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Merging companies: A fiscal regime (Part 1: the advantages of a plan)

Home > French Business Law | Published 2015-11-12

Business mergers imply a total business transfer for the one or multiple businesses being acquired. In principal, these operations should normally result in the immediate taxation of the entirety of profits which have thus far remained untaxed, including in this instance capital gains.

However, in order to encourage business mergers, the legislature instituted an exemption from this tax regime in favor of deferring taxes for mergers involving businesses liable to corporate taxation. Thus the capital gains and provisions of the absorbed business are not, under any condition, immediately subject to corporate tax during the operation of the transfer.

Special provisions apply to transactions in which one or more of the absorbed businesses transfer all of their patrimony to another pre-existing acquiring business, consequently being dissolved without liquidation, allowing the acquiring business to allocate shares to their shareholders (and eventually, a lump sum not exceeding 10% of the nominal value of such securities). That is, two or more acquired companies will transmit these constituents to the acquiring company, by way of the method referred to above.

These provisions also apply to operations in which it is not possible for the acquiring business to carry out an exchange of shares against the acquired society, if they are held by either the acquiring or the acquired business.

In effect, the legal plan in these situations does not require the acquiring company to issue shares as compensation.

Of course, considering contributions, some conditions should be satisfied by business managers to allow them to benefit from the fiscal optimization mentioned in Articles 210A, 210B, and 210C of general tax code.

First off, the contributions should be paid by corporate stocks or shares.

Special requirements apply to contributions made by French legal persons to foreign legal persons. Such transfers must first be authorized. Furthermore, the contributions of fixed assets should be apparent in the overall net gain.

But this preferred method of merging businesses should be closely analyzed to see where it brings different advantages, not only with respect to taxes on actual companies, but to registration fees, and the level of taxable income given to income tax on behalf of partners.

Concerning corporate tax

The net capital gains and the profits on assets (both current and fixed) brought upon by the merger are not subject to corporate tax.

However, for the absorbed company, this same provision is not irrelevant.

Whatever the date of the merger, the eventual capital gains may be released by the acquiring business. Upon cancellation of shares in its own capital, the acquired business receives contributions corresponding to its rights within the acquiring business, which are not subject to corporate tax.

The registration of assets in the acquiring business, because of technical losses during the merger due to cancelling of the acquired business’s shares, cannot give rise to any subsequent deductions.

Finally, the free allocation of securities representing contributions to the acquired business is not considered to be a distribution of capital income.

Distributed revenue and income tax

Titles are created as a form of payment to the acquired company for its contribution to the acquiring business’s effected net gains.

The difference between the actual value of such securities and the percentage of capital of the acquired business- corresponding with real or assimilated contributions that partners have the opportunity to take tax-free, following the dissolution of the acquired business- make up the profits of the merger.

These profits are usually subject to income tax on behalf of the partners, in the category of investment income tax.

However, in agreement with the provisions of article 115-1 of C.G.I, in the instance of business mergers, the allocation of securities, sums, or assets to members of the transferring company, in exchange for cancellation of shares in this company, is not regarded as a distribution of capital income.

This principal is also applicable to mergers between companies in which one of the companies is foreign.

Right of Registration

Corporate mergers are expressed legally either by augmenting capital of pre-existing businesses, or by the formation of new businesses.

The provision is also for acts that see mergers entered into by legal persons or by organizations liable to corporate tax. However, according to article 816-A-II of C.G.I. it applies even if the transferring business is not liable to corporate tax (but only to the extent of contributions other than those related to pecuniary mutations.)

Outright contributions are subject to a fixed tariff of 375 euros to 500 euros for businesses having less capital then 225,000 euros.

The management of all or part of the liabilities levied on inputs does not give rise to any rights. Pecuniary contributions other than those resulting in the assumption of liabilities, are taxable under the conditions of common law.

Merger proposals are subject to the fixed law of unnamed acts, and must either be presented to the formalities of registration if written in notarial form, or be produced under a private seal.

Thereafter, the rights owed at the event of the business merger are received at the operations conclusion, subject to acts which determine the definitive conclusion of the merger.

So that our study is as thorough as possible in terms of current legislation, we will address in the second section the obligations of the absorbed party, ending finally with the fundamental principals involved in this difficult operation.

This article is available online for public information purposes. It is updated regularly, as needed. Due to the constant evolution of the laws and the legal system, we cannot guarantee that the information in this article is still applicable. We invite you to contact us with any legal questions or concerns you have regarding this topic at +33 1 56 79 11 00. In no way can this firm be held liable for articles that contain inaccuracies or are now out of date.

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