tax notes international - latham & watkins llp · pdf filecorrespondents africa: zein...

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Cross-Border Mergers:

A French Overview

by Xavier Renard and Julien Soisson

Reprinted from Tax Notes Int’l, 21 June 2004, p. 1271

tax notesinternational

CorrespondentsAfrica: Zein Kebonang, University of Botswana, GaboroneAlbania: Adriana Civici, Ministry of Finance, TiranaAngola: Trevor Wood, Ernst & Young, LisbonAnguilla: Alex Richardson, Anguilla Offshore Finance Centre, AnguillaAntigua: Donald B. Ward, PricewaterhouseCoopers Center, St. John’sArgentina: Cristian E. Rosso Alba, Hope, Duggan & Silva, Buenos AiresArmenia: Suren Adamyan, Association of Accountants and Auditors of Armenia, YerevanAustralia: Graeme S. Cooper, University of Sydney, Sydney; Richard Krever, DeakinUniversity, Melbourne.Austria: Markus Stefaner, Vienna University of Economics and Business Administration,ViennaBahamas: Hywel Jones, Canadian Imperial Bank of Commerce Trust Company (Bahamas) Ltd.,NassauBangladesh: M. Mushtaque Ahmed, Ernst & Young, DhakaBarbados: Patrick B. Toppin, Pannell Kerr Forster, Christ ChurchBelgium: Werner Heyvaert, Nauta Dutilh, Brussels; Marc Quaghebeur, Vandendijk & Partners,BrusselsBermuda: Wendell Hollis, Ernst & Young, BermudaBotswana: I.O. Sennanyana, Deputy Director, Tax Policy, Ministry of Finance & DevelopmentPlanning, GaboroneBrazil: David Roberto R. Soares da Silva, Farroco & Lobo Advogados, São PauloBritish Virgin Islands: William L. Blum, Solomon Pearl Blum Heymann & Stich LLP, St.Thomas, USVI and New YorkBulgaria: Todor Tabakov, Interlex, SofiaCameroon: Edwin N. Forlemu, International Tax Program, Harvard University, CambridgeCanada: Brian J. Arnold, Goodmans, Toronto, Ontario; Jack Bernstein, Aird & Berlis, Toronto,Ontario; Martin Przysuski, Srini Lalapet, and Hendrik Swaneveld, Transfer Pricing andCompetent Authority Services, BDO Dunwoody, Toronto (Markham) OntarioCaribbean: Bruce Zagaris, Berliner, Corcoran, and Rowe, Washington, D.C.Cayman Islands: Timothy Ridley, Maples & Calder Asia, Hong KongChile: Macarena Navarrete, Ernst & Young, SantiagoChina (P.R.C.): David D. Liu, Sidley Austin Brown & Wood, Shanghai; Jinyan Li, YorkUniversity, Toronto; Lawrence Sussman, O’Melveny & Myers LLP, BeijingCook Islands: David R. McNair, Southpac Trust Limited, RarotongaCroatia: Hrvoje Zgombic, Zgombic & Partners, ZagrebCyprus: Theodoros Philippou, PricewaterhouseCoopers, NicosiaCzech Republic: Michal Dlouhy, White & Case, PragueDenmark: Thomas Froebert, Philip & Partners, Copenhagen; Nikolaj Bjørnholm, Bech-BruunDragsted Law Firm, CopenhagenDominican Republic: Dr. Fernándo Ravelo Alvarez, Santo DomingoEastern Europe: Iurie Lungu, Graham & Levintsa, ChisinauEgypt: Farrouk Metwally, Ernst & Young, CairoEstonia: Helen Pahapill, Ministry of Finance, TallinnEuropean Union: Joann M. Weiner, Facultés Universitaires Saint-Louis, BrusselsFiji: Bruce Sutton, KPMG Peat Marwick, SuvaFinland: Marjaana Helminen, University of Helsinki in the Faculty of Law, HelsinkiFrance: Marcellin N. Mbwa-Mboma, Baker & McKenzie, New York; Olivier Delattre, Latham& Watkins, ParisGambia: Samba Ebrima Saye, Income Tax Division, BanjulGermany: Jörg-Dietrich Kramer, Ministry of Finance, Berlin/Bonn; Rosemarie Portner, MeilickeHoffmann & Partner, Bonn; Klaus Sieker, Flick Gocke Schaumburg, FrankfurtGhana: Seth Terkper, Chartered Accountant/Tax Expert, AccraGibraltar: Charles D. Serruya, Baker Tilly, GibraltarGreece: Alexandra Gavrielides, AthensGuam: Stephen A. Cohen, Carlsmith Ball LLP, HagatnaGuernsey: Neil Crocker, PricewaterhouseCoopers, St. Peter PortGuyana: Lancelot A. Atherly, GeorgetownHong Kong: Colin Farrell, PricewaterhouseCoopers, Hong KongHungary: Daniel Deak, Budapest University of Economics, Budapest

Iceland: Indridi H. Thorlaksson, ReykjavikIndia: Nishith M. Desai, Nishith Desai Associates, Mumbai; Sanjay Sanghvi, RSM & Co., MumbaiIndonesia: Freddy Karyadi, Karyadi & Co Law and Tax Office, JakartaIran: Mohammad Tavakkol, Maliyat Journal, College of Economic Affairs, TehranIreland: Kevin McLoughlin, Ernst & Young, DublinIsle of Man: Richard Vanderplank, Cains Advocates & Notaries, DouglasIsrael: Joel Lubell, Teva Pharmaceutical Industries, Ltd., Petach Tikva; Doron Herman, S. Friedman& Co. Advocates & Notaries, Tel-AvivItaly: Alessandro Adelchi Rossi and Luigi Perin, George R. Funaro & Co., P.C., New York;Gianluca Queiroli, Cambridge, MassachusettsJapan: Gary Thomas, White & Case, Tokyo; Shimon Takagi, White & Case, TokyoJersey: J. Paul Frith, Ernst & Young, St. HelierKenya: Glenday Graham, Ministry of Finance and Planning, NairobiKorea: Chang Hee Lee, Seoul National Univ. College of Law, Seoul, KoreaKuwait: Abdullah Kh. Al-Ayoub, KuwaitLatin America: Ernst & Young LLP, MiamiLatvia: Andrejs Birums, Tax Policy Department, Ministry of Finance, RigaLebanon: Fuad S. Kawar, BeirutLibya: Ibrahim Baruni, Ibrahim Baruni & Co., TripoliLithuania: Nora Vitkuniene, International Tax Division, Ministry of Finance, VilniusLuxembourg: Jean-Baptiste Brekelmans, Loyens & Loeff, LuxembourgMalawi: Clement L. Mononga, Assistant Commisioner of Tax, BlantyreMalaysia: Jeyapalan Kasipillai, University Utara, SintokMalta: Dr. Antoine Fiott, Zammit Tabona Bonello & Co., and Lecturer in Taxation, Faculty of Law,University of Malta, VallettaMauritius: Ram L. Roy, PricewaterhouseCoopers, Port LouisMexico: Jaime Gonzalez-Bendiksen, Baker & McKenzie, Juarez, Tijuana, Monterrey, andGuadalajara; Ricardo Leon-Santacruz, Sanchez-DeVanny Eseverri, MonterreyMiddle East: Aziz Nishtar, Nishtar & Zafar, Karachi, PakistanMonaco: Eamon McGregor, Moores Rowland Corporate Services, Monte CarloMongolia: Baldangiin Ganhuleg, General Department of National Taxation, UlaanbaatarMorocco: Mohamed Marzak, AgadirMyanmar: Timothy J. Holzer, Baker & McKenzie, SingaporeNauru: Peter H. MacSporran, MelbourneNepal: Prem Karki, Regional Director, Regional Treasury Directoriate, KathmanduNetherlands: Eric van der Stoel, Otterspeer, Haasnoot & Partners, Rotterdam; Dick Hofland,Freshfields, Amsterdam; Michaela Vrouwenvelder, Loyens & Loeff, New York; Jan Ter Wisch,Allen & Overy, AmsterdamNetherlands Antilles: Dennis Cijntje, KPMG Meijburg & Co., Curaçao; Koen Lozie, DeurleNew Zealand: Adrian Sawyer, University of Canterbury, ChristchurchNigeria: Elias Aderemi Sulu, LagosNorthern Mariana Islands: John A. Manglona, SaipanNorway: Frederik Zimmer, Department of Public and International Law, University of Oslo, OsloOman: Fudli R. Talyarkhan, Ernst & Young, MuscatPanama: Leroy Watson, Arias, Fabrega & Fabrega, Panama CityPapua New Guinea: Lutz K. Heim, Ernst & Young, Port MoresbyPeru: Italo Fernández Origgi, Yori Law Firm, LimaPhilippines: Benedicta Du Baladad, Bureau of Internal Revenue, ManilaPoland: Dr. Janusz Fiszer, Warsaw University/White & Case, WarsawPortugal: Francisco de Sousa da Câmara, Morais Leitao & J. Galvão Teles, Lisbon; ManuelAnselmo Torres, Galhardo Vilão, Torres, LisbonQatar: Finbarr Sexton, Ernst & Young, DohaRomania: Sorin Adrian Anghel, Senior Finance Officer & Vice President, The Chase ManhattanBank, BucharestRussia: Scott C. Antel, Ernst & Young, Moscow; Joel McDonald, Salans, LondonSaint Kitts–Nevis: Mario M. Novello, Nevis Services Limited, Red BankSaudi Arabia: Fauzi Awad, Saba, Abulkhair & Co., DammamSierra Leone: Shakib N.K. Basma and Berthan Macaulay, Basma & Macaulay, FreetownSingapore: Linda Ng, White & Case, Tokyo, JapanSlovakia: Alzbeta Harvey, Principal, KPMG New YorkSouth Africa: Peter Surtees, Deneys Reitz, Cape TownSpain: José M. Calderón, University of La Coruña, La CoruñaSri Lanka: D.D.M. Waidyasekera, Mt. LaviniaSweden: Leif Mutén, Professor Emeritus, Stockholm School of EconomicsTaiwan: Keye S. Wu, Baker & McKenzie, Taipei; Yu Ming-i, Ministry of Finance, TaipeiTrinidad & Tobago: Rolston Nelson, Port of SpainTunisia: Lassaad M. Bediri, Hamza, Bediri & Co., Legal and Tax Consultants, TunisTurkey: Mustafa Çamlica, Ernst & Young, IstanbulTurks & Caicos Islands, British West Indies: Ariel Misick, Misick and Stanbrook, Grand TurkUganda: Frederick Ssekandi, KampalaUnited Arab Emirates: Nicholas J. Love, Ernst & Young, Abu DhabiUnited Kingdom: Trevor Johnson, Trevor Johnson Associates, Wirral; Eileen O’Grady,barrister, London; Jefferson P. VanderWolk, Baker & McKenzie, LondonUnited States: Richard Doernberg, Emory Univ. School of Law, Atlanta GA.; James Fuller,Fenwick & West, Palo AltoU.S. Virgin Islands: Marjorie Rawls Roberts, Attorney at Law, St. Thomas, USVIUruguay: Dr. James A. Whitelaw, Whitelaw Attorneys, UruguayUzbekistan: Ian P. Slater, Arthur Andersen, AlmatyVanuatu: Bill L. Hawkes, KPMG, Port VilaVenezuela: Ronald Evans, Baker & McKenzie, CaracasVietnam: Frederick Burke, Baker & McKenzie, Ho Chi Minh CityWestern Samoa: Maiava V.R. Peteru, Kamu & Peteru, ApiaYugoslavia: Danijel Pantic, European Consulting Group, BelgradeZambia: W Z Mwanza, KPMG Peat Marwick, LusakaZimbabwe: Prof. Ben Hlatshwayo, University of Zimbabwe, Harare

TAX NOTES INTERNATIONALCopyright 2004, Tax Analysts

ISSN 1048-3306

Editor: Cathy Phillips

Special Reports Editor: Alice Keane Putman

Managing Editor: Maryam Enayat

Deputy Editor: Doug Smith

Production: Paul M. Doster

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Cross-Border Mergers: A French Overview

by Xavier Renard and Julien Soisson

This article addresses the tax consequences andother considerations for cross-border mergers ofcorporate entities involving French companies.SectionI provides a brief overview of the legal framework asso-ciated with cross-border mergers in France. Section IIaddresses the tax consequences for the followingentities, in which French Co. is a company organizedunder the laws of France and Foreign Co. is a companyorganized under laws other than the laws of France:

Foreign Co. merges into French Co.

French Co. merges into Foreign Co.

Foreign Sub1 and Foreign Sub2 are foreigncompanies organized in different foreign juris-dictions, and Foreign Sub1and/or Foreign Sub2

are direct or indirect subsidiaries of FrenchCo. Foreign Sub1 merges into Foreign Sub2.

Although the contribution of a complete branch ofactivity by a French company to a foreign entity, or by aforeign entity to a French company, does not strictlyqualify as a merger from a legal and tax standpoint,this article also provides a short description of theFrench tax treatment of those transactions using thefollowing fact patterns:

Foreign Co. contributes its French permanentestablishment to French Co.

French Co. contributes its French permanentestablishment to Foreign Co.

French Co. contributes shares in a subsidiary(Target) to Foreign Co.

I. French Legal Framework ofCross-Border Mergers

A. Preliminary CommentsExcept as expressly stated herein, the word

“merger” (fusion) is used in its technical sense. It refersto a situation in which all assets and liabilities of themerged corporate entity are transferred to the mergingentity, which is deemed by law to continue the mergedcorporate entity. That can be achieved in Francethrough several different legal structures.

The standard fusion process is found in both thestandard merger, in which the two companies thatmerge are not in a parent-subsidiary relationship, andin the simplified merger (fusion simplifiée), in whichthe two companies that merge are in thatparent-subsidiary relationship, with the wholly ownedsubsidiary merging into the parent. In both cases, theprocess calls for the two companies involved to agree onthe terms and conditions of the transfer, which arenormally set out in a merger agreement (referred to asa projet de fusion). Shareholders of both companiesthen must approve it at special shareholders’meetings.1

Under the merger agreement, the shareholders ofthe merged corporate entity tender their shares to themerging entity in exchange for newly issued shares ofthat corporate entity. As a result of the vote of share-holders’ resolutions approving the merger within bothcompanies, the merged corporate entity is deemed tobe wound up and its assets and liabilities are automat-ically transferred to the merging entity.2 The mergingentity is the sole surviving entity, with all the shares ofthe merged entity canceled as a result of the approvalof the merger agreement.

If the effective date of the merger vis-à-vis thirdparties remains the date of approval of the merger bythe last of the shareholders’ meetings to be held, one ofthe most useful advantages of the standard mergerprocess found in the fusion and fusion simplifiée is theright granted to the two companies involved in themerger to determine in the merger agreement aneffective date for the merger that is different from thatdate of approval. The merger can be made effectiveretroactively (as far back as the later of the closing

Tax Notes International 21 June 2004 • 1271

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Xavier Renard is a partner and Julien Soissonis an associate with Latham & Watkins in Paris.

1In the case of a simplified merger, because the parent com-pany holds 100 percent of the stock of the subsidiary to be mergedinto it, only one shareholders’ meeting is required, namely that ofthe parent company.

2This process is referred to as transmission universelle dupatrimoine. Note, however, that because the merged entity disap-pears as a separate corporate entity in the process, the automatictransfer of contracts entered into by the merged entity entails oneimportant exception. The so-called intuitu personae agreements(that is, for example, contracts entered into with the merged en-tity by parties who included provisions that the contract had beenentered into specifically in consideration of the other party’s sta-tus as a merged entity, or contracts including a change of controlprovision) can only be transferred if the other party has con-sented to the transfer as a result of the merger.

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dates of the last fiscal year ended by any of the entitiesinvolved) or delayed to a date in the future (as farforward as the earlier of the last day of the fiscal year ofthe surviving merging entity).

Still, for the purpose of this overview, merger trans-actions also include a situation in which a parentcompany holding the entire shareholding of a subsid-iary resolves to wind it up (dissolution avec transmis-sion universelle du patrimoine). In that case, thesubsidiary is deemed to be automatically wound upwithout going through a lengthy process, such as thenegotiation or determination of the terms and condi-tions of the merger or the normally lengthy liquidationprocedure for a French company.

A review of the company law rulesgoverning the combination of corporateentities in the two countries involvedshould be done to determine if anyexisting rule could block the process.

Despite that, as for a standard or simplified merger,all assets and liabilities of the subsidiary are deemedtransferred upon the mere approval of a resolution bythe parent company’s appropriate corporate body,depending on the type of corporate entity involved, theCEO, its board of directors, its management board, orthe shareholders through the vote of a resolution. Also,the merger must wait 30 days to allow interestedcreditors to come forward and claim that the mergingentity provide assurances or guarantees as to theoutcome of its payables.

A quasi-merger transaction may also be made in theform of an apport partiel d’actif. That transactioninvolves a contribution by a corporate entity of anentire block of its existing assets and liabilities,usuallyconstituting a stand-alone operating division of thecontributing entity, in consideration for newly issuedshares of the beneficiary of the contribution. Althoughnot a legal merger, strictly speaking, that type of trans-action is generally viewed as constituting a type ofmerger.

Similarly, the division of a corporate entity into twoseparate corporations (scission) constitutes a type oftransaction, the legal and tax regime of which ispatterned along that of mergers. This article does notaddress the French legal and tax treatment ofscissions.

Finally, the acquisition of all or almost all of theshares of a company, although it results in a de factomerger of the two companies through the consolidationof both corporate entities, does not constitute a mergerin France.

B. Cross-Border Mergers Are GenerallyPermitted Under the Domestic Laws ofFrance

Cross-border mergers are not prohibited in France.It can be stated that this lack of prohibition entails anauthorization. However, because a transnationalmerger is a complex transaction involving twocorporate entities subject to two different legalsystems, just because a merger is permitted in onecountry does not mean that the merger may take place.

A detailed legal review of the transaction isnecessary to determine if the transaction is feasible,both legally and in practice, and to determine the legalconsequences of the merger (particularly the statutorytransfer of all assets and liabilities of the mergedentity, which is an important feature of the Frenchsystem). That review must entail a comparativeanalysis of each point of law in the merger to correlatesolutions afforded by the various legal systems todetermine the feasibility of the merger between thecorporate entities of France and of the second country.3

C. Legal Limitations or RequirementsThe most restrictive rule regards the change of

jurisdiction entailed by some cross-border mergersinvolving French companies. Under French companylaw rules, the merger of a French company into anon-French corporate entity results in a change of thecountry of incorporation for the shareholders of themerged corporate entity,as it will be wound up and willdisappear following the merger.

In that situation,French company law requires thatthe decision of shareholders approving the merger betaken unanimously by all shareholders (present orrepresented by a proxy at the meeting). In practice,that requirement restricts the merger of a Frenchcompany to closely held corporations, in which nodissenting shareholder could object and thereforeblock the merger process by a negative vote or byrefusing to attend the shareholders’ meeting.

That issue is the best-known pitfall of cross-bordermergers, but other pitfalls can be found, depending on

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3For example, countries with very similar law systems — suchas France and the Netherlands, which, until recently, shared thesame statutory framework — offer very different solutions formergers. The concept of the transmission universelle dupatrimoine (that is, the transfer of all the assets and liabilities ofthe merged entity) is unknown in the Netherlands. As a result,the merger of a French corporate entity and of a Dutch corporateentity would be complex and would require relying on different le-gal structures, such as a transfer of designated assets to an exist-ing corporate entity to effect a de facto merger. In that case,however, all transferred assets would have to be identified andthe specific transfer steps completed for each category of assetsfor all identified assets pertaining to the transferred corporateentity, or division, to be actually and duly transferred to the ab-sorbing entity.

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the specific rules of the laws of the country of thesurviving corporate entity. If applicable French rulesgoverning the valuation of the contributed assets andliabilities, or the verification process required for thatvalue, cannot be properly implemented because ofinadequate rules in the jurisdiction where one of theentities is incorporated,French statutory auditors mayobject to the merger or express reservations of whichthey could notify French judicial authorities and jeop-ardize the entire process. In other words, a review ofthe company law rules governing the combination ofcorporate entities in the two countries involved shouldbe done to determine if any existing rule could blockthe process.

Several rules in France, other than company lawrules, may complicate or prevent a merger. Forexample, environmental rules governing financialwarranties provided by operators of polluting indus-tries, employment law requirements governing theinformation of the workers council, and the reviewprocess for transactions involving a transfer ofbusiness operations have direct bearing on mergersand must be integrated in the process at an early stage.

D. Specific Aspects of Cross-Border MergersInvolving EU Companies

In the European Union, European directives havebeen a major help in streamlining company law rulesand have assisted in simplifying cross-border mergers.A directive on cross-border mergers of companies hasrecently been adopted by the Commission andpresented to the Council and the Parliament (Directive2003/0277 on cross-border mergers of companies withshare capital submitted on 18 November 2003). Thepurpose of the directive is to provide for a generallyapplicable procedure enabling EU companies tocomplete cross-border mergers under the mostfavorable conditions, including reduced costs and legalcertainty.

The basic principle underlying that procedure isthat the merger would be, to the extent possible,governed in each member state by rules applicable todomestic mergers. Notably, the domestic law shouldapply to each participant company as far as thedecisionmaking process, the protection of creditors,and employees’ rights are concerned. But the domesticlaw would be combined to the strictest possible extentwith a common set of rules generally applicable tocross-border mergers. Those rules are based on thosefor the formation of the European company, notably onemployee participation (that aspect was a deadlock forthe original cross-border mergers directive proposal of1984).

The directive lists the items that must be includedin the draft merger agreement. It includes the opportu-nity to provide for a single expert report on the transac-tion for all shareholders involved. The directive alsodeals with the effective date of the merger, the terms of

approval of the merger by the shareholder meetings ofthe companies involved, and the publicity measuresrequired for both the draft merger agreement and thecompletion documentation.

European directives have been a majorhelp in streamlining company law rulesand have assisted in simplifyingcross-border mergers.

Scrutiny of the legality of the merger is alsoaddressed. The directive provides for a distinctionamong the monitoring of the merger’s completion andthe legality of the decisionmaking process, whichshould be done by the relevant national authority foreach merging company, and the monitoring of thecompletion and legality of the merger itself, whichshould be completed by the national authority withjurisdiction over the company created by the merger.

The directive is to facilitate cross-border mergersbetween companies governed by the laws of differentEU member states. But it is drafted with rathergeneral wording. Its effect, if adopted, is difficult toappraise now. It will depend on both the implementa-tion of the new rules in respective domestic laws of EUmember states and on the European Court of Justice’sconstruction of the directive.

II. Tax Treatment of Cross-BorderLegal Mergers in France

In principle, mergers are treated as a liquidation ofthe business of the absorbed company for French taxpurposes and, therefore, prompt the immediatetaxation of the profits of the fiscal year, as well as thetaxation of all hidden gains and profits for whichtaxation has been deferred. However, article 210-A ofthe French Tax Code (FTC) provides a special taxregime under which,upon election by the parties to themerger, capital gains realized by the absorbedcompany upon the transfer of its assets to theabsorbing company are exempt from corporate incometax, subject to conditions.

A. French Special Merger Tax Regime —Domestic Mergers

1. Mechanism for Tax Deferral

Under French tax law, the capital gains realized bythe absorbed company as a result of the transfer of itsassets to the absorbing company may benefit from atax deferral, provided that the absorbing company:

record in its books the reserves for which taxa-tion has been deferred at the level of theabsorbed company and the nonfixed assetsreceived upon the merger for the tax value


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they had at the level of the absorbed company;and

compute any capital gains realized on the sub-sequent transfer of nondepreciable assetsusing the tax value of those assets in the booksof the absorbed company and to add back to itstaxable results the capital gains acknowl-edged upon the contribution of depreciablefixed assets over a 15-year period for immov-able assets and 5-year period for other assets.

The fixed assets received upon the merger must berecorded at their market value at the time of themerger.However,French tax authorities allow that thefixed assets may be recorded at the book value they hadat the level of the absorbed company, provided that thetransaction benefits from the special tax regime andthe absorbing company records both gross value andformer depreciation and computes any future depreci-ation on the basis of that gross value.

Finally, when the absorbed company is a subsidiaryof the absorbing company, the capital gains realized bythe latter upon cancellation of its shares in theabsorbed subsidiary are tax-exempt, provided that thetransaction is subject to the special tax regime.

2. Preservation of Tax Losses

a. Tax Losses of the Absorbed Company

In principle, the premerger carryforward tax lossesof the absorbed company cannot be offset against thetaxable profits of the absorbing company.

Those tax losses may, however, be transferred to theabsorbing company subject to a prior ruling from theFrench tax authorities. That ruling will be granted ifthe transaction is subject to the special tax regimeprovided in article 210-A of the FTC and is economi-cally justified (that is, not tax-driven) and the activitythat generated the losses at stake is continued by theabsorbing company for at least three years.

The amount of the tax losses that may be trans-ferred is limited to an amount equal to the higher of thebook value (before depreciation) of the fixed assetstransferred (excluding financial assets) and the valuefor which those assets are transferred (article 209-II ofthe FTC). The loss carryback receivable is automati-cally transferred as a result of the merger, whether ornot it is under the special tax regime (article 220quinquies of the FTC).

b. Tax Losses of the Absorbing Company

The premerger tax losses of the absorbing companycan be offset against its postmerger taxable profits.That is subject to the condition that the absorbingcompany does not deeply change the scope of itsbusiness activity as a result of the merger, that is, thatthe transaction does not result in a “change of activity”of the absorbing company (article 221-5 of the FTC).

Before 1 January 2004, as a result of the transfer ofbusiness activity realized upon the merger, the taxlosses of the absorbing company that corresponded todepreciation and that, as such, could be carriedforward indefinitely (evergreen losses), could be retro-actively transformed into ordinary tax losses. Thosecould only be carried forward on the results of the fivefiscal years following the year in which they wererealized; that is, those losses were lost when they werecreated more than five years before the merger (article209-I of the FTC).4 The absorbing company could,however, request to keep its evergreen losses despitethe merger upon prior ruling from the French tax au-thorities (article 209-III of the FTC), whether underthe special tax regime or not.

Effective 1 January 2004, the finance law for 2004provided for the end of the distinction betweenordinary losses and evergreen losses. All tax lossesexisting on the first day of the fiscal year beginning on1 January 2004 or acknowledged for fiscal yearsopened from that last date can be carried out indefi-nitely against the taxable profits of French companies.As a result, a transfer of business realized upon amerger no longer has any consequences for the taxlosses of the absorbing company except, as mentionedabove, if it results in a deep change in the scope of theactivities of the latter.

B. French Special Tax Regime — Applicationto Cross-Border Mergers

1. Tax Definition of Qualifying MergersBefore the 2002 Finance Law, French tax authori-

ties considered that the special tax regime applied onlyto transactions that qualified as mergers based on bothFrench and foreign legal criteria, which raised difficul-ties for transactions involving foreign companies. (Forexample, when a French company merged into aforeign company, the French tax authorities oftenrequested, in practice, a legal opinion to ensure thatthat transaction legally qualified as a merger both forthe foreign and the French companies.)

Since 1 January 2002, French tax law provides adefinition of mergers that is independent from thelegal qualification of the transaction (article 210-OA ofthe FTC). Basically, the special tax regime applies totransactions that result in a transfer of all assets andliabilities (transmission universelle de patrimoine)from one or more companies to another, followed by the


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4The tax losses of the absorbing company, which correspondedto depreciation, are not transformed into ordinary carryforwardtax losses when the business activities transferred concerned lessthan 5 percent of the gross value of the fixed assets, the turnover,and the employee force of the absorbing company.

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dissolution without liquidation of the companies thathave transferred their assets and liabilities.5

As a result, mergers involving foreign companiesthat meet that tax definition may benefit from thespecial regime without reference to the legal definitionof the transaction. Based on that new tax definition ofmergers, the scope of the special regime is extended tothe dissolution without liquidation of a wholly ownedsubsidiary (article 1844-5 of the French Civil Code),which may be of interest to foreign companies thathave wholly owned subsidiaries in France.

2. Qualifying Foreign CompaniesThe foreign companies that may qualify for the

special tax regime are those that either benefit from theEU Directive 90/434 or are located in a state that has atax treaty with France that includes an administra-tive-assistance provision (article 210-OA of the FTC).

3. Special Ruling for Cross-Border MergersWhen a French company merges into a foreign

company, the transaction is analyzed as a contributionby the French company of its assets to the foreigncompany. That transaction may benefit from the taxdeferral provided by article 210-A of the FTC subject toa previous ruling from the French tax authorities(article 210-C-2 of the FTC). That ruling will begranted if the purpose of the transaction is restruc-turing for economic purposes, it is not mainlymotivated by tax avoidance reasons, and the transac-tion presents characteristics that allow the futuretaxation in France of capital gains, the taxation ofwhich is deferred upon the merger (article 210-B-3 ofthe FTC). As a result, it is necessary for the foreigncompany to have a permanent establishment inFrance, either before the merger or as a result of thatmerger, in the books in which the assets and liabilitiestransferred upon the merger are recorded.

When a foreign company merges into a Frenchcompany, the special tax regime may apply withoutprior ruling.6

Scenario 1: Foreign Co. Merges Into FrenchCo.

1. Tax Treatment of the Merger for the ParticipatingCompanies

a. Corporate Income TaxThere are no direct French tax consequences when

Foreign Co. does not have a French permanent estab-lishment and is not a subsidiary of French Co.

A transfer of business realized upon amerger no longer has anyconsequences for the tax losses of theabsorbing company except if it resultsin a deep change in the scope of theactivities of the latter.

When Foreign Co. is a subsidiary of French Co., themerger may benefit from the special tax regimewithout prior approval; that is, the capital gainsrealized by French Co. upon cancellation of its ForeignCo. shares are tax-exempt (article 210-A-1 of the FTC).When French Co. realizes a loss upon cancellation ofthe Foreign Co. shares, that loss would constituteeither a short-term or a long-term capital loss. Thatdepends on whether the Foreign Co. shares were heldby French Co. for more or less than two years andwhether the Foreign Co. shares qualify as partici-pating stock (titres de participation) under French taxlaw (article 219-I-a-ter of the FTC). That loss would bedeductible from the income of French Co., which aretaxable at the ordinary rate (that is, a maximumeffective rate of 35.43 percent) if it qualifies as ashort-term loss. On the contrary, that loss would not bedeductible from the ordinary taxable income if itqualifies as a long-term capital loss. In that case,French Co. could only use that loss to offset any futurelong-term capital gains during a 10-year period(long-term capital gains are, in principle, taxable at thecurrent effective reduced rate of 20.20 percent).7

That transaction also triggers French tax conse-quences when Foreign Co. has a French permanentestablishment, which, as a result of the merger, is


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5Under article 210-OA of the FTC, a transaction has to meetone of the following requirements to benefit from the special taxregime: one or more absorbed companies transfer, upon their dis-solution without liquidation, all of their assets and liabilities tothe absorbing company — newly created or existing — in ex-change for the delivery to their shareholders of shares of the ab-sorbing company and, possibly, a cash payment not exceeding 10percent of the par value of those shares; or transactions in whichan absorbed subsidiary transfers upon its dissolution without liq-uidation all of its assets and liabilities to its 100 percent parentcompany. In the case of the latter, there is no issuance of sharesby the absorbing company.

6Under article 210-C of the FTC, the special tax regime ap-plies only to companies that are subject to corporate income tax inFrance. However, the French tax authorities admit that it alsoapplies when a foreign company merges into a French company,even when the foreign company is not taxable in France underthe French territoriality principles (that is, it has no French per-manent establishment).

7The deduction of the loss is subject to the condition that theloss corresponds to an actual loss; that is, the market value of theassets transferred by Foreign Co. to French Co. upon the mergeris lower than the purchase price of the Foreign Co. shares in thebooks of French Co. By contrast, the loss is not deductible when itmerely occurs because Foreign Co. transferred the assets at theirnet book value. It is also nondeductible for its entire amountwhen the purchase price of the Foreign Co. shares by French Co.was higher than the intrinsic value of the Foreign Co. shares(that is, when French Co. overpaid for the Foreign Co. shares be-cause those shares increased its own goodwill).

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contributed to French Co. The transaction may benefitfrom a tax deferral for the French assets contributed byForeign Co. to French Co. if the latter subscribes to thevarious undertakings provided by article 210-A of theFTC (see above, section II.A.1). In principle, that trans-action does not need a previous ruling from the Frenchtax authorities for the tax deferral.

b. Transfer TaxesThe merger is only subject to a €230 transfer duty

(article 816 of the FTC) whether the transactionbenefits from the special tax regime or not. However,when French real estate is recorded in the books of theFrench permanent establishment of Foreign Co.,French Co. is liable for a 0.1 percent land registrar feeassessed on the market value of the real estate trans-ferred. Notary fees may also be due.

2. Tax Treatment of the Merger for the ShareholdersThe attribution of French Co. shares to the former

shareholders of Foreign Co. upon cancellation of theirForeign Co. shares is not considered a distribution ofthe liquidation proceeds of Foreign Co. to the share-holders of Foreign Co. and therefore is not subject totax, whether the merger benefits from the special taxregime or not (articles 115-1 and 121-1 of the FTC).8

Also, the capital gains realized by French individ-uals and corporate shareholders upon exchange oftheir Foreign Co. shares for French Co. shares benefitfrom a tax deferral until the subsequent transfer of theFrench Co. shares received upon the merger whetherthe merger benefits from the special tax regime or not(article 150-OB and 38-7 bis of the FTC).9 For share-holders that are not French tax residents, those capitalgains are not taxable in France under French tax law,because it is regarded as a transfer of foreign shares bynontax residents.

3. Tax Treatment of Existing LossesWhen Foreign Co. does not have a French

permanent establishment before the merger, the taxlosses incurred by Foreign Co. cannot be offset againstthe taxable profits of French Co. because of the Frenchterritoriality rules (article 209 of the FTC). On thecontrary, when Foreign Co. has a French permanentestablishment before the merger, the carryforward taxlosses incurred by that French permanent establish-

ment might be transferred to French Co. subject to aprevious ruling by the French tax authorities (article209-II of the FTC, see above, section II.A.2). Thecarryback receivable registered by the Frenchpermanent establishment, if any, would be automati-cally transferred to French Co. (article 220 quinquies ofthe FTC).

4. Taxation of the Merged Businesses After theMerger

a. Operations Within France/Operations OutsideFrance

Under French tax law, French Co. is subject tocorporate income tax on the sole results derived fromits French enterprises.

When Foreign Co. does not have a Frenchpermanent establishment before the merger, thetransaction should result in French Co. having aforeign permanent establishment in the country whereForeign Co. was incorporated (as well as in any othercountry in which Foreign Co. had a permanent estab-lishment). French Co. is not subject to corporateincome tax in France for the profits attributable tothose foreign permanent establishments, nor is it in aposition to deduct tax losses generated by the latter.

b. Distributions to ShareholdersThe finance law for 2004 provides for the progres-

sive cancellation of the mechanism of the avoir fiscal(French tax credit on dividend) and précomptemobilier (equalization tax).10 The avoir fiscal isgenerally no longer attached to dividends paid from 1January 2004 to corporate shareholders (whetherFrench tax residents or not) and dividends paid from 1January 2005 to individual shareholders (whetherFrench tax residents or not). The distributions paidfrom 1 January 2005 will no longer be subject toprécompte (whether paid to corporate or individualshareholders); that is, the dividends distributed in2004 may still be subject to précompte.

As a result, French Co. is not liable for theprécompte for distributions paid from 1 January


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8This is only to the extent that the merger meets the tax defi-nition in article 210-A of the FTC, which we assume is the case inthe developments below except when stated otherwise.

9For the tax deferral applying to individual shareholders un-der article 150-OB of the FTC, the transaction must legally quali-fy as a merger in the state where it is realized, as the new taxdefinition of mergers provided by article 210-OA of the FTC doesnot apply to the term “mergers” referred to under article 150-OBof the FTC.

10Before the finance law for 2004, dividends distributed byFrench companies subject to corporate income tax benefited froma tax credit (avoir fiscal) at a rate that varied depending onwhether the beneficiary was an individual (50 percent of theamount of the net dividend) or a legal entity (10 percent of theamount of the net dividend). As a counterpart to the avoir fiscal,which was aimed at avoiding the double taxation of the same in-come (once at the level of the distributing company and a secondtime at the level of the shareholders), the distributing companycould be required to pay an equalization tax (précompte) equal toone-third of the gross amount distributed (or 50 percent of the netdividend after payment of the précompte) when the dividendswere distributed out of profits that were taxed for more than fiveyears or that were not subject to corporate income tax at the ordi-nary rate of taxation.

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2005.11 For distributions paid in 2004, French Co.should not be liable for précompte upon distribution toits shareholders of the premerger retained earnings ofForeign Co. if they have been subject to corporateincome tax in France during the five preceding years,when Foreign Co. had a permanent establishment inFrance before the merger and the transaction benefitsfrom the special tax regime. On the contrary, FrenchCo. should be liable for the précompte upon a distribu-tion made in 2004 of the premerger retained earningsof Foreign Co., when Foreign Co. did not have a Frenchpermanent establishment before the merger (as thoseprofits were not subject to corporate income tax inFrance). The tax treatment is the same when ForeignCo. had a French permanent establishment before themerger, but the transaction does not benefit from thespecial tax regime.

Scenario 2: French Co. Merges Into ForeignCo.

When French Co. merges into Foreign Co., thetransaction results in Foreign Co. having a Frenchpermanent establishment. It may be realized througha legal merger (sections 1 to 4 below) or, if French Co. is100 percent owned by Foreign Co., through the dissolu-tion without liquidation of French Co. (section 5below).12

1. Tax Treatment of the Merger for the ParticipatingCompanies

a. Corporate Income TaxTo benefit from the special tax regime, a merger of

French Co. into Foreign Co. is subject to a prior rulingfrom the French tax authorities (article 210-C-2 of theFTC), which will be granted subject to the conditionthat the assets and liabilities transferred upon themerger are recorded in the books of a Frenchpermanent establishment of Foreign Co. (see above,section B.3). The latter is also required to subscribe tothe various undertakings set forth by article 210-A ofthe FTC.

When Foreign Co. does not have a Frenchpermanent establishment as a result of the merger, theFrench tax authorities will not grant a favorable rulingto that particular transaction, because the condition

under which the capital gains for which taxation isdeferred upon the merger must remain taxable inFrance will not be fulfilled (article 210-B-3 of the FTC).That situation generally arises when French Co. is apure holding company.On the contrary,the transactioncould, in principle, benefit from a favorable rulingwhen French Co. is a holding company that activelymanages its operating subsidiaries,because a manage-ment seat is deemed to constitute a permanent estab-lishment under most tax treaties.

b. Transfer TaxesThe merger is only subject to a €230 transfer duty

(article 816 of the FTC). However, when French Co.owns real estate, Foreign Co. is also liable for a 0.1percent land registrar fee assessed on the marketvalue of the real estate transferred. Notary fees mayalso be due.

2. Tax Treatment of the Merger for the ShareholdersThe attribution of Foreign Co. shares to the former

French or foreign shareholders of French Co. uponcancellation of their French Co. shares is not consid-ered a distribution of the liquidation proceeds ofFrench Co. to those shareholders. Such attribution ofshares does not give rise to income or withholding taxin France, whether the merger benefits from thespecial tax regime or not (article 121-1 of the FTC).

Also, the capital gains realized by French individ-uals and corporate shareholders (article 150-OB and38-7 bis of the FTC) upon exchange of their French Co.shares for Foreign Co. shares benefit from a taxdeferral until the subsequent transfer of the ForeignCo. shares received upon the merger, whether themerger benefits from the special tax regime or not. Forshareholders that are not French tax residents, capitalgains are not taxable in France under most taxtreaties, which generally grant the right to tax to thestate of the seller. However, when the capital gainscome within the scope of French taxation under anapplicable tax treaty or, in the absence of a tax treaty,under French tax legislation, the capital gains benefitfrom a de facto tax exemption (articles 244 bis B and150-OB of the FTC).13

3. Tax Treatment of Existing LossesForeign Co. can ask for a ruling from the French tax

authorities to benefit from a transfer of the premergercarryforward tax losses incurred by French Co. so thatthose losses can be offset against the taxable results ofthe postmerger permanent establishment that ForeignCo. will have in France (article 209-II of the FTC, see


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11However, the finance law for 2004 introduced a one-yearspecial tax of 25 percent assessed on the net amount of distribu-tions made in 2005, which were taxed for more than five years orwhich were not subject to corporate income tax at the ordinaryrate of taxation. That tax can be offset in three installmentsagainst the amount of French corporate income tax of the distrib-uting company due for the three following years, the excess beingrefundable.

12The reverse situation — that is, when Foreign Co. convertsits French branch into a French subsidiary — is realized throughthe contribution by Foreign Co. of its French branch to a FrenchNewco. This is briefly discussed in section III.

13Under article 244 bis B and article 150-OB of the FTC, a taxdeferral applies until the subsequent sale of the Foreign Co.shares received upon the merger. However, the capital gain is defacto exempt because the subsequent sale of the Foreign Co.shares realized by non-French tax residents are not taxable inFrance.

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above, section II.A.2). The carryback receivable regis-tered by French Co., if any, would be automaticallytransferred to the French permanent establishment ofForeign Co. (article 220 quinquies of the FTC).

4. Taxation of the Merged Businesses After theMerger

a. Operations Within France/Operations OutsideFrance

Under French tax law, Foreign Co. is subject tocorporate income tax for the sole results derived fromits French enterprises, that is, for the profits it realizesthrough the French permanent establishment that itreceives as a result of the merger.

The French Tax Code provides a specialtax regime under which capital gainsrealized by the absorbed companyupon the transfer of its assets to theabsorbing company are exempt fromcorporate income tax.

Also, when Foreign Co. is not located within theEuropean Union, the profits realized by its Frenchpermanent establishment are deemed distributedoutside France and are accordingly subject to a 25percent branch tax (article 115 quinquies of the FTC),subject to contrary provisions of tax treaties.

b. Distributions to Shareholders

Distributions made by Foreign Co. to its share-holders that are not French tax residents do not haveany French tax consequences. Distributions made byForeign Co. to its shareholders who are French taxresidents are subject to individual income tax (indi-vidual shareholders) or corporate income tax(corporate shareholders). Under most tax treatiesconcluded by France, the withholding tax, if any, leviedin the state where Foreign Co. is incorporated could beoffset against the French tax due.

5. Alternative Scenario: Dissolution Without Liqui-dation of French Co.

As already mentioned, the dissolution without liqui-dation of French Co. applies when French Co. is 100percent held by Foreign Co. Rather than being legallymerged into Foreign Co., French Co. is merelydissolved upon a decision taken by Foreign Co. Thedissolution of French Co. does not give rise to its liqui-dation, but to the immediate transfer of all of its assetsand liabilities to Foreign Co.

The dissolution of French Co. would trigger theimmediate taxation of the profits of the fiscal year andof all hidden capital gains and other profits for whichtaxation has been deferred. Existing tax losses can beoffset against those taxable profits and gains.

However, since 1 January 2002, that dissolutionmay benefit from the special tax merger regime underthe same conditions as legal mergers. The French taxadministration recently determined that the dissolu-tion can be made with retroactive effect on the first dayof the fiscal year. However, the possibility to grant thatretroactive effect is subject to some uncertainties froma legal and accounting standpoint. To benefit from thespecial tax regime, Foreign Co. is required to ask for aruling from the French tax authorities (article 210-C-2of the FTC). That will be granted under the sameconditions as in the case of a legal merger; that is, theassets and liabilities transferred must be recorded inthe books of a French permanent establishment ofForeign Co. The latter is also required to take thevarious undertakings set forth by article 210-A of theFTC.

Foreign Co. can also ask for a ruling from the Frenchtax authorities to benefit from the transfer of thecarryforward tax losses generated by French Co. sothat those losses can be offset against the taxableresults of the permanent establishment that ForeignCo. will have in France as a result of the dissolution ofFrench Co. (article 209-II of the FTC).

The dissolution is only subject to a €230 transferduty. However, when French Co. owns real estate,Foreign Co. is also liable for additional taxes at a globalrate of 0.7 percent (0.1 percent plus 0.6 percent)applying on the market value of the real estate trans-ferred (as opposed to only 0.1 percent for a legalmerger).

In conclusion, the alternative scenario of a dissolu-tion without liquidation should be considered byForeign Co. when it owns 100 percent of French Co.,because it is simpler to implement than a legalmerger.14 That kind of transaction may be of particularinterest when, for example, the law of the state inwhich Foreign Co. is established does not allow across-border merger (for example, the Netherlands). Infact, the decision and the transfer of the assets andliabilities are generally governed by French lawexclusively.

Scenario 3: Foreign Sub1 Merges Into ForeignSub2

We address below the tax treatment applicable toFrench Co. for the attribution or exchange of ForeignSub2 shares against its Foreign Sub1 shares.


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14From a legal standpoint, the dissolution of French Co. maybe implemented through the sole decision taken by Foreign Co.However, the creditors of French Co. are given a 30-day period torequest early payments of the company’s debts or the granting ofspecific guarantees and the dissolution will not be effective beforethe settlement of that request, if any.

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The attribution of Foreign Sub2 shares to French Co.upon cancellation of its Foreign Sub1 shares is notconsidered a distribution of the liquidation proceeds ofForeign Sub1 to French Co. Therefore, the proceeds arenot subject to tax to the extent that the mergerbetween Foreign Sub1 and Foreign Sub2 qualifies as amerger under the definition provided for by article210-OA of the FTC (article 121-1 of the FTC).

In the same way, the capital gain realized by FrenchCo. upon exchange of its Foreign Sub1 shares forForeign Sub2 shares is generally taxable in Franceunder most tax treaties that grant the right to tax tothe state of the seller. Subject to specific provisions oftax treaties concluded by France, that gain would notbe taxable in France when Foreign Sub1 is located in acountry that has a tax treaty with France containing asubstantial shareholding provision.

When taxable in France, the capital gains benefitfrom a tax deferral until the subsequent transfer of theForeign Sub2 shares received upon the merger (article38-7 bis of the FTC) whether the transaction benefitsfrom the special tax regime or not. However, themerger between Foreign Sub1 and Foreign Sub2 mustmeet the tax definition provided in article 210-OA ofthe FTC, and Foreign Sub1 and Foreign Sub2 musteither benefit from the EU directive 90/434 or belocated in a state that has a tax treaty with France thatincludes an administrative-assistance provision.

When the aforementioned conditions are not met(for example, Foreign Sub1 or Foreign Sub2 are locatedin Switzerland), article 38-7 bis (tax deferral uponexchange of shares) or article 115-1 of the FTC (taxexemption upon attribution of shares) does not apply.However, the French tax administration has notspecified whether French Co. is taxable on the deemeddistribution made by Foreign Sub1 or on the capitalgain realized upon the transfer of the Foreign Sub1

shares (in exchange for Foreign Sub2 shares).This is allthe more surprising because the tax consequences arevery different. The taxation of the foreign-sourcedistribution may be tax-exempt under the parent-subsidiary regime, while the capital gain is taxedeither at the maximum effective reduced rate of 20.20percent (long-term capital gain) or at the maximumeffective normal rate of 35.43 percent (short-termcapital gain).

III. Tax Treatment of Cross-BorderPartial Contributions of Assets or

Shares in France

A. Definition of Partial Contribution of Assetsor Shares

Article 210-B of the FTC provides that the specialtax regime set forth in article 210-A of the FTC appliesfor the contribution of a “complete branch of activity.”

For the definition of a “complete branch of activity,”the French tax authorities refer to the definitionprovided by EU Directive 90/434: A transfer of “all theassets and liabilities of a division of a company which,from an organizational point of view, constitutes anindependent business, that is to say an entity capableof functioning by its own means.”

Under article 210-B of the FTC, the following contri-butions of shares are assimilated to a contribution of acomplete branch of activity:

contribution of shares representing more than50 percent of the share capital of the companywhose shares are contributed;

contribution of shares when the beneficiary isgranted more than 30 percent of the votingrights of the company whose shares are con-tributed and no shareholder holds more votingrights; and

contribution of shares when the beneficiary —that already owns more than 30 percent of thevoting rights in the company whose shares arecontributed — is granted the greatest propor-tion of voting rights.

When the contribution of assets or shares does notqualify or cannot be assimilated to a complete branchof activity, the special tax regime may apply, but onlysubject to a prior ruling from the French tax authori-ties (article 210-B-3 of the FTC). When a Frenchcompany contributes its assets to a foreign company, aprevious ruling is also necessary (article 210-C-2 of theFTC). Both rulings will be granted provided thepurpose of the transaction is restructuring foreconomic purposes, the transaction is not mainlymotivated by tax avoidance reasons, and the transac-tion presents characteristics that allow the futuretaxation in France of capital gains, the taxation ofwhich was deferred upon the contribution (article210-B-3 of the FTC).

B. Mechanism for Tax Deferral for PartialContributions of Assets or Shares

If the assets or shares qualify for the special taxregime, article 210-B of the FTC provides for a taxdeferral of the capital gains realized upon the contribu-tion, subject to three conditions:

the contributing company must undertake tokeep the shares received on the contributionfor at least three years;

the contributing company must undertake tocompute the capital gains that will be realizedon the transfer of the shares received uponcontribution on the basis of the tax value of theassets transferred to the contributed com-pany; and

the contributed company must also undertaketo record the assets transferred upon the


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contribution for the tax value that they had atthe level of the contributing company.15

The provisions of article 210-B of the FTC are, tosome extent, contrary to the provisions of the EUDirective 90/434, which does not provide for aminimum holding period of the shares received uponcontribution. For intangible assets, those provisionsresult in a double taxation of the same capital gain atthe level of the companies party to the contribution;under the EU directive, the tax deferral is only subjectto the condition that the assets and liabilities receivedupon the merger are recorded in the books of the bene-ficiary for the tax value they had at the level of thecontributing company.

On 18 November 2003, the EU Commission issued aproposal amending EU Directive 90/434. The proposalincludes several items that may affect the Frenchregime. Notably, the proposal addresses the doubletaxation issue identified above and provides that thecontributing company must record the shares receivedupon the contribution in its books for the “real valuethat the assets and liabilities transferred had immedi-ately before the transfer of assets.” As a result, thecontributing company is definitely exempt from tax onthe capital gain realized upon the contribution ofassets.

Scenario 1: Foreign Co. Contributes ItsFrench Permanent Establishment to French Co.

This transaction may correspond to a transforma-tion by Foreign Co. of its French branch into a Frenchsubsidiary.

According to French tax authorities, that transac-tion could benefit from the special tax regime withoutprior approval when Foreign Co. could subscribe thevarious undertakings set forth by article 210-B of theFTC for the shares it would hold in French Co. as aresult of the transaction. That is, no prior approvalshould be requested when:

Foreign Co. is situated in a state that has a taxtreaty with France containing a substantialshareholding provision (for example, Italy), sothat the future capital gains realized on thedisposal of the French Co. shares will be tax-able in France; or

French Co. shares are recorded in the books ofanother permanent establishment of ForeignCo. in France.

Otherwise, Foreign Co. would have to establish aholding company in France to hold the French Co.

shares and take the undertakings referred to underarticle 210-B of the FTC.In practice, the French tax au-thorities request that Foreign Co. hold the shares ofsaid holding as long as the latter holds the French Co.shares.

When Foreign Co. is located within the EuropeanUnion, the EU Directive 90/434 should not allowFrance to request that undertaking.

Scenario 2: French Co. Contributes Its FrenchPermanent Establishment to Foreign Co.

Foreign Co. has a French permanent establishmentas a result of the transaction.

To benefit from the special tax regime, that transac-tion is subject to a prior ruling from the French tax au-thorities (article 210-C of the FTC). The ruling shouldbe granted if the future capital gains realized byForeign Co. upon disposal of the assets recorded in theFrench permanent establishment remain taxable inFrance, on the one hand, and the capital gains realizedby French Co. upon disposal of the Foreign Co. shareswill be taxable in France, on the other hand.

The transferred assets and liabilities must berecorded on the balance sheet of the French permanentestablishment of Foreign Co. for the tax value they hadat the level of French Co.French Co.must undertake tokeep the Foreign Co. shares for at least three years andcompute capital gains on the subsequent sale of thoseshares on the basis of the tax value of the assetstransferred.

Scenario 3: French Co. Contributes Shares inIts Subsidiary (Target) to Foreign Co.

To benefit from the special tax regime, that transac-tion is subject to a prior ruling from the French tax au-thorities (article 210-C-2 of the FTC), which will begranted provided that:

French Co. undertakes to keep the Foreign Co.shares received upon the contribution of Tar-get shares for at least three years and to com-pute any future capital gains on the sale of theForeign Co. shares on the basis of the tax valuethat the Target shares had in its own book; and

Foreign Co. undertakes to hold Target sharesas long as French Co. holds Foreign Co. shares.

When the undertakings referred to above are notfulfilled by French Co. or Foreign Co., the rulinggranted by the French tax authorities would bewithdrawn and the capital gain, the taxation of whichwas deferred at the time of the contribution, wouldretroactively become taxable (that is, resulting in thepayment of interest for late payment on the capitalgain tax).

Foreign Co.will either benefit from the EU Directive90/434 or be located in a state that has a tax treaty withFrance that includes an administrative-assistanceprovision. When Foreign Co. is located in a country


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15The contributed company must, in fact, take all undertak-ings referred to by article 210-A of the FTC when relevant (seesection II.A.1 above).

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where it would benefit from an exemption fromcorporate income tax on capital gains realized on thesale of shares of subsidiaries, the ruling granted by theFrench tax authorities may specify that any futuregains realized by Foreign Co. as from the date of thecontribution remains taxable in France under theFrench CFC provisions (article 209-B of the FTC).

Conclusion

The above developments show that French tax lawand the guidelines issued by the French tax authorities

subject cross-border mergers and similar transactionsto special treatment, the primary purpose of which is toallow the future taxation in France of capital gainswhen their taxation was deferred upon the merger. Toan extent, that special treatment goes beyond what ispermitted under the EU regulations.

The changes in legislation introduced by the 2002Finance Law — which provided a definition of mergersthat does not depend on the legal qualification of thetransaction — mark significant progress,which shouldextend the scope of the special tax regime to anincreasing number of cross-border transactions. ✦


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