When contemplating any M&A in Slovenia, tax considerations are an important factor to assess. Neglecting tax implications may, at minimum, lead to “unpleasant” surprises in the course of the transaction. In the worst case, however, it may lead to turning what seemed to be a profitable opportunity at first into a costly mistake. The aim of this short analysis is to present some guidance on which are the most important income tax considerations of M&A in Slovenia and how they should be addressed.
Slovenian Companies Act distinguishes among different types of M&A transactions: merger by absorption or by formation of a new company, and various types of divisions (spin-offs, split-ups and split-offs; either by absorption or by formation of a new company). In the following, tax considerations of merger by absorption as one of the most basic types of M&A in Slovenia will be analysed. Such considerations will be presented separately from the point of view of each of the participating subjects: (1) the transferring company, (2) the receiving company, and shareholders of (3) the transferring and of (4) the receiving company. It should be noted, however, that analogical (mutatis mutandis) conclusions apply also to other types of M&A in Slovenia.
First, let’s have a look at the structure of the analysed transaction:
Merger by absorption is a type of M&A in Slovenia, whereas a limited company (transferring company – company A) transfers all of its assets and liabilities to another public limited company (receiving company – company B) by means of universal succession. The transferring company is dissolved without going into liquidation, while its shareholders (shareholders A) are attributed shares of the receiving company. Consequently, the percentage share of the existing shareholders of the receiving company (shareholders B) in the capital of that company is reduced accordingly.
1. Tax considerations of the transferring company (“Company A”):
Pursuant to the provisions of Slovenian Corporate Income Tax Act (CITA) the transferring company is exempt from the tax relating to hidden reserves and/or profits. Additionally, losses that can be attributed to the transferred assets and liabilities are also exempt from taxation. Such exemption, however, is recognized only on the basis of notification of the transaction to the Tax Administration, subject to the requirements of the Tax Procedure Act (TPA). Notification needs to be submitted by the transferring or the receiving company which is the resident of the Republic of Slovenia. If both companies are Slovenian residents, transferring company needs to submit the notification; while in case none of the companies is Slovenian resident, receiving company needs to submit it. The notification is to be submitted before the intended date of the transaction.
As provided by Article 49 of the CITA, the transferring company is required to calculate its profit or loss as the difference between the fair value and the tax value of the assets and liabilities as at the cut-off date of the merger (as if the assets and liabilities were disposed to non-associated enterprises against payment). Consequently, the profit is calculated, but not taxed (provided that the tax benefits under Article 49 of the CITA have been granted by the Tax Administration upon notification).
It should also be noted that neutrality entitlements provided by Article 49 of the CITA are only the possibility the transferring company may opt to pursue by submitting notification to the Tax Administration; while it may as well choose not to exercise these rights.
2. Tax considerations of the receiving company (“Company B”):
As a general rule, the receiving company assumes liability for the entire tax history of the transferring company. Thus, it could end up having to pay back taxes for the acquired entity, the amount of which could in practice be very significant. Consequently, tax due diligence needs to be carried out and should include not only the company’s entire tax history but also inquiries about matters such as open audits and notices of audits.
Pursuant to the provisions of Article 49 of the CITA, the receiving company (company B) is entitled to the following tax benefits:
- the right to carry over provisions created by the transferring company and assume its rights and obligations related to these provisions;
- the right to take over tax losses of the transferring company;
- it is not liable to taxation relating to any gains accruing on the cancellation of its holding in the capital of the transferring company (company A).
Again, entitlement to these benefits is not an automatic consequence of the transaction. Rather, tax benefits may only be granted by Tax Administration upon submission of a relevant notification (pursuant to the provisions of Article 381 of the TPA).
In addition, the receiving company as a universal successor may in practice also benefit from the use of tax incentives or tax reliefs of the transferred company.
The receiving company is required, however, to value the acquired assets and liabilities, to depreciate the acquired assets and calculate the profits and losses related to the transferred assets and liabilities by taking into account their tax values at the transferring company as at the cut off date of the merger as if the operation had not taken place. Thus, for the tax purposes, individual assets retain their character, bases and holding periods; there is no »step-up« in basis. Thus, in case the transferring company has a substantial amount of depreciable assets that have been fully depreciated that may be a negative factor in assessing the transaction.
3. Tax considerations of the shareholders of the transferring company (“Shareholders A”):
Pursuant to the provision of Article 49 of the CITA, the allotment of securities representing the capital of the receiving company (company B) in exchange for securities representing the capital of the transferring company (company A) in itself does not give rise to any taxation of the profits or losses of the shareholder. This benefit, however, may only be granted, if the shareholder is a resident of Slovenia or if he holds securities of the transferring company and of the receiving company through a business unit located in Slovenia. In addition to this, this benefit applies only in case no additional cash-payments have been made. In case of additional cash payments the shareholder is subject to tax in proportion to such payments; while the pro rata profit or loss is added to the cash payment and the fair value of the securities of the receiving company.
As further specified by Article 94 of the Personal Income Tax Act (PITA) in case of mergers the taxation of capital gains of the individuals may also be deferred. In such case, the date of acquisition of exchanged shares of the transferring company (company A) is considered to be the time of acquisition of the newly acquired capital (for the tax purposes). Practical importance of such legal presumption may be substantial, since it may amount to longer holding period and subsequently to lower taxation of capital gains of individuals. Deferral may be granted on the basis of the notification of the Tax Administration. The notification needs to be submitted for the shareholder (individuals) by the transferring or receiving company.
It may also be noted, that due to the exchange rate, the overall percentage share of individual shareholder in the capital of the receiving company may be reduced as a consequence of the merger. While this fact in itself does not have any direct tax consequences, it may in some particular cases result in important tax considerations in the sphere of application of the provisions of national taxation legislation or Double Taxation Treaties that require ownership of the qualified share in the capital as a pre-condition to granting certain benefits under such provisions (e.g. rules on hidden profits distribution, international aspects of taxation of dividends etc.).
4. Tax considerations of the shareholders of the receiving company (“Shareholders B”):
As a consequence of the transaction, the overall percentage share of existing shareholders in the capital of the receiving company will be reduced. As is the case with the shareholders of the transferring company, this in itself does not have any direct tax consequences. However, the reduced share in the capital of the company may lead to not satisfying the required thresholds under the relevant provisions of national legislation or particular Double Taxation Agreements (in order to be eligible for certain benefits, e.g. reduced tax rate).
As it has been shown, M&A in Slovenia have important tax implications. Relevant tax considerations may also differ, depending the perspective of each of the participants of the transaction (each of the companies, or their shareholders). In order to avoid any subsequent “unpleasant surprises” or unnecessary additional costs, it is recommended that such tax considerations are taken into account and thoroughly analysed when deciding on whether to proceed with any proposed corporate transaction, in particular M&A.
 See also David Burton, Anne Levin-Nussbaum, Tax Considerations in M&A Transactions, p. 3, available on http://cdn.akingump.com/images/content/5/2/v4/5297/Akin-Gump-Tax-Considerations-in-MA-Transactions.pdf (9.4.2015).
 Companies Act, “Zakon o gospodarskih družbah” (ZGD-1), Official Gazette of the Republic of Slovenia No. 42/2006 with subsequent changes. Available at: http://www.pisrs.si/Pis.web/pregledPredpisa?id=ZAKO4291 (9.4.2015).
 Corporate Income Tax Act, “Zakon o davku od dohodkov pravnih oseb” (ZDDPO-2), Official Gazette of the Republic of Slovenia No. 117/06 with subsequent changes. Available at: http://www.pisrs.si/Pis.web/pregledPredpisa?id=ZAKO4687 (9.4.2015).
 Tax Procedure Act, “Zakon o davčnem postopku” (ZDavP-2), Official gazette of the Republic of Slovenia No. 117/06 with subsequent changes. Available at: http://www.pisrs.si/Pis.web/pregledPredpisa?id=ZAKO4703 (9.4.2015).
 Under the provision of Article 381 of the TPA, the submitting company should also enclose written consent of the other engaged company to the submitted notification.
 For the scope of information and documentation that needs to be submitted to the Tax Administration, see Article 381 of the TPA.
 For additional tax considerations of M&A in Slovenia, see also Marijan Kocbek, Nekateri davčni vidiki pri združitvah gospodarskih družb, Podjetje in Delo 1/2001/XXVII, str. 53-60.
 See David Burton, Anne Levin-Nussbaum, see above.
 Personal Income Tax Act, “Zakon o dohodnini” (ZDoh-2), Official Gazette of the Republic of Slovenia, no. 117/06 with subsequent changes. Available at: http://www.pisrs.si/Pis.web/pregledPredpisa?sop=2006-01-5013 (9.4.2015).
 Under the provisions of PITA, capital gains of individuals are subject to a tax rate of 25%. This rate is reduced by 10 percentage points after first five years and then by five percentage points for each subsequent five years the asset is held. Thus, capital gain is exempt in total once the asset is held for more than 20 years.
 To further explore these tax considerations, see also Explanation of Slovenian Tax Administration No. 4210-432/2008 of 30.11.2007.
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