Institution “A” currently applies the exemption provided under Article 471 CRR, whereby it does not deduct from its own funds a qualifying shareholding held in Insurance Undertaking “C” for an amount not exceeding the amount held in CET1 instruments issued by that Insurance Undertaking as of December 31, 2012. 

Institution “B” is in the process of merging with Institution “A” through a merger by absorption, as a result of which Institution “A” will be absorbed by Institution “B”. Upon completion of the merger, and by virtue of universal succession, Institution “B” will acquire all assets, liabilities, rights, obligations and legal relationships of Institution “A”, including the direct shareholding in Insurance Undertaking “C”.

Following the completion of the merger, Institution “B” envisages to transfer the direct shareholding in Insurance Undertaking “C” to Institution “D”, an institution fully owned by Institution “B” and therefore falling within the consolidation perimeter of Institution “B”.

In light of the above, the question arises whether Article 471 CRR exemption:

• transfers together with the direct shareholding in Insurance Undertaking “C” by virtue of a universal succession event such as the one resulting from the merger (Question 1); and
• continues to be available for Institution “B” also at consolidated level (should all conditions under Article 49(1) CRR be satisfied) when the direct shareholding in Insurance Undertaking “C” is subsequently transferred to a banking subsidiary within the same consolidation perimeter (Question 2).

In this regard, it appears that if application of Article 471 exemption were to be denied in any of the two scenarios above, the resulting outcome could not be reconciled with the substance-over-form principle alleging the neutrality from a regulatory perspective of substantially equivalent corporate transactions the structure of which differs only for merely formal aspects.

In particular, the banking group (of which Institution “B” is the parent) could have achieved the same ultimate economic and organizational result through an alternative corporate process as a result of which the continued application of Article 471 CRR exemption would not be disputable. 

It would appear disproportionate, and potentially contrarian to the purpose of Article 471 CRR, for the group to be penalized – as a result of the impossibility for the latter to apply such exemption - solely as a consequence of having opted to pursue a corporate reorganization structure that is functionally and substantially equivalent to the alternative one (which would have otherwise ensured continued application of Article 471 CRR exemption), and that does not alter the substantive position of Insurance Undertaking “C” or its relationship to the group. In both scenarios, the shareholding in Insurance Undertaking “C” remains within the consolidation perimeter, and the rationale underpinning the exemption applies with equal force.