4.3.4.1 Introduction

Cross-border restructurings typically result in taxation of unrealized capital gains.1 The realization – for tax purposes – of a capital gain, while there is no cash realization yet, can lead to difficulties for an entity. If a shareholder exchanges their shares in company A for new shares in a foreign company (which acquires the shares in company A), they realize a capital gain on their shares. As the shareholder only received shares in the foreign company in return, they may not have the liquidity available to pay the tax that is due on the realization of the capital gain. In case of a restructuring within national borders there is usually a possibility for a tax deferral. Under such a tax deferral the reorganization is not treated as a taxable event. Therefore, taxation over the accrued gain is deferred until it is actually realized.2 The rationale for providing such a tax deferral for intra-group reorganizations is the fact that the economic ownership of the assets held by the companies within the group is not affected by the reorganization. In this manner the efficiency of the business community can be safeguarded. Companies can continuously adapt to a change in circumstances.3