Enterprise mergers (shares in exchange for assets)
The Curaçao profit tax ordinance contains enterprise merger rules, under which the acquisition of assets that form a business or independent business in exchange of shares in the company that acquires the assets and liabilities are facilitated.
The enterprise merger rules are especially relevant for the transfer of family-owned businesses where the business is transferred from one generation to another.
The enterprise merger can also be used to merge the assets of two businesses and create holding companies of the original entities.
Characteristic of the enterprise merger is that the assets and liabilities, which have to form a business or part of an independent part of a business, are transferred to a new entity in exchange for shares in the new entity. The contributing entity becomes a holding company, provided certain conditions are met. No taxes are levied at the time of the merger. The tax claim is preserved as the new entity continues the book value of assets received. Therefore, the new company that acquires the assets and liabilities cannot account for goodwill or revalue assets.
Tax not levied at the time of the merger will be levied when the shares issued are sold within three years of the enterprise merger.
A special form of enterprise merger is where the assets and liabilities that form a business or independent part of a business are transferred in exchange for cumulative preference shares. As a result, it is possible to transfer all business assets to a new company in exchange for cumulative preference shares placed with the company of the contributor of the assets. Nominal shares are, for example, placed with a company incorporated by a third party, the acquiring party. After three years, the cumulative preference shares can be repurchased as a result of which the company is fully owned by the company of the third party. The proceeds of the repurchase of the cumulative preference shares are not taxable under the participation exemption rules.
The enterprise merger can take place without prior approval of the tax authorities if the following conditions are met:
- the enterprise merger must contain the transition of a business or assets that are considered an independent business;
- the transition of assets must take place in the context of a merger;
- the acquiring party may not have losses that can be carried forward;
- the tax claim on the assets must be secured (realised by continuing with the book value);
- the transition of assets must take place against exchange of shares in the acquiring company;
- the shares acquired with the merger may not be sold within three years; and
- for the purpose of determining the profit, both companies must use the same system of profit determining. This implicates that the merger is not possible in case one of the companies is subject to, for example, a special regime.
Standard conditions have been published, under which the enterprise merger can take place if one of the seven conditions mentioned above are not met. In such a case, a request must be filed with the tax authorities and the enterprise merger can only take place after the approval of the tax authorities.
Share exchange (shares for shares)
In a share merger, a company is taken over by an acquisition of its shares in exchange for shares in the acquiring company.
The tax facility rules regarding share exchange, merger, demerger and conversion rules were introduced on 1 January 2017. With respect to the share merger, these tax facility rules have replaced the old share exchange directive based upon which a tax facilitated share exchange was already possible.
Under the provisions for the share exchange, the profit realised with the exchange of shares does not have to be taken into account, unless the acquirer also pays a cash remuneration. Under the provisions for share exchange, share exchanges in the following situations are facilitated when:
- a Curaçao company acquires, in exchange for its own shares, sufficient shares in another Curaçao company such that it has more than 50 per cent of the voting rights in the company acquired;
- a Curaçao company acquires, in exchange for its own shares, such a number of shares in a foreign company that it has all, or almost all (ie, 90 per cent or more) of the voting rights of the foreign company acquired; or
- a Curaçao company already possesses shares in a Curaçao company that represents more than 50 per cent of the voting rights or such a number of shares in a foreign company that represents more than 90 per cent of the voting rights and the scope of the voting rights are extended by the share merger.
An advantage of the share exchange is that there is hardly a need for cash. The rules only allow limited cash payments (10 per cent) in the case of a share exchange.
The provision also contains a general anti-abuse provision. The share exchange provision is not applicable when the share exchange is aimed at avoiding taxes or postponing taxes. Such will be the case if the share exchange is not based on business motives such as reorganisation, restructuring or rationalisation of the businesses of the companies involved.
A share exchange can be of use in the case of the reverse takeover, where public listing is sought.
There are some companies that are still listed but hardly have any activities. Such companies are sometimes used to acquire shares in the company that seeks a listing in exchange for shares in the already listed company.
The rules also provide for bypassing the tax claim in the case of individual shareholders who are considered substantial interest holders.
The share exchange rules are especially useful to shareholders with a substantial interest in the company that is going to exchange its shares for shares in the acquiring company. Under the share exchange rules, the substantial interest is not levied but the tax claim is passed on to the shares received. The tax claim is preserved by passing on the original cost-price of the shares to the shares obtained in the acquiring company.
Briefly, an individual is considered to have a substantial interest when he or she, whether or not together with a spouse, possesses 5 per cent or more of the shares. Under the substantial interest rules, individuals are taxed for their dividends as well as capital gains. Foreign individuals are generally not taxed under the substantial interest rules, unless they receive income from their substantial interest within 10 years of becoming a resident of Curaçao.
The share exchange rules are also advantageous for creating joint ventures.
Legal merger and demerger
As of 1 March 2004, the Curaçao Civil Code (CCC) contains merger, demerger and conversion rules, but the tax rules that facilitate mergers, demergers and conversions have only been implemented since 1 January 2017.
A tax-neutral merger (and demerger) is possible provided the following four conditions are met:
- both the acquiring and disappearing company may not have any losses that are eligible for carry-forward;
- both companies have the same system for profit determination;
- the tax claim on the assets must be secured (realised by continuing with the book value); and
- the merger must be based on sound business reasons (see share exchange above).
If the four conditions mentioned above are not met, a facilitated merger or demerger can take place on request. Standard conditions are published with demands that must be met.
In both the share exchange and legal merger, the companies continue with the original cost-price of the assets and, contrary to an asset transaction, no tax is levied upon acquiring assets through a merger.
The merger rules of the CCC allow an inbound cross-border merger in which a foreign legal entity is the disappearing entity (provided that foreign law allows such merger) and an outbound cross-border merger were the Curaçao legal entity is the disappearing entity, though the tax facility rules only facilitate a domestic merger as the standard conditions only apply for mergers when both companies are located in Curaçao.
As with the share exchange, the merger rules also contain a facility in case the shareholders are individuals with a substantial interest.
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