Taxation of European Companies at the Time of Establishment and Restructuring docx

Foreword In 2004 the first legal entity applicable in all EU member states, the so-called European Company or Societas Europaea SE, was introduced in order to strengthen the competi-tive

Taxation of European Companies at the Time

of Establishment and Restructuring

Issues and Options for Reform with Regard

to the Status Quo and the Proposals

at the Level of the European Union

With a foreword by Prof Dr Christoph Spengel

RESEARCH

The Deutsche Nationalbibliothek lists this publication in the Deutsche Nationalbibliografie; detailed bibliographic data are available in the Internet at http://dnb.d-nb.de.

Dissertation Universität Mannheim, 2009

1st Edition 2010

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Foreword

In 2004 the first legal entity applicable in all EU member states, the so-called European Company or Societas Europaea (SE), was introduced in order to strengthen the competi-tiveness of European companies and improve the functioning of the internal market In or-der for the SE to be an alternative to existing legal forms, the establishment as well as the transfer of seat should not result in tax consequences However, despite the rules provided

by the Merger Directive, the taxation of hidden reserves is still a major concern for panies that want to reorganize themselves cross-border As a consequence, a need for fur-ther research covering aperiodic transactions existed The doctoral thesis of Ms Malke provides a comprehensive contribution to fulfill this need

com-Ms Malke has assessed the tax treatment of SEs at the time of establishment and structuring based on economic and legal criteria This is provided for all 27 EU member states In addition, she has competently analyzed the existing literature on the subject at hand The special merit of the doctoral thesis of Ms Malke consists in developing reform proposals for different addressees and different levels of harmonization in the EU More in detail, the relevant tax rules for SEs at the time of establishment and restructuring are worked out and presented in a systematic way for the 27 EU member states Based on this, existing deficiencies are shown and solutions are elaborated in a comprehensive manner These solutions cover changes to the national law of the member states, to EU law as well

re-as to the proposals provided by the European Commission regarding the introduction of a Common (Consolidated) Corporate Tax Base The reform proposals are methodically well-founded and feasible in practice

The doctoral thesis of Ms Malke is a diversified and sound work which fulfills thodical as well as tax law requirements It constitutes a contribution to the discussion of economic and tax implications of restructurings of companies doing business in Europe as well as to the systematic development of current rules It is not only of importance for in-ternational researchers in this field, but also for national governments and policy makers

me-in the European Union dealme-ing with this issue as well as for tax advisors who need an overview of the aperiodic tax rules of SEs in the EU member states I therefore strongly recommend the doctoral thesis of Ms Malke to this audience

Prof Dr Christoph Spengel

Preface

This thesis was written while I was working at the Business Administration and tion II Department at the University of Mannheim, in the beginning led by Prof Dr Dr h.c mult Otto H Jacobs and later by Prof Dr Christoph Spengel It was accepted by the Faculty of Business Administration of the University of Mannheim in 2009

Taxa-For supporting me during the preparation of this thesis I wish to express my thanks to various people Foremost, I am indebted to my thesis supervisor, Prof Dr Christoph Spengel, for his guidance, encouragement, his constructive comments and his advice dur-ing the whole time Moreover, I owe Prof (em.) Dr Dr h.c mult Otto H Jacobs a debt of gratitude for providing the second assessment of the doctoral thesis as well as for arousing

my interest in international taxation I also thank Prof Dr Hans-Wolfgang Arndt for viding the examination in my elective subject

pro-Many thanks I wish to give to Andrea Kamp and Michael David for putting a lot of time and effort in reading my thesis Andrea, I want to thank for her valuable input and for be-ing a sympathetic listener Michael, I want to thank for his very careful proofreading of this thesis with regard to English style and grammar I also wish to thank Carsten Wendt for his constructive remarks in technical discussions Furthermore, I thank my colleagues

at the department and the ZEW for the pleasant environment to work in

Lastly, but most importantly, I thank my family and friends, especially Felix for his tience, invaluable support and for cheering me up as well as my parents for their continu-ous care, encouragement and great support in every situation

pa-Christiane Malke

Summary of Contents

1 Introduction 1

1.1 Motivation of the thesis 1

1.2 Aim of the thesis and object of examination 6

1.3 Organization of the thesis 7

2  Relevance of the European Company in practice 9

2.1 Basic features of the European Company 9

2.2 Examination of statistical data regarding the use of the European Company 10

2.3 Interim conclusions 15

3  Taxation of European Companies during the time of restructuring in an

ideal environment 16

3.1 Guiding tax principles 16

3.2 Issues at reorganizations 20

3.3 Application to purely national contexts 26

3.4 Application to the ideal internal market 27

3.5 Interim conclusions 29

4  Taxation of European Companies during the time of restructuring in the current environment 30

4.1 Guiding tax principles 30

4.2 Comparative analysis of the treatment in the EU member states 55

4.3 Issues and options for reform 147

5  Taxation of European Companies during the time of restructuring in the proposed environment 191

5.1 Guiding tax principles 191

5.2 Common Corporate Tax Base 192

5.3 Common Consolidated Corporate Tax Base 195

5.4 Interim conclusions 214

6  Conclusions 216

Table of Contents

List of Abbreviations XV List of Figures XIX List of Tables XXI

1 Introduction 1

1.1 Motivation of the thesis 1

1.2 Aim of the thesis and object of examination 6

1.3 Organization of the thesis 7

2 Relevance of the European Company in practice 9

2.1 Basic features of the European Company 9

2.2 Examination of statistical data regarding the use of the European Company 10

2.3 Interim conclusions 15

3 Taxation of European Companies during the time of restructuring in an ideal environment 16

3.1 Guiding tax principles 16

3.1.1 Neutrality and efficiency 16

3.1.2 Equity and fairness 17

3.2 Issues at reorganizations 20

3.2.1 General features of reorganizations 20

3.2.2 Treatment of hidden reserves 21

3.2.3 Retention of unused losses 24

3.2.4 Treatment of tax incentives 25

3.2.5 Additional transaction taxes 25

3.2.6 Scope of rules 26

3.3 Application to purely national contexts 26

3.4 Application to the ideal internal market 27

3.5 Interim conclusions 29

4 Taxation of European Companies during the time of restructuring in the

current environment 30

4.1 Guiding tax principles 30

4.1.1 Neutrality and equity in an international context 30

4.1.1.1 International neutrality and efficiency 31

4.1.1.2 International equity and fairness 32

4.1.1.3 Taxing right and time of taxation at international restructurings 35

4.1.1.4 Valuation at international restructurings 39

4.1.1.5 Interim conclusions 40

4.1.2 EU law 41

4.1.2.1 Primary EU law 42

4.1.2.1.1 Decisive fundamental freedoms 42

4.1.2.1.2 Discriminations and restrictions of the fundamental freedoms 44

4.1.2.1.3 Justifications of discriminations and/or restrictions 46

4.1.2.2 Secondary EU law 49

4.1.2.3 Decisive judgments of the European Court of Justice in the context of reorganizations 49

4.1.2.4 Interim conclusions 52

4.1.3 Side condition: Feasibility 52

4.1.4 Interim conclusions 53

4.2 Comparative analysis of the treatment in the EU member states 55

4.2.1 Approach for the comparative analysis 55

4.2.2 Merger Directive 56

4.2.3 Entry 58

4.2.3.1 Merger 58

4.2.3.1.1 Basics with regard to company law 58

4.2.3.1.2 Tax consequences 59

4.2.3.1.2.1 Entity level 61

4.2.3.1.2.1.1 Transferring company/companies 61

4.2.3.1.2.1.1.1 Assets and liabilities in country of transferring company 61

4.2.3.1.2.1.1.2 Permanent establishments in country other than that of transferring company 72

4.2.3.1.2.1.2 Receiving company (SE) 77

4.2.3.1.2.1.2.1 Tax-exempt provisions and reserves 77

4.2.3.1.2.1.2.2 Losses 79

4.2.3.1.2.1.2.3 Prior holdings 82

4.2.3.1.2.1.2.4 Additional transaction taxes 84

4.2.3.1.2.2 Shareholder level 86

4.2.3.1.3 Interim conclusions 93

4.2.3.2 Holding SE 94

4.2.3.2.1 Basics with regard to company law 94

4.2.3.2.2 Tax consequences 95

4.2.3.3 Subsidiary SE 109

4.2.3.3.1 Basics with regard to company law 109

4.2.3.3.2 Tax consequences 109

4.2.3.3.2.1 Contributions of cash or shares 110

4.2.3.3.2.2 Contributions of branches of activity or single assets 111

4.2.3.4 Conversion 128

4.2.4 Transfer 130

4.2.4.1 Basics with regard to company law 130

4.2.4.2 Tax consequences 131

4.2.5 Exit 144

4.2.6 Interim conclusions 145

4.3 Issues and options for reform 147

4.3.1 Company law 147

4.3.2 Tax law 150

4.3.2.1 Missing or incorrect transformation of Merger Directive 150

4.3.2.2 Treatment of accrued hidden reserves 152

4.3.2.2.1 Transfer of assets and companies from one member state to another 153

4.3.2.2.1.1 Issues 153

4.3.2.2.1.1.1 Taxing right and time of taxation 153

4.3.2.2.1.1.1.1 Assessment against the background of international neutrality and equity 154

4.3.2.2.1.1.1.2 Assessment against the background of primary and secondary EU law 156

4.3.2.2.1.1.2 Valuation 162

4.3.2.2.1.1.3 Interim conclusions 164

4.3.2.2.1.2 Options for reform 164

4.3.2.2.1.2.1 Assets remaining in the former jurisdiction to tax 164

4.3.2.2.1.2.2 Assets leaving the former jurisdiction to tax 165

4.3.2.2.1.2.2.1 Requirements with regard to the tax base, the tax rate and the taxable event 165

4.3.2.2.1.2.2.2 Personal, objective and territorial scope 168

4.3.2.2.1.2.2.3 Required coordination between countries involved 168

4.3.2.2.1.2.2.4 Uncoordinated approaches 172

4.3.2.2.1.2.2.5 Other options: taxation of unrealized gains or abolishment of taxing rights upon exit 175

4.3.2.2.1.2.3 Interim conclusions 177

4.3.2.2.2 Transfers of foreign permanent establishments 177

4.3.2.2.3 Transfer of shares from one member state to another 178

4.3.2.2.4 Doubling of hidden reserves 179

4.3.2.3 Retention of unused losses 182

4.3.2.4 Filing obligations and avoidance of abuse 185

4.3.2.5 Additional transaction taxes 187

4.3.3 Interim conclusions 188

5 Taxation of European Companies during the time of restructuring in the proposed environment 191

5.1 Guiding tax principles 191

5.2 Common Corporate Tax Base 192

5.3 Common Consolidated Corporate Tax Base 195

5.3.1 Proposed rules 195

5.3.1.1 Ongoing system 195

5.3.1.2 Transitional aspects 200

5.3.2 Issues and options for reform 203

5.3.2.1 Transactions taking place within a consolidated CCCTB group 203

5.3.2.2 Transactions not taking place within a consolidated CCCTB group 208

5.4 Interim conclusions 214

6 Conclusions 216

Appendix 223

List of References 229

CCTB Common Corporate Tax Base

CCCTB Common Consolidated Corporate Tax Base

CDD Capital Duty Directive

CDFI Cahier de Droit Fiscal International

ECJ European Court of Justice

ECR European Court Report

ECS European Company Statute

ECT EC Treaty

Ed Editor/Edition

Eds .Editors

EE Estonia

EEA European Economic Area

EEC European Economic Community

EEIG European Economic Interest Grouping

IBFD International Bureau of Fical Documentation

I.e .id est

IE Ireland

IFA International Fiscal Association

IFRS International Fiancial Reporting Standards

N/a Not available

N/a Not applicable

N.B .Note besides

NL Netherlands

No .Number

OECD Organisation for Economic Co-operation and Development

List of Figures

Figure 1: Merger by acquisition 60

Figure 2: Merger by formation of a new company 60

Figure 3: Establishment of a holding SE through companies in different member

Figure 7: Establishment of an SE by conversion 129

Figure 8: Transfer of an SE 133

List of Tables

Table 1: Established SEs within the EU member states 10

Table 2: Merger - tax consequences at transferring company 63

Table 3: Merger - permanent establishment abroad 75

Table 4: Merger - carryover of provisions and reserves 78

Table 5: Merger - loss carryover 80

Table 6: Merger - merging gains or losses (receiving company) 83

Table 7: Merger - Additional transaction taxes 85

Table 8: Merger - shareholders of transferring entity/entities 88

Table 9: Holding SE - shareholders of founding entities and level of SE 100

Table 10: Subsidiary SE - Contributing entities and SE 116

Table 11: Transfer of SE 135

Table 12: Double tax treaties concluded between EU member states 223

Table 13: Foreign permanent establishments - avoidance of double taxation 224

Table 14: Transfer of nondepreciable assets 225

1 Introduction

1.1 Motivation of the thesis

Effective 8 October 2004, a legal entity which is applicable in all EU member states (the so-called European Company or Societas Europaea (SE)) has been introduced.1 The legal basis was the Council Regulation (EC) No 2157/2001 of 8 October 2001 on the Statute for a European Company (SE) (hereinafter: European Company Statute)2 and the Council Directive 2001/86/EC of 8 October 2001 supplementing the Statute for a Euro-pean Company with regard to the involvement of employees3 Whereas the regulation on the Statute for a European Company introducing the legal form of the Societas Europaea was binding in its entirety and directly applicable in all the EU member states as of 8 Oc-tober 2004 due to Art 249 (2) ECT, the directive on the involvement of employees was binding with regard to the result which should be achieved but still needed to be imple-mented into the national law of the member states according to Art 249 (3) ECT.4 In 2009

- five years after the introduction of the SE - the European Company Statute shall be viewed and amended if necessary as stated in Art 69 (a) ECS

re-The aim of the introduction of the SE was to strengthen the competitiveness of pean Companies and improve the functioning of the internal market.5 The internal market which shall be established within the European Community according to the EC Treaty is defined as an area without internal frontiers in which the free movement of goods, per-sons, services and capital is ensured (Art 14 ECT) Thus, the internal market is rathera national market than an international one, since the system of the marketis uniform or su-pranational and no longer international or multinational.6 In order to complete the internal market and improve the economic and social situation within the EU, barriers to trade need to be removed and structures of production need to be adaptable to the EU dimen-

Euro-1 It is one of the first supranational European legal entities Other EU-wide entities are the European operative Society (SCE) which is applicable to co-operative societies and the European Economic In- terest Grouping (EEIG) which may be of interest for small and medium sized enterprises or self- employed persons and is mainly used for auxiliary functions (e.g joint research and development pro- jects) Cf for example for the SCE: Selbherr/Manz (eds.), 1995; for the EEIG: Schulze (ed.), 2004

Co-2 Council Regulation, 2157/2001: 1

3 Council Directive, 2001/86/EC: 22

4 Such rules need to have the status of a code or treasury regulations Administrative interpretations are not sufficient Cf Reiß, 1994: 327-328 This has been done, for example, in Germany via the “SE- Ausführungsgesetz” and the “SE-Beteiligungsgesetz” Cf Lutter/Hommelhoff (eds.), 2008

5

sion This implies that companies which are not only doing business on a local market need to be able to plan and carry out reorganizations as needed on a Community scale Observing the rules of competition laid down in the EC Treaty, such reorganizations should give existing companies from different member states the opportunity to combine their potential by means of new structures, mergers or similar transactions.7 Furthermore, conditions need to be established so that the management of European groups of compa-nies can be optimized Only then there is no need for companies to relocate their head of-fices to countries outside the EU which may provide them with more efficient structures.8

However, the laws of the member states in the European Union are in certain areas ther orientatedtowards domestic transactions than cross-border transactions Especially in company law each nation has its own legal forms If a company wants to change its regis-tered office within the European Union or reorganize its company in order to do business EU-wide, such transactions may be forbidden by law or hindered because of exit charges Such exit charges arise if the company needs to be liquidated in one country and re-established in another country due to the reorganization Furthermore, tax costs may ap-ply If a company is involved in reorganizations beyond the national borders hidden re-serves which have been accrued in the assets may become taxable upon transfer.9

ra-Within the European Union such restrictions are clearly in conflict with the idea of an internal market Thus, one measure adopted by the Community to overcome obstacles was

to introduce a legal form which will be available in every one of the member states of the

EU The council regulation and directive which govern the Societas Europaea focus on rules regarding company law and employee involvement With regard to company law, the statute uniformly regulated for the first time that cross-border transactions shall not re-sult in the need to liquidate and reestablish the companies involved Thus, using an SE made it possible to use new structures, reorganize the organization and transfer the regis-tered office within the European Union without dissolution and thus without restrictions Accordingly, it was only with the introduction of the SE that companies could choose a legal form which was not governed by a particular national law Thus, from the perspec-tive of company law the conditions to complete the internal market within the EU with re-

spect to legal entities have been established in general.10 However, due to various optionscontained in the regulation, overall uniformity may not be fulfilled in detail.11

The introduction of the SE was especially important in the context of cross-border mergers and transfers of the registered office across a border since this was not possible before without the dissolution of the involved companies.12 In the meantime further devel-opments have taken place The Directive 2005/56/EC13 now allows national corporations from different member states to merge without any consequences due to company law Thus, as far as the directive is transformed into national law, which had to be done by 15/12/2007, cross-border mergers are not only possible for an SE (or in order to establish

an SE) but also for limited liability companies within the EU The conditions are logues to those which are provided for in the European Company Statute for a merger of

ana-an SE.14 Regarding the transfer of the registered office, the SE is still unique since the 14th Company Law Directive has not been passed at the Community level Accordingly, a transfer of the registered office without dissolution of the company in one state and rees-tablishment of the company in another state is not possible for national corporations.15

On the subject of taxation, the European Company Statute concluded in 2001 is silent, even though former proposals regarding the introduction of an SE had included tax rules The SE looks back at a history of over thirty years.16 In a first proposal in 197017 far reaching rules regarding the tax treatment had been included When looking at noncurrent transactionsthe tax neutrality for shareholders upon the establishment of a holding SE, the definition of the registered office for tax purposes and the tax neutrality upon the transfer

of the registered office were regulated When looking at current transactions the border loss transfer with subsidiaries and taxation of profits and losses of permanent estab-lishments were addressed The second proposal in 198918 still contained rules regarding the taxation of profits and losses of permanent establishments In the final version of the

cross-10 Cf Wenz, 1993: 35-44; Council Regulation, 2157/2001: 1.

11 Cf Thoma/Leuering, 2002: 1450; Thömmes, 2004b: 17; Bartone/Klapdor, 2007: 7-8

12 Cf Sauter/Wenz, 2002: 10; Schön/Schindler, 2004: 573

13 Council Directive, 2005/56/EC: 1

14 Cf Chapter 2 Cf also European Commission, COM(2003)703; Herrler, 2007, 295-300; Winter, 2008: 532-537

15 Cf European Commission, XV/6002/97 The work on this issue has been officially stopped in ber 2007 See http://ec.europa.eu/internal_market/company/seat-transfer/index_en.htm (date of access: 31/01/2009)

Decem-16 Regarding the historical development of the SE see in detail Blanquet, 2002: 20-34; Diemer, 2004: 38; Lenoir, 2008: 13-14; Schön/Schindler, 2008: paras 1-6

36-17 Cf European Commission, COM(70)600

18

European Company Statute of 2001 tax rules have no longer been included19 since consent among the member states was not reached.20 Instead, these complex issues should be dealt with separately in the following years.21 This has only been partly achieved in the mean-time

In the European Company Statute it is only stated that member states are generally obliged to guarantee that provisions applicable to SEs do neither result in a discrimination because of an unjustified different treatment of SEs compared to other national public lim-ited-liability companies, nor in disproportionate restrictions when an SE is formed or transfers its registered office This also has to be respected with regard to taxes.22 In addi-tion, Art 9 (1) (c) (ii) ECS refers to the national law of the country in which the SE is domiciled In addition, according to Art 10 ECS the SE shall be treated in every member state as if it were a public limited-liability company formed in accordance with the law of the member state in which it has its registered office and head office Accordingly, general

EU law, bilateral treaty law and national tax law applies.23 With respect to current tions, this implies that the rules applicable to any other national corporate entity are valid.24 As a result, 27 different tax systems prevail within the EU not leading to a uniform treatment of SEs or a reduction of compliance costs.25 Instead, SEs are faced with the same obstacles treated as national corporate entities when doing business cross-border.26

transac-As ongoing activities of SEs are currently not treated differently from other corporations, the consequences of the entry into an SE, the transfer of the registered office from one member state to another one and the exit out of an SE become important when analyzing the attractiveness and effectiveness of this new European legal form If these transactions

do not result in tax consequences an SE may freely move around within the internal ket and adapt its structures as required by business objectives This puts these noncurrent

mar-19 Number 20 of the preamble of the European Company Statute explicitly states that areas like taxation are not covered by the regulation

20 Among others, there was the fear that special tax rules could lead to distortions of competition against other legal entities Cf Blanquet, 2002: 54; Thömmes, 2004b: 18.

21 Cf Diemer, 2004: 38

22 Cf Council Regulation, 2157/2001: 1; Lenoir, 2007: 71

23 Cf Soler Roch, 2004: 11; Terra/Wattel, 2008: 600 For an overview of the general hierarchy for norms regulating the SE beyond taxation see Theisen/Wenz, 2005: 51; Bartone/Klapdor, 2007: 7-8, which both show that various laws need to be observed leading to a complex situation

transactions into the focus of this work In this context, as has been stated above, a major issue involves the tax treatment of hidden reserves which have been accrued in the assets which are transferred This is also a concern upon entry into an SE since the SE may not

be established by individuals via a contribution of cash or assets, but solely by tion or conversion of specific entities already existing Here, the Merger Directive 90/434/EEC, which has recently been amended by Directive 2005/19/EC,27 is of great im-portance for the SE It deals with cross-border reorganizations and provides guidelines on their tax treatment for the EU member states The Merger Directive is generally applicable

reorganiza-to national corporations but with regard reorganiza-to the transfer of the registered office, it only ers the SE

cov-Additionally, the SE can be examined in a broader context Due to the various obstacles that companies doing business in Europe face, resulting from dealing with 27 different tax systems, the European Commission has proposed to introduce a new fiscal framework in the long run in order to complete the internal market from a tax perspective The work is aimed at introducing a common consolidated corporate tax base throughout Europe This would provide uniform rules within the whole EU and thus limit the obstacles mentioned above more effectively than case specific measures Such a uniform tax base would change the systems on profit determination and profit allocation of groups of companies.28

In this context, it had also been discussed to use the SE in a pilot scheme As the European Company Statute had not provided for a fiscal framework and the SE is an entity organ-ized EU-wide, this would have served the EU dimension of the SE However, due to con-cerns that a special tax regime for the SE would discriminate other companies against the

SE and would thus create distortions to competition within the EU it has been doned.29 Overall though, work by the Commission Services and tax experts go on in de-signing such a new tax system, not only for the SE but for all companies doing business

aban-on an EU-wide level.30 Thus, the SE “may prove to be a “Trojan Horse” that Member States have unwittingly allowed within their city walls and which will in time disgorge its contents to the further downfall of national corporate tax systems”.31 In such a new system certain issues need to be examined with regard to noncurrent transactions Among others,

27 Council Directive, 90/434/EEC: 1; Council Directive 2005/19/EC: 19

28 Cf European Commission, SEC(2001)1681 See also e.g Diemer 2004: 49-50

29 Cf European Commission, COM(2003)726; Deloitte, 2004; Diemer, 2004: 62; Herzig, 2004: 98-99

30 Cf the website of the General Directorate “Taxation and Customs Union” on the progress: http://ec.europa.eu/taxation_customs/taxation/company_tax/common_tax_base/index_en.htm

the question arises on how to handle the entry into and exit out of such a new system Here again the focus is on the treatment of accrued hidden reserves Furthermore, within the ongoing system, one has to determine how to deal with reorganizations in general

1.2 Aim of the thesis and object of examination

Against this background the aim of this work is to determine how cross-border turings shall be treated within the EU from a tax point of view especially with regard to unrealized gains immanent in transferred assets (i.e hidden reserves) In order to do so, first, economic guiding tax principles (neutrality and equity) in an ideal environment (e.g one country or one internal market) are elaborated and examined with regard to reorgani-zations Secondly, additional requirements in cross-border situations are elaborated (eco-nomic principles, legal principles as well as administrative aspects) Based on these find-ings, the currently applicable rules in the EU member states regarding the treatment of the establishment and restructuring of SEs are compared and evaluated The goal is to identify the main deficits of the restructuring rules and develop reform options within the current tax system Third, within the context of the reform proposals of the European Commission

restruc-to establish a common tax base, the entry inrestruc-to and exit out of such a system as well as structurings within the ongoing system shall be examined and critically analyzed This analysis serves to provide guidance on the treatment of such transactions in a new tax sys-tem which is in line with the aforementioned principles

re-For the purpose of the further analysis the ongoing taxation after the reorganization will

be disregarded as it is not immediately relevant for the question of taxing rights at lishment or restructuring Furthermore, the decision whether to reorganize or not will mainly be driven by impediments at the point of time of the reorganization Finally, changes to current taxation are caused by the fact that in most countries taxation is not neutral towards legal forms Thus, different rules apply depending on the legal form in which the business takes place These differences, however, do not originate from the re-organization itself.32 However, aspects which are directly connected to the reorganizations

estab even if they affect the current taxation afterwards estab are evaluated (e.g loss carryover)

31 Gammie, 2004: 36 Cf also Jacobs (ed.), 2007: 186

32 Cf Herzig, 1997: 3-4; Buchheim, 2001: 69 Regarding the effects which corporate tax systems may have on the company and its shareholders after the reorganization see Herzig, 1999: 621-643 For ex- ample, in case of a merger issues which result from the taxation of legally separate entities vanish as

1.3 Organization of the thesis

The thesis is organized as follows: Chapter 2 starts with a description of basic istics of the Societas Europaea In this context, statistical data on the SE is assessed with regard to frequency and reasons for establishment among others This shall show whether

character-or not the SE has been accepted by entrepreneurs up to now and provide reasons Then the focus shifts to taxes in different scenarios In Chapter 3 ideal tax environments for reorganizations are examined Ideal tax environments may be defined as areas without borders from a tax perspective For the examinations, general guidelines for the taxation of restructurings (neutrality and equity) are presented and put into more precise terms with regard to such transactions Then the principles are tested in ideal environments, thus in areas with a uniform tax system as is the case in a domestic reorganization or could be the case in an internal market as the European Union

Chapter 4 analyzes the currently applicable tax rules in the 27 member states of the EU, hence an area with borders from a tax perspective In order to do so, in a first step, guide-lines in such a scenario are evolved Due to the cross-border situation, additional eco-nomic, legal and administrative aspects need to be observed compared to Chapter 3 Im-portant criteria commonly agreed on by economists and tax experts are international efficiency and neutrality as well as international equity from the perspective of the com-panies involved as well as of the countries involved Moreover, restrictions arising for transactions within the European Union due to EU law are analyzed, i.e EC Treaty, EC Directives, decisions by the European Court of Justice Administrative aspects of taxation are also taken into account In a second step, the prevailing rules concerning cross-border restructurings of SEs in the EU are described and compared The analysis looks at the en-try into an SE, the transfer of the registered office of an SE from one member state to an-other member state and the exit out of an SE With regard to the entry, the four options to establish an SE are assessed: the merger, the foundation of a holding, the foundation of a subsidiary and the conversion into an SE As the Merger Directive serves as the basis for most of the relevant transactions, it will be described up front as well as with the specific cases Furthermore, when examining the different cases, first, company law aspects are briefly described Next, the general tax rules will be discussed (mainly based on the Merger Directive) As the Merger Directive is not directly applicable but needs to be transposed into national law, finally, the current treatment in the member states is as-

sessed In a third step, the main deficits of the prevailing rules in the EU member states with respect to cross-border restructurings (e.g treatment of accrued hidden reserves, re-tention of unused losses) are analyzed against the background of the guiding principles es-tablished at the beginning of the chapter Based on these findings, necessary changes to the European Company Statute, the Merger Directive and/or national law are elaborated for each issue

After focusing on short-term options to improve the treatment of cross-border turings, Chapter 5 deals with long-term proposals of the European Commission In order

restruc-to establish an internal market within the European Union, also with regard restruc-to direct taxes,

it has been proposed to introduce a common tax base for companies doing business throughout the EU Accordingly, in this chapter the design of the new rules is addressed and evaluated with respect to the treatment of cross-border restructurings After elaborat-ing the guiding tax principles for such a new environment, the chapter focuses on the two scenarios which have been the focus of the work by the European Commission These are the Common Corporate Tax Base (CCTB) and the Common Consolidated Corporate Tax Base (CCCTB).33 In contrast to a Common Corporate Tax Base, which implies the intro-duction of a uniform tax base throughout Europe, the Common Consolidated Corporate Tax Base would further include a consolidation and apportionment mechanism.34 For each approach, the proposed design is outlined and critically assessed with regard to the treat-ment of cross-border restructurings in order to form SEs or transfer the registered office of SEs This does not only cover issues regarding the facilitation of reorganizations and transfers of the registered office in the ongoing system but also aspects regarding the entry into and exit out of the proposed environment as - in order to change to such a new tax system - transitional aspects are a major concern In this context, options are presented and evaluated based on the principles laid down at the beginning of the chapter

The final chapter offers a summary of the main findings

33 Cf European Commission, COM(2003)726, COM(2005)532, COM(2006)157 and COM(2007)223

34

2 Relevance of the European Company in practice

This thesis deals with the tax treatment of European Companies upon entry, subsequent reorganization and exit Before the taxation issue is addressed, however, basic characteris-tics of the SE are presented, as well as data on the use of the SE in the EU member states This assessment shall show whether or not the SE has been accepted as a new legal entity

so far and provide reasons

2.1 Basic features of the European Company

According to the European Company Statute an SE has certain features An SE may be

a listed or unlisted company It may either have a corporate governance structure with a board of directors (one-tier or monist structure - like in the Anglo-Saxon countries) or a structure with a supervisory and management board (two-tier or dualist structure - like in Austria or Germany).35 Additionally, in a two-tier structure of an SE (compared to a na-tional company) employee involvement can be restricted as the number of members in the supervisory board may be lowered and trade union members of different countries (not only the country where the registered office is located) may be added in accordance with Art 7 of the Council Directive 2001/86/EC.36 The starting share capital needs to be at least 120.000 Euros There are four ways to form an SE: formation by merger, the estab-lishment of a holding SE or subsidiary SE and the conversion from an existing company into an SE Furthermore, the SE may transfer its registered office without losing its legal identity The companies involved need to be formed under the law of a member state and need to have their registered office and head office within the EU In addition, a cross-border relationship has to be given.37

2.2 Examination of statistical data regarding the use of the European Company

mer- ver- sion n/a

con-Austria 12 1 2 2 7 1 - - 6 - Belgium 7 1 6 0 0 - - - Bulgaria - - - - - - - - Cyprus 7 0 5 1 1 1 - - - - Czech Repub-

lic

110 59 49 2 0 - - - Denmark 2 0 2 0 0 - - - Estonia 3 0 1 0 2 1 - - 1 - Finland - - - - - - - - France 8 0 5 0 3 - - - 3 - Germany 88 20 22 7 39 8 1 1 19 10 Greece - - - - - - - - Hungary 3 0 0 2 1 - - - - 1 Ireland 1 0 1 0 0 - - - Italy - - - - - - - - Latvia 3 0 1 0 2 1 - - - 1 Lithuania - - - - - - - - Luxembourg 13 1 10 1 1 - - - 1 - Malta - - - - - - - -

38 The information has been extracted from the database of ETUI-REHS, available at:

http://ecdb.worker-Netherlands 30 0 19 9 2 - - - 2 - Poland - - - - - - - - Portugal - - - - - - - - Romania - - - - - - - - Slovak Repub-

lic

5 0 2 1 2 - - - 2 - Slovenia - - - - - - - - Spain 1 0 0 1 0 - - - Sweden 5 3 1 0 1 - - - 1 - United King-

dom

12 1 7 3 1 - 1 - - -

a) SE without operation or employees, available for sale

b) SE with operations but no further information available (e.g with regard to business purpose or number

of employees)

c) SE with operations but without employees

d) SE with operations and employees

In order to analyze data on the use of the SE in the EU member states information has been extracted from the database of ETUI-REHS (see Table 1).39 There, SEs are classified

as follows “Normal SEs” are SEs with operations and employees, “UFO SEs” are SEs with operations but no further information is available (e.g with regard to business pur-pose or number of employees), “empty SEs” are SEs with operations but without employ-ees and “shelf SEs” are SEs without operation or employees which are available for sale This classification is used here as well in order to adequately evaluate the data

The first SEs established were MPIT Structured Financial Services SE and SCS Europe

SE in the Netherlands They were set up on 08/10/2004, the day the SE became effective Both are operating in the financial services sector but without employees (i.e they are empty corporations) Prominent examples with operations and employees followed (i.e

39

normal SEs), among others Allianz SE (financial services and insurance),40 BASF SE (chemicals), Elcoteq SE (computer services), Fresenius SE (health care),41 MAN Diesel

SE (metal industry),42 Mensch und Maschine Software SE (information technology),43

Porsche Holding SE (automobiles), SCOR SE (reinsurance) and Strabag Bauholding SE (construction).44 As of the beginning of 2009, over 300 companies have been registered as SEs in the EU (see Table 1).45 An additional 20 companies are planning on becoming an

SE This number is steadily increasing As compiled in a study by müller/Engert/Hornhuf46 in 2004, the year in which the SE became effective as of 08/10/2004, 8 SEs were found In 2005 21 SEs were found, in 2006 40 and in 2007 85, summing up to 154 by the end of 2007.47 Based on this, the number has doubled in 2008 (to 310) as has been predicted by Eidenmüller/Engert/Hornhuf.48

Eiden-When looking at the regional distribution, the Czech Republic and Germany are leading with 110 and 88 SEs respectively Whereas in former studies Germany was leading in numbers,49 the Czech Republic has recently passed Germany.50 At least ten SEs are lo-cated in the Netherlands (30), Luxembourg (13), Austria (12) and the United Kingdom (12) Of the remaining 21 member states 11 member states contain less than 10 SEs In 10 member states no SE has been established or transferred its registered office to The num-ber of member states without SEs is decreasing.51 A reason for the increasing spreading of SEs may be found in the fact that only now the council directive on employee involvement has been transposed in every member state.52 Before, legal certainty was missing in mem-

40 For the motives and procedure of Allianz see Hemeling, 2008, whose initial incentive was to squeeze out minority shareholders in Italy

41 For the motives and procedure of Fresenius see Götz, 2007: 148-158

42 For the motives and procedure of MAN see Höhfeld, 2007: 159-172

43 For the motives and procedure of Mensch und Maschine Software see Drotleff, 2007: 173-180

44 For detailed information see ETUI-REHS, European Company (SE) Factsheets, participation.eu/ (date of access: 31/01/2009)

http://ecdb.worker-45 Additional 9 SEs have been established in EEA countries (Liechtenstein: 2 (all UFO), Norway: 7 (4 normal, 3 UFO))

46 Cf Eidenmüller/Engert/Hornhuf, 2008: 724 which generated their data as of June 2008 by checking the national registries

47 Bayer/Schmidt end up with a number of only 127 SEs as of 10/01/2008 primarily based in the entry in the official journal of the EU Cf Bayer/Schmidt, 2008a: 454 The reason seems to be that the registra- tion of SEs has not in all cases been published in the official journal of the EU Cf Eiden- müller/Engert/Hornhuf, 2008: 723

48 Cf Eidenmüller/Engert/Hornhuf, 2008: 724

49 Cf Bayer/Schmidt, 2007: R196; Bayer/Schmidt, 2008: R32; Eidenmüller/Engert/Hornhuf, 2008: 724

50 This has also correctly been predicted by Eidenmüller/Engert/Hornhuf Cf ler/Engert/Hornhuf, 2008: 724

Eidenmül-51 Cf Bayer/Schmidt, 2007: R196; Bayer/Schmidt, 2008: R32; Eidenmüller/Engert/Hornhuf, 2008: 724

52 Regarding the transposition date and details on the implementation see

http://www.worker-ber states which had not transposed the directive in time.53When looking at the ratio of SEs and the population of the member states,54 the rather small member state Luxembourg

is leading Here the relatively high number results mainly from SEs which have ferred their registered office to Luxembourg.55 This can probably be attributed to the fact that Luxembourg is an attractive member state from a company and tax law point of view When analyzing the business of the established SEs it becomes obvious that a substan-tial part of the SEs (overall 28%) are shelf companies (in the Czech Republic (54%) but also in Germany (23%) and few other countries) This means that the SEs do not carry out

trans-an own business yet but instead have been established in order to serve as a vehicle for other companies which want to become an SE These ready-made structures provided by advisory companies save founders of companies the administrative red tape.56 Moreover, they assure that a cross-border relationship is given as required in order to establish an

SE.57 The use of such shelf companies in practice can be proven.58 Furthermore, a cant number of the SEs are involved in financial and insurance services.59 This may origi-nate from the possibility to streamline the relationship with national supervisory authori-ties.60 Additionally, as is discussed below, SEs of the financial services business are rather mobile and apparently make use of different company and tax laws.61 Finally, even though the share capital is quite high and a cross-border relationship is necessary it can be shown that not only big companies use the SE but medium sized companies as well.62 One reason could be that medium-sized companies use shelf companies upon establishment bypassing the cross-border issue.63 Other reasons may be the European image associated with an SE and the positive signals which conversions of big companies send towards smaller compa-nies.64

53 Cf the assumption in Bayer/Schmidt, 2007: R196.

54 This has been done by Eidenmüller/Engert/Hornhuf, 2008: 725 In this ranking the density in the EEA state Liechtenstein is even higher

55 Cf Eidenmüller/Engert/Hornhuf, 2008: 725, and the discussion below

61 Of the same opinion Eidenmüller/Engert/Hornhuf, 2008: 727

62 Cf Bayer/Schmidt, 2007: R196; Bayer/Hoffmann/Schmidt, 2008a: R127-128; ler/Engert/Hornhuf, 2008: 726

Eidenmül-63 Cf Eidenmüller/Engert/Hornhuf, 2008: 726

64

The high number of businesses in Germany can be explained by two strong motives First, the SE provides more flexibility with regard to governance as a one-tier model may

be chosen Secondly, the SE is more flexible regarding employee involvement in big panies and may even avoid or freeze employee involvement in medium-sized enterprises compared to national companies.65 Besides, the image associated with an SE seems to be a reason This image may be described as a European corporate identity connected with this EU-wide legal entity It may, on the one hand, support a European integration inside the company (e.g with regard to employees from different member states) and may, on the other hand, also provide a positive signal to persons outside the company (e.g potential investors).66

com-Regarding the way of formation of normal SEs (i.e SEs which conduct a business, have employees and information is available) conversions have been the most frequent option (55%) (e.g Fresenius SE), followed by mergers (18%) (e.g Allianz SE).67 Establishing a holding SE or subsidiary SE has only occurred in rare instances However, when examin-ing shelf SEs in most cases such SEs are formed as a subsidiary SE of a domestic and for-eign national company or as a subsidiary SE of an existing SE.68

Cross-border transfers of the registered office have taken place in some instances The first company with operations and employees to transfer its registered office from one member state (Finland) to another member state (Luxembourg) took place on 01/01/2008

by Elcoteq SE.69 Furthermore, there have been transfers of companies in the financial tor from Germany to the United Kingdom as well as from the Netherlands to Luxembourg and further to the Cayman Islands among others.70 These companies are mainly UFOs, thus they are operating, but details on the business purpose or employees are not pro-vided.71 Apparently, such companies can easily move and by this also make their way to a

sec-65 Cf Reichert, 2006: 822-825 with further references; Bayer/Schmidt, 2007: R196; Drotleff, 2007: 176; Götz, 2007: 148-149; Höhfeld, 2007: 160; Eidenmüller/Engert/Hornhuf, 2008: 728; Hemeling, 2008: 6-12

175-66 Cf Buchheim, 2001: 242-245; Wenz, 2003: 196; Götz, 2007: 148-149; Höhfeld, 2007: 160; Hemeling, 2008: 12

67 Equivalent result in Lenoir, 2008: 17

68 Cf the proofs in Bayer/Hoffmann/Schmidt, 2008: R103; Eidenmüller/Engert/Hornhuf, 2008: 726

69 Cf Stock Exchange Release of 02/01/2008, available at http://www.elcoteq.com/en/Media/Release/ 2008/1179031.htm (date of access: 02/01/2008)

70 Cf Bayer/Schmidt, 2007: R 196; ETUI-REHS, European Company (SE) Factsheets, http://ecdb worker-participation.eu/ (date of access: 31/01/2009) As of June 2008 18 transfers of 16 companies have been identified Cf Eidenmüller/Engert/Hornhuf, 2008: 723

71 Cf ETUI-REHS, European Company (SE) Factsheets, http://ecdb.worker-participation.eu/ (date of

ac-tax haven country as pointed out by Schmidt.72 The transfer to the Cayman Islands was dependent on the specific law in Luxembourg and the Cayman Islands according to which companies may exit and enter a country without losing their legal identity.73 The transfer

of an SE to a member state outside the EU is not per se forbidden by the European pany Statute Instead, it is not explicitly regulated.74 Opinions differ on the implications which follow On the one hand, Schmidt interprets this in a way that such transactions are permitted even though outside the EU the company loses its SE identity.75 On the other hand, Heuschmid/Schmidt argue that a transfer to a country outside the EU, while keeping

Com-or losing the SE identity, is against the rules provided in the European Company Statute which shall protect stakeholder (e.g minority shareholders and employees) and thus, against the purpose of the SE According to them, a transfer in a third country is only pos-sible by converting the SE back into a national company of the member state where it has its registered office as stated in Art 66 ECS Then the transfer needs to follow domestic law.76

2.3 Interim conclusions

The number of SEs is increasing Due to uncertainties the number has grown very slowly in the beginning but has recently increased substantially Motives can be found in non tax factors like the European image and the flexibility in governance and employee involvement The predominant way of formation has been the conversion which is gener-ally not an issue from the tax perspective.77 Furthermore, companies use the option to re-organize themselves and move around Europe Against this background it is not only im-portant to consider the tax issues involved in reorganizations to SEs and transfers of registered offices of SEs in order to further boost the use of this EU-wide legal form, but also to safeguard the interest of the countries involved when assets or companies are trans-ferred from one member state to another one (or even outside the EU)

72 Cf Schmidt, 2006: 2221 Also practitioners mention this according to Eidenmüller/Engert/Hornhuf Cf Eidenmüller/Engert/Hornhuf, 2008: 725

73 Cf Schmidt, 2006: 2222 with further references

74 Cf Art 7, 8 ECS; Schmidt, 2006: 2222; Heuschmid/Schmidt, 2007: 55

75 Cf Schmidt, 2006: 2222

76 Cf Heuschmid/Schmidt, 2007: 55-56

77

3 Taxation of European Companies during the time of restructuring in an ideal environment

As has been pointed out above, a Societas Europaea may not be established by viduals via a contribution of cash or assets but solely by reorganization of entities already existing Furthermore, a feature of the SE is the possibility to transfer the registered office from one country to another without losing the legal entity.78 Thus, in the following, the focus is on generally accepted principles which need to be observed in such transactions from a tax perspective In this chapter an ideal environment is considered An ideal envi-ronment may be defined as an area with a uniform tax system in which the transaction takes place, thus an area without borders Such an environment would be provided if the transaction occurs within one country Taking the aim of the European Company Statute into consideration, it should also be provided within the internal market of the European Union

indi-3.1 Guiding tax principles

3.1.1 Neutrality and efficiency

Taxes are not explicitly mentioned in the European Company Statute It is only stated that member states may not discriminate SEs against domestic corporations for unjustified reasons or disproportionately restrict SEs when they are formed or transfers their regis-tered offices This implies that such reorganizations may not be hindered, which also needs to be respected with regard to taxes.79 The generally accepted principle in this con-text is the principle of tax neutrality Accordingly, taxes shall not influence decisions Ide-ally, in a world with taxes decisions are made in the same manner as in a world without taxes Thus decisions would be made only with regard to profitability or other corporate aspects.80 There are two ways to put tax neutrality into more precise terms The microeco-nomicperspective looks at the effects of taxation on the decision makers of single busi-nesses (decision neutrality).81 Accordingly, on the one hand, one can analyze whether cur-rent tax systems are neutral and, on the other hand, how neutral tax systems should look

78 Cf Chapter 1

79 Cf Chapter 1 Cf also Council Regulation, 2157/2001: 1; Lenoir, 2007: 71

80 Cf Zuber, 1991: 48; Schneider, 1992: 193; Schreiber, 2009: 84-85

like.82 Such an approach can be justified by the following reasons One argument is that tax planning and information costs are avoided since decisions are not influenced by taxes.83 Another argument is that the risk of incorrect business decisions is minimized since the factor “taxes” does not need to be taken into account.84 From a macroeconomic perspective, taxation shall provide allocation and production efficiency and thus avoid the misuse of resources from the point of view of the economy as a whole since this would cause a loss of welfare, i.e an excess burden.85 Although decision neutrality and allocation and production efficiency areput into concrete termsdifferently, a neutral system is the basis for an efficient system Only if decisions at the level of the entrepreneurs are not dis-torted by taxes, may an optimal allocation of resources within the whole economy take place.86 Neutrality and efficiency are also part of the requirements established by the European Commission in the context of company taxation within the internal market.87

3.1.2 Equity and fairness

Furthermore, the principle of equity or fairness needs to be followed in taxation This is also one of the guiding principles established by the European Commission.88 It implies that the tax burden is distributed as evenly as possible among the taxpayers in order to fi-nance public expenditures.89 Consequently, taxation must be aligned to the taxpayer's abil-ity to pay.90 This applies to individuals as well as corporations.91 The commonly accepted yardstick of the ability-to-pay principle goes as follows The income derived during one period is computed for all taxpayers according to uniform, objectified and non-arbitrary rules which are clearly and certainly defined in the tax code.92 This implies that not only

81 Cf Elschen/Hüchtebrock, 1983: 253, 255; Elschen, 1991: 100-101; Zuber, 1991: 49; Wagner, 1992:

3-7

82 Cf Heinhold, 1999: 78 with examples; Lange, 2005: 98

83 Cf Wagner, 1989: 264-265; Wagner, 1992: 3-4 However, one has to mention that an entrepreneur may also favor a non-neutral system if the tax due plus tax planning and information costs are still lower compared to the tax due in a neutral system Cf Wagner, 1989: 265; Wagner, 1995: 737

84 Cf Zuber, 1991: 51-52

85 Cf Elschen/Hüchtebrock, 1983: 253-255; Zuber, 1991: 48-49; Rosen/Gayer, 2008: 331-338

86 Cf McLure, 1979: 204 with further references; European Commission, SEC(2001)1681: 26; Spengel, 2003: 223-226 with further references

87 Cf Schön, 2000: 191-195; European Commission, SEC(2001)1681: 26-27

88 Cf Schön, 2000: 191-195; European Commission, SEC(2001)1681: 26

89 Cf Kirchhof, 2002: 10; Rosen/Gayer, 2008: 367-369

90 Cf Tipke/Lang, 2008: 88

91 Cf Musgrave, 2001: 1339 Whereas the ability to pay of individuals contains an objective and tive component, the ability to pay of corporations is solely determined by objective criteria Cf Tipke/Lang, 2008: 91-92

subjec-92

income or gains but also expenses or losses need to be taken into account.93 Furthermore,

it follows that revenues cannot be recognized and thus taxed until the economic benefits associated with them are realized This is called realization principle Realization means that a market transaction has taken place Therefore, gains and losses are only taxable when realized in a transaction with a third party and not when accrued.94

One alternative is to base taxation on unrealized values, i.e fair market values that have not been validated in a market transaction yet This has three major disadvantages First, the values of all assets of individuals and businesses would need to be determined at the end of each period which seems impracticable.95 Secondly, the amount of taxable gains is uncertain since the market transaction is missing.96 Third, no cash is generated with a third party which could be used to pay taxes Consequently, due to these liquidity problems, the substance of a person or company would be taxed instead of the profits generated in a cer-tain period.97 This may have negative effects on business decisions.98 A fair value taxation would only be defensible if taxpayers could get money at the capital market without re-strictions on the basis of the gains which will be realized in the future.99 However, due to costs of information and uncertainty this is not the case in reality.100 Moreover, as unreal-ized losses would immediately become tax effective, this would be an element of uncer-tainty and could result in a substantial burden for the treasury.101 In conclusion, a taxation

of unrealized values can be rejected.102

The other alternative is to only tax current income flows but not noncurrent flows However, this would create arbitrage options for the taxpayer He would likely try to structure transactions in such a way that ordinary taxable income would be converted into tax-exempt capital gains, thus he would have the option to receive the net present value of income flows derived from using an asset tax free upon sale This would result in an ero-

96 Cf Mayr, 2008a: 88; Tipke/Lang (eds.), 2008: § 17 paras 202, 220

97 Cf King, 1995: 156; Homburg/Bolik, 2005: 2335; Mayr, 2008a: 88; Tipke/Lang (eds.), 2008: § 8

sion of the tax revenues of the treasury and is therefore not likely to apply in reality ther.103

ei-Following the realization principle, the value of an asset should be reported at cost in the tax balance sheet Costs are the acquisition or production costs, i.e the consideration given for the acquisition or used in the production process.104 Furthermore, the cost base is the highest value possible, thus the upper limit.105 Consequently, increases in the carrying amount of an asset or revaluations which exceed the historical costs may not result in tax-able income unless the value is realized in an exchange transaction with a third party (e.g disposal).106 Moreover, subsequent reductions, depreciation or amortization exceeding the historical costs may not be included in taxable income.107 Hidden reserves which are es-tablished in the assets due to the cost principle are called genuine hidden reserves They are calculated as market value minus investment cost and constitute the growth in value.108

If the market value is below the investment cost a tax effective write-down to this going concern value may be available in tax law provided that the decline in value is substantial

In addition, the realization principle implies that the historical costs of depreciable sets are allocated to the periods of use via depreciation in order to account for wear and tear As the neutral course of depreciation depends on the structure of the net payments general guidelines regarding the method and rate of depreciation cannot exactly be estab-lished.109 Mainly for reasons of simplicity and certainty, depreciation rules are standard-ized in most countries, sometimes even providing for an accelerated depreciation in order

as-to grant incentives for new investments.110 This may also be a source for hidden reserves, called artificial hidden reserves They are calculated as investment cost minus book value111 and constitute a pure book profit.112 Moreover, inflation which results in higher

103 Cf King, 1995: 157; Lange, 2005: 104

104 Cf Burns/Krever, 1998: 648; Oestreicher/Spengel, 2007: 439, 442; Tipke/Lang (eds.), 2008: § 17

pa-ra 70; Schreiber, 2009: 84

105 Cf Weber-Grellet, 2001: 181; Oestreicher/Spengel, 2007: 439; Tipke/Lang (eds.), 2008: § 17 para 68

106 Cf Weber-Grellet, 2001: 337 However, the revaluation of an asset may be reflected in equity via a valuation reserve Cf Oestreicher/Spengel, 2007: 439

re-107 Cf Oestreicher/Spengel, 2007: 439

108 Cf Spori, 2001: 61-62 This also includes the earning capacity of a company which is not attributable

to one specific asset (i.e goodwill) In this case the cost may be zero if the goodwill was not allowed to

be capitalized in the tax balance sheet Cf Scheffler, 2002: 369 See the overviews on the treatment of intangible assets in the EU member states in Endres et al (eds.), 2007: 36-40

109 Cf Oestreicher/Spengel, 2007: 443

110 For an overview of the rules in the EU member states see Oestreicher/Spengel, 2007: 443

111 The book value equals the investment costs minus depreciation It is also called adjusted basis Cf

prices for assets as well as an overestimation of liabilities, which prolongs the balance sheet, may also cause hidden reserves.113

The realization of such hidden reserves generally occurs when the ownership of an asset changes against a consideration The consideration may be cash (i.e sale) or other assets (i.e exchange) This is the case when assets are transferred to a third person who is a dif-ferent taxpayer In general, taxation is bound to legal criteria, independent of economic criteria Accordingly, the legal form and the single legal entity are of relevance Oppo-sitely, when taking into account economic criteria various legal entities are regarded as one for tax purposes if they conduct a unitary business.114 The concept of disposal is to be interpreted widely as to not only include the sale (positive amount) but also the use in the sales process (e.g due to depreciation), redemption, destruction etc of the asset (negative amount).115 Realization also takes place when the company to which the assets belong changes (e.g due to liquidation or termination) or the sphere of the asset changes (e.g when the asset is transferred from the private to the business sphere or vice versa).116

3.2 Issues at reorganizations

When applying the principles of neutrality and equity to reorganizations in order to form an SE or transfer the registered office, such transactions need to be defined first In general, companies are characterized by their legal form and the participation of other shareholders (individuals, companies) in the specific company or their own participations

in other companies In order to change this structure a reorganization needs to take place Thus, reorganizations may be defined as changes in the legal form and/or the interest of the shareholders in the company117 or more generally, as changes to the legal or economic structure of one or more companies.118 This principally covers transfers of assets between

112 Cf Gordon, 1998: 704; Spori, 2001: 61-62; Weber-Grellet, 2001: 181; Cf Oestreicher/Spengel, 2003: 460

113 Cf Andersson, 1991; Tipke/Lang (eds.), 2008: § 17 para 210

114 Cf Weber-Grellet, 2001: 180-181; Jacobs (ed.), 2007: 1149-1150

115 Cf Wöhe, 1997: 224-225; Burns/Krever, 1998: 647; Weber-Grellet, 2001: 180; meyer/Andresen/Ditz (eds.), 2006: 154-155

Wasser-116 Cf Weber-Grellet, 2001: 180-181, 337

117 Cf Herzig, 1997: 3

118

different taxpayers (including shares) as well as transfers of assets between different tions.119

loca-The parties involved in reorganizations are (1) the acquired or transferring company (i.e transferor) which transfers its assets to another entity, (2) the acquiring or receiving company (i.e transferee)120 which receives assets from another entity and (3) the share-holders of the involved companies (i.e transferor and transferee) Furthermore, other per-sons (e.g creditors) may be affected Depending on the type of reorganization, however, not all of the parties need to be involved.121

One can distinguish reorganizations by determining whether or not the legal parties gaged in the transaction disappear as part of the transaction If they disappear this gener-ally qualifies as a reorganization (e.g merger, conversion) Here, special cases are the conversion from one legal entity into another and the transfer of the registered office where the assets are transferred from one location to another If they do not disappear, a transfer of assets or shares may only qualify as reorganization if a substantial part of the assets or a substantial holding is transferred (e.g contribution of assets, exchange of shares) Otherwise, the transfer is treated as a sale.122

en-3.2.2 Treatment of hidden reserves

There are some tax issues with regard to reorganizations which will be discussed next The main issue at the point of time of the reorganization concerns the taxation of gains and losses immanent in the assets transferred, thus of the hidden reserves, as they may have accrued to a substantial extent.123 These assets include the business assets of the companies involved as well as the shares of the shareholders involved.124 If legal criteria prevail a transfer of assets principally leads to a realization of gains or losses immanent in the assets provided that the assets are transferred from one single legal entity to another one.125 Of the cases discussed above this is not the case in a change from one territorial al-location to another one (i.e transfer of the registered office) In a transfer of the registered

office the assets change the location but the taxpayer stays the same Thus, tax quences may not result.126

conse-In a change from one legal form to another (i.e conversion) or from one organizational structure to another (e.g merger, contributions of assets or shares) such a legal view may cause problems as assets are transferred from one tax subject to another one Indeed, there are several reasons why the application of the realization principle should be restricted in such transactions.127 First, from the perspective of the equity, the economic ability to pay

is decisive Consequently, a taxation may only take place if a sufficient change in the payer’s economic position has occurred However, in instances where the corporate reor-ganization equals a legal restructuring of the same business such a change does not occur This is the case where the business activity is continued and the interest of the sharehold-ers in the company is retained.128 These conditions are most obviously fulfilled in a change of legal form, as only the legal identity changes whereas the business and share-holder remain exactly the same.129 Furthermore, this is also defensible for organizational changes provided that they economically equal such a change of legal form This is the case if all (merger) or substantially all (contribution) assets are transferred.130 Further-more, cash does not flow in such transactions - neither at the level of the entity nor at the level of the shareholder - since economically no gain or loss is realized in a market trans-action Accordingly, the values are uncertain and there is no money to pay any tax charges.131 Instead, liquidity would have to be generated from other sources (e.g current business operations, sale of assets, borrowing of money from bank etc.).132 Secondly, from the perspective of tax neutrality,133 if taxes would be levied on hidden reserves which may

126 Cf also Vanistendael, 1998: 900; and Endres, 1982: 212 for the conversion

127 In literature there are different views on whether the realization principle is restricted or does not apply

at all to reorganizations Cf the overview provided by Lange, 2005: 112 Despite the different ing, both approaches come to the same result as reproduced in the text

133 As pointed out by Lange there may be interactions between the tax neutrality of current and noncurrent

transactions However, even if the current tax system is neutral reorganization may still be efficient -

have accrued to a substantial extent, such a burden could hinder restructurings134 and thus entrepreneurs’ decisions on a change of the legal form or organizational structure.135 From

a microeconomic perspective it may also cause tax planning and thus costs for nesses.136 If reorganizations are not carried out because of taxes, this leads to inflexible corporate structures and the preservation of inefficient structures.137 From a macroeco-nomic point of view this would result in a lock-in effect since companies and shareholders would be bound to their current structures A Pareto efficient allocation of resources would thus be distorted.138

busi-Consequently, in order to avoid illiquidity, inflexible structures and tax planning costs,

an immediate taxation upon reorganization may not take place This is based on the quirement that a subsequent taxation of hidden reserves is guaranteed.139 Thus, ultimately hidden reserves should be taxed according to general rules Otherwise, if the reorganiza-tion process would be exempt from tax, companies would be privileged instead of being taxed according to their ability to pay Furthermore, this would likely cause tax planning

re-in order to create tax-exempt capital gare-ins re-instead of ordre-inary taxable re-income.140 quently, taxation should only be postponed and take place when hidden reserves are real-ized in a market transaction.141 Such a deferral of taxation can technically be accom-plished by attributing the values of the assets as used by the transferor company to the transferring company (roll over relief) These values equal the tax/book value The same should apply to shares of the shareholders involved.142

134 Cf Herzig/Dautzenberg/Heyeres, 1991: 4; Herzig, 1997: 4; Schindler, 2004c: 425 Herzig points out,

though, that there may be rare situations in which it is favorable to realize and tax hidden reserves upon

a reorganization This is the case if capital gains tax is low and the depreciable capacity is increased as part of the realization inasmuch as the benefit from the increased depreciation in later years is higher than the burden from taxing the gains Cf Herzig, 1997: 4 For such options in the EU member states see Section 4.2.3.1.2.1

135 Cf Schön, 2007: 415; Schön, 2008: 54

136 Cf e.g Feinschreiber/Kent (eds.), 2002; IFA (ed.), 2005; PwC (ed.), 2006

137 Cf Herzig, 1997: 4; Vanistendael, 1998: 896; Schindler, 2004c: 425; Jacobs (ed.), 2007: 1149

138 Cf King, 1995: 158; Rosen/Gayer, 2008: 387

139 Cf Herzig/Dautzenberg/Heyeres, 1991: 4; Weber-Grellet, 2001: 181 with further references; Tipke/Lang (eds.), 2008: § 17 para 203 This taxation will take place at a legally different taxpayer but due to the continuity of the shareholders at a taxpayer who is economically the same Cf Endres, 1982: 243-244

140 Cf Herzig/Dautzenberg/Heyeres, 1991: 4; King, 1995: 157; Jacobs (ed.), 2007: 1150.

141 Cf Vanistendael, 1998: 908; Canellos, 2005: 30 Thus, tax neutrality upon the reorganization implies

an interest-free loan on the taxes due until hidden reserves are finally realized (positive timing effect with regard to interest and liquidity) Cf Dautzenberg, 1997: 215; Jacobs (ed.), 2007: 1150; Rosen/Gayer, 2008: 387; Tipke/Lang (eds.), 2008: § 17 para 211

142