As of July 15, 20081, the Act to amend the Dutch Civil Code (DCC) to bring the articles of the Code in line with the requirements of the European corporate merger directive of October 26, 20052 (the European Merger Directive) is effective. Provided that certain legal requirements are met, as of July 15, 2008 it is possible to merge a Dutch legal entity with an entity incorporated in one of the other member states of the European Union or the European Economic Area (Member States). Obviously, this may open up an array of opportunities for international companies, or companies that have international aspirations. Please find below a general outline of the Dutch tax and legal aspects of cross-border mergers.
Dutch legal framework
A legal merger is constituted by a deed of a civil law notary, whereby (i) the disappearing company B merges into the acquiring company A, or (ii) company A and company B incorporate company C, and subsequently both merge into company C; or (iii) subsidiary (D) merges into the holding company A, or (iv) another subsidiary (E) merges into subsidiary D, whereby either subsidiary F or holding company A issues shares to the former shareholders of subsidiary E. The requirements for a legal merger are set forth in articles 2:308-334 of the DCC.
Pursuant to article 2:308 sub 3 DCC, a legal merger can be effected by and between a public or private company with limited liability or a European cooperative and a public or private limited company or cooperative that is governed by the laws of any other Member State.
The various steps of the legal merger process are, in short and as a result incomplete, as follows:
The managements of the merging companies draft a merger proposal. Articles 2:312, 2:326 and 2:333 DCC summarise a list of the information and data the merger proposal should hold, for instance the share exchange ratio and, as the case may be, the amount of the payments to be made pursuant to such exchange ratio. An auditor shall examine the merger proposal and certify whether in his opinion the proposed share exchange ratio is reasonable. In addition, proposals for a cross-border merger need to include a valuation of the assets that are transferred to the acquiring company and the effect of the merger on employment. Prior to the presentation of the merger proposal the merging companies need to inform the trade unions3 and they need to timely consult the work councils, if there are any, and give said works councils ample opportunity to issue their advice4.
Please note that the merging companies may fall within the scope of relevant competition rules. Pursuant to those rules, the merging company(ies) may need to apply for a license with the Dutch Competition Authority or need to file their intent with the European Committee.
The merger proposal, together with the adopted annual accounts and annual reports or other financial statements over the last three years and a interim statements of assets and liabilities or annual accounts which have not been adopted, all insofar to the extent the annual accounts of the merging company must be available for inspection, need to be submitted at the trade registries of the merging companies and at the office of the merging companies. The merging companies shall publish a notice of the lodged documents stating the public registries at which the same are deposited and the address where the same may be inspected, in a daily, national newspaper, and, for cross-border mergers, in the Staatscourant (the official gazette). Subsequent to the lodging of all documents, creditors have one month to oppose the merger.
Assuming there is no delay pursuant to a claim of a creditor, after one month the general shareholders meeting votes on the merger proposal. Once the merger proposal is adopted, the legal merger is effective the day after the execution of the deed of merger by the civil law notary. Should the acquiring company be a non-Dutch legal entity, than the effective merger date is determined by the governing law of the acquiring company (article 2:3331 sub 1 DCC).
Mergers with 100 per cent subsidiaries, can be ensured through a simplified merger procedure (article 2:333 DCC), in which case for instance the valuation proceedings by the auditor, and all complications in connection therewith, can be omitted.
The Act provides for the option for shareholders of a Dutch company (i) that is being merged into a non-Dutch company, governed by the laws of another Member State, and (ii) who object said merger, to have their shares cancelled in return for the payment of damages by the non-Dutch company (Article 2:333h DCC).
Dutch tax framework
The European tax merger directive5 (the “Tax Directive”) has been implemented in The Netherlands by law of 10 September 19926. The Tax Directive was implemented in the Dutch corporate income tax act (CITA) (wet op de vennootschapsbelasting 1969) and in the Dutch personal income tax act (PITA) (wet inkomstenbelasting 2001). Following the amendment of the Tax Directive, as per 18 August 2006 further amendments were implemented in The Netherlands in accordance with the latter Directive.
Dutch tax consequences at the level of the merged company
If the assets of a Dutch taxpayer (the merged company) are transferred under general title in connection with a legal merger, then the merged company is deemed to have transferred its assets at the time of the legal merger to the legal person which acquired these assets under general title (the acquiring company). The merged company is deemed to have ceased generating taxable profits from the business in The Netherlands at that time7.
In principle, the profits realised on the transfer of the shares will have to be taken into account at the level of the merged company. This will also apply to any hidden and tax reserve. Based on article 14B paragraph 2, of the Dutch corporate income tax Act (CITA) profits realised on the legal merger are not taken into account provided that inter alia the following conditions are met:
- The same measures apply for the determination of the profit of the disappearing legal person and the acquiring legal persons
- None of these legal persons has losses to be carried forward under article 20 CITA
- None of these legal persons is entitled to relief from double taxation with regard to foreign income
- Future levying of tax is guaranteed.
Even if the conditions of article 14B CITA are not all met, upon joint prior request of the merged company and the acquiring company, the tax authorities may decide to apply the tax facility (ie such that taxation at the level of the merged company would be deferred), provided certain additional requirements (which mainly aim to safeguard the future levying of tax) are complied with. In such situation, the tax facility could also be applied to a legal merger which would involve entities that have tax losses. As a result losses incurred by the merged company can be transferred to the acquiring company. A separate approval of the Dutch tax authorities will be required8.
The tax facility is not applicable in case the legal merger is primarily aimed at the avoidance or deferral of taxation. Unless the contrary is shown to be likely, the legal merger is deemed to be primarily aimed at the avoidance or deferral of taxation if the legal merger does not take place on the basis of business considerations, such as the restructuring or rationalising of the active business of the demerging and the acquiring legal persons9.
Furthermore, the tax facility will only be applicable if both the merged company and the acquiring company are resident of The Netherlands or resident in one of the Member states of the EU10 or EEA11.
Dutch tax consequences at the level of the acquiring company
If the acquiring company is a Dutch tax resident company, and the merger tax facility applies, the acquiring company will continue the business of the merged company at the same book value (ie, no step-up in base of the acquired assets is allowed).
Dutch tax consequences at the level of the shareholder
A shareholder that is involved in a legal merger is deemed to have disposed its shares in the merged company at the time of the merger. If the shareholder is an Dutch resident (natural or legal) person, generally the profits realised on the disposal of the shares do not have to be taken into account at the level of the shareholder (ie taxation is deferred) if it relates to a qualifying legal merger, ie if (inter alia) both the acquiring and merged company are resident of the EU/EEA and the legal merger is not primarily aimed at the avoidance or deferral of taxation.
Furthermore, in case of a legal merger, for Dutch dividend withholding tax and corporate income tax purposes an amount equal the share capital of the merged company is treated as share capital of the acquiring company in respect of all the shareholders.
Dutch transfer taxes
Real estate transfer tax is levied at a rate of 6 per cent from the buyer on the acquisition of the legal or the beneficial ownership of real estate situated in The Netherlands, or the acquisition of the rights to which this real estate are subject12.
Exemptions exist for legal mergers if a company exclusively acquires the whole enterprise or an independent part of it from another company, against the issue of shares. A 100 per cent participation in another company is treated as an independent part of an enterprise. The issue of shares includes the case in which an amount is paid in cash together with the issue, provided that it does not exceed 10 per cent of the value of the contribution made on the shares13.
In order to apply for the exemption, the shares in the acquired company should be held, and the acquiring company should continue the business of the merged company for an uninterrupted period of three years, unless the disposal of the shares takes place in connection with a merger, demerger or internal reorganisation qualifying for an exemption from real estate transfer tax itself14.