According to European case law, companies are entitled to tax neutral cross-border mergers, demergers and conversions within the EEA, in order to protect the freedom of establishment. However, the lack of a uniform legal framework for cross-border conversions and divisions, caused legal fragmentation and legal uncertainty. After a number of decisions issued by the Court of Justice of the European Union, there was a need to create new harmonized rules on cross-border conversions and divisions across the EEA with further optimization of the current framework applicable to cross-border mergers.
Therefore, the EU Directive 2019/2121 (“New Directive”) was published to supplement the previous adopted regulations, such as the EU Directive 2017/1132. This New Directive was set to be implemented in domestic law by 31st of January 2023. Although, several countries will not implement the New Directive by this date.
As a result of the New Directive, new rules are implemented to make it possible for Swedish limited liability companies to change their domicile to another EEA country by way of a cross-border conversion. At the same time, the rules for cross-border mergers and divisions will be updated. The purpose is to further facilitate cross-border restructurings.
The main changes include:
1. Cross-border merger
A cross-border merger involves a limited company from one Member State merging with one or more equivalent legal entities in another Member State, which results in that one entity is taking over the assets and liabilities of another entity or entities.
Already today, Swedish limited companies may merge with a corresponding legal entity in another EEA member state. However, the new legislation includes certain changes. The most essential changes to be considered are:
- Mergers with no remuneration can take place without the consent of all shareholders, in certain cases.
- New requirements on the report of the board and the auditor’s statement.
- More documentation has to be submitted to the Swedish Companies Registration Office, thus being made public.
- Creditors must have three months to oppose the merger from registration of the merger plan. The notice period is normally two months according to the current procedure.
- More extensive rights for shareholders to submit their views on the cross-border merger and to have their shares redeemed for compensation. Also, to get even more compensation in certain cases.
- The requirement for special financial statements for cross-border mergers where a Swedish company is given a new domicile is removed.
- The Companies Registration Office may engage an expert to determine if a cross-border merger may be executed. The company applying for the execution will be liable for the cost.
- Companies that are bankrupt or undergoing corporate restructuring cannot participate in a cross-border merger.
2. Cross-border demerger
A cross-border demerger is a new procedure whereby a limited company is fully or partially divided into several new companies created by the demerger, of which at least one in a different Member State. Cross-border demergers were allowed by the EU Merger Directive (Tax law) and implemented to the domestic tax law accordingly. However, domestic corporate laws in all EU member states did not necessarily recognise e.g. cross-border demergers. This led to inconsistency between Tax and Corporate law, which should change once the New Directive enters into force in all Member States. Thereby, the Member States are harmonized.
3. Cross-border conversion
A cross-border conversion is a new procedure whereby a limited company, resident in one Member State, can be converted into an equivalent legal entity in another Member State. After the conversation, the company is subject to the legislation of the receiving Member State. A conversion does not require the company to move its head office or business activities to the new Member State. If it would do so, however, tax considerations related to the change of residency (e.g. exit taxes) would need to be considered.
With a cross-border conversion, no new company is formed and no company is dissolved. Instead, the same company continues to exist in a converted form in another EEA member state. To a large extent, the rules will correspond to those that apply to cross-border mergers and divisions, such as a requirement to prepare a plan with the terms of the conversion, shareholder approval and a notice to the creditors of the company and permission to execute the plan.
Tax law has always been a front runner when it comes to the exercise of the freedom of establishment in the EU. The inconsistency between domestic corporate laws in the EU member states and the tax freedoms confirmed by the European Court of Justice led to a situation where these tax freedoms could not always be effectively implemented in practice. This is because corporate laws in some cases lagged behind the tax laws, resulting in a gap and making it difficult for companies to fully exercise their rights and freedoms. Although entities had the right to cross-border mergers, divisions and conversions already, the implementation and harmonisation of corporate law through the New Directive gives more legal certainty which in turn can clarify the situations regarding inconsistencies between the tax system and the corporate law system. We believe the implementation of the New Directive may result in more cross-border restructurings and is a helpful tool in the single market.
From a legal perspective, the Swedish legislation does not contain any transitional regulations. As a result, cross-border mergers initiated under the current rules and not completed before the entry into force on 31 January 2023 will not be able to be implemented. This means that if a cross-border merger that has been initiated is not completed before 31st of January 2023, the entire merger procedure will have to be redone in Sweden in accordance with the New Directive.
Please contact Caroline Björnfot or Hanna Myronicheva in case of any questions!
Caroline Björnfot and Hanna Myronicheva are both working at PwC's Karlstad office. Caroline works with business legal advice, specialising in corporate law and transactions, and Hanna works with Tax aspects within PE and M&A.
Caroline: +46 10 212 51 22, email@example.com
Hanna: +46 76 853 78 75, firstname.lastname@example.org