Tax inspectors must now prove misfeasence in EU cross-border mergers

Luxembourg, 28 April 2017

In March, the Court of Justice of the European Union (CJEU) rendered its decision in the Société Euro Park Service, venant aux droits et obligations de la société Cairnbulg Nanteuil v Ministre des finances et des comptes publics case.

The case (C-14/16) concerned the refusal by France to defer taxing capital gains on a French company’s assets at the time of merger with a company established in another member state, on the grounds that the merging companies had not sought the prior approval of the French tax authority and that the merger had been carried out for the purposes of tax evasion or avoidance.

This case concerned the acquisition of a French company (‘Cairnbulg’) into its Luxembourg, sole shareholder company (‘Euro Park’). At the time of the merger, Cairnbulg did not report the net capital gains and profits generated by the assets which it had transferred to Euro Park to the French tax authority.

At bar was whether the derogation from the tax deferral provided for in Article 11(1)(a) of the EU Merger Directive (‘Directive’) should be interpreted restrictively.

According to the Court, there are a number of EU principles with respect to the transposition of the Directive. Member states might have to consider the CJEU’s requirement on restrictive interpretation and not go beyond what is provided for under EU secondary law when transposing anti-abuse rules, such as those of the EU ATAD Directive, into their national law.

As such, the onus is on tax authorities to prove misfeasance as opposed to merging entities across EU jurisdictions to prove otherwise.