105. ECJ: Jurisdiction Of The Court And Interpretation Of Merger Directive Anti-Abuse Clause

KPMG Germany Webpage
Click on the above link to visit the KPMG Germany webpage on the Mondaq website
For disclaimer and copyright see end of this article.

In a decision dated 17 July 1997 (DB 1997, 1851; with commentary by wfr.), the ECJ addresses an issue of its own jurisdiction and provides guidance as to the interpretation of the anti-abuse provisions of the 1990 Merger Directive. The case was referred to the ECJ by the Amsterdam Gerechtshof.

The court holds with respect to its jurisdiction that this extends to matters not mandatorily regulated by the law of the European Union when an EU member state voluntarily chooses to apply the provisions of an EU directive to domestic matters outside of the scope of the directive. A court of a member state may therefore request the ECJ to decide the meaning of a provision of EU law which the legislature of a member state has voluntarily chosen to apply to a matter not within the scope of the provision. However, the ECJ does not apparently regard the courts of member states as obligated to refer issues of this nature to it. Specifically at issue was the meaning of the term "exchange of shares" under Article 2 (d) of the Merger Directive.

In the substantive part of its decision, the ECJ construed the authority granted to member states under Article 11 (1) (a) of the Merger Directive to deny the protection of the Merger Directive to transactions having tax evasion or avoidance as their principal motive or one of their principal motives. It interpreted this to mean that the member states are free to deny recognition to transactions having no "reasonable economic purpose" (vernuenftige wirtschaftliche Gruende). The court stated that a mere desire to achieve tax advantages was not sufficient to constitute a "reasonable economic purpose". A reorganisation which is exclusively tax driven need not be recognised by the member states. On the other hand, the court likewise seemed to hold that the member states were not permitted to establish irrebutable presumptions of abusive intent, but must rather use justiciable criteria permitting review by the courts in each specific case. While the court gives examples of provisions which it considers unacceptable in this respect, it does not clearly articulate its reasoning.

In the commentary which follows the lengthy and complicated decision, wfr. suggests that the validity of sec. 26 (2) UmwG (German tax reorganisation act) is questionable in light of the ECJ decision because it provides e.g. that the protection of the Merger Directive can be lost on contributions of shares in an EU company to another EU company if the receiving company sells the shares received within seven years. Arguably, the ECJ decision requires an examination of the reasons for the sale of the contributed shares within the seven year period and would permit the taxpayer to show that sound economic reasons existed for the sale.

This article treats the subjects covered in condensed form. It is intended to provide a general guide to the subject matter and should not be relied on as a basis for business decisions. Specialist advice must be sought with respect to your individual circumstances. We in particular insist that the tax law and other sources on which the article is based be consulted in the original, whether or not such sources are named in the article. Please note as well that later versions of this article or other articles on related topics may have since appeared on this database or elsewhere and should also be searched for and consulted. While our articles are carefully reviewed, we can accept no responsibility in the event of any inaccuracy or omission. Please note the date of each article and that subsequent related developments are not necessarily reported on in later articles. Any claims nevertheless raised on the basis of this article are subject to German substantive law and, to the extent permissible thereunder, to the exclusive jurisdiction of the courts in Frankfurt am Main, Germany. This article is the intellectual property of KPMG Deutsche Treuhand-Gesellschaft AG (KPMG Germany). Distribution to third persons is prohibited without our express written consent in advance.