Re-organisations using UK provisions implementing the EU cross border mergers directive

Tue 13 Feb 2018

The Court of Appeal has overturned the High Court and held that the inclusion of an existing dormant EU subsidiary in a merger involving a number of other UK companies, could not prevent the EU mergers directive provisions as enacted in the UK from applying.  The case also discussed whether the inclusion of the dormant subsidiary could amount to an abuse of rights and held that on the facts of this case it could not.

The case summary includes some further discussion of the possible application of the abuse principle in this sort of scenario. It indicates it is acceptable to establish a foreign subsidiary to retain the flexibility of using the EU cross border merger provisions, provided there is no illegitimate purpose for establishing that subsidiary.  This may be a very pertinent point for those considering reorganisations prior to the UK’s withdrawal from Europe.

Background

Interoute Communications Limited, part of the Interserve group, bought the Easynet group business (an internet service provider) from Lloyds Development capital in 2015.   Following the acquisition an internal reorganisation was considered, to transfer all assets and liabilities of the Easynet UK companies (originally 22 companies, but by the time of the Court of Appeal hearing, a lower number) into one UK company, Easynet Global Services Ltd.  A scheme of reconstruction under s.900 Companies Act 2006 and a scheme of reconstruction involving s.110 Insolvency Act 1986 were considered.  The case summary indicated the former option presented difficulties with the transfer of contracts, while the latter would have resulted in tax charges and might have reputational issues with respect to companies going into insolvency.

The way Easynet wanted to solve the problem was to use the EU Cross Border merger directive (implemented in UK law through SI 2007/2974 and for corporation tax purposes by SI 2007/3186) by including an existing dormant Dutch subsidiary containing minimal assets in the merger.  The CGT implications of the EU merger rules in the circumstances of this case are covered in TCGA 1992 s140E(1)(c), but only (amongst other things) if all the merging entities are not resident in the same Member State.  This created the need to include the Dutch subsidiary.  The High Court had previously rejected this planning, contending that the only purpose for including the Dutch subsidiary was to obtain the benefit of the merger rules and holding that this on its own did not permit the merger to meet the required conditions.

Court of Appeal decision and implications

The Court of Appeal overturned the High Court decision, holding that preventing the application of the EU merger directive in this case would have been a restriction on the freedom of establishment. It considered the High Court decision would have prevented groups from establishing small scale or dormant subsidiaries in other member states in order to retain flexibility to apply the mergers directive, thus triggering a challenge under that EU principle.

When considering the reorganisation of business activities to prepare for Brexit, there may be a number of tax issues to consider, both in the UK and overseas. To discuss how the tax issues affect your particular circumstances, please get in touch with a member of the Mazars international tax team.