Business reorganisations free of tax under new EU regulations
Owing to the globalisation of the world economy over the past ten years, many companies have been forced to grow in scale. For many years, megadeals have been a feature of the M&A (Mergers & Acquisitions) scene. Companies make such deals in order to grow, increase their profits and remain competitive in the global market. This often leads to the creation of huge multinational groups with extremely complex corporate structures, consisting of countless companies and divisions, sometimes in more than 100 countries. The recent economic recession has forced multinationals to cut costs in order to offset disappointing revenues. This has led to a new trend: corporate simplification. Corporate simplification is a way to achieve savings by making the decision-process more straightforward and cutting costs, in part by reducing the complexity of corporate structures. Recent EU regulations on mergers and reorganisations, which have now been incorporated in the national regulations of all 27 EU member states, including Belgium, are bound to encourage this trend. PwC therefore expects that in the coming years, following the wave of acquisitions in recent years, there will be an increasing number of business reorganisations that lead to greater integration and simplification, and hence cost savings.
Size does matter…
Since the start of the new millennium, the number of mergers and acquisitions in Europe has shown an upward trend, as has the average value of such deals. In 2007, the combined value of all mergers and acquisitions in Europe was some € 1,100 billion, compared with € 424 billion in 2003(1). Undeniably, mega mergers and acquisitions have dominated the M&A scene during the past decade. According to the same source, the total value of all deals worth more than € 500 million was no less than € 863.7 billion in 2007, compared with € 298.5 billion in 2003. The main reason for mergers and acquisitions is to achieve economic growth. Companies conduct mergers and acquisitions with the aim of increasing their market share or gaining access to new markets and activities. “A merger or acquisition is only the beginning,” explained Jan Muyldermans, Lead Transactions Partner at PwC. “We have established that it often takes businesses a long time to integrate a newly acquired business or group into their business, and often this simply does not happen. This could be for any of a number of reasons, for example so that it will be easier to sell the acquired company on in future if the group decides to do so. However, this can sometimes result in extremely complicated corporate structures with different entities and divisions in various countries, and mean that some of the benefits of the acquisition, in the form of synergies or cost savings, are not realised.”
…as does manageability
Structural complexity of this kind is a cause of many unnecessary costs. These may include overlapping management structures, double staffing of back office positions, or high compliance costs. Moreover, a complex structure leads to a higher effective tax rate as the operating results of various companies in different countries cannot be consolidated. And if these companies make profits, higher tax expenses may be incurred when these profits are passed on through the organisation to shareholders. “Moreover, there are often a large number of intragroup transactions,” Mr Muyldermans said. “That entails a great deal of administrative work, and thus wasted costs. What this all means is that less value is created for shareholders. And that’s without even considering the ‘fragmentation’ of cash, even though cash flow is vitally important to a company in a tough economy.”
Growing trend towards simplification
The crisis and the current economic climate have led multinationals to change their operational and organisational structure. Achieving cost savings is clearly one of the top priorities of management, and reducing the complexity of the corporate structure as a result of mergers and acquisitions plays an increasingly important part in this. In practice, businesses wind up dormant companies, reduce the number of active entities by means of mergers or integrate subsidiaries into the parent company, and convert separate legal entities into branches so that profits and losses can be consolidated.
Simplification means more control and greater versatility thanks to a more efficient decision-making process, among other things. Reducing the number of business entities also means fewer compliance costs and less work for financial and back-office functions. Of course, some of the consequences for employees are not so pleasant. Reorganisations usually mean redundancies as double staffing is eliminated. Local decision-making is also undermined. In effect, people see the power to make decisions being taken away from local entities and transferred to the parent company. All that is left for local employees to do is to carry out the decisions. This means that the work for the local HR and other managers will be less challenging.
“Consolidation and restructuring are clearly on the rise,” Jan Muyldermans explained. “According to Intralinks’ Global M&A Survey (ed.: published in July 2010), around 62% of the M&A professionals who were interviewed expect to see a sharp rise in the number of business reorganisations in the coming year. But while simplifying the corporate structure may lead to one-off or structural savings, it also entails costs itself… Companies therefore need to conduct a thorough analysis and weigh up the costs and benefits before they go down this route.”
EU legislation as a catalyst for cross-border simplification
As part of the creation of an integrated European market, in which the free movement of capital, labour, goods and services is possible, the EU wants to increase uniformity and promote fair competition in the area of mergers and acquisitions. For this reason, Europe issued the Tax Merger Directive in 1990, among other things. This directive, which has been amended and extended on several occasions, most recently in 2007, regulates cross-border reorganisations from a tax perspective. Specifically, the Tax Merger Directive ensures that legal entities that are the subject of an international reorganisation do not need to pay extra taxes, provided certain conditions are met. Moreover, in many cases losses can also be carried forward and shareholders do not owe any tax on capital gains on shares. The Legal Merger Directive regulates the legal aspects of mergers, such as the fact that the buyer has to respect the obligations of the business it has taken over. The two directives create a framework that will encourage business reorganisations within Europe.
The deadline for implementing these directives (including the amendments to them) was December 2007. The 27 EU member states have all amended their legislation to regulate legal and tax aspects of cross-border reorganisations. However, these directives only create a framework that the legislation of member states must comply with. Each member state has to decide for itself how these directives are to be interpreted and integrated in local legislation. As a result, there are still 27 different sets of laws and terms and conditions that need to be taken into consideration in the event of cross-border reorganisations. PwC has therefore produced ‘Tax Restructuring in the EU’, a handy guide which, in addition to going into more detail on aspects of European taxation in the event of mergers and acquisitions, also provides details of the relevant tax legislation in the 27 member states.
(1) Source: Deal Drivers, mergermarket, February 2010, and Monthly M&A Insider, mergermarket, July 2010
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