Commission Notice on calculation of turnover under Council Regulation (EEC) No 4064/89 on the control of concentrations between undertakings
2. 3. 98 EN Official Journal of the European Communities C 66/25 COMMISSION NOTICE on calculation of turnover under Council Regulation (EEC) No 4064/89 on the control of concentrations between undertakings (98/C 66/04) (Text with EEA relevance) I. ‘ACCOUNTING’ DETERMINATION OF TURNOVER 1. Turnover as a reflection of business activity 1. 1. The concept of turnover 1. 2. Ordinary activities 2. ‘Net’ turnover 2. 1. The deduction of rebates and taxes 2. 2. The deduction of ‘internal’ turnover 3. Adjustment of turnover calculation rules for the different types of operations 3. 1. The general rule 3. 2. Acquisition of parts of companies 3. 3. Staggered operations 3. 4. Turnover of groups 3. 5. Turnover of State-owned companies II. GEOGRAPHICAL ALLOCATION OF TURNOVER 1. General rule 2. Conversion of turnover into ecu III. CREDIT AND OTHER FINANCIAL INSTITUTIONS AND INSURANCE UNDERTAKINGS 1. Definitions 2. Calculation of turnover 1. 2. The purpose of this Notice is to expand upon the text of Articles 1 and 5 of Council Regulation (EEC) No 4064/89 (1) as last amended by Council (EC) No 1310/97 (2) Regulation (hereinafter referred to as ‘the Merger Regulation’) and in so doing to elucidate certain procedural and practical questions which have caused doubt or difficulty. This Notice is based on the experience gained by the Commission in applying the Merger Regulation to date. The principles it sets out will be followed and the Commission’s practice in individual cases. further developed by This Notice replaces the Notice on calculation of turnover (3). 3. The Merger Regulation has a two fold test for Commission jurisdiction. One test is that the transaction must be a concentration within the meaning of Article 3 (4). The second comprises the turnover thresholds contained in Article 1 and designed to identify those transactions which have an impact upon the Community and can be (1) OJ L 395, 30. 12. 1989, p. 1; corrected version OJ L 257, 21. 9. 1990, p. 13. (2) OJ L 180, 9. 7. 1997, p. 1. (3) OJ C 385, 31. 12. 1994, p. 21. (4) See the Notice on the concept of concentration. C 66/26 EN Official Journal of the European Communities 2. 3. 98 deemed to be of ‘Community interest’. Turnover is used as a proxy for the economic resources being combined in a concentration, and is allocated geographically in order to reflect the geographic distribution of those resources. in order the worldwide to establish whether Two sets of thresholds are set out in Article 1, in paragraph 2 and paragraph 3 respectively. Article 1(2) sets out the thresholds which must first be checked the transaction has a Community dimension. In this is respect, intended to measure the overall dimension of the undertakings concerned; the Community turnover the threshold level of concentration activities in the Community; and the two-thirds rule aims to exclude purely domestic transactions from Community jurisdiction. to determine whether involves a minimum threshold turnover seek ‘multiple notifications’). For Article 1(3) must only be applied in the event that the thresholds set out in Article 1(2) are not met. This second set of thresholds is designed to tackle those transactions which fall short of achieving Community dimension under Article 1(2), but would need to be notified under national competition rules in at least three Member States this (so called purpose, Article 1(3) provides for lower turnover thresholds, both worldwide and Community-wide, to be achieved by the undertakings concerned. A concentration has a Community dimension if these lower thresholds are fulfilled and the undertakings individually a concerned achieve minimum least three Member States. Article 1(3) also contains a two-thirds rule similar to that of Article 1(2), which domestic identify transactions. level of activities jointly and purely in at aims to 4. The thresholds as such are designed to establish jurisdiction and not to assess the market position of the parties to the concentration nor the impact of the operation. In so doing they include turnover derived from, and thus the resources devoted to, all areas of activity of the parties, and not just those directly involved in the concentration. Article 1 of the Merger Regulation sets out the thresholds to be used to determine a concentration with a ‘Community dimension’ while Article 5 explains how turnover should be calculated. 5. The fact that the thresholds of Article 1 of the Merger Regulation are purely quantitative, since is they are only based on turnover calculation instead of market share or other criteria, shows that their aim to provide a simple and objective mechanism that can be easily handled by the in order to companies determine if their transaction has a Community dimension and is therefore notifiable. in a merger involved The decisive issue for Article 1 of the Merger Regulation is to measure the economic strength of the undertakings concerned as reflected in their respective turnover figures, regardless of the sector where such turnover was achieved and of whether those sectors will be at all affected by the transaction in question. The Merger Regulation has thereby given priority to the determination of the overall economic and financial resources that are being combined through the merger in order to decide whether is of Community interest. latter the the undertakings In this context, it is clear that turnover should reflect as accurately as possible the economic strength of in a transaction. This is the purpose of the set of rules contained in Article 5 of the Merger Regulation which are designed to ensure that the resulting figures are a true representation of economic reality. involved The Commission’s interpretation of Articles 1 and 5 with respect to calculation of turnover is without prejudice to the interpretation which may be given by the Court of Justice or the Court of First Instance of the European Communities. I. ‘ACCOUNTING’ CALCULATION OF TURNOVER 1. Turnover as a reflection of activity 1. 1. the concept of turnover The concept of turnover as used in Article 5 of the Merger Regulation refers explicitly to ‘the amounts derived from the sale of products and the provision of the undertaking’s activity, is thus the essential criterion for calculating turnover, whether for products or services’. Sale, as a reflection of 6. 7. 8. 9. 2. 3. 98 EN Official Journal of the European Communities C 66/27 the provision of services. ‘Amounts derived from sale’ generally appear in company accounts under the heading ‘sales’. the case of products, In determined without identifying each commercial act transfer of ownership. difficulty, turnover can be namely by involving a In the case of services, the factors to be taken into account in calculating turnover are much more complex, since the commercial act involves a transfer of ‘value’. 10. 11. 12. Generally speaking, the method of calculating turnover in the case of services does not differ from that used in the case of products: the Commission takes into consideration the total amount of sales. Where the service provided is sold directly by the provider to the customer, the turnover of the undertaking concerned consists of the total amount of sales for the provision of services in the last financial year. 13. Because of the complexity of the service sector, this general principle may have to be adapted to the specific conditions of the service provided. Thus, in certain sectors of activity (such as tourism and advertising), the service may be sold through the intermediary of other suppliers. Because of the diversity of such sectors, many different situations may arise. For example, the turnover of a service undertaking which acts as an intermediary may consist solely of the amount of commissions which it receives. 14. Similarly, in a number of areas such as credit, financial services and insurance, technical problems in calculating turnover arise which will be dealt with in Section III. For example, price (5). the consumption of a product allows the manufacturer to sell at a higher price than that actually paid by consumers. towards aid In its Decision 17. With regard to services, the Commission looks at the undertaking’s ordinary activities involved in establishing the resources required for providing the the service. case (6), Accor/Wagons-Lits the Commission decided to take into account the item ‘other operating proceeds’ in Wagons-Lits’s loss account. The Commission profit and considered that the components of this item which included certain income from its car-hire activities were derived from the sale of products and the provision of services by Wagons-Lits and were part of its ordinary activities. included in 2. ‘Net’ turnover 18. The turnover to be taken into account is ‘net’ turnover, after deduction of a number of components specified in the Regulation. The Commission’s aim is to adjust turnover in such a way as to enable it to decide on the real economic weight of the undertaking. 2. 1. The deduction of rebates and taxes 19. Article 5(1) provides for the ‘deduction of sales rebates and of value added tax and other taxes directly related to turnover’. The deductions thus relate to business components (sales rebates) and tax components (value added tax and other taxes directly related to turnover). 1. 2. Ordinary activities 15. Article 5(1) states that the amounts to be included in the calculation of turnover must correspond to the the undertakings concerned. ‘ordinary activities’ of 20. ‘Sales rebates’ should be taken to mean all rebates or discounts which are granted by the undertakings during their customers and which have a direct influence on the amounts of sales. their business negotiations with 16. With regard to aid granted to undertakings by public bodies, any aid relating to one of the ordinary activities of an undertaking concerned is liable to be included in the calculation of turnover if the undertaking is itself the recipient of the aid and if the aid is directly linked to the sale of products and the provision of services by the in the undertaking and is therefore reflected (5) See Case IV/M. 156 — Cereol/Continentale Italiana of 27 November 1991. In this case, the Commission excluded Community aid from the calculation of turnover because the aid was not intended to support the sale of products manufactured by one of the undertakings involved in the merger, but the producers of the raw materials (grain) used by the undertaking, which specialized in the crushing of grain. (6) Case IV/M. 126 — Accor/Wagons-Lits, of 28 April 1992. C 66/28 EN Official Journal of the European Communities 2. 3. 98 21. As regards the deduction of taxes, the Merger Regulation refers to VAT and ‘other taxes directly related to turnover’. As far as VAT is concerned, its deduction does not in general pose any problem. The concept of ‘taxes directly related to turnover’ is a clear reference to indirect taxation since it is directly linked to turnover, such as, for example, taxes on alcoholic beverages. 2. 2. The deduction of ‘internal’ turnover 22. The first subparagraph of Article 5(1) states that ‘the aggregate turnover of an undertaking concerned shall not include the sale of products or the provision of services between any of the undertakings referred to in paragraph 4’, i. e. those which have links with the undertaking concerned (essentially parent companies or subsidiaries). 23. The aim is to exclude the proceeds of business dealings within a group so as to take account of the real economic weight of each entity. Thus, the into account by the Merger ‘amounts’ taken Regulation reflect only the transactions which take place between the group of undertakings on the one hand and third parties on the other. 3. Adjustment of turnover calculation rules for the different types of operations 3. 1. The general rule 24. According turnover comprises to Article 5(1) of the Merger Regulation, aggregate the amounts derived by the undertakings concerned in the preceding financial year from the sale of products and the provision of services. The basic principle for each undertaking concerned the turnover to be taken into account is the turnover of the closest financial year to the date of the transaction. thus that is are country observed, audited or other definitive accounts. However, in cases where major differences between the Community’s accounting standards and those of a non-member the Commission may consider it necessary to restate these accounts in accordance with Community standards in respect of turnover. The Commission is, in any case, reluctant to rely on management or any other form of provisional accounts in any but exceptional circumstances (see the next paragraph). Where a concentration takes place within the first months of the year and audited accounts are not yet available for the most recent financial year, the figures to be taken into account are those relating to the previous year. Where there is a major divergence between the two sets of accounts, and in particular, when the final draft figures for the most recent years are available, the Commission into may decide to take those draft figures account. 27. Notwithstanding paragraph 26, an adjustment must always be made to account for acquisitions or divestments subsequent to the date of the audited accounts. This is necessary if the true resources being concentrated are to be identified. Thus if a company disposes of part of its business at any time before the signature of the final agreement or the announcement of the public bid or the acquisition of a controlling interest bringing about a concentration, or where such a divestment or closure is a pre-condition for the operation (7) the part of the turnover to be attributed to that part of the business must be subtracted from the turnover of the notifying party as shown in its last audited accounts. Conversely, the turnover to be attributed to assets of which control has been acquired subsequent to the preparation of the most recent audited accounts must be added to a company’s turnover for notification purposes. 25. This provision shows that since there are usually no audited accounts of the year ending the day before the transaction, the closest representation of a whole year of activity of the company in question is the one given by the turnover figures of the most recent financial year. 28. Other factors that may affect turnover on a temporary basis such as a decrease in orders for the product or a slow-down in the production process within the period prior to the transaction will be ignored for the purposes of calculating turnover. No adjustment to the definitive accounts will be made to incorporate them. 26. The Commission seeks to base itself upon the most accurate and reliable figures available. As a general rule therefore, the Commission will refer to (7) See Judgment of the Court of First Instance in Case T-3/93, Air France v Commission, [1994] ECR II-21. 2. 3. 98 EN Official Journal of the European Communities C 66/29 29. Regarding the geographical allocation of turnover, since audited accounts often do not provide a geographical breakdown of the sort required by the Merger Regulation, the Commission will rely on the best figures available provided by the companies in accordance with the rule laid down in Article 5(1) of the Merger Regulation (see Section II. 1). 34. 3. 2. Acquisitions of parts of companies 30. Article 5(2) of the Merger Regulation provides that ‘where the concentration consists in the acquisition of parts, whether or not constituted as legal entities, of one or more undertakings, only the turnover relating to the parts which are the subject of the transaction shall be taken into account with regard to the seller or sellers’. as one and the same concentration arising on the date of the last transaction’. In practical terms, this provision means that if company A buys a subsidiary of company B that represents 50 % of the overall activity of B and one year later it acquires the other subsidiary (the remaining 50 % of B), both transactions will be taken as one. Assuming the subsidiaries attained a turnover in the Community of only ECU 200 million, the first transaction would not be notifiable unless the operation fulfilled the conditions set out in Article 1(3). However, since the second transaction takes place within the two-year period, both have to be notified as a single transaction when the second occurs. that each of included 31. This provision states that when the acquirer does not purchase an entire group, but only one, or part, of its businesses, whether or not constituted as a subsidiary, only the turnover of the part in the turnover acquired should be calculation. In fact, although in legal terms the seller as a whole (with all its subsidiaries) is an essential party the sale-purchase agreement cannot be concluded without him, he plays no role once the agreement has been implemented. The possible impact of the transaction on the market will depend only on the combination of financial resources that are the subject of a property transfer with those of the acquirer and not on the remaining business of the seller who remains independent. the economic and transaction, since the to 3. 3. Staggered operations 32. Sometimes certain successive transactions are only individual steps within a wider strategy between the same parties. Considering each transaction alone, even if only for determining jurisdiction, would imply ignoring economic reality. At the same time, whereas some of these staggered operations may be designed in this fashion because they will better meet the needs of the parties, others could be structured like this in order to circumvent the Merger the application of Regulation. 33. The Merger Regulation has foreseen these scenarios in Article 5(2), second subparagraph, which provides that ‘two or more transactions within the meaning of the first subparagraph which take place within a two-year period between the same persons or undertakings shall be treated 35. The importance of the provision is that previous transactions (within two years) become notifiable with the the most recent thresholds are cumulatively met. transaction once 3. 4. Turnover of groups 36. When an undertaking concerned in a concentration within the meaning of Article 1 of the Merger Regulation (8) belongs to a group, the turnover of the group as a whole is to be taken into account in order to determine whether the thresholds are met. The aim is again to capture the total volume of the economic resources that are being combined through the operation. 37. The Merger Regulation does not define the concept of group in abstract terms but focuses on whether the companies have the right to manage the undertaking’s affairs as the yardstick to determine which of the companies that have some direct or indirect links with an undertaking concerned should be regarded as part of its group. 38. Article 5(4) of the Merger Regulation provides the following: ‘Without prejudice to paragraph 2 [acquisitions of parts], the aggregate turnover of an undertaking concerned within the meaning of Article 1(2) and (3) shall be calculated by adding together the respective turnovers of the following: (8) See the Commission Notice on the concept of undertakings concerned. C 66/30 EN Official Journal of the European Communities 2. 3. 98 (a) the undertaking concerned; a: The undertaking concerned (b) those undertakings in which the undertaking concerned directly or indirectly: b: Its subsidiaries and their own subsidiaries (b1 and b2) c: Its parent companies and their own parent companies — owns more than half the capital or business (c1) assets, or — has the power to exercise more than half the voting rights, or — has the power to appoint more than half the members of the supervisory board, the administrative board or bodies legally representing the undertakings, or — has the right to manage the undertaking’s affairs; (c) those undertakings which have an undertaking concerned the rights or powers listed in (b); in (d) those undertakings in which an undertaking as referred to in (c) has the rights or powers listed in (b); (e) those undertakings in which two or more undertakings as referred to in (a) to (d) jointly have the rights or powers listed in (b). ’ This means that the turnover of the company directly involved in the transaction (point (a)) should include its subsidiaries (point (b)), its parent companies (point (c)), the other subsidiaries of its parent companies (point (d)) and any other undertaking jointly controlled by two or more of the companies belonging to the group (point (e)). A graphic example is as follows: The undertaking concerned and its group: c1 100 % c c 50 % 50 % a 100 % d 51 % 51 % 100 % b b 100 % 100 % 50 % b1 b2 b e 50 % d: Other subsidiaries of the parent companies of the undertaking concerned e: Companies jointly controlled by two (or more) companies of the group Note: these letters correspond to the relevant points of Article 5(4). Several remarks can be made from this chart: 1. As long as the test of control of point (b) is fulfilled, the whole turnover of the subsidiary in question will be into account regardless of the actual shareholding of the controlling company. In the example, the whole turnover of the three subsidiaries (called b) of the undertaking (a) will be included. concerned taken 2. When any of the companies identified as belonging to the group also controls others, these should also be incorporated into the calculation. the subsidiaries of a (called b) has in turn its own subsidiaries b1 and b2. the example, one of In 3. When two or more companies jointly control the undertaking concerned (a) in the sense that the agreement of each and all of them is needed in order to manage the undertaking affairs, the turnover of all of them should be included (9). In the example, the two parent companies (c) of the undertaking concerned (a) would be taken into account as well as their own parent companies (c1 in the example). Although the Merger Regulation does not explicitly mention this rule for those cases where the undertaking concerned is in fact a joint venture, it is inferred from the text of Article 5(4)(c), which uses the plural when referring to the parent companies. This interpretation has been consistently applied by the Commission. 4. Any intra-group sale should be subtracted from the turnover of the group (see paragraph 22). (9) See Commission Notice on the concept of undertakings concerned (paragraphs 26-29). 2. 3. 98 EN Official Journal of the European Communities C 66/31 39. The Merger Regulation also deals with the specific scenario two or more that arises when undertakings concerned in a transaction exercise joint control of another company. Pursuant to point (a) of Article 5(5), the turnover resulting from the sale of products or the provision of services between the joint venture and each of the undertakings concerned or any other company connected with any one of them in the sense of Article 5(4) should be excluded. The purpose of such a rule is to avoid double counting. With regard to the turnover of the joint venture generated from activities with third parties, point (b) of Article 5(5) provides that it should be apportioned equally amongst the undertakings concerned, to reflect the joint control (10). 40. Following the principle of point (b) of Article 5(5) by analogy, in the case of joint ventures between undertakings concerned and third parties, the Commission’s practice has been to allocate to each of the undertakings concerned the turnover shared equally by all the controlling companies in the joint venture. In all these cases, however, joint control has to be demonstrated. The practice shows that it is impossible to cover in the present Notice the whole range of scenarios which could arise in respect of turnover calculation of joint venture companies or joint control cases. Whenever ambiguities arise, an assessment should always give priority to the general principles of avoiding double counting and of reflecting as accurately as possible the economic strength of the undertakings involved in the transaction (11). 41. It should be noted that Article 5(4) refers only to the groups that already exist at the time of the transaction, the undertakings concerned in an operation, and not to the new structures created as a result of the concentration. For example, if companies A and B, the group of each of i. e. (10) For example, company A and company B set up a joint venture C. These two parent companies exercise at the same time joint control of company D, although A has 60 % and B 40 % of the capital. When calculating the turnover of A and B at the time they set up the new joint venture C, the turnover of D with third parties is attributed in equal parts to A and B. (11) See for example Case IV/M. 806 — BA/TAT, of 26 August 1996. together with their respective subsidiaries, are going to merge, it is A and B, and not the new entity, that qualify as undertakings concerned, which implies that the turnover of each of the two groups should be calculated independently. 42. Since the aim of this provision is simply to identify the companies belonging to the existing groups for the purposes of turnover calculation, the test of having the right to manage the undertaking’s affairs in Article 5(4) (12) is somewhat different from the test of control set out in Article 3(3), which refers to the acquisition of control carried out by means of the transaction subject to examination. Whereas the former is simpler and easier to prove on the basis of factual evidence, the latter is more demanding because in the absence of an acquisition of control no concentration arises. 3. 5. Turnover of State-owned companies read turnover, in order should be 43. While Article 5(4) sets out the method for determining the economic grouping to which an undertaking concerned belongs for the purpose of calculating in it conjunction with recital 12 to Regulation (EEC) No 4064/89 in respect of State-owned enterprises. This recital states to avoid that discrimination between the public and private sector, account should be taken ‘of undertakings making up an economic unit with an independent power of decision, irrespective of the way in which their capital rules of is held or of administrative supervision applicable to them’. Thus the mere fact that two companies are both State-owned should not automatically lead to the conclusion that they are part of a group for the purposes of Article 5. Rather, it should be considered whether there are grounds to consider that each company constitutes an independent economic unit. the to any coordination with 44. Thus where a State-owned company is not part of an overall industrial holding company and is not subject other State-controlled holdings, it should be treated as an independent group for the purposes of Article 5, and the turnover of other companies owned by that State should not be taken into account. Where, however, a Member State’s interests are grouped together in holding companies, or are (12) See for example Case IV/M. 126 — Accor/Wagons-Lits, of 28 April 1992, and Case IV/M. 940 — UBS/Mister Minit, of 9 July 1997. C 66/32 EN Official Journal of the European Communities 2. 3. 98 managed together, or where for other reasons it is clear that State-owned companies form part of an ‘economic unit with an independent power of decision’, then the turnover of those businesses should be considered part of the group of the undertaking concerned’s the purposes of Article 5. for may well be driven across Europe by its purchaser but it was purchased at only one place — Paris, Berlin or Madrid say. This is also true in the case of those services where it is possible to separate the purchase of a service from its delivery. Thus in the case of package holidays, competition for the sale of holidays through travel agents takes place locally, as with retail shopping, even though the service may be provided in a number of distant locations. This turnover is, however, earned locally and not at the site of an eventual holiday. II. GEOGRAPHICAL ALLOCATION OF TURNOVER 1. General rule 45. The thresholds other than those set by Article 1(2)(a) and Article 1(3)(a) select cases which have sufficient turnover within the Community in order to be of Community interest and which are primarily cross-border in nature. They require turnover to be allocated geographically to achieve this. The second subparagraph of Article 5(1) provides is determined by the location of the customer at the time of the transaction: location of turnover that the 47. This applies even where a multinational corporation has a Community buying strategy and sources all its requirements for a good or service from one location. The fact that the components are subsequently used in ten different plants in a variety of Member States does not alter the fact that the transaction with a company outside the group occurred in only one country. The subsequent distribution to other sites is purely an internal question for the company concerned. 48. Certain sectors do, however, pose very particular the geographical regard problems with allocation of turnover (see Section III). to ‘Turnover, in the Community or in a Member State, shall comprise products sold and services provided to undertakings or consumers, in the Community or in that Member State as the case may be. ’ 2. Conversion of turnover into ecu 46. The reference to ‘products sold’ and ‘services provided’ is not intended to discriminate between goods and services by focusing on where the sale takes place in the case of goods but the place where a service is provided (which might be different from where the service was sold) in the case of services. In both cases, turnover should be attributed to the place where the customer is located because that is, in most circumstances, where a deal was made, where the turnover for the supplier in question was generated and where competition with alternative took place (13). The second subparagraph of Article 5(1) does not focus on where a good or service is enjoyed or the benefit of the good or service derived. In the case of a mobile good, a motor car suppliers (13) If the place where the customer was located when purchasing the goods or service and the place where the billing was subsequently made are different, turnover should be allocated to the former. 49. When converting turnover figures into ecu great care should be taken with the exchange rate used. The annual turnover of a company should be converted at the average rate for the twelve months concerned. This average can be obtained from the Commission. The audited annual turnover figures into component should not be broken down quarterly, monthly, or weekly sales figures which are converted individually at the corresponding average quarterly, monthly or weekly rates, with the ecu figures then added to give a total for the year. 50. When a company has sales in in a range of currencies, the procedure is no different. The total turnover given the consolidated audited accounts and in that company’s reporting currency is converted into ecu at the average rate for the twelve months. Local currency sales should not be converted directly into ecu since these figures are not from the consolidated audited accounts of the company. 2. 3. 98 EN Official Journal of the European Communities C 66/33 III. CREDIT AND OTHER FINANCIAL INSTITUTIONS AND INSURANCE UNDERTAKINGS 1. Definitions 51. The specific nature of banking and insurance activities is formally recognized by the Merger Regulation which includes specific provisions dealing with the calculation of turnover for these sectors (14). Although the Merger Regulation does not provide a definition of the terms, ‘credit institutions and other financial institutions’ within the meaning of point (a) of Article 5(3), the its practice has consistently Commission adopted the definitions provided in the First and Second Banking Directives: in — ‘Credit institution means an undertaking whose to receive deposits or other business repayable funds from the public and to grant credits for its own account (15)’. is — ‘Financial institution shall mean an undertaking other than a credit institution, the principal activity of which is to acquire holdings or to carry one or more of the activities listed in points 2 to 12 in the Annex (16)’. — issuing and managing instruments of payment (credit cards, travellers’ cheques and bankers’ drafts), — guarantees and commitments, — trading on own account or on account of customers instruments, in money market foreign exchange, financial futures and options, exchange and interest rate instruments, and transferable securities, — participation in share issues and the provision of services related to such issues, — advice to undertakings on capital structure, industrial strategy and related questions and advice and services relating to mergers and the purchase of undertakings, — money broking, — portfolio management and advice, — safekeeping and administration of securities. 2. Calculation of turnover 52. as regarded the other hand, From the definition of ‘financial institution’ given above, it is clear that on the one hand holding financial companies must be that institutions and, on undertakings which perform on a regular basis as a principal activity one or more activities expressly mentioned the abovementioned Annex must also be regarded as financial institutions within the meaning of point (a) of Article 5(3) of the Merger Regulation. These activities include: in points 2 to 12 of 53. The methods of calculation of turnover for credit and other financial institutions and for insurance undertakings are described in Article 5(3) of the Merger Regulation. The purpose of this Section is to provide an answer to supplementary questions related the abovementioned types of undertakings which were raised during the first years of the application of the Merger Regulation. calculation turnover for to — lending (inter alia, consumer credit, mortgage 2. 1. Credit and financial institutions (other than credit, factoring,. ), — financial leasing, — money transmission services, financial holding companies) 2. 1. 1. G e n e r a l (14) See Article 5(3) of the Merger Regulation. (15) Article 1 of First Council Directive 77/780/EEC of 12 December 1977 on the coordination of laws, regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions (OJ L 322, 17. 12. 1977, p. 30). (16) Article 1(6) of Second Council Directive 89/646/EEC of 15 December 1989 on the coordination of laws, regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions (OJ L 386, 30. 12. 1989, p. 1). and other kinds of 54. There are normally no particular difficulties in applying the banking income criterion for the definition of the worldwide turnover to credit institutions financial institutions. Difficulties may arise for determining turnover within the Community and also within individual Member States. For this purpose, the appropriate criterion is that of the residence of the branch or division, as provided by Article 5(3)(a)(v), second subparagraph, of the Merger Regulation. C 66/34 EN Official Journal of the European Communities 2. 3. 98 2. 1. 2. T u r n o v e r o f l e a s i n g c o m p a n i e s leases and operating 55. There is a fundamental distinction to be made between financial leases. Basically, financial leases are made for longer periods than operating leases and ownership is generally transferred to the lessee at the end of the lease term by means of a purchase option included in the lease contract. Under an operating lease, on the contrary, ownership is not transferred to the lessee at the end of the lease term and the costs of maintenance, repair and insurance of the leased equipment are included in the lease payments. A financial lease therefore functions as a loan by the lessor to enable the lessee to purchase a given asset. A financial leasing company is thus a financial institution within the meaning of point (a) of Article 5(3) and its turnover has to be calculated by applying the specific rules related to the calculation of turnover for credit and other financial that operational leasing activities do not have this lending function, they are not considered as carried out by financial institutions, at least as primary activities, and therefore the general turnover calculation rules of Article 5(1) should apply (17). institutions. Given 2. 2. Insurance undertakings 2. 2. 1. G r o s s p r e m i u m s w r i t t e n 56. The application of the concept of gross premiums written as a measure of turnover for insurance undertakings has raised supplementary questions notwithstanding the definition provided in point (b) of Article 5(3) of the Merger Regulation. The following clarifications are appropriate: — ‘gross’ premiums written are the sum of received premiums (which may include received the undertaking reinsurance premiums if concerned has activities field of in reinsurance). Outgoing or outward reinsurance premiums, i. e. all amounts paid and payable the the undertaking by get reinsurance cover, are already included in the gross premiums written within the meaning of the Merger Regulation, concerned to — wherever the word ‘premiums’ is used (gross premiums, net (earned) premiums, outgoing reinsurance premiums, etc. ), these premiums are related not only to new insurance contracts made during the accounting year being considered but also to all premiums related to contracts made in previous years which remain into in consideration. force during the period taken 2. 2. 2. I n v e s t m e n t s u n d e r t a k i n g s o f i n s u r a n c e 57. In order to constitute appropriate reserves allowing for the payment of claims, insurance undertakings, which are also considered as institutional investors, usually hold a huge portfolio of investments in shares, land and property and other assets which provide an annual revenue which is not considered as turnover for insurance undertakings. interest-bearing securities, and is not involved the undertakings where 58. With regard to the application of the Merger Regulation, a major distinction should be made between pure financial investments, in which the in the insurance undertaking the management of investments have been made, those investments leading to the acquisition of an interest giving control in a given undertaking thus allowing the insurance undertaking to exert a decisive influence on the business conduct of the subsidiary or affiliated company concerned. In such cases Article 5(4) of the Merger Regulation would apply, and the turnover of the subsidiary or affiliated company should be added to the turnover of the insurance undertaking for the determination of the thresholds the Merger down Regulation (18). laid in (17) See Case IV/M. 234 — GECC/Avis Lease, 15 July 1992. (18) See Case IV/M. 018 — AG/AMEV, of 21 November 1990. 2. 3. 98 EN Official Journal of the European Communities C 66/35 2. 3. Financial holding companies (19) 59. A is a financial holding company financial institution and therefore the calculation of its turnover should follow the criteria established in point (a) of Article 5(3) for the calculation of turnover for credit and other financial institutions. However, since the main purpose of a financial holding is to acquire and manage participation in other undertakings, Article 5(4) also applies, (as for insurance undertakings), with regard to those financial holding participations allowing company to exercise a decisive influence on the business conduct of the undertakings in question. Thus, the turnover of a financial holding is basically to be calculated according to Article 5(3), but it may be necessary to add turnover of undertakings falling within the categories set out in Article 5(4) (‘Article 5(4) companies’). the In practice, the turnover of the financial holding company (non-consolidated) must first be taken into account. Then the turnover of the Article 5(4) companies must be added, whilst taking care to deduct dividends and other income distributed by those companies to the financial holdings. The following provides an example for this kind of calculation: ECU million 1. Turnover activities P&L) related financial to (from non-consolidated 2. Turnover related to insurance Article (gross premiums 5(4) companies written) 3 000 300 3. Turnover of industrial Article 5(4) companies 4. Deduct dividends and other income derived from Article 5(4) companies 2 and 3 5. Total turnover financial holding and its group 2 000 (200) 5 100 60. to be identical within taken In such calculations different accounting rules, in particular those related to the preparation of consolidated accounts, which are to some extent the harmonised but not Community, may need into consideration. Whilst this consideration applies to any type of undertaking concerned by the Merger Regulation, it is particularly important in the case of financial holding companies (20) where the number and the diversity of enterprises controlled and the degree of control the holding holds on its subsidiaries, affiliated companies and other companies in which it has shareholding requires careful examination. 61. Turnover for calculation financial holding companies as described above may in practice prove onerous. Therefore a strict and detailed application of this method will be necessary only in cases where it seems that the turnover of a financial holding company is likely to be close to the Merger Regulation thresholds; in other cases it may well be obvious that the turnover is far from the thresholds of the Merger Regulation, and therefore the published accounts are adequate for the establishment of jurisdiction. (19) The principles set out in this paragraph for financial holdings may to a certain extent be applied to fund management companies. (20) See for example Case IV/M. 166 — Torras/Sarrió, of 24 February 1992, Case IV/M. 213 — Hong Kong and Shanghai Bank/Midland, of 21 May 1992, IV/M. 192 — Banesto/Totta, of 14 April 1992