred to aforeign country.The The methods available for effecting the migration of a shareholders of the domestic company become share- company out of India are briefly set out in 1. to 4., holders of the new foreign parent company.The legal below. status of the company changes from that of adomes- tic company to that of aforeign company without any 1. Legal transfer of the company from one physical change in the company’slocation or opera- jurisdiction to another without any physical tions. movement

A. Reasons for corporate inversion/migration Under this method, the company concerned is legally transferred from one jurisdiction to another without Abusiness is preferably headquartered wherever the any actual physical movement. Though legally its ju- key management personnel or promoters are located. risdiction changes, the company remains in the origi- However,this may not always be the most tax-efficient nal jurisdiction. It is rare for this type of transfer to be

48 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 accepted both by the country from which the com- D. Provisions under the Act affecting corporate migration pany legally migrates and also by the country to which it migrates. Nor does India recognise the concept of dual incorporation that is accepted in some countries. 1. Transactions resulting in the transfer of income to nonresidents

2. Transfer of control and management In considering an outbound transaction, it is neces- sary to be mindful of certain provisions in the Act of Generally,the taxation of an entity depends inter alia both aspecific and ageneral anti-avoidance nature. upon its residential status. The vital factors for deter- mining the residential status of acompany include the Section 93 of the Act concerns the transfer of 2 location of its management and control and/or its assets2 to anonresident, either alone or in conjunc- place of incorporation. The management and control tion with associated operations, that would result in is viewed as being located at the place where the ‘‘head income being payable to the nonresident. Where the and brains’’ofthe company are to be found. person transferring the assets (the ‘‘transferor’’) thereby acquires any rights by virtue of which the Where acompany is resident in aparticular juris- transferor has the power to enjoy,whether immedi- diction based purely on the fact that its management ately or at some future time, any income of the non- and control is located in that jurisdiction, it is possible resident that, if it were income of the transferor, to achieve the migration of the company simply by would be chargeable to income tax in the hands of the shifting the location of its management and control to transferor,Section 93 provides that such income shall another jurisdiction. However,since the residential be chargeable to income tax in the hands of the trans- status of acompany under the Act is determined by feror. reference to the place of the company’sincorporation, it is not generally possible to migrate an Indian com- Further where any such transfer results in the trans- pany for tax purposes simply by transferring its place feror being entitled to receive any capital sum of management to another jurisdiction. However,it (whether before or after the transfer), whether or not may be possible to achieve this by having recourse to the nonresident is entitled to income not chargeable the provisions of an applicable Indian tax treaty.Ina to tax in India, such capital sum is chargeable to tax in case where the control and management of acom- India. pany is located in the treaty partner country,itispos- However,such atransfer will not be considered to sible that the company may be regarded as aresident constitute tax avoidance, and so Section 93 of the Act of both the countries: i.e., as aresident of India by would not apply,ifthe transferor is able to demon- virtue of its being incorporated in India and as aresi- strate that: (1) neither the transfer nor any associated dent of the treaty partner country by virtue of its con- operation had for its sole purpose or for one of its pur- trol and management being located in that country (if poses the avoidance of liability to taxation; or (2) the the laws of that country so provide). In this scenario, transfer and all associated operations were bona fide the tie-breaker provisions of the tax treaty may be ap- commercial transactions and were not designed for plied, under which, if the company is aresident of purposes of avoiding liability to taxation. both countries under the application of the basic treaty residence criteria, it would be considered aresi- dent of the country in which its control and manage- 2. Proposed general anti-avoidance rule ment is located. India is one of anumber of countries that has ex- pressed its concern over the potential for interna- 3. Share transfer tional tax evasion and avoidance. It is in this context that India introduced in Finance Act 2012 aproposed Transferring the shares of an Indian company to general anti-avoidance rule (GAAR) that was to apply shareholders in another jurisdiction is afeasible with effect from April 1, 2013. The GAAR is ameasure method of achieving the migration of the company that allows the tax authorities to characterise abusi- out of India, but such an operation could involve tax ness arrangement or transaction as ‘‘impermissible’’ implications for both the shareholders and the com- and thereby deny the tax benefits to the parties in- pany. volved in the arrangement or transaction. The draft proposed rules provide an illustrative list of transac- 4. Other methods tions that may be regarded as impermissible. The rules are currently being amended based on sugges- It may also be possible to achieve the migration of a tions advanced by acommittee set-up to review them. holding company from India to another jurisdiction The final report of the committee was recently re- using one of the following methods: leased, which has deferred the implementation of the GAAR to April 1, 2016. s merger of the Indian company with aforeign com- pany;1 Once the GAAR is implemented, there would have s ‘‘slump sale’’ofthe business; to be arelevant ‘‘business purpose’’for effecting the s share swap; or migration of acompany from India to another juris- s acombination of the above alternatives to achieve diction if the application of the GAAR were to be the desired structure. avoided.

02/13 TaxManagement International Forum BNA ISSN 0143-7941 49 3. Capital gains tax exemption available only be effected under ascheme of merger in accordance where the transferee is an Indian company with the provisions of Sections 391 to 394 of the Com- –Section 47 of the Act panies Act 1956 and would require prior Court ap- proval. Any gain arising from the direct or indirect transfer of acapital asset located in India is liable to tax under b. Possibility of merging an Indian company with a the Act. However,certain transfers on account of a foreign company corporate reorganisation are tax exempt. Section 47 of the Act illustrates the situations in which such a One available option for achieving acorporate transaction is not regarded as atransfer and conse- inversion/migration would be to merge the Indian quently does not give rise to acapital gains tax liabil- parent company with aforeign company located in a ity in India. It must be emphasised that the exemption tax-efficient jurisdiction. Such an operation would be provided in such cases is subject to the condition that possible only if it were in compliance with India’scor- the transferee is an Indian company.This has the porate and foreign exchange control regulations. Cur- effect of discouraging the migration of Indian compa- rently,under the Companies Act 1956, across-border nies to overseas jurisdictions, as the tax exemption is merger is permitted only if the transferee company is lost where the transferee is anonresident. The follow- an Indian company and not vice versa.The Companies ing are the instances in which such atax exemption is Bill 20115 proposes to relax this requirement and provided for under the Section 47: permit the merger of an Indian company with afor- s transfer of acapital asset by aholding company to eign company.Under the provisions of the Bill, the its wholly owned subsidiary (the wholly owned sub- Central Government would give notice of the foreign sidiary must be an Indian company)[Section jurisdictions with whose companies such cross- 47(iv)];3 border mergers are to be permitted and the prior per- s transfer of acapital asset by awholly owned subsid- mission of the Reserve Bank of India (RBI) would iary to its holding company (the holding company have to be sought. 3 must be an Indian company)[Section 47(v)]; Though the merger of an Indian company with a s transfer of capital assets by the amalgamating com- foreign company will now be permitted, correspond- pany to the amalgamated company in ascheme of ing amendments need to be made in the provisions of amalgamation (the amalgamated company must be the Act, which currently provide for atax exemption an Indian company)[Section 47(vi)]; only if the transferee company is an Indian company. s transfer of capital assets by the demerged company Abrief synopsis of the provisions of the Act under to the resulting company in ascheme of demerger which atax exemption is available to the transferor (the resulting company must be an Indian company) company and its shareholders in the case of aqualify- [Section 47(vib)]; and ing merger is provided in c., below. s transfer of capital assets by ashareholder of the amalgamating company in consideration for shares c. Taxbenefits available in the case of amerger where in the amalgamated company in ascheme of amal- the amalgamated company is an Indian company gamation (the amalgamated company must be an Indian company)[Section 47(vii)]. Under the Act, the transfer of assets and liabilities by the amalgamating company,which could give rise to E. Provisions in the Act dealing with the tax implications short-term6 or long-term7 capital gains, is tax exempt, of the various methods of corporate migration subject to the condition that the amalgamated com- pany is an Indian company.The shareholders whose As well as being aware of the restrictions imposed rights are extinguished in the amalgamating company under the Act, it is also necessary to be well versed in and who are allotted shares in the amalgamated com- the tax implications of the available methods of cor- pany are also exempt from tax. If ashareholder trans- porate inversion/migration. The relevant provisions fers its shares in the amalgamated company at some are briefly discussed in 1. to 5., below. future date, the original cost and holding period with respect to the original shares will be taken into ac- 1. Cross-border merger count in computing acapital gain/loss on such trans- fer.Other tax benefits such as the carryforward of the a. Meaning of the term ‘‘merger’’ unabsorbed operating losses (including depreciation) of the amalgamating company are available to the The term ‘‘merger’’isequivalent to the term ‘‘amalga- amalgamated company,subject to the fulfillment of mation’’used in the Act. ‘‘Amalgamation’’isdefined in certain conditions.8 the Act4 to mean the merger of one or more compa- nies with another company or the merger of two or d. Taxability in the absence of specific provisions more companies to form one company so that: (1) all exempting merger the assets and liabilities of the amalgamating com- pany (or companies) immediately before the amalga- As noted in b., above, even though the Companies Bill mation become the assets and liabilities of the 2011 proposes to permit the merger of an Indian com- amalgamated company; and (2) shareholders holding pany with aforeign company,there are currently no not less than three-fourths in value of the shares in the provisions in the Act that provide for atax exemption amalgamating company (or companies) become in such circumstances. The question therefore arises shareholders of the amalgamated company by virtue as to whether the requirements laid down in the cur- of the amalgamation. Such an amalgamation would rent provisions in the Act for atax exemption to be

50 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 available to the amalgamating company need actually provisions providing for an exemption be enacted. A to be met to claim tax neutrality. demerger would also be subject to transfer taxes such as stamp duty. Typically,inamerger,the amalgamating company transfers its assets and liabilities, but receives no con- sideration. In such acase, it can be contended that, in 3. Slump sale the absence of any consideration, no capital gains can Aslump sale is one of the methods by which an entire be computed (capital gains being the excess of sale undertaking (constituting abusiness activity) can be consideration over cost) and, consequently,there transferred as agoing concern for alump-sum consid- should be no taxation. However,asthis position is eration. Aslump sale does not allow for the ‘‘cherry contentious, it is imperative that specific provisions picking’’ofassets and liabilities. providing for an exemption be enacted. As regards the position of the shareholders, in the absence of specific a. Taximplications for the seller of the business provisions, the extinguishing of their rights in the amalgamating company would certainly be taxable. Consideration in excess of the net worth11 of the busi- The merger would also be subject to transfer taxes ness transferred is taxed as capital gains. Net worth such as stamp duty. must be computed in accordance with the provisions of the Act. 2. Cross-border demerger Where the undertaking transferred has been held by the selling company for more than 36 months, the un- dertaking is treated as along-term capital asset and a. Meaning of the term ‘‘demerger’’ any gains arising from its transfer are treated as long- term capital gains taxable at arate of 20 percent.12 The term ‘‘demerger’’isdefined in the Act9 to mean the Otherwise, the gains are short-term capital gains and transfer of one or more undertakings10 by ademerged subject to tax at the rate of 30 percent where the seller company to aresulting company so that all the assets is adomestic company and at the rate of 40 percent and liabilities of the demerged company immediately where the seller is aforeign company. before the demerger are transferred to the resulting The slump sale of an undertaking is also subject to company.Also, shareholders holding not less than transfer taxes such as stamp duty.Aslump sale is, three-quarters in value of the shares in the demerged however,exempt from value added tax (VAT). company become shareholders in the resulting com- pany by virtue of the demerger.Such atransaction would be effected under ascheme of demerger in ac- b. Taximplications for the buyer of the business cordance with the provisions of Sections 391 to 394 of In case of purchase under aslump sale arrangement, the Companies Act 1956 and would require prior the buyer can enjoy the benefit of recording the assets Court approval at an enhanced value based on a‘‘Purchase Price Allo- cation report’’obtained from an independent valuer. b. Taxbenefits available in the case of ademerger Depreciation can also be claimed by the purchaser on where the resulting company is an Indian company the assets acquired in proportion to the period during the year of acquisition for which the assets are put to Under the Act the transfer of assets and liabilities by use. the demerged company,which could give rise to In the current context, the undertaking could be short-term or long-term capital gains, is tax exempt, sold on aslump sale basis to aforeign company,which subject to the fulfillment of the condition that the re- could then hold the undertaking. In such circum- sulting company is an Indian company.The share- stances, the undertaking so transferred could be con- holders receiving shares in the resulting company strued as abranch in India of the foreign company. would not be taxable based on the specific exemption However,such atransfer by an Indian company on a provided for under the Act. Other tax benefits, such as slump sale basis might be subject to the obtaining of the carryforward of unabsorbed operating losses (in- regulatory approvals. cluding depreciation of the undertaking) of the de- merged company,are available to the resulting 4. Share swap company. Another option for acorporate inversion/migration c. Taxability in the absence of specific provisions might be aswap arrangement under which the share- exempting demerger holders of the Indian company would transfer their equity stake therein to the foreign company.Inex- Typically,inademerger,the demerged company change for the transfer,the shareholders would be al- transfers the assets and liabilities of its undertaking lotted shares in the foreign company.Itshould be but receives no consideration. The consideration is re- emphasised that such ashare swap would require the ceived by the shareholders of the demerged company prior approval of the Foreign Investment Promotion in the form of shares in the resulting company.Insuch Board (FIPB) of India. It would be necessary to obtain acase, it can be contended that, in the absence of any such approval to comply with the foreign exchange consideration, no capital gains can be computed control regulations since the transaction would result (capital gains being the excess of sale consideration in there being an investment in an Indian company over cost) and, consequently,there should be no taxa- without any corresponding infusion of funds. Such tion of the demerged company.However,asthis posi- swap transactions must also be in compliance with tion is contentious, it is imperative that specific the prescribed valuation norms.

02/13 TaxManagement International Forum BNA ISSN 0143-7941 51 Aswap involving the shares of an unlisted company eliminated in the Companies Bill 2011, which is yet to would be taxable in India since the assets transferred be enacted. The tax implications of the various re- would be located in India. The excess of the consider- structuring options are discussed below. ation (i.e., the fair value of shares acquired in the for- eign company) over the cost of the shares transferred 1. ICo remains the same business entity but would be subject to Indian capital gains tax in the effects achange (of some type) that changes it hands of the shareholders. from an Indian corporation into an FC The transfer of the shares would also be subject to corporation for Indian income tax purposes. transfer taxes such as stamp duty. In this scenario, it is envisaged that, although the exis- 5. Liquidation of an Indian company tence of ICo would continue, it would be treated as FCo by virtue of some mode of reorganisation. This The liquidation of an Indian Company,which requires would not be feasible under Indian law,asacompany Court approval, is along-drawn out process under the incorporated under the Companies Act 1956 is treated Companies Act 1956. The taxation treatment on liqui- as an Indian company for taxation purposes. Under dation at the level of the company and its sharehold- the Act, the residential status of such acompany does ers is briefly discussed in a. and b., below,respectively. not change so that it becomes aforeign company even if its entire control and management is shifted over- a. Company seas. However,ifthe company were to become atax resident of the foreign country (by virtue of its man- The distribution of its assets by the company under agement and control being shifted to that country) as liquidation to its shareholders is not regarded as a well as aresident of India (by virtue of its being incor- ‘‘transfer’’that is taxable under the Act. porated in India), then, applying the provisions of the applicable tax treaty (if any), the company might be b. Shareholders considered aresident for treaty purposes of the coun- The receipt of assets by the shareholders in compen- try to which its control and management had been sation for the extinguishing of their rights in the com- shifted. However,interms of the Companies Act 1956, pany under liquidation may give rise to capital gains as long as ICo continues to be registered under that taxable under the Act. The distribution of assets to the Act (which is one of the requirements under India’s shareholders is treated as adeemed dividend to the corporate law), it would not be possible to transform extent of the accumulated profits of the company.The it to an FC corporation. balance is treated as capital gains subject to tax at the applicable rate. 2. FCo is created with anominal shareholder.ICo then merges into FCo, with FCo surviving. The F. Pricing rules for the issue/transfer of shares/securities shareholders of ICo receive stock in FCo to nonresidents This scenario is an example of across-border merger Under the foreign exchange control regulations, there whereby an Indian company (here, ICo) is proposed is arestriction on the price at which shares can be to be merged with aforeign company (here, FCo). As issued or transferred to nonresidents, such that they discussed at I.E.1., above, the proposed transaction is are required to bring in funds equal to at least the not aviable option under the current provisions of the value of the shares determined applying the dis- Companies Act 1956, which do not provide for cross- counted free cash flow (DCF) method. Nor may the border mergers. amount that can be paid to nonresidents in these cir- However,after the enactment of the Companies Bill cumstances exceed the DCF value of the shares. 2011, the merger of ICo with FCo should be feasible. The Forum questions are addressed below against For the tax implications in such circumstances, see the background of the above discussion of the Indian the discussion at I.E.1.d., above. law provisions relating to the various methods of cor- porate restructuring that can be used to achieve acor- 3. FCo is created with anominal shareholder.The porate inversion/migration. shareholders of ICo then transfer all of their stock in ICo to FCo in exchange for stock of FCo. III. Forum questions ICo then liquidates For purposes of the following discussion, HC is re- In this scenario, it is envisaged that the assets of ICo ferred to as India and HCo is referred to as ICo. would be shifted to FCo. The assets would then be held by the shareholders of ICo in aforeign jurisdic- A. Viability under Indian corporate law.Treatment for tion. For the tax implications in the case of share Indian income tax purposes swaps and liquidation, see the discussion at I.E.4. and 5., respectively. In India, companies are required to be incorporated under the Companies Act 1956 and are taxed in accor- 4. ICo creates FCo as awholly owned subsidiary. dance with the provisions of the Act. The various re- ICo then merges into FCo, with FCo surviving. structuring options discussed below are viable under The shareholders of ICo receive shares in FCo the Companies Act 1956, except for the option of merging an Indian company with aforeign company, This scenario appears to be similar to that described which is currently not permissible under the Compa- at 2., above and its tax implications would be the same nies Act 1956. The above restriction is proposed to be as those discussed in that section.

52 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 5. FCo is created with anominal shareholder.The by shareholders of ICo in the form of shares of FCo be shareholders of ICo then transfer all of their taxable under Section 47(vid) of the Act, since the ex- stock in ICo to FCo in exchange for stock of FCo emption provided for in that section is not condi- tioned on the resulting company being an Indian In this scenario, ICo’sbusiness would continue; how- company. ever,itwould be held by FCo, in which the sharehold- ers of ICo would acquire an equity right. The tax C. Difference for Indian income tax purposes if ICo has a implications would be the same as those discussed in ‘‘business purpose’’ for the restructuring 3., above in relation to ashare swap. Currently,the provisions of the Act that provide atax 6. FCo is created with anominal shareholder and exemption for various kinds of corporate restructur- in turn creates IMergerCo, awholly owned ing do not explicitly require the existence of a‘‘busi- limited liability business entity formed under the ness purpose.’’However,the anti-avoidance tax law of India and treated as acorporation for provisions in Section 93 of the Act (see II.D.1., above) Indian income tax purposes. IMergerCo then and also the proposed GAAR (see II.D.2., above) merges into ICo, with ICo surviving. The would have to be taken into account to ensure that the shareholders of FCo receive stock in ICo proposed transaction was not treated as an impermis- sible arrangement. The GAAR proposes that there This operation represents an alternative to that in should be a bona fide commercial purpose for transac- which the holding company is migrated to aforeign tions and provides guidance on this requirement in jurisdiction via ashare swap. This scenario achieves the form of an illustrative list of cases in which the the same result, but does so using atax-neutral GAAR could be invoked. method of reorganisation, i.e., amerger between com- panies. For the tax implications of the merger of D. Treatment for Indian income tax purposes if FCo were IMergerCo with ICo, see the discussion at II.E.1.c., an existing, unrelated foreign corporation, and ICo above. merged into FCo, with FCo surviving

7. FCo is created with the same corporate Even if FCo were an existing unrelated foreign corpo- structure as ICo, and with the same shareholders ration, the tax implications under the Act would with the same proportional ownership. ICo then remain as indicated at A.2., above. sells all its assets and liabilities to FCo and liquidates NOTES In this scenario, it is envisaged that the business of 1 Currently,the merger of an Indian company with afor- ICo is transferred to FCo through the transfer of all eign company is not permissible under the Companies ICo’sassets and liabilities. Further,after the transfer, Act 1956. However,under the proposals in Companies ICo is liquidated and all its funds are distributed to its Bill 2011, such amerger could be possible. 2 shareholders. In this way,the sale proceeds of the 2‘‘Transfer’’inrelation to acapital asset includes: the business would indirectly be distributed to the share- sale, exchange, relinquishment of an asset; the extin- holders via the liquidation of ICo. The sale whereby guishing of any rights in an asset; the compulsory acqui- ICo transfers all its assets and liabilities to FCo could sition of an asset; the conversion of an asset into stock-in- trade; the maturity or redemption of zero coupon bonds; be effected through aslump sale arrangement under the possession of any immovable property in part perfor- which alump sum consideration would be paid to mance of acontract; and atransaction that has the effect ICo. For the tax implications for ICo of aslump sale of transferring or enabling the enjoyment of any immov- arrangement, see the discussion at II.E.3., above. For able property. the tax implications of the liquidation of ICo for ICo 3 Subject to following conditions specified in Act, Sec. and its shareholders, see the discussion at II.E.5., 47A(1): above. the capital asset transferred may not be converted into stock-in-trade for at least aperiod of eight years from the B. Other scenarios that ICo might consider and their date of transfer; and treatment for Indian income tax purposes the parent company or its nominee must hold the entire share capital of the subsidiary for aperiod of at least eight Currently,under the Companies Act 1956, the de- years from the date of transfer. merger of an Indian company is not permitted where 4 Act, Sec. 2(1B). the resulting company is aforeign company.However, 5 Companies Bill 2011 has been approved by the Lower once the Companies Bill 2011 is enacted, such atrans- House of Parliament but has yet to receive the President’s action would be possible. In that scenario, ICo would assent. be able to demerge its main business to FCo. In con- 6 Short-term capital gains arise from the transfer of a sideration of the demerger of the main business un- short-term capital asset. A‘‘short-term capital asset’’isa dertaking of ICo, ICo’sshareholders would receive capital asset held by the taxpayer for not more than 36 shares in FCo. months immediately preceding the date of transfer. The tax implications of ademerger are discussed at Shares in acompany are regarded as short-term capital II.E.2., above. Taxneutrality could be achieved if the assets if they are held for not more than 12 months imme- view were to prevail that, as the transfer of capital diately preceding the date of transfer. assets by the demerged company to the resulting com- 7 Long-term capital gains arise from the transfer of a pany is for no consideration, no capital gains arise on long-term capital asset. A‘‘long-term capital asset’’isa the transaction. Nor would the consideration received capital asset that is not ashort-term capital asset.

02/13 TaxManagement International Forum BNA ISSN 0143-7941 53 8 The carryforward of unabsorbed losses (including de- 9 Act, Sec. 2(19AA). preciation) of the amalgamating company is available to 10 Under Explanation 1toAct, Sec. 2(19AA), the term the amalgamated company only if: the amalgamated company owns aship or ahotel, or is an ‘‘undertaking’’includes any part of an undertaking or a industrial undertaking (manufacturing or processing of unit or division of an undertaking or abusiness activity goods, manufacturing of computer software, electricity taken as awhole, but does not include individual assets or generation and distribution, telecommunications, liabilities or any combination thereof not constituting a mining, or construction of ships, aircraft or rail systems); business activity. the amalgamation involves banking companies; or 11 Net worth is the difference between the ‘‘aggregate the amalgamation is of apublic sector company(ies) en- value of total assets of the undertaking or division’’and gaged in the business of operating aircraft with one or the ‘‘value of liabilities of such undertaking or division.’’ more public sector companies engaged in the same busi- ness. 12 The rate of tax excludes the surcharge and cess.

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54 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 Host Country IRELAND

Peter Maher and Philip McQueston A&L Goodbody,Dublin

I. Introduction II. Forum questions

iven Ireland’sfavourable corporate tax For the purposes of the discussion below,HCwill be regime, the trend is towards companies mi- referred to as Ireland and HCo will be referred to as G grating to, rather than from, Ireland. In IrishCo. recent years there have been several high profile mi- grations of U.K. groups to Ireland. One of the main A. Viability under Irish corporate law.Treatment for Irish reasons given for those migrations was the proposed income tax purposes changes to U.K. controlled foreign company (CFC) rules. Following achange of government in the United 1. IrishCo remains the same business entity but Kingdom, the amendments that were ultimately made effects achange (of some type) that changes it to the United Kingdom’staxation of foreign profits from an Irish company into an FC corporation for were not as adverse as had been feared and, in late Irish income tax purposes. 2012, some companies that had migrated to Ireland announced their intention to return to the United This scenario is viable under Irish law only in limited Kingdom. Such companies include the media group instances. Subject to the two exceptions below,acom- WPP,the business publisher UBM and the investment pany incorporated in Ireland may not move its place management group, the Henderson Group. Otherwise of incorporation to another jurisdiction. there have been few,ifany,outward migrations from An Irish incorporated company that is an au- Ireland of publicly listed companies (Dragon Oil plc thorised collective investment undertaking may apply to the Irish Courts to be de-registered as an Irish com- proposed migrating from Ireland to Bermuda but this pany and to cease to be acompany for the purposes of did not ultimately happen). Irish company legislation, but to continue as acom- The EU Cross-Border Merger Directive1 (CBMD) pany under the laws of one of anumber of prescribed was implemented into Irish law in 2008. This facili- foreign jurisdictions (certain offshore jurisdictions) tates the migration of acompany out of Ireland in cer- without becoming anew legal entity.This is under tain instances by way of amerger with an entity recent changes made to facilitate the migration of incorporated in another European Economic Area regulated funds with corporate form. Authorised col- (EEA) Member State (the EEA consists of the 27 EU lective investment undertakings are exempt from Irish Member States together with Iceland, Liechtenstein tax, except to the extent that they have Irish resident unitholders, and migrations of such companies from and Norway). Prior to the implementation of the Ireland may generally be effected on atax-neutral CBMD, under Irish company law it was not possible basis. to effect amerger of an Irish incorporated company A Societas Europaea (SE) registered in Ireland may and acompany incorporated outside of Ireland. Out- move its country of registration and effective place of ward migration from Ireland was (and still is) com- incorporation from Ireland to another EEA Member monly achieved by moving the central management State. An SE is acompany incorporated under Euro- and control of the company out of Ireland and ensur- pean law (created by way of the merger of two compa- ing that an exception from the place of incorporation nies, each of which is incorporated in adifferent EEA test of Irish tax residence was satisfied. Outward mi- Member State) that may change its seat and domicile gration by this method continues to be common; rea- from one EEA Member State to another and after sons for this include the relative ease by which it may such change continues as acompany registered in the be effected and the costs involved with this method transferee jurisdiction. An SE remains the same form being somewhat less than those that would be in- of legal entity following such move, and the transfer of curred in the case of migration by merger (which re- the registered office out of Ireland would not of itself quires two Irish High Court applications). Migration result in the SE ceasing to be tax resident in Ireland. by way of merger is becoming more common. In order for the SE to cease to be tax resident in Ire-

02/13 TaxManagement International Forum BNA ISSN 0143-7941 55 02/13 TaxManagement International Forum BNA ISSN 0143-7941 55 land its place of central management and control provision provides that no such adjustment is made would have to be moved from Ireland to another juris- on the transfer of an asset to an SE in the course of a diction. The Irish tax consequences for an SE regis- merger. tered in Ireland that ceases to be tax resident in To the extent that the assets in question fall outside Ireland are the same as those for any other corporate the Irish tax net after they have been acquired by the entity that ceases to be tax resident in Ireland. Migra- SE, and save to the extent the assets form part of aper- tion from Ireland by way of moving the place of cen- manent establishment (PE) of the SE in an EU tral management and control is described further Member State (other than Ireland), no form of relief is below. available. In those circumstances, IrishCo will be sub- As already noted, an SE is created by way of the ject to corporation tax in respect of chargeable gains merger of two companies, each of which is incorpo- at the current effective rate of 33 percent3 in respect of rated in adifferent EEA Member State. Where one of any gain arising on the disposal of any such assets. the companies is an Irish incorporated company,it If the transaction was to be regarded as giving rise must be apublic limited liability company.IrishCo to an income distribution (as opposed to acapital could therefore effect amigration from Ireland by transaction) for Irish tax purposes, made by IrishCo way of merger with another company incorporated in to anon-Irish tax resident shareholder or to an Irish an EEA Member State other than Ireland, so as to tax resident individual shareholder,then Irish divi- create an SE, with such SE having its registered office dend withholding tax could be applicable. Irish divi- in an EEA Member State other than Ireland. dend withholding tax is currently imposed at the rate If IrishCo is an Irish private it of 20 percent, subject to the availability of awide would first need to convert to an Irish public limited number of exemptions. The availability of these ex- company.This is areasonably straightforward pro- emptions is, however,dependent on compliance with cess, although it can take anumber of weeks to com- certain administrative requirements. plete all of the steps. Following such conversion, No amendments have been made to Irish domestic IrishCo could effect amerger with another appropri- law to extend the relevant existing provisions permit- ate company incorporated in another EEA Member ting the transfer of tax losses specifically to cover State in order to create an SE. cross-border mergers. However,the Irish domestic Specific relieving provisions were introduced into provision that permits areceiving company to take Irish domestic law in 2006 to facilitate the formation over the carried forward tax losses of atransferring of an SE from an Irish tax perspective. The main Irish company when there has been acompany reconstruc- tax issue with the creation of an SE is that IrishCo tion is drafted in quite awide manner and should gen- would be considered to have disposed of its assets, erally extend to transfers effected by way of cross- which may precipitate taxable gains for IrishCo, such border merger creating an SE, in appropriate gains being taxed currently at the effective rate of 33 circumstances. percent.2 By way of background, the provision allows tax losses of atransferring company relating to aparticu- The ability to have assets transferred to the non- lar trade (or part of atrade) to be used by areceiving Irish tax resident SE on atax-neutral basis is depen- company that takes over the operation of that trade dent on the assets remaining within the Irish tax net (or part of atrade). In order to qualify for this treat- immediately after the transfer.Inrespect of an SE that ment, acommon ownership test must be satisfied — is not resident in Ireland for tax purposes, an asset of there must be a75percent or greater level of common that SE will be within the charge to Irish tax if the ownership between the transferring company and the asset in question is: (1) land that is located in Ireland; receiving company. (2) minerals located in Ireland or any rights, interests or other assets in relation to mining or minerals or There is aspecific exemption from Irish stamp duty searching for minerals in Ireland; (3) ashare deriving for instruments made for the purposes of the transfer the greater part of its value from assets fully within of assets pursuant to the formation of an SE. category (1) or (2); or (4) an asset situated in Ireland that will be used, or held or acquired for use, in or for 2. FCo is created with anominal shareholder. the purposes of atrade carried on in Ireland by the SE IrishCo then merges into FCo, with FCo surviving. through an Irish branch or agency. The shareholders of IrishCo receive stock in FCo The Irish domestic provision provides that qualify- With the implementation of the CMBD, this scenario ing transferred assets are to be treated for tax pur- should now be possible in appropriate circumstances poses as if they had been acquired by the SE for a in the case of across-border merger between an Irish consideration that results in neither again nor aloss limited liability company (whether apublic limited arising on the particular transfer.Onasubsequent company or aprivate limited company) and acom- disposal, the tax basis that the SE would have in re- pany incorporated in another EEA Member State. It spect of the relevant asset would be equal to the basis should be noted that it is not entirely clear that the of IrishCo. In other words, the SE would be subject to Irish regulations implementing the CBMD provide for tax on the full increase in value of the asset for the amerger of an Irish company in circumstances where combined period of ownership by IrishCo and the SE. the other company is formed for the purpose of the Normally where an Irish company disposes of an merger.Irish unlimited companies, statutory corpora- asset that qualifies for tax depreciation (capital allow- tions, building societies, co-operative societies or ances), an adjustment is made by way of abalancing would not seem to be able to avail them- allowance or charge to ensure that the overall amount selves of the merger procedures prescribed by the of allowances made is appropriate. The Irish domestic 2008 Regulations.

56 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 Across-border merger,within the meaning of the assets remain within the charge to Irish tax after CMBD, is aspecial form of court-approved corporate completion of the transaction, the Irish domestic restructuring involving the dissolution of one or more capital gains relief applicable in respect of companies of the companies concerned, without their going into entering into qualifying schemes of reconstruction or liquidation, and the transfer of their assets and liabili- amalgamation may apply.Ifthat is the case, the rel- ties to another company,which becomes the succes- evant assets of the transferring company will be sor company. treated, for Irish capital gains tax purposes, as if they Across-border merger may trigger Irish tax, princi- had transferred for aconsideration such that no pally capital gains tax and stamp duty,onthe transfer chargeable gain or loss would arise. of assets, and clawbacks of tax depreciation (capital allowances) previously claimed. Also, the carryfor- There is aspecific exemption from Irish stamp duty ward of losses may be affected. Reliefs relevant to for instruments made for the purposes of the transfer these matters may be available under the general pro- of assets pursuant to across-border merger. visions of Irish tax law.There is aprovision that allows the Irish tax authorities to grant appropriate 3. FCo is created with anominal shareholder.The reliefs in accordance with the terms of the European shareholders of IrishCo then transfer all of their 4 Mergers TaxDirective (EMTD) following an applica- stock in IrishCo to FCo in exchange for stock tion in writing by the party wishing to effect across- in FCo. IrishCo then liquidates border merger. The EMTD contains provisions allowing for cross- FCo may acquire the shares of IrishCo for an issue of border mergers to be implemented on atax efficient shares to the shareholders of IrishCo. The transfer of basis. However,the EMTD was only partly imple- the shares in IrishCo will be within the remit of Irish mented into Irish tax legislation. At the time of imple- stamp duty (which would be charged at the rate of 1 mentation (1992), it was not possible under Irish percent of the market value of the shares of IrishCo), company law for some of the cross-border mergers but should be fully relieved, subject to atwo-year envisaged by the EMTD to take place. Those parts of clawback period during which the foreign acquiring the EMTD dealing with mergers were not imple- company must continue to retain the shares in mented into Irish law.The Irish legislation imple- IrishCo. However,the liquidation of IrishCo within menting the EMTD addressed transfers of assets other that two-year period should not trigger the stamp duty than by merger.Relief from stamp duty was already clawback. The liquidation of IrishCo may give rise to available under Irish law in respect of exchanges of various Irish tax considerations, including potential shares and certain shares for undertaking transac- tax in respect of capital gains arising on the disposal tions. of assets by the liquidator,onbehalf of IrishCo. With the implementation into Irish law of the CBMD, cross-border mergers involving an Irish lim- The transfer of the shares in IrishCo to FCo may ited liability company and acompany incorporated in cause IrishCo to cease to be amember of the group of another EEA Member State may now take place. Irish companies to which it previously belonged, which tax law has not generally been amended in order to could cause acrystallisation of previously enjoyed address mergers. The Irish tax authorities are appar- group relief from capital gains tax, and would mean ently satisfied that Irish tax legislation as currently that no further use of group loss relief in respect of drafted is sufficient to achieve tax neutrality in the trading losses would be possible with regard to com- case of atransfer of assets pursuant to across-border panies that were previously grouped with IrishCo. merger.This is because, at the time the EMTD was Any Irish tax resident shareholders of the IrishCo implemented into Irish law,the general ‘‘sweep up’’ will have disposals of their shares for Irish capital provision referred to above was included in the legis- gains tax purposes, but should be relieved by way of lation. This provision allows the Irish tax authorities share for share transaction relief under Irish domestic to grant such relief as appears to them to be ‘‘just and law.Such relief will treat the transaction as not giving reasonable,’’inaccordance with the terms of the rise to any chargeable disposal but instead treat the EMTD, following an application in writing by the tax- shareholders as rolling their base date and cost of the payer. original shares in the target into the consideration There are anumber of shortcomings with the cur- shares received in the acquiring company,FCo. rent legislation and reliance on the granting by the Irish tax authorities of relief is an unsatisfactory ap- For Irish tax resident corporate shareholders of proach for ataxpayer.Nevertheless, where FCo is resi- IrishCo, if the transaction in question qualifies for the dent in aMember State of the EU, the expectation is Irish capital gains participation exemption, then the that relief under the EMTD should be granted by the participation exemption is deemed to take prece- Irish Revenue Commissioners to IrishCo to the extent dence. The corporate shareholders could claim a‘‘full’’ the assets being transferred in the course of the exemption in respect of the disposal as opposed to a merger are assets remaining within the charge to Irish postponement of the recognition of any gain by way of corporation tax/capital gains tax after the merger. ‘‘roll-over’’treatment. The participation exemption It is possible that relief may be obtained under other broadly applies where the shares disposed of are in an Irish domestic legislation (not related to the transpo- EU or treaty country company,and are in acompany sition of the EMTD). For example, in atransaction that is atrading company or that is amember of a where an Irish company carrying on atrade in Ireland trading group. The threshold for the application of the for tax purposes is merged with acompany tax resi- participation exemption is, generally speaking, a5 dent in another EEA Member State and the relevant percent holding held for at least one year.

02/13 TaxManagement International Forum BNA ISSN 0143-7941 57 4. IrishCo creates FCo as awholly owned gains; and (3) IrishCo receives no consideration for subsidiary.IrishCo then merges into FCo, with the transfer other than the assumption of some or all FCo surviving. The shareholders of IrishCo of its business liabilities, relief should be available receive stock in FCo from tax on capital gains. Stamp duty relief should also be available. As already mentioned, the Irish regulations imple- menting the CBMD arguably do not provide for a B. Other scenarios that IrishCo might consider and their merger of an Irish company in circumstances where treatment for Irish income tax purposes the other company is formed for the purpose of the merger.Inappropriate circumstances, this scenario As already mentioned, it is common for migration should now be possible in the case of across-border from Ireland to be achieved by: (1) moving the central merger between an Irish limited liability company management and control of acompany out of Ireland; (whether apublic limited company or aprivate lim- and (2) failing the place of incorporation test of Irish ited company) and acompany incorporated in an- tax residence by falling within one of two exceptions other EEA Member State. The analysis regarding the to that test. scenario in 2., above applies to this scenario also. Corporate residence for tax purposes is determined by the place where the central management and con- 5. FCo is created with anominal shareholder.The trol of acompany is carried on, subject to compulsory shareholders of IrishCo then transfer all of their tax residence if the company concerned is Irish incor- stock in IrishCo to FCo in exchange for stock porated –with two exceptions. Central management in FCo and control is generally taken to be the place where the board of directors customarily meet to deal with FCo may acquire the shares of IrishCo for an issue of the strategic and policy decisions affecting the compa- shares to the shareholders of IrishCo. The analysis re- ny’sstrategy and business. It is not the place where garding the scenario in 3., above, applies to this sce- shareholder control is exercised, unless shareholder nario also. control is effectively being effected in place of the board of directors’ control. Nor is it necessarily the 6. FCo is created with anominal shareholder and place where the day-to-day business activities of the in turn creates IrishMergeCo, awholly owned company are carried on if, for example, the board con- limited liability business entity formed under the ducts its board level strategy and policy function else- laws of Ireland and treated as acorporation for where. Irish income tax purposes. IrishMergeCo then The two exceptions from compulsory tax residence merges into IrishCo, with IrishCo surviving. The for an Irish incorporated company are the following: shareholders of IrishCo receive stock in FCo The multi-national exception applies to an Irish in- corporated company that is managed and controlled Under Irish company law,the only form of merger out of Ireland, provided that: (1) it is either: (a) ulti- permitted between Irish incorporated companies is a mately controlled by aperson or persons resident in a merger between two Irish public limited liability com- country with which Ireland has atax treaty or in an panies. However,such amerger would rarely be seen EU Member State (a ‘‘Relevant Territory’’); or (b) is in practice and the relevant Irish company law regard- itself, or is related to, acompany whose principal class ing such mergers is largely untested. The transfer of of shares is substantially and regularly traded on a assets by IrishCo may trigger Irish tax, principally stock exchange in aRelevant Territory; and (2) it is (a) capital gains tax and stamp duty on the transfer of related to adegree of at least 50 percent to acompany assets, and clawbacks of tax depreciation (capital al- that conducts atrading operation in Ireland; or (b) lowances) previously claimed. Also, the carryforward itself conducts atrading operation in Ireland. This ex- of losses may be affected. Relief should, however,be ception permits, for example, U.S. multinationals to available on request from the Revenue Commission- continue to have Irish non-resident companies in ers on the basis that the assets remain within the Irish their structures provided at least one of their compa- tax net. nies is trading in Ireland. The second exception is that where the terms of an 7. FCo is created with the same corporate applicable tax treaty provide for atie-breaking of cor- structure as IrishCo, and with the same porate residence into the other country on the basis of shareholders with the same proportional management and control or place of effective man- ownership. IrishCo then sells all of its assets (and agement, then Irish domestic law will regard the com- liabilities) to FCo and then liquidates pany as not being compulsorily resident in Ireland. Given the importance of residence for Irish tax pur- The Irish tax analysis of this scenario is similar to that poses, IrishCo could effect amigration from Ireland for the scenario in 6., above. The transfer of assets by by way of achange of its central management and IrishCo may trigger Irish tax, principally capital gains control from Ireland to another jurisdiction so as to tax and stamp duty on the transfer of assets, and claw- satisfy one of the two exceptions from the general backs of tax depreciation (capital allowances) previ- place of incorporation test for Irish tax residence. An ously claimed. Also, the carryforward of losses may be outbound migration by cessation of Irish residence in- affected. volves consideration of the termination of afinal ac- However,where: (1) FCo is resident in aMember counting period and the likely precipitation of State of the EU; (2) the assets transferred remain taxation on adeemed market value realisation of all within the charge to Irish corporation tax or capital inventory,and of capital assets that have enjoyed tax

58 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 depreciation allowances, and thus effectively the pre- Where acompany ceases to be within the charge to cipitation of any deferred corporate income taxation. Irish corporation tax in respect of atrade it will be It will also involve consideration of the exit charge to treated as if there has been adiscontinuance of the capital gains tax in respect of capital assets. trade and this may give rise to charges to tax on Under Irish law,acharge to capital gains tax can deemed disposals of stock-in-trade and balancing al- arise when acompany changes its tax residence from lowances or balancing charges in respect of tax depre- Ireland to another country.Where this occurs, the ciation (capital allowances). company is deemed to have disposed of all of its assets at open market value immediately prior to the change C. Difference for Irish income tax purposes if IrishCo has of residence and immediately reacquired them at a‘‘business purpose’’ for the restructuring market value. This may give rise to achargeable capi- tal gain which would then be subject to Irish corpora- The Irish domestic capital gains relief for sharehold- tion tax. ers in respect of companies entering into qualifying schemes of reconstruction or amalgamation requires However this exit tax does not apply where the mi- that the reconstruction or amalgamation is effected grating company is an ‘‘excluded company,’’that is at for bona fide commercial reasons and does not form least 90 percent of its issued share capital is held by a part of any arrangement or scheme of which the main ‘‘foreign company’’that is: purpose or one of the main purposes is the avoidance s not Irish tax resident; of aliability to tax. There is asimilar anti-abuse provi- s under the control of aperson or persons resident in sion in respect of the Irish domestic tax provisions acountry with which Ireland has atax treaty; and that facilitate the transfer or disposal of assets on the s not under the control of aperson or persons resi- formation of an SE by merger. dent in Ireland. In addition, Irish tax law includes ageneral anti- The exit tax does not apply in respect of assets that avoidance provision that can allow the Irish tax au- are and continue to be used for the purposes of an thorities to recharacterise atransaction where they Irish trade before and after the migration of the com- can demonstrate that the transaction in question was pany’stax residence from Ireland. The reason for this not undertaken or arranged primarily for purposes exclusion is that assets in use for the purposes of a other than to give rise to atax advantage. trade carried on in Ireland by acompany through a branch or agency remain within the charge to Irish D. Treatment for Irish income tax purposes if FCo were capital gains tax even though the company is not tax an existing, unrelated foreign corporation, and IrishCo resident in Ireland. merged into FCo, with FCo surviving It is possible to make an election to have the exit charge postponed in respect of foreign trading assets Under the CBMD, amerger may be effected between where the company that migrates its tax residence unconnected companies. Such amerger would be the from Ireland is a75percent subsidiary of an Irish tax same type of merger as provided for in the scenario at resident company and both companies give notice in A.2., above and the Irish tax analysis regarding that writing to the Irish tax authorities electing for the scenario would apply to this scenario also. postponement. Acharge to Irish capital gains tax in respect of the postponed gain will arise for the Irish resident parent company on the happening of certain NOTES events within 10 years of the migration. These events 1 EU Directive 2005/56 EC. are: the disposal of the assets by the company; the 2 Subject to the passing of the Finance Bill, 2013, the rate company ceasing to be a75percent subsidiary of the will increase to 33 percent from 30 percent. other company; or the Irish parent ceasing to be Irish 3 See fn. 2, above. tax resident. 4 Council Directive 90/434/EEC of July 23, 1990.

02/13 TaxManagement International Forum BNA ISSN 0143-7941 59 Host Country ITALY

Giovanni Rolle WTS R&A Studio Tributario Associato, Milano

I. Introduction The new rules, the operation of which is illustrated in more detail below,provide for the deferral of taxa- hile, in general terms, Italy has aworld- tion of hidden capital gains until the time of the actual wide basis of taxation, the dividend ex- disposal of the assets concerned, although some un- W emption regime, adopted in 1992 in the certainties remain as to the precise rules on such de- context of the EU Parent-Subsidiary Directive, and ferral and the avoidance of double taxation at the time later progressively extended to encompass non-EU of the actual disposal of the assets. dividends, represents a de facto foreign income ex- emption for corporate Italian taxpayers. II. Forum questions In recent years, however,the scope of application of the foreign income exemption, has been somewhat For purposes of the discussion below,HCwill be re- narrowed. Examples of this narrowing include the in- ferred to as Italy and HCo will be referred to as ITACo. troduction, in 2000, of the controlled foreign com- pany (CFC) legislation (which was initially limited in A. Viability under Italian corporate law.Treatment for its application to CFCs located in tax havens but was Italian income tax purposes enlarged in 2010 to encompass CFCs located in other foreign countries) and the dividend source rule, which 1. ITACo remains the same business entity but denies the dividend exemption to the extent that the effects achange (of some type) that changes distributed profits concerned derive from sharehold- it from an Italian corporation into an FC ings in entities resident in tax havens. corporation for Italian income tax purposes Indeed, these new rules, which aim to tax certain kinds of foreign-source income, have created asitua- tion in which multinational groups headquartered in a. Corporate law Italy may have an Italian tax liability higher than that The transfer of acompany’sresidence for tax purposes of groups with the same Italian-source income, but can be achieved either through the mere transfer of foreign headquarters. Notwithstanding this inequality the company’splace of management or,inother cases in treatment, corporate expatriations are virtually un- where this is necessary,through the transfer of both known in Italy,atleast insofar as they concern larger the company’splace of management and its registered 1 enterprises. office. In the past, the rarity of corporate expatriations was In the first case, where the transfer is merely of the attributable to the lack of areliable legal framework place of management, there are virtually no corporate for such transactions. After the 1995 reform of the law implications from an Italian perspective. Since, conflict of law rules, the adoption of the EU Directive under Article 25 of Law 218/95 (regulating conflicts of on cross-border mergers of limited liability compa- laws), the applicable law is determined for Italian pur- nies and the European Court of Justice (ECJ) deci- poses by reference to the country in which the incor- sions on the outbound freedom of establishment, the poration process was completed (‘‘law of main obstacle to corporate expatriation was perhaps incorporation’’criterion), the transfer would not be to be found in the taxation of hidden capital gains at relevant for corporate law purposes and ITACo would the time of expatriation, as provided for in the Italian remain subject to Italian corporate law.Itmay,how- Income TaxCode (ITC), along with some uncertainty ever,bethat the foreign country of destination deter- as to whether such capital gains might also be recog- mines the applicable law based on the place of nised in the country of destination. There may be a effective management (‘‘sie`gere´ el’’ criterion), in which slight change in the situation (and corporate expatria- case ITACo may become subject also to the foreign tions may become less unusual) following the 2012 country’srules after the transfer of its place of effec- change in the legislation prompted by the stream of tive management to that country.Inthe second case, ECJ case law on exit taxation. where the transfer necessarily also entails the transfer

60 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 of the company’sregistered office, specific corporate Under the general rule stated in Paragraphs 1to law and conflict of laws rules would apply. 2-bis of Article 166 of the ITC, atransfer of residence From acorporate law perspective, the transfer of a entails: registered office is specifically regulated in the Italian s the taxation of hidden capital gains (equal to the Civil Code, which provides that aqualified majority of difference between the market value of the assets the shareholders present at the meeting is required for concerned and their respective tax basis), unless the the shareholders’ meeting resolving on the transfer assets remain effectively connected with aperma- and grants to dissenting shareholders the right of nent establishment (PE) in Italy of the transferred withdrawal.2 company; and Under conflict of laws rules (specifically,under s the taxation of tax deferred reserves and provisions Paragraph 3ofArticle 25 of Law 218/95), such atrans- entered in the latest financial report (including fer would be effective only if made in accordance with those taxable only in the event of adistribution) the laws of all the countries involved. The provision unless these are restated in the accounts of aPEin means that the effect of the transfer is subject not only Italy of the transferred company. to compliance with the Italian corporate law provi- Conversely,the transfer has no effect on the share- sions outlined above, but also to the provisions of the holders, as is made clear by Paragraph 2-bis of Article law of the country of destination: the most important 166 of the ITC. consequence is that such atransfer would be viable Amore favourable regime was introduced by Legis- only if the legal system of the country of destination lative Decree No. 1ofJanuary 12, 2012 for companies accepts the immigration of foreign companies. transferring their residence for tax purposes to a Should the country of destination not accept the country that is aMember State of the EU or the Euro- transfer,the transfer might be (re)construed, from an pean Economic Area (EEA), if specific conditions are Italian perspective, as aliquidation of ITACo, which fulfilled.7 The new legislation is aimed to make the would have different legal and tax consequences. Italian income tax system consistent with the EU free- It is worth noting that the above framework would dom of establishment principle, as interpreted by the be subject to two relevant exceptions if the transfer ECJ, especially in its decision in National Grid Indus.8 were to take place within the EU. First, it could be Under the regime, the transferring company can re- argued that, according to the most recent case law of quest the deferral of the tax effects of the transfer until the ECJ,3 national obstacles to the transfer of aregis- such time as the assets concerned are actually dis- tered office (whether deriving from the country of posed of. The actual implementation of the new rules origin or the country of destination) may be in breach is subject to the adoption of aMinisterial Decree, of the freedom of establishment. Second, the transfer which will identify the events that may terminate the of aregistered office between different EU Member deferral, the criteria for the imposition of tax and the States is expressly provided for by Regulation 2001/ method of payment of the deferred tax. 2157/CE for companies incorporated in the form of a 4 European Company (Societas Europaea or SE). 2. FCo is created with anominal shareholder. ITACo then merges into FCo, with FCo b. Income tax surviving.The shareholders of ITACo receive Under Paragraph 3ofArticle 73 of the ITC, acompany stock in FCo or entity is considered to be resident in Italy if, for most of the tax period concerned, it has either its reg- a. Corporate law istered office or its effective place of management in Italy,orthe main purpose of its activity is in Italy.This This transaction would qualify as across-border rule must be read in conjunction with the provisions merger for purposes of the Italian conflict of laws rule contained in Italy’stax treaties, most (but not all5)of enshrined in Paragraph 3ofArticle 25 of Law 218/95. which provide atie-breaker rule modelled on Article As in the case of the transfer of aregistered office, the 4(3) of the OECD Model Convention, thus settling merger would be effective only if made in accordance dual residence cases based on the place of effective with the laws of all the countries involved. The provi- management.6 sion makes the effectiveness of the merger subject not The change of an Italian resident corporation into a only to compliance with the Italian corporate law pro- nonresident corporation would thus have effect if: visions concerning mergers, but also to the provisions s all the corporation’sconnections with Italy,asset of the law of the country of destination, so that the forth in Paragraph 3ofArticle 73 of the ITC (regis- merger would be viable only if the legal system of the tered office, effective place of management, main country of destination accepts the cross-border business purpose) are removed; or merger by absorption of aforeign company.Should s the corporation’splace of effective management is the country of destination not accept the merger,the transferred to acountry that would then consider transaction might be (re)construed, from an Italian the corporation aresident and that has signed atax perspective, as aliquidation of ITACo, which would treaty with Italy under which dual residence cases have different legal and tax consequences. are settled through recourse to the place of effective The above framework is subject to two relevant ex- management criterion. ceptions where the merger takes place within the EU. If, in either case, the change is effective for tax pur- First, the merger may be implemented under the pro- poses (so that the corporation ceases to be atax resi- visions of Directive 2005/56/CE on cross-border merg- dent of Italy) the exit taxation regime provided for in ers of limited liability companies.9 The transaction Article 166 of the ITC will apply. would then be subject to the conditions and proce-

02/13 TaxManagement International Forum BNA ISSN 0143-7941 61 dural requirements laid down by the Directive and remain connected to aPE) the principles stated by the would have the effect provided for in Article 14 of the ECJ should apply.11 Directive, i.e. all the assets and liabilities of the com- pany being acquired would be transferred to the ac- 3. FCo is created with anominal shareholder.The quiring company; the shareholders of the company shareholders of ITACo then transfer all of their being acquired would become shareholders of the ac- stock in ITACo to FCo in exchange for stock in quiring company; and the company being acquired FCo. ITACo then liquidates would cease to exist. Alternatively,the merger may be designed to create an SE under the provisions of Ar- ticles 17 to 31 of Regulation 2001/2157/CE, provided a. Corporate Law the conditions set forth therein are fulfilled. The ef- According to the Italian conflict of laws rule enshrined fects of such amerger would be similar to those of a in Article 25 of Law 218/95, the first transaction here general cross-border merger,but (as provided for in (i.e., the contribution of ITACo shares to FCo) would Paragraph 2ofArticle 17 of the Regulation), on the be subject to the law applicable to the receiving com- merger being effected, the absorbing company would pany (i.e., FCo). So, except in the rare case in which become an SE. the transfer of shares to foreign persons or entities is limited by the principle of reciprocity or by specific in- b. Income tax dustry regulations, the transaction would be viable from an Italian perspective. The Italian tax regime for cross-border mergers is the The liquidation of ITACo would then be subject to result of the implementation into Italian domestic law the rules set forth in the Italian Civil Code, which es- of the EU tax directives concerning intra-EU cross- sentially concern procedural requirements (including border reorganisations (Directive 90/434/CEE, later approval by an extraordinary shareholders’ meeting modified by Directive 2005/19/CE, together,the ‘‘EU and the drafting of financial reports). Merger Directive’’)10 and Italy’sdomestic provisions concerning domestic mergers. b. Income Tax As aconsequence, different rules will apply depend- ing on whether the absorbing company is resident in For income tax purposes, the overall reorganisation or outside the EU. The latter situation (i.e., where an would be regarded as consisting of two separate trans- Italian company merges by absorption into acom- actions, each of which is subject to its own respective pany resident in acountry outside the EU) is charac- tax regime. terised by alack of regulations, so that it is open to The first transaction is the exchange (or contribu- question whether,insuch acase, the same provisions tion) of ITACo shares for shares of (to) FCo. As agen- on the transfer of tax residence apply (i.e., immediate eral rule, such atransaction would be taxable in the taxation of hidden capital gains and tax deferred re- hands of ITACo’sshareholders (while no tax liability serves, unless the assets remain with an Italian PE of would ever arise at the level of either the transferred the foreign absorbing company) or whether the trans- company or the foreign recipient company). The tax- action (not being aregulated merger) is to be con- able base would be determined as the difference be- strued as aliquidation, with the consequence that tween the fair market value and the tax basis of the there is immediate and unconditional taxation of ITACo shares contributed.12 capital gains and reserves. The actual taxation of the capital gain so deter- On the other hand, if an Italian resident company mined would then depend on the nature of the seller merges into acompany resident in an EU Member (whether aresident corporation, aresident individual State (and the other conditions set forth in the EU or anonresident) and on the share percentage con- Merger Directive are fulfilled), the merger will not give tributed. In summary,subject to certain conditions, a rise to the taxation of hidden capital gains to the resident corporation may benefit from Italy’spartici- extent the assets remain with an Italian PE of the ab- pation exemption regime (which is contained in Ar- sorbing company. ticle 87 of the ITC), while aresident individual may be subject to the flat tax on capital gains (currently,20 Paragraph 6ofArticle 179 of the ITC provides that percent) if the contributed share percentage is less those assets that do not remain with an Italian PE are than 20 percent, or to the individual income tax pro- deemed to be sold at their respective fair market value gressive rates on the capital gain, reduced by approxi- and the same would be the case for assets that are dis- mately half of its amount, where the contributed posed of subsequently (by the PE). Article 180 of the share percentage is over the 20 percent threshold. Ita- ITC provides for the taxation of deferred tax reserves ly’sability to impose taxation on anonresident tax- and provisions that have not been restated in the ac- payer in this context, which would otherwise be counts of an Italian PE of the absorbing company. identical to the taxation imposed on aresident, may It may be questioned whether the above rules (and, be denied by the capital gains provision of an appli- specifically,the immediate taxation of capital gains cable tax treaty.13 where the assets are not included in the assets of an No taxable gain would arise if the contribution were Italian PE) are still consistent with the EU freedom of within the scope of application of the tax neutrality establishment principle as delineated by the ECJ in regime provided for intra-EU exchanges of shares by National Grid Indus.Indeed, even before that decision the EU Merger Directive. To this end, it is required was handed down, the European Commission was of that the receiving company (here FCo): should be resi- the opinion that in situations as to which the EU dent in an EU Member State; should be subject in that Merger Directive is silent (i.e., where assets do not Member State to one of the taxes listed in Article 3of

62 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 Directive 90/434/CEE; should have one of the com- b. Income Tax pany forms listed in Annex AtoDirective 90/434/CEE; and should acquire control, or increase its existing The Italian tax regime for cross-border mergers, control, of the contributed company.Finally,itisre- would apply to this merger in exactly the same way as quired that the contributing shareholders allocate to it applies in the scenario outlined at 2., above. the shares received the tax basis of the shares contrib- 5. FCo is created with anominal shareholder.The uted.14 shareholders of ITACo then transfer all of their The second transaction is the liquidation of ITACo, stock in ITACo to FCo in exchange for stock in which is assumed to take place as aresult of the attri- FCo bution to FCo of all ITACo’sassets and liabilities. Hidden capital gains on the assigned assets would be taxable in the hands of the liquidated company (under a. Corporate law Paragraph 1c of Article 86 of the ITC) based on the dif- According to the Italian conflict of laws rule enshrined ference between their fair market value and their re- in Article 25 of Law 218/95, the first transaction (i.e., 15 spective cost basis. the contribution of ITACo shares to FCo) would be The attribution of assets or other liquidation pro- subject to the law applicable to the receiving company ceeds would also be taxable in the hands of FCo, to the (i.e., FCo). So, except in the rare case in which the extent the attributed assets or proceeds exceed the tax transfer of shares to foreign persons or entities is lim- basis of the shares of the liquidated company.This ited by the principle of reciprocity or under specific means that if the exchange of shares takes place at industry regulations, the transaction would be viable from an Italian perspective. market value, it is likely that no further taxation will arise at the level of the shareholders at this stage of the b. Income tax transaction. Otherwise, taxable income may arise that would be characterised as adividend (in an amount This transaction would be subject to the tax regime corresponding to the undistributed profits of ITACo) for cross-border exchanges of shares outlined in 3.b., and as acapital gain (to the extent exceeding those above. profits). In either case, taxation in Italy can be limited It should be noted, however,that in this particular or prohibited, as the case may be, by the provisions of case, the mere exchange of shares would not cause an applicable tax treaty. ITACo to lose its status as an Italian tax resident: the exchange of shares would replace the prior sharehold- 4. ITACo creates FCo as awholly owned ers with anonresident corporate shareholder,but no subsidiary.ITACo then merges into FCo, with FCo change would occur with respect to the nexus factors (registered office, effective place of management, surviving.The shareholders of ITACo receive main business purpose) that determine that ITACo is stock in FCo resident in Italy for tax purposes. a. Corporate Law 6. FCo is created with anominal shareholder and in turn creates ITAMergeCo, awholly owned The merger of ITACo into its fully owned foreign sub- limited liability business entity formed under the sidiary would qualify as across-border merger for law of Italy and treated as acorporation for purposes of the Italian conflict of laws rule enshrined Italian income tax purposes. ITAMergeCo then in Paragraph 3ofArticle 25 of Law 218/95 and would merges into ITACo, with ITACo surviving. The be effective only if made in accordance with the laws shareholders of ITACo receive stock in FCo of all the countries involved.

In this particular case, not only would it have to be a. Corporate law ascertained whether the legal system of the country of destination accepts the cross-border merger by ab- The merger of ITAMergeCo into ITACo would qualify sorption of aforeign company,but also whether it as aplain domestic merger under Italian law,since recognises the possibility of atransaction in which the both companies are incorporated under the laws of absorbing company is asubsidiary of the absorbed Italy.Since ITACo does not have any shares in ITA- company. MergeCo, an effect of the transaction would be that the shareholders of ITAMergeCo would receive shares Although such apossibility is not expressly pro- of ITACo on the merger. vided for by Italian corporate law,ithas been increas- The attribution of FCo shares to the shareholders of ingly admitted in case law (being usually referred to as ITACo would not be viable under Italian corporate a‘‘fusione inversa’’ or a‘‘reverse merger’’), so that from law. an Italian perspective, the transaction can be consid- ered to be viable. It could be argued that the same con- b. Income tax clusion may be reached in light of the provisions of Directive 2005/56/CE on cross-border mergers of lim- This transaction would be subject to the tax regime ited liability companies and of Regulation 2001/ for cross-border exchanges of shares outlined in 3.b., 2157/CE on mergers resulting in the formation of an above. SE, even though there is currently no authority on this It should be noted, however,that, in this particular point. case, the mere exchange of shares would not cause

02/13 TaxManagement International Forum BNA ISSN 0143-7941 63 ITACo to lose its status as an Italian tax resident. The the merger was between unrelated parties. In other merger would not entail any change in the nexus fac- words, the market value rule, which is ordinarily ap- tors (registered office, effective place of management, plicable only to related party transactions, is univer- main business purpose) that determine that ITACo is sally applicable in the context of cross-border aresident of Italy for tax purposes. mergers.

B. Other scenarios that ITACo might consider and their treatment for Italian income tax purposes NOTES 1 Corporate expatriations are more frequently associated Based on the Italian rules and common practice, there with legal arbitrage, especially with respect to bank- would seem to be no other available scenarios. The ruptcy law.For acritical consideration of the phenom- usual methods considered for achieving corporate ex- enon and the rules concerned, see F. M. Mucciarelli, patriation are asimple transfer of residence for tax Societa`dicapitali, trasferimento all’estero della sede sociale purposes (as addressed in 1., above) and across- earbitraggi normativi,Milan, 2010, p. 203 f. border merger (as addressed in 2. and 4., above). 2 The right of withdrawal is granted by Civil Code, Art. 2437 with respect to joint stock companies and by Civil C. Difference for Italian income tax purposes if ITACo Code, Art. 2473 with respect to limited liability compa- has a‘‘business purpose’’ for the restructuring nies. 3 Cartesio,Dec. 16, 2008, Case C-210/06. The recognition for tax purposes of the effects of acor- 4 See M.T.Soler Roch, The residence of the SE,inEuro- porate reorganisation and the availability of the ben- pean Taxation,Jan. 2004, p. 11 f.; O. Tho¨mmes, EC Law eficial tax regime for reorganisations are, in general, Aspects of the Transfer of Seat of an SE, ibid.,p.22f. subject to the condition that the reorganisation has a 5Some of Italy’stax treaties, e.g., the Italy-Canada and sound business purpose and is not designed to cir- Italy-United States treaties, do not lay down aspecific cri- cumvent Italian tax rules.16 terion, but simply provide that the competent authorities The Italian tax authorities can challenge transac- of the Contracting States are to attempt to settle dual resi- tions entered into by taxpayers based on acodified dence cases by mutual agreement. 6 anti-avoidance rule enshrined in Article 37–bis of OECD Model Convention, Art. 4(3) reads as follows: Presidential Decree No. 600/1973 (the statute govern- ‘‘where (. ..)aperson other than an individual is aresi- dent of both Contracting States, then it shall be deemed ing income tax assessment procedures) or based on a to be aresident only of the State in which its place of ef- more recent judicial doctrine rooted in the concept of fective management is situated.’’ the ‘‘abuse of rights.’’ 7 The country must not be considered by Italy to have a Under the anti-avoidance rule, the tax authorities privileged tax regime and must have entered into an are entitled to disregard ‘‘acts, facts and legal arrange- agreement on administrative assistance with Italy as ef- ments, included linked acts, etc., lacking avalid busi- fective ad Directive 2010/24/UE. The EEA includes, in ad- ness purpose, aimed at by-passing rights and duties dition to the 27 EU Member States, three non-EU provided for by the tax rules, and at obtaining tax re- Member States (Norway,Iceland and Liechtenstein): in ductions or tax reimbursements that would not be le- practice, the conditions set forth in ITC, Art. 166 mean 17 gally available.’’ The above provision applies only that, outside the EU, the deferral regime would currently where one or more expressly listed transactions are apply only to Norway. involved. The list includes most typical corporate reor- 8 Case C-371/10. See M. Mojana, S. Marchio`, Italy The ganisation transactions —mergers, exchanges of Transfer of aCompany’sTax Residence within the Euro- shares and others. pean Union: The New Italian Rule on Exit Taxation,inEu- The Italian Supreme Court has also adopted the ropean Taxation,Dec. 2012, p. 510 ff. 9 broader notion of the ‘‘abuse of rights.’’InDecision Directive 2005/56/CE was implemented in Italy by Leg- No. 8772 of April 4, 2008, the Court concluded that islative Decree No. 108 of May 30, 2008. AS regards the any transaction aimed at achieving an undue tax Directive, see M. Pannier, The EU cross border merger di- saving can be disregarded by the tax authorities rective -anew dimension for employee participation and unless the taxpayer provides proof of the existence of company restructuring,inEuropean Business Law Review,2005, p.1424 s. concurrent underlying economic reasons that appro- 10 Directive 90/434/CEE was implemented into Italian priately justify the transaction concerned. law by Legislative Decree No. 544 of Dec. 30, 1992, whose In light of the above, it is essential that the ‘‘business provisions were later transposed into ITC, Arts. 178 to purpose’’ofareorganisation be adequately identified 181. Directive 2005/19/CE was implemented into Italian and documented. law by Legislative Decree No. 199 of Nov.6,2007. 11 Commission of the European Communities, Commu- D. Treatment for Italian income tax purposes if FCo were nication of 19 December 2006. Exit taxation and the need an existing, unrelated foreign corporation, and ITACo for co-ordination of Member States’ tax policies, merged into FCo, with FCo surviving COM(2006) 825 fin. 12 See ITC, Art. 9, Para. 2. It is open to question whether The Italian tax regime for cross-border mergers, as income deriving from acontribution of shares to anon- outlined in A.2., above, would apply in exactly the resident company may alternatively be subject to the rule same way to amerger between related parties and a set forth in ITC, Art. 177, Para. 2, under which the capital merger between unrelated parties. In particular, gain (or loss) is equal to the difference between the book where the assets of the absorbed company did not value attributed to the shares received by the receiving remain connected with an Italian PE of the absorbing company and the tax basis of the shares contributed. This company,the hidden capital gains would be taxed latter regime may be more favourable (to the extent that based on the market value of the assets, even where the book value attributed to the shares by the receiving

64 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 company is lower than the market value of those shares) the further requirement (not mentioned in the Directive) and was conceived to apply to domestic transactions, al- that at least one of the contributing shareholders be resi- though, on aliteral interpretation, cross-border transac- dent in Italy. tions are not excluded. 15 ITC, Art.86, Para. 3. 13 Most of Italy’stax treaties provide for the exclusive 16 This topic was more widely addressed in an earlier taxation of capital gains on shares in the country of resi- issue of the Forum. See G. Rolle, Host Country Taxation of dence of the seller. Tax-Motivated Transactions: The Economic Substance 14 The conditions are listed in Directive 90/434/CEE, Arts. Doctrine. Italy,inTaxManagement International Forum, 3and 8, which is currently implemented into Italian law June 2010, p. 56. in ITC, Art. 178, Para. 1e). The latter provision introduces 17 Presidential Decree No. 600/1973, Art. 37 – bis,Para. 1.

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02/13 TaxManagement International Forum BNA ISSN 0143-7941 65 Host Country JAPAN

Yuko Miyazaki Nagashima Ohno &Tsunematsu, Tokyo

I. Relevant rules statutory exchanges of stock (‘‘kabushiki kokan’’)or company splits (‘‘kaisha bunkatsu’’)only with other ‘‘Japanese’’corporations. Accordingly,taking amerger A. Definition of aJapanese corporation under Japanese as an example, it is the established interpretation of tax law the Japanese corporation law that aJapanese corpo- or purposes of the Corporation TaxLaw ration is not legally allowed to merge with aforeign (CTL)1 and the Income TaxLaw (ITL),2 acor- corporation. Second, it is also the established inter- poration that has its head office in Japan will pretation of the Japanese corporation law that acor- F 3 be adomestic (Japanese) corporation. Under the cor- poration incorporated under the law of Japan (i.e., a poration law of Japan (including, inter alia,the Com- Japanese corporation) cannot change its place of in- panies Act,4 which provides for general rules corporation to aforeign jurisdiction, and aforeign applicable to Japanese corporations), acorporation corporation cannot change its place of incorporation incorporated under the laws of Japan is required to to Japan, without changing its legal identity.Inother have its head office in Japan and acorporation incor- words, acorporation’sredomiciliation or domestica- porated under the laws of aforeign jurisdiction is not tion is not allowed under the Japanese corporation allowed to register its head office in Japan. Accord- law. ingly,for purposes of the CTL and the ITL, aJapanese Another important legal constraint existed until corporation effectively means acorporation incorpo- 2006. That is, under Japanese corporation law,upon a rated under the laws of Japan and acorporation that merger or other relevant type of corporate reorganisa- is incorporated under the laws of ajurisdiction other tion transaction involving Japanese corporations, the than Japan is treated as aforeign corporation.5 consideration allowed to be given to the shareholders of one such Japanese corporation (for example, in the B. Constraints on corporate expatriation imposed on a case of amerger,shareholders of the merging/ Japanese corporation by Japanese corporation law disappearing corporation) was limited to either cash or the shares of the other party to the corporate reor- The expatriation of aJapanese corporation would in- ganisation transaction (for example, in the case of a evitably involve the transfer of either shares issued by merger,either cash or shares of the merged/surviving the Japanese corporation or assets held by the Japa- corporation). However,this constraint was lifted by nese corporation to aforeign corporation. From apri- an amendment to the Japanese corporation law that vate law perspective, and putting aside any regulatory, was enacted in 2005 and became effective in 2006 (the foreign exchange or other similar constraints that ‘‘2006 Corporation Law Amendment’’), and now the may apply depending on the facts involved (all of Japanese corporation law allows any kind of asset to which are outside of the scope of this article), such a be used as such consideration. Since the 2006 Corpo- transfer is legally possible either by way of acontrac- ration Law Amendment was introduced, it has tual arrangement or by way of certain corporate reor- become possible for aforeign corporation (FCo) to ac- ganisation transactions, such as mergers, statutory quire, through its subsidiary Japanese corporation exchanges of stock and company splits. (JSub), atarget Japanese corporation (JCo), through, 6 Of these two possibilities, legally Japanese corpora- in particular,atriangular merger, atriangular ex- 7 8 tions may,inprinciple, find it much more flexible to change of stock or atriangular company split ;in enter into acontractual arrangement than acorporate each such triangular corporate reorganisation, by the reorganisation transaction, because the latter is re- making of an arrangement to have JSub hold FCo quired to be effected within the constraints of, and in shares, JSub is allowed to exchange the shares of JCo compliance with, the Japanese corporation law.The held by its shareholders with such FCo shares under first of the constraints under the Japanese corporation the triangular corporate reorganisation transaction. law is that aJapanese corporation may engage in such Such atriangular merger or triangular exchange of corporate reorganisation transactions as mergers stock would enable FCo to hold 100 percent of the JCo (‘‘gappei’’), statutory stock transfers (‘‘kabushiki iten’’), shares either directly (in the case of atriangular

66 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 merger) or indirectly (through JSub, in the case of a to aJapanese corporation considering acorporate ex- triangular exchange of stock). Such atriangular cor- patriation, and it is beyond the scope of this article to porate restructuring transaction may be used by FCo address any other issues. typically in two situations: first, where aforeign cor- poration, FCo, acquires aJapanese corporation, JCo, C. Relevant Japanese tax rules with FCo’sown stock; and second, where aJapanese corporation, JCo, expatriates itself to aforeign juris- diction. It is necessary to keep in mind that the viabil- 1. General ity of any corporate expatriation plan involves, and Under the CTL and the ITL, any transfer of assets (in- depends on, various non-tax issues and various legal cluding shares of stock) or exchange of assets (includ- and regulatory considerations, in addition to the tax ing shares of stock) is arealisation event for income issues and tax considerations, and that such issues tax purposes, unless otherwise specifically provided and considerations may well vary depending on the under the law.Accordingly,acorporate expatriation facts involved, even if the core of the plan is one of the transaction involving any such transfer or exchange triangular corporate reorganisation transactions re- generally would require the transferor of the shares or ferred to above. Putting such issues and consider- assets to recognise income, and would trigger income ations aside, the key steps taken to implement such taxation under the CTL and the ITL. triangular corporate reorganisation transactions, gen- By way of exception to the foregoing general rule, erally,include, in the first situation: FCo’screating a the recognition of gains or losses from such atransfer wholly-owned Japanese subsidiary,JSub; the transfer or exchange can be deferred under the CTL and the of FCo shares (whether treasury stock or newly issued ITL if the transfer or exchange occurs as part of a shares) from FCo to JSub; either JCo’smerging into qualified corporate reorganisation transaction, as JSub or JCo and JSub engaging in astatutory ex- more fully defined therein. change of stock, upon either of which JSub transfers the FCo shares (as transferred from FCo to JSub) to When the 2006 Corporation Law Amendment was the JCo shareholders in exchange for the JCo shares enacted, asignificant concern was raised by business held by the JCo shareholders. Likewise, generally,the to the effect that the Amendment might make foreign key steps taken in the second situation include: JCo corporations (in particular,listed foreign corpora- and/or its shareholders having aforeign corporation, tions) interested in acquiring Japanese corporations FCo, created or acquired; FCo’screating its wholly- by using their own stock. Another significant concern owned Japanese subsidiary,JSub; FCo’stransferring was raised to the effect that the Amendment could ad- its shares (whether treasury stock or newly-issued versely erode Japanese corporations’ Japanese shares) to JSub; and either JCo’smerging into JSub by income tax base because the Amendment makes it way of atriangular merger or JCo and JSub engaging possible for aJapanese corporation to achieve corpo- in astatutory exchange of stock by way of atriangular rate expatriation. With such concerns as the back- exchange of stock, upon either of which JSub trans- ground, Japanese tax laws (most notably,the CTL, the 9 fers FCo shares (as transferred from FCo to JSub) to ITL and the Special Taxation Measures Law (STML) ) the JCo shareholders in exchange for the JCo shares were amended almost concurrently with the 2006 Cor- held by the JCo shareholders. poration Law Amendment not only to impose special conditions for triangular corporate reorganisation Thus, it is fair to say that the 2006 Corporation Law transactions to qualify as tax-free reorganisations but Amendment has opened up an avenue for Japanese also to introduce ‘‘anti-inversion regulations.’’The key corporations wishing to achieve corporate expatria- elements in this tax legislation that may impact the tion. However,the Japanese legislature also enacted tax treatment of the parties involved in acorporate ex- certain anti-corporate expatriation provisions in the patriation plan using one of the triangular corporate Japanese tax laws at the time the 2006 Corporation reorganisation transactions are set out below.The ex- Law Amendment came into force. Since then, how planations below are intended to be general in nature corporate expatriation can be effected in the most tax- and are not exhaustive. efficient manner has, in practice, been the subject of discussion. Japanese corporations with business ac- tivities overseas and closely-held Japanese corpora- 2. Triangular merger tions whose owners are interested in estate planning seem to show akeen interest in the subject; however, a. Taxation of JCo the implementation and execution of any plans of cor- porate expatriation have not yet become prevalent in Under the CTL, on amerger between two Japanese Japan. corporations, the general rule is that the merging/ It should be noted that it is very likely —indeed disappearing corporation is treated as transferring its almost certain —that, if acorporate expatriation plan assets and liabilities to the merged/surviving corpora- 10 is to be structured for aJapanese corporation, various tion at their fair value at that time. By way of an ex- tax issues as well as various legal issues, both Japa- ception to the foregoing general rule, the CTL nese and foreign, must be examined and resolved sat- provides that, if the merger in question falls within the isfactorily and there may not always be a category of atax-qualified merger (tekikaku gappei), straightforward answer to such issues. This article fo- the recognition of income is deferred by deeming the cuses only on the question of the general tax implica- transfer of assets and liabilities on the merger to take 11 tions of some basic legal structures that may place at book value. technically be available (subject to the satisfactory As noted in B., above, atriangular merger between resolution of any legal and regulatory issues involved) JSub and JCo could be atax-qualified merger if,

02/13 TaxManagement International Forum BNA ISSN 0143-7941 67 among other things: (1) 100 percent of the shares of triangular merger (that would otherwise be atax- JSub are directly owned by FCo immediately before qualified triangular merger) where the triangular the merger and FCo’s100 percent controlling relation- merger is used to erode the Japanese tax base. These ship with JSub is intended to continue;12 and (2) the rules would generally make it difficult for aJapanese shareholders of the merging corporation (JCo) receive corporation to execute acorporate expatriation in a no cash or assets other than the shares of FCo in ex- tax-qualified manner. change for their JCo shares on the merger,13 in addi- tion to the parties to the merger satisfying such other b. Taxation of the JCo shareholders requirements as are more fully prescribed in the law and its subordinated regulation and that apply to In principle, any transfer of shares, by way of merger normal (non-triangular) mergers between Japanese or otherwise, requires the transferor to realise capital corporations;14 provided, however,that atriangular gain or loss, unless otherwise provided in the relevant merger that meets the above requirements is never- tax law; provided, however,that in the case of atrans- theless treated as anon-tax-qualified merger if it falls fer by way of merger,ifthe transferor (who is ashare- into the category of acorporate reorganisation among holder of the merging corporation) transfers the specified group companies where the following condi- merging corporation’sshares in exchange for the tions are satisfied:15 shares of the merged corporation (or,inthe case of a triangular merger,the shares of the direct parent of s the parties to the triangular merger fail to satisfy the merged corporation20)and receives no cash or the conditions concerning: the mutual relevance of other assets,21 then such transfer will be deemed to the of the parties; the ratio of the rev- take place at book value, thus deferring the recogni- enues of the parties; the business of the merged cor- tion of capital gain or loss,22 except that if any JCo poration not being amere holding of equity and shareholder is anonresident or aforeign corporation, debt or the licensing of certain intangible rights; the such deferral does not apply to such JCo share- merged corporation’shaving afixed place of busi- holder.23 Further,the shareholders of the merging cor- ness and management in Japan; and the non- poration will be treated as receiving deemed existence of excessive interlocking of the dividends on the merger by virtue of their receipt of directorship and employees of the merged corpora- assets (cash, shares or other assets) in exchange for tion with those of the merging corporation, and the merging corporation’sshares held by them, except those of the merged corporation with those of its where the merger in question is atax-qualified foreign parent corporation;16 merger.24 s both parties to the triangular merger are within the On atriangular merger,where the JCo shares are ex- same group (if one of the parties to the triangular changed only for FCo shares, the exchange is a‘‘trans- merger (JCo or JSub) owns more than 50 percent of fer’’ofshares for income tax purposes. Ashareholder the other party’sshares, directly or indirectly,or of JCo who receives FCo shares in exchange for the more than 50 percent of the shares issued by each JCo shares held by such shareholder would, in prin- party to the triangular merger are owned by the ciple, be required to recognise the receipt of deemed same parent, JCo and JSub are within the same dividends; if, however,the triangular merger is specified group);17 and achieved in the form of atax-qualified triangular s (1) FCo is a‘‘low-tax jurisdiction corporation’’(if merger,nodeemed dividends are required to be recog- FCo has its head office in ajurisdiction in which no nised by the JCo shareholders. If and to the extent the income tax is imposed on the income of acorpora- value of the FCo shares received by aJCo shareholder tion or the effective rate of tax levied on FCo’sprof- exceeds the amount of JCo’scapital corresponding to its in either of the two business years preceding the the JCo shares exchanged for FCo shares by such year in which the triangular merger is executed is shareholder,the amount of deemed dividends to be 20 percent or less, then FCo will be treated as alow- recognised is such excess amount.25 tax jurisdiction corporation unless FCo has sub- stance of its own in such low-tax jurisdiction by 3. Triangular exchange of stock virtue of satisfying certain requirements that are more fully prescribed in the relevant regulations18); and (2) the substance of FCo’sbusiness does not a. Taxation of JCo meet the requirements specified in the relevant cabinet order (if FCo’sprimary business is to hold Under the CTL, statutory exchange of stock transac- equity or debt securities, to license patents, know- tions are classified as either tax-qualified exchanges of how,copyrights or other similar intangible rights or stock or non-tax-qualified exchanges of stock. The to lease ships or aircraft, FCo’sbusiness will not latter (non-tax-qualified exchanges of stock) trigger a meet such requirements, or if FCo’sprimary busi- mandatory revaluation of real property and certain ness is something other than the foregoing, in order other assets and liabilities of the ‘‘to-be-subsidiary cor- for FCo to satisfy such requirements, FCo is re- poration,’’which revaluation would subject the to-be- quired to have afixed place of business in the coun- subsidiary corporation to corporate income taxation try in which its head office is located, and to at the time of the statutory stock exchange with re- operate, control and manage such place by itself spect to unrealised gains and losses calculated based and, in addition, FCo is required to derive more on such revaluation.26 than 50 percent of its revenue from dealings with Atax-qualified exchange of stock is more fully de- non-related parties19). fined in the CTL. As noted in B., above, atriangular ex- It is clear from these rules that they were enacted to change of stock between JSub and JCo could be atax- disallow the deferral of income taxation by means of a qualified exchange of stock if requirements that are

68 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 substantially the same as those described in 2.a., and/or nonresident individuals having acertain spe- above, in connection with atriangular merger are sat- cial relationship to any of such resident individuals or isfied. As in the case of atriangular merger,the legis- Japanese corporations, and FSub is alow-tax jurisdic- lator has enacted rules to disallow the use of a tion corporation (in the same sense as is described in triangular exchange of stock (which would otherwise 2.b., above); and (2) FCo owns 80 percent or more of be atax-qualified triangular exchange of stock) for the shares issued by JCo or FCo, and JCo is respec- purposes of enjoying the deferral of Japanese income tively controlled, whether directly or indirectly,bythe taxation where the triangular exchange of stock is same person through 80 percent or more sharehold- used to achieve the expatriation of aJapanese corpo- ings,30 and FCo is alow-tax jurisdiction corpora- ration to alow-tax jurisdiction.27 tion.31 Thus, realistically,atransfer of assets and liabilities b. Taxation of the JCo shareholders from aJapanese corporation to aforeign corporation by way of acontribution-in-kind would not be an Astatutory exchange of stock involves a‘‘transfer’’for option for aJapanese corporation wishing to achieve income tax purposes of the shares of ato-be- acorporate expatriation, unless the situation involved subsidiary corporation from its existing shareholders did not require tax-deferral treatment. to the ‘‘to-be-parent corporation;’’thus, such atrans- fer is, in principle, ataxable event for the sharehold- ers of the to-be-subsidiary corporation. However,if 5. Anti-inversion regulations the shareholders receive nothing other than shares of The Japanese anti-inversion regulations32 were en- the to-be-parent corporation, or,inthe case of atrian- acted as acountermeasure to any potential use by a gular merger,shares of the direct parent foreign cor- Japanese corporation (JCo) of the triangular corpo- poration of the to-be-parent corporation, then rate reorganisation transactions that became avail- recognition of the capital gain or loss derived on the able as aresult of the 2006 Corporation Law transfer will be deferred or deemed ignored.28 Amendment to make itself asubsidiary of aforeign No dividends are deemed to be received by the corporation (FCo). In essence, if any such corporate shareholders of the to-be-subsidiary corporation on expatriation is effected by JCo and/or its shareholders, the exchange of stock, regardless of whether the ex- the Japanese anti-inversion regulations require any change of stock is atax-qualified exchange of stock or FCo shareholder that is either aJapanese resident in- anon-tax-qualified exchange of stock, simply because, dividual or aJapanese corporation to include such as far as the to-be-subsidiary corporation is con- FCo shareholder’sproportionate share in the undis- cerned, the statutory exchange of stock merely causes tributed profits of FCo as its income. The regulations achange in its shareholders. achieve this by deeming that such undistributed prof- its are such FCo shareholder’sown income and taxing 4. Transfer of assets by way of acontribution-in- such deemed income in Japan if certain conditions kind are met. For illustrative purposes, if JCo makes itself a Under the Japanese corporation law,itislegally pos- subsidiary of FCo through JSub by way of atriangular sible for aJapanese corporation (JCo) to contribute its merger (in which case JSub is the merged/surviving assets, liabilities or business to aforeign corporation corporation into which JCo is merged), and if the fol- in exchange for the foreign corporation’sshares (i.e., a lowing conditions are met, the Japanese anti- ‘‘contribution-in-kind’’). Under the CTL, such a inversion regulations would apply: contribution-in-kind is arealisation event, so that JCo s immediately before JCo’scorporate expatriation would generally be subject to income taxation with re- transaction is consummated, not more than five spect to any gains or losses arising from such persons and any individual or corporation related contribution-in-kind. By way of an exception to this to any one of such persons own, in aggregate, 80 rule, the CTL provides that, if aJapanese corporation percent or more of the shares issued by JCo (the makes atax-qualified contribution-in-kind, as more shareholders who are included in these categories fully defined in the CTL, recognition of the income of shareholders are referred to as ‘‘Specified Share- from the contribution-in-kind is deferred. holders’’); However,ifand to the extent aJapanese corpora- s the Specified Shareholders and any individual or tion (JCo) transfers, by way of acontribution-in-kind, corporation having certain special relationships to to aforeign corporation, any assets and liabilities that any of such Specified Shareholders (collectively, belong to JCo’soffices in Japan (except for shares of ‘‘Specially-Related Shareholders’’), in aggregate, stock issued by aforeign corporation if JCo owns 25 own, indirectly through one or more related foreign percent or more of the issued shares of that foreign corporations (such as, for example, FCo), 80 per- corporation) and any real property and mining rights cent or more of the shares issued by JCo or another in Japan, the contribution-in-kind does not qualify as Japanese corporation to which all or almost all of atax-qualified contribution-in-kind.29 Further,asa the assets and liabilities of JCo have been trans- result of the tax law amendment following the 2006 ferred by way of amerger,company split, business Corporation Law Amendment, the transfer by JCo of transfer or other arrangement; and shares in any of its foreign subsidiaries (FSub) by way s either arelated foreign corporation mentioned in of acontribution-in-kind to its direct or indirect the preceding bullet has its head office in ajurisdic- parent foreign corporation (FCo) is also disqualified tion in which no income tax is imposed on acorpo- from being atax-qualified contribution-in-kind if: (1) ration’sincome, or the effective rate of income tax more than 50 percent of the shares issued by FSub are on such related foreign corporation in the relevant owned by resident individuals, Japanese corporations business year is 20 percent or lower (any such re-

02/13 TaxManagement International Forum BNA ISSN 0143-7941 69 lated foreign corporation is called a‘‘Foreign Re- C. Difference for Japanese income tax purposes if JCo lated Corporation’’). has a‘‘business purpose’’ for the restructuring If all of the above conditions are met, then any Specially-Related Shareholder who is either aJapa- As discussed in I.C., above, Japanese tax laws already nese resident individual or aJapanese corporation is include certain anti-inversion rules and regulations. subject to income taxation in Japan with respect to its ‘‘Business reason’’isnot explicitly mentioned in these proportionate share in the undistributed retained rules and regulations. Accordingly,whether the rules earnings of each Foreign Related Corporation as the and regulations are applied to JCo does not hinge on amount of such undistributed retained earnings shall whether JCo has any ‘‘business reason’’ per se for the be deemed to constitute such Specially-Related Share- restructuring. It should be noted, however,that there holder’sown income.33 Because of the introduction of is one special anti-avoidance article in the CTL appli- 41 these anti-inversion regulations, using atriangular cable to corporate reorganisation transactions. Pur- corporate reorganisation transaction to achieve atax- suant to this article, the tax authorities are authorised free corporate expatriation has become difficult for to negate and recharacterise ataxpayer’sact or calcu- closely-held Japanese corporations. lation if any corporate reorganisation transaction (in- cluding, among others, amerger and astatutory exchange of stock) entered into by the taxpayer,re- II. Forum questions sults in the taxpayer unjustly decreasing its corpora- tion tax liability.How this article is to be interpreted has been the subject of significant debate. Twocases A. Viability under Japanese corporate law.Treatment for are currently pending before the Tokyo District Court Japanese income tax purposes and ajudicial view on the interpretation of the article Scenarios 1.,34 2.35 and 4.36 of the Forum Questions is expected to be issued, for the first time, in the forth- would not be viable under the Japanese corporation coming judgment in these two cases. The ‘‘business law.Asexplained in I.B., above, it is not legally pos- purpose’’may be of some relevance when it comes to sible to change JCo’sstatus as aJapanese corporation the question of the circumstances under which the tax to that of aforeign corporation under the Japanese authorities are allowed to exercise their authority corporation law,and because acorporation incorpo- under this anti-avoidance article. rated under the laws of Japan is always treated as a Japanese corporation for purposes of Japanese tax D. Treatment for Japanese income tax purposes if FCo law,scenario 1. is not viable. Scenarios 2. and 4. are were an existing, unrelated foreign corporation, and JCo not legally viable because under the Japanese corpo- merged into FCo, with FCo surviving ration law,aJapanese corporation cannot merge with As JCo cannot merge with FCo under the Japanese aforeign corporation. corporation law,the suggested scenario would not be Scenarios 3.37 and 5.38 are legally possible; however, legally viable. However,if, for example, FCo were to for income tax purposes, the shareholders of JCo enter into atriangular merger or atriangular ex- would need to recognise capital gain or loss as aresult change of stock, FCo being totally unrelated to JCo, of their transfer of their JCo shares to FCo because an this would no longer constitute acorporate expatria- ‘‘exchange’’isgenerally treated as ataxable transfer tion transaction, but would be atypical arm’s-length for Japanese tax law purposes. The liquidation of JCo acquisition transaction –and in fact there is at least envisaged in scenario 3. could also trigger further one widely published precedent where atriangular ex- taxation, because any distribution of residual assets change of stock was used to consummate such an ac- from JCo to the then shareholder (FCo) would likely quisition, and the triangular exchange of stock in such include deemed dividends, which are subject to Japa- precedent, reportedly,worked effectively.42 nese withholding tax unless otherwise exempted Given that the effective corporate income tax rate in under the terms of an applicable tax treaty. Japan is quite high (according to the calculation pub- lished by the Ministry of Finance, the effective corpo- Scenario 6.39 would not be legally viable for the rate income tax rate in Japan, inclusive of both reason mentioned in footnote 6. Scenario 7.40 is le- national level and local level taxes, is currently 38.48 gally viable, but JCo’ssale of its assets and liabilities to percent, which rate will be reduced to 35.93 percent FCo would certainly be arealisation event for Japa- once the temporarily introduced Rehabilitation Cor- nese income tax purposes. Thus, JCo would be subject poration Taxislifted in afew years), it is not surpris- to Japanese taxation with respect to capital gains and ing if there are many Japanese corporations that are losses realised on such sale. Further,with respect to at least potentially considering engaging in acorpo- the distribution of residual assets from JCo to FCo on rate expatriation. In that sense, this topic is about to liquidation, the same comments apply as were made receive serious attention from more Japanese corpo- in relation to scenario 3. rations than ever,although in-depth analysis and dis- cussion of the subject is still underway and has not yet B. Other scenarios that JCo might consider and their matured. treatment for Japanese income tax purposes

As discussed in I., above, there are certain legal forms NOTES available to JCo for its corporate expatriation, al- 1 Law No. 34 of 1965, as amended. though there are certainly many legal and tax issues 2 Law No. 33 of 1965, as amended. that need to be addressed and resolved in order to 3 CTL, Art. 4, item 3and ITL, Art. 2, item 6. implement any corporate expatriation plan. 4 Law No. 86 of 2005, as amended.

70 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 5 CTL, Art. 2, item 4and ITL, Art. 2, item 7provide that a 12 CTL, Art. 2, item 12-8 and Corporation TaxLaw En- foreign corporation means any corporation other than a forcement Order (CTLEO), Art. 4-3(1). domestic (Japanese) corporation. 13 CTL, Art. 2, item 12-8. 14 6 Under the Companies Act, on amerger,itmust be the CTL, Art. 2, item 12-8 of CTL and CTLEO, Art. 4-3(2) merged corporation that transfers assets to the share- through (4). 15 holders of the merging corporation in exchange for See STML, Art. 68-2-3(1). 16 shares in the merging corporation (cf. Companies Act, For more details, see Special Taxation Measures Law Art. 749(1)) and, accordingly,the shareholders of the Enforcement Order (STMLEO), Art. 39-34-3. 17 merged corporation would not be able to exchange their STML, Art. 68-2-3(1)(i) and (5)(ii) and STMLEO, Art. shares in the merged corporation for other assets. Thus, 39-34-3(10). 18 while atriangular merger (JCo merges into JSub) could See STML Art. 68-2-3(1)(ii) and (5)(i) and STMLEO be used to have the JCo shareholders to exchange their Art. 39-34-3(5) through (9). 19 JCo shares for FCo shares, areverse triangular merger See for more details, STML, Art. 68-2-3(1) (ii) and (JSub merges into JCo) would not be viable for purposes STMLEO, Art. 39-34-3(5) through (7). 20 of having the JCo shareholders receive FCo shares. If, for See CTL, Art. 61-2(2) and CTLEO Art. 119-7-2. 21 some reason, it is necessary to retain JCo’sidentity,e.g., CTL, Art. 61-2(2). 22 because JCo needs to retain an important license in order CTL, Art. 61-2(2) and Income TaxLaw Enforcement to continue its business, JCo’sidentity can be retained if Order,Art. 112(1). 23 FCo acquires JCo by way of atriangular exchange of See CTLEO, Art. 188(1), item (xviii). 24 stock (see fn. 7, below), as opposed to atriangular merger. CTL, Art. 24(1), item (i) and ITL, Art. 25(1), item 1. 25 7 Atriangular exchange of stock is avariation of astatu- CTL, Art. 24(1), item (i) and ITL, Art. 25(1), item 1. 26 tory exchange of stock, which is one form of corporate re- CTL, Art. 62-9. 27 organisation transaction provided for in the Companies For more details, see STML, Art. 68-2-3(3) and (5) and Act (see Companies Act, Art. 2, item xxxi and Arts. 767 et. STMLEO, Art. 39-34-3(4) through (7). 28 seq.). Astatutory exchange of stock transaction is typi- CTL, Ar.61-2(9) and ITL, Art. 57-4(1). 29 cally carried out between two unrelated Japanese corpo- CTL, Art. 2, item12-14 and CTLEO, Art. 4-3(9). 30 rations in order to make one of them (a ‘‘to-be-subsidiary STML, Art. 68-2-3(5)(iv) and STMLEO, Art. 39-34- corporation’’) awholly-owned subsidiary of the other (a 3(14). 31 ‘‘to-be-parent corporation’’). Subject to the meeting of STML, Art. 68-2-3(5)(iv). 32 certain requirements under the Companies Act, the For more details, see STML, Arts. 40-7 through 40-9 shares of the to-be-subsidiary corporation held by its ex- and Arts. 66-9-2 through 66-9-5 and their respective sub- isting shareholders are, by operation of law,deemed to be ordinated cabinet orders. 33 transferred to the to-be-parent corporation and the share- STML, Art. 66-9-2(1). 34 holders of the to-be-subsidiary corporation, in exchange JCo remains the same business entity but effects a for their shares in the to-be-subsidiary corporation, are change (of some type) that changes it from aJapanese deemed received cash or other assets as determined by corporation into an FC corporation for Japanese income agreement between the to-be-subsidiary corporation and tax purposes. 35 the to-be-parent corporation, which agreement is re- FCo is created with anominal shareholder.JCo then quired to be approved by the respective corporations’ merges into FCo, with FCo surviving. The shareholders of general meetings of shareholders. In the case of atriangu- JCo receive stock in FCo. 36 lar exchange of stock between ato-be-parent corporation JCo creates FCo as awholly owned subsidiary.JCo then (JSub) and ato-be-subsidiary corporation (JCo), shares merges into FCo, with FCo surviving. The shareholders of of the direct parent foreign corporation (FCo) of the to- JCo receive shares in FCo. 37 be-parent corporation (JSub), are to be given to the JCo FCo is created with anominal shareholder.The share- shareholders in exchange for their JCo shares. Accord- holders of JCo then transfer all of their stock in JCo to ingly,onconsummation of the triangular exchange of FCo in exchange for stock of FCo. JCo then liquidates. 38 stock, FCo will own 100 percent of the shares issued by FCo is created with anominal shareholder.The share- JSub, which in turn will own 100 percent of the shares holders of JCo then transfer all of their stock in JCo to issued by JCo, and the previous JCo shareholders will FCo in exchange for stock of FCo. 39 become shareholders of FCo, together with any existing FCo is created with anominal shareholder and in turn shareholders of FCo. Atriangular exchange of stock could creates JMergeCo, awholly owned limited liability busi- be followed by amerger between JSub and JCo. ness entity formed under the law of Japan and treated as acorporation for Japanese income tax purposes. 8 Acompany split is another form of corporate reorgani- JMergeCo then merges into JCo, with JCo surviving. The sation transaction provided for in the Companies Act (see shareholders of FCo receive stock in JCo. Companies Act, Art. 2, items xxvii and xxviii and Arts. 757 40 FCo is created with the same corporate structure as et. seq.). Atriangular company split may be used if only a JCo, and with the same shareholders with the same pro- part of JCo business is to be transferred to JSub. As such portional ownership. JCo then sells all its assets and li- apartial transfer is not necessarily within the scope of abilities to FCo and liquidates. this article, this article focuses primarily on triangular 41 CTL, Art. 132-2. mergers and triangular exchanges of stock. 42 In 2008, Citigroup, through its 100 percent Japanese 9 Law No. 26 of 57, as amended. subsidiary,acquired Nikko Cordial Securities (a Japanese 10 CTL, Art. 62(1). corporation) by way of atriangular exchange of stock 11 CTL, Art. 62-2(1). preceded by atakeover bid.

02/13 TaxManagement International Forum BNA ISSN 0143-7941 71 Host Country MEXICO

Terri L. Grosselin Ernst &Young LLP,Miami

I. Introduction transfer of the company’sassets;1 and (2) adeemed re- duction of the company’scapital.2 The company’s enerally speaking, Mexico’stax rules do not assets are deemed to be transferred at their fair include adefinition of what is considered a market value; any resulting gain must be recognised G Mexican corporation or aforeign corpora- and is taxed at the corporate income tax rate of 30 per- tion, except by reference to Mexican corporate law in cent.3 Aliquidation also results in adeemed distribu- the context of certain reorganisations. Rather,Mexi- tion in exchange for shares (capital redemption), i.e., can tax treatment is generally based on the residence the liquidating company is deemed to distribute cash of acorporate entity.AMexican resident entity is sub- and property to cancel the shares issued to its share- ject to income tax in Mexico on aworldwide basis. A holders. nonresident entity is subject to income tax in Mexico As regards the redemption of the shares from the only on its Mexican-source income. shareholders, this would be tax-free to the extent the distribution is not recharacterised as adividend and is II. Forum questions not in excess of previously taxed earnings. Whether a distribution made by aMexican company triggers For purposes of the following analysis, HC will be re- income tax at the company level depends upon the ap- ferred to as Mexico and HCo as MexCo. plication of the capital reduction rules contained in the MITL. Capital redemptions are non-taxable to the A. Viability under Mexican corporate law.Treatment for extent that the amount being redeemed is less than Mexican income tax purposes the balances of the company’spaid-in Capital Contri- bution Account (CUCA) and After TaxEarnings Ac- count (CUFIN). 1. MexCo remains the same business entity but effects achange (of some type) that changes If the distribution exceeds the distributing compa- it from aMexican corporation into an FC ny’sCUCA and CUFIN balances, the excess amount will be subject to tax at arate of 30 percent at the level corporation for Mexican income tax purposes of the company on agrossed up basis.

a. Income tax b. Flat rate business tax and value added tax

The definition of aMexican tax resident is provided in In addition to income tax, two other Mexican taxes Article 9, Section II of the Federal TaxCode (FTC). Ar- need to be considered. The treatment of the migration ticle 9provides that alegal entity will be considered a of MexCo out of Mexico for purposes of these other Mexican resident if the site of the effective manage- taxes would depend on whether the assets concerned ment or the principal administration of the company were owned directly by MexCo and the manner in is in Mexico. As such, the place of incorporation is not which achange in MexCo’sresidence was effected. arelevant factor in determining residence in Mexico. The two additional taxes concerned are the flat rate Thus, amere change in the corporate entity would not business tax (IETU) and the value added tax (VAT). affect tax treatment to the extent the management of IETU effectively operates as aminimum tax in rela- the company continued to be carried out in Mexico. tion to income tax, at arate of 17.5 percent, and is trig- However,achange of tax residence would be ataxable gered by the sale or disposition of property,the event for Mexican income tax purposes. If the place of rendering of independent services and the temporary management of MexCo was moved from Mexico to use or enjoyment of property.Generally,IETU need FC, this would constitute achange of residence, which only be paid if it exceeds the corresponding income would be considered ataxable event for Mexican tax liability.VAT is paid on the transfer of most goods income tax purposes. and services in Mexico at the rate of 16 percent and at Under the Mexican Income TaxLaw (MITL), a the rate of 11 percent in border zones. change of residence of acompany is considered aliq- To the extent MexCo owns only shares in subsidiar- uidation, and consequently: there is: (1) adeemed ies, neither IETU nor VATshould apply,asthe trans-

72 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 fer of shares is exempt from both IETU and VAT. 3. FCo is created with anominal shareholder.The However,ifMexCo owns other assets, the nature of shareholders of MexCo then transfer all of their the migration of residence would have to be evaluated stock in MexCo to FCo in exchange for stock to determine whether it gives rise to ataxable transfer in FCo. MexCo then liquidates for purposes of these taxes. In the case of achange in MexCo’stax status by virtue of achange in its residence without any change a. Income tax in the legal entity,the liquidation provisions should Under the MITL, any net gain from the sale of stock generally not apply to trigger an IETU or aVAT liabil- issued by aMexican company is subject to income tax ity.Asthe deemed liquidation provisions are included regardless of whether the shareholders are Mexican only in the MITL, if there is amere migration of the residents or nonresidents. Mexican resident share- residence of MexCo by virtue of achange in the man- holders would generally be taxed at the rate of 30 per- agement of the entity,there would be no legal transfer cent on the net gain on the sale. However,inthe case of assets that would be subject to IETU or VAT. The of nonresident shareholders, the tax is imposed at a scenario under consideration here would not trigger rate of 25 percent on the gross value of the shares, any consequences under either the IETU Law or the unless certain requirements are met, in which case the VATLaw,since on achange of residence effected in tax is 30 percent of the net gain —i.e., the same tax this manner,there would be no actual sale or transfer that Mexican resident sellers would pay.Inthe case of of assets to trigger either IETU or VATliability. shareholders resident in certain tax havens, the rate However,itmay also be possible to change the resi- would be 40 percent of the gross value of the shares. dence of MexCo by ‘‘re-domesticating’’ittoFCand The cost of shares for tax purposes is calculated in changing its place of incorporation. In this case, the one of two different ways, depending on the period of laws of FC would have to be reviewed to evaluate ownership of the shares. The cost of shares held for a whether there was alegal transfer of assets to the new period of less than 12 months is computed taking into entity or whether MexCo continues in anew form. If account the acquisition cost of the shares, dividend there is alegal transfer of the assets, the income tax distributions and capital reimbursements made consequences as described above should be the same; during the ownership period. The cost of shares held however,there might also be VATand IETU tax conse- for aperiod of 12 months or more is determined quences, as such atransfer could be ataxable transfer taking into account, among other things, the acquisi- under the general tax laws. In this case, VATof16per- tion cost of the shares, the CUFIN balance of the issu- cent could be due on the value of the assets trans- ing company,the tax losses of the issuing company ferred and would not be recoverable by anonresident. and capital reimbursements made during the owner- Further,IETU would be due at arate of 17.5 percent ship period.6 on the value of the assets transferred. Under certain of the tax treaties entered into by Mexico, the transfer of shares in this scenario could 2. FCo is created with anominal shareholder. be regarded as constituting areorganisation that MexCo then merges into FCo, with FCo surviving. would not be taxable in Mexico either as adeferred The shareholders of MexCo receive stock in FCo gain or as atransaction providing acarryover basis. In addition, depending on the residence status of the Mexico has rules that provide for tax-free mergers; MexCo shareholders, it might be possible for them to however,one of the requirements for amerger to obtain aruling allowing them to defer Mexican taxa- qualify for tax-free treatment is that the parties to the tion on the gain arising on the transfer of their MexCo merger are Mexican residents. As such, this scenario shares. However,the liquidation of MexCo would gen- would not be considered atax-free merger,unless the erally trigger recognition of the gain so deferred. company into which MexCo merges is resident in The subsequent liquidation of MexCo would give Mexico for tax purposes. However,for purposes of rise to the same consequences as are set out in the this analysis, it is assumed that the intention is to analysis of the scenario in 1., above. move MexCo to FC for tax purposes and across- border merger that would achieve this result cannot b. Flat rate business tax and value added tax be effected tax-free. Under the FTC and the MITL, amerger is generally Under this scenario, the IETU and VATconsequences treated as atransfer of assets that results in ataxable would have to be considered, as an actual transfer of gain to the extent the market value of the assets trans- assets takes place on the liquidation of MexCo. How- ferred exceeds their adjusted tax basis.4 However,by ever,asdescribed in relation to the scenario in 1., way of an exception to this general rule, if amerger above, the transfer of shares would not be subject to between Mexican resident entities meets certain re- either IETU or VAT. quirements, it should not be treated as ataxable trans- fer of assets, and no gain should be deemed triggered 4. MexCo creates FCo as awholly owned as aresult of the transfer under the merger.5 However, subsidiary.MexCo then merges into FCo, with as already noted, aprimary requirement for atax-free FCo surviving. The shareholders of MexCo merger is that the merger should occur between Mexi- receive stock in FCo can tax resident entities. In this scenario, IETU and VATcould be due, de- a. Income tax pending on what assets are owned by MexCo. It should be noted that if aVAT liability was triggered, as Since the merger would be implemented between a anonresident entity FCo would generally not be able Mexican resident company and anonresident com- to recover the VATcharge. pany,itwould generally not be treated as atax-free

02/13 TaxManagement International Forum BNA ISSN 0143-7941 73 merger from aMexican perspective (see 2., above). In- is nonresident for Mexican tax purposes. This transfer stead, MexCo would be deemed to: (1) transfer its will, therefore, be considered subject to the general assets to FCo; (2) liquidate; and (3) distribute cash and rule on transfers of shares explained at 3.a., above. property to cancel the shares issued to its sharehold- ers. 7. FCo is created with the same corporate structure as MexCo, and with the same b. Flat rate business tax and value added tax shareholders with the same proportional ownership. MexCo then sells all of its assets (and Under this scenario, the IETU and VATconsequences would have to be considered, as an actual transfer of liabilities) to FCo and then liquidates assets takes place, unless the only assets transferred This transaction would be taxable in Mexico for both are shares in which case, the transfer would not be income tax and IETU and VATpurposes, as described subject to either IETU or VAT. in 1.b., above. The sale of the assets would be taxable in Mexico, as there is no provision under Mexican law 5. FCo is created with anominal shareholder.The that would allow for the transfer of the assets of the shareholders of MexCo then transfer all of their business on atax-free basis. stock in MexCo to FCo in exchange for stock in FCo B. Other scenarios that MexCo might consider and their treatment for Mexican income tax purposes As discussed in relation to the scenario in 3., above, the transfer of shares in MexCo would be ataxable Depending on what assets are owned by MexCo, it event for Mexican tax purposes. The amount of tax may be possible to structure the change in ownership payable would depend on the residence status of the of subsidiaries through adilution mechanism MexCo shareholders. In this regard, Mexico does not whereby MexCo’sownership of such subsidiaries is di- consider ashare-for-share exchange to be atax-free luted over time by FCo investing in such subsidiaries. reorganisation; rather the transfer of shares in ex- It is not clear that under the relevant Mexican tax change for other shares constitutes ataxable sale, rules such an operation would be treated as asale by even if made as acapital contribution. MexCo of its ownership interest in the subsidiaries. Mexico does, however,have arule that allows for the deferral of taxation of gains arising on transfers of C. Difference for Mexican income tax purposes if MexCo shares within an economic group, if certain condi- has a‘‘business purpose’’ for the restructuring tions are met and aruling is obtained in advance. As well as requiring an advance ruling, the availability of As ageneral rule, Mexico’sreorganisation rules do not deferral is conditioned on the transferor and the require the existence of abusiness purpose. There are transferee being resident in countries with which general requirements that transactions should not be Mexico has abroad exchange of tax information simulated, but, except in certain cases involving tax agreement. However,even if aruling is obtained, taxa- havens, abusiness purpose is not specifically re- tion on the gains is merely deferred and would quired. Nor can the law relevant to migrations of resi- become due and payable if the shares concerned (here dence, mergers and other reorganisations be the shares of MexCo) were to leave the group. This interpreted as indicating any different tax treatment if would depend on the residence status of the share- there is abusiness purpose for the migration, merger holders of MexCo —ifthe shareholders of MexCo or other reorganisation.. were Mexican residents, the reorganisation provisions would not allow atransfer of their shares out of D. Treatment for Mexican income tax purposes if FCo Mexico. were an existing, unrelated foreign corporation, and It may also be possible, where the MexCo share- MexCo merged into FCo, with FCo surviving holders are not Mexican residents, to transfer the shares under the reorganisation provision of an appli- The consequences in this regard would be the same, cable tax treaty. since Mexican legislation does not contain any rules that specifically distinguish mergers with related par- 6. FCo is created with anominal shareholder and ties from mergers with unrelated parties. The transac- in turn creates MexMergeCo, awholly owned tion envisaged here would be taxable, since the limited liability business entity formed under the merger is not between two Mexican resident entities. law of MexCo and treated as acorporation for Mexican income tax purposes. MexMergeCo then merges into MexCo, with MexCo surviving. The NOTES 1 shareholders of MexCo receive stock in FCo MITL, Art. 12. 2 MITL, Art. 89. As explained in relation to the scenario in 2., above, 3 MITL, Arts. 10 and 20, Sec. V. The current rate of 30% is this scenario would not qualify as atax-free merger scheduled to be reduced to 29% in 2014, and 28% in 2015 since, although the merger of MexCo and and thereafter. MexMergeCo is between Mexican resident compa- 4 FTC, Art. 14, Sec. IX of the; MITL, Art. 20, Sec. V. nies, the transfer of the stock of FCo to the sharehold- 5 FTC, Art. 14-B. ers of MexCo involves in the transaction an entity that 6 MITL, Art. 24.

74 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 Host Country THE NETHERLANDS

Maarten J.C. Merkus &Bastiaan L. de Kroon KPMG Meijburg &CoTax Lawyers, Amsterdam

I. Introduction tities managed and controlled outside the Netherlands that earn ‘‘Dutch-source income,’’asde- he Dutch tax analysis below focuses on the fined in Sections 17 and 17a of the CITA. corporate income tax and dividend withhold- The Netherlands has concluded tax treaties with a ing tax aspects of the various scenarios. The T large number of jurisdictions. Most of these treaties restructuring scenarios may also have Dutch tax con- contain a‘‘tie-breaker’’clause, which states that if an sequences for the shareholders of NLCo, which will entity is considered to be aresident of both - vary depending on the type of shareholder (i.e., ing States based on the respective local tax rules, for whether corporate or individual), the ownership per- purposes of the treaty concerned, the entity is consid- centage held by the shareholder (i.e., whether less ered resident in the jurisdiction in which its place of than 5percent, or 5percent or more), the intention of effective management is located. the shareholder (i.e., whether the shareholder is an In order for NLCo to be considered atax resident of active or Apassive investor) and residence (i.e., FC for Dutch tax purposes, FC must be a‘‘Contracting whether Dutch resident or nonresident, and, if non- State’’(i.e., acountry that is party to atax treaty with resident, whether resident in atreaty or non-treaty ju- the Netherlands) and the place of effective manage- risdiction). ment of NLCo must be transferred to FC. Under Dutch company law,acompany incorporated under Dutch II. Forum questions law is governed by Dutch company law,irrespective of where its place of effective management is located; For purposes of the following discussion, HC is re- this principle is known as the ‘‘incorporation doc- ferred to as the Netherlands and HCo is referred to as trine.’’Based on this principle, the transfer of the NLCo. place of effective management to FC will not result in the liquidation of NLCo under Dutch company law. A. Viability under Dutch corporate law.Treatment for However,there are jurisdictions that apply the ‘‘sie`ge Dutch income tax purposes re´el doctrine,’’according to which acompany is gov- erned by the laws of the state in which the effective 1. NLCo remains the same business entity but management of the company is located. If FC is aEu- effects achange (of some type) that turns it into ropean Union (EU)/European Economic Area (EEA) an FC corporation for Dutch corporate income Member State, based on EU case law,the migration of tax purposes. NLCo to FC should not result in the liquidation of NLCo under either the company law of the Nether- The Dutch Corporate Income TaxAct 1969 (CITA) lands or that of FC. Amigration may be either apure identifies two types of taxpayers: resident taxpayers migration, in which case NLCo will remain aDutch and nonresident taxpayers. Resident taxpayers are corporation, or amigration combined with aconver- taxed on their worldwide income; nonresident taxpay- sion of NLCo into an FC corporation. The latter will ers are taxed only on defined Dutch-source income. only be possible if the laws of FC allow such inbound Resident taxpayers are entities —whether Dutch or migration.1 foreign —that have their place of effective manage- Under Section 15c of the CITA, if the migration of ment in the Netherlands. Section 2(4) of the CITApro- NLCo to FC means that the Netherlands is no longer vides for afiction under which entities incorporated allowed to tax the profits of NLCo under the terms of under Dutch law are considered to be Dutch resident, atax treaty between the Netherlands and FC (i.e., no irrespective of where their place of effective manage- permanent establishment (PE) of NLCo remains in ment is located. Nonresident taxpayers are foreign en- the Netherlands), aDutch exit tax may be imposed:

02/13 TaxManagement International Forum BNA ISSN 0143-7941 75 02/13 TaxManagement International Forum BNA ISSN 0143-7941 75 immediately prior to the migration, all the assets and recognised at existing tax book values.7 This relief is liabilities of NLCo will have to be valued at market only available if the merger is ‘‘business-motivated.’’ value with the result that any hidden reserves —i.e., Moreover,the relief can only be applied if FCo is resi- any value in excess of tax book value —will, in prin- dent in an EU or EEA Member State, and after the ciple, be subject to Dutch corporate income tax. If FC merger the former assets and liabilities of NLCo form is an EU/EEA Member State, the payment of this exit part of FCo’staxable base in the Netherlands (i.e., if tax can be postponed until the moment of actual real- the former activities of NLCo form aDutch PE or if ization of the hidden reserves (i.e., on asubsequent NLCo owned Dutch-situs real property). sale or other form of alienation of the assets). Profit on arevaluation of participations that qualify Under Dutch tax law,nodistribution of profits by for the Dutch participation exemption2 will be tax- NLCo should be recognised with respect to the merger exempt. Aparticipation held by NLCo will qualify for of NLCo into FCo, and therefore the merger should be the participation exemption if: free from Dutch dividend withholding tax. s the participation represents 5percent or more of the paid-up share capital of asubsidiary company 3. FCo is created with anominal shareholder.The with acapital divided into shares; and shareholders of NLCo then transfer all of their s the participation is held as an active investment; or s the participation is subject to aprofit tax that is stock in NLCo to FCo in exchange for stock in considered ‘‘realistic’’when measured by Dutch FCo. NLCo is subsequently liquidated standards; or This scenario is viable under Dutch company law. s less than 50 percent of the assets of the company in which the participation is held consist of low- Under Section 15d of the CITA, the liquidation of taxed passive investments. NLCo will require its assets and liabilities to be reval- Ashareholding of 5percent or more in acompany ued to market value. Again resulting from the revalu- conducting an active business in line with the busi- ation will, in principle, be taxable. Gain on ness of the Dutch parent should normally qualify for participations that qualify for the Dutch participation the participation exemption. exemption will be tax exempt (for the conditions for Assuming that the migration of NLCo to FC does the availability of the participation exemption, see 1., not result in the liquidation of NLCo under company above). law —which should be the case if FC is aMember State of the EU/EEA —the migration will not consti- The distribution of liquidation proceeds will trigger tute adistribution of profits3 and therefore will not 15 percent Dutch dividend withholding tax insofar as trigger Dutch dividend withholding tax. the proceeds exceed NLCo’sshare capital. Areduction Distributions made by NLCo following the migra- or exemption may apply under the terms of an appli- tion should generally not be subject to Dutch dividend cable tax treaty or the EU Parent-Subsidiary Direc- withholding tax based on the applicable tax treaty.In tive, depending on where FCo is resident. situations in which atreaty cannot be relied on, the If and to the extent the share-for-share exchange Netherlands will levy a15percent dividend withhold- would potentially result in alower Dutch dividend tax ing tax on future profit distributions. liability on profit distributions made by NLCo, the Dutch dividend stripping rules in Section 4(7) of the 2. FCo is created with anominal shareholder. Dividend Withholding TaxAct 1965 (DWTA) could NLCo then merges into FCo, with FCo apply.These rules generally apply in cases involving a surviving.The shareholders of NLCo receive stock restructuring under which the former direct share- in FCo holders of aDutch company retain asimilar but indi- Cross-border mergers within the EU and the EEA are rect interest in the company,and the new shareholder feasible, according to case law of the European Court of the Dutch company has abetter Dutch dividend of Justice (ECJ),4 the Tenth EU Company Law Direc- withholding tax position under the terms of an appli- tive5 and the domestic laws of the individual EU/EEA cable tax treaty or the EU Parent Subsidiary Direc- Member States. The tax aspects of across-border tive.8 Insofar as the dividend stripping rules apply, intra-EU merger are governed by the EU Merger Di- profit distributions made by NLCo to FCo, for ex- rective and the domestic legislation implementing this ample, in the course of the subsequent liquidation of Directive.6 NLCo, will be subject to 15 percent Dutch dividend Under Dutch corporate income tax law,the merger withholding tax, so that any reduction or exemption of NLCo into FCo will be regarded as asale by NLCo under an applicable tax treaty or the EU Parent- of its assets and liabilities to FCo. The general rule is Subsidiary Directive —depending on where FCo is that the sale is deemed to take place at market value resident —isignored. Whether the application of the and any gain resulting from the deemed sale will, in Dutch dividend stripping rules is allowed under either principle, be taxable. Capital gains on participations the Netherlands’ tax treaties or the EU Parent- that qualify for the Dutch participation exemption Subsidiary Directive is, however,open to debate. will be tax-exempt (for the conditions for the avail- ability of the participation exemption, see 1., above). As an alternative to the liquidation of NLCo, NLCo Section 14b of the CITAprovides tax relief for legal could be merged into FCo, with FCo surviving. For an mergers in the form of ‘‘rollover relief,’’which, by way analysis of the Dutch corporate income tax and divi- of exception to the general rule described above, dend withholding tax consequences of such amerger, allows the deemed sale of assets and liabilities to be see the scenario in 2., above.

76 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 4. NLCo creates FCo as awholly owned When NLCo is liquidated, the distribution of its liq- subsidiary.NLCo then merges into FCo, with FCo uidation proceeds will, in principle, trigger 15 percent surviving (downstream merger). The Dutch dividend withholding tax to the extent the pro- shareholders of NLCo receive stock in FCo ceeds exceed NLCo’sshare capital. Reductions or ex- emptions may apply depending on the positions of the The analysis of this scenario is similar to the analysis shareholders (i.e., whether individual or corporate, of the scenario at 2., above. whether Dutch resident or nonresident, etc.).

5. FCo is created with anominal shareholder.The B. Other scenarios that NLCo might consider and their shareholders of NLCo then transfer all of their treatment for Dutch income tax purposes stock in NLCo to FCo in exchange for stock in FCo In the scenarios described in 1., 3. and 5., above, FCo is set up by anominal shareholder.There is no re- This scenario is similar to the scenario in 3., above, al- quirement under either Dutch company or Dutch tax though there is no liquidation of NLCo or upstream law that FCo be incorporated by anominal share- merger.This scenario is also viable under Dutch com- holder.Analternative would be to have FCo set up by pany law.Asthe scenario does not involve the liquida- the existing shareholders of NLCo. This would avoid tion of NLCo or an upstream merger,there will be no having anominal shareholder in FCo in the final Dutch corporate income tax consequences for NLCo. structure. As regards the Dutch dividend withholding tax as- As an alternative to the scenarios described above, pects of this scenario, i.e., the potential impact of the NLCo might, in certain circumstances, consider split- Dutch dividend stripping rules, see the analysis of the ting offall or part of its activities to FCo, acompany scenario in 3., above. to be set up by the existing shareholders of NLCo (or a nominal shareholder,ifsorequired under foreign 6. FCo is created with anominal shareholder and law). Based on Dutch company law,aDutch company in turn creates NLMergeCo, awholly owned may split offits assets and liabilities to one or more limited liability business entity incorporated Dutch companies. under the laws of the Netherlands and treated as Within the EU, cross-border split-offs have not yet acorporation for Dutch corporate income tax been formally regulated and it is not clear whether purposes. NLMergeCo then merges into NLCo, they are legally possible. The Tenth EU Company Law with NLCo surviving. The shareholders of NLCo Directive relates only to cross-border mergers and receive stock in FCo most EU Member States have yet to implement spe- cific cross-border split-offlegislation. However,in Although it resembles the scenarios in 3. and 5., practice, intra-EU cross-border split-offs can be re- above, this scenario is not viable under Dutch com- alised by invoking the EU principle of the freedom of pany law.The proposed merger between NLMergeCo establishment. and NLCo would normally result in FCo owning a The tax aspects of across-border intra-EU split-off shareholding in NLCo in addition to the existing are governed by the EU Merger Directive. Section 14a shareholders of NLCo. To achieve the envisaged struc- of the CITAimplements the EU Merger Directive into ture, the existing shareholders would have to contrib- Dutch domestic law and provides tax relief for legal ute their shares in NLCo to FCo in exchange for shares split-offs. Section 14a provides for rollover relief, of FCo. The merger between NLMergeCo and NLCo which allows the deemed sale of assets and liabilities would have no added value. in connection with the split-offtoberecognised at ex- isting tax book values. The relief is only available if the 7. FCo is created with the same corporate split-offisbusiness-motivated. Moreover,the relief structure as NLCo, and with the same can only be applied if FCo is resident in an EU or EEA shareholders with the same proportional Member State and, after the split-off, the former ownership. NLCo then sells all its assets and assets and liabilities of NLCo form part of FCo’stax- liabilities to FCo, after which it is liquidated able base in the Netherlands (i.e., if the former activi- ties of NLCo form aDutch PE or if NLCo owned This scenario is viable under Dutch company law. Dutch-situs real property). For Dutch tax purposes, the sale of assets and li- Under Section 3a(4) of the DWTA, the split-offwill abilities by NLCo will have to be recognised at market be regarded as constituting adividend distribution if value. Any profit from that transaction will, in prin- the split-offisnon-business motivated. Such adivi- ciple, be taxable. Capital gains on the sale of participa- dend will be subject to 15 percent Dutch dividend tions that qualify for the Dutch participation withholding tax. Reductions or exemptions may apply exemption will be tax exempt (for the conditions for depending on the positions of the shareholders (i.e., the availability of the participation exemption, see 1., whether individual or corporate, whether Dutch resi- above). dent or nonresident, etc.). If asales price is used that is lower than the market price, aconstructive dividend will be deemed to have C. Difference for Dutch income tax purposes if NLCo has been paid by NLCo to its shareholders. The construc- a‘‘business purpose’’ for the restructuring tive dividend will be subject to Dutch dividend with- holding tax at the rate of 15 percent, although this rate In the case of restructuring scenarios involving a may be reduced under the terms of an applicable tax merger or split-off, ‘‘business motivation’’must be treaty or the EU Parent-Subsidiary Directive. present if the rollover relief provided for under Sec-

02/13 TaxManagement International Forum BNA ISSN 0143-7941 77 tion 14a (split-offs) or Section 14b (mergers) of the No distribution of profits by NLCo should be recog- CITAistobeavailable. Under Section 3a(4) of the nised with respect to the merger of NLCo into FCo, DWTA, split-offs that are non-business motivated will and therefore the merger should be exempt from give rise to adeemed dividend. Dutch dividend withholding tax. The Dutch tax consequences for the shareholders of D. Treatment for Dutch income tax purposes if FCo were NLCo will vary depending on the type of shareholder an existing, unrelated foreign corporation, and NLCo (i.e., whether corporate or individual), the ownership merged into FCo, with FCo surviving percentage held by the shareholder (i.e., whether less than 5percent or 5percent or more), the intention of Under Dutch corporate income tax law,the merger of the shareholder (i.e., whether the shareholder is an NLCo into FCo will be regarded as asale by NLCo of active or apassive investor) and nationality (i.e., its assets and liabilities to FCo. The general rule is that whether Dutch resident or nonresident, and, if non the sale is deemed to take place at market value and resident, whether resident in atreaty or non-treaty ju- any gain resulting from the deemed sale will, in prin- risdiction). ciple, be taxable. Capital gains on the sale of participa- tions that qualify for the Dutch participation exemption will be tax exempt (for the conditions for the availability of the participation exemption, see 1., NOTES 1 ECJ Nov.5,2002, case C-208/00 (U¨ berseering), ECJ Dec. above). 16, 2008, case C-210/06 (Cartesio). Under Section 14b of the CITA, the deemed sale of 2 CITA, Sec. 13. assets and liabilities in the context of amerger may be 3 recognised at existing tax book values subject to the Confirmed by the Dutch Supreme Court on Oct. 24, 1990 (BNB 1991/2). condition that the merger is business-motivated. 4 Moreover,the relief can only be applied if FCo is resi- ECJ Dec. 13, 2005, case C-411/03 (Sevic). 5 dent in an EU or EEA Member State and, after the Directive 2005/56/EC, dated Sept. 20, 2005. merger,the former assets and liabilities of NLCo form 6 Directive 2009/133/EC, dated Oct. 19, 2009. part of FCo’staxable base in the Netherlands (i.e., if 7 This relief is aresult of the implementation of the EU the former activities of NLCo form aDutch PE or if Merger Directive. NLCo owned Dutch-situs real property). 8 Directive 2003/123/EC, dated Dec. 22, 2003.

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78 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 Host Country SPAIN

A´ lvaro de Lacalle and Luis Briones Baker &McKenzie, Madrid

I. Introduction courts follow the guidelines provided by the OECD Commentary on the Model Convention. A. Taxresidence under domestic law C. Migration of companies under Spanish corporate law rticle 8.1 of the Spanish Corporate Income TaxAct (the ‘‘CIT Act’’) deems alegal entity to The Spanish Capital Companies Law (CL) provides A be atax resident of Spain if: that all companies having Spanish ‘‘legal domicile’’are s it was incorporated under Spanish law; to be regarded as Spanish corporations irrespective of s it has its legal domicile in Spain; or their place of incorporation. The CL provides that a s it has its place of effective management in Spain. company will have its legal domicile in Spain when its An entity has its place of effective management in main place of business or business operations are lo- Spain when the management and control of its set cated in Spain. Thus, under Spanish corporate law, of activities are located in Spain. any corporation incorporated in Spain but having its An entity will, therefore, be considered anonresident main place of establishment and operations outside of Spain if none of the above three conditions deter- Spain may be regarded as aforeign corporation and, mining tax residence are fulfilled. Nevertheless, even conversely,aforeign incorporated company having its if none of the above conditions are fulfilled, the law main place of business and operations in Spain may allows the Spanish tax authorities to presume that an entity based in aterritory regarded as atax haven or a be regarded as aSpanish corporation with the result territory that has no taxation is atax resident of Spain that it will be subject to both Spanish corporate law if : and Spanish CIT.Asthere is no precedent for chal- lenging domicile based on these provisions, an ‘‘invol- s the entity’smain assets, whether directly or indi- rectly,are assets located in Spain or rights or obli- untary’’migration is very unlikely. gations agreed to be fulfilled or executed in Spain; Until recently,itwas almost impossible for acom- or pany incorporated in Spain to transfer its domicile s the entity’smain activity is carried on in Spain. abroad (and thus lose its Spanish ‘‘nationality’’), even This presumption may be rebutted if: if the CL theoretically allowed such migration. s the entity proves that its place of effective manage- ment is in the country or territory in which it is The evolution of the EU legislation on cross-border based; and mergers and company migration resulted in the en- s the entity was incorporated and carries on its activ- actment of the Law 3/2009 of April 3, 2009 relating to ity for valid economic and commercial reasons the Structure and Modification of Commercial Com- other than the simple management of stock or other panies (‘‘Law 3/2009’’). Law 3/2009 allows aSpanish assets. incorporated company to transfer its legal domicile to acountry whose corporate law maintains the compa- B. Taxresidence under Spain’stax treaties ny’slegal personality.ASpanish incorporated com- pany may,therefore, lose its Spanish ‘‘nationality’’by As regards the tax residence of legal entities, Spain’s transferring its legal domicile outside Spain provided: tax treaties follow the wording proposed in Article 4(3) of the OECD Model Convention. Thus, if an entity s the corporate law of the host country allows such a is considered resident for tax purposes in both Con- transfer while maintaining the legal personality of tracting States it is to be considered resident in the the company,which will be deregistered in Spain as country in which its place of effective management is of the date of registration in the host country; located. There are no regulations providing guidance s the company is not in liquidation or bankruptcy with respect to Spain’sinterpretation of the phrase proceedings at the time of the migration; and ‘‘place of effective management,’’nor is there much s the procedure established in Title VofLaw 3/2009 case law.Both the Spanish tax authorities and the is followed.

02/13 TaxManagement International Forum BNA ISSN 0143-7941 79 02/13 TaxManagement International Forum BNA ISSN 0143-7941 79 D. Migration of tax residence tities, when the PE is registered as abranch in the Spanish Trade Registry and the participations are Under the CIT Act, it is relatively simple for acom- registered in the books of the branch; pany to become Spanish tax resident by moving its (3) all other assets not attributed to aSpanish PE of legal domicile into Spain or establishing its place of the migrating entity.Unrealised gains on such effective management in Spain. In practice, migration assets will be taxable in the year of migration. into Spain is almost always achieved through a It should be noted that the European Commission change of legal domicile because of the uncertainty regards the relevant provision as penalising compa- surrounding the concept of ‘‘place of effective man- nies deciding to leave Spain as opposed to those that agement.’’ choose to remain Spanish tax residents (or those that Migration out of Spain is more complicated. A choose to transfer their assets within Spain) in a Spanish incorporated company moving its legal domi- manner incompatible with the freedom of establish- cile out of Spain will not automatically lose its Span- ment principle provided for in the Treaty on European ish tax residence. Theoretically,aSpanish Union. In November 2008, the Commission requested incorporated company will never be able to migrate that Spain amend its legislation on this matter.As out of Spain for tax purposes to acountry that does Spain did not comply with the request, the Commis- not have atax treaty with Spain, because Spain may sion took the issue further,inFebruary 2011, report- continue to regard such acompany as Spanish tax ing Spain to the European Court of Justice (ECJ). resident on the grounds that it was incorporated in Should the ECJ deem Spain’sregime to be contrary to Spain. In practice, the Spanish tax authorities take the the Treaty on European Union, companies that have view that achange of acompany’slegal domicile in- paid the Spanish exit tax may be able to request a volves an actual loss of its Spanish ‘‘nationality’’–that refund of excess tax paid, using the appropriate proce- the company is no longer aSpanish incorporated dures. entity since it must be deregistered from the Spanish Trade Registry.Thus, if the legal domicile of acom- III. Corporate reorganisations: mergers and pany is moved out of Spain to anon-tax treaty coun- exchanges of shares try,the company should be considered nonresident, provided its place of effective management is also lo- Generally speaking, under Spanish domestic law,cor- cated outside Spain. Nevertheless, it should be noted porate reorganisations give rise to two taxable events: that there is no specific case law that supports this in- (1) the entity transferring its assets (the ‘‘transferor’’) terpretation. to another entity will be taxed on the difference be- On the other hand, it is possible to transfer the tax tween the ordinary market value of the transferred residence of aSpanish incorporated company to atax assets and their tax basis; and (2) shareholders ex- treaty partner country by simply moving its place of changing their shares, if any,will be taxed on the dif- effective management to that country,provided the re- ference between the ordinary market value of the cipient country will consider the entity aresident. In shares received and the tax cost of the shares received. order to avoid practical problems (and potential dual residence), the migration of acompany’stax residence A. Tax-neutral regime for mergers out of Spain is almost always implemented via the joint transfer to the same country of its legal domicile As aresult of the implementation in Spain of Directive and its place of effective management. 2005/19/CE of February 17, 2005 (the ‘‘EU Merger Di- rective’’), the CIT Act defers the recognition of unre- alised capital gains when aSpanish company merges II. Taxconsequences of ceasing to be aSpanish into aforeign entity in the following circumstances: tax resident entity s when the acquiring entity is not aSpanish entity, Under Spain’sdomestic law,the transfer of the tax the tax on deemed taxable capital gains will only be residence of acompany out of Spain allows Spain to deferred if the assets are attributed to aSpanish PE tax all the company’sunrealised gains on assets or ac- of the acquiring entity.The tax treatment will thus tivities not attributed to aSpanish permanent estab- be identical to that applying on the migration of a lishment (PE) of the migrating company.Inpractice, Spanish entity; adistinction is made among three different kinds of s in the case of the transfer of an EU PE of aSpanish assets for purposes of this exit tax: transferor,the tax deferral will only be available if (1) qualifying participations in active foreign compa- the acquirer is an EU company.Itshould be noted nies and active foreign PEs. Capital gains realised that, in most cases, the transfer of an EU PE will not on such participations and activities are exempt be subject to Spanish tax as aresult of the exemp- under Spanish domestic law.The migration of a tion granted in Article 22 of the CIT Act and, there- Spanish company will not trigger any tax with re- fore, the deferral provision will not apply.Such a spect to unrealised gains on such assets, irrespec- transfer will only be taxable (and the tax may,there- tive of whether they are or are not attributed to a fore, be deferred) if the PE concerned is not en- Spanish PE; gaged in an active business or is located in anon- (2) assets attributed to aSpanish PE of the migrating treaty partner country and is not subject to company.Such assets will not give rise to any tax corporate income tax; liability but will maintain their tax basis. Assets s the tax treatment applicable to the merger of a are considered to be attributed to aPEwhen they Spanish company into anon-Spanish company will are functionally linked to the PE’sactivities or,in therefore be very similar to that applicable to the the case of participations in the capital of other en- migration of aSpanish company,with the sole ex-

80 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 ception that, in the case of amerger,anon-active IV.Forum questions EU PE may also be transferred without the actual For purposes of the discussion below,HCwill be re- payment of tax if the acquirer is an EU resident ferred to as Spain and HCo will be referred to as SPCo. company. The shareholders of the Spanish merged company A. Viability under Spanish corporate law.Treatment for receiving shares in the absorbing non-Spanish com- pany will also be entitled to adeferral of income tax, Spanish income tax purposes but only if they are residents of an EU Member State or the absorbing entity has its tax residence in Spain. 1. SPCo remains the same business entity but effects achange (of some type) that changes B. Tax-neutral regime for exchanges of shares it from aSpanish corporation into an FC corporation for Spanish income tax purposes An exchange of shares is acorporate reorganisation in Transferring abroad the tax residence of aSpanish which acompany (the ‘‘dominant company’’) acquires company always involves moving the company’splace aparticipation in the capital stock of another com- of effective management to the new country of resi- pany (the ‘‘subordinate company’’) that allows the dence. As indicated at I.D., above, this is asomewhat dominant company to obtain the majority of the ambiguous concept that in practice has to involve not voting rights in the subordinate company by way of only achange in the company’smanagement but also the assignment to the shareholders of the subordinate aguarantee that the main business decisions with re- company,inexchange for their shares, of an interest spect to the company will be adopted in the new coun- in the capital of the dominant company and, if appro- try of residence. If the company’sresidence is moved priate, of amonetary compensation that does not to anon-treaty partner country,itishighly advisable exceed 10 percent of the face value of the interests of also to transfer the company’slegal domicile to that the dominant company which have been assigned to country.This is only possible when the recipient coun- the shareholders of the subordinate company or,in try allows such achange, while maintaining the legal the absence of such aface value, of avalue equal to the personality of the migrating company. face value of the interests assigned, which must be in- SPCo will be subject to an exit tax on non-realised ferred from the information contained in the domi- gains deriving from assets and activities not attrib- nant´s company books. Operations by which a uted to aSpanish PE of SPCo post-migration. No tax dominant company that already has the majority of will be levied on gains resulting from qualifying par- the voting rights in asubordinate company acquires ticipations of SPCo in non-Spanish active companies new stock that reinforces this majority are also con- or active foreign PEs of SPCo because of the participa- sidered exchanges of shares. tion exemption granted under Spanish domestic law. In the circumstances under consideration here, an The shareholders of SPCo will not be subject to tax exchange of shares will take place when the share- as aconsequence of the migration. holders of the Spanish resident company contribute the majority of the capital of the Spanish company to 2. FCo is created with anominal shareholder. the non-Spanish company in exchange for shares in SPCo then merges into FCo, with FCo surviving. the non-Spanish company.This transaction will result The shareholders of SPCo receive stock in FCo in the recognition of ataxable gain equal to the differ- This scenario involves amerger in which an existing ence between the market price of the shares received foreign company (FCo) absorbs aSpanish company and the tax basis of the contributed stock. The tax on (SPCo). Provided the merger is communicated to the this gain will be deferred and the received stock will Spanish tax authorities and certain procedures are consequently take over the basis of the contributed followed, the merger is likely to qualify for the tax- stock if the shareholders are residents of an EU neutral regime applicable to cross-border mergers. In Member State or,ifthe recipient company is Spanish this scenario, the outcome will be almost identical to tax resident, residents of any other country. that described in the case of the migration of tax resi- dence (see 1., above). The only difference will be that C. Valid business reasons tax on unrealised gains relating to non-active EU PEs will also be deferred if FCo is an EU resident company An essential requirement for qualifying for the tax- qualifying for the benefits of the EU Merger Directive. neutral regime in all corporate reorganisations is that The tax deferral granted with respect to such a the restructuring transaction should be supported by merger may be denied if the main purpose of the valid business reasons other than tax reasons (anti- merger is tax avoidance or evasion, which is assumed abuse clause). In particular,ifthe main purpose of the when the transaction is not entered into for avalid reorganisation is to obtain atax advantage, and the business and economic purpose other than obtaining non-tax reasons are ancillary or insufficiently signifi- tax savings. In this case, it can be argued that no cant when compared to the tax advantage obtained, actual tax benefit is derived from the merger because the tax-neutrality regime will likely be challenged by the same outcome might be obtained through the mi- the Spanish tax authorities. This is especially relevant gration of the tax residence contemplated in 1., above. in mergers giving rise to tax-deductible goodwill or an Thus, the reasons for preferring the current transac- asset tax step-up or enabling the transfer of tax losses, tion are likely to be based on commercial, business or or in spin-offs allowing for asubsequent transfer corporate law considerations, rather than tax consid- under amore favourable tax regime. erations.

02/13 TaxManagement International Forum BNA ISSN 0143-7941 81 The shareholders of SPCo will be taxed on the 5. FCo is created with anominal shareholder.The deemed capital gain arising on the disposal of their shareholders of SPCo then transfer all of their stock in SPCo, unless the merger qualifies for the tax- stock in SPCo to FCo in exchange for stock in neutral regime and the shareholders are EU residents. FCo In the case of non-EU shareholders it will, therefore, be preferable to structure the transaction by way of a The contribution of the capital of SPCo to FCo is con- migration of residence unless such shareholders are sidered an exchange of shares. Therefore, subject to entitled to the benefits of one of Spain’stax treaties the general anti-avoidance provision applicable to cor- that grants the sole right to tax capital gains on shares porate reorganisations (described in 2., above) and to the state of residence of the seller. provided they are residents of an EU Member State, SPCo’sshareholders will be able to defer the recogni- 3. FCo is created with anominal shareholder.The tion of any gain on the transfer of their SPCo stock to shareholders of SPCo then transfer all of their FCo until they subsequently dispose of their FCo stock in SPCo to FCo in exchange for stock in shares. FCo. SPCo then liquidates Non-EU resident shareholders of SPCo will be sub- ject to Spanish tax on the difference between the This scenario involves two steps: an exchange of market price of FCo’sshares received and their tax shares and asubsequent liquidation. The tax conse- basis in the SPCo stock transferred unless they are en- quences of the exchange of shares will be described at titled to the benefit of atax treaty that grants the ex- 5, below. clusive right to tax such capital gains to the country of The subsequent liquidation of SPCo can be imple- residence (as do most of Spain’streaties –except to mented in one of three ways: the extent that the gains arise from the disposal of a participation in aSpanish real estate company or a s astraightforward liquidation: in this case, SPCo substantial participation in aSpanish resident com- will be subject to tax on all unrealised gains; in ad- pany). dition, FCo may be subject to tax on the excess re- ceived over its basis in the SPCo stock (which excess may be large if the exchange of shares was 6. FCo is created with anominal shareholder and tax-neutral); in turn creates SPMergeCo, awholly owned s dissolution without an actual liquidation: before limited liability business entity formed under the the enactment of Law 3/2009, it was possible in cer- law of Spain and treated as acorporation for tain circumstances for acompany owned by asole Spanish income tax purposes. SPMergeCo then shareholder to transfer all of its assets and liabili- merges into SPCo, with SPCo surviving. The ties to the shareholder,thus terminating the com- shareholders of SPCo receive stock in FCo pany without an actual liquidation of the assets. There were arguments over whether this transac- From acorporate law point of view,itwill not be pos- tion qualified under the Spanish domestic provi- sible to deliver shares of FCo to the SPCo sharehold- sions applicable to tax-neutral mergers. Both ers as aconsequence of the absorption by SPCo of commentators and case law uphold the applicabil- SPMergeCo. In order to achieve this goal, SPCo’ ity of the tax-neutral regime to some of these trans- shareholders will have to make acontribution of their actions. The wording of Article 81.2 of Law 3/2009 stock to FCo, as envisaged in the scenario at 5., above seems to suggest that the transfer of all acompany’s The absorption of SPMergeCo by SPCo is unlikely to assets and liabilities to its shareholder without any generate any tax liability because SPMergeCo will not compensation being paid to the company is to be have any unrealised capital gains. characterised as an actual liquidation of the com- pany.Thus, since this provision was enacted, com- mentators have taken the view that the tax 7. FCo is created with the same corporate treatment of such atransaction should be identical structure as SPCo, and with the same to that applicable to astraightforward liquidation; shareholders with the same proportional s merger of SPCo into FCo: the consequences will be ownership. SPCo then sells all of its assets (and identical to those of the scenario described in 2., liabilities) to FCo and then liquidates above, but from abusiness law point of view,the merger will be simpler and, therefore, such aproce- SPCo’ssale of all its assets and liabilities is ataxable dure is often followed. event. SPCo will, therefore, be subject to CIT on the difference between the market value of all the assets 4. SPCo creates FCo as awholly owned and activities transferred and its tax basis in those subsidiary.SPCo then merges into FCo, with FCo assets, except to the extent of any gains that are surviving. The shareholders of SPCo receive stock exempt under Spanish law,such as gains realised on in FCo the transfer of qualifying participations in foreign active subsidiaries or of foreign active qualifying PEs. Under the CIT Act, this kind of corporate reorganisa- tion is considered areverse merger: the acquiring The subsequent liquidation of SPCo will also be a entity is the subsidiary and the acquired entity the taxable event, so that SPCo’sshareholders will be parent company.The tax treatment will be the same as taxed on the difference between the amount they re- that described in 2., above. ceive and their basis in the stock.

82 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 B. Other scenarios that SPCo might consider and their restructuring is necessary if the tax-neutral corporate treatment for Spanish income tax purposes reorganisation regime is to be applied. In the case of a Most of the scenarios that SPCO might consider have migration, no business purpose is required by the law. already been dealt with in A. 1. to 7., above. Nevertheless, if the migration is attributable exclu- Apossible variation on the scenario in 7., above sively to tax reasons, the Spanish tax authorities may could be the contribution by SPCo of all its assets and try to apply the general anti-avoidance provisions and liabilities to FCo followed by the merger of SPCo into Spain may be able to disregard the migration and FCo. Such acontribution would qualify under the tax- neutral reorganisations provisions and SPCo would treat the company as Spanish tax resident. be subject to the tax treatment provided with respect to mergers described in 2., above. In some cases, the procedure might be simplified if D. Treatment for Spanish income tax purposes if FCo FCo were to qualify as aEuropean company (i.e., a So- were an existing, unrelated foreign corporation, and cietas Europaea or SE) under Council Regulation EC SPCo merged into FCo, with FCo surviving No. 2157/2001.

C. Difference for Spanish income tax purposes if SPCo The fact that the acquirer (FCo) is not arelated com- has a‘‘business purpose’’ for the restructuring pany may help to show that the reorganisation has been entered into for avalid business purpose, but As explained in II.C., above, the existence of valid business reasons other than tax reasons for corporate would not have any other direct tax consequences. WORLD WISE ////////////////////////////////// International Tax Centre™ Get a global perspective on international tax implications for your business or your clients with the complete tool-kit for today’s tax practitioner, featuring treaties, background analysis, news and insights, rates, and transfer pricing guidance.

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02/13 TaxManagement International Forum BNA ISSN 0143-7941 83 Host Country SWITZERLAND

Dr.Silvia Zimmermann and Jonas Sigrist Pestalozzi Attorneys at Law Ltd, Zu¨rich

I. Introduction group is contingent on their being held within the group for at least five years following the reorganisa- nSwitzerland, the Federation, the Cantons tion. (‘‘states’’) and the Municipalities levy income I taxes. While each of these authorities autono- mously applies its own income tax rates, the prin- III. Taxation of expatriations in general ciples of taxation and the income subject to taxation are to acertain extent governed by Swiss Federal law, As corporations expatriating from Switzerland gener- i.e., the Swiss Federal Act on the Harmonisation of ally transfer their assets outside Switzerland, they Direct Taxes of the Cantons and Municipalities must generally pay corporate income tax on the (StHG). The considerations outlined in the following hidden reserves with respect to such assets.6 The taxa- discussion therefore generally apply with respect to tion of hidden reserves can only be avoided if the ex- the territory of Switzerland as awhole. patriating corporation maintains aSwiss PE and/or Switzerland has so far been better known for the Swiss real estate to which the hidden reserves are al- immigration of foreign companies into the country than for the expatriation of Swiss entities. This is at- located, i.e., where the tax authorities are certain that tributable, in particular,toSwitzerland’sgenerally low adissolution of hidden reserves at alater stage re- corporate income tax rates,1 to its favourable taxation mains subject to Swiss income tax. In addition, the of income derived from participations,2 to its holding emigration of acorporation from Switzerland quali- company and other beneficial tax regimes,3 to the ab- fies as aliquidation for Swiss withholding tax pur- sence of any controlled foreign company (CFC) legis- poses, i.e., the emigrating corporation is subject to lation, and to the fact that foreign permanent withholding tax at the rate of 35 percent on the liqui- establishments (PEs) of Swiss business entities are dation gain (which equals net asset value minus nomi- exempt from taxation in Switzerland on aunilateral nal share capital and reported surplus created since basis. Swiss corporate law facilitates both immigra- 1997) regardless of whether any assets are maintained tion and expatriation by means of the transfer of an in Switzerland. The withholding tax can be reclaimed existing legal entity as well as by means of corporate by shareholders resident in Switzerland or acountry reorganisation. that has entered into atax treaty with Switzerland that provides for an exemption from, or areduction II. Taxation of restructurings in general in, the source country taxation of dividends (see fur- Reorganisations such as mergers, spin-offs, conver- ther at IV.A.1. and 2., below). Therefore, while immi- sions and exchanges of shareholdings, as well as intra- grations of corporations into Switzerland may be group transfers of businesses, business assets or implemented without giving rise to any taxes, corpo- participations of at least 20 percent of share capital rate expatriations from Switzerland generally cannot are generally exempt from both Swiss corporate be effected without Swiss income and withholding tax income tax and Swiss withholding tax, provided the consequences.7 hidden reserves subject to deferred taxation in Swit- zerland are maintained.4 Regardless of whether this requirement is met, reorganisations are generally also IV.Forum questions exempt from Swiss stamp taxes.5 Hidden reserves are maintained and are not taxed if there is: (1) no trans- For purposes of the discussion below,HCwill be re- fer or sale at over book value; (2) no revaluation of the ferred to as Switzerland and HCo will be referred to as respective assets or participations; and (3) no transfer SwissCo. As Swiss corporate law is mostly governed of the hidden reserves abroad. In addition, the tax- by Federal law,the same provisions apply for the neutral transfer of assets and participations within a entire territory of Switzerland.

84 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 A.Viability under Switzerland’scorporate law.Treatment (i). Income tax at the level of SwissCo for Swiss income tax purposes If it has hidden reserves (i.e., the difference between the fair market value and the book value of its assets) 1. SwissCo remains the same business entity but that are transferred outside Switzerland, SwissCo effects achange (of some type) that changes it must pay Swiss income tax on such hidden reserves from aSwiss corporation into an FC corporation (which are deemed to be realised for Swiss tax pur- for Swiss income tax purposes poses). Such atransfer is assumed unless the con- verted corporation maintains aPEinSwitzerland, which ensures that the assets (at their book value) are a. Qualification of SwissCo for Swiss corporate law still allocated to Switzerland.15 and income tax purposes (ii). Swiss withholding tax Acorporation qualifies as aSwiss corporation if it is 8 organised under Swiss corporate law. Corporations The expatriation of SwissCo to FC is deemed to be a organised under Swiss law must adopt alegal form liquidation for Swiss withholding tax purposes be- and organisation provided for by Swiss corporate law cause of the moving of SwissCo’sregistered seat to and must specify aregistered seat within Switzer- FC.16 As aconsequence, awithholding tax of 35 per- 9 land. cent of the corporation’sdeemed liquidation profit is levied.17 Such liquidation profit is equal to the corpo- For Swiss income tax purposes, acorporation is ration’snet assets at fair market value less the nomi- generally subject to unlimited taxation provided it has nal share capital, the paid-in surplus and other either its registered seat in Switzerland (Swiss corpo- recorded shareholders’ contributions since 1997.18 ration) or its place of effective management in Swit- Shareholders resident in Switzerland (both entities zerland (foreign corporation).10 Acorporation that is and individuals) are entitled to afull refund of the subject to Swiss income taxation is taxed on its world- withholding tax paid by the converted SwissCo pro- wide income, except for income allocated to foreign vided they qualify as beneficial owners of the income PEs and foreign business organisations, and real concerned.19 Nonresident shareholders are entitled to estate located abroad.11 arefund if they are resident in acountry that has en- Therefore, in order to become aforeign corporation tered into atax treaty with Switzerland providing for for Swiss income tax purposes (as well as for corpo- areduction of, or exemption from, income tax on divi- rate law purposes), SwissCo must transfer its regis- dends in the state of payment of the dividends (i.e., the tered seat from Switzerland to FC, as aresult of which source state).20 Refunds may be refused in cases of tax it will be converted into acorporation governed by the avoidance or the abusive use of adouble taxation laws of FC. agreement. Provided the number of shareholders does not exceed 20 and all the shareholders are entitled to afull b. Corporate law aspects of conversion of SwissCo into refund, SwissCo may settle the withholding tax by an FC corporation way of notification instead of actual payment of the From aSwiss corporate law perspective, SwissCo may withholding tax.21 be converted into acorporation governed by the laws of FC without liquidation, provided it will continue (iii). Taxation of shareholders tax resident in existing after the conversion under the laws of FC.12 Switzerland The converting corporation must publish acreditors’ At the level of the shareholders,aconversion of call in the Swiss Commercial Gazette two months in SwissCo into FCo is not deemed to be aliquidation for advance of the conversion; meanwhile its creditors income tax purposes. Therefore, the deemed liquida- may ask for payment of, or security for,their claims, tion proceeds for withholding tax purposes are not unless the corporation proves that such claims are not subject to taxation at the level of the shareholders of jeopardised by the expatriation.13 FCo.22 Swiss resident shareholders of SwissCo/FCo holding their shares as private assets must pay income c. Swiss tax consequences of conversion of SwissCo to taxes to the extent the par value of their shares in FCo FCo exceeds the par value of their former shares in SwissCo.23 The conversion of aSwiss corporation into another legal form provided for by Swiss corporate law or the d. Swiss tax consequences of change of place of transfer of an ordinarily taxed corporation’sregistered effective management seat or place of effective management within Switzer- land does not give rise to any taxes, provided the There is adeemed liquidation not only where aSwiss hidden reserves are maintained and no additional corporation is converted into acorporation under the nominal value is created.14 However,the transfer of a laws of aforeign country,but also where aSwiss cor- Swiss corporation’sregistered seat to aforeign coun- poration transfers its effective place of management try cannot generally be effected in atax-neutral from Switzerland to another country.Such atransfer manner —instead such atransfer gives rise to the tax therefore gives rise to the same tax consequences as a consequences set out in (1) to (3), below. conversion of SwissCo into FCo, i.e., the hidden re-

02/13 TaxManagement International Forum BNA ISSN 0143-7941 85 serves not maintained in Switzerland are subject to its liquidation profit (net asset value in excess of Swiss income tax and the deemed liquidation profit share capital, paid-in surplus and other recorded (net assets at fair market value less nominal share shareholders’ contributions since 1997), which may capital, paid-in surplus and other recorded sharehold- be refunded either in full or in part depending on 31 ers’ contributions since 1997) is subject to Swiss with- the shareholder’scountry of residence; holding tax at the rate of 35 percent.24 The s there is no deemed liquidation income subject to withholding tax is levied where the corporation does taxation in the hands of the shareholders of ab- 32 not have aregistered seat in Switzerland, as well as sorbed SwissCo; and where it maintains aregistered seat in Switzerland s Swiss resident shareholders of SwissCo/FCo who hold their shares as private assets must pay income but the expatriation of its place of effective manage- tax to the extent the par value of the shares received ment results in the discontinuance of the corpora- in FCo exceeds the par value of their former shares tion’stax residence in Switzerland under an in SwissCo, as well as on any cash or other compen- applicable tax treaty.25 sation received.33

2. FCo is created with anominal shareholder. 3. FCo is created with anominal shareholder.The SwissCo then merges into FCo, with FCo shareholders of SwissCo then transfer all of their surviving. The shareholders of SwissCo receive stock in SwissCo to FCo in exchange for stock stock in FCo in FCo. SwissCo then liquidates a. Classification of foreign companies for Swiss tax a. Share exchange law purposes The transfer of shares in exchange for shares of an- ASwiss company is classified either as fiscally other corporation generally qualifies as atax-exempt opaque, i.e., as an entity subject to separate taxation merger-type transaction (i.e., no income, withholding (corporations and ) or as fiscally trans- or stamp taxes are levied), provided the acquiring cor- parent, i.e., the company’sincome is allocated to and poration subsequently holds at least 50 percent of the taxed at the level of its owners (partnerships and sole shares in the acquired corporation and the sharehold- proprietors). However,aforeign or simi- ers of the acquired company do not receive as com- lar business organisation without legal personality is pensation for the exchange any additional taxed under the provisions applicable to aSwiss cor- remuneration (other than the shares received in ex- poration, regardless of whether it is more similar to a change) exceeding 50 percent of the fair market value partnership than to acorporation under Swiss com- of the exchanged shares.34 Such additional remunera- 26 pany law. It is therefore irrelevant for Swiss income tion is subject to income tax in the hands of aSwiss tax purposes whether or not the foreign limited liabil- resident corporate shareholder or an individual hold- 27 ity company (here, FCo) is acorporation. ing his or her shares as abusiness asset,35 but quali- fies as atax-free capital gain in the hands of an b. Expatriation merger under Swiss corporate law individual holding his or her shares as aprivate asset, provided there is no merger between the two corpora- SwissCo may merge into FCo provided: (1) its assets tions concerned during the following five years.36 and liabilities are effectively transferred to FCo; and Since ashare exchange has no influence on the (2) the shares/participation rights of the shareholders hidden reserves of SwissCo, it does not give rise to any of SwissCo are preserved by the issuing to such share- income tax at the level of SwissCo. holders of an appropriate number of shares in FCo.28 SwissCo must publish acreditors’ call in the Swiss Commercial Gazette two months in advance of the b. Liquidation merger; its creditors may ask for payment of, or secu- rity for,their claims, unless the corporation proves (i). Income tax at the level of SwissCo that such claims are not jeopardised by the expatria- 29 tion. Since the assets of SwissCo are sold or distributed in the course of its liquidation, SwissCo must pay Swiss c. Swiss income tax consequences of expatriation income tax on all hidden reserves that are dissolved merger of SwissCo (i.e., on the difference between the net income from liquidation and the recorded book values). The Swiss income tax consequences of an expatria- tion merger (i.e., of SwissCo into FCo) are mainly the (ii). Swiss withholding tax same as those of the conversion of SwissCo into FCo (see 1.c., above), i.e.: The liquidation gives rise to the same withholding tax s SwissCo must pay income tax on its hidden re- consequences as an expatriation of SwissCo by way of serves, unless it proves that such reserves are main- relocation to FC or merger into FCo. FCo may be en- tained in, and allocated for tax purposes to, aSwiss titled to arefund of the withholding tax levied depend- PE or Swiss real estate of FCo;30 ing on the existence and terms of an applicable double s unless SwissCo qualifies for the notification proce- taxation agreement between FC and Switzerland (see dure, it must pay the 35 percent withholding tax on 1.c.(2), above). However,ifthe shareholders of the

86 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 former SwissCo are resident in acountry with no 5. FCo is created with anominal shareholder.The treaty with Switzerland or with aless favourable shareholders of SwissCo then transfer all of their treaty with Switzerland than the treaty between Swit- stock in SwissCo to FCo in exchange for stock zerland and FC, FCo is not entitled to arefund of the in FCo withholding tax paid by SwissCo, except to the extent the former shareholders would have been entitled to This scenario is the same as that outlined in 3., above, such arefund (i.e., the residual withholding tax rate except that SwissCo will not be liquidated after the applies as if the liquidation profit were to have been share exchange. Therefore, since this transaction does distributed directly by SwissCo to its former share- not affect SwissCo, there are generally no tax conse- 37 holders). quences for SwissCo, provided it is neither liquidated, transferred nor merged abroad (meaning that no ex- (iii). Taxation of shareholders tax resident in patriation will occur at the level of SwissCo). Switzerland However,ifthe shareholders of the former SwissCo Assuming FCo is the sole shareholder of SwissCo at are resident in acountry with no treaty with Switzer- the time of liquidation, there will be no Swiss income land or with aless favourable treaty with Switzerland tax at the shareholder level as aresult of the liquida- than the treaty between Switzerland and FC, FCo may tion, because FCo is not subject to Swiss income taxa- not be eligible for arefund of the withholding tax paid tion. However,ifthere were shareholders in SwissCo by SwissCo on distributions of reserves that were dis- that were tax resident in Switzerland, they would have tributable at the moment of the share transfer to FCo, to pay income taxes on the liquidation profit. For except to the extent the former shareholders would companies and for individuals holding their shares as have been entitled to such arefund (i.e., the residual business assets, the taxable liquidation profit would withholding tax rate applies as if the distributed re- consist of the difference between the distributed liqui- serves were to have been distributed directly by dation profit and the recorded book value of their SwissCo to its former shareholders).42 As soon as dis- shares.38 Individuals holding their shares as private tributions in the amount of the reserves that were dis- assets would have to pay income taxes on the distribu- tributable at the moment of the share transfer have tion of liquidation profit exceeding the par value and recorded surplus of their shares. been made, the shareholders in FCo are entitled to the normal refund of withholding tax under the tax treaty between Switzerland and FC. 4. SwissCo creates FCo as awholly owned subsidiary.SwissCo then merges into FCo, with FCo surviving. The shareholders of SwissCo 6. FCo is created with anominal shareholder and receive stock in FCo in turn creates SwissMergeCo, awholly owned limited liability business entity formed under the An upstream/reverse merger in which aparent is ab- laws of Switzerland and treated as acorporation sorbed by its subsidiary is permissible under Swiss for Swiss income tax purposes. SwissMergeCo corporate law.IfFCo was also acompany tax resident then merges into SwissCo, with SwissCo in Switzerland, such areverse merger could generally be effected tax-free. Areverse merger is considered a surviving. The shareholders of SwissCo receive contribution into the subsidiary by the parent’sshare- stock in FCo holders, the difference between the value of the par- In this scenario two Swiss entities are merged. Unlike ticipation in the subsidiary accounted for in the books the expatriation merger of SwissCo into FCo, this of the parent and the net value of the subsidiary quali- merger can therefore be effected in atax neutral fying as tax neutral agio (appreciation) or disagio (de- manner (see also II., above and B., below). However, preciation).39 while forward triangular mergers are permissible If FCo were acorporation tax resident in Switzer- under Swiss corporate law provided 90 percent of the land, it would have to pay withholding tax on the par shareholders of each company vote for the merger value of the shares issued to the shareholders to the agreement,43 ruling doctrine and the Swiss Commer- extent such par value exceeded the par value of the cial Registries (which have to review and register shares of absorbed SwissCo.40 mergers effected by Swiss entities) deny the permissi- Individuals resident in Switzerland holding shares bility of reverse triangular mergers because the per- in SwissCo as private assets must pay income tax on missibility of such mergers is not expressly provided the shares received in FCo to the extent the par value for in the Merger Act.44 Thus far,noSwiss court has of the new shares exceeds the par value of their former handed down adecision on this issue. Although there 41 shares in SwissCo. would be strong arguments for the permissibility of Since FCo is aforeign corporation, the (reverse) reverse triangular mergers under Swiss corporate law, merger of SwissCo into FCo is an expatriation merger it is not advisable to contemplate areverse triangular and therefore gives rise to the tax consequences out- merger under Swiss corporate law since the operation lined in 2.c., above. may result in alawsuit with an uncertain result.

02/13 TaxManagement International Forum BNA ISSN 0143-7941 87 7. FCo is created with the same corporate either: (1) by the transfer of SwissCo’sassets to a structure as SwissCo, and with the same Swiss PE of FCo, where both SwissCo and FCo are shareholders with the same proportional controlled by the same (domestic or foreign) parent ownership. SwissCo then sells all of its assets company,which is entitled to afull refund of with- (and liabilities) to FCo and then liquidates holding taxes; or (2) by the merger of SwissCo into a subsidiary of FCo that is tax resident in Switzerland. The latter alternative could be achieved inter alia by a. Swiss corporate law aspects means of aforward triangular merger (i.e., by the If SwissCo transfers its liabilities together with its transaction outlined at A.6., above), with the sole dif- assets, the transfer must be effected by means of apar- ference that SwissMergeCo would have to be the sur- tial universal succession under Articles 69 et seq. of viving company instead of SwissCo. Provided the the FusG. Such an asset transfer must be registered book values of the assets acquired by SwissMergeCo with the Swiss Commercial registry in order to by the absorption of SwissCo are maintained, such a become effective.45 The transferred assets must merger will not give rise to any tax consequences at exceed the transferred liabilities and the transferring the level of the affected companies. Individual share- corporation remains liable for such liabilities for holders of absorbed SwissCo who are tax resident in three years.46 Since SwissCo will be liquidated before Switzerland and who hold their shares as private the end of the three year period, the creditors with re- assets must pay income tax on their shares received in spect to the transferred liabilities may request ad- FCo to the extent the par value of the newly allocated equate security for their claims.47 SwissCo’sboard of FCo shares exceeds the par value of the absorbed directors must inform the shareholders subsequent SwissCo shares and/or to the extent they receive any 52 to, and the affected employees, if any,prior to, the compensation in cash or other additional benefits. asset transfer.48 Such an asset transfer to FCo is per- Other former shareholders in SwissCo tax resident in missible if it is also viable under the law of FC.49 Switzerland (i.e., companies and individuals who hold their shares as business assets) generate taxable In order to avoid the requirements relating to such income to the extent the transaction produces an ac- an asset transfer under Articles 69 et seq. of the FusG, counting profit. in legal practice such transactions are usually effected by simple asset deals (i.e., the two corporations enter C. Difference for Swiss income tax purposes if SwissCo into anormal asset purchase agreement without has a‘‘business purpose’’ for the restructuring transferring the liabilities). The acquiring corporation may ask for the creditors’ consent to acquire major In general, Swiss tax law does not require any specific contracts and liabilities from the transferring corpo- business reason for business reorganisations. It is, ration separately. therefore, not necessary to demonstrate the existence of specific economic reasons in order to achieve atax- b. Swiss income tax law aspects neutral restructuring. The only precondition that takes account of the business situation is the require- Entire business organisations, assets related to busi- ment that assets transferred at book value between ness operations, and shareholdings and other partici- group companies must be either: (1) participation of pations of at least 20 percent of share capital may be at least 20 percent; (2) assets directly related to busi- transferred tax-neutrally at book value from one com- ness operations; or (3) an aggregation of assets (and li- pany to another,provided both companies are con- abilities) that together constitute an entire business trolled by the same group, i.e., athird company must organisation that could survive on its own in the hold at least 50 percent of the voting rights in both market.53 50 companies. The transferred hidden reserves are sub- In abusive situations, the tax authorities may refuse ject to subsequent taxation if the transferred assets to accept atax-neutral restructuring if an ‘‘unusual’’ are sold to any party outside the group within ahold- transaction structure is chosen and additional taxes 51 ing period of five years. would become due were the chosen structure such as However,since in the current case the assets are to be considered astandard transaction structure. In transferred to FCo, any transferred hidden reserves these cases, the tax-neutral ‘‘unusual’’transaction are subject to income tax in the hands of SwissCo, must be justified by business reasons in order to dem- unless the assets including hidden reserves are trans- onstrate that it has not been chosen purely with aview ferred to aSwiss PE of FCo (see III., above). The sub- to obtaining an (unjustified) tax benefit. sequent liquidation of SwissCo will give rise to the tax consequences outlined in 3.b., above. D. Treatment for Swiss income tax purposes if FCo were an existing, unrelated foreign corporation, and SwissCo B. Other scenarios that SwissCo might consider and their merged into FCo, with FCo surviving treatment for Swiss income tax purposes Any (Swiss or foreign) corporation may merge into a Acomplete expatriation of SwissCo and its assets re- Swiss corporation without any tax consequences at sults in the taxation of its hidden reserves regardless the level of the affected companies, provided the book of the form of transaction chosen. Thus, the only way values accounted for are maintained and no assets to avoid such taxation is to forego complete expatria- booked at below market value are transferred abroad tion. Atax-neutral restructuring could be achieved as aresult of the merger.Except in abusive transac-

88 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 tions, it is not decisive whether the merging corpora- 15 Circular of the Swiss Federal TaxAdministration of tions belong to the same group nor whether the June 1, 2004 regarding Reorganizations (Circular no. 5), merging corporations have been in existence for some no. 4.2.2.2.2. 16 time or have been recently established with aview to VStG, art. 4para 2; Circular no. 5, no. 4.2.2.4.2. 17 the envisaged merger (see also B., above). VStG, art. 13 para. 1lit. a. It is disputed whether this practice also applies where the company maintains its However,since FCo is the surviving company,the place of effective management in Switzerland and there- merger in the current scenario qualifies as an expa- fore remains subject to Swiss taxation. Ruling doctrine triation merger that gives rise to the tax consequences states that the withholding tax may not be levied unless outlined in A.2.c., above. Switzerland would no longer be entitled to levy withhold- ing taxes under an applicable tax treaty (Bru¨lisauer Peter/ Guler Silvan, in: Zweifel Martin/Beusch Michael/Bauer- NOTES Balmelli Maja (ed.), Bundesgesetz u¨ ber die 1 The effective income tax rate applicable to corporations Verrechnungssteuer,2nd ed., Basel 2012, no. 331 et seq.to subject to ordinary taxation is approximately 10-25 per- VStG, art. 4, with additional references). cent depending on where the corporation is resident and 18 VStG, art. 5para. 1bis. operating its business in Switzerland. 19 VStG, arts. 21 et seq. 2 Income derived from participationsofatleast 10 per- 20 Corporations resident in the European Union (EU) or cent of share capital or with afair market value of CHF 1 the European Free Trade Association (EFTA) countries million are almost entirely tax-exempt because of the par- are eligible for afull exemption from withholding tax ticipation reduction (DBG, arts. 69 et seq.;StHG, art. 28 after aholding period of two years with regard to share- para. 1-1ter). Capital gains from the sale of qualifying par- holdings of at least 25 percent (Savings Agreement be- ticipations are eligible for the participation reduction tween Switzerland and the European Communities, art. after aholding period of one year.Participation income 15 para. 1). U.S. residents are eligible for reduction at realized as aresult of the recapture of values formerly source to 15 percent or to 5percent in the case of U.S. written down is not eligible for the participation reduc- companies with ashareholding of at least 10 percent tion. (Switzerland-United States tax treaty,Art. 10). 3 Corporations at least two thirds of whose assets consist 21 VStG, art. 20; Swiss Federal Withholding TaxOrdi- of participationsand/or at least two thirds of whose earn- nance (VStV), art. 24 para. 1lit. dand para. 2. ings consist of income derived from participations 22 Circular no. 5, no. 4.2.2.3.2. in connection with no. qualify as holding companies (StHG, art. 28 para. 2). 4.1.2.3.9. Holding companies do not have to pay any income tax at 23 DBG, art. 20 para. 1lit. c; Circular no. 5, no. 4.2.2.3.1 et the cantonal level, except on income from real estate, i.e., seq. in connection with no. 4.1.2.3.9. there is only an effective federal income tax of 7.83 per- 24 DBG, art. 58 para. 1lit. c; VStG, art. 4para. 2incon- cent on income other than participation income (as well nection with art. 9para. 1. as areduced tax on net equity). Since SwissCo is the 25 Bru¨lisauer/Guler, loc. cit.,no. 336 et seq. to VStG, art. 4, parent of amultinational group, it would most likely with additional references. Since the place of effective qualify as aholding company for Swiss tax purposes. management prevails over the place of the registered seat 4 Federal Act on Federal Direct Taxes (DBG), art. 61; in all Switzerland’stax treaties except the Switzerland- StHG, art. 24 para. 3-3quinques;Federal Withholding Tax Japan tax treaty (OECD Model Convention, Art. 4(3); Act (VStG), art. 5para. 1lit. a. Switzerland-Japan tax treaty,Art. 4(3)), expatriation of 5 Swiss Federal Act on Stamp Taxes (StG), art. 6para. 1 the effective place of management to acountry that has a lit. abis and art. 14 para. 1lit. j. double taxation agreement with Switzerland (other than 6 DBG, art. 58 para. 1lit. cand art. 80 para. 2. Japan) gives rise to Swiss withholding tax regardless of 7 For alternatives see IV.B. whether the corporation’sregistered seat remains in 8 Swiss Federal Act on International Private Law (IPRG), Switzerland. Another exception applies in the case of Ger- art. 154 para. 1. This principle is called the statute of in- many,since Switzerland is able to levy withholding taxes corporation. on companies with their registered seat in Switzerland 9 Meier-Hayoz Arthur/Forstmoser Peter,Schweizerisches despite their tax residence in Germany under the German Gesellschaftsrecht, 11th ed., Bern 2012, §11no1et seq.; place of effective management rule (Switzerland- §16no. 133. Swiss corporations may take the legal form Germany tax treaty,Art. 4(10) in connection with Arts. 10 of ashare corporation, aLimited Liability Company or a and 28). with shares. Cooperatives are also 26 DBG, art. 11 and art. 49 para. 3; StHG, art 20 para. 2. treated as corporations for tax purposes. Swiss corpora- 27 Swiss limited liability companies qualify as corpora- tions must be registered in the public Commercial Regis- tions and are taxed in the same manner as Swiss share ter at the canton of their corporate seat. corporations. 10 DBG, art. 50; StHG, art. 20 para. 1. 28 IPRG, art. 163b para. 1. 11 DBG, art. 52 paras. 1and 3. The allocation of profit fol- 29 IPRG, art. 163b para. 3inconnection with FusG, art. lows the rules developed by the Swiss Federal Supreme 46. Court on allocation between the Cantons, which is some- 30 Circular no. 5, no. 4.1.2.2.2. times not completely in line with the profit allocation 31 Circular no. 5, no. 4.1.2.4.2. under tax treaties. Income allocated to another state 32 Circular no. 5, no. 4.1.2.3.9. under one of Switzerland’sapproximately 90 tax treaties 33 Circular no. 5, no. 4.1.2.3.9. is exempt from income taxation in Switzerland. 34 Circular no. 5, no. 4.1.7.1. 12 IPRG, art. 163 para. 1. 35 Corporations with shareholdings of aleast 10 percent 13 IPRG, art. 163 para. 2inconnection with Swiss Federal qualify for the participation reduction with respect to Act on Mergers, Spin-offs, Conversions and Transfers of such capital gains, provided the shareholding is held for Assets (FusG), art. 46. at least one year (see fn. 2, above). Income and such capi- 14 See StHG, art. 24 para. 2lit. b. tal gains of individuals derived from qualifying participa-

02/13 TaxManagement International Forum BNA ISSN 0143-7941 89 tions are taxed at areduced rate or using areduced 44 Bertschinger Urs/Spori Peter,Dreiecksfusionen – taxable basis (relief of approximately 50 percent, depend- einige zivil- und steuerrechtliche Fragen, in: Festschrift ing on the Canton in which the shareholder is resident). fu¨r Peter Bo¨ckli, p. 328 et seq.;Gerhard Fran/Schiwow 36 Circular no. 5, no. 4.1.7.3.1 et seq. Emanuel, U¨ bernahme mit Hilfe von Tochtergesell- 37 ‘‘Practice on old reserves,’’see Bauer-Balmelli Maja, in: schaften im internationalen Verha˜ltnis, in: GesKR Zweifel Martin/Beusch Michael/Bauer-Balmelli Maja 2/2009, p. 198, both with additional references. 45 (ed.), Bundesgesetz u¨ ber die Verrechnungssteuer,2nd FusG, art. 73 para. 2. 46 ed., Basel 2012, no. 59 et seq. to VStG, art. 21, with addi- FusG, art. 71 para. 2and art. 75 para. 1. 47 tional references). FusG, art. 75 para. 3lit. a. 48 38 For the relief for income from qualifying participations FusG, arts. 74 and 77. 49 see fns. 2and 35, above. IPRG, art. 163d para. 1inconnection with art. 163 paras. 1and 2. 39 Circular no. 5, no. 4.1.6.2. 50 DBG, art. 61 para. 3; StHG, art. 24 para. 3quater. 40 VStG, art. 4para. 1lit. b. 51 DBG, art. 61 para. 3; StHG, art. 24 para 3quinquies. 41 DBG, art. 20 para. 1lit. c. Arelevant example is out- 52 Circular no. 5, no. 4.1.2.3. lined in Circular no. 5, attachment no. 6. 53 DBG, art. 61 para. 1lit. dand art. 61 para. 3; StHG, art. 42 Bauer-Balmelli Maja, loc. cit.,no. 61 to VStG, art. 21. 24 para. 3lit. dand para. 3quater;Circular no. 5, no. 43 FusG, art. 18 para. 5. 3.2.2.3.

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90 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 Host Country UNITED KINGDOM

Charles EV Goddard Rosetta TaxLLP,London

I. Introduction and context spotlight, however,substantial discussion was taking place between large corporates and the U.K. Treasury, well-informed reader of the business pages in which in due course led to significant changes to the the U.K. press over the last few years would be regime of taxation of foreign profits. That process is A familiar with the concept of corporate expa- now largely complete and that, together with the re- triations, as they have appeared relatively high up duction of U.K. corporate tax rates, seems to have both the fiscal and political agendas. However,there stemmed the flow of corporate emigrations, at least have been anumber of undercurrents, including the for now. impact of EU law on U.K. tax law,which have meant Our well-informed reader might have imagined, as that the true story of the ability of international she read about these companies threatening to shake groups headquartered in the United Kingdom to leave English dust from their feet, that nothing was easier its shores has been less well understood. than to migrate an existing U.K. company to amore In the last decade or so, U.K. corporate tax law has welcoming European jurisdiction. However,that is far been the subject of increasingly vocal discussion from the truth, and acombination of U.K. corporate within the business, political, and most recently even laws and tax treatments of particular transactions has the general media, communities. In the early 2000s, meant that emigration was much harder,and poten- businesses which had benefited from relatively gener- tially much more costly,than the CEOs of these com- ous tax incentives and reliefs under the Conservative panies would have liked to think. governments of the 1980s and 1990s, and had devel- While it has always been possible to change the tax oped multinational businesses from U.K. bases, began residence of aU.K. company,that is only possible with to chafe under the weight of increasingly burdensome the effective consent of the United Kingdom’stax au- and complex U.K. tax legislation seeking to tax profits thority,Her Majesty’sRevenue &Customs (HMRC). of overseas operations and to prevent the avoidance of In addition, adeparting company is subject to an exit tax through the use of offshore companies. The United charge, by which any gains on capital assets are sub- Kingdom’scontrolled foreign companies (CFC) rules ject to U.K. tax on departure. Our reader may well were aprincipal target, but the whole range of U.K. have been confused by that, as she is well aware that legislation seeking to tax foreign profits was asource one of the essential freedoms embodied in the consti- of complaint. Comparisons were made with the in- tution of the European Union is the freedom of estab- creasingly generous regimes instituted in European lishment. Surely for the United Kingdom to impose a neighbour countries, especially the Netherlands and tax charge on acompany seeking to establish in an- the Republic of Ireland, and the lack of acomprehen- other EU Member State, by reference to unrealised sive series of reliefs aimed at international holding profits, is contrary to that fundamental freedom? If companies (such as aproper participation exemption) she has paid close attention during 2012, and espe- was seen as adisincentive for internationally mobile cially following the publication of the draft Finance companies to base themselves in the United Kingdom. Bill for 2013 in December 2012, she would have In that environment, many of those international learned that, indeed, the United Kingdom’sexit groups that were headquartered in the United King- charges have been determined by the EU Commission dom, but had major international operations, began to be in breach of EU law,and that the United King- to threaten to leave the United Kingdom. This threat dom has decided as aresult to amend the terms of its was more talked about than acted upon but there were exit charges, including on acorporate emigration. anumber of high profile cases of corporate groups, Our well-informed reader might reasonably con- which the U.K. public fondly thought of as ‘‘British,’’ sider that this is the end of the matter,but unsurpris- changing their structures so as to ensure that their ingly the tax issues to consider for adeparting holding companies were established outside the corporate group do not end there. An international United Kingdom. Examples include WPP (an interna- group wishing to leave the group has arange of issues tional marketing communications group) and Cad- to consider,which are made more complex by the lack bury (a chocolate manufacturer). Out of the media of asingle all-encompassing code. Many of the reliefs

02/13 TaxManagement International Forum BNA ISSN 0143-7941 91 02/13 TaxManagement International Forum BNA ISSN 0143-7941 91 relied upon in these transactions were designed with affecting the key activities of the company when they different purposes in mind in adifferent economic are in the United Kingdom. Anumber of groups have world, in which U.K. businesses rarely operated out- in the past established structures using holding com- side the United Kingdom. The sections that follow ex- panies incorporated in Jersey (in the Channel Islands) plain the core concepts necessary for aproper and resident for tax purposes in the Republic of Ire- understanding of the tax treatment of the scenarios to land. These structures have been considered vulner- be discussed. able to challenge by HMRC as being resident in the United Kingdom as aresult of there being no real sub- II. Corporate residence in the United Kingdom stance in either Jersey or Ireland. As always, the effi- cacy of astructure for tax purposes depends on the Afundamental issue in assessing the tax treatment of long-term running of the structure. acompany or group seeking to establish that it should be considered not to be subject to U.K. tax is the con- III. UK law applicable on emigrations cept of U.K. tax residence for companies. Anumber of different tests apply. Where aU.K. company wishes to move its place of tax All companies incorporated in the United Kingdom residence, it must first notify HMRC of its intention to are automatically treated as resident in the United change its tax residence.1 It must also notify HMRC of Kingdom and therefore subject to U.K. corporation the amount of tax it expects to be liable for under the tax, unless they have completed the specific process United Kingdom’sexit charge provisions, of how that for becoming non-U.K. resident. tax is to be paid and by whom, and of the name of a Companies incorporated outside the United King- guarantor for that tax liability.2 In the event that the dom are treated as resident in the United Kingdom if tax is not paid, it may be collected by HMRC from di- their ‘‘central management and control’’isexercised rectors of the migrating company or other members in the United Kingdom. Central management and of the corporate group of which the migrating com- control is the control of the fundamental activities of pany is amember.3 the company and is exercised by the directors of the Under current law,onleaving the United Kingdom, company.Itisexercised in the place where the direc- the migrating company is deemed to have disposed of tors make their decisions. all its capital assets before the migration and to have Companies incorporated in jurisdictions with reacquired them immediately afterwards, in each case which the United Kingdom has atax treaty may have at their market value at that time.4 Similar provisions their tax residence determined under the terms of the apply under the special codes applicable to loan rela- applicable treaty and, as such, generally by the terms tionships, derivatives and intangible assets. This has of the ‘‘effective management and control’’test. long been acause of complaint, as the resulting tax AU.K.-resident company is subject to U.K. corpora- charge is imposed on anotional gain which may not tion tax on all its profits wherever they are made. In arise to the same extent or at all in practice and in any addition, anon-U.K. resident company which carries event arises in advance of any economic disposal. on atrade in the United Kingdom through aperma- However,this charge is subject to the application of nent establishment (PE) is subject to U.K. corporation any available reliefs. tax on the profits of that trade to the extent that it is Aspecific relief which may be available to aholding carried on through the PE and on gains on capital company holding shares in subsidiaries is that which assets used for the purposes of that trade. If acom- applies in respect of chargeable gains realised on dis- pany is found to be not U.K. resident under each of the posals or deemed disposals of interests in ‘‘substantial tests outlined above, and has no UK PE through shareholdings.’’This is similar to atraditional partici- which it carries on atrade, the company is not subject pation exemption, in that it exempts gains arising on to corporation tax. It may,nevertheless, be subject to disposals of holdings in subsidiary companies of at U.K. income tax on certain types of income, including least 5percent which have been held for at least ayear through the imposition of withholding tax on certain prior to the disposal. However,itapplies only in re- payment types. Taxoncapital gains, however,does spect of shares in trading subsidiaries or trading sub- not currently apply to non-U.K. resident companies groups, and only where the retained group is itself a which do not have aU.K. PE (although it will be intro- trading group. For these purposes, all the activities of duced later this year for non-U.K. companies holding the group are taken into account other than purely in- U.K. residential properties with avalue in excess of £2 ternal activities. Agroup or sub-group is trading if it million). carries on trading activities and its activities do not in- The practical issue that these rules impose on a clude ‘‘to asubstantial extent’’activities other than multinational group wishing to establish astructure trading activities. Avariety of methods can be used to which is successfully treated as non-U.K. resident is measure this and apercentage level of 20 percent is the need to ensure that each of the relevant companies the general threshold for being considered ‘‘substan- is managed and controlled outside the United King- tial.’’Particular difficulties can arise where substantial dom so that the central management and control and cash reserves are held within the group. An interna- effective management and control tests can be met. tional group looking to leave the United Kingdom Where the board members of international groups without an exit charge would therefore need to con- are based in the United Kingdom, that can cause diffi- sider and discuss with HMRC the question of whether culties. Not only is it necessary for all board meetings the group as awhole, world-wide, is atrading group to be held outside the United Kingdom, but the com- as determined under these rules. pany must show that the directors are not, either indi- The above sets out the law which currently applies. vidually or together,habitually making decisions However,for the reasons explained below,the law is to

92 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 be changed to allow companies leaving the United This may then be followed by an intra-group reorgani- Kingdom to defer the charge arising for aperiod of up sation to ensure that the group becomes tax-efficient. to six years, subject to the company meeting avariety The preferred forms of transactions have to work their of conditions. Claims are to be allowed to be for com- way round anumber of U.K. tax concerns, including: panies leaving on or after December 11, 2012 (the date s income tax for shareholders on dividends or distri- on which the change was announced). Whether this butions of assets; will be sufficient to meet the concerns about compli- s tax on capital gains for any person transferring ance with EU law remains to be seen. shares or other assets, subject to reliefs or exemp- tions, such as the Substantial Shareholdings Ex- IV.EUlaw on expatriations emption; s de-grouping charges for companies which have pre- The freedom of establishment is afundamental prin- viously claimed group relief on intra-group transac- ciple of EU law and therefore directly applicable in tions where the relevant group relationship is U.K. law.Ithas been argued before the European broken; and Court of Justice (ECJ) that exit charges in anumber of s stamp duty charged at the rate of 0.5 percent on different circumstances are in conflict with this prin- transfers of shares in U.K. companies, subject to re- ciple. Twoparticular cases are relevant: National Grid liefs for certain types of reorganisation transac- Indus BV (Case C-371/10), in which acompany sought tions. to migrate from The Netherlands to the United King- There are, however,anumber of key treatments dom; and Commission vPortugal (Case C-381/11), which apply to reorganisation transactions and which where the Commission challenged Portugal’sdomes- typically drive their structure. These are: tic tax rule which required non-resident taxpayers to s no disposal of shares on reorganisations.Areorgani- appoint arepresentative in Portugal. sation of acompany’sshare capital is not treated as In the National Grid Indus case, the ECJ held that involving any disposal of the original shares or the the Dutch exit tax rules infringed EU law because they acquisition of new shares: the new shares are required the tax to be paid immediately when acom- treated as the same asset, acquired for the same pany migrated. However,the Court did not say that consideration as the original shares;5 the Dutch exit tax itself infringed EU law.Inthe s no disposal of shares on ashare-for-share exchange. Court’sview,the infringement related to the timing of The same treatment as applies on areorganisation the payment of the tax and not the fact of the exit tax applies where aperson exchanges shares in acom- itself. pany for shares in another company,providing the Following these cases, on March 22, 2012 the Com- exchange relates to at least 25 percent of the shares mission requested the United Kingdom to amend its to be exchanged or the exchange is made as part of rules imposing exit charges, including the rule in TMA ageneral offer to all the shareholders of the com- 1970, s. 109B. According to the Commission, ‘‘the U.K. pany to be acquired.6 This is subject to arequire- legislation at stake results in immediate taxation of ment for shareholders selling more than 5percent unrealised capital gains in respect of certain assets of any class of shares that the exchange is done for when the seat or place of effective management of a bona fide commercial reasons and is not part of a company is transferred to another EU/EEA State. scheme or arrangements of which the main pur- However,asimilar transfer within the U.K. would not pose or one of the main purposes is the avoidance generate any such immediate taxation and the rel- of tax;7 evant capital gains would only be taxed once they have s no disposal of shares on ascheme of reconstruction. been realised.’’The U.K. Government has sought to The same treatment applies where there is a scheme meet the Commission’srequest by introducing arule of reconstruction.8 This can take anumber of forms in Finance Bill 2013 allowing companies leaving the but typically will involve the cancellation of existing United Kingdom to defer the time at which an exit tax shares and the issue of new shares to shareholders is payable. pro rata to their previous shareholdings. It may in- Mention should also be made of two types of enti- volve the liquidation of the existing company under ties, for which EU law specifically provides and which aCourt-approved scheme and the transfer of the are designed to be able to migrate around the EU company’sbusiness and assets to anew company without facing any legal restrictions: the Societas Eu- which issues the new shares. The rule is subject to ropaea (SE) and the Societas Co-operativa Europaea the same anti-avoidance test as applies for share- (SCE). An SE or an SCE can be registered in any for-share exchanges; Member State of the EU, and can transfer its registra- s no gain/no loss treatment on adisposal of assets/ tion to any other Member State. However,normal shares.This applies automatically where the assets U.K. rules of tax residence apply to SEs registered in are transferred between members of acorporate the United Kingdom. group, but only where both the transferee and the transferor are subject to U.K. tax.9 It can also apply, V. UK rules applicable to reorganisations subject to the same anti-avoidance rule as is de- scribed above, on transfers of assets which take The administrative requirements and exit charges place on a scheme of reconstruction but, again, only which apply on adirect emigration mean that gener- where the transferee company is within the charge ally groups looking to ‘‘leave the United Kingdom’’ to U.K. corporation tax;10 and have instead chosen to do so indirectly,byestablish- s limited applicability of stamp duty. Stamp duty is ing structures outside the United Kingdom to which payable only on transfers of shares in U.K. incorpo- the existing U.K. structure is effectively transferred. rated companies. It is not payable on the issue of

02/13 TaxManagement International Forum BNA ISSN 0143-7941 93 shares. This will often drive the choice of astruc- s the shares have been held, broadly,for at least a ture in which shares are cancelled and new shares year prior to the deemed disposal; issued. s the companies deemed to be disposed of are trading subsidiaries or members of atrading sub-group; VI. Forum questions and s the disposing company is atrading company or For purposes of the discussion below,HCwill be re- member of atrading group. ferred to as the United Kingdom and HCo will be re- If UKCo is atraditional holding company and car- ferred to as UKCo. ries on no activities other than holding shares in its subsidiaries, it will therefore be necessary to deter- A. Viability under the United Kingdom’s(or one of its mine whether the worldwide group is atrading group. political subdivision’s) corporate law.Treatment for U.K. HMRC guidance on the application of the rules in this income tax purposes area is available, but in practice the question may need to be determined by reference to adetailed ex- In the United Kingdom, three separate jurisdictions amination of the activities of the entire group world- exist: (1) England and Wales; (2) Scotland; and (3) wide. Northern Ireland, and business entities are formed under the laws of one of these jurisdictions. Business Once approval has been achieved and the company laws and changes to the structure of abusiness entity has ceased to be U.K. tax resident, the company must are governed by the laws of the jurisdiction in which ensure that it remains tax resident outside the United the entity is formed. The laws of each jurisdiction are Kingdom. This requires that all aspects of the compa- similar in most respects. For ease of reference, it is as- ny’scentral management and control, and, if it is sub- sumed that the laws of England and Wales will apply. ject to the provisions of atax treaty between the Taxlaws, however,currently apply generally identi- United Kingdom and another jurisdiction, its effective cally to each of the constituent parts of the United management and control, are exercised outside the Kingdom. References to the tax laws governing acom- United Kingdom. As aresult, effective migration will pany incorporated in England and Wales will there- generally require that executive officers of the com- fore be referred to as U.K. law. pany are based outside the United Kingdom with effect from the intended migration and that all board 1. UKCo remains the same business entity but meetings of the board of directors of the company are effects achange (of some type) that changes held outside the United Kingdom. it from aU.K. corporation into an FC corporation for U.K. corporation tax purposes. 2. FCo is created with anominal shareholder. UKCo then merges into FCo, with FCo surviving. As discussed above, no change is needed to the consti- The shareholders of UKCo receive stock in FCo tution of UKCo in order to change its residence for tax purposes. UKCo can change its tax residence by noti- U.K. corporate laws do not permit atrue merger of a fying HMRC of its intention to do so, and obtaining company incorporated under the laws of the U.K. into the prior approval of HMRC with regard to the pay- another company,such that the merging company ment of any exit charge or other tax liabilities of the ceases to exist solely as aresult of the merger.How- company.Itisnecessary to: ever,amerger can be undertaken under U.K. corpo- s notify HMRC of UKCo’sintention to cease to be rate laws by way of ascheme of reconstruction, under U.K. resident, specifying adate for doing so; which the merging companies and the shareholders of s provide astatement to HMRC of the amount of tax the company which is to cease to exist enter into an ar- which is payable in respect of the period before mi- rangement approved by the Court. Under this ar- gration, along with details of the arrangements rangement, UKCo would cease to exist, its assets UKCo will make to secure payment of that tax; would be transferred to FCo and FCo would issue s ensure that those arrangements are made; and shares to UKCo’sshareholders. s obtain the approval of HMRC of those arrange- U.K. shareholders in UKCo would expect to be able ments. to be treated as continuing to hold the same asset for In practice, HMRC will need to be convinced of the tax purposes with no disposal (subject to meeting the business rationale for ceasing to be tax-resident in the bona fide commercial purposes test). Whether the United Kingdom and will likely require aguarantee to same treatment applies for non-UK shareholders be provided by one or more of UKCo’sU.K. subsidiar- would depend on the rules of their home jurisdiction. ies. As discussed above, an exit charge is payable by a FCo will be not be subject to U.K. tax even though it company wishing to leave the United Kingdom by ref- holds shares in U.K. companies, provided it maintains erence to any chargeable gains on its capital assets, appropriate procedures to ensure that it remains tax subject to relevant exemptions and reliefs. UKCo may resident outside the United Kingdom. therefore be subject to corporation tax on any inher- UKCo will be treated as disposing of all its assets, ent gains on its shares in all of its subsidiaries, both and tax may arise on resulting gains (as no gain/no U.K. resident and non-U.K. resident. That is subject to loss treatment is not available as the transferee, FCo, the application of the Substantial Shareholding Ex- is not subject to U.K. tax), subject to available reliefs emption.11 Any gains on the deemed disposal are and exemptions. The Substantial Shareholding Ex- exempt, provided: emption may be available to ensure no gain arises but s the shares held represent at least 5percent of the or- consideration will be needed of whether this is avail- dinary share capital in the subsidiary company; able.

94 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 Although the scheme of reconstruction will involve 6. FCo is created with anominal shareholder and the transfer of UKCo’sU.K. subsidiaries, no stamp in turn creates UKMergeCo, awholly owned duty would be expected on this transfer because of a limited liability business entity formed under the specific exemption from stamp duty available for laws of the United Kingdom and treated as a schemes of reconstruction. corporation for U.K. corporation tax purposes. UKMergeCo then merges into UKCo with UKCo 3. FCo is created with anominal shareholder.The surviving. The shareholders of UKCo receive shareholders of UKCo then transfer all of their stock in FCo stock in UKCo to FCo in exchange for stock in FCo. UKCo then liquidates This structure is not possible under U.K. corporate law due to the inability to carry out atrue merger. This form of transaction would be possible under U.K. corporate laws and may,depending on the circum- 7. FCo is created with the same corporate stances, be asensible choice as ameans of structuring structure as UKCo, and with the same acorporate exit. The principal downside in tax terms shareholders with the same proportional of atransaction structured this way is the cost of U.K. ownership. UKCo then sells all of its assets (and stamp duty,payable at the rate of 0.5 percent on the liabilities) to FCo and then liquidates transfer of the UKCo shares by reference to the market value of the FCo shares issued in exchange for While this structure may be sensible in some situa- them. tions, especially where the shares in UKCo are stand- U.K. shareholders would expect to be able to be ing at aloss for most shareholders, this will generally treated as continuing to hold the same asset for tax not achieve the beneficial treatment that other struc- purposes with no disposal. Whether the same treat- tures will. U.K. shareholders will be treated as dispos- ment applies for non-UK shareholders would depend ing of their shares in UKCo at market value and on the rules of their home jurisdiction. acquiring anew asset. UKCo will be subject to tax on FCo will be not be subject to U.K. tax rules even any gains it makes on the sale of its assets, subject to though it holds shares in U.K. companies, provided it relevant exemptions such as the Substantial Share- maintains appropriate procedures to ensure that it re- holdings Exemption. FCo will be liable to pay stamp mains tax-resident outside the United Kingdom. duty on any U.K. shares it acquires as part of the sale On the liquidation of UKCo, UKCo will be treated as of UKCo’sassets. If those assets include U.K. land, disposing of all its assets, and tax may arise on result- stamp duty land tax would be payable on the transfer ing gains, subject to available reliefs and exemptions. of that land by reference to that part of the consider- The Substantial Shareholding Exemption may be ation which is payable for the land. available to ensure no gain arises but consideration will be needed of whether this is available. B. Other scenarios that UKCo might consider and their Although the liquidation of UKCo will involve the treatment for U.K. income tax purposes transfer of UKCo’sU.K. subsidiaries, no stamp duty would be expected on this transfer,either because of Atypical transaction used by U.K.-headquartered group relief being available or because the shares are groups with substantial U.K. and international activi- distributed rather than sold for consideration. ties carried on through separate subsidiaries would take the following form: 4. UKCo creates FCo as awholly-owned Anew holding company (FCo) is incorporated in a subsidiary.UKCo then merges into FCo, with FCo jurisdiction outside the United Kingdom. The choice surviving. The shareholders of UKCo receive of jurisdiction would depend on many factors, but a stock in FCo typical choice would be of ajurisdiction which im- poses little or no tax on the receipt of distributions This structure is not possible under UK corporate law from subsidiaries or on their profits through CFC due to the inability to carry out atrue merger. rules, and no withholding tax on distributions to shareholders. 5. FCo is created with anominal shareholder.The New FCo, existing UKCo and its shareholders enter shareholders of UKCo then transfer all of their into ascheme of arrangement, under U.K. corporate stock in UKCo to FCo in exchange for stock in law and approved by the Court in England, under FCo which the shares in the UKCo are cancelled, new The treatment for this structure is the same as for the shares are issued by UKCo to FCo, and FCo issues initial step in 3., above. Therefore, U.K. shareholders shares pro rata to the shareholders. in UKCo would expect to be treated as continuing to UKCo then transfers its non-UK subsidiaries into a hold the same asset. FCo would be subject to acharge non-UK holding structure. to U.K. stamp duty by reference to the full value of the This structure results in UKCo being retained shares issued to the shareholders. within the structure, which is likely to be beneficial as However,without further intra-group reorganisa- ameans of preserving existing contractual relation- tion arrangements, this structure would not achieve ships, including financing relationships with third effective departure from the United Kingdom, as parties. UKCo would remain within the charge to U.K. corpo- In order to preserve the ability of U.K. shareholders ration tax and the United Kingdom’sCFC rules would to receive distributions from aU.K. company,which continue to apply in respect of profits accruing to may in some circumstances be beneficial, some com- UKCo’snon-U.K. subsidiaries. panies have also established adividend access scheme

02/13 TaxManagement International Forum BNA ISSN 0143-7941 95 alongside the new holding structure so that share- theory at least, it could be capable of applying to holders can elect to receive profits available for distri- structuring designed solely for tax purposes. bution from aU.K. subsidiary directly from that company rather than from the non-UK holding com- D. Treatment for U.K. income tax purposes if FCo were an pany.This is achieved through atrust arrangement existing, unrelated foreign corporation, and UKCo and is most likely to be relevant where there is the po- merged into FCo, with FCo surviving tential for the imposition of withholding taxes on divi- dends declared by the new holding company. If this is to be effected by way of atrue merger,it Under this structure, U.K. shareholders are not would not be possible under English corporate law. treated as making any disposal of their old shares, and However,itcould be achieved through two alternative no stamp duty is payable on the transaction as there is routes: no sale of U.K. shares. s FCo acquires the shares in UKCo from its existing UKCo may be subject to tax on any gains arising on shareholders in exchange for the issue of shares to the transfer of its assets into the new holding struc- them, before UKCo is liquidated; or ture, but this is subject to available reliefs and exemp- s FCo, UKCo and the shareholders in UKCo under- tions, in particular the Substantial Shareholdings take ascheme of arrangement under which UKCo is Exemption. wound up, its assets are transferred to FCo and FCo issues shares to UKCo’sshareholders. C.Difference for U.K. income tax purposes if UKCo has a In either case, UKCo’sshareholders should be ‘‘business purpose’’ for the restructuring treated as continuing to hold the same asset for the purposes of tax on capital gains. Stamp duty would be As described above, anumber of the rules on which payable by FCo on its acquisition of the shares in reliance is placed for the effective structuring of an UKCo under the first route. UKCo would be subject to exit are subject to the requirement that the transac- tax on any chargeable gains arising on the disposal of tion is done for bona fide purposes and does not form its assets, subject to available reliefs and exemptions, part of arrangements of which the main purpose or including the Substantial Shareholdings Exemption. one of the main purposes is the avoidance of tax. This While anumber of anti-avoidance tests may,de- rule only applies to those shareholders who are selling pending on the circumstances, apply in these sce- more than 5percent of the existing shares, which, in narios, the fact that FCo is apre-existing, separately the case of alisted company,may well exclude all owned, company will likely ensure that there is acom- shareholders. For shareholders to whom this rule mercial purpose to the transaction entirely separate does apply,itispossible to seek advance clearance from any tax benefits which may accrue. from HMRC. In this case, it would be necessary to show that the principal purpose of the transaction was to advantage the group’soverall operating proce- NOTES dures or achieve some similar benefit, and that taking 1 Taxes Management Act 1970 (TMA 1970), s. 109B. overseas profits out of the scope of the United King- 2 TMA 1970, s. 109B(4), (5). dom’scorporation tax rules was not the main purpose. 3 TMA 1970, s. 109E. The same rule does not apply on asimple migration, 4 Taxation of Chargeable Gains Act 1992 (TCGA 1992), s. but there the test is in effect stricter,asitisnecessary 185. to satisfy HMRC as to arrangements for the payment 5 TCGA 1992, s. 127. of tax. 6 TCGA 1992, s. 135. In addition, the U.K. Government has announced 7 TCGA 1992, s. 137. the introduction of ageneral anti-abuse rule. The de- 8 TCGA 1992, s. 136, Sch. 5AA. tails of this rule are still under discussion and guid- 9 TCGA 1992, s. 171. ance available so far indicates that it is intended not to 10 TCGA 1992, s. 139. apply to genuine commercial arrangements, but, in 11 TCGA 1992, Sch. 7AC.

96 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 Host Country UNITED STATES

Herman B. Bouma, Esq.1 Buchanan Ingersoll &Rooney PC, Washington, DC

I. Introduction 1. Application of U.S. business law

n2004, the United States enacted a‘‘meat-axe’’ One benefit that has been cited is that being organised approach to corporate expatriations by adding pursuant to alaw of the United States or of astate I §7874 to the U.S. Internal Revenue Code of thereof (or of the District of Columbia) generally re- 1986, as amended (the Code).2 In the U.S. context, the sults in the application of the business law of the term ‘‘corporate expatriation’’generally refers to the United States or of that subdivision (‘‘U.S. business transformation of aU.S. multinational group (i.e. an law’’), which is generally viewed as quite beneficial. affiliated group of U.S. and foreign corporations However,foreign jurisdictions also have beneficial headed by aU.S. parent corporation) into aforeign business laws and anumber of these jurisdictions tax multinational group (i.e., an affiliated group of U.S. business entities organised pursuant to their laws ef- and foreign corporations headed by aforeign parent fectively on aterritorial basis, for example, the Neth- corporation).3 (A corporate expatriation may also be erlands and France, or not at all, for example, 8 referred to as a‘‘corporate inversion.’’4) Bermuda and the Cayman Islands. Thus, by being or- ganised pursuant to alaw of one of these jurisdictions Section 7874 was enacted in response to anumber instead of alaw of the United States or of asubdivi- of corporate expatriations that had taken place in the sion thereof, abusiness entity can obtain the benefit of 1990s and early 2000s.5 Section 7874 basically pro- beneficial business law without paying the ‘‘price’’of vides that the new ‘‘foreign’’parent corporation of the worldwide taxation.9 multinational group is treated as aU.S. corporation, thus defeating the whole purpose of the expatriation 2. Access to U.S. capital markets transaction. Second, it is sometimes argued that U.S. corporations Acorporate expatriation by aU.S. multinational have the benefit of ‘‘access’’toU.S. capital markets. group enables the group to avoid anumber of onerous However,foreign business entities also have access to aspects of the U.S. international tax system, including U.S. capital markets. The New York Stock Exchange, worldwide taxation of the parent corporation and cur- the NASDAQ and the American Stock Exchange all rent taxation of certain income realised by controlled list business entities that are organised abroad.10 For- foreign corporations (CFCs) (under the egregious eign business entities may be listed in the same way as ‘‘Subpart F’’regime6). In addition, acorporate expa- U.S. corporations, i.e., by meeting the minimum capi- triation provides the added benefit of allowing taxable talisation requirement imposed by the specific ex- income from U.S. sources to be substantially reduced change and by completing the necessary disclosures through loans to U.S. subsidiaries from foreign affili- required by the Securities and Exchange Commission. ates. Thus, it is not surprising that anumber of U.S. Hundreds of foreign business entities, representing multinational groups decided to expatriate.7 more than 50 countries, are traded on the New York Stock Exchange.11 Moreover,foreign business entities are also able to raise capital from within the United A. ‘‘Benefits’’ of being aU.S. corporation States from other sources, such as U.S. venture capi- tal funds. Such funds consider business opportunities Although at first blush one might think that aU.S. around the world and do not limit themselves to busi- multinational group would lose anumber of signifi- ness entities that have been organised in the United cant benefits as aresult of expatriating, this is not ac- States.12 tually the case. Three main benefits are often cited as derived by amultinational group from having aU.S. 3.Benefits received from the U.S. Government parent corporation but, as discussed below,these ben- efits are extremely limited and generally are far out- Third, it is sometimes argued that aU.S. corporation weighed by the substantial tax benefits to be gained receives anumber of benefits from the U.S. govern- from expatriating. ment, such as diplomatic and consular assistance

02/13 TaxManagement International Forum BNA ISSN 0143-7941 97 02/13 TaxManagement International Forum BNA ISSN 0143-7941 97 abroad, military protection and export promotion as- they made the unfortunate mistake, perhaps 50 or 100 sistance. However,the value of these benefits is ex- years ago, of being organised pursuant to aU.S. or tremely uncertain. Diplomatic and consular state law. assistance can in fact be helpful, but would most likely As more and more corporate expatriations took not be considered asignificant factor by most CEOs. place, they generated much heated rhetoric in Con- Moreover,even if it were considered significant, such gress, and some politicians began to demagogue the assistance could be obtained by incorporating in a issue, going so far as to call expatriating U.S. corpora- country such as the Netherlands, which taxes on ater- tions ‘‘corporate traitors.’’Not surprisingly,diatribes ritorial basis. Whether the United States would pro- against such multinationals made for good sound- vide military protection to abusiness entity would bites, especially during election campaigns. generally be resolved on strategic grounds, and the Because of all the commotion over expatriations, on fact that the entity was organised pursuant to the law February 28, 2002, the U.S. Department of the Trea- of Delaware would likely be only an incidental consid- sury announced that it was conducting astudy of the eration. With respect to export promotion assistance, issues arising in connection with the expatriation of the various programs offered by the Department of U.S. corporations.16 The Treasury News Release Commerce to promote exports focus on the export of stated that several such expatriations were announced products made in the United States, and it is far from in recent months and ‘‘are similar to transactions that clear that aforeign corporation with asignificant U.S. began occurring in the late 1990s, but have increased presence would not receive assistance with respect to in number and size.’’OnMay 17, 2002, the Depart- products it manufactures in the United States. ment of the Treasury released its preliminary report 17 Thus, the benefits aU.S. multinational group loses on corporate expatriations. The report concluded by expatriating may be minimal compared to the tax that ‘‘[m]easures designed simply to halt inversion benefits it obtains.13 transactions may address the issues in the short run, but in the long run produce unintended and harmful effects for the U.S. economy.’’Itwent on to state, ‘‘A B. Background to §7874 comprehensive reexamination of the U.S. interna- tional tax rules and the economic assumptions under- It should be noted that, under the U.S. income tax lying them is needed to ensure that the system of system, it is very easy (apart from §7874) to set up a international tax rules does not disadvantage U.S.- corporation that qualifies as aforeign corporation for based companies competing in the global market- U.S. income tax purposes. Under §7701(a)(4), acor- place.’’OnJune 6, 2002, the House Ways and Means poration is ‘‘domestic’’(U.S.) if it was ‘‘created or or- Committee held ahearing on corporate expatriations ganised in the United States or under the law of the at which the Assistant Secretary of the Treasury for 14 United States or of any State ....’’ Thus, a‘‘U.S. cor- TaxPolicy,Pamela Olson, testified. Assistant Secre- poration’’isacorporation that was created or organ- tary Olson objected to legislation that would ban such ised (hereinafter simply ‘‘organised’’) pursuant to a transactions and stated, ‘‘It’sbetter to focus on the un- law of the United States or of astate. Pursuant to derlying problems.’’18 As indicated by the Department §7701(a)(5), a‘‘foreign corporation’’isacorporation of the Treasury,the long-term solution to the corpo- that is not aU.S. corporation. Thus, whether acorpo- rate expatriation ‘‘problem’’lay not in making expa- ration is aU.S. or foreign corporation for U.S. income triations more difficult, nor in punishing those that do tax purposes has absolutely nothing to do with the lo- expatriate, but in reducing the onerous tax burden cation of the corporation’sproperty,employees or that applies to U.S. corporations. (The developing business operations, or the nature of its interest hold- consensus was that this could best be done by chang- ers as U.S. or foreign persons. Rather,itisbased en- ing to territorial taxation for U.S. corporations and re- tirely on the law pursuant to which the corporation ducing the onerous burden of the anti-deferral rules.) was organised. Acorporation that has all of its prop- Aprominent bill to prevent corporate inversion erty,employees and business operations located out- transactions was S. 2119, the Reversing the Expatria- side the United States and has only foreign interest tion of Profits Offshore Act, introduced on April 11, holders is still aU.S. corporation if it was organised 2002, by Senator Max Baucus (D-Mont.), Chairman of pursuant to aU.S. or state law.Similarly,acorpora- the Senate Finance Committee, and Senator Charles tion that has all of its property,employees and busi- Grassley (R-Iowa), ranking member of the Senate Fi- ness operations located in the United States and has nance Committee.19 Rep. William Thomas (R-Calif.), only U.S. interest holders is nevertheless aforeign cor- Chairman of the Ways and Means Committee, voiced poration if it was organised pursuant to aforeign law. opposition to the legislation on April 15, 2002, stating It should also be noted that, prior to the enactment that, rather than preventing corporate expatriations, of §7874, the ‘‘toll charge’’imposed by §367(a) pre- Congress should ‘‘look at the tax code that drives them vented many U.S. multinational groups from expatri- to do such athing.’’20 ating.15 Many long-established U.S. multinational However,notwithstanding the Treasury’sposition groups remained U.S. multinational groups not be- and Chairman Thomas’ position that the ‘‘problem’’of cause they appreciated the benefits of being aU.S. corporate expatriations should be dealt with through multinational group but because the ‘‘toll charge’’ aradical overhaul of the U.S. international tax system, under §367(a) made acorporate expatriation prohibi- the Republicans finally caved to the political pressure tive. These established U.S. multinational groups and agreed to aspecific provision in the Code to make were ‘‘trapped’’by§367(a), and disadvantaged com- corporate expatriations much more difficult. That pared to foreign business entities (whether newly- provision was §7874, enacted on October 22, 2004, as formed, expatriated or long-established), just because part of the American Jobs Creation Act of 2004.21 It

98 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 should be noted that the American Jobs Creation Act §368(a)(1), sets forth seven basic types of reorganisa- of 2004 was enacted during the 2004 U.S. presidential tions (subject to the special rules in §368(a)(2) and campaign, in which the Democratic presidential can- (3)): didate, John Kerry,referred to expatriating U.S. cor- 1. an (A) reorganisation: a‘‘statutory merger or con- porations as ‘‘Benedict Arnold corporations.’’22 solidation’’(under either U.S. or foreign law26); 2. a(B) reorganisation: the acquisition by one corpo- Although §7874 may,for the most part, have shut ration, in exchange solely for all or apart of its down U.S. corporate expatriations, it has had no voting stock (or in exchange solely for all or apart impact on start-up companies. Informed taxpayers of the voting stock of acorporation that is in control are realising that being organised in the United States of the acquiring corporation), of stock of another is not worth the price of worldwide taxation, and thus corporation if, immediately after the acquisition, more and more start-up companies are organising the acquiring corporation has control of such other pursuant to the law of alow-tax jurisdiction, even corporation; though they anticipate having their headquarters in 3. a(C) reorganisation: the acquisition by one corpo- the United States and being traded on aU.S. stock ex- ration, in exchange solely for all or apart of its change. In testimony before the Senate Finance Com- voting stock (or in exchange solely for all or apart mittee on March 11, 1999, Mr.Robert Perlman, Vice of the voting stock of acorporation that is in control President for Tax, Licensing &Customs for Intel Cor- of the acquiring corporation), of substantially all of poration, stated that if Intel had it to do over again, it the assets and liabilities of another corporation would organise overseas.23 (but, pursuant to §368(a)(2)(G), only if stock or se- If an existing U.S. multinational group wishes to ex- curities received by the transferor corporation are patriate, and is willing to pay the tax cost under distributed to its shareholders in liquidation); §367(a), its expatriation should be recognised for U.S. 4. a(D) reorganisation: atransfer by acorporation of income tax purposes. By expatriating it is simply ob- all or apart of its assets and liabilities to another taining the same corporate structure it could have had corporation if, immediately after the transfer,the ab initio without any U.S. tax cost. To prevent aU.S. transferor (or one or more of its shareholders or multinational group from expatriating is akin to the any combination thereof) is in control of the trans- Soviet Union’spreventing its citizens from expatriat- feree corporation, but only if stock or securities of ing, apolicy that aroused the ire of Senator Henry the transferee corporation are distributed in a ‘‘Scoop’’Jackson (D-WA) and many others in the U.S. transaction that qualifies under §354, 355 or 356; Congress during the Cold War. Why it is inappropriate 5. an (E) reorganisation: arecapitalisation; to prevent the expatriation of individuals but not inap- 6. an (F) reorganisation: amere change in identity, propriate to prevent the expatriation of corporations form, or place of organisation of one corporation, is far from clear. however effected; and 7. a(G) reorganisation: atransfer by acorporation of Basically,there are three main Code provisions that all or part of its assets and liabilities to another cor- apply,ormay apply,toacorporate expatriation – poration in atitle 11 or similar case (pertaining to §§ 368, 7874, and 367. bankruptcy), but only if stock or securities of the transferee corporation are distributed in atransac- II.Section 368 tion that qualifies under §354, 355, or 356. An (A) reorganisation, i.e., astatutory merger or Generally speaking, aperson has arealisation event consolidation, may consist of a‘‘pure’’(A) reorganisa- for U.S. income tax purposes if the person exchanges tion, in which shareholders of the corporation that is 24 an asset for another asset. In that case, the person transferring its assets and liabilities (the transferor realises gain or loss, based on the difference between corporation) receive stock in the corporation to which the fair market value of the asset received and the per- the assets and liabilities are transferred (the trans- son’sbasis in the asset exchanged. However,there are feree corporation), or a‘‘triangular’’(A) reorganisa- anumber of exceptions in the Code to this basic prin- tion, in which shareholders of the transferor ciple. Under one exception, an exchange may qualify corporation receive stock in acorporation that di- for tax-free treatment if it is part of acorporate re- rectly controls the transferee corporation. Atriangu- structuring that qualifies as a‘‘reorganisation’’within lar (A) reorganisation in turn may be either a the meaning of §368(a)(1). If the restructuring does ‘‘forward’’triangular (A) reorganisation,27 in which qualify as areorganisation, then the person may take the transferor corporation merges into the transferee a‘‘carryover basis’’inthe asset received and thus re- corporation and the transferee corporation survives, 25 alise no gain or loss on the exchange. (Over the or a‘‘reverse’’triangular (A) reorganisation,28 in years, the rules in this area have evolved into asome- which the ‘‘transferee’’corporation merges into the what arcane body of law that does not always make a ‘‘transferor’’corporation and the transferor corpora- lot of sense –sometimes highly dependent on form tion survives. and sometimes highly dependent on substance.) Case law has held that, even if arestructuring meets In very broad terms, and highly simplified (and sub- the requirements for areorganisation set forth in ject to variations on atheme), there are two basic §368(a)(1), three additional requirements must be types of reorganisations —one involving the transfer met in order for arestructuring to qualify as areor- of substantially all of acorporation’sassets and liabili- ganisation: ties to another corporation and the other involving the 1. continuity of interest; transfer of substantially all of the stock of acorpora- 2. continuity of business enterprise; and tion to another corporation. However,the statute, 3. business purpose.29

02/13 TaxManagement International Forum BNA ISSN 0143-7941 99 Generally speaking, acorporate expatriation would stock in the U.S. corporation, then the 60 percent rule meet the continuity of interest and continuity of busi- applies (but subject to the same substantial business ness enterprise requirements. Whether it would meet activities exception that applies for purposes of the 80 the business purpose requirement would depend on percent rule). Under the 60 percent rule, the new for- the particular facts and circumstances. eign parent corporation is respected as aforeign cor- poration for U.S. income tax purposes but the taxable III. Section 7874 income of the expatriating U.S. corporation (includ- ing, for this purpose, any related U.S. person) for any As mentioned earlier,§7874 provides a‘‘meat-axe’’ap- taxable year that includes aportion of the ‘‘applicable proach to corporate expatriations. Under the basic period’’cannot be less than the ‘‘inversion gain’’ofthe rule of §7874 (the ‘‘80 percent rule’’), which is some- expatriating U.S. corporation for that taxable year. 30 what hidden in the statutory language, if: (1) what Under §7874(d)(1), the ‘‘applicable period’’isthe would otherwise be aforeign corporation completes period beginning on the first date on which assets are after March 4, 2003, the direct ‘‘or indirect’’acquisi- acquired as part of the expatriation and ending on the tion of substantially all of the properties held directly date that is 10 years after the last date on which assets 31 ‘‘or indirectly’’byaU.S. corporation; and (2) after are so acquired. Under §7874(d)(2), ‘‘inversion gain’’ the acquisition at least 80 percent of the stock (by vote is the income (including gain) realised during the ap- or value) of the foreign corporation is held by former plicable period by the expatriating U.S. corporation as shareholders of the U.S. corporation by reason of aresult of the transfer of stock or assets or by reason holding stock in the U.S. corporation, then the foreign of alicense of property,provided the income is re- corporation is treated as aU.S. corporation for U.S. alised as part of the expatriation or after the expatria- income tax purposes. Thus, if the 80 percent rule ap- tion in atransfer or license to aforeign related person plies to acorporate expatriation, the corporate ‘‘expa- (within the meaning of §7874(d)(3)). (However,the triation’’will be ineffective because the multinational preceding rule does not apply to income from the sale group will still have, for U.S. income tax purposes, a of inventory.) The principal purpose of the 60 percent U.S corporation as its parent. rule is to make sure that inversion gain cannot be The statute provides an exception to the 80 percent offset by net operating losses (NOLs)33 and the tax on rule but the exception has been practically eviscerated inversion gain cannot be offset by credits (other than by regulations. Under §7874(a)(2)(B)(iii), the 80 per- foreign tax credits). cent rule will not apply if, after the acquisition, the Section 7874 may apply to acorporate expatriation ‘‘expanded affiliated group’’(within the meaning of even if it does not constitute areorganisation. §7874(c)(1)) that includes the new parent corpora- Section 7874(f) specifically provides that the section tion has ‘‘substantial business activities’’inthe foreign applies notwithstanding any treaty obligation of the country in which the new parent corporation is organ- United States ‘‘heretofore or hereafter entered into.’’ ised, when compared to the total business activities of Thus, the section applies notwithstanding atreaty tie- the expanded affiliated group. Pursuant to Regs. breaker provision under which acorporation treated 32 §1.7874-3T(b), issued on June 7, 2012, an expanded as U.S. under §7874(b) would be treated as foreign affiliated group meets the substantial business activi- for U.S. income tax purposes.34 ties exception only if each of the following tests is met: 1. Group employees.The number of group employees IV.Section 367 based in the relevant foreign country is at least 25 percent of the total number of group employees and In general, under §367(a)(1), if, as part of areorgani- the employee compensation incurred with respect sation, aU.S. corporation transfers its assets and li- to group employees based in the relevant foreign abilities to aforeign corporation (which transfer is country is at least 25 percent of the total employee referred to as a§361 transfer), the U.S. corporation compensation incurred with respect to all group will realise gain (but not loss) on the transfer.There is employees during atesting period; an exception in §367(a)(5), but this only applies if the 2. Group assets.The value of group assets located in U.S. corporation is owned by five or fewer U.S. corpo- the relevant foreign country is at least 25 percent of rations.35 In addition, transfers of rights in intangible the total value of all group assets; and property36 are carved out and subject to aspecial rule 3. Group income.The group income derived in the rel- in §367(d). Under that rule, atransfer of rights in in- evant foreign country is at least 25 percent of the tangible property is treated as asale in exchange for total group income during the testing period. payments that are contingent on the productivity,use For most U.S. multinational groups, it will be very or disposition of the intangible property,and the difficult to meet these 25 percent tests. Thus, for the deemed payments are treated as royalties. However, most part, the exception to the 80 percent rule has pursuant to IRS guidance, when the U.S. transferor been written out of the statute by the new regulations. goes out of existence as part of the reorganisation and It should be noted that §7874 provides asecondary there is no ‘‘qualified successor,’’the U.S. transferor rule (the ‘‘60 percent rule’’) that applies where an expa- should realise gain on the transfer of the rights in the triation would have been subject to the 80 percent rule intangible property.37 except that less than 80 percent of the stock of the for- In general, under §367(a)(1), if, in connection with eign corporation is held by former shareholders of the an exchange described in §332, 351, 354, 356 or 361, U.S. corporation by reason of holding stock in the U.S. aU.S. person transfers stock in aU.S. corporation to a corporation. Provided at least 60 percent of the stock foreign corporation, the U.S. person will realise gain of the foreign corporation is held by former share- (but not loss) on the transfer.However,if, as part of a holders of the U.S. corporation by reason of holding reorganisation involving a§361 transfer,aU.S.

100 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 person transfers stock in aU.S. corporation to aliqui- because it is formed under the law of FC and is treated dating U.S. corporation in exchange for stock in afor- as acorporation for U.S. income tax purposes. eign corporation (which transfer is referred to as a §354 transfer), it is not clear if that transfer is covered A. Viability under the United States’ (or one of its by §367(a)(1). However,the regulations address this situation. Under the regulations, gain will be realised political subdivision’s) corporate law.Treatment for U.S. in this situation on the §354 transfer only if the §354 income tax purposes transfer is considered an ‘‘indirect stock transfer’’ within the meaning of Regs. §1.367(a)-3(d). Gener- In the United States, business entities are generally ally,the §354 transfer will be considered an indirect formed under astate’s(or the District of Columbia’s) stock transfer only if the U.S. transferor corporation business law and restructuring involving abusiness does not realise gain on the §361 transfer.38 entity may be governed by the law under which it is formed. The various restructurings discussed below The regulations provide an exception to the realisa- should be viable under astate’sbusiness law but, gen- tion of gain on an indirect stock transfer but the ex- erally speaking, astate’sbusiness law would not pro- ception is very narrowly drafted. Under Regs. vide for astatutory merger between aU.S. and a §1.367(a)-3(c), known as the ‘‘anti-expatriation regu- foreign business entity. lations,’’aU.S. shareholder will not be required to re- alise gain on an indirect stock transfer if the following requirements are met: 1. USCo remains the same business entity but 1. 50 percent or less of both the total voting power and effects achange (of some type) that changes the total value of the stock of the transferee foreign it from aU.S. corporation into an FC corporation corporation is received in the transaction, in the ag- for U.S. income tax purposes gregate, by U.S. transferors (i.e., the amount of stock received does not exceed the 50 percent- This scenario is not viable for U.S. income tax pur- ownership threshold); poses because, if USCo remains the same business 2. 50 percent or less of each of the total voting power entity,itwill still be organised under aU.S. or state and the total value of the stock of the transferee for- law and thus will still be aU.S. corporation for U.S. eign corporation is owned, in the aggregate, imme- income tax purposes. diately after the transfer by U.S. persons that are either officers or directors of the U.S. corporation 2. FCo is created with anominal shareholder. the stock or securities of which are transferred (re- USCo then merges into FCo, with FCo surviving. ferred to here as the ‘‘U.S. target company’’) or that The shareholders of USCo receive stock in FCo are 5percent target shareholders (as defined in Regs. §1.367(a)-3(c)(5)(iii)) (i.e., there is no control This scenario involves an (F) reorganisation under group). For this purpose, any stock of the transferee §368 (i.e., amere change in the identity,form or place foreign corporation owned by U.S. persons imme- of organisation of one corporation, however effected). diately after the transfer is taken into account, whether or not it was received in the exchange for If the expanded affiliated group (within the mean- stock or securities of the U.S. target company; ing of §7874) of FCo does not have substantial busi- 3. either: ness activities in FC (within the meaning of Regs. s The U.S. person is not a5percent transferee §1.7874-3T), then, under the 80 percent rule of shareholder (as defined in Regs. §1.367(a)- §7874, FCo will be treated as aU.S. corporation for 3(c)(5)(ii)); or U.S. income tax purposes and thus the attempted ex- s The U.S. person is a5percent transferee share- patriation will be ineffective. holder and enters into afive-year agreement to recognise gain (with respect to the U.S. target Assuming the expanded affiliated group does have company stock or securities it exchanged) in the substantial business activities in FC, then the at- form provided in Regs. §1.367(a)-8; tempted expatriation will be effective but it will be 4. the active trade or business test (as set forth in subject to the rules of §367. Under §367(a)(5) and Regs. §1.367(a)-3(c)(3)) is satisfied. (d), USCo will realise gain on the transfer of its assets 5. the U.S. target company complies with the report- and liabilities to FCo. However,the shareholders of ing requirements set forth in Regs. §1.367(a)- USCo will not realise gain on the transfer of their 3(c)(6). shares in USCo for shares of FCo because the §354 transfer is in connection with a§361 transfer and the §354 transfer does not constitute an indirect stock V. Forum questions transfer.40 For purposes of the discussion below,HCwill be re- ferred to as the United States and HCo will be referred 3. FCo is created with anominal shareholder.The to as USCo. USCo is aU.S. corporation for U.S. shareholders of USCo then transfer all of their income tax purposes because it is formed under the stock in USCo to FCo in exchange for stock in law of the United States (or asubdivision thereof) and FCo. USCo then liquidates is treated as acorporation for U.S. income tax pur- poses. It is assumed that USCo is widely held and thus This scenario also involves an (F) reorganisation and is not owned by five or fewer U.S. corporations.39 FCo is subject to the same analysis as the scenario in is aforeign corporation for U.S. income tax purposes V.A.2., above.

02/13 TaxManagement International Forum BNA ISSN 0143-7941 101 4. USCo creates FCo as awholly owned tempted expatriation will be effective but it will be subsidiary.USCo then merges into FCo, with FCo subject to the rules of §367. Section 367(a)(5) and (d) surviving. The shareholders of USCo receive stock will not apply because there is no transfer by USCo of in FCo its assets and liabilities to aforeign corporation. Under §367(a)(1) and Regs. §1.367(a)-3, the U.S. This scenario also involves an (F) reorganisation and shareholders of USCo will realise gain on the transfer is subject to the same analysis as the scenario in of their shares in USCo for shares of FCo because the V.A.2., above. shareholders of USCo will receive more than 50 per- cent of the stock of FCo (in fact, 100 percent of such 5. FCo is created with anominal shareholder.The stock). shareholders of USCo then transfer all of their After the restructuring, USCo will still hold all of the stock in USCo to FCo in exchange for stock in foreign subsidiaries of the expanded affiliated group. FCo Again, as stated above, attempting to transfer them to FCo on atax-free basis is no mean feat, given that gain Assuming the stock received by the USCo sharehold- will be realised by USCo (subject to §1248) if stock in ers is voting stock in FCo, this scenario involves a(B) aforeign subsidiary is either sold to, or distributed to, reorganisation under §368 (i.e., the acquisition by FCo. one corporation, in exchange solely for all or apart of its voting stock, of stock of another corporation if, im- 7. FCo is created with the same corporate mediately after the acquisition, the acquiring corpora- structure as USCo, and with the same tion has control of such other corporation). shareholders with the same proportional If the expanded affiliated group (within the mean- ownership. USCo then sells all of its assets and ing of §7874) of FCo does not have substantial busi- liabilities to FCo and liquidates ness activities in FC (within the meaning of Regs. §1.7874-3T), then, under the 80 percent rule of Assuming there is some type of circular flow of ‘‘cash’’ §7874, FCo will be treated as aU.S. corporation for or notes payable in the transaction, so that at the end U.S. income tax purposes and thus the attempted ex- of the transaction the assets and liabilities of FCo are patriation will be ineffective. the assets and liabilities that USCo had and the share- Assuming the expanded affiliated group does have holders have not gained or lost any assets as aresult substantial business activities in FC, then the at- of the transaction, then it is likely the transaction will tempted expatriation will be effective but it will be be treated as an (F) reorganisation, subject to the subject to the rules of §367. Section 367(a)(5) and (d) same analysis as the scenario in V.A.2., above. (Thus, will not apply because there is no transfer by USCo of an attempt to realise loss through the transaction its assets and liabilities. Under §367(a)(1) and Regs. would be ineffective.) §1.367(a)-3, the U.S. shareholders of USCo will re- alise gain on the transfer of their shares in USCo for B. Other scenarios that USCo might consider and their shares of FCo because the shareholders of USCo will treatment for U.S. income tax purposes receive more than 50 percent of the stock of FCo (in fact, 100 percent of such stock). An additional scenario USCo might consider is similar After the restructuring, USCo will still hold all of the to the scenario in V.A.4., above, except that FCo is an foreign subsidiaries of the expanded affiliated group. existing wholly owned subsidiary.Thus, USCo merges Attempting to transfer them to FCo on atax-free basis into FCo, with FCo surviving, and the shareholders of is no mean feat, given that gain will be realised by USCo receive stock in FCo. USCo (subject to §1248) if the stock in the subsidiar- Assuming the stock received by the USCo share- ies is either sold to, or distributed to, FCo. holders is voting stock in FCo, this scenario involves a (C) reorganisation under §368 (i.e., the acquisition by 6. FCo is created with anominal shareholder and one corporation, in exchange solely for all or apart of in turn creates USMergeCo, awholly owned its voting stock, of substantially all of the assets and li- limited liability business entity formed under the abilities of another corporation and the distribution law of the United States and treated as a of the stock received by the transferor corporation to corporation for U.S. income tax purposes. its shareholders in liquidation). USMergeCo then merges into USCo, with USCo If the expanded affiliated group (within the mean- surviving. The shareholders of USCo receive stock ing of §7874) of FCo does not have substantial busi- in FCo ness activities in FC (within the meaning of Regs. §1.7874-3T), then, under the 80 percent rule of This scenario involves areverse triangular (A) reor- §7874, FCo will be treated as aU.S. corporation for ganisation under §368. U.S. income tax purposes and thus the attempted ex- If the expanded affiliated group (within the mean- patriation will be ineffective. ing of §7874) of FCo does not have substantial busi- Assuming the expanded affiliated group does have ness activities in FC (within the meaning of Regs. substantial business activities in FC, then the at- §1.7874-3T), then, under the 80 percent rule of tempted expatriation will be effective but it will be §7874, FCo will be treated as aU.S. corporation for subject to the rules of §367. Under §367(a)(5) and U.S. income tax purposes and thus the attempted ex- (d), USCo will realise gain on the transfer of its assets patriation will be ineffective. and liabilities to FCo. The shareholders of USCo will Assuming the expanded affiliated group does have not realise gain on the transfer of their shares in USCo substantial business activities in FC, then the at- for shares of FCo because the §354 transfer is in con-

102 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 nection with a§361 transfer and the §354 transfer tional group was set up with aforeign corporation as does not constitute an indirect stock transfer. the parent corporation.43

C. Need for U.S. income tax purposes for USCo to havea ‘‘business purpose’’ for the restructuring NOTES 1 The author gratefully acknowledges very helpful com- Technically,for arestructuring to qualify as areor- ments received from Bruce N. Davis, Esq., of White & ganisation, it must have abusiness purpose. However, Case LLP,Washington, D.C., on prior drafts of this article. this requirement is fairly easy to finesse by coming up However,the author is solely responsible for the contents with some type of business purpose, which may in- of the final version. clude reducing foreign tax burdens. Eric Solomon has However,the author is solely responsible for the contents stated that abusiness purpose may also include ‘‘the of the final version. foreign jurisdiction’sfavorable business and tax poli- 2 All ‘‘§’’references are to the Code, and all ‘‘Regs. §’’ref- cies, greater proximity and access to foreign custom- erences are to regulations issued thereunder by the U.S. ers and investors, and enhancement of the company’s Department of the Treasury (and set forth in 26 CFR). reputation as aglobal company with afocus on inter- 3 The term ‘‘corporate expatriation’’may also include the national markets.’’41 (It is alright if arestructuring has transformationofaU.S. corporation into aforeign cor- aU.S. tax purpose as long as it also has abusiness pur- poration (whether or not the U.S. corporation is the pose.) parent of amultinational group). 4 The term ‘‘corporate inversion’’may also be used in a D. Treatment for U.S. income tax purposes if FCo were an more technical sense, referring to acorporate expatria- existing, unrelated foreign corporation, and USCo tion in which: (1) the stock of aU.S. parent corporation is merged into FCo, with FCo surviving transferred to awholly owned foreign subsidiary of the parent corporation; or (2) the U.S. parent corporation Assuming the stock received by the USCo sharehold- merges into the wholly owned foreign subsidiary,thus ers is voting stock in FCo, this scenario involves a(C) producing an ‘‘inversion.’’ reorganisation under §368 (i.e., the acquisition by 5 For example, Helen of Troy Corp. (expatriated to Ber- one corporation, in exchange solely for all or apart of muda in 1994), Tyco International (expatriated to Ber- its voting stock, of substantially all of the assets and li- muda in 1997), Transocean (expatriated to the Cayman abilities of another corporation and the distribution Islands in 1999), Cooper Industries (expatriated to Ber- of the stock received by the transferor corporation to muda in 2001), Ingersoll Rand (expatriated to Bermuda its shareholders in liquidation). in 2001), Nabor Industries (expatriated to Bermuda in 2002), and Noble Drilling (expatriated to the Cayman Is- If the expanded affiliated group (within the mean- lands in 2002). Some of these multinational groups later ing of §7874) of FCo does not have substantial busi- moved their parent corporate tax domiciles again, either ness activities in FC (within the meaning of Regs. to Ireland or Switzerland. See Webber,‘‘Escaping the U.S. §1.7874-3T), then it is necessary to determine what TaxSystem: From Corporate Inversions to Re- percentage of the stock of FCo (after the transaction) Domiciling,’’2011 WTD 142-9 (7/25/11); Solomon, ‘‘Cor- is owned by former shareholders of USCo. If such porate Inversions: ASymptom of Larger TaxSystem shareholders own at least 80 percent of the stock of Problems,’’2012 TNT 182-6 (9/19/12). FCo, then, under the 80 percent rule of §7874, FCo 6 Set forth in §§ 951-965. will be treated as aU.S. corporation for U.S. income 7 Over the years, the extreme dichotomy in U.S. income tax purposes. If such shareholders own at least 60 per- tax treatment between U.S. and foreign corporations was cent but less than 80 percent of the stock of FCo, then generally taken as agiven in the tax literature. Any justi- the 60 percent rule of §7874 (pertaining to inversion fication for the dichotomy was generally limited to draw- gain) will apply.Ifthe expanded affiliated group does ing aloose analogy between U.S. citizens and U.S. have substantial business activities in FC, then §7874 corporations. See, e.g., Isenbergh, International Taxation will not apply. (2nd ed. 1999), at 2:31. Assuming the 80 percent rule does not apply (either 8 In fact, from the perspective of management, the busi- because §7874 does not apply or because the former ness laws of some of these jurisdictions might be even shareholders of USCo own less than 80 percent of the more beneficial, e.g., if they have fewer protections for stock of FCo), the transaction will be subject to the minority shareholders. Moreover,ifone truly wanted the rules of §367. Under §367(a)(5) and (d), USCo will re- application of U.S. business law,such as that of Dela- alise gain on the transfer of its assets and liabilities to ware, it might be possible to organise abusiness entity in FCo. The shareholders of USCo will not realise gain aforeign jurisdiction such as the Cayman Islands and on the transfer of their shares in USCo for shares of provide in the that the business law of Delaware is to apply to the resolution of all dis- FCo because the §354 transfer is in connection with a putes arising under the Articles of Association. In some §361 transfer and the §354 transfer does not consti- cases, such as the Marshall Islands, the corporate law of a tute an indirect stock transfer. jurisdiction is actually based on Delaware law. As stated by Willard B. Taylor,because of the oner- 9 AFeb. 2002 solicitation for ‘‘redomiciliations’’into the ous way in which the United States taxes U.S. corpo- Marshall Islands (prepared by International Registries, rations, in negotiations involving amerger of ‘‘equals,’’ Inc., afirm with offices in Reston, VA,and New York, NY) such as the negotiations that took place between states that the Marshall Islands is ‘‘azero tax jurisdiction Chrysler and Daimler-Benz, ‘‘there is astrong bias that [protects] corporate officers, does not have manda- against the survival of the U.S. corporation.’’42 In tory or annual filings and protects corporate confidential- recent mergers between U.S. multinational groups ity.’’Italso states, ‘‘Redomiciliation is FREE with no fees and foreign multinational groups, the new multina- payable in the first year.The first annual corporate main-

02/13 TaxManagement International Forum BNA ISSN 0143-7941 103 tenance fee of US$450 will not be due until one year after 19 ‘‘Baucus, Grassley Offer Bill to Discourage Firms from the company is redomiciled into the Marshall Islands.’’ Moving Abroad to Avoid U.S. Tax,’’ Daily TaxRep. (BNA), 10 Stock in aforeign business entity is normally traded on April 12, 2002, at G-10. Arefined version of this bill was aU.S. stock exchange through what are known as ‘‘Ameri- approved by the Senate Finance Committee on June 18, can Depositary Receipts.’’ 2002. ‘‘Finance OKs Charitable Giving Incentives, Corpo- 11 In its preliminary report on corporate expatriations,re- rate Inversion Limits, Shelter Curbs,’’ Daily TaxRep. leased on May 17, 2002, the U.S. Department of the Trea- (BNA), June 19, 2002, at GG-1. sury acknowledged that corporate expatriations generally 20 ‘‘Thomas Outlines Additional Provisions to Be Included do not affect abusiness’ access to the U.S. capital mar- in Permanent TaxCut Bill,’’ Daily TaxRep.(BNA), April kets. The report stated, ‘‘Although the parent of the corpo- 16, 2002, at G-7. rate group is aforeign corporation following an 21 P.L. 108-357 (10/22/04). inversion, the stock of the foreign parent typically contin- 22 Sullivan, ‘‘Economic Analysis: Eaton Migrates to Ire- ues to be traded on the U.S. stock exchange where the land: Will the U.S. Now Go Territorial?,’’2012 TNT 112-2 former U.S. parent’sstock was traded before the inver- (6/11/12). sion transaction. Indeed, the ability to continue to use the 23 ‘‘Multinationals Beg Finance to Simplify International same ticker symbol often is acondition in the underlying TaxLaws,’’ TaxNotes,March 15, 1999, at 1539. merger agreement.’’The report also noted that removal 24 §§ 61, 1001. from the S&P 500 can have asignificant impact on acom- 25 The statute actually speaks in terms of gain or loss re- pany’sstock price and stated that ‘‘[s]everal corporations alised not being recognised,but this is confusing since that have undergone or are contemplating an inversion there is no gain or loss realised if the asset received has a have qualified or expect to qualify for continued inclusion carryover basis. in the S&P 500.’’ Treasury Department News Release and 26 Regs. §1.368-2(b)(1)(ii) and (iii) Example 13. Preliminary Report on TaxPolicy Implications of Corporate 27 Inversion Transactions, Daily TaxRep. (BNA), May 20, §368(a)(2)(D). 28 2002, at L-3. §368(a)(2)(E). 29 12 In aletter to the author dated June 11, 2002, Mr.Robert Adetailed discussion of these judicial doctrines may be E. Grady,aManaging Director at The Carlyle Group, a found in Switzer and Wilcox, 771-3rd T.M. (Bloomberg global private equity firm headquartered in Washington, BNA Tax&Accounting), Corporate Acquisitions –(A), (B), DC, confirmed that where abusiness entity is organised and (C) Reorganizations.See also Phillips, 770-4th T.M. does not affect The Carlyle Group’sinvestment decision, (Bloomberg BNA Tax&Accounting), Structuring Corpo- as long as the jurisdiction does not raise questions about rate Acquisitions –Tax Aspects. political stability,ownership rights and expropriation 30 The overlay of §7874(b) on §7874(a)(2)(B)(i) and (ii) risk. Mr.Grady stated that investors understand that produces the 80 percent rule. The presentation here of the people choose places like Bermuda and the Cayman Is- structure of §7874, in terms of the 80 percent rule, the ex- lands for tax reasons, and noted that many successful ception, and the 60 percent rule, differs from the literal public companies, including those organised primarily structure of the statute but is believed to make more by U.S. persons, have been organised pursuant to the law sense conceptually. of Bermuda. 31 For this purpose, the acquisition of all of the stock of a 13 There are also detriments to being aU.S. corporation U.S. corporation would be considered the acquisition of (in addition to onerous taxation), such as the obligation all of the properties of the U.S. corporation. to comply with trade embargoes, anti-boycott legislation, 32 REG-107889-12,T.D. 9592. Prior to the change, afacts- the Foreign Corrupt Practices Act and the myriad report- and-circumstances rule applied with respect to the notion ing requirements imposed by the Department of Com- of ‘‘substantial business activities.’’Obviously,that rule al- merce. In addition, in this age of terrorism, aU.S. lowed U.S. corporations more flexibility in determining corporation might even be amore likely target. Any non- whether the substantial business activities exception was tax benefits to being aU.S. corporation might very well be met. On Aug. 18, 2009, TimHorton’sInc. announced it outweighed by such detriments. In that case, there would was expatriating to Canada and noted it could escape the be no net non-tax benefit to being aU.S. corporation. application of §7874 because it had substantial business 14 Pursuant to §301.7701-1(e), the term ‘‘State’’includes activities in Canada. On Nov.23, 2009, Ensco Interna- the District of Columbia for this purpose. tional announced it was expatriating to the United King- 15 Generally speaking, §367(a) applies to transfers to for- dom and noted it could escape the application of §7874 eign corporations that would otherwise qualify for tax- because it had substantial business activities in the free treatment under Subchapter C(dealing with United Kingdom. In similar fashion, Aon Corp. (Feb. 10, corporations). In the case of the transfer of assets other 2012) and Rowan Companies Inc. (March 8, 2012) an- than those that relate to certain intangible property,gen- nounced they were expatriating to the United Kingdom. erally gain is realised unless the assets qualify for the Wells, ‘‘Cant and the Inconvenient Truth About Corporate active trade or business exception. In the case of the Inversions,’’2012 TNT 143-8 (7/25/12). transfer of assets that relate to certain intangible prop- 33 See §172. erty,generally under §367(d) there is adeemed license 34 See, e.g., the tie-breaker provision in Art. 4(4) of the agreement giving rise to deemed royalties. 2006 U.S. Model TaxConvention on Income, issued by 16 Treasury News Release Announcing Study on U.S.-Based the U.S. Department of the Treasury on Nov.15, 2006. Multinational Corporations Reincorporating in Foreign 35 For this purpose, all members of an affiliated group Countries,Feb. 28, 2002. (within the meaning of §1504) are treated as one corpo- 17 Treasury Department News Release and Preliminary ration. If the exception in §367(a)(5) applies, i.e., the U.S. Report on TaxPolicy Implications of Corporate Inversion corporation is owned by five or fewer U.S. corporations, Transactions,May 20, 2002. then special basis adjustment rules must be applied to the 18 ‘‘Administration Unveils Inversion Proposals at Hear- stock held by the five or fewer U.S. corporations. In addi- ing Marked by Controversy,Dissent,’’ Daily TaxRep. tion, special rules in Regs. §1.367(a)-3(e) apply to trans- (BNA), June 7, 2002, at GG-1. fers of stock by the U.S. transferor corporation.

104 02/13 Copyright ஽ 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN 0143-7941 36 For this purpose, the term ‘‘intangible property’’has the 43 See, e.g., the mergers involving Alkermes (U.S.) and meaning set forth in §936(h)(3)(B). Elan Drug Technologies (Ireland) (merger announced 37 Regs. §1.367(d)-1T and Notice 2012-39, 2012-31 I.R.B. May 9, 2011); Pride International (U.S.) and Ensco Inter- 95 (7/13/12). national (U.K.) (merger announced May 31, 2011); Jazz 38 See Regs. §1.367(a)-3(d). Pharmaceuticals (U.S.) and Azur Pharma (Ireland) 39 It is also assumed that USCo is not aUnited States real (merger announced Sept. 19, 2011); Pentair (U.S.) and property holding corporation (within the meaning of Tyco International (Switzerland) (merger announced §897(c)(2)). March 28, 2012); and Eaton Corp. (U.S.) and Cooper In- 40 Regs. §1.367(a)-1(a)(2)(ii), (c), and (d). dustries (Ireland) (merger announced May 21, 2012). Sul- livan, ‘‘Economic Analysis: Eaton Migrates to Ireland: 41 Solomon, ‘‘Corporate Inversions: ASymptom of Larger Will the U.S. Now Go Territorial?,’’2012 TNT 112-2 TaxSystem Problems,’’2012 TNT 182-6 (9/19/12). (6/11/12); Wells, ‘‘Cant and the Inconvenient Truth About 42 Taylor,‘‘Corporate Expatriations—Why Not?,’’ Taxes, Corporate Inversions,’’2012 TNT 143-8 (7/25/12). March 2000, at 146, 157.

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02/13 TaxManagement International Forum BNA ISSN 0143-7941 105 Forum Members and Contributors

CHAIRMAN & CHIEF EDITOR: Leonard L. Silverstein Buchanan Ingersoll & Rooney PC, Washington, D.C.

ARGENTINA international tax law. He teaches at the Brussels Tax School and at ED- HEC (Ecole des Hautes Etudes Commerciales) in France, as well as in the Manuel Benites* graduate programmes of the Universities of Bologna, Vienna, Hamburg and Peréz Alati, Grondona, Benites, Arntsen & Martínez de Hoz, Buenos Tilburg. Aires Manuel M. Benites, a founding partner of Peréz Alati, Grondona, Benites, Henk Verstraete Arntsen & Martínez de Hoz, focuses his practice on tax law. Admitted to the Liedekerke Wolters Waelbroeck Kirkpatrick, Brussels bar in 1980, he is a graduate of the University of Buenos Aires (JD, 1980); Henk Verstraete is a partner with Liedekerke in Brussels. His practice focus- master in laws, Southern Methodist University, Dallas, Texas (LLM, 1987). es on Belgian and international tax advisory, transactional and litigation He is professor of Corporate Income Tax at Universidad Torcuato Di Tella work. He was educated at the University of Leuven (Leuven, Belgium) (law), and professor of Tax-free Corporate Reorganisations, Universidad Católica New York University School of Law (New York, NY, USA) (LL.M. in Taxation) Argentina, School of Law. He is a member of the Argentine Association of and the University of Michigan School of Law (Ann Arbor, MI, USA) (law). He Fiscal Studies, IFA, the Tax Committee of the International Bar Association teaches at the University of Leuven, is a visiting professor at the European and of the Buenos Aires City Bar Association. He is the author of several Tax College (Tilburg University) and is a professor at the Fiscale Hogeschool articles on tax law and a lecturer and panellist at national and international Brussel (Tax School Brussels). He frequently speaks at seminars and regu- congresses and seminars. larly publishes on tax- related topics. Alejandro E. Messineo * M. & M. Bomchil, Buenos Aires BRAZIL Alejandro E. Messineo is a lawyer and partner in charge of the tax depart- Gustavo M. Brigagão * ment of the law firm, M. & M. Bomchil, where he deals with both tax liti- Ulhôa Canto, Rezende e Guerra, Advogados, Rio de Janeiro gation and tax planning. He has recognised experience in international tax Gustavo M. Brigagão lectures on tax law in the Advanced Tax Law and In- issues and corporate reorganisations. He lectures in Universidad Austral direct Tax courses of Fundação Getúlio Vargas (FGV), and in the Magistrate Law School on international taxation. He is a member of IFA, the Buenos School of the State of Rio de Janeiro (EMERJ). He is a general council mem- Aires City Bar, the Public Bar of Buenos Aires and the Argentine Association ber of IFA; secretary general of the Brazilian Association of Financial Law of Fiscal Studies (and a former member of its board). (ABDF); executive national director of the Center of Studies of Law Firms (CESA); president of the British Chamber of Rio de Janeiro (BRITCHAM-RJ); BELGIUM chairman of the Legal Committee of BRITCHAM-RJ; and a partner (board member) of Ulhôa Canto, Rezende e Guerra, Advogados. Howard M. Liebman * Jones Day, Brussels Henrique de Freitas Munia e Erbolato * Howard M. Liebman is a partner of the Brussels office of Jones Day. He is CFA Advogados, São Paulo a member of the District of Columbia Bar and holds A.B. and A.M. degrees Henrique Munia e Erbolato is a senior associate at the tax department of from Colgate University and a J.D. from Harvard Law School. Mr. Liebman CFA Advogados in São Paulo, Brazil. Henrique concentrates his practice has served as a Consultant to the International Tax Staff of the U.S. Treas- on international tax and transfer pricing. He is a member of the Brazilian ury Department. He is presently Chairman of the American Chamber of Bar. Henrique received his LL.M with honours from Northwestern University Commerce in Belgium’s Legal & Tax Committee. He is also the co-author School of Law (Chicago, IL, USA) and a Certificate in Business Administra- of the BNA Portfolio 999-2nd T.M., Business Operations in the European tion from Northwestern University — Kellogg School of Management (both Union (2005). in 2005). He holds degrees from Postgraduate Studies in Tax Law —Institu- to Brasileiro de Estudos Tributários — IBET (2002) — and graduated from Jacques Malherbe * the Pontifícia Universidade Católica de São Paulo (1999). He has written Liedekerke Wolters Waelbroeck Kirkpatrick, Brussels numerous articles on international tax and transfer pricing. He served as Jacques Malherbe is a partner with Liedekerke in Brussels and Professor the Brazilian “National Reporter” of the Tax Committee of the International Emeritus of commercial and tax law at the University of Louvain. He is the Bar Association (IBA)-2010/2011. Henrique speaks English, Portuguese and author or co-author of treatises on company law, corporate taxation and Spanish.

106 03/13 Copyright © 2013 by The Bureau of National Affairs, Inc. TM FORUM ISSN: 0143-7941

FORUM0313_members.indd 106 07-Mar-13 3:55:56 PM Antonio Luis Henrique da Silva Junior Peng Tao * Ulhôa Canto, Rezende e Guerra, Advogados, Rio de Janeiro DLA Piper Hong Kong, PRC Antonio Luis Henrique da Silva Junior Antonio Luis is an associate at the Peng Tao is Of Counsel in DLA Piper’s Hong Kong office. He focuses his tax department of Ulhôa Canto, Rezende e Guerra Advogados, Rio de Janei- practice on PRC tax and transfer pricing, mergers and acquisitions, foreign ro, Brazil, and concentrates his practice on corporate and international tax direct investment, and general corporate and commercial issues in China matters. Prior to holding his current position, Antonio Luis served in the New and cross-border transactions. Before entering private practice, he worked York City (USA) office of a Big Four professional services firm (2010-12). He for the Bureau of Legislative Affairs of the State Council of the People’s is a member of the Brazilian Bar and the New York State Bar. Antonio Luis Republic of China from 1992 to 1997. His main responsibilities were to draft received his LL.M from New York University School of Law (New York, NY, and review tax and banking laws and regulations that were applicable na- USA) in 2010. He holds a degree from his graduate studies in Corporate tionwide. He graduated from New York University with an LLM in Tax. and Tax Law — Ibmec (2008), and graduated from the Universidade do Estado do Rio de Janeiro (2004). Antonio Luis speaks Portuguese, English, Richard Tan Spanish and French. DLA Piper, Beijing CANADA Richard Tan is an associate in DLA Piper’s China tax and corporate teams. He has extensive experience in Chinese tax issues for more than five Jay Niederhoffer * years. Richard’s practice is focused on advising multi-national clients on Deloitte & Touche LLP, Toronto tax planning strategies related to holding structure and restructuring of op- Jay Niederhoffer is an international corporate tax partner of Deloitte & erations in China. Richard also has experience in foreign direct investment Touche based in Toronto. Over the last 15 years he has advised numerous and M&A in China. Canadian and foreign-based multinationals on mergers and acquisitions, international and domestic structuring, cross-border financing and do- DENMARK mestic planning. Jay has spoken in Canada and abroad on cross-border tax issues including technology transfers and financing transactions. He Nikolaj Bjørnholm * obtained his Law degree from Osgoode Hall Law School and is a member of Hannes Snellman, Copenhagen the Canadian and Bar Associations. Nikolaj Bjørnholm is a Copenhagen-based equity partner of pan-Nordic law Brian M. Schneiderman * firm Hannes Snellman. He concentrates his practice in the area of corpo- Borden Ladner Gervais, LLP, Montréal rate taxation, focusing on mergers, acquisitions, restructurings and inter- Brian M. Schneiderman is senior counsel at the Montréal office of Borden national / EU taxation. He represents US, Danish and other multinational Ladner Gervais LLP, a member of the Québec and Ontario Bars, a graduate groups and high net worth individuals investing or conducting business in of the University of Montréal law school and holds a Bachelor of Arts degree Denmark and abroad. He is an experienced tax litigator and has appeared from McGill University. Prior to joining Borden Ladner Gervais, he served as before the Supreme Court more than 10 times since 2000. He is ranked as a a tax litigator with the Canadian Department of Justice. He is a governor of leading tax lawyer in Chambers, Legal 500, Who’s Who Legal, Which Lawyer the Québec Bar Foundation, a past president and current member of Council and Tax Directors Handbook among others. He is a member of the Interna- of the Canadian branch of IFA, a former member of the Canada Revenue tional Bar Association and was an officer of the Taxation Committee in 2009 Agency’s Appeals Advisory Committee, and a member of the Transfer Pricing and 2010, the American Bar Association, IFA, the Danish Bar Association Committee of the American Bar Association Section of Taxation. He focuses and the Danish Tax Lawyers’ Association. He is the author of several tax ar- his practice on international taxation, transfer pricing and corporate reor- ticles and publications. He graduated from the University of Copenhagen in ganisations. 1991 (LLM) and the Copenhagen Business School in 1996 (Diploma in Eco- nomics) and spent six months with the EU Commission (Directorate General Rick Bennett IV (competition)) in 1991/1992. He was with Bech-Bruun from 1992-2010. Borden Ladner Gervais, LLP, Vancouver Rick Bennett is a partner and is the tax practice group leader at the Van- Christian Emmeluth * couver office of Borden Ladner Gervais LLP. Rick was admitted to the British CPH LEX Advokater, Copenhagen Columbia Bar in 1983, graduated from the University of Calgary Faculty of Christian Emmeluth obtained an LLBM from Copenhagen University in 1977 Law in 1982, and holds a Master of Arts from the University of Toronto and and became a member of the Danish Bar Association in 1980. During 1980- a Bachelor of Arts (Honours) from Trent University. Rick practises in the 81, he studied at the New York University Institute of Comparative Law and area of income tax planning with an emphasis on corporate reorganisations, obtained the degree of Master of Comparative Jurisprudence. Having prac- mergers and acquisitions, and international taxation. tised Danish law in London for a period of four years, he is now based in Copenhagen. PEOPLE’S REPUBLIC OF CHINA Stephen Nelson * Tilde Hjortshøj DLA Piper Hong Kong Hannes Snellman, Copenhagen Stephen Nelson is a partner in DLA Piper’s Asia Tax team. He is a leading tax Tilde Hjortshøj has significant tax law experience, gained from dealing with practitioner with more than 25 years’ experience in China, with a practice international corporate tax matters for nearly 10 years, and has advised covering foreign investments, mergers and acquisitions and other broad Danish and international companies on various tax issues relating to cor- corporate matters. Over the past several years his practice has focused porate restructuring and tax structures. Tilde is also experienced in corpo- on advising multinational clients on the tax-effective establishment and rate law and M&A transactions. Tilde was with KPMG Tax for four years and restructuring of operations in China. He is a well respected PRC tax prac- Plesner Law Firm for nearly six years before joining Hannes Snellman two titioner specialising in tax planning from both a PRC and home country tax years ago. perspective. He also has significant experience in foreign investment and M&A in China, with an industry focus in the TMT sector. He has been named FRANCE as a leading lawyer in the fields of PRC taxation, corporate and projects in the Asia Pacific Legal 500, Chambers Global, Chambers Asia and the Inter- Stéphane Gelin * national Tax Review. He has published numerous articles and contributed CMS Bureau Francis Lefebvre, Paris towards many books on PRC tax and investment, and regularly speaks at major international conferences on PRC tax and investment. He is admitted Stéphane Gelin is an attorney, tax partner with CMS Bureau Francis Lefe- to the bar in California, USA and Hong Kong. He speaks English and Chinese bvre, member of the CMS Alliance. He specialises in international tax and (Mandarin). transfer pricing.

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FORUM0313_members.indd 107 07-Mar-13 3:55:56 PM Thierry Pons * Zainab Bookwala FIDAL, Paris Deloitte, Haskins & Sells, Mumbai Thierry Pons is a partner with FIDAL in Paris. He is an expert in French and Zainab Bookwala is a Deputy Manager in the International Tax practice for international taxation. Thierry covers all tax issues mainly in the banking, Deloitte India. Zainab has around three years of experience in the field of finance and capital market industries, concerning both corporate and indi- Direct Taxes, Mergers and Acquisitions and International Taxation. rect taxes. He has wide experience in advising corporate clients on interna- tional tax issues. IRELAND GERMANY Peter Maher * A&L Goodbody, Dublin Dr. Jörg-Dietrich Kramer * Bruhl Peter Maher is a partner with A&L Goodbody and is head of the firm’s tax department. He qualified as an Irish solicitor in 1990 and became a partner Dr. Jörg-Dietrich Kramer studied law in Freiburg (Breisgau), Aix-en- with the firm in 1998. He represents clients in every aspect of tax work, with Provence, Gottingen, and Cambridge (Massachusetts). He passed his two particular emphasis on inbound investment, cross-border financings and legal state examinations in 1963 and 1969 in Lower Saxony and took his structuring, capital market transactions and US multinational tax planning L.L.M. Degree (Harvard) in 1965 and his Dr.Jur. Degree (Göttingen) in 1967. and business restructurings. He is regularly listed as a leading adviser in He was an attorney in Stuttgart in 1970-71 and during 1972-77 he was Euromoney’s Guide to the World’s Leading Tax Lawyers, The Legal 500, Who’s with the Berlin tax administration. From 1997 until his retirement in 2003 Who of International Tax Lawyers, Chambers Global and PLC Which Lawyer. he was on the staff of the Federal Academy of Finance, where he became He is a former co-chair of the Taxes Committee of the International Bar vice-president in 1986. He has continued to lecture at the academy since Association and of the Irish Chapter of IFA. He is currently a member of the his retirement. He was also a lecturer in tax law at the University of Giessen Tax Committee of the American Chamber of Commerce in Ireland. from 1984 to 1991. He is the commentator of the Foreign Relations Tax Act (Außensteuergesetz) in Lippross, BasiskommentarSteuerrecht, and of the Joan O’Connor * German tax treaties with France, Morocco and Tunisia in Debatin/Wasser- Deloitte, Dublin meyer, DBA. He maintains a small private practice as a legal counsel. Joan O’Connor is an international tax partner with Deloitte in Dublin. Dr. Rosemarie Portner * Deloitte & Touche GmbH Wirtschaftsprüfungsgesellschaft, Düsseldorf Philip McQueston A&L Goodbody, Dublin Before joining private practice as a lawyer and tax adviser in 1993, Dr. Rosemarie Portner, LLM, worked as a civil servant for several State and Philip McQueston is a senior associate in the tax department of A&L Good- Federal tax authorities, including in the Tax Counsel International’s office of body, Solicitors. He is a qualified solicitor in Ireland and an Associate of the Federal Ministry of Finance. Her areas of practice are employee benefits the Irish Taxation Institute. He practices all areas of Irish taxation law and and pensions with a focus on cross-border transactions, and international tutors and lectures in tax and business law at the Law School of the Law taxation (at the time she worked as a civil servant she was member of the Society of Ireland. He has had articles published in the Irish Tax Review German delegation which negotiated the German/US Treaty of 1989). She is and is a contributing author to Capital Taxation for Solicitors, an Oxford member of the Practice Counsel of New York University’s International Tax University Press/Law Society of Ireland publication. He is a frequent speaker Programme and a frequent writer and lecturer in her practice area. on Irish tax issues and is a Vice President of the Tax Law Commission of the Association Internationale des Jeunes Avocats (AIJA). INDIA ITALY Kanwal Gupta * Deloitte Haskins & Sells, Mumbai Dr. Carlo Galli * Clifford Chance, Milan Kanwal Gupta is a director in Deloitte’s Mumbai office. He is a member of the Institute of Chartered Accountants of India and has experience in Carlo Galli is a partner at Clifford Chance in Milan. He specialises in Italian cross-border tax issues and investment structuring including mergers and tax law, including M&A, structured finance and capital markets. acquisitions. He is engaged in the tax knowledge management and litiga- tion practice of the firm and advises clients on various tax and regulatory Giovanni Rolle * matters. WTS R&A Studio Tributario Associato, Member of WTS Alliance, Turin – Milan Jayesh Thakur * Giovanni Rolle is a partner of R&A Studio Tributario Associato, a member PricewaterhouseCoopers Pvt. Ltd., Mumbai of WTS Alliance. He is a chartered accountant who has long focused exclu- Jayesh Thakur is a fellow of the Institute of Chartered Accountants of In- sively on international and EU tax, corporate reorganisation and transfer dia (ICAI) with post qualification experience of more than 20 years. He is pricing, and thus has significant experience in international tax planning, an associate director with PricewaterhouseCoopers Pvt. Ltd., heading the cross-border restructuring, and supply chain projects for both Italian and knowledge management function at PwC Tax & Regulatory Services. He foreign multinationals. He is a member of IFA, of the Executive Committee of is a commerce graduate of Mumbai University and holds a Diploma in In- the Chartered Institute of Taxation – European Branch, and of the Interna- formation System Audit (DISA) from the ICAI. He is a frequent speaker at tional Tax Technical Committee of Bocconi University, Milan. A regular con- seminars in India, has presented several papers on tax-related subjects tributor to Italian and foreign tax law journals, he is also a frequent lecturer and authored books on tax subjects for the Bombay Chartered Accountants’ in the field of international, comparative, and European Community tax law. Society (BCAS) and the Chamber of Tax Consultants (CTC). JAPAN Vandana Baijal Deloitte, Haskins & Sells, Mumbai Yuko Miyazaki * Nagashima Ohno and Tsunematsu, Tokyo Vandana Baijal is a Director in the International Tax practice for Deloitte Haskins & Sells, India. Vandana has over 14 years of experience in the Yuko Miyazaki is a partner of Nagashima Ohno & Tsunematsu, a law firm field of Direct Taxes, Mergers and Acquisitions and International Taxation. in Tokyo, Japan. She holds an LLB degree from the University of Tokyo and Vandana has advised clients on cross-border transactions and foreign ex- an LLM degree from Harvard Law School. She was admitted to the Japanese change control regulations. Bar in 1979, and is a member of the Dai-ichi Tokyo Bar Association and IFA.

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FORUM0313_members.indd 108 07-Mar-13 3:55:56 PM Eiichiro Nakatani * Bastiaan de Kroon Anderson Mōri & Tomotsune, Tokyo KPMG Meijburg & Co., Amsterdam Eiichiro Nakatani is a partner of Anderson Mōri & Tomotsune, a law firm in Bastiaan de Kroon is a senior tax manager at KPMG Meijburg & Co, Am- Tokyo. He holds an LLB degree from the University of Tokyo and was admit- sterdam. After graduating in tax law at the University of Amsterdam, Bas- ted to the Japanese Bar in 1984. He is a member of the Dai-ichi Tokyo Bar tiaan joined KPMG Meijburg & Co in February 2001. Bastiaan practises Association and IFA. mainly in the field of international corporate tax and advises on cross-bor- der transactions and reorganisations. MEXICO Terri Grosselin * SPAIN Ernst & Young LLP, Miami, Florida Luis F. Briones * Terri Grosselin is a director in Ernst & Young LLP’s Latin America Business Baker & McKenzie Madrid SLP Center in Miami. She transferred to Miami after working for three years in the New York office and five years in the Mexico City office of another Big Luis Briones is a tax partner with Baker & McKenzie, Madrid. He obtained a Four professional services firm. She has been named one of the leading degree in law from Deusto University, Bilbao, Spain in 1976. He also holds a Latin American tax advisors in International Tax Review’s annual survey of degree in business sciences from ICAI-ICADE (Madrid, Spain) and has com- Latin American advisors. Since graduating magna cum laude from West Vir- pleted the Master of Laws and the International Tax Programme at Harvard ginia University, she has more than 15 years of advisory services in financial University. His previous professional posts in Spain include inspector of and strategic acquisitions and dispositions, particularly in the Latin Amer- finances at the Ministry of Finance, and executive adviser for International ica markets. She co-authored Tax Management Portfolio — Doing Business Tax Affairs to the Secretary of State. He has been a member of the Taxpayer in Mexico, and is a frequent contributor to Tax Notes International and other Defence Council (Ministry of Economy and Finance). A professor since 1981 major tax publications. She is fluent in both English and Spanish. at several public and private institutions, he has written numerous articles and addressed the subject of taxation at various seminars. José Carlos Silva * Chevez, Ruiz, Zamarripa y Cia., S.C., Mexico City Eduardo Martínez-Matosas * José Carlos Silva is a partner in Chevez, Ruiz, Zamarripa y Cia., S.C., a tax Gómez-Acebo & Pombo SLP, Barcelona firm based in Mexico. He is a graduate of the Instituto Tecnológico Autóno- mo de México (ITAM) where he obtained his degree in Public Accounting in Eduardo Martínez-Matosas is an attorney at Gómez-Acebo & Pombo, Bar- 1990. He has taken graduate Diploma courses at ITAM in business law and celona. He obtained a Law Degree from ESADE and a master of Business international taxation. He has been a member of the faculty at the School Law (Taxation) from ESADE. He advises multinational, venture capital and of Administration and Finance of the Universidad Panamericana. He is the private equity entities on their acquisitions, investments, divestitures or author of numerous articles on taxation, including the General Report on the restructurings in Spain and abroad. He has wide experience in LBO and IFA’s 2011 Paris Congress “Cross-Border Business Restructuring” published MBO transactions, his areas of expertise are international and EU tax, in- in Cahiers de Droit Fiscal International. He sits on the Board of Directors ternational mergers and acquisitions, cross border investments and M&A, and is a member of the Executive Committee of IFA, Grupo Mexicano, A.C., financing and joint ventures, international corporate restructurings, trans- an organisation composed of Mexican experts in international taxation, the fer pricing, optimisation of multinationals’ global tax burden, tax contro- Mexican Branch of the International Fiscal Association. He presided over versy and litigation, and private equity. He is a frequent speaker for the the Mexican Branch from 2002-2006 and has spoken at several IFA Annual IBA and other international forums and conferences, and regularly writes Congresses. He is a member of the Nominations Committee of IFA. articles in specialised law journals and in major Spanish newspapers. He is a recommended tax lawyer by several international law directories and considered to be one of the key tax lawyers in Spain by Who’s Who Legal. He THE NETHERLANDS is also a member of the tax advisory committee of the American Chamber Martijn Juddu * of Commerce in Spain. He has taught international taxation for the LLM Loyens & Loeff, Amsterdam in International Law at the Superior Institute of Law and Economy (ISDE).

Martijn Juddu is a senior associate at Loyens & Loeff based in their Am- Álvaro de Lacalle sterdam office. He graduated in tax law and notarial law at the University Baker & McKenzie Madrid SLP of Leiden and has a postgraduate degree in European tax law from the Eu- ropean Fiscal Studies Institute, Rotterdam. He has been practising Dutch Álvaro de Lacalle is a Junior Associate at Baker & McKenzie. Álvaro grad- and international tax law since 1996 with Loyens & Loeff, concentrating uated in Law with a Diploma in Economics from the University of Comillas on corporate and international taxation. He advises domestic businesses (ICADE) in 2010. During his studies, Álvaro participated in the Erasmus and multinationals on setting up and maintaining domestic structures and Program at The Hague University in The Hague (the Netherlands). Álvaro ob- international inbound and outbound structures, mergers and acquisitions, tained a Masters degree in taxation from the Instituto de Empresa in 2011. group reorganisations and joint ventures. He also advises businesses in He has been a member of the Madrid Bar Association since 2011. the structuring of international activities in the oil and gas industry. He is a contributing author to a Dutch weekly professional journal on topical tax matters and teaches tax law for the law firm school. SWITZERLAND

Maarten J. C. Merkus * Walter H. Boss * KPMG Meijburg & Co., Amsterdam Poledna Boss Kurer AG, Zürich Maarten J. C. Merkus is a tax partner at KPMG Meijburg & Co, Amsterdam. Walter H. Boss is a graduate of the University of Bern and New York Uni- He graduated in civil law and tax law at the University of Leiden, and has versity School of Law with a Master of Laws (Tax) Degree. He was admitted a European tax law degree from the European Fiscal Studies Institute, Rot- to the bar in 1980. Until 1984 he served in the Federal Tax Administration terdam. Since joining KPMG Meijburg & Co., he has practised in the area (International Tax Law Division) as legal counsel; he was also a delegate at of international taxation with a focus on M&A /corporate reorganisations the OECD Committee on Fiscal Affairs. He was then an international tax at- and the real estate sector. He regularly advises on the structuring of cross torney with major firms in Lugano and Zürich. In 1988, he became a partner border real estate investments and the establishment of real estate invest- at Ernst & Young’s International Services Office in New York. After having ment funds. Among his clients are Dutch, Japanese, UK and US (quoted) joined a major law firm in Zürich in 1991, he headed the tax and corporate property investment groups as well as large privately held Spanish and department of another well-known firm in Zürich from 2001 to 2008. On July Swedish property investment groups. He also taught at the 1, 2008 he became one of the founding partners the law firm Poledna Boss University of Leiden. Kurer AG, Zürich, where he is the head of the tax and corporate department.

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FORUM0313_members.indd 109 07-Mar-13 3:55:57 PM Dr. Silvia Zimmermann * tional and domestic corporate/commercial tax issues, including corporate Pestalozzi Rechtsanwälte AG, Zürich restructuring, transfer pricing and thin capitalisation, double tax treaty Silvia Zimmermann is a partner and member of Pestalozzi’s Tax and Private issues, corporate and structured finance projects, mergers and acquisitions Clients group in Zürich. Her practice area is tax law, mainly international and management buyouts. He is a graduate of Jesus College, Oxford and the taxation; inbound and outbound tax planning for multinationals, as well as College of Law, London. for individuals; tax issues relating to reorganisations, mergers and acqui- sitions, financial structuring and the taxation of financial instruments. She Charles Goddard graduated from the University of Zürich in 1976 and was admitted to the Rosetta Tax LLP, London bar in Switzerland in 1978. In 1980, she earned a doctorate in law from the Charles Goddard is a partner with Rosetta Tax LLP, a U.K. law firm which spe- University of Zürich. In 1981-82, she held a scholarship at the International cialises in providing “City” quality, cost-effective tax advice to businesses Law Institute of Georgetown University Law Center, studying at Georgetown and professional services firms. Charles has wide experience of advising University, where she obtained an LL.M. degree. She is chair of the tax group on a range of corporate and finance transactions. His clients range from of the Zürich Bar Association, and chair or a member of other tax groups; multinational blue-chip institutions to private individuals. The transactions a board member of some local companies which are members of foreign on which he has advised include corporate M&A deals, real estate trans- multinational groups; a member of the Swiss Bar Association, the Interna- actions, joint ventures, financing transactions (including Islamic finance, tional Bar Association, IFA, and the American Bar Association. She is fluent structured finance and leasing), and and restructuring deals. in German, English and French.

Jonas Sigrist UNITED STATES Pestalozzi Rechtsanwälte AG, Zürich Patricia R. Lesser * Jonas Sigrist is an Associate at Pestalozzi Attorneys at Law Ltd, Zurich, Buchanan Ingersoll & Rooney PC, Washington, D.C. Switzerland, where he is a member of the Tax, as well as the Corporate/M&A, Patricia R. Lesser is associated with the Washington, D.C. office of the practice group. He specialises in advising on transactions and reorganisa- law firm Buchanan Ingersoll & Rooney PC. She holds a licence en droit, a tions from both a tax and a corporate perspective. He also advises business maitrise en droit, a DESS in European Community Law from the University clients on tax, commercial and social security law. Mr. Sigrist is a summa of Paris, and an MCL from the George Washington University in Washington, cum laude graduate of the University of Zurich, Master of Law (2009) and D.C. She is a member of the District of Columbia Bar. was admitted to the Swiss bar in 2012. Herman B. Bouma * UNITED KINGDOM Buchanan Ingersoll & Rooney PC, Washington, D.C. Liesl Fichardt * Herman B. Bouma is Senior Tax Counsel with the Washington, D.C. office Berwin Leighton Paisner LLP, London of Buchanan Ingersoll & Rooney PC. He has over 25 years’ experience in US Liesl Fichardt is a partner in Berwin Leighton Paisner LLP, practising from taxation of income earned in international operations, assisting major US their London office. She advises on all areas of international tax including companies and financial institutions with tax planning and analysis and the EU treaty, double taxation conventions and EC directives in relation to advising on such matters as the structuring of billion-dollar international direct tax and VAT. She has extensive experience in contentious tax matters financial transactions, the creditability of foreign taxes, Subpart F issues, and tax litigation in the Tribunal, the High Court and the Court of Appeal, transfer pricing, and foreign acquisitions, reorganisations and restructur- the Supreme Court and the European Court of Justice. She advises multi- ings. He was counsel to the taxpayer in Exxon Corporation v. Comr., 113 nationals, corporates and high net worth individuals on contentious issues T.C. 338 (1999) (creditability of the UK Petroleum Revenue Tax under sec- relating to corporation tax, income tax and VAT. She is dual qualified as So- tions 901/903), and in The Coca-Cola Company v. Comr., 106 T.C. 1 (1996) licitor and Solicitor-Advocate (England and Wales). She previously acted as (computation of combined taxable income for a possession product under a Judge in the High Court of South Africa and is qualified in that country as section 936). He began his legal career as an attorney-advisor in the IRS a Barrister. She is honorary secretary of the British branch of IFA and sits on Office of Chief Counsel, Legislation and Regulations Division (International the International Taxes Committee of the Law Society of England and Wales. Branch) in Washington, D.C. He was the principal author of the final foreign tax credit regulations under sections 901/903, and participated in income James Ross * tax treaty negotiations with Sweden, Denmark, and the Netherlands Antilles. McDermott, Will & Emery UK LLP, London He is a graduate of Calvin College and the University of Texas at Austin School of Law. James Ross is a partner in the law firm of McDermott Will & Emery UK LLP, based in its London office. His practice focuses on a broad range of interna- * Permanent Members

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