Cross-border merger was not possible through application of the Danish Companies Act's rules of solvent liquidation

Date 7 jun. 2011

 

On March 16 2011, the National Income Tax Tribunal refused that a Danish company could carry out a tax-free cross-border merger with a Cypriot company, provided that the Danish company ended by liquidation, regardless of the Cypriot company fiscally would be based in Denmark at the time of merger.


The case

A Danish private limited company wanted to transfer all its assets and liabilities to a Cypriot company. The Danish shareholders would, as remuneration, receive shares in the Cypriot company. The Danish private limited company would subsequently end by liquidation. Since Cyprus at the time had not yet implemented the 10th Company Directive, whereafter there would have been legal basis for ending a company without liquidation according to the rules regarding cross-border merger, the company could not end by merger.


The legal foundation

The Danish Merger Tax Act provides legal basis to carry out tax-free cross-border mergers. One condition for this is that the contributing company must end by merger. This is in compliance with the Danish Companies Act’s concept of merger of, according to which a merger exists when a limited liability company ends without liquidation, either by transferring all assets and liabilities to another company, or by merging with one or more companies into a new limited liability company.


For a number of years in Denmark, it was not possible to do tax-free cross-border mergers, as there was no legal basis for this in the Danish Companies Act. In 2007, the legal basis was established, when Denmark implemented the 10th Company Directive.


The National Income Tax Tribunal’s verdict

The National Tax Board had declined permission to do tax-free cross-border mergers giving the reasons that, since the Danish contributing company would end by application of the Danish liquidation rules, it was not a merger in the sense of the Danish Companies Act. It was the opinion of The National Tax Board that there was complete identity between the concept of merger related to tax law and company law.


The representative of the firm indicated in his argumentation that there in relation to company law exist two concepts of merger: One procedural and one substantive, where the latter was the relevant in relation to both the concept of merger related to tax law and company law. According to the representative, substantive merger means a company’s transfer of all its assets and liabilities to another company, when the shareholders are paid in shares of the continuing company and when the contributing company dissolve, regardless of in which way.


The National Income Tax Tribunal refused the representative’s understanding of the concept of merger. Initially, the National Income Tax Tribunal referred to the interpretative notes of the Danish Merger Tax Act, where it is stated that the concept of merger related to tax law is based on the concept related to company law. Moreover, the interpretative notes indicates that the Danish Merger Tax Act was introduced to provide legal basis for tax-free mergers, and only tax-free mergers, and not other types of fusions between companies followed by discontinuance of a company.


Moreover, the National Income Tax Tribunal accentuated that pursuant to the Danish Merger Tax Act, the contributing company must end without liquidation. In this context, liquidation must be understood in line with the Danish Companies Act’s rules.


Since the contributing company would end by application of the Danish Companies Act’s rules of solvent liquidation, there was no legal basis for application of the Danish Merger Tax Act.


The verdict’s influence

The verdict seems to provisionally end the controversial problem regarding the identity between the concept of merger related to tax law and company law. Nevertheless, the National Income Tax Tribunal has left the door ajar when it finally stated that the verdict was not to be regarded as a general stand on the concept of merger related to tax law, but merely was specifically reasoned in the facts of the case. However, this statement is difficult to unite with the statements and arguments of the case, especially when it comes to public and private limited companies.



If you have any questions or require any additional information on the case, please contact partner Jakob Bundgaard (jbu@mwblaw.dk) or attorney Kim David Lexner (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 of considerations.