Cyprus constitutes a popular destination for mergers and acquisitions. Except from the well-known advantages of merging two companies such as, the creation of a stronger entity, the simplification of the structure and the straightforward procedure of the transfer of the assets and liabilities, merges and acquisitions in Cyprus are also appealing since they offer tax exemption.
Cyprus Companies Law, Cap 113 (the “Companies Law”), provides the procedure where two companies can amalgamate into one entity with the dissolution of one of the companies and the transfer of all its assets and liabilities to the other company. Alternatively, all the merging companies can be dissolved without going to liquidation and establish all their assets and liabilities to a new established company.
A merger between Cyprus companies is defined by section 30 of the Income Tax Law (the “Tax Law”) as an act where:
- one or more companies, on their dissolution without going into liquidation, transfer all of their assets and liabilities to another existing company in exchange for the issue to their shareholders of shares in the capital of the receiving company and potentially in exchange for cash, not exceeding 10% of the nominal value of the shares or, in the absence of a nominal value, of the accounting par value of the shares;
- two or more companies, on their dissolution without going into liquidation, transfer all of their assets and liabilities to a new company that they establish in exchange for their shareholders being issued with shares in the new company’s capital and, potentially, in exchange for cash, which should not exceed 10% of the nominal value of the shares or, in the absence of a nominal value, of the accounting par value of the shares; or
- a limited liability company, on its dissolution without going into liquidation, transfers all of its assets and liabilities to a company holding all the shares representing its capital.
Local mergers are governed by sections 198-200 of the Companies Law and a court order is required before they can be conducted.
The most important formalities which are required to be satisfied in order to obtain a merger order include:
- drafting of a common merger plan;
- passing of a board resolution of the merging companies’ board approving the merger and the proposed merger plan;
- approval by the shareholders;
- preparation of updated financial statements; and
- creditors’ consent, if relevant.
All documents related to the proposed merger and the constitutional documents of the merging companies, are attached as exhibits to the two petitions that are filed with the relevant district court. The first petition is for the request of the order to convene a general meeting of the shareholders of the merging companies to approve the merger. The second petition is for the request of the order approving the merger after the meetings of the shareholders of the merging companies.
Submissions to the Registrar
If court is satisfied and issues a merger order, then this must filed with the Registrar of Companies. The Registrar of Companies will subsequently issue a certificate of dissolution of the company being absorbed and dissolved. The certificate of dissolution will state that the merger has been completed and the date on which it has become effective. The merger is effective only when the Registrar of Companies processes the documents filed and not on the date of the final court order, even though the dissolution of the absorbed entity can take effect retrospectively. From a tax perspective, an application shall be made to the Revenue Department, accompanied by the relevant documents requesting a re-organisation certificate, confirming the exemption from taxes.
Cross border mergers
EU Directive 2017/1132/EC (the “Directive”) provides for cross border mergers, namely the merger of two or more limited liability companies incorporated and governed under the laws of different EU member states. Cyprus has incorporated the requirements and procedures of the Directive into articles 201I-201X (Greek 201Θ-201ΚΖ) of the Companies Law.
Types of mergers
The Directive defines the merger as a procedure where:
- one or more companies, on being dissolved without going into liquidation, transfer all of their assets and liabilities to another existing company (an acquiring company) in exchange for the issue to their members of securities or shares representing the capital of the other company and, if applicable, a cash payment not exceeding 10% of the nominal value or, in the absence of a nominal value, of the accounting par value of those securities or shares;
- two or more companies, on being dissolved without going into liquidation, transfer all of their assets and liabilities to a company that they form (a new company) in exchange for the issue to their members of securities or shares representing the capital of that new company and, if applicable, a cash payment not exceeding 10% of the nominal value or, in the absence of a nominal value, of the accounting par value of those securities or shares; or
- a company, on being dissolved without going into liquidation, transfers all of its assets and liabilities to the company holding all the securities or shares representing its capital.
The general procedure to carry out a cross-border merger is as follows:
- Each merging company draws up the common merger plan, containing the particulars listed in the Directive and the Companies Law.
- The merger plan is filed with the Registrar of companies of Cyprus (in regards to the Cyprus entity) and publication of the same in the Official Gazette takes place. The Companies Law also provides the option for the company to publish merger plan in its website. In any event the Registrar will have to be notified of the intended merger. The analogous procedure takes effect in the other EU member state in accordance with applicable law and regulations.
- The directors of each merging company draws up a report intended for the members explaining and justifying the legal and economic aspects of the cross-border merger and the implications of the same on members, creditors and employees, as applicable.
Independent Auditors’ Report
- An independent experts’ report for each merging company must be obtained if required. The Directive and the Companies Law provide an exception that neither an examination of the common draft terms of cross-border mergers by independent experts nor an expert report is required if the members of each of the companies consent.
Publication of the merger plan and shareholders’ meeting
- Following the expiration of the relevant timeframes set out in the respective laws of each EU member state, a general meeting of each merging company must be convened in accordance with the respective laws, to approve the common draft terms of the cross-border merger. In Cyprus the time frame is one month from the publication of the merger plan in Gazette or at the website of the company.
Court procedure – Pre-merger certificate
- After the approval of the merger by the members, an initial application must be made to the district court where the registered office of the Cyprus company is situated, requesting the pre-merger certificate, attaching all the relevant documents including among others corporate certificates, merger plan, approval resolutions, up-to-date financial statements and creditors’ consent, if required. The pre-merger certificate verifies the legality of the procedure. An analogous procedure is followed in the other EU member state in accordance with its laws.
Court procedure – Final merger certificate
- Depending on which entity will survive the merger, the relevant steps must be taken in the relevant EU member state for the merger’s completion. The national legislation of the relevant EU member state of the absorbing company has to be followed and the relevant authorities of the two countries will communicate regarding the necessary notifications. If the country of the surviving company is Cyprus, then a second court application must be submitted to the court, within six months from the issuance of the pre-merger certificate requesting the final merger certificate.
- Once the notifications have been made to the competent authority of the dissolved entity by the competent authority of the surviving company, the competent authority will proceed with the dissolution of the same.
Consequences of a cross border merger
As a result of the cross border merger, the absorbed entity shall be dissolved but not liquated. All assets and liabilities are transferred without the need for any further action and likewise, the absorbed company ceases to exist. Also the members of the company being acquired shall become members of the acquiring company. From a tax perspective, an application shall be made to the Revenue Department, accompanied by the relevant documents requesting a re-organisation certificate, confirming the exemption from taxes.
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