2023-05-04-KPMG_s_EU_Tax_Centre-Euro_Tax_Flash_from_KPMG_s_EU_Tax_Centre_4页_324kb

KPMG Euro Tax Flash Summary: CJEU Decision on the Applicability of the Merger Directive to Domestic Reorganizations

Core Content

The Court of Justice of the European Union (CJEU) issued a ruling on April 27, 2023, in case C-827/21, addressing whether national courts must interpret national legislation on domestic reorganizations in a manner consistent with the Merger Directive. The decision clarified the boundaries of EU law applicability in domestic contexts.

Main Viewpoints

• Scope of the Merger Directive:
  The CJEU determined that the Merger Directive does not apply to purely internal reorganizations. Therefore, national courts are not required to interpret domestic provisions in line with the Directive unless explicitly stated.

• National Interpretation and Intent:
  While the Romanian legislator expressed an intention to harmonize the tax treatment of domestic reorganizations with the Merger Directive, the CJEU found that this intent, as reflected in the explanatory memorandum, was not sufficient to establish a direct and unconditional application of the Directive to internal situations.

• Legislative Alignment:
  The referring court noted that the Romanian Tax Code had previously treated domestic and cross-border mergers under separate articles, with domestic reorganizations excluded from the list of tax-neutral operations. However, a later recast of the Tax Code aligned domestic rules with the Merger Directive, raising questions about the legal basis for such alignment.

• CJEU Jurisdiction:
  The Court emphasized that it does not have the authority to determine whether national legislation extends the scope of the Merger Directive to internal situations. This responsibility lies with national courts.

• Precedent Consideration:
  The CJEU acknowledged that in previous cases, national courts had interpreted domestic rules as being in line with the Merger Directive when the legislation explicitly extended its provisions to internal situations. However, the current case did not meet those conditions.

Key Information

• Case Background:
  A Romanian banking group underwent a domestic reorganization where the parent company absorbed a subsidiary. The acquiring company recorded income from the cancellation of shares, which was not taxable under the existing domestic rules.

• Tax Authority Position:
  The Romanian tax authorities initially did not agree with the taxpayer's view that the gain should be non-taxable. The case was eventually referred to the High Court of Cassation and Justice.

• Referring Court's Inquiry:
  The High Court asked the CJEU whether the Romanian legislator's intention, as expressed in the explanatory memorandum, was enough to require a national interpretation consistent with the Merger Directive.

• CJEU's Ruling:
  The CJEU concluded that the facts in the case were not directly covered by the Merger Directive and that the national law did not unconditionally apply the Directive to domestic reorganizations. Thus, it declined to answer the preliminary questions.

ETC Comment

• The decision reconfirmed the criteria for applying secondary EU law in domestic situations. It emphasized the importance of clear legislative alignment and the wording of national laws.
• The CJEU highlighted that while it had previously ruled on the application of the Merger Directive in internal contexts, such rulings were based on the explicit extension of the Directive by national legislation.
• The case at hand is distinct because the referring court did not establish a direct and unconditional link between the domestic rules and the Merger Directive.
• The outcome may influence future cases, particularly in light of the Budapest Regional Court's similar inquiry (C-318/22), which the CJEU may address in the future.

Conclusion

This ruling underscores the principle that EU law does not automatically extend to domestic situations unless clearly and unconditionally provided by national legislation. It reinforces the need for precise legislative implementation to ensure the harmonization of tax treatment across internal and cross-border reorganizations.