Introduction to European Tax Law on Direct Taxation

I. S. 158The Necessity of Tax-Neutral Reorganizations in the European Union

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Reorganizations – in absence of any specific tax provisions – will generally trigger taxation of unrealized capital gains. For domestic reorganizations Member States typically provide for tax deferrals of the capital gains tax levied on the hidden reserves of the transferred assets under their domestic tax law. Often, losses not yet utilized by the transferring company may also be carried over to the acquiring company. Therefore, domestic reorganizations are tax neutral, i.e. they do not trigger immediate taxation at the time of reorganization since taxation of the capital gain is deferred until a later disposal of those assets.

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Similar tax provisions for reorganizations of companies of different Member States are necessary for the completion of an internal market within the European Union. Thus, cross-border reorganizations ought not to be hampered by restrictions, disadvantages or distortions arising from the tax provisions of the Member States. It is therefore necessary to have tax provisions that are neutral from the point of view of competition, in order to allow enterprises to adapt to the requirements of the...