Cross-border mergers and acquisitions in the EU

Mergers and acquisitions (M&A) usually form an important part of company’s strategy. Integration within the EU has led to a situation where it has become common for companies to participate in cross-border M&A in the internal market. The importance of M&A can especially be seen from the very high ratio of cross-border M&A values to foreign direct investment globally. The amount of mergers in the Baltics (Estonia, Latvia and Lithuania) has increased due to the European legislation.

European legislation

According to European legislation merger means an operation in which one or more companies, on being dissolved (without going into liquidation), transfer their assets and liabilities to another company in exchange for the issue to the company´s shares of securities representing the capital of that other company.

Mostly mergers and acquisitions in the EU are regulated by competition laws, because M&A result in a smaller number of parties competing in the market thus giving them more economic power. Therefore regulating M&A have been important to ensure fair competition in the internal market. Most important legislation in the EU related to cross-border mergers and acquisitions are Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings (the EC Merger Regulation known as ECMR) and Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on cross-border mergers of limited liability companies.

The directive regulating taxation related to M&A in the EU is Council Directive 2009/133/EC on the common system of taxation applicable to mergers, divisions, partial divisions, transfers of assets and exchanges of shares concerning companies of different Member States and to the transfer of the registered office of an SE or SCE between Member States. The aim of the European legislation is to ensure effective functioning of the European internal market.

Taxation of M&A in the EU

As the main principle, mergers or acquisitions shall not give rise to taxation of capital gains in the member states. This concerns capital gains that are calculated by reference to the difference between the real values of the assets and liabilities transferred.

According to EU regulation the member states have to ensure that in a situation where a transferring company holds provisions or reserves that are partly or wholly exempt from tax, and those provisions or reserves are not derived from foreign permanent establishments, that such provisions or reserves may be carried to the receiving company with the same tax exemption. It is required though that both companies’ permanent establishments are located in the EU (different member states). The receiving company also acquires all the other rights and obligations of the transferring company.

Regarding taxation in M&A company´s should note that there are special provisions applicable regarding transfer of permanent establishment, transparent entities and transfer of registered offices.

Latvian implementation

In Latvia cross-border mergers are mainly regulated in the Latvian Commercial law which has been amended in accordance with the regulatory enactments of the EU. The section in the law concerning cross-border mergers also regulates division of companies and restructuring of companies. Latvian Commercial law has amendments regarding the increase of the equity capital of the acquiring company as a result of the merger or division process and reorganization of the company as well. Latvian M&A legislation is applied to cross-border mergers and acquisitions in accordance with the EU law.

To find out more about M&A and taxation in Latvia or the Baltics, please contact our English speaking lawyers at

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