Merger premium: definition, taxation and vigilance

Quick answer. The merger premium (prime de fusion) is the difference between the net value of the assets contributed to the absorbing company and the nominal value of the capital it issues to remunerate them. It is credited to account 1042 "Primes de fusion". The merger bonus and the merger mali, by contrast, only arise where the absorbing company already held shares in the absorbed company.

The merger premium is first and foremost an accounting and corporate concept. The French tax authorities define it as the difference between the real net value of the contributions made to the absorbing company and the nominal value of the capital created (BOFiP, BOI-RPPM-RCM-10-20-30-30, paragraph 20).

The formula fits on one line:

merger premium = net value of the contributions - nominal value of the capital created

Only two parameters drive the result: the value retained for the contributions, which is not freely negotiable (see below), and the nominal amount of capital issued, which follows from the exchange ratio set in the merger agreement.

Worked example#

An absorbed company contributes net assets valued at EUR 1,200,000. The absorbing company increases its capital by EUR 400,000 to issue the corresponding shares to the shareholders of the absorbed company.

• net value of the contributions: EUR 1,200,000
• capital increase, at nominal value: EUR 400,000
• merger premium: EUR 800,000

The arithmetic is simple. Justifying the EUR 1,200,000 is not. It is the contribution value, not the premium, that carries most of the risk in the file.

To complete, see also Taxation and business taxes, Business tax audit and Tax verification.

The premium sits in equity, in account 104 "Primes liées au capital", which records share premiums, merger premiums, contribution premiums and bond conversion premiums (French GAAP, ANC regulation 2014-03). That account breaks down as follows:

The entry in the absorbing company#

The capital increase that remunerates the contributions is a three-line entry:

• debit account 4561 "Associés - Comptes d'apport en société" for the net value of the contributions, EUR 1,200,000;
• credit account 1013 "Capital souscrit - appelé, versé" for the nominal capital created only, EUR 400,000;
• credit account 1042 "Primes de fusion" for the difference, EUR 800,000.

Account 4561 is then cleared by recognising, line by line, the assets and liabilities transferred by the absorbed company. The premium is therefore not a balancing figure added at the end: it is the arithmetic consequence of two decisions taken upstream, the contribution value and the exchange ratio.

This is the point most often overlooked, and it is the one that determines the amount of the premium. The contribution value is not a matter of negotiation: French GAAP imposes it, based on the direction of the transaction and on whether the entities are under common control.

French GAAP first defines the two possible directions. A merger is forward (à l'endroit) where the main shareholder of the absorbing company keeps its control over it, while the main shareholder of the absorbed company simultaneously loses control of the latter (art. 742-1). It is reverse (à l'envers) in the opposite case, where the main shareholder of the absorbed company takes control of the absorbing company (art. 742-2).

Article 743-1 then crosses that criterion with control:

The consequence is direct: two economically identical mergers can produce very different premiums. An internal reorganisation between companies of the same group is under common control, hence at book value, with a premium that is often modest. The absorption of a company acquired from third parties is a forward transaction under separate control, hence at fair value, with a premium that captures unrealised gains.

In that second case, French GAAP requires the merger agreement to state both the book values and the fair values of the assets and liabilities. That is a document to prepare before signing, not afterwards.

The mali is often presented as the other side of the premium. That is inaccurate. Article 745-1 sets a single condition: a bonus or a mali can only arise where the absorbing company acquired shares in the absorbed company before the date of the merger, on cancellation of those shares.

In other words, in a merger between two companies that do not hold each other, there is a merger premium and there is neither bonus nor mali. These are not two readings of the same difference, they are two distinct differences, which may coexist where the absorbing company held only part of the capital of the absorbed company.

The bonus is the positive difference between the net assets received up to the shareholding held and the book value of that shareholding. It is recognised in financial result up to the share of earnings accumulated since acquisition and not distributed, and in equity for the remaining amount (art. 745-2).

The mali is that same difference when it is negative (art. 745-3). It splits into two components (art. 745-4):

• the technical mali as such, corresponding, up to the shareholding previously held, to the unrealised gains on the assets of the absorbed company, whether recognised or not, less the liabilities not recognised in the absence of an accounting obligation;
• beyond the technical mali, any impairment or additional impairment of the shareholding, which must be recognised in the financial result of the year in which the merger takes place.

The technical mali is therefore not an expense of the year: it is allocated to the contributed assets at the date of the transaction (art. 745-5). Where it exceeds the sum of the unrealised gains on identified assets excluding goodwill, it is allocated to those assets and the residual amount to goodwill. Where it is lower, it is allocated in proportion to those unrealised gains.

Legally, yes. The premium sits in equity and is not a restricted reserve: the general meeting may decide to distribute amounts drawn from the reserves at its disposal, the decision having to state expressly the reserve accounts from which the amounts are drawn (French Commercial Code, art. L232-11). The same article sets the limit: no distribution may be made where equity would, as a result, fall below capital plus the reserves that the law or the articles of association do not allow to be distributed.

For tax purposes the answer is less comfortable, and this is where many files go wrong. The reflex is to reason by analogy with the share premium, whose repayment escapes the regime of distributed income under article 112, 1° of the French tax code. The BOFiP takes the opposite view for the merger premium.

Paragraph 110 of BOI-RPPM-RCM-10-20-30-30 states that repayments of amounts which were incorporated into capital or booked to the "prime de fusion" line on a merger carried out after 1 January 1949 are treated as distributions of income.

The exception is in paragraph 120: the repayment recovers the nature of a repayment of contributions to the extent that the assets contributed were themselves treated as contributions in the absorbed company. It is therefore the origin of the assets within the absorbed company that has to be traceable, and that traceability is prepared at the time of the merger, not on the day the distribution is decided.

Hayot Expertise advice: where a distribution is contemplated after the merger, set out in the merger agreement itself the split of the net assets contributed between what constituted contributions in the absorbed company and what came from its reserves or its profits. Rebuilding that information three years later costs far more than writing it down on the day.

• treating the premium as an ordinary reserve and distributing it without reading paragraph 110 of the BOFiP;
• setting a contribution value without having qualified the direction of the transaction or the control (art. 743-1);
• referring to a bonus or a mali where the absorbing company held no shares in the absorbed company;
• expensing the technical mali instead of allocating it to the contributed assets (art. 745-5);
• exceeding the 10% cash balance (soulte) and losing the special regime without having anticipated it;
• securing the legal deed without finalising the tax analysis.

For a merger premium to hold up, it must be possible to retrace the path to the figure recorded in equity:

• the merger agreement and its annexes, with the exchange ratio retained;
• the valuation of the contributions and the method behind it;
• the qualification of the transaction (forward or reverse, common or separate control) justifying the contribution value;
• for a transaction at fair value, both the book values and the fair values of assets and liabilities in the agreement;
• the merger auditor's report where one is required;
• the resolutions of the competent bodies;
• the opening entries and the detailed computation of the premium;
• the split of the net assets contributed between original contributions and reserves, with a view to a future distribution.

Quick link: Structuring your merger with legal and tax support

The merger premium is not a decorative equity line. Its amount is driven by a precise rule, article 743-1 of French GAAP. Its accounting runs through a precise account, 1042. And its distribution follows a counter-intuitive tax rule, paragraph 110 of BOI-RPPM-RCM-10-20-30-30. All three are prepared at the time of the merger, not on the day the question arises.

Under French tax law, mergers can qualify for either:

Standard regime: the absorbed company's assets are valued at fair value, generating taxation of unrealised gains at the entity level. The merger premium may be larger but the tax cost is immediate.

Special merger regime (régime de faveur, article 210 A CGI): article 210 A states that "the net capital gains and the profits generated on all the assets contributed as a result of a merger are not subject to corporation tax". Those gains are rolled over to the absorbing entity instead of being taxed immediately. Article 210-0 A defines the transactions that qualify, and in particular allows a cash balance (soulte) "not exceeding 10% of the nominal value of those securities". Above that threshold, the transaction falls outside the special regime.

Key implication: the accounting contribution value and the tax value of the contributions do not necessarily coincide. The premium recorded in account 1042 follows the French GAAP rule of article 743-1, while the tax analysis follows articles 210-0 A and 210 A. The two must be reconciled explicitly in the documentation.

For US and international professionals: the French prime de fusion is conceptually similar to the excess consideration over book value in a US merger, but the treatment differs:

• Under US GAAP, the premium is typically recorded as goodwill or additional paid-in capital
• Under French GAAP (PCG), it has a specific equity line (prime de fusion) with regulatory constraints on its distribution
• Any cross-border merger involving a French entity will trigger additional analysis under the EU Merger Directive and potentially create reporting obligations in the parent's jurisdiction

(Official sources: French GAAP, ANC regulation 2014-03, articles 742-1, 742-2, 743-1 and 745-1 to 745-5; BOFiP, BOI-RPPM-RCM-10-20-30-30; French tax code, articles 210-0 A, 210 A and 112; French Commercial Code, articles L232-11 and L236-1)

This English section is written for international readers who need to apply the French guidance to a real management decision. The key point for French merger premium is not to memorise every technical rule, but to connect the rule to documents, deadlines, cash impact and governance. For groups preparing mergers, restructurings or post-acquisition simplification, the right approach is to identify the decision to be made, collect reliable evidence, and only then choose the accounting, tax, payroll or legal treatment.

The practical decision is how the premium should be calculated, presented and reconciled with legal and tax documentation. That decision should be documented before the year-end close, financing discussion, payroll run, transaction signing or tax filing concerned by the topic. When the matter is material, the file should include who decided, which assumptions were used, and which professional advice was obtained.

Evidence to keep#

• valuation report;
• exchange ratio;
• merger agreement;
• opening balance sheet;
• tax regime memo;

The merger premium is not only an accounting label; it must match the valuation, exchange ratio and legal merger file. A clean file also helps the company answer questions from banks, investors, auditors, tax authorities, employees or buyers. It is usually cheaper to prepare that evidence during the process than to reconstruct it after a dispute, audit or urgent financing request.