Spin Offs - Transfer Of Business Sectors Or Aggregates Of Assets & Liabilities

When do we use the term spin off?

Normally the term “spin off” is used in Greece to indicate the transfer of a business sector from a tax law perspective. However, the term (“spin off”) may also be used to indicate cases of splits, demergers, divisions, transfer of business as a going concern etc.

From a tax law perspective a “spin off” is usually dealt as a transfer of a business sector. In view of the above, our comments below focus on tax related matters and on the implementation of corporate and civil law in cases where the relevant tax incentive laws apply.

The use of tax incentive laws (Laws 1297/1972, 2166/1993 and art. 52 of L. 4172/2013) is optional. If none of the tax incentives is applicable, all relevant taxes will be imposed on the transaction at stake.

What is a spin off and how is this transaction executed?

A spin off is a form of corporate transformation, where a company (transferring) transfers one or more business sectors or segments to another company (receiving) which may either already exist or may be newly incorporated for the purposes of the transformation.

The transferring entity continues to operate its remaining sector/sectors and acquires shares of the receiving company in which the business sector or segment is contributed. The receiving company issues new shares resulting from the share capital increase. Those shares will be depicted in the transferring entity’s balance sheet.

Where the business sector to be transferred constitutes a distinct/autonomous and fully operative economic entity, the spin off meets the requirements of a transfer of business in its entirety (aggregates of assets and liabilities). However, due to the fact that provisions regarding universal succession do not apply in spin offs, the transfer of the business sector is treated as transfer of assets and liabilities (this is supported by both jurisprudence and legal doctrine). This results in the need for each transfer to meet the specific requirements of the law.

Which tax incentive laws govern spin offs?

Laws 1297/1972, 2166/1993 and 4172/2013 (art. 52) include tax incentives in cases of spin offs and specify the conditions under which numerous tax exemptions apply (see below).

With regards to corporate law, there are currently no relevant provisions regulating spin offs, although L. 2190/1920 (AEs, Greek equivalent of Sociétés Anonymes), L. 3190/1955 (EPEs, Greek equivalent of Limited Liability Companies) and L. 4072/2012 (IKEs Greek equivalent of Private Companies) were recently amended. The treatment of spin offs from a corporate and civil law perspective is problematic and fragmentary in view of the fact that jurisprudence and legal doctrine do not share the same views, although they both take the position that spin offs are considered as a “contribution in kind” of the transferring entity and the procedure for such transformation is regulated by the provisions of the Civil Code, in combination with the general corporate law provisions (the specific provisions for transformations included in L. 2190/1920, 3190/1955 and L. 4072/2012 do not apply).

Although no amendments were introduced following the recent reform of L. 2190/1920 (by L. 4548/2018) related to corporate transformations of AEs (art. 68 – 89 of L. 2190/1920), a Commission to work on draft legislation for corporate transformations/M&As, was established in February 2018. New provisions with regards to corporate transformations, which will most likely include spin offs, are expected.

Are there similar procedures to spin offs?

Corporate transformations such as demergers, partial demergers, and transfer of business as a going concern or through an asset deal (take-overs) may seem to have similarities with spin offs. However, they should not be confused with spin offs.

In case of demergers the entities are dissolved, while through partial demergers (acceptable in cases of cross-border transformations and pursuant to art. 52 of L. 4172/2013), even though the entities continue to operate, the shares issued by the receiving entity are acquired by the shareholders (individuals or entities of any kind) of the transferring entity and not by the entity itself.

Lastly, the main difference between a spin off and a take-over of business sector or segment - regardless of whether the take-over is carried-out via the transfer of business as a going concern or through an asset deal - is that instead of shares the transferring entity sells the business sector/segment or a group of assets for an agreed amount.

Are there any general prerequisites in order for the spin off to be permitted?

Spin offs are permitted where an entity has two or more separate business sectors, or one sector consisting of two separate segments, all of which are independent sectors/segments from a functional and management point of view, supported by separate accounting.

The transferring entity must continue to have a business activity after the spin off and continue to operate such activity (i.e. it cannot operate as a holding entity, exclusively acquiring passive income). So, regardless of which tax incentives will be used, the transferring company must not be dissolved after the spin off.

In cases where L. 2166/1993 or 1297/1972 govern the transformation, the receiving company must be an AE (for tax incentives provided by L. 2166/1993 the AE should be operating for at least a year) and have a share capital of at least € 300,000. The transferring companies share capital must meet the normal minimum capital requirements provided by law (e.g. € 25,000 for AEs pursuant to recently amended L. 4548/2018).

L. 2778/1999 (Real Estate Investment Companies - REICs regulatory framework) introduced an exemption to the aforementioned prohibition with regards to the one year obligatory operation of the receiving AE. Pursuant to relevant art. 31, par. 4, the tax incentives provided by L. 2166/1993 may be granted to a newly established REIC (special purpose AE) that was incorporated following the spin off of the transferring entity’s real estate business sector.

In case L. 4172/2013 regulates the transformation (art. 52), the receiving company may be an AE, EPE or IKE with the relevant minimum corporate law capital requirements (L. 2190/1920, L. 3190/1955 and L. 4072/2012 respectively).

Which is the competent body to decide the spin off?

Although there is no explicit provision (neither in corporate nor tax laws) regarding the competent body to decide the spin off, pursuant to general corporate law provisions with regards to management tasks and responsibilities, it may be supported that a decision for spin off is outside the scope of day-to-day management and, thus, a decision of the General Meeting of shareholders/partners is necessary for both the transferring and receiving company.

Other technical issues that should be taken into account?

The below table presents indicative steps for the implementation of a spin off in cases of AEs, taking into account the 3 tax incentive laws:

How would the creditors of the transferring company be protected?

There is no specific provision for spin offs similar to art. 70 of L. 2190/1920 for mergers (and art. 83 for demergers) which stipulate that the creditors of the merging companies may exercise their right to obtain guarantees for claims, which arose prior to the submission of the DMA (Draft Merger Agreement) within a limited deadline. The creditors in cases of spin offs are protected by the provisions of art. 479 and, in some cases, by art. 939 of the Civil Code (C.C.).

The system of liability provided for by art. 479 of the C.C. stipulates that both the transferring and receiving company are liable towards the creditors of the transferring company. The receiving company, however, is only liable to the extent of the value of the business’ sector’s assets. Article 479 of the C.C. is applicable in all cases of transfer of business, whether it is a business sector that meets all the aforementioned requirements to be characterized as a distinct/autonomous and fully operative economic entity, or whether it is a business in its entirety.

In some cases, where the creditors might be informed about the planned transformation prior to its conclusion, provisional measures before the competent court may serve as a temporary precautionary measure, if an imminent risk with regards to their claims is justified.

Finally, it must be noted that where the transferring entity is under insolvency proceedings, which require (by virtue of a relevant court decision) the transfer of a business sector, art. 479 of the C.C. does not apply and thus creditors cannot bring proceedings against the receiving entity.

What about the employees of the business sector to be transferred? Are they protected?

According to Presidential Decree 178/2002 (applicable in cases of spin offs as well) the change of the employer (whether in case of a spin off or other type of transfer of business) does not constitute a threat to the employees’ rights due to the fact that all rights and contracts are transferred as-is to the new employer (the receiving entity). Usually employees are not affected by the change of the company’s ownership status and thus a transfer of business is often treated as neutral from a legal perspective for their rights.

This does not mean that the “new” employer cannot proceed with redundancies. It means though that a rebuttable presumption that the redundancy was made due to the transformation exists in favor of the employees and thus the new employer must provide solid proof for his decision (e.g. employees’ inadequate performance).

However, if the transferring entity is under an insolvency proceeding (e.g. bankruptcy, special administration etc.), which, following the issuance of a relevant court decision, results in the restructuring of the relevant business sector or segment, the aforementioned protection of the employees’ rights is waived.
 

For what type of companies are the tax incentives provided by Laws 1297/1972, 2166/1993 and 4172/2013 applicable?

What are the main tax incentives provided by Laws 1297/1972, 2166/1993 and 4172/2013?

Real Estate Transfer Taxation (RETT): L. 2166/1993 and L. 4172/2013 grant full exemption, whereas L. 1297/1972 grants the exemption under the condition that the real estate assets will be used by the receiving company for 5 years following the spin off (with further specifications provided).
Taxation of capital gains (goodwill): for L. 1297/1972 and L. 4172/2013 the tax exemption for capital gains is granted until the receiving company’s dissolution/liquidation (deferred taxation) and/or disposal of assets in cases of L. 4172/2013. ). By the use of the tax incentives provided in L. 2166/1993 there are no tax implications regarding capital gains (goodwill) due to the transfer of the assets at book value. Where L. 4172/2013 applies, the exemption is granted under the condition that the shares acquired by the receiving company will not be transferred, or the relevant capital gain will not be distributed or capitalized within a 3 year period.
V.A.T.: Laws 1297/1972, 2166/1993 and 4172/2013 grant full exemption under the specifications of VAT Code (L. 2859/2000), i.e. the transferring and receiving entity carry out activities that are subject to VAT and/or give them the right to set off, while the sector to be transferred is indeed functionally autonomous.
All other taxes, stamp duty, other duties provided in favor of the Greek State and thirdparty charges are exempted, with no differentiation between the three tax incentive laws. Indicatively the above includes taxes, duties and charges for: any kind of transfer of assets (e.g. movables), the registration of the real estate in the Cadastre, GEMI registrations etc.

With regards to Capital Concentration Tax (CCT), Laws 1297/1972, 2166/1993 and 4172/2013 do not grant an explicit exemption from CCT. However, by virtue of Circular 1388/2001, particularities regarding the calculation of CCT must be taken into account.

Finally it must be noted that the spin off as well as any other corporate transformation must always be supported by a solid business rational in order to mitigate risks associated with general anti-avoidance rule (art. 38 of L. 4174/2013).

Is there an indication of the most common strength of each tax incentive law?

While this depends on the business rational and the particular circumstances of each case/ entity and whether the necessary requirements are met, the following may serve as the main strength (in brief ) of each tax incentive law:

“Amendments regarding corporate transformations, including new provisions governing spinoffs are expected to be introduced based on the draft law «Corporate Transformations». Therefore an updated version of the present article will be published following the adoption of the new law”.

Disclaimer

«The present article was drafted on September 2018 and is included in the paper version of “Greek Law Digest 3rd Edition”. Online publication will be updated following the implementation of L. 4548/2018 as of 01.01.2019 and new L. 4601/2019 on Corporate Transformations»