On May 20, 2010, the ECJ rendered its decision in the Zwijnenburg case (C-352/08). The case concerns the interpretation of the anti-avoidance provision in the Merger Directive (90/434/EEC) (“Directive”), specifically whether the benefit of the Directive can be denied where a merger transaction has as its purpose the avoidance of a tax that is not covered by the Directive. The ECJ held that the benefits could not be denied on these grounds.
Facts and legal background
The case involved a planned merger involving two Dutch companies, whereby the business of one company was to be transferred to another company in exchange for shares in the transferee company. The underlying purpose was to transfer ownership of real estate from one Dutch company to the other. However, a straightforward transfer of the real estate would have given rise to a Dutch transaction tax. By structuring the transaction as a merger, it was possible to obtain an exemption from this tax. Dutch tax law also provided for an exemption from corporate income tax for such a merger transaction, but this exemption was subject to the condition that the merger was not predominantly designed to avoid or defer taxation. This corporate income tax exemption was based on the exemption provided under the Directive, which was implemented by the Netherlands both for domestic and cross-border mergers.
The taxpayer appealed against the Dutch tax authorities’ refusal to confirm that the corporate income tax exemption would apply, because they took the view that the merger was designed predominantly to avoid or defer taxation, i.e., the Dutch real estate transaction tax, so that the condition for applying the exemption was not satisfied. The Dutch Supreme Court requested a preliminary ruling on the interpretation of this condition in the Directive.
The ECJ’s ruling
In line with its previous case law, the ECJ held that it was competent to answer the question posed by the Dutch court even though the case involved a purely domestic transaction. It was sufficient that the Dutch legislator had chosen to implement the Directive both for domestic and cross-border mergers.
Regarding the central question as to whether the benefits of the Directive can be denied where a merger transaction has as its purpose the avoidance of a tax that is not covered by the Directive, i.e., the Dutch real estate transaction tax, the ECJ held that these benefits could not be denied on such grounds.
The ECJ pointed out that an exception to beneficial provisions of a Directive, such as was contained in the above-mentioned condition, had to be interpreted strictly. Since the Directive was not aimed at a comprehensive harmonization of taxes in relation to mergers, it applied only to the taxes that were expressly mentioned – which did not include the Dutch real estate transaction tax. The taxes referred to in the context of the tax avoidance condition also had to be confined to the taxes expressly mentioned by the Directive.
KPMG Meijburg & Co’s comment
The ECJ’s decision follows the AG’s opinion and is a welcome clarification of EU law in this area.
It is not only relevant for asset mergers, but also for legal mergers, divisions and partial divisions for purposes of corporate income tax and individual income tax with the companies concerned, as well as their shareholders. Based on this decision, one could argue that the tax authorities would not be allowed to refuse a tax exempt cross-border legal merger in which a company merges into another company, even if the purpose of the merger would be the avoidance of dividend withholding tax or the application of anti-dividend stripping rules. The dividend withholding tax is – just like the real estate transfer tax – not mentioned in the Directive. The strict interpretation the ECJ gives to the anti-abuse condition may be welcomed especially with an eye on legal certainty.