TAX NEWS - 
2010
European Union Tax: ECJ limits Dutch denial of Merger Directive benefits
Dutch legislation
The EC Merger Directive, which has been implemented into Dutch law, applies to mergers between companies that have a legal form listed in the annex to the Directive, are residents of an EU Member State and are subject to a corporate income tax listed in the Directive (or a tax that can be substituted for a corporate income tax). If these requirements are met, a merger between two qualifying companies cannot give rise to any taxation of capital gains arising from the merger. Consequently, the merger will not result in a levy of corporate or individual income tax. The Directive does allow Member States to deny benefits when the principle purpose (or one of the principal purposes) of a merger is tax evasion or avoidance.
Under Dutch law, the merger facilities are applicable to both domestic and cross-border mergers.
Facts of the case
An individual, Mr. Zwijnenburg, operated a clothing store at two separate premises in the Netherlands. Dutch company, Zwijnenburg BV, ultimately owned by Mr. Zwijnenburg, owned one of the buildings and leased the other from Zwijnenburg Beheer BV, a property management company, owned indirectly by Mr. Zwijnenburg's parents. Both buildings were used for purposes of the retail business. To consolidate the two premises in a single company and transfer ownership of the building, the entire enterprise of Zwijnenburg BV was merged into Zwijnenburg Beheer BV in a share exchange transaction. The Merger Directive facility was applied and, as a result, corporate income tax on the transaction was deferred. The remaining shares in Zwijnenburg Beheer BV were then purchased by Zwijnenburg BV, with no transfer tax on the premises. The parties decided to undertake the merger transaction rather than simply transfer the property directly because the Dutch 6% real estate transfer tax would have been due on a direct transfer.
The Dutch tax authorities challenged the transaction and disallowed the corporate income tax exemption on the grounds that the requirements for qualifying for the exemption were not met since the predominant purpose of the transaction was to avoid the Dutch real estate transfer tax that otherwise would have been due. The case was eventually brought before the Netherlands Supreme Court, which referred the issue to the ECJ for a preliminary ruling on whether the Merger Directive could be applied in connection with a transaction designed to avoid a tax other than the taxes within the scope in the Directive.
ECJ decision
The ECJ ruled that the benefits of the Merger Directive cannot be denied when the purpose of a merger is to avoid a tax that is not within the scope of the Directive, and the real estate transfer tax is not such a tax.
According to the ECJ, the objective of the Directive is to eliminate fiscal barriers to cross-border restructuring of undertakings by ensuring that any increase in the value of shares is not taxed until their actual disposal. In that respect, the Merger Directive foresees the deferral of taxation on capital gains. The benefits under the Directive should, in principle, be granted regardless of the motives for carrying out the merger. The fact that the Merger Directive allows Member States to deny (or withdraw) the benefits if (one of) the principal purposes of the merger is tax evasion or avoidance is considered less relevant. Any exception to granting benefits should be interpreted strictly, according to the ECJ. Consequently, the exception should be examined on a case-by-case basis and without using any predetermined criteria or presumptions.
The ECJ held that only the taxes specifically mentioned in the Merger Directive can benefit from its advantages. By the same token, the advantage for corporate income tax purposes can only be denied if the purpose of the merger is to avoid corporate or individual income tax. The anti-abuse provision cannot be interpreted more broadly by extending denial of the advantages to mergers that are designed to avoid taxes other than those mentioned in the Directive, such as the Dutch real estate transfer tax. Thus, the Zwijnenburg merger should be entitled to the exemption.
Comments
As anticipated, the ECJ has interpreted the Merger Directive strictly. Since the Directive itself only foresees advantages for corporate and individual income tax purposes, the exceptions can also only be applied in respect of corporate and individual income tax.
In Zwijnenburg, the merger was undertaken to avoid Dutch transfer tax. Since transfer tax is not within the scope of the Merger Directive, the benefits of the Directive could not be denied and, therefore, the company merger could be carried out without any tax consequences.
The wording of the ECJ decision is rather general, so that where the principal purpose of a merger is to avoid a tax that is not specified in the Merger Directive, the exception provided for by the Directive cannot be used to deny benefits. This also could mean that where two companies merge to avoid (dividend) withholding tax or gift tax, the deferral of corporate or individual income tax on the unrealized capital gains cannot be denied.
It should also be noted that Dutch Advocate General Wattel advised the Dutch Supreme Court to refer a second question to the ECJ. That question related to the implementation of the anti-abuse exception into Dutch law. Under the Merger Directive, the benefits of the directive can be denied if the principal purpose of the merger is tax evasion or avoidance. In the transposing Dutch legislation, this was translated in such a way that the benefits of the Directive could be denied if the principal purpose of the merger is tax avoidance or the deferral of taxation. Since tax deferral is the goal and the benefit of the Merger Directive (i.e. to postpone a levy until the time a capital gain is actually realized), there is at least some question as to whether the Netherlands correctly implemented the Directive into Dutch law. However, an answer to this question will need to await a case in which deferral of corporate or individual income tax is the main purpose of the merger.
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