Over recent years mergers and reorganizations between a Cyprus entity with other Cyprus entities but also at a cross-border, EU level, between a Cyprus entity and other EU companies, have become increasingly popular.
There are many reasons for taking the decision of merging two or more companies. These include the creation of good synergies, the transfer of assets and liabilities without complicated procedures and processes, the avoidance of the liquidation process of group entities which are no longer required, but also major tax incentives, as mergers and reorganisations falling within the scope of the law may result in a total exemption from tax in Cyprus.
A closer look at the concept of Merger and Demerger
There are 3 main types in reference to private companies:
- To another existing company:
One or more companies, on being dissolved without going into liquidation, transfer all their assets and liabilities to another existing company in exchange for the issue to their shareholders of shares representing the capital of that other company (and if applicable for a cash payment not exceeding 10% of the nominal value of the shares).
- To a new company:
Two or more companies, on being dissolved without going into liquidation transfer all their 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 for a cash payment not exceeding 10% of the nominal value of the shares).
- To the holding company – upstream merger
A company on being dissolved without going into liquidation transfers all assets and liabilities to the company holding all the shares representing its capital.
Division / Demerger
- Can be partial
- Operation whereby a company on being dissolved without going into liquidation transfers all its assets and liabilities to two or more existing or new companies, in exchange for the pro rata issue to its shareholders of shares representing the capital of the companies receiving the assets and liabilities and, if applicable, for a cash payment not exceeding 10% of the nominal value of the shares.
- The percentages of the shareholders in the original company are maintained in the companies created following the division.
The procedure in summary
To give effect to the reconstruction, a scheme is set out by the auditors of the companies who are also responsible for the scheme’s approval by the Income Tax Authorities which in turn need to confirm that there will be no tax complications with the proposed reorganization.
The board of directors of each of the companies involved passes a resolution setting out the reorganization plan prepared. Each of the companies involved in the reorganization should then apply to the court by summons, requesting the court to convene meetings of the parties concerned.
(a) The court by an order gives directions as to the way the meetings will be convened.
(b) Thereafter, a notice for the meeting is sent to the shareholders and/or creditors together with a statement which explains the effect of the plan and stating any material interests of the directors.
(c) The general meeting of the shareholders is held. It is noted that a majority representing 3/4 in value of those of the shareholders present and voting in general meeting is required for the passing of the resolution.
(d) Once the general meeting approves the scheme, a petition is presented to court for final approval of the reorganization plan.
It is noted that in practice, the Court tends to exempt the companies from convening such meetings if proof is shown that the reorganization is unanimously approved.
(e) Upon its approval by the court, the reorganization plan is binding on the company and on all parties concerned.
To have binding force, such an order must be delivered to the Registrar of Companies for registration within the provided time limit.
It is noted that for the Cyprus Courts to allow the restructuring, both the acquiring and the acquired companies must have fulfilled in full their obligations to the tax authorities of the Republic of Cyprus and the Department of Registrar of Companies and Official Receiver, including the filing of the annual company reports.
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