Mergers & acquisitions - Merger

 Merger

One or more absorbed companies, for example B, C and D, transfer on their dissolution without liquidation, their entire net assets to a new company A, the absorbing entity. A is the only surviving entity.

The surviving entity may also be an existing entity, B for example. B will be the only surviving entity.

A merger is used to regroup several businesses in the same company. A merger of SA, SAS and SARL takes at least 2-3 months and require an external auditor, a merger agreement, an approval of the merger by an extraordinary shareholder meeting and audited account not older than 3 months. Under regular French tax rules, a merger is treated as a dissolution with liquidation of the absorbed companies. If not priory taxed, profits, reserves and capital gain of the absorbed companies are taxable at the date of the merger.

The absorbing entity must pay registration duties on the taxable assets (e.g. goodwill) received from the absorbed companies. The shareholders of the absorbed entities pay income tax on the shares of the absorbing entities received in exchange of their shares in the absorbed entities.

Permanent tax breaks are available to avoid these tax effects for qualifying transactions. The special tax regime applies only to mergers between companies liable to corporate income tax.

In order to qualify, the surviving entity must absorb all the assets and liabilities of the absorbed entities. In addition the consideration given in exchange for the transfer of assets must take the form of shares. Cash payment must not exceed 10% of the nominal value of the shares received.

Subject to a prior ruling "Ruling" it is possible to merge with a foreign entity. When the special tax regime applies, the net capital gains arising on the transfer of capital assets are not immediately liable to corporation tax if the gain realized on depreciable assets is restored to the taxable profits of the absorbing company on a staggered basis. No liability to corporate tax arises on any gain realized by the absorbing company on the cancellation of its own shares in the absorbed company. Likewise the reserves of the absorbed companies , if still justified, are not liable for immediate taxation. The transfer duty paid for by shareholders are only liable to a fixed registration fee "Facts and figures" of 230 euros.
As of January 1st, 2005 accumulated tax losses are transferred to the absorbing entity without limitation.
As of January 1st, 2005 book losses equal to the excess of the liabilities over the net asset are not tax deductible for simplified mergers or mergers with a 100% subsidiary (Favorable tax regime and regular tax regime). In addition when the favorable tax regime applies to a merger, losses resulting from the write-off of the shares of the merged entity are not tax deductible.
Loss carry-back receivable is automatically transferred at nominal value.

The allotment of shares to shareholders of the divided company in consideration of assets transferred is not deemed to be a taxable distribution of securities income. As a result it is not taxable. Capital gains will only be taxable in the event of a subsequent sale of the new shares. It is possible to merge with retroactive effect.

To benefit from the special regime, the absorbing company must covenant in the merger agreement to respect several conditions (Specific schedule attached to its annual tax return, keep an on-going register of capital gains on non depreciable assets, restore the net capital gains arising on the contribution of depreciable assets to its profits on a staggered basis, etc..) A merger triggers many consequences, requirements and opportunities for VAT, business tax, salary taxes, miscellaneous taxes and employee profit sharing plan.