Bill to change the rules on tax-exempted cross-boarder mergers under the Fiscal Act on Mergers

Date 15 feb. 2011

 

The Danish Tax Board has with two binding answers made a decision on tax-exempted cross-boarder mergers under the Fiscal Act on Mergers. In the first case (published on 1 December 2010), the Tax Board indicated that the merger might result in taxation of distribution proceeds while in the second case (published on 7 December 2010), the Tax Board dismissed this possibility. As a consequence hereof, a bill to change the rules in a way that would result in taxation of distribution proceeds in the mentioned cases was introduced.

 

Facts

In both cases, the questioner wanted to make a vertical merger, merging a Danish subsidiary company with a foreign parent company.

 

The Tax Board was asked whether or not the presented mergers could be done as tax-exempted vertical mergers.

 

The legal basis         

In accordance with the Fiscal Act on Mergers, a tax-exempted cross-boarder merger may take place if the following conditions are fulfilled: (i) the Danish company shall be dissolved as a result of the merger, (ii) both companies must be covered by the notion “company in a member state” in the Parent-Subsidiary Directive, and (iii) the foreign company must not be considered transparent according to Danish law.

 

Having complied with these conditions, the general rules in the Fiscal Act on Mergers will apply, with the exception that the rules concerning acquisition prices for assets and debts only apply to those assets which, following the merger, are connected to the permanent establishment of the received company.

 

According to the Tax Assessment Act, taxation in connection with distribution of liquidation proceeds under the rules of the Capital Gains Tax Act should not be paid when the shares are either subsidiary shares or affiliated company shares.

 

The Tax Board’s decision

In the first case, the Tax Board concluded that it was possible to carry out a tax-exempted cross-boarder merger, but at the same time maintained the possibility that distribution of liquidation proceeds might be subject to taxation.

 

In the second case, SKAT concluded that it was possible to carry out a tax-exempted cross-boarder merger, but at the same time maintained the possibility that distribution of liquidation proceeds might be subject to taxation. The Tax Board did not agree with this decision.

 

SKAT’s decision was based upon the opinion that the liquidation proceeds should be treated as a distribution to be taxed as a partly taxable distribution in accordance with the general rules on distribution to foreign companies.

 

The Tax Board did not agree with this assessment and stated that there could be no taxation on liquidation proceeds due to the fact that the rules of the Tax Assessment Act did not provide the sufficient legal basis and because the merger should be entirely tax-exempted when complying with the conditions in the Fiscal Act on Mergers.

 

A new bill

The fact that the Tax Board reached very different conclusions in two comparable cases within such a short amount of time makes the legal status on whether or not distribution of liquidation proceeds is subject to taxation very unclear.

 

However, this confusion may very well soon be history due to the fact that bill L84, which among other things comprises new rules on taxation of distribution of liquidation proceeds, has been proposed. From the bill’s explanatory notes it appears that, following the uncertainty created by the above-mentioned cases, one of the reasons the bill has been proposed is to provide clarity concerning the legal status.

 

If the bill is passed, a rule making the parent company partly tax liable in connection with the distribution of liquidation proceeds will be introduced into the Fiscal Act on Mergers. As a result, there will no longer be any confusion as to whether or not distribution of liquidation proceeds is subject to taxation, as there will be a clear legal basis regarding taxation as a capital gain under the the Capital Gains Tax Act.


 

If you have any questions regarding the above or require additional information about tax assessment or the income tax form, please contact Jakob Bundgaard, Partner, jbu@mwblaw.dk or Kim David Lexner, Junior Associate, kdl@mwblaw.dk.


The above does not constitute legal counselling and Moalem Weitemeyer Bendtsen does not warrant the accuracy of the information. With the above text, Moalem Weitemeyer Bendtsen has not assumed responsibility of any kind as a consequence of a reader’s use of the above as a basis of decisions or considerations.