Simplified mergers between sister companies: details of their accounting and tax procedures to be provided before the end of the year

Since 19 July 2019, mergers between sister companies wholly owned by the same entity have to be carried out without any exchange of shares by the common shareholder (Law no. 2019-744 of 19 July 2019 on the simplification of company law codified in Article L.236-3 of the French Commercial Code).

The associated rules on the accounting treatment of such transactions and rules to ensure their tax neutrality had seemingly not been appropriately anticipated.

This lack should be remedied before the end of the year, according to the latest available information.

The ANC (i.e. France’s national accounting standards body) has just published a draft regulation (Regulation no. 2019-06 of 8 November 2019 amending Regulation ANC no. 2014-03 relating to the General Accounting Plan’s provisions on mergers and demergers with no exchange of securities), which should be enacted before 31 December 2019. This regulation provides the following clarifications:

•    At the level of the merging company: the net assets transferred as part of the transaction should be recorded in the “retained earnings” account;

•    At the level of the common shareholder: the holder of the shares in the merging and merged companies, the gross value and any impairment in the value of the shares held in the merged entityare added to the gross value and to any impairment in the value of the shares held in the merging entity. The gross book value of the shares in the merged company is uniformly spread across the value of each share held in the merging company.

Secondly, from a tax perspective, the law that defines whether certain mergers are entitled to the preferential corporation tax regime for mergers (Article 210-OA of the French General Tax Code) should be amended as a result of an amendment to the Finance Act for 2020 tabled in the Senate, in order to also cover simplified lateral mergers.

However, the effective vote of this amendment before the end of the year the exact scope of this amendment and its date of entry into force should be followed with interest. In order to be consistent with the legislator’s objective the amendment should provide that any lateral mergers carried out from July 2019 onwards are tax neutral.

There remains the question of how the transaction should be taxed for the common shareholder, which is no longer carrying out an exchange of shares but is altering the net book value of the shares it holds in the merging company by the amount of the net book value of the shares it held in the merged company. The tax treatment of this mechanism has not been clearly determined. In the absence of any specific provisions, an eventual confirmation by the tax authorities in their guidelines that they do not consider that there has been any change in taxable net assets as a result of such a transaction, and details of any impact on the calculation of the holding period of the shares in the absorbing company would be welcome.