Company merger is related to the fulfilment of the obligations listed in the Commercial Companies Code. What does the whole procedure involve? What are the tax implications of mergers? We answer these and other questions in the article below. We invite you to read.
Table of Contents
- What is a company merger?
- Types of company mergers
- Company merger through acquisition
- Company merger through combining shares
- Company merger – schedule
- Company merger – how to start?
- Company merger step by step
- Cross-border merger of companies
- Company merger without increasing share capital
- Transfer pricing documentation in a company merger
- Company merger and VAT
- Company merger – tax consequences
- Company merger – summary
What is a company merger?
Company merger involves transferring the assets of one company to another.
As a rule, both capital companies and partnerships can participate in a merger. However, there are limitations outlined in the Commercial Companies Code:
- Companies may merge with other companies or partnerships. However, a partnership, with the exception of a limited joint-stock partnership, may not be the acquiring entity or the newly formed company.
- Partnerships may merge with other partnerships only by forming a company or a limited joint-stock partnership. Another possible way is the acquisition initiated by a limited joint-stock partnership.
- A company in liquidation that has initiated the division of assets cannot merge. This also applies to a company in a state of bankruptcy
What is the conclusion? The following entities are allowed to merge:
- Capital companies with other capital companies,
- Partnerships with other partnerships,
- Capital companies with partnerships.
However, the entity resulting from the merger will always be a capital company.
Types of company mergers
According to regulations, mergers may be effected through:
- Transfer of all the assets and liabilities of one entity to another entity. This occurs for shares which the acquiring company issues to the shareholders or partners in the entity being acquired. The procedure is known as merger by acquisition.
- Formation of a company or a limited joint-stock partnership to which the assets of all merging entities are transferred. The transfer is in exchange for shares of the new company. The procedure is known as a merger by formation of a new company.
Company merger through acquisition
In a merger by acquisition, the acquiring entity receives the assets of the acquired company. The partners or shareholders of this entity receive shares or stocks in the acquiring entity. As a result, the acquired company loses its legal existence. The acquiring company retains both its legal and organizational identity.
A capital increase in the acquiring company may accompany the merger by acquisition. It establishes new shares or stocks for the partners or shareholders of the acquired company.
The management of each entity prepares a written report justifying the merger. It should provide the merger’s legal basis and economic rationale. It must also include the exchange ratio of shares or stocks.
The merger by acquisition takes effect on the date of its registration. The appropriate register is determined by the registered office of the acquiring company.
Company merger through combining shares
The method of combining shares is applicable in the following cases:
- merger of dependent companies related directly or indirectly to the same dominant company,
- merging a lower-level dominant company with a dependent company.
In merging companies, combining shares involves summing up the respective assets, liabilities, revenues, and costs of each entity as of the merger date. These actions should be preceded by verification of individual items of the financial statements. The verification should focus on uniformity of valuation principles and methods. The following items are then excluded from the financial statement:
- The value of the share capital of the company whose assets were transferred,
- Mutual receivables, liabilities, and similar settlements,
- Mutual revenues and costs arising from transactions conducted before the merger,
- Mutual profits and losses arising from transactions conducted before the merger of companies.
The legislator, however, allows for the possibility of not making the described exclusions. This can happen if it doesn’t affect the reliability and clarity of the financial statements of the acquiring company.
Company merger – schedule
Company merger is a process that consists of several stages. We can distinguish three phases:
- The phase of preparatory (managerial) activities. It includes all initiating activities, encompassing legal and factual aspects.
- The phase of the owners’ actions. It focuses on preparing a resolution on the merger. It is adopted respectively by the assembly of associates, shareholders’ meeting, or general meeting.
- The phase of authorization (registration and announcement of the merger). It includes notifying the registry court of the resolution on the merger.
Company merger – how to start?
Before merging, company boards must submit a merger plan to the registry court. This requires a written agreement between the merging companies.
The merger plan should include at least:
- The legal form, business name and registered office of each merging company. Also the method of merger. In the event of a merger by formation of a new company, also the legal form, business name and registered office of the new company;
- The exchange ratio of the shares of the acquired company or companies merging by formation of a new entity for the shares of the acquiring company or the newly created company and the amount of any additional payments in cash, unless no such exchange takes place;
- The terms relating to the allotment of shares in the acquiring company or in the new company
- The date on which shares start to entitle holders to profit in the acquiring or new company.
- The rights given by the acquiring company or a new entity to shareholders or authorities in the acquired or merged companies
- Any special benefits granted to authorities and other participants in the merger, if applicable.
A company should submit the merger plan together with:
- Draft resolutions on the merger of the companies
- Draft of amendments to the articles of association or the statutes of the acquiring company. Alternatively, draft articles of association or draft statutes of the new company;
- A document setting forth the value of the assets and liabilities of the company being acquired or of the companies merging by formation of a new company. It should refer to a specific date in the month preceding filing of the announcement on the merger plan;
- An information on the company’s status disclosed in its accounts, drawn up for the purpose of merger. It should concern a specified day in the month preceding the submission of the merger plan. It should follow the use of the same methods and the same layout as the last annual balance sheet.
The merger plan should be announced no later than one month before the date of the shareholders’ meeting or general meeting at which a resolution on the merger is to be adopted.
Company merger step by step
- Document analysis. Agreements and administrative decisions should be verified. This concerns in particular permits, licenses and the rights of the merging companies.
- Merger plan. The next step involves drafting a written merger plan. Since agreeing on the merger plan exceeds regular company matters, it requires prior resolutions of the boards.
- Preparing a reports of the management boards of the merging companies. The management boards of the merging companies are obliged to prepare a written report justifying the merger. It should specify its legal and economic basis. It should also determine the share exchange ratio.
- Examination of the merger plan by a statutory auditor. The merger plan should subsequently be filed with the registry court. Along with it, you should submit a request for the appointment of a statutory auditor to examine it. The auditor verifies the merger plan in terms of correctness and reliability.
- Notification of partners about the planned merger. Partners of the merging companies must be notified twice about the planned merger. The first term is no later than one month before the planned date of adopting the merger resolution. The next one is within a period not shorter than two weeks from the date of the first notification.
- Adopting a resolution on a merger of companies. The next step is to adopt resolutions on the merger of companies. A notary should prepare a record of this. The resolutions must be adopted by a majority of three-quarters of votes representing at least half of the share capital.
- Submission of an application to the National Court Register (KRS). Depending on the method of merger, this will be an application for the registration of the newly formed company or the registration of the increase in the share capital of the acquiring company. Both merging entities are obliged to register the merger in the KRS.
The merger of companies takes place on the so-called “merger date.” It depends on the adopted method of merger. It can be the day of registering a newly formed company with the National Court Register. In the second case, it will be the day of the increase in the share capital of the acquiring company.
Cross-border merger of companies
Determining the applicable law is fundamental in the cross-border merger of companies. It conditions what documents the company must compile and what issues it will have to deal with. Until a certificate of compliance of the cross-border merger with national law is obtained, the merger is subject to the law of the country where each of the merging companies is located. After certification, the merger follows the laws of the acquiring or newly formed company’s location.
The next step is to prepare a merger plan, which is agreed upon by all companies participating in the merger. It includes issues such as the purchase price of shares or stocks or shareholders’ rights. It specifies all other conditions for the allocation of shares or stocks. Next, an expert evaluates if the purchase price and exchange ratio are correct. Expert opinion is vital for evaluating a cross-border merger’s legality and fairness.
Subsequently, the management board prepares a report for shareholders and employees. It explains the legal basis and justifies economic aspects of the cross-border merger. A shareholder who does not consent to the merger may demand the repurchase of his shares or stocks.
This is also the moment when creditors have the right to demand security for their claims. The registry court considers these demands and makes decisions accordingly.
Next, the management board applies for the issuance of the merger’s certificate of compliance with Polish law. The registry court verifies the application and issues the certificate.
It is also necessary to apply for an opinion of the Head of the National Tax Administration.
Getting certificates for all participating companies allows the merger registration.
Company merger without increasing share capital
The regulations provide for four different procedures applicable in the following cases:
- The acquiring company owns at least 90% of the acquired company’s shares.
- The acquiring company holds all shares or stocks in the acquired company.
- Horizontal merger via takeover where one company holds all shares in both the acquiring and acquired companies without issuing new shares.
- The merging companies are the so-called small limited liability companies.
The regulation concerning the first 3 cases constitutes the implementation of European law. The fourth case is an original Polish regulation.
Transfer pricing documentation in a company merger
Companies merging within the fiscal year must fulfil transfer pricing obligations. This includes the requirement to submit Transfer Pricing Reports. This applies if, during the year of the merger, these entities engaged in controlled transactions with related parties.
Merged companies must conduct an analysis regarding transfer pricing. They must verify the potential necessity of completing the TPR form with regard to the following issues:
- Which entity will be responsible for submitting the TPR report and whether they should submit separate reports on TPR forms,
- How many TPR reports do they need to submit,
- What scope of information should the TPR form disclose?
Company merger and VAT
In company mergers, where all assets of the acquired company are transferred to the acquiring or newly formed entity, often considered an enterprise, VAT taxation generally doesn’t apply. Yet, we cannot exclude a scenario in which the company’s assets do not qualify under the definition of an enterprise. In such a case, the merger could potentially be subject to VAT taxation.
Company merger – tax consequences
Tax succession is one of the primary tax consequences of the merger of companies. The acquiring or newly formed company takes over all tax obligations of the acquired (merged) companies. At the same time, it may exercise the rights of these companies. Tax succession also includes responsibility for tax liabilities incurred by the acquired company.
The act of merging companies itself may also entail tax obligations, including:
- Corporate income tax,
- Value-added tax (mentioned earlier),
- Tax on civil law transactions.
Corporate income tax (CIT). At the level of the acquiring or newly formed entity, merging an LLC with another company generally results in income. Its amount results from the respective provisions.
Tax on civil law transactions (PCC). Tax liability under PCC arises in the case of amendments to the company agreement. This involves also merging companies. It applies when merging companies leads to an increase in the share capital of the acquiring or newly formed company. Yet, this only concerns mergers involving an LLC and general partnership, limited partnership, or partnership limited by shares. The acquiring or newly formed company is then obliged to pay PCC at a rate of 0.5% of its share capital value. Mergers involving only LLCs, joint-stock companies, or limited joint-stock partnerships are not taxed.
Company merger – summary
Company merger typically aims to organize their ownership structure. It usually implements a new tax model, corporate order, or enhances enterprise value. Such process may take several months. This is why it should be well-planned and verified in terms of legal and tax implications.
If you find the above topic interesting and want to know more about it, we invite you to contact us. Our experts are ready to help you.