Tax-Free Mergers and Demergers

Tax-Free Mergers and Demergers – An Overview

Tax-free mergers and demergers allow companies to restructure their activities without triggering immediate taxation. Below is an outline of the two concepts.

Tax-Free Merger

A tax-free merger means that two or more companies are combined into a single company. The receiving company assumes all assets and liabilities of the transferring company without triggering taxation for the parties involved.

Mergers can be carried out in several ways:

• Vertical merger – a subsidiary’s assets and liabilities are contributed to the parent company.

• Reverse vertical merger – a parent company’s assets and liabilities are contributed to its subsidiary.

• Horizontal merger – two or more companies are consolidated into one.

No formal permission is required to complete a tax-free merger. However, all conditions must be met.

Key Conditions for a Tax-Free Merger

• All shareholders must be compensated with shares – cash consideration is not permitted.

• The merger date must correspond with the receiving company’s financial year.

• All assets and liabilities must be transferred to the continuing company.

• The receiving company takes over all assets and liabilities at their existing tax values from the transferring company.

• The opening balance sheet must be prepared in accordance with accounting principles.

• Companies must meet documentation requirements with Skattestyrelsen, and the merger must be reported to the Danish Business Authority.

The above conditions are not exhaustive. Management should always seek professional advice to ensure compliance with both company law and tax law.

If the conditions are not met, a merger may trigger taxation.
Tax losses in the transferring company will generally be forfeited unless the companies have been subject to joint taxation prior to the merger and the losses are not classified as special losses.

For private limited companies (ApS), the merger plan may be omitted. However, a statement from a certified auditor is still required.

Tax-Free Demerger

In a tax-free demerger, a company is split into two or more companies without triggering immediate taxation.

A demerger can be carried out either with or without approval from the tax authorities. If permission is required, the company must demonstrate that the demerger is based on valid business reasons. If no application is made, a three-year ownership requirement will apply instead.

Key Conditions for a Tax-Free Demerger

• The company’s activities (or parts thereof) are transferred to one or more new companies.

• Shareholders receive shares in the receiving company in exchange for their shares in the transferring company.

• Assets and liabilities are transferred at the same tax values as in the transferring company.

• Both the company and its shareholders must meet documentation requirements, and the demerger must be reported to the authorities.

• Dividend distributions may be subject to taxation in certain cases.

• Other factors may need to be observed, such as the date for the new financial year.

The above conditions are not exhaustive. Management should always seek professional advice to ensure compliance with company law and tax law.

If the conditions are not met, a demerger may trigger taxation.
Mergers and demergers can also be combined with other restructuring models, which is why professional advice is always recommended.

Benefits of a Tax-Free Restructuring

• No immediate tax burden for the company or shareholders.

• Opportunity to adapt the company’s structure to business needs.

• Preservation of historical tax positions, such as losses carried forward and depreciations.

Please note:

• A company may lose the right to carry forward tax losses in certain situations.

• Ownership requirements may arise in connection with a merger or demerger.

Contact Us Today

SkatteInform can assist in determining whether the required conditions can be met and help you carry out a merger, a demerger, or a combination of restructuring methods. We can also advise on the most optimal model for your specific case.

As a state-authorized public accounting firm, we can provide the necessary declarations. You are also welcome to contact us via the contact form below.

Disclaimer

The above is for general guidance only. We accept no liability for decisions made on the basis of this information without prior individual advice. We also disclaim liability for any errors or omissions.

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