The treatment in France of cross-border mergers involving companies outside the EU

Celine Souverain
Polaris Avocats, Paris
cs@polaris-avocats.fr

While cross-border mergers are recognised under French law, both within and outside the European Union, and their tax treatment is relatively well-defined, the necessary alignment with the law of the other jurisdiction involved introduces numerous uncertainties and requires agility in regard to the legal implementation of the transaction.

Under French law, a merger by absorption is an operation according to which a company transfers all of its assets and liabilities to another existing company.

This process, governed by Article 1844-4 of the French Civil Code and Articles L.236-1 to L.236-53 and R.236-11 to R.236-34 of the French Commercial Code, results in the dissolution without liquidation of the absorbed company and the universal transfer of its assets and liabilities to the absorbing company is only possible under the condition that all the assets and liabilities of the company can be considered as transferred as on the date of the merger (eg, all agreements, employees, etc).

The merger requires, under French law, a collective decision to have been taken by the shareholders of each participating company, in accordance with the requirements for amending the respective articles of association.

Once approved by the shareholders and upon the effective date of the merger, the absorbed company ceases to exist as a legal entity, and the absorbing company becomes its universal successor.

Mergers by absorption are well-established mechanisms under French law and benefit from a favourable tax regime that is designed to enhance their efficiency, both from the perspective of the participating companies and their shareholders and creditors.

Can a foreign legal entity absorb a French company via a merger?

Under French law, the answer is affirmative: no provisions prohibit cross-border mergers, international asset transfers or even changes to a company’s nationality.

However, French law distinguishes between foreign companies located within the EU and those outside of it.

If the foreign company is established in an EU Member State, the merger will be governed by Articles L.236-31 to L.236-45 of the French Commercial Code, which transpose several EU directives into French law.

In contrast, if the foreign company is established outside the EU, the merger will fall under the general rules of French private international law (sometimes referred to by scholars as the ‘residual law’ governing international mergers).

Such a merger is only possible if this form of corporate restructuring is accepted by the laws governing both the absorbed and the absorbing company.

According to French legal theory, a merger necessarily involves the transfer of all assets and liabilities from one company to another.

French private international law requires either a distributive or cumulative application of the respective lex societatis (ie, the law governing each company) at each stage of the merger.

In practice, French law does not require that all stages of the merger comply cumulatively with both legal systems. It suffices for the absorbing company to comply with its own corporate law for the integration of the absorbed company’s assets (notably, with respect to capital increases). Conversely, the dissolution of the absorbed company is governed solely by its own national law.

Thus, a cumulative application of the relevant corporate laws is required, with the more stringent provision prevailing.

In this respect, the mandatory information requirements under Article R.236-1 of the French Commercial Code appear to remain applicable.

According to private international law principles, neither the law of the absorbing company nor that of the absorbed company takes precedence. Rather, the two must be coordinated throughout the various stages of the merger, an approach that may generate uncertainty.

In essence, the legal consequences of failing to comply with a requirement will derive solely from the legal system in which the requirement has not been fulfilled.

Once the merger is completed, only the law of the absorbing company (or of the newly formed entity, as applicable) will remain in force to govern the rights of shareholders and directors.

Tax regimes applicable to mergers under French law

The general tax regime

Under the general tax regime, the merger is treated as a taxable transfer for the absorbed company and it produces all of the associated tax consequences. The transaction is, therefore, regarded as a total business transfer, subject to taxation under the ordinary rules.

As such, the merger triggers the effects of a cessation of business activity, as follows:

• untaxed profits and capital gains realised during the merger become immediately taxable; and
• provisions become taxable as they are deemed to have lost their purpose, even if the business activity continues following the merger with the absorbing company.

The principal tax consequences include:

• for the absorbed company, the immediate taxation of profits, provisions and capital gains upon dissolution;
• for its shareholders, the receipt of new shares in the absorbing company may generate a capital gain taxable according to personal income tax rules; and
• for the absorbing company, the liability for registration duties may apply, depending on the nature and classification of the contributed assets.

However, this strict tax treatment is generally avoided in practice, as companies typically opt for utilising the special tax regime provided under Article 210 A of the French General Tax Code.

The special (favourable) tax regime

The favourable tax regime under Article 210 A of the French General Tax Code ensures tax neutrality for the merger and, thereby, avoids the immediate taxation of capital gains.

For tax purposes, a merger (whether domestic or cross-border) must meet the following cumulative conditions:

• dissolution without liquidation of the absorbed company;
• the universal transfer of the absorbed company’s assets;
• the allocation of shares in the absorbing company to the shareholders of the absorbed company (excluding treasury shares or when both companies are wholly owned by the same entity);
• the absence of a cash payment (soulte) or, if it occurs, it must not exceed ten per cent of the nominal value of the shares allocated.

The regime applies only to companies subject to corporate income tax (impôt sur les sociétés).^[1]

The application of this regime is subject to express election. As such, the merger agreement must explicitly reflect the parties’ intention to benefit from the special tax regime.

Under this regime, the merger is considered a transitional operation: the absorbing company is deemed to continue the business of the absorbed entities, assuming all their rights and obligations.

The absorbed company is exempt from tax on capital gains and provisions, provided those provisions still serve a purpose. For instance, a provision for risk remains exempt only if the absorbing company may still bear the risk.

This regime requires compliance with certain obligations by the absorbing entity, including proper accounting treatment, the reintegration of profits and gains, and correct recording of the contributed assets.

If the merger is deemed effective retroactively from the first day of the fiscal year of the absorbed company, the relevant results of both entities may be consolidated, allowing any tax losses to be offset against the absorbing company’s profits.

The regime may apply to mergers, demergers and partial asset contributions.

In cross-border contexts, the regime also applies to mergers and similar operations involving foreign legal entities, provided that the transferred assets are attributed to a permanent establishment located in France.^[2]

Additionally, where such operations are conducted under the special regime in favour of a foreign legal entity, the contributing company must file a special declaration (Form 2260) electronically, by the same deadline as its annual tax return, detailing the operation’s purpose and consequences.^[3]

The declaration must include:

• the date and nature of the transaction, the names and addresses of all the parties involved, including the permanent establishment in France (if applicable), their capital links and the nature of the foreign entity’s business activities;
• the reasons and objectives of the transaction, including anticipated improvements and any related prior or subsequent operations; and
• the economic and tax impact of the transaction, including the activities maintained in France and those transferred abroad.

Failure to comply with this filing obligation triggers a fine of €10,000 per operation, pursuant to Article 1760 bis of the French General Tax Code.

Excluded operations from the special merger regime

Some transactions are excluded from the scope of the special regime, including:

• operations whose main objective, or one of the main objectives, is tax fraud or tax evasion. This is presumed when no valid economic reason for the transaction is provided (such as business restructuring or rationalisation);^[4]
• so-called ‘quick mergers’, where a company acquires another and promptly merges with it solely to deduct acquisition costs or to engineer an unbalanced transaction with no sufficient counterpart. These types of transactions may be challenged under tax abuse doctrines (abuse of law or abnormal act of management), except in certain leveraged buyout contexts involving holding companies; and^[5]
• transactions where a company that is not exempt from corporate tax contributes assets to a variable capital investment company (Société d'investissement à Capital Variable or SICAV).^[6]