This is a summary of several positions confirmed by the French Tax Authorities since two years.
Dissolution by gathering of all shares within only one hand: can it benefit from the favourable tax regime of mergers?
No, the favourable tax regime cannot apply to dissolutions by gathering of all shares within only one hand.
Mergers realised within a brief period of time after the acquisition: do the Tax Authorities accept them?
The above mergers realised between an investment company and the target company within a short time after the acquisition of the latter may lead the Tax Authorities to look for a possible misappropriation of corporate funds.
Is the way a company can absorb the other (or vice-versa) significant?
The Tax Authorities reserve the right to challenge the "direction" of the merger if, owing to the factual circumstances, the operation's aim is exclusively a tax one.
Merger with creation of a new company: which is the deadline for the retroactivity?
The retroactivity deadline in case of merger with creation of a new company cannot be earlier than the registering of this company in the Register of Commerce and Companies.
Will the parties always have the possibility to choose their contribution values?
The French Stock Exchange Committee (Yearly Report for 1994) does not wish it. It recommends the use of real values which gives a more reliable picture of the operation. It thus challenges its recommendation dated 1977 making a difference between contribution values and parity.
Do the values retained in the consolidated accounts and expressing a merger have a consequence on the contribution values to be retained by the merger treaty?
Yes, as far as the French Stock Exchange Committee (1994 Report) is concerned, using again the position of the French National Council for Accountancy. No existing text allows to retain different values in the individual accounts and in the consolidated accounts.
Therefore it is necessary for accountants but as well for legal and tax experts, either to look at the consolidated accounts or to fight against the influence of international harmonisation of accounting standards.
Which are the consequences of the realisation of a merger at the net book value?
In order to be able to realise a merger at the net book value, the input values must be split-up (gross value, depreciation or provision for depreciation, net value). Within this context:
- the absence of split-up must be considered as not meeting the arm's length principle;
- the derogatory depreciations booked by the absorbed company can be rebuilt by the absorbing company by way of levying a paid-in capital;
- for the determination of the business tax, the gross values should be retained.
Is there a tax exposure when contribution values are retained which range between the net book values and the real values?
The Tax Authorities consider that this operation does not meet the arm's length principle.
Is the merger possible if the contributed net assets are in a negative position?
It is only possible to do a merger with a company in a negative position if the absorbing company is the parent and exclusive shareholder of the target company.
Are the provisions non deductible for the absorbed company taxed when they are carried forward at the level of the absorbing company?
The carry forward by the absorbing company of non-deductible reserves for liabilities and charges is not taxable. This solution applies, according to the Tax Authorities, to current litigations, and may also apply to reserves for depreciation and other real estate elements already taxed and not yet booked in the accounts.
Is it always necessary to have an agreement in order to benefit from the transfer of tax losses of the absorbed company to the absorbing company?
The carry forward of the tax losses from the absorbed company to the absorbing company cannot be automatic.
Which are the new tax engagements which must absolutely appear in the contribution treaty in order to benefit from the favourable tax regime?
- The carry forward by the absorbing company of the engagement to keep the equity shares acquired by the absorbed company less than two years before the merger, and benefiting from the regime of parent companies; for lack of that, the exemption that the absorbed company could obtain on the amount of dividends received would be challenged (Finance Law for 1995).
- The part of investment subsidies remaining to be taxed contributed by the absorbed company (Finance Law for 1995).
- The split of the net book value between the original value, the depreciations and the provisions for depreciation, in case of mergers at the net book value.
Is it necessary to make up a provision for non-depreciable elements, even though the absorbing company is in a tax loss position?
Reserves for taxes linked to contribution capital gains realised on depreciable elements should be made up, except when the taxation of these capital gains allows the absorbing company to save losses which would have been lost without the merger.
Is it necessary to make up a provision for latent tax for non-depreciable elements?
It is not in principle necessary except in the case when a sale of these elements is probable, which is often the case for investment securities now systematically benefiting from a payment deferment until their sale (Finance Law for 1994).
Financial information: is the obligation to publish the half-year accounts of quoted companies modified in the case of a merger?
As far as documents of the first half-year of quoted companies are concerned, if the date of realisation of the merger occurs after the end of the first half-year (position of the French Stock Exchange Committee):
- the quoted absorbed company is no longer obliged to publish its half-year accounts, if this date is set within the four months following the end of the first half-year;
- the quoted absorbing company cannot take the merger into account, and thus even in case of retrospective effect.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about specific circumstances.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be brought about your specific circumstances. For additional information contact Claire Acard on 33/(1)/42.91.07.00 or Lionel Benant on 33/188.8.131.52 or enter text search: "ARCHIBALD ANDERSEN Profile". The members of ARCHIBALD ANDERSEN Association d'Avocats (S.G. Archibald and Arthur Andersen International) are registered with the Hauts-de-Seine Bar and the Lyon Bar.