Greece: Analysing partial demergers

The partial demerger type of restructuring was one of the not-so-few novelties introduced into Greece in the context of the major tax reform that took place in 2013.

According to the Greek Income Tax Code, a partial demerger entails the transfer of a branch of activity from one entity to another, in exchange for the pro-rata issue or transfer of securities to its existing shareholders. This results in two entities held by the same shareholders becoming sister companies. This article is aligned with the provisions of the EU Merger Directive and, thus ensures the neutrality – at least from an income tax perspective – of the restructurings in scope.

Having established the tax neutrality, there remains a question regarding the corporate law framework to be applied. Up until recently, there was no explicit corporate law provision regulating partial demergers. In light of this absence, the prevailing position was that a partial demerger was not feasible from a corporate perspective. The void was addressed by the new corporate law on restructuring, which became effective from April 15 2019. This aims to consolidate the scattered provisions on corporate restructurings into a single coherent piece of legislation.

A partial demerger may take place in a tax neutral manner, insofar as both the transferring and the receiving company involved in the partial demerger are corporations that are EU tax residents, subject to income tax, without an option of being exempt.

The assets transferred must comprise a "branch of activity," that is, a totality of assets and liabilities, qualifying and operating as an independent economic unit, where, following the demerger, the transferring company must continue with at least one branch of activity itself. It is important to note that, while participations in other companies may constitute part of a branch of activity to be transferred, shareholdings alone do not qualify as branch of activity since they are not capable of being autonomous and self-operating from an organisational point of view. Consequently, a company cannot contribute its "branch" of holdings or be left, following the partial demerger, only with the management of its holding portfolio.

Tax neutrality is achieved by means of specific provisions in relation to certain items. In particular, any capital gain arising at the time of the demerger is not subject to income tax. Furthermore, the receiving company may carry over tax losses concerning solely the transferred branch of activity, as well as provisions and reserves, whereas the assets transferred will be subject to depreciation according to the rules that would have applied to the transferring entity if the restructuring had not taken place.

The shareholders should assign to their new shares the same value for tax purposes as the old shares had, in order to achieve tax deferral up until a future disposal thereof.

Prerequisites and mechanics aside, the ultimate test for the tax neutrality of any type of restructuring lies in the anti-abuse provisions. Based on the targeted anti-abuse rule, all benefits granted are revoked, in full or in part, if the main or one of the main objectives of the restructuring is tax avoidance or tax evasion. Lack of valid economic reasons, such as the restructuring or the rationalisation of the involved entities, may constitute evidence that the main or one of the principal objectives of the transaction is tax avoidance or tax evasion.

An additional measure provided is that the Greek tax authorities may impose further conditions for the application of relevant provisions with an aim to safeguard their potential circumvention. The provision has not been interpreted to date through relevant administrative guidelines. In addition, there is no process in place for the Greek tax authorities to implement ad hoc measures (e.g. no procedure enabling the prior examination of the contemplated restructuring exists to date).

The branch of activity requirement may be viewed as in fact safeguarding the existence of valid economic reasons for implementing a partial demerger (i.e. separating two distinct activities). This said, what would constitute a typical example of abuse in this area? Potentially, a back-to-back disinvestment achieving a relief from capital gains tax, that would be otherwise payable, should be carefully examined in light of anti-abuse provisions. Any type of restructuring is a major event in a company life cycle, thus an increased level of certainty around potential tax exposures is usually required by decision-makers and other stakeholders. In the guidelines issued in relation to the application of anti-abuse provisions (as recently as in September 13), the Independent Authority for Public Revenue prudently opted to draw some basic principles in line with EU case law, instead of an exhaustive list. These guidelines are a valuable starting point but a more detailed analysis would inevitably have to be the subject of a separate article.

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