Note: Mergers and similar restructuring operations may qualify for a favorable neutral regime (see below). Eligibility for the favorable regime sometimes requires a prior approval by the tax administration. The Finance Law 2018 has amended the prior approval procedure. As from 1 January 2018, the failure by the tax administration to reply to a ruling request for the favorable regime within 6 months from its submission is interpreted as a tacit approval.

Standard Tax Regime of Mergers

Mergers may be eligible for a favorable tax regime. Where the favorable regime does not apply, the merger is treated as a liquidation of the absorbed company. This, therefore, entails immediate taxation, at the level of the merged company, of:

the operating profits relating to the current tax period. However, the merger may be retroactive, provided that the retroactive date does not precede the date on which the current tax period of the absorbing company has started. In this case, the taxable income realized by the absorbed company during the retroactive period is included in the taxable income of the absorbing company;
any previous profits benefiting from a deferral of taxation;
any provisions which had been deducted for tax purposes; and
the capital gains resulting from the contribution of assets at a fair market value exceeding their net accounting value.

The merger also entails the end of the absorbed company's loss carry-forwards.

Favorable Tax Regime

Article 210-0 A-I of the CGI provides for a specific tax definition of transactions qualifying for the favorable tax regime, which is line with the definition provided by the EC Merger Directive and does not refer to the legal qualification of these transactions. They should correspond to one of the following operations:

one or more absorbed companies, upon their dissolution without liquidation, transfer all their assets and liabilities to another existing absorbing company, in exchange for the issuance to their shareholders of shares of the absorbing company, and, if any, a cash payment not exceeding 10% of the nominal value of these shares; or
one or more absorbed companies, upon their dissolution without liquidation, transfer all their assets and liabilities to a new absorbing company that they set up, in exchange for the issuance to their shareholders of shares of the absorbing company, and, if any, a cash payment not exceeding 10% of the nominal value of these shares.

The favorable tax regime implies the consequences set out below.

At the Level of the Absorbed Company

The operating profits realized by the absorbed company from the end of the last tax period are taxable under the ordinary rules. The merger may, however, have retroactive effect provided that the retroactive date does not precede the date on which the current tax period of the absorbing company starts. In that case, the income realized by the absorbed company during the retroactive period is attributed to the absorbing company;
the provisions and reserves of the absorbed company that have not become purposeless as a result of the merger are transferred to the absorbing company and are not recaptured (under the standard regime, all provisions are recaptured upon a merger); and
the capital gains realized in respect of the assets of the absorbed company may escape taxation at the level of the absorbed company, provided that they are taxed under certain conditions at the level of the absorbing company.

At the Level of the Absorbing Company

The absorbing company should:

record in its balance sheet the provisions and reserves taken over from the absorbed company;
assume certain commitments of the absorbed company, in particular, those relating to previous mergers or partial asset contributions;
determine the future capital gains on the disposal of non-depreciable fixed assets received within the framework of the merger by reference to the value of the assets in the accounts of the absorbed company (and not their contribution value);
add back to its taxable income, over a period of 5 or 15 years (depending on the type of asset) the capital gains relating to the depreciable fixed assets realized by the absorbed company upon the merger. The absorbing company may, in any case, elect to anticipate the taxation of the deferred capital gains;
in case of the disposal of a depreciable asset received upon the merger, add back to its taxable income that part of the gain still benefiting from a deferral (i.e. the deferral expires); and
record in its balance sheet the non-fixed assets (inventories, in particular) received in the merger at their value in the balance sheet of the absorbed company. Future capital gains on these assets are determined by reference to this value.

The absorbing company is entitled to:

depreciate the depreciable assets received from the absorbed company on the basis of their contribution value (and not on the basis of their value in the accounts of the absorbed company). This right is the counterpart of the obligation for the absorbing company to add back to its taxable income the capital gains relating to depreciable assets. The assets may be depreciated according to their expected useful life for the absorbing company. In addition, declining-balance depreciation may be applied, even though this is ordinarily restricted to new assets; and
compute the holding period of shares received upon the merger and subsequently sold in order to determine whether the gain can qualify as a long-term gain by reference to the initial acquisition date of such shares by the absorbed company.

In addition, any capital gains on the cancellation of shares of the absorbed company held by the absorbing company prior to the merger are exempt. Conversely, if the absorbed company held at the time of the merger a participation in the absorbing company, the capital gain realized by the absorbing company upon the cancellation of its own shares (received from the absorbed company within the framework of the merger) is tax exempt.

Impact on Loss Carry-Forwards

Absorbed Company

The loss carry-forwards of the absorbed company may, in principle, not be transferred to the absorbing company. They may be offset against the operating profits of the absorbed company relating to the current tax period or against the taxable income corresponding to the recapture of provisions which have become purposeless. The excess is lost. If, however, a ruling is granted by the Revenue, the loss carry-forwards of the absorbed company may be transferred to the absorbing company, which may then offset the carry-forwards against its future taxable income or against the deferred capital gains relating to depreciable assets of the absorbed company which should be taxed at the level of the absorbing company.

The ruling is generally granted provided that:

the merger qualifies for the favorable tax regime;
the merger is justified from an economic standpoint and mainly motivated by non-tax reasons; and
the activities at the origin of the transferred tax losses must be carried on for more than 3 years by the absorbing company.

If a ruling cannot be obtained, various structures are sometimes used in order to avoid the cancellation of the loss carry-forwards, including:

a revaluation of the absorbed company's fixed assets (but a risk of abuse of law exposure may ensue);
an election for the standard tax regime whereby, in particular, the latent capital gains on the contributed assets and on all provisions and reserves are taxed immediately at the level of the absorbed company; or
an inversion of the merger order, so that the loss-making company absorbs the profitable one.

The use of these structures may imply an abuse of law exposure. The exposure would depend on the facts and circumstances of each case. In the specific case of the inversion of the merger order, the Supreme Administrative Court has held that, although the turnover of the absorbed company is greater than that of the absorbing company, the Revenue may not challenge the merger on the basis of the abuse of law concept provided that the merger: (a) does not modify the business purpose and actual activities of the absorbing company; and (b) is not fictitious and is motivated by non-tax reasons (which would generally be the case).

Absorbing Company

The ordinary loss carry-forwards of the absorbing company are not affected by the merger unless the merger results in a change of the social (i.e. business) purpose and actual activities of the company. Therefore, if a pure holding company absorbs an operating company, the change in the activity and social purpose implies, as a rule, a liquidation for tax purposes and entails the cancellation of the loss carry-forwards.

Under Art. 816 of the CGI, mergers may be subject to a fixed duty of EUR 375 if the share capital of the company is less than EUR 225.000 or of EUR 500 if the share capital exceeds this threshold, provided that:

the companies involved are subject to corporate income tax. The registration duties may, nevertheless, still apply if the absorbed company is not subject to corporate income tax in respect of assets other than buildings, real estate rights, goodwill, clientele or real estate leases;
the contributing company is dissolved; and
the contribution is compensated by shares. The compensation may, nevertheless, also consist of a cash settlement not exceeding 10% of the nominal value of the shares issued.

Consequences of a Merger at the Level of the Shareholders of the Absorbed Company

The shares of the absorbing company received by the shareholders of the absorbed company do not qualify as a distribution and, accordingly, are not subject to income tax in their hands. This tax exemption applies regardless of the tax regime of the merger (favorable or standard).

Capital gains realized by the shareholders on the exchange of their shares in the absorbed company for shares in the absorbing company are taxed as described below.

For individuals, as for contribution of shares, the gain may benefit from a deferral of taxation (for mergers realized prior to 1 January 2000), or from a rollover relief (for operations realized after 1 January 2000). In both cases, the capital gain realized upon the exchange of shares is not taxed immediately.

For companies, under Art. 38-7 bis of the CGI, the capital gain may be included in the taxable income relating to the tax period during which the shares of the absorbing company received upon the merger are sold, regardless of whether or not the merger itself qualified for the favorable tax regime. The gain is determined by reference to the accounting value of the absorbed company's shares as shown in the accounts of the shareholder.

If the shareholder receives a cash settlement in addition to the shares in the absorbing company, the deferral of taxation remains available provided that the cash settlement does not exceed 10% of the nominal value of the shares received or the amount of the capital gain realized. The capital gain corresponding to the cash settlement is taxed immediately.

Merger into a Foreign Holding Company

The favorable corporate income tax regime applying to mergers as well as the possibility for the loss carry-forwards of the absorbed company to be transferred to the absorbing company subject to a ruling do not depend on the nationality of the merging companies. Thus, to date, there is no specific distinction to be made between the tax regime of a merger into a foreign holding company located within or outside the European Union.

Nevertheless, cross-border operations involving a company with its head office in a country that has not concluded with France a tax treaty including a mutual assistance clause are explicitly excluded from the favorable regime and from the possibility to transfer the carry-forward losses; this exclusion does, however, not apply to operations within the scope of the EC Merger Directive (this provision may concern companies with their head office in a disqualified country with an establishment in the European Union). In particular, any merger involving a company with its head office in Switzerland cannot benefit from the favorable regime.

Moreover, if the absorbing company is a foreign company (whether or not a resident of the European Union), a special ruling must be requested from the Revenue. This ruling is no longer discretionary and should be granted provided that the merger complies with the above-mentioned definition of mergers and the operation is:

• the operation is justified by economic reasons and is not mainly driven by fraud or tax evasion; and

• safeguards the future taxation in France of capital gains which benefit from a rollover.

This implies that the assets and liabilities transferred should be recorded in the balance sheet of an establishment of the foreign company taxable in France, so that the foreign company remains in a position to comply with the requirements relating to the future assessment of the capital gains on non-depreciable assets and the recapture of the capital gains on depreciable assets. These requirements are a prerequisite for the application of the favorable tax regime.

However, in a judgment issued on 8 March 2017, the Court of Justice of the European Union (CJEU) ruled that the above requirement under French law for prior approval in order to obtain the benefits under the EU Merger Directive, was incompatible with EU Law. The Court observed that since the prior approval requirement does not apply in case of national mergers, the differing treatment for cross-border mergers and national mergers under French law constitutes an infringement on the freedom of establishment that cannot be justified.

Accordingly, effective from 1 January 2018, the requirement for prior approval in order to benefit from the deferral of taxation on capital gains in the case of cross-border mergers has been repealed. A new anti-abuse rule is now applicable for both domestic and cross-border operations, which provides that the benefits of the merger regime will not be available if the main purpose, or one of the main purposes, of an operation is the evasion or avoidance of tax. Taxpayers may request for a pre-restructuring ruling from the tax authority confirming the non-application of the anti-abuse rule.

Regarding registration duties, no ruling is necessary to benefit from the favorable regime (from 1 January 2006, these registration duties are EUR 375 if the share capital of the company is less than EUR 225.000 or EUR 500 if the share capital exceeds this threshold).

Effective 1 January 2018, French companies involved in reorganization transactions (including a merger, division or asset transfer operation) carried out for the benefit of a foreign legal person are required to submit a special declaration disclosing:

The date of completion and the nature of the transaction,
the names and addresses of the persons concerned with the transaction, including permanent establishments in France of the foreign legal person, the capital links between these persons prior to the completion of the transaction, and the exact nature of the activities performed by the foreign legal person;
The reasons and aims of the transaction carried out, including the improvements sought, as well as any other divestment, merger, division or asset transfer related to the transaction; and
The economic and fiscal consequences of the transaction, including on the activities, means, and functions maintained in France and transferred abroad.

The declaration is required to be submitted electronically along with the tax return.

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