Fusion enligt ABl 14:8 - en skatte-, bolags, och redovisningsrättslig studie

Författare

Martin Smiciklas

Summary, in English

Summary in English

This dissertation bears the title "Fusions as defined by the Swedish Companies Act 'ABL' of 1975 (14:8) - a study of tax, corporation and accountancy legislation". The dissertation constitutes a study of fusions from the perspective of (as the title suggests) taxation, corporation and accountancy legislation.

The Swedish Companies Act (ABL) includes rules concerning two forms of fusion. Fusions can take place through either 'absorption' or 'combination'. In turn, absorption is possible in two variants. One variant is the absorption of a wholly owned subsidiary company into the parent company (ABL 14:8) while the other variant is absorption involving companies where such a relationship does not exist (ABL 14:1). Combination is a form of fusion whereby two or more companies (assigning companies) are unified through the establishment of a new company which inherits their assets and liabilities in return for shares in the acquiring company (ABL 14:2). The rules in the act are relatively complicated and detailed. By means of a formalized procedure, creditors and other interested parties are granted protection against inappropriate behaviour. This dissertation deals mainly with fusions between public companies as described in

ABL 14:8.

Fusions are characterized by the dissolution of one or more companies. The dissolution takes place according to an established procedure whereby the company (or companies) that is being dissolved (assigning company) transfers all of its assets and liabilities to the company which inherits these (the acquiring company). The dissolution takes place without the liquidation of assets and liabilities. The capital is transferred intact and the acquiring company represents the dissolved company in relation to its rights and obligations. The transfer of capital is total and the dissolved company ceases to exist as an independent

legal entity.

Fusion is a juridical process by which two companies can amalgamate. In questions concerning the actual merger from civil and corporate legal points of view, the process is regulated by ABL. In addition to these aspects, the fusion also raises other matters. The companies must keep a full account of the fusion and they must also pay tax in conjunction with the fusion.

The purpose of this dissertation is to highlight those issues which may become relevant with regard to the legal rules concerning accountancy, corporate organization and taxation.

Thus, fusions are business events involving a number of different actions which are, in turn, regulated by different systems of rules. The various rules which concern issues involved in fusions are closely related to one another. The companies in a fusion must take into account rules of corporate law, they must keep accounts of the fusion in accordance with the rules concerning accountancy and they must fulfil the terms of the taxation laws so that the correct amount of tax is paid. The corporate legal procedures for fusions are contained in ABL. The taxation rules are spread among various statutes in the taxation legislation. There are, however, no particular rules for the accounting of fusions.

In this presentation, I have chosen to prioritize the issues concerning the tax costs for companies involved in fusions and the distribution of the parent company's own capital.

Capital transfer and amalgamation

Fusions are carried out for various reasons. From the point of view of business economics, fusions might be carried out in order to reorganize the business of a concern. Fusions, like other actions, are normally evaluated on the basis of cost. On the basis of such an evaluation, fusions will not take place if they are too costly or if the cost can be reduced if a different action is taken. The effect brought about by a fusion of merging the business of two or more companies can, namely, be brought about in other ways. The companies in a group might, for example, take such organizational actions that they in effect act as one company. Furthermore, the companies can, within the framework of the concern, fulfil co-operation if the parent company transfers the business of the subsidiary to itself thereby eaving the subsidiary an empty shell.

When companies consolidate without fusing, they must take into account the various stipulations of company law which regulate the procedures undertaken. From the point of view of corporate law, the rules which mainly come into play are those which protect creditors from misuse of company capital. In the alternative procedures to fusion, parent companies can empty the assets of a subsidiary to the detriment of the creditors of the subsidiary. Such actions are in principle prevented by the rules concerning payments to shareholders. Parent companies are shareholders in their subsidiaries and as such must respect the rules which apply to the distribution of profits and other dispositions of the funds of the subsidiary companies.

The rules contained in corporate law for the protection of creditors are, to a large extent, in the form of definite rules of procedure dictating how the transfer of funds between companies and their shareholders is to take place. All transfers which are of benefit to the shareholders fall under the regulations found in chapter 12 of ABL. This means that companies may only pay out funds in the form of dividends, payments in conjunction with reductions of the share capital or reserve fund or in conjunction with the liquidation or fusion of the company. In these standardized procedures, the company making payments must respect the established protection rules. In the case of fusions and related procedures, the most relevant payments are distribution of dividends or the distribution of remaining equity as part of the actual fusion procedure.

In the case of alternative procedures (for example by group benefits whereby the parent company takes over the entire equity of a subsidiary), the parent company may not control a greater degree of funds than those designated as payable funds. In ABL, the payable funds are limited by the regulations concerning the distribution of the company's equity. Only that capital which comes under free equity is payable. The free equity is determined by how the total equity is accounted. In turn, the fusion is an event which may affect the capital distribution of the parent company. It is, therefore, important that the accounting of the fusion takes into account the fact that the equity of the parent company may be altered to the detriment of the creditors of the parent company.

In connection with the adaptation of certain Swedish legislation to comply with EC regulations, changes to the regulations concerning fusions in the companies act have been suggested. These suggested changes would imply that the fusion process as such would remain. After the adaptation to the EC, it will still be possible to carry out fusions in the form of combination and

absorption between independent companies and between parent companies and their subsidiaries.

Even after the introduction of the EC-adapted regulations, an important function of ABL will be to protection for creditors. With this in mind, my presentation would seem relevant even with regard to those regulations which will apply after adaptation to the EC.

The protection of creditors

For the protection of creditors, it is important that the acquisition of assets and debts is correctly accounted for by the parent company after the fusion. The regulations in corporate law which provide protection for company creditors are based on accountancy regulations. For the creditors of a company, the capital of the company is the only source of recompense against any claims they may have. The regulations of corporate law protect creditors from improper use of company funds on the part of shareholders. The shareholders shall not control more than the non-restricted equity of the company. The remaining funds, the restricted equity, is to remain within the company as security for the creditors. The shareholders may only use restricted equity under specially regulated conditions. These conditions include great demands on publicity. It must be made clear to the creditors how much of the company's equity is bound and therefore protected, to a certain extent, from use by

the shareholders.

The capital of a company consists primarily of accountancy entries. The rules in company law concerning protection of equity depend, therefore, upon the company keeping correct accounts of its assets and debts. It is the accounted capital which is the object of protection in accordance with the regulations of corporate law. In the occurrence of a fusion, the accounting of the assets of the mother company is altered. In some cases, assets may have been accounted for in one manner in the subsidiary in order to be accounted for in a different manner in the -parent company after fusion. The parent company may, for example, take over the fixed assets of the subsidiary which, according to general accountancy regulations, are to be accounted for as turn-over assets by the parent company. This alteration can imply changes in the capital composition of the parent company.

In order that accountancy should fulfil the demand in civil regulations for the protection of creditors, it should be adapted to the same objectives as those of the regulations for the protection of capital.

A fusion involves two companies. The creditors of the assigning company are protected from improper use of funds by the actual procedure involved in the fusion. They may demand security for their claims. According to present rules, the creditors of the parent company are not given an opportunity to state their views concerning the fusion. In order to protect them from use of company funds by the parent company in a manner which is to the creditors' detriment but to the advantage of the shareholders, the accountancy procedures should be designed to provide protection for the creditors.

The accountancy regulations take into account the need for information on the part of the creditors and other interested parties. Much of the protection in a company depends upon the company's interested parties themselves being careful. In order to be able to judge the risks, creditors require access to correct accounts. The capital accounted for by the company is also, for the benefit of the creditors, surrounded by protective regulation. In the perspective of the creditors' protection consisting of information and equity protection regulations, consolidated accounts play an important part. From the point of view of the group, the parent company has, in its subsidiary a possession of assets. The subsidiary owns its assets, but the parent company

also owns the same assets indirectly. The parent company's possession of the subsidiary's assets is accounted for by its ownership of shares in the subsidiary. The shares in the subsidiary are to be treated as fixed assets. Special valuation rules apply to such assets. These valuation rules prevent the parent company from showing unconverted profits.

After the fusion, the group consisting of the parent company and its subsidiary ceases to exist. It is not necessary to demand protection for the creditors of the group or of the subsidiary at this stage. Instead, it is more important to protect those creditors who will have claims in the parent company after the fusion. Other creditors can receive securities or payment for their claims as part of the fusion procedure. It is therefore necessary that the accounting of the fusion takes place from the parent company's side. From the perspective of the parent company, it is its creditors who stand to lose due to the redistribution of capital in the company accounts. A detrimental redistribution has taken place if previously restricted equity becomes non-restricted. It is important to prevent the parent company from creating new non-restricted equity. Rather than being permitted to create new non-restricted equity, the parent company should, after the fusion, only control the same amount of non-restricted equity as it did in the group before the fusion.

As part of the stock of the group, the entire non-restricted equity of the subsidiary cannot be transferred to the parent company. Profits or reserves which have been earned prior to the acquisition of the subsidiary can, for example, not be transferred without a corresponding devaluation of the parent company's shares. In principle, such profits of the subsidiary have formed restricted equity from the point of view of the parent company. In the accounts of the parent company, these profits have been included as fixed assets in the form of shares in the

subsidiary. The parent company has not been able to pay out these profit funds by increasing the value of its shares. Nor has the parent company been able to pay out these funds by first having the subsidiary pay them out to the parent company. In such a case, the parent company would, of course, devalue the shares of the subsidiary to the same degree. A loss would have been created by this devaluation which would have reduced the possibilities for paying dividends.

Taxational consequences of fusions

There is no direct connection between the taxational regulations and the regulations in corporate law concerning fusions. From the point of view of taxation, different objectives have been of importance than the protection of creditors. The taxational regulations have, however, been developed from the civil fusion procedure. The taxational regulations serve to guarantee that companies pay tax• on their incomes. In this context, fusions are events which can create income or outlay. In turn, the business event itself is also taxed.

In the sections dealing with taxational aspects, I have treated fusion as an alternative business event. Tax forms an outlay in the business of a company. Thus, companies seek to keep tax

costs at as low a level as possible. This means that the fusion procedure is used if no other action will entail lower tax costs. In my opinion, certain actions are, from the point of view of taxation, equal' to the fusion procedure. These include, among others, transactions involving companies with collected profits. Companies can also achieve the same effects, from the point of view of taxation, as with fusion by means of various income equalizations. Companies may simply transfer assets and avoid taxation by keeping within the regulations concerning group subsidies or tax exemption for share dividends.

By applying regulations and inconsistencies between different regulatory systems, tax-payers can obtain taxation benefits. The restrictive interpretation of the taxation regulations, has in fact resulted in the development of procedures which are similar to those which involve a tax burden. The inventiveness of taxpayers in finding ways to legally avoid taxes is great. Many of the tax-related procedures which have been developed are based upon one person taking over assets from another. The idea is that the take-over brings taxation advantages. Such possibilities have been brought about, in part, by the inconsistency in the taxation of legal as opposed to physical persons. In some cases, a company can transfer untaxed and taxed funds from another company to itself.

The 'raison d'etre' of a company is to make a profit for its owners. Taxation legislation is so formed that taxes are first levied on profits at the company level, and later, when dividends are paid, at the level of the individual share-holder. In order to avoid double taxation in the private sector, rules exist which allow parent companies to receive tax exempt payments from subsidiary companies. There are also other possibilities for parent companies to transfer funds to themselves from subsidiaries without paying tax on them. One such possibility is group subsidy. A company can also acquire another company with the intention of transferring assets to itself after the acquisition. Such transactions depend on the fact that companies, but not physical individuals, are exempt from taxation in the transfer of the acquired company's assets to themselves.

The taxation laws are detailed and far reaching. They include, for example, special rules concerning the transfer of assets where one of the companies involved is an investment or trustee company. Tax payers can, using creative accounting, ease their tax burdens by utilizing the different tax regulations applying to different types of companies. Different types of companies are taxed differently for various procedures. A trustee company cannot, for example, receive tax exempt dividends. Therefore, trustee companies seek to find possibilities of income adjustment between themselves and their subsidiaries. One such possibility to receive untaxed dividends is for the trustee company to change its status in such a way that it is no longer subject to the regulations concerning trustee companies. The company can achieve this by initiating some active enterprise or by acquiring an active company.

These days, fusion between a subsidiary and its parent company can be included among the income adjusting transactions which can be made within the private sector. The tax regulations are to be found in SIL § 2 article 4. In principle, the regulations exempt companies from taxation of profit arising from fusions. Fusions of Parent companies and their subsidiaries would otherwise have involved taxation consequences in line with income tax legislation. A fusion is. the taking over of a subsidiary's assets by its parent company whereby the parent company actually makes a profit (or alternatively loss). A fusion is a business event in which a parent company exchanges shares in the subsidiary for the assets and debts of that subsidiary. This business event should, therefore, not involve income taxation.

The intention behind the fusion regulations is that the companies involved should be regarded as if they had represented one tax payer from the outset. Aided by the regulations for tax relief in the case of fusions, fusions become, essentially, a way of unifying a parent company and its subsidiary into a single taxpaying unit. Fusions also give beneficial taxation effects as the companies are not taxed as part of the unification process. In those cases where fusion brings about taxation, it is likely that this would act as a deterrent. Fusions are therefore not usually undertaken in cases where they bring about considerable negative consequences.

As the companies involved are not taxed in conjunction with a fusion, the procedure implies a greater degree of tax reduction than do other restructuring processes. The occurrence of beneficial taxation consequences in connection with fusions is to a large extent due to the fact that the regulations surrounding fusions do not correspond to those connected with distribution of dividends, group subsidies and other transfers of assets between companies. We can take the fusion of a trustee company and another company as an example. As the acquiring company, the trustee company can transfer assets to itself in a way which would otherwise not be possible due to dividend distribution and group subsidy regulations.

Fusions also make it possible for companies, using various transactions, to offset losses made by either the parent company or the subsidiary against profits made by the companies. The parent company can, for example, take over assets from the subsidiary and value them at levels other (lower) than the taxation level of the subsidiary. Later the parent company can revalue the acquired assets at a higher level thus offsetting the profit gained against its own losses. In some cases, the parent company can also take over assets at higher values, then directly offsetting the profit gained against corresponding losses. Similar effects can occasionally be brought about using group subsidy and dividend distribution regulations. In most cases, however, fusion is the most beneficial method of transferring income from a subsidiary to its parent company.

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