October 1, 2014 The EU Mergers Directive What it does and why you should care! Jim Close, HMRC Pete Miller, Tax Director, Ernst & Young LLP Jim Close,

April 11, 2023

The EU Mergers DirectiveThe EU Mergers Directive

What it does and why you should care!What it does and why you should care!

Jim Close, HMRC

Pete Miller, Tax Director, Ernst & Young LLP

Jim Close, HMRC

Pete Miller, Tax Director, Ernst & Young LLP

HistoryHistory

1978 – 3rd Company Law Directive on mergers of public companies

1990 – EU Mergers Directive

2005 – European Company statute

2005 – Amendment to EU Mergers Directive

2005 – 10th Company Law Directive on cross-border mergers

1978 – 3rd Company Law Directive on mergers of public companies

1990 – EU Mergers Directive

2005 – European Company statute

2005 – Amendment to EU Mergers Directive

2005 – 10th Company Law Directive on cross-border mergers

3rd Company Law Directive on mergers of public companies3rd Company Law Directive on mergers of public companies

• Required domestic law to permit mergers of public companies

• Legislation at sections 425 to 427 and Sch 15B CA 1985

• Now at …

• UK legislation does not appear to be restricted to public companies

• Although no one seemed to know about it!

• Required domestic law to permit mergers of public companies

• Legislation at sections 425 to 427 and Sch 15B CA 1985

• Now at …

• UK legislation does not appear to be restricted to public companies

• Although no one seemed to know about it!

What is a merger?What is a merger?

"merger by acquisition" shall mean the operation whereby one or more companies are wound up without going into liquidation and transfer to another all their assets and liabilities in exchange for the issue to the shareholders of the company or companies being acquired of shares in the acquiring company and a cash payment, if any, not exceeding 10 % of the nominal value of the shares so issued or, where they have no nominal value, of their accounting par value

"merger by acquisition" shall mean the operation whereby one or more companies are wound up without going into liquidation and transfer to another all their assets and liabilities in exchange for the issue to the shareholders of the company or companies being acquired of shares in the acquiring company and a cash payment, if any, not exceeding 10 % of the nominal value of the shares so issued or, where they have no nominal value, of their accounting par value

Merger by acquisitionMerger by acquisition

A

a

B

a

B

b b

Company B issues shares to the shareholders of Company ACompany A is dissolved without a winding up

(cf liquidation reconstruction)

What is a merger?What is a merger?

"merger by the formation of a new company“ shall mean the operation whereby several companies are wound up without going into liquidation and transfer to a company that they set up all their assets and liabilities in exchange for the issue to their shareholders of shares in the new company and a cash payment, if any, not exceeding 10 % of the nominal value of the shares so issued or, where they have no nominal value, of their accounting par value.

"merger by the formation of a new company“ shall mean the operation whereby several companies are wound up without going into liquidation and transfer to a company that they set up all their assets and liabilities in exchange for the issue to their shareholders of shares in the new company and a cash payment, if any, not exceeding 10 % of the nominal value of the shares so issued or, where they have no nominal value, of their accounting par value.

Merger by formation of NewCoMerger by formation of NewCo

A

a

NewCo B

b

NewCo

a b

NewCo issues shares to the shareholders of Companies A and BCompanies A and B are dissolved without a winding up

(cf liquidation reconstruction)

2007 changes – SI 2007/31862007 changes – SI 2007/3186

Schedule 1 – cross-border transfers of business

Schedule 2 – European cross-border mergers

Schedule 3 – Mergers, etc.: treatment of transparent entities

Schedule 1 – cross-border transfers of business

Schedule 2 – European cross-border mergers

Schedule 3 – Mergers, etc.: treatment of transparent entities

UK Mergers – 2005 tax provisionsUK Mergers – 2005 tax provisions

• Section 140E - merger to form UK SE

• Section 140F - merger to form non-UK SE

• Section 140G - shareholder relief

• Section 140E - merger to form UK SE

• Section 140F - merger to form non-UK SE

• Section 140G - shareholder relief

2007 changes – section 140E2007 changes – section 140E

• Merger to form and SE

• Merger to form an SCE

• Merger by acquisition

• Merger to form new company

Merged entity is UK resident or has UK PE

No gain, no loss transfer

• Merger to form and SE

• Merger to form an SCE

• Merger by acquisition

• Merger to form new company

Merged entity is UK resident or has UK PE

No gain, no loss transfer

2007 changes – section 140F2007 changes – section 140F

• Merger to form and SE

• Merger to form an SCE

• Merger by acquisition

• Merger to form new company

UK company transfers assets of non-UK PE to non-UK transferee

Aggregate gain subject to section 815A ICTA

• Merger to form and SE

• Merger to form an SCE

• Merger by acquisition

• Merger to form new company

UK company transfers assets of non-UK PE to non-UK transferee

Aggregate gain subject to section 815A ICTA

Consequential amendmentsConsequential amendments

• Section 140G – shareholder relief

• Section 209(1A) ICTA – treated as distributions in a winding up

• S140 TCGA

• Loan relationships / derivative contracts

• Capital allowances

• Intangibles

• Section 140G – shareholder relief

• Section 209(1A) ICTA – treated as distributions in a winding up

• S140 TCGA

• Loan relationships / derivative contracts

• Capital allowances

• Intangibles

Partial divisions – ss140A & 140CPartial divisions – ss140A & 140C

• New provision to permit part of the business to be transferred

• Part transfers treated as schemes of reconstruction to which s136 applies (new section140DA)

• References to ‘trade’ changed to ‘business’

• New relief for cross-border demergers, section 213A ICTA

• New provision to permit part of the business to be transferred

• Part transfers treated as schemes of reconstruction to which s136 applies (new section140DA)

• References to ‘trade’ changed to ‘business’

• New relief for cross-border demergers, section 213A ICTA

Outstanding pointsOutstanding points

• Can UK companies be merged?

• Is the UK wholly compliant with the Mergers Directive? (10% test)

• Do UK shareholders get relief for a merger of non-UK companies?

• What about mergers of EU and non-EU companies?

• Can UK companies be merged?

• Is the UK wholly compliant with the Mergers Directive? (10% test)

• Do UK shareholders get relief for a merger of non-UK companies?

• What about mergers of EU and non-EU companies?

April 11, 2023

The EU Mergers DirectiveThe EU Mergers Directive

What it does and why you should care!What it does and why you should care!

Jim Close, HMRC

Pete Miller, Tax Director, Ernst & Young LLP

Jim Close, HMRC

Pete Miller, Tax Director, Ernst & Young LLP

AppendixAppendix

Sections 140 A and 140C TCGA

An overview

Sections 140 A and 140C TCGA

An overview

Section 140A TCGA 1992Section 140A TCGA 1992

Transfer of a UK trade

• Co A resident in a Member State transfers UK trade

• To Co B resident in another Member State

• Consideration is wholly shares or debentures issued by B to A

Transfer of a UK trade

• Co A resident in a Member State transfers UK trade

• To Co B resident in another Member State

• Consideration is wholly shares or debentures issued by B to A

Section 140A TCGA 1992Section 140A TCGA 1992

Conditions

• Co B has a UK PE and gains chargeable in UK or

• Co B is UK resident and liable to CT on UK gains

Result

• No gain, no loss on transfer of assets

Conditions

• Co B has a UK PE and gains chargeable in UK or

• Co B is UK resident and liable to CT on UK gains

Result

• No gain, no loss on transfer of assets

Section 140A examplesSection 140A examples

A

UK

A

UK

B

Section 140C TCGA 1992Section 140C TCGA 1992

Transfer of a non-UK trade

• Co A resident in UK transfers non-UK trade (cf s140 TCGA)

• To Co B resident in another Member State

• Consideration is wholly or partly shares or debentures issued by B to A

Transfer of a non-UK trade

• Co A resident in UK transfers non-UK trade (cf s140 TCGA)

• To Co B resident in another Member State

• Consideration is wholly or partly shares or debentures issued by B to A

Section 140B TCGA 1992Section 140B TCGA 1992

Result

• Co A’s gains and losses aggregated

• Gain taxed subject to section 815A TCGA

• So credit given for tax that would have bee payable in Member State of PE had the Mergers Directive not existed

NB NOT tax free

Result

• Co A’s gains and losses aggregated

• Gain taxed subject to section 815A TCGA

• So credit given for tax that would have bee payable in Member State of PE had the Mergers Directive not existed

NB NOT tax free

Section 140B examplesSection 140B examples

A UK

Non-UK

A UK

Non-UK

B Non-UK