Cross-border Mergers
Cross-border mergers allow businesses to grow and flourish, and hence as a financial services centre, having an efficient cross-border merger process is essential. To this end, Malta has adopted a legislative framework which effectively caters for this process, mainly through its robust and efficient framework regulating the avenue of cross-border mergers, which has become essential in aiding the growth and diversification of companies in a sustainable manner.
A cross-border merger occurs when companies from different jurisdictions form one single company. This brings with it an array of benefits, such as the possibility afforded to companies to tap into new markets and have increased resources at their disposal. The process also improves the competitive position of the companies in question.
Malta regulates cross-border mergers primarily through the Companies Act ('the Act') and the relevant Subsidiary Legislation (The Cross-Border Mergers of Limited Liability Companies Regulations). This legal framework is intended to provide a simplified framework which harmonises the cross-border merger process within the EU, allowing the cross-border merger to occur with ease.
Maltese law mandates that for this framework to be applicable, all the subject companies need to be regulated under laws of EU member states, at least 2 of such companies must be regulated under the laws of different member states and one of such companies has to be regulated under Maltese law, unless the merger is resulting in the formation of a new company which new company would be registered in Malta.
The law, however, makes an exception in that it caters for the possibility that cross-border mergers of limited liability companies occur when such companies are formed 'in accordance to the law of any other approved jurisdiction, provided that at least two of the limited liability companies involved in the merger are governed by the laws of different approved countries or jurisdictions.'
Following the above, a detailed merger plan needs to be drafted so as to outline the terms and conditions for the merger to be conducted accordingly. The merger plan ought to encapsulate important information on the shares and their exchange ratio, information on how shareholders rights are being protected through the cross-border merger and a timeline delineating the whole process.
The law further mandates that companies involved in the merger ought to obtain relevant approval from their shareholders. Here, an extraordinary resolution would need to be drafted, which resolution would typically require a greater and higher threshold of votes.
Maltese law also aims to protect the rights of involved employees, ensuring that the employees, together with shareholders and creditors, of the merging companies are not prejudiced in any way,
Legislative amendments have been made in recent years in an effort to have local corporate law align with relevant EU directives and the modern business landscape. Through the notable amendments effected to the Act in 2021, certain processes have been streamlined with a view to rendering cross-border mergers more efficient. The main takeaways from this amendment include:
- Simplifying of procedures relevant to the documentation and the actual procedure of the cross-border merger, with a view to effectively reducing unwarranted costs and inefficiencies which could be associated with the process as a whole;
- The enhanced level of protection offered to minority shareholders by means of new provisions;
- A greater degree of focus on digital solutions which comes into play. This is especially important when considering the ever-growing digital landscape both in Malta and overseas. Malta appreciates the constant evolution and growth of this landscape, integrating a diverse array of digital solutions into corporate processes it adopts. This greatly eases the cross-border merger process.
Another significant and noteworthy advantage offered by Malta in the context of cross-border mergers includes its favourable tax regime, coupled with the numerous double taxation treaties it has entered into. Malta's modus operandi is a business-friendly one, offering a regulatory environment which seeks not to place a lot of burdens on companies.
The above-mentioned advantages are best seen through the 5% tax refund mechanism. What this mechanism entails is that, although the flat rate of corporate tax stands at 35%, foreign investors incorporating a company in Malta typically receive a 30% refund, essentially meaning that only an effective 5% rate of tax on the company's worldwide income is levied.
Moreover, one finds the full imputation system by virtue of which the law prevents double taxation from being levied on the company and the body of shareholders. Therefore, once tax would have been levied on the trading company, no further tax would be paid by it and, moreover, no further tax would be payable on the dividends received by the shareholders.
Other favourable advantages from a tax perspective relate to the group tax consolidation and fiscal unity. What this entails is that, following recent legislative amendments, group entities which satisfy the relevant rules are allowed to register as a sole fiscal unit, creating a level of tax consolidation between group entities.
Moreover, one finds the participation exemption, originating from the Parent-Subsidiary Directive, which applies tax exemptions between participating holding companies and their subsidiaries in EU Member States.
When applicable criteria are satisfied, a full tax exemption would apply on taxes between a holding company and its subsidiaries. Another advantage which is afforded relates to the branch exemption, allowing Maltese companies to claim an exemption from Maltese law in respect of profits attributable to a branch of the company outside Malta. Here, no Maltese tax would be levied on intra-group transfers of assets of a company, provided that some conditions are satisfied.
In conclusion, the Maltese framework on cross-border mergers highlights their nature as a powerful strategy aiming for growth and scalability. Having said that, to further navigate the complexities of cross-border mergers, it is essential to understand Maltese and EU regulations. Companies ought to ensure compliance from their end with relevant legal requirements, such as drafting the relevant merger plan and obtaining shareholder approval, while protecting the interests of employees and minority shareholders.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
