In the course of 2023, the European Mobility Directive was transposed into Belgian law. As a result of this transposition, a number of new restructuring methods were introduced, including the simplified sister merger, the main features of which are explained below.
The term sister companies refers to companies that are held by one and the same shareholder, or that are held in the same proportion by the same shareholders.
From the definition in Article 12:7(2) of the Companies and Associations Code [1], we can derive the following conditions for describing an operation as a simplified sister merger:
It should be added that a simplified sister merger may occur either on a cross-border basis or within an individual state.
Before the transposition of the European Mobility Directive, it was also possible to have a merger take place between sister companies; however, the acquiring sister company was obliged in this context to issue shares to the shareholder or shareholders of the acquired sister company or companies, which were of course the same as those of the acquiring sister company.
The result of such mergers was invariably that the shareholders of the sister companies continued to participate in the acquiring company in the same proportion as was previously the case.
Moreover, each merger took place with accounting continuity, so that in the sister merger there was no risk of any disadvantage to the existing shareholders when determining the valuation method or exchange ratio used. As a result, the report of the administrative body and the audit report of the company auditor or external accountant rarely added much value in the context of sister mergers.
The European Mobility Directive has now simplified this restructuring operation and the procedure is now the same as that for the familiar parent-subsidiary merger (often known as a silent merger), in which no additional reporting is required in addition to the merger proposal. In our opinion, this makes sense in view of the limited usefulness of that additional reporting.
The procedure can therefore be summarised as follows:
Provided that there are sufficient business reasons for a restructuring transaction under the WVV, such as a merger, the restructuring may be subject to an exemption from income taxes.
However, the Income Tax Code (WIB92) contains autonomous tax definitions of these restructuring transactions that qualify for tax neutrality. The simplified sister merger described above did not fit into any of these tax definitions. The legislators have therefore addressed this by expanding the tax description of the merger-like operation to include simplified sister mergers without the issuance of shares, so that these sister mergers can now be carried out in a tax-neutral manner.
When the simplified sister merger was introduced into the tax definitions of WIB92, it was decided not to adopt the definitions from the WVV verbatim. As a result, there is no exemption from income taxes for a simplified sister merger in which all shares are held indirectly by one and the same shareholder, or indirectly in the same proportion by the same shareholders. Such simplified sister mergers therefore cannot (yet) be carried out on a tax-neutral basis.
In addition, for a number of types of tax-free reserves that have been created at the acquired company prior to the merger, there are specific conditions for these reserves to remain exempt from income taxes.
More specifically, such reserves become taxable if:
Careful readers of the above will have spotted the problem here. In the context of the simplified sister merger:
A number of types of exempt reserves that were created at the acquired company prior to the merger will therefore become taxable after a simplified sister merger under the tax definitions as they stand.
Due to the complexity of WIB92, the existing tax neutrality therefore could not simply be applied in its entirety to the simplified sister merger through additional definitions of merger types.
As this may not have been the legislators’ intention, and could form a reason not to carry out a simplified sister merger (see below), we hope that legislative repairwork will soon be approved to provide for an exemption from income taxes in the missing areas (preferably retroactively).
The uncertainty described above about the tax neutrality of the simplified sister merger raises the question of whether companies can voluntarily opt for a classic sister merger, for example with the issuance of shares and associated reports from the administrative body and the auditor or accountant.
We see no reason why companies cannot do this voluntarily. The costs of the additional reporting probably do not outweigh the certainty (provided there are business reasons) that the classic sister merger offers for the companies involved.
[1] Unless determined otherwise by law, merger by acquisition is equated with: the legal action whereby the entire assets of one or more companies, both rights and obligations, are transferred as a result of dissolution without liquidation to another company without the issuance of shares in the acquiring company and where all their shares and other voting securities are held directly or indirectly by one person or where the partners or shareholders in the merging companies hold their securities and shares in all merging companies in the same proportion.
