Cyprus has an attractive merger and reorganisation regime between Cyprus entities and cross-border, at EU level. The companies obtain many advantages as a result of merger and reorganisation such as the avoidance of liquidating group entities, the transfer of assets and liabilities without the need for contracts and and the creation of a stronger entity.
The Income Tax Law classifies mergers, divisions, partial divisions, transfer of assets and exchange of shares as ways of approved reorganisations between two or more companies.
Scope of the Law:
The following types of local merger and reorganisations are included within the Income Tax Law and the Companies Law, Cap 113:
- Merger by acquisition:
One or more companies on being dissolved without going into liquidation, transfer all assets and liabilities to another existing company in exchange for the issue to their shareholders of shares representing the capital of the “existing company” and if applicable, in exchange for a cash payment not exceeding 10% of the nominal value of shares
- Merger by the creation of a new company:
One or more companies being dissolved without going into liquidation, transfer all assets and liabilities to a new company that they form in exchange for the issue to their shareholders of shares representing the capital of the “new company” and if applicable, in exchange for a cash payment not exceeding 10% of the nominal value of shares
- Merger by way of holding company absorbing a subsidiary:
A Company on being dissolved, without going into liquidation, transfers all assets and liabilities to the company holding all the shares representing its capital.
Merger Procedure
Through the merger, the company to be absorbed (the Target Company) will be acquired by the remaining company, undertaking the rights over all of its assets and the responsibility over all of its liabilities. Therefore the remaining company will be the legal successor of the target (absorbed) company.
The procedure for the Merger as defined by the Companies Law Cap. 113 articles 198-200 is as follows:
- The Board of Directors of both companies must hold meetings convening the Extraordinary General Meeting (EGM) of the Companies’ 14 days after the board meeting which will consider the merger and notify accordingly the companies’ members;
- The EGM will be held and decide to proceed with the merger and authorize the Board of Directors to proceed with filing the relevant application to Court and to publish at the Government Gazette the decision for merger.
- Within three months after the EGM the decision of the companies must be published and the application to Court must be filed;
- The application to Court must present the re-organization (merger) plan and structure, the relevant decisions of the companies as well as confirmations by any existing Creditors of the Target Company that they do not object to the merger.
- The Court will set the hearing of the application approximately within one month from the date of its submission and if it finds it complete it will issue the relevant Court Order;
- Upon receipt of the relevant Court order, the same must be presented to the ROC which will proceed with liquidating the Target Company without appointing a Liquidator and making the relevant publications with the Governmental Gazette within three months;
- During the period until the liquidation of the Target Company is finalized, we will proceed with transferring all assets of the Target Company to the ownership of the remaining company as well as arranging for the Remaining Company to undertake any existing obligations and debts of the Target Company;
- Finally the ROC will issue the liquidation certificate for the Target Company which finalizes the merger.
Cross-Border Mergers:
The EU Cross – Border Merger Directive 2005/56 (the Directive), allows for all reorganization types listed above between EU members. A merger is only considered cross-border if at least two of the participating companies are governed by the laws of different Member States. The Cyprus Companies Law Cap 113 which regulates the cross-border mergers is stipulating the requirements and procedures in line with the Directive.
Scope of the Directive
- Merger by acquisition:
One or more companies on being dissolved without going into liquidation, transfer all assets and liabilities to another existing company in exchange for the issue to their shareholders of shares representing the capital of the “existing company”.
- Merger by the creation of a new company:
One or more companies are acquired on being dissolved without going into liquidation and transfer all assets and liabilities to a new company that they form in exchange for the issue to their shareholders of shares representing the capital of the “new company”.
- Merger by way of holding company absorbing a subsidiary:
A Company on being dissolved, without going into liquidation, transfers all assets and liabilities to the company holding all the shares representing its capital.
Cross-Border Merger Procedure
- Common Draft Terms
The board of directors or the administrative organs of each merging company must produce the common draft terms, which must contain at least the following information:
- the legal type, name and registered office address of the merging companies including the relevant information on the company that results from the cross-border merger (Post Merger Company);
- the likely consequences of the cross-border merger on employment;
- the terms of allotment of shares or securities of the Post Merger Company;
- set out the main terms and conditions of the proposed cross-border merger;
- the date from which the shares or securities in the share capital will have a right to a dividend and every special term regarding this right;
- the date from which the transactions of the merging companies are regarded for accounting purposes as being those of the Post Merger Company;
- any special rights that are conferred by the Post Merger Company to its shareholders;
- any special rights and or advantages granted to the experts who have examined the cross-border merger plan or the directors of the merged companies;
- the memorandum and articles of association of the Post Merger Company;
- information on the disposal of the assets and liabilities to be transferred to the Post Merger Company.
The content of the Common Draft Terms must be drafted identical by each company participating into the cross-border merger. Once the Common Draft Terms are duly completed must be approved by the board of directors and consequently by the shareholders of the company.
2. Filling and Publication
The Common Draft Terms must be publicized, at least one month prior to the general assembly to approve the cross-border merger by the shareholders of the company, though it’s filling at the Registrar of Cyprus Companies which will thereafter publish them in the Official Gazette of Cyprus.
3.Directors Report
The board of directors or the administrative organs of each company must draft a report and present it to the stakeholders of each company prior to the general assembly of the shareholders. The report must specify the legal and economic grounds for the cross-border merger and any long term possible implications which may result from such cross-border merger.
4. Experts Report
Each merging company must appoint an independent expert, who will examine the Common Draft Terms and report to the shareholders of each company. The expert will report on the fairness of the terms and shall illustrate the methods used to conclude on their report. The report must be completed and given to the shareholders at least one month prior to the general assembly
5. Approval of Common Draft Terms
The shareholders of the company must hold a general meeting to pass a special resolution. Thus, the Common Draft Terms in accordance with Cyprus law, in order to take effect, need to be approved by at least 75% of the shareholders present and voting either in person or by proxy.
6. Initial application to the Court for obtaining the Pre-Merger Certificate
Once the Common Draft Terms are approved by the shareholders of the company at a duly convened general meeting, the company will then need to apply to the competent District Court in Cyprus for obtaining the Pre-Merger Certificate. This certificate in the form of a Court Order will confirm that all the pre-merger formalities have been satisfied, as per the Cyprus Companies Law, Cap.113.
7. Finalisation of cross-border merger
The District Court where the registered office of the company is situated will have jurisdiction to decide on the legality of the completion procedure and checks that the merging companies need to comply under their national rules. If the surviving company maintains its registered address in Cyprus, the competent District Court will issue a Court Order to approve the completion of the merger. The Court Order will state the date that the cross-border merger will take effect. Thereafter, the surviving company will need to file the Court Order at the Registrar of Cyprus Companies and publish it at the Cyprus Official Gazette. The Court Order must be attached to the memorandum of association of the surviving company.
As a result of the cross-border merger the companies other than the surviving company will be dissolved without liquidation, therefore will cease to exist and all of their assets, rights and liabilities will be transferred to the surviving company, which resulted from the merger. The shareholders of the acquired companies will hold shares in the surviving company.
Tax benefits of an approved merger/reorganisation:
- No taxes on the transfer on any assets;
- No Capital gains tax (or corporation tax if trade) on the transfer of Cyprus Immovable property;
- No balancing statement is required for assets transferred;
- Any losses carried forward of a transferring company can be transferred to the receiving company;
- No transfer fees nor stamp duty.
