Read the judgment: Punch Graphix
Two Belgian subsidiary companies merged with their Belgian parent company, and the two subsidiaries were then dissolved without being liquidated. All of the subsidiaries’ assets were transferred to the parent company.
The resulting merger surplus was, in principle, taxable in the hands of the parent company, but under the rules that applied at the time (2002), 95% of the surplus was tax-deductible as “definitely taxed income” up to the amount of the taxable profits for the year at issue.
Because the parent company’s profits were less than the merger surplus, part of the surplus was not deductible (and also could not be carried forward). The parent company claimed that this treatment was contrary to Article 4(1) of the Parent-Subsidiary Directive 90/445 which requires profits distributed by a subsidiary to its parent company (except when the subsidiary is liquidated) either to be exempt or taxable with a credit for underlying corporate income tax.
The Belgian tax authorities accepted that limiting the deduction for distributed profits to the amount of taxable profits, without providing for a carryforward opportunity, was in breach of Article 4(1), but argued that the merger constituted a liquidation, and therefore that Article 4(1) did not apply. This argument was based on the fact that the dissolution of subsidiaries was treated as a liquidation under the provisions of Belgian national tax law, even when no liquidation had taken place.
The CJEU held that the dissolution of a company in the context of a merger-by-acquisition cannot be considered to be a “liquidation” within the meaning of the Parent-Subsidiary Directive. Because the Parent-Subsidiary Directive did not define the concept of “liquidation,” the court looked to the Merger Directive for the definition of liquidation.
Read an October 2012 report [PDF 55 KB] prepared by KPMG’s EU Tax Centre: CJEU decisions—interpretation of Parent Subsidiary and Merger Directives