On 20 May 2010, the European Court of Justice (ECJ) issued its judgment in the Modehuis Zwijnenburg case (C-352/08) regarding the interpretation of the antiavoidance provision in the EU Merger Directive (Directive). In this case, it became clear that a merger that is primarily undertaken for tax purposes (specifically, to avoid Dutch transfer tax) is not covered by the anti-abuse regulation of the Directive to the extent that the avoided tax does not fall within the scope of the Directive.
The case involved a transfer of a Dutch company from father to son within the Netherlands. The son, indirectly (through a Dutch holding company), held a Dutch operating company. One of the assets of the operating company was a building, which housed a retail business. The father was the owner of another company, which also owned a building. This latter building was being leased to the son for purposes of operating the business. The intention was to transfer all of the assets from the father to the son. However, a direct transfer of the building from father to son would have resulted in transfer tax and Corporate Income Tax (CIT).
Under Dutch tax law, in principle, no transfer tax (regarding the sale of real estate) or CIT is levied in the event of a company merger. This exemption, derived from the Directive, was implemented in Dutch national law and applies both to domestic as well as cross-border mergers. Based on the Directive, no CIT is levied by an EUmember- state in the event of a merger.
Consequently, a merger was planned in which the son’s operating company would merge with the father’s company whereby the son would receive shares of the latter company. Eventually, the father would sell his shares in the company to his son. However, art. 14 sub 4 Corporate Income Tax Act prevents the exemption from the CIT if the merger is mainly designed to avoid or defer taxation. However, no such provision is implemented in the Dutch transfer tax Act. Therefore, there are no legal grounds for denying the exemption for transfer tax, even though the merger was primarily structured in order to avoid or defer this transfer tax.
In principle, transfer tax does not fall within the scope of the Directive. However, since no anti-avoidance provision is implemented in the Dutch transfer tax Act, the Dutch Supreme Court questioned whether the anti-avoidance provision of the Directive (art. 11 sub 1a of the Directive) may be interpreted in such a way that as to deny the Directive’s advantages for transactions that are predominantly structured to avoid or defer a tax that is not included in the scope of the Directive. Therefore, the Dutch Supreme Court filed for a preliminary ruling with the ECJ regarding the interpretation of the anti-avoidance provision in the Directive.
Since the Netherlands has implemented the Directive both for domestic as well as cross-border mergers, the ECJ held that it was competent to answer the question with regard to the purely internal situation (in accordance with previous case law e.g. Leur-Bloem, C-28/95, 17 July 1997).
Moreover, according to the ECJ, art. 11 sub 1a of the Directive should be interpreted restrictively since it sets out an exception. Therefore, the Court held that the Directive solely applies to mergers and other reorganizations, and only the taxes specifically referred to in the Directive (such as CIT) may fall within the scope of the Directive.
Consequently, the ECJ determined that the benefits of the Directive may not be denied if the main purpose of a merger is the avoidance of a tax that is not covered by the Directive.