Cyprus boasts an attractive merger and reorganisation regime not only locally (ie, between Cyprus entities), but also at a cross-border, EU level. Apart from the apparent and well-known advantages of merging two companies (eg, the creation of a stronger entity, the avoidance of liquidating group entities, the transfer of assets and liabilities without the need for the novation of contracts or other cumbersome procedures), mergers in Cyprus are also attractive from a tax perspective, as mergers and reorganisations which fall within the scope of the law may well result in a total exemption from tax in Cyprus.
Section 30 of the Income Tax Law (118(I)/2002), as amended, defines a local merger between Cyprus companies as an act where:
A 'company' is defined by the Companies' Law, Cap 113, as amended, as "a company established and registered pursuant to the Companies' Law". This includes all entities with a legal personality or an organisation of public law, as well as all companies, fraternities or other associations of persons with an acquired legal personality, but not partnerships.
The Income Tax Law classifies mergers and divisions (demergers), partial divisions, asset transfers and share exchanges as arrangements, all of which are carried out pursuant to Sections 198 to 201 of the Companies' Law, relating to compromises and reorganisations (or arrangements and reconstructions as in the original English text). Sections 201A to 201H of the law apply to public companies.
Local mergers must receive court approval before they can be conducted. Mergers result in the transfer of the assets and liabilities of one company to another and the dissolution of the first company without it going into liquidation. The relevant formalities include the passing of a resolution of the absorbing company's board approving the merger and the proposed deed of arrangement, which is then put before shareholders for approval and ratification. A deed of arrangement is entered into, accounts are prepared and consent from creditors, if any, are obtained. All merger documents, together with the constitutional documents of the absorbing company, are attached as exhibits to two petitions that are filed with the relevant district court. One petition is for directions to dispense with the need to apply to court to convene a shareholders' and creditors' meeting regarding the companies proposed to be merged, as the shareholders' meeting will have already taken place and creditor consent letters obtained. The other petition is for approval of the proposed merger.
If the court is satisfied with the content of both petitions, it may issue the merger order immediately or reschedule the hearing of the main petition for another date and request the filing of a supplementary affidavit with further information in the meantime. Following the issue of the merger order, it must be filed with the registrar of companies who will proceed with issuing the certificate of dissolution for the company being absorbed and dissolved. The certificate of dissolution is the official document evidencing the completion of the merger and contains the date on which it becomes effective (ie, the date on which the registrar of companies receives the court order and the accompanying documents, unless the deed of arrangement specifies an effective merger date). Although a merger is not effective until the registrar of companies processes the documents filed, once processed, the merger and consequently the dissolution of the absorbed entity takes effect retrospectively.
As far as cross-border mergers are concerned, following the repeal of the EU Directive on Cross-Border Mergers of Limited Liability Companies (2005/56/EC) by EU Directive 2017/1132/EC relating to certain aspects of company law, Chapter II of the 2017 directive applies, which sets out simplified provisions relating to the cross-border mergers of limited liability companies.
Cross-border mergers can take place between limited liability companies incorporated in accordance with the legislation of an EU member state that have their registered office, central administration or principal place of business in the European Union, provided at least two of them are governed by the laws of different member states (Article 118 of EU Directive 2017/1132/EC).
Under Chapter II of EU Directive 2017/1132/EC, a 'limited liability company' means a company:
Chapter II of EU Directive 2017/1132/EC defines a 'merger' as an operation whereby:
According to Article 121 of EU Directive 2017/1132/EC, save as otherwise provided in Chapter II thereof, cross-border mergers are possible only between types of company that can merge under the national law of the relevant EU member state. A company taking part in a cross-border merger must comply with the provisions and formalities of the national law to which it is subject. These provisions and formalities must include those concerning the decision-making process relating to the merger and, considering the cross-border nature of the merger, the protection of creditors of the merging companies, debenture holders and the holders of securities or shares, as well as of employees as regards rights other than those governed by Article 133 of the directive. An EU member state may, in the case of companies participating in a cross-border merger and governed by its law, adopt provisions designed to ensure appropriate protection for minority members that have opposed the cross-border merger.
The procedure to carry out a cross-border merger as above is as follows:
The consequences of a cross-border merger are contained in Article 131 of EU Directive 2017/1132/EC. In all cases, all assets and liabilities are transferred without the need for any other action (save for any necessary notifications) and likewise, the company or companies being absorbed cease to exist. From a tax perspective, an application can be made to the Revenue Department, accompanied by the reorganisation plan and relevant information on the merging entities, for a reorganisation certificate, confirming the exemption from taxes. The tax authorities retain the discretion to issue a tax exemption certificate if they take the view that the merger or reorganisation was at arm's length and reflected economic reality.