Tax on corporate transactions in Germany: overview

A Q&A guide to tax on corporate transactions in Germany.

The Q&A gives a high level overview of tax in Germany and looks at key practical issues including, for example: the main taxes, reliefs and structures used in share and asset sales, dividends, mergers, joint ventures, reorganisations, share buybacks, private equity deals and restructuring and insolvency.

To compare answers across multiple jurisdictions, visit the Tax on corporate transactions Country Q&A tool.

The Q&A is part of the multi-jurisdictional guide to tax on corporate transactions. For a full list of jurisdictional Q&As visit www.practicallaw.com/taxontransactions-mjg.

Norbert Schneider and Philipp Hoffsümmer, Freshfields Bruckhaus Deringer LLP
Contents

Tax authorities

1. What are the main authorities responsible for enforcing taxes on corporate transactions in your jurisdiction?

Generally, taxes are administered and enforced by the competent local tax offices of the particular German federal state (Landesfinanzverwaltung). These local tax offices enforce:

  • Taxes on corporate transactions.

  • Value added tax (VAT).

  • Real estate transfer tax (Grunderwerbsteuer) (RETT), where applicable (see Question 3, RETT and Question 5).

Local municipalities (Gemeinden) enforce trade tax (Gewerbesteuer) (see Question 4, Trade tax).

The Federal Tax Office (Bundeszentralamt für Steuern) is, among other things, responsible for:

  • Advanced Transfer Pricing Agreements.

  • Exemption and refund of withholding tax under double tax treaties and EU Directives.

  • Issuance of tax rulings for foreign investors.

  • Several measures in connection with VAT on cross-border services and supplies.

 

Pre-completion clearances and guidance

2. Is it possible to apply for tax clearances or obtain guidance from the tax authorities before completing a corporate transaction?

A party to a corporate transaction can apply for a tax ruling (verbindliche Auskunft) to clear the tax treatment of a transaction before its implementation. Gaining this tax ruling requires both:

  • The party to demonstrate a legitimate interest in the ruling. This is accepted where the transaction has substantial tax consequences, which is typically the case in corporate transactions.

  • Legal uncertainty to exist concerning the tax treatment of the planned transaction. Rulings are not issued if the facts are unclear or no specific legal questions are asked.

A tax ruling requires a written application to the competent local tax office, containing the following information:

  • A detailed description of the planned transaction.

  • An explanation of the particular interest that the party has in the tax ruling.

  • The precise legal questions that the tax authorities should answer.

  • The value of the tax ruling (the difference between the tax consequences in the best- and worst-case scenarios).

Once issued, the tax ruling is binding on the tax authorities, provided that both:

  • The planned transaction is actually implemented as it was described in the application.

  • The legal provisions concerning the tax issues in question are not changed.

Tax rulings are subject to administrative charges. The charges depend on the value of the tax ruling, capped at EUR91,456, but under certain circumstances the charge can arise more than once, for example, if several sets of questions are covered by the tax ruling. If the ruling's value cannot be determined, the charge is based on the time spent by the tax authorities at EUR100 per hour. As at 1 March 2012, US$1 was about EUR0.7.

 

Main taxes on corporate transactions

Transfer taxes and notaries' fees

3. What are the main transfer taxes and/or notaries' fees potentially payable on corporate transactions?

RETT

Generally, RETT is triggered when German real estate property is transferred (in an asset deal). The tax rate is 3.5% to 5% (depending on the federal state where the property is located) on the consideration, or where no consideration is given or it cannot be easily determined, on a special tax value (Bedarfswert), which is calculated under the Tax Valuation Act (Bewertungsgesetz).

RETT is also triggered if shares in a company owning real estate are transferred and where an acquirer achieves or exceeds a 95% ownership of the company's share capital. The 95% test must be applied on all levels of shareholding so that indirect changes (for example, the sale of a parent company of the relevant real estate company) are also counted. Shares in intermediate companies are attributed to one person if either:

  • He holds 95% in the intermediate company.

  • Under certain further requirements, where he holds more than 50% and controls the intermediate company (known as RETT fiscal unity).

RETT is also triggered if the real estate is held by a partnership and at least 95% of the partnership interests are transferred (directly or indirectly) to one or more new partners within a five-year period. In these scenarios RETT is calculated in the same way as for a direct transfer of real estate (that is, 3.5% up to 5% on the special tax value (Bedarfswert) (see above)).

A transfer of real estate effected as part of a qualified intragroup restructuring under the Reorganisation Act (Umwandlungsgesetz) (for example, by way of a merger, demerger or spin-off) is exempt from RETT if the real estate is transferred between either:

  • A controlling enterprise and a controlled enterprise.

  • Different enterprises controlled by the same controlling enterprise.

An enterprise is controlled if at least 95% of its shares are directly and/or indirectly held by the controlling enterprise. In addition, the controlling shares must generally have been held for five years before, and continue to be held for five years after, the transfer.

The local tax office, in whose area the property is located, generally assesses RETT.

Notaries' fees

The legal effectiveness of certain agreements requires their notarisation (for example, agreements relating to the sale and/or transfer of real estate property or shares in a limited liability company (Gesellschaft mit beschränkter Haftung) (GmbH)). The amount of notaries' fees depends on the value of the agreed transaction. This value is capped at EUR60 million per notarisation, so the maximum fee for a sale of GmbH shares is EUR52,247.

 

Corporate and capital gains taxes

4. What are the main corporate and/or capital gains taxes potentially payable on corporate transactions?

Corporate income tax (Körperschaftsteuer) (CIT)

Companies that are tax-resident in Germany (that is, their registered office or effective place of management is located in Germany) are subject to CIT on their worldwide income, unless relieved by double tax treaties. Non-resident companies are only subject to German CIT on their German-source income. Partnerships are not subject to CIT and are treated as transparent, that is, their income is allocated to their partners on a pro rata basis and taxed at each partner's level with CIT or (if the partner is a private individual) income tax.

The calculation of the taxable income is based on financial statements drawn up under German generally accepted accounting principles (GAAP) (Handelsbilanzrecht) and adjusted in accordance with specific provisions and general principles of tax law. The taxable income includes the company's current profits or losses as well as any capital gains (for example, from corporate transactions).

Generally, the company's entire profit is fully taxable. However, some exemptions apply. For corporations, 95% of dividends received, as well as capital gains from the sale of shares in (German or non-German) corporations, are effectively tax exempt (unless certain restrictions apply). This tax exemption may not be available if the selling corporation is a bank or other financial institution (and, under certain conditions, even to mere holding corporations) that holds the shares as trading assets. Any losses arising from the ownership of shares (for example, from sales, liquidation, or impairment adjustments) are not tax deductible.

Special rules limit the deductibility of interest expenses (interest barrier). Any net interest expenses exceeding EUR3 million can only be deducted for CIT purposes at 30% of the borrower's taxable earnings before interest, taxes, depreciations and amortisations (tax EBITDA). Interest here includes all interest payments, regardless of whether paid from or to a related party or third party and/or if the debt is secured or unsecured. The 30% limitation does not apply to enterprises that are either:

  • Not, or only partially, part of a group.

  • Part of a group where the borrowing German entity can prove that its equity ratio is not (or is at most 2%) lower than the group's equity ratio.

Both exceptions further require that no detrimental shareholder or shareholder-backed financing exists, that is, no German or foreign entity of the group can be financed by:

  • More than 10% by a shareholder holding 25% or more and who is not part of the group (if any).

  • Third parties whose financing is guaranteed or otherwise backed by such a shareholder.

Net interest expenses that are not deductible under these rules can be carried forward to future tax years where they will be subject to the same tests. If the net interest expenses amount to less than 30% of the tax EBITDA (so that the net interest is fully tax deductible in that year), the unused tax EBITDA can be carried forward for five years.

Further, losses can be:

  • Carried back, up to EUR511,500.

  • Carried forward without limitation in amount or time.

Up to EUR1 million of profits in a given year can be fully offset against losses carried forward. 60% of any profit exceeding EUR1 million can be offset against losses carried forward (that is, 40% of the profit exceeding EUR1 million is taxed regardless of any loss carry-forward (minimum taxation)). For circumstances where loss carry-forwards can be forfeited see Question 11, Disadvantages.

The CIT rate is 15%. An additional solidarity surcharge (Solidaritätszuschlag) of 5.5% is levied on the CIT due, making the total tax rate 15.825%.

The tax office in whose area the central management of the company is placed is the competent authority to assess CIT.

Trade tax

Business entities (Gewerbebetriebe) are also subject to trade tax. Corporations are, because of their civil law status, considered to be business entities and therefore subject to trade tax. Partnerships are only business entities (and therefore subject to trade tax) if they carry out commercial activity, that is, generate income from trade or services (except for certain professional advisory services). Merely administering assets (for example, holding participations) is not trade. In addition, partnerships are business entities if all their fully liable partners are corporations and only these corporate partners (or third parties) are the partnership's managing directors. This applies in particular to typical GmbH & Co KGs (a limited partnership (Kommanditgesellschaft) with the general partner being a limited liability company).

Business entities are subject to trade tax on their trade income (Gewerbeertrag). The trade income is generally derived from the CIT income. However, this CIT income is subject to a number of adjustments for trade tax purposes (for example, adding back a portion of any interest, royalties and rental expenses).

The trade income is first multiplied by a factor (Steuermesszahl) of 3.5%. The resulting trade tax product (Steuermessbetrag) is multiplied by the local tax multiplier (Gewerbesteuerhebesatz), which is fixed by each local authority and which is between 200% (the statutory minimum local rate) and currently up to 490%. For example, if the local tax multiplier is 400%, the effective trade tax burden on the trade income will be 14% (that is, 3.5% multiplied by 400%).

The trade tax product is determined by the local tax office that is also competent for CIT (see above, Corporate income tax (Körperschaftsteuer) (CIT)). The local municipality applies the local tax multiplier on the product (that is, effectively assesses and collects the tax).

 

Value added and sales taxes

5. What are the main value added and/or sales taxes potentially payable on corporate transactions?

VAT

VAT is levied in accordance with the harmonised EU system. It is a tax on the domestic supply of goods and services (supplies) by taxpaying businesses and on the import of goods from other states inside or outside the EU.

Each taxpayer can deduct the VAT that it incurred on a supply received (input VAT) provided that the supply is used or otherwise connected with a taxable output supply. If and to the extent the received supply is used for, or connected to, VAT exempt output services (see below) then that part of the input VAT is not deductible. Any deductible input VAT can be offset against the VAT payable on output supplies. If the input VAT exceeds the output VAT, the excess is refunded by the tax authorities.

The standard VAT rate is 19%. A reduced rate of 7% applies for certain vital goods and services. Certain supplies are exempt from VAT, including the transfer of shares and partnership interests and most financial services. However, for certain VAT-exempt supplies (for example, renting services or transferring shares) an option to tax is available.

In corporate transactions, the transfer of shares is generally VAT exempt. The supplier can opt for VAT taxation so that it can deduct input VAT. For the buyer of the shares, the option to tax is detrimental if it cannot deduct this VAT as input VAT. As the German tax authorities try to limit the deduction of input VAT on share acquisitions the parties often agree not to opt for VAT in share transfers.

VAT generally applies on asset transfers. VAT is payable by the supplier to the tax authorities and it therefore increases the purchase price. The buyer must then get the VAT refunded by the tax authorities as input VAT. However, the transfer of a business as a going concern (Geschäftsveräußerung im Ganzen) is deemed not subject to VAT.

The competent authority for VAT assessment is the local tax office in whose area the company conducts the majority of its business.

 

Other taxes on corporate transactions

6. Are any other taxes potentially payable on corporate transactions?

There are no further taxes payable on corporate transactions.

 

Taxes applicable to foreign companies

7. In what circumstances will the taxes identified in Questions 3 to 6 be applicable to foreign companies (in other words, what "presence" is required to give rise to tax liability)?

RETT and notaries' fees

RETT and notaries' fees (if any) in a corporate transaction do not depend on the buyer or the seller being a German or a foreign entity.

CIT

A foreign company is subject to CIT if both:

  • It has German-source income.

  • The German right to tax is not excluded or limited under a double tax treaty concluded between Germany and the foreign entity's home jurisdiction.

If a foreign company has a permanent establishment (PE) or representative in Germany, then its sale is German-source income of the foreign seller. If a double tax treaty applies, the right to tax is typically with Germany as the source jurisdiction, so that the foreign seller is subject to CIT and trade tax on any capital gain. The same applies for the sale of shares or interests in business partnerships.

A capital gain from the sale of shares in a German corporation is treated as German-source income if the seller holds at least 1% in the corporation. However, if a double tax treaty applies, the home jurisdiction of the foreign seller generally has the sole right to tax the capital gain under the double tax treaty, provided the shares in the German corporation are not held through a German PE of the foreign seller.

Trade tax

A foreign company is liable to trade tax on its trade income if it is derived through a PE or representative in Germany. Basically the same rules apply as for CIT (see above, CIT). Capital gains from the sale of German businesses in an asset deal, or of shares in a business partnership, are typically subject to trade tax, whereas capital gains from the sale of shares in German corporations are not.

VAT

The imposition of VAT depends on where the supply occurs (or is considered to occur under the applicable VAT law) rather than on the residence of the supplier, although the place of supply may depend on where the supplier has established its business or has a fixed establishment. Accordingly, non-resident companies that make supplies of goods or services in Germany may be required to register for VAT in Germany.

 

Dividends

8. Is there a requirement to withhold tax on dividends or other distributions?

Generally corporations must withhold taxes for all dividend and other profit distributions (Kapitalertragsteuer) irrespective of whether the recipient or shareholder is a German or foreign entity. The withholding tax is 25% (with a solidarity surcharge of 5.5%, making the overall tax 26.375%). If the shareholder is subject to German CIT, the tax withheld is credited against its overall CIT liability.

For non-resident shareholders the withholding tax can be decreased to 15% on application. In addition, double tax treaties can provide for a lower rate between 0% and 10% where the recipient is a corporation and holds a certain minimum holding. Additionally, no withholding tax is due if the dividend is paid to a parent company which both (Directive 90/435/EEC on the taxation of parent companies and subsidiaries (Parent-Subsidiary Directive)):

  • Is resident in another EU member state.

  • Holds at least 10% of the share capital in the distributing German subsidiary for at least one year.

However, the decrease as well as limitations and exemptions under both double tax treaties and the Parent-Subsidiary Directive are subject to an anti-treaty shopping rule. This means that no limitation or exemption is available where the recipient is an interposed entity with insufficient "substance". This anti-treaty shopping rule applies:

  • If and to the extent the recipient's shareholders would have no right to the limitation or exemption if they received the dividends directly.

  • The foreign company does not earn income for the year in question from its own business activities (that is, not from mere investment management).

  • No economic or other justifiable reasons exist for the foreign company's interposition in relation to this income or the foreign company has no tenable physical business establishment.

 

Share acquisitions and disposals

Taxes potentially payable

9. What taxes are potentially payable on a share acquisition/share disposal?

RETT and notaries' fees

The disposal of shares potentially triggers RETT if the sold company owns German real estate property (see Question 3, RETT).

A sale and transfer of real property and shares in GmbHs requires the notarisation of the agreements (for the sale and purchase agreement, for example) and therefore triggers notaries' fees (see Question 3, Notaries' fees).

CIT

Generally, 95% of any capital gain that arises from a disposal of shares is exempt from CIT if the seller is a corporation. However, losses are not tax deductible (see Question 4, Corporate income tax (Körperschaftsteuer) (CIT)).

Trade tax

As the trade tax basis follows that for CIT only 5% of the capital gain is subject to trade tax (see Question 4, Trade tax).

VAT

The sale of shares is generally exempt from VAT but the seller may opt for VAT taxation (see Question 5, VAT).

 

Exemptions and reliefs

10. Are any exemptions or reliefs available to the liable party?

There is a 95% exemption for certain capital gains arising from the disposal of shares (see Question 4, Corporate income tax (Körperschaftsteuer) (CIT)).

 

Tax advantages/disadvantages for the buyer

11. Please set out the tax advantages and disadvantages of a share acquisition for the buyer.

Advantages

RETT is either not payable or can often be mitigated (see Question 3, RETT). Generally, no VAT is payable (see Question 5, VAT).

Disadvantages

There is no step up of assets for tax purposes where the purchase price exceeds the equity of the acquired entity. The transferred corporation may forfeit (fully or partially) loss carry-forwards under certain circumstances in (direct or indirect) share transfers. Share transfers to one acquirer (alone or together with related parties or with persons with aligned interests) in any given five-year period of more than:

  • 25% of the company's share capital or voting rights generally result in partial forfeiture of loss carry-forwards.

  • 50% of the company's share capital or voting rights generally result in full forfeiture of loss carry-forwards.

In share transfers since 1 January 2010, the loss forfeiture may be limited in the case of existing built-in gains. Losses and loss carry-forwards remain in place and do not forfeit to the extent they do not exceed the amount of the company's domestic taxable built-in gains. Built-in gains in corporate shares do not (or only with 5%) count as taxable due to the 95% tax exemption (see Question 4). The loss forfeiture rules do not apply at all in a qualified intragroup transfer. This requires that the share transfer occurs between a transferring and an acquiring corporation which are both (directly or indirectly) held 100% by the same company or individual. The former exemption for qualified restructurings or bail-out situations was challenged by the European Commission and is not applicable anymore unless the Courts of the European Union declare the Commission's decision void (see Question 28). The same rules apply to interest carry-forwards under the interest barrier (see Question 4, Corporate income tax (Körperschaftsteuer) (CIT)).

 

Tax advantages/disadvantages for the seller

12. Please set out the tax advantages and disadvantages of a share disposal for the seller.

Advantages

95% of a capital gain is tax exempt if the seller is a corporation (see Question 4, Corporate income tax (Körperschaftsteuer) (CIT)).

Disadvantages

Losses (if any) are not deductible for CIT (see Question 4, Corporate income tax (Körperschaftsteuer) (CIT)).

 

Transaction structures to minimise the tax burden

13. What transaction structures (if any) are commonly used to minimise the tax burden?

With a view to a tax-exempt exit, the buyer often acquires the German target through holdings in jurisdictions with full capital gains exemptions and double tax treaties with Germany (for example, Luxembourg or The Netherlands).

If the target owns German real estate RETT is often mitigated by interposing blocker partnerships that (directly or indirectly) hold at least 5.1% in the target and in which a third party unrelated with the acquirer owns a partnership interest.

 

Asset acquisitions and disposals

Taxes potentially payable

14. What taxes are potentially payable on an asset acquisition/asset disposal?

RETT and notaries' fees

If real property is disposed, RETT and notaries' fees are triggered (see Question 3).

CIT and trade tax

Any capital gains that arise from an asset disposal are fully subject to CIT and trade tax (see Question 4).

VAT

VAT is generally chargeable on a sale of business assets. The main exception applies to sale of real property, which is VAT exempt but where the seller can opt for VAT. Where a seller transfers all or part of its business as a going concern to a buyer that intends to use the assets to carry on the same kind of business, the supply generally falls outside the scope of VAT (see Question 5).

 

Exemptions and reliefs

15. Are any exemptions or reliefs available to the liable party?

Capital gains from the sale of land or buildings can be rolled over to other land or buildings acquired in the year of the disposal, the preceding year, or in the following four (and under certain circumstances six) years through a tax-exempt reserve.

 

Tax advantages/disadvantages for the buyer

16. Please set out the tax advantages and disadvantages of an asset acquisition for the buyer.

Advantages

The buyer achieves a full step up, that is, the assets acquired (including goodwill) are capitalised with the purchase price and therefore generate higher tax depreciations and amortisations in the future.

Disadvantages

If a business is sold as a going concern through an asset deal, the buyer is liable for the seller's business-related tax liabilities.

 

Tax advantages/disadvantages for the seller

17. Please set out the tax advantages and disadvantages of an asset disposal for the seller.

Advantages

The step up on the level of the buyer (see Question 16) may help to achieve a higher purchase price.

Disadvantages

Capital gains are fully subject to CIT and trade tax.

 

Transaction structures to minimise the tax burden

18. What transaction structures (if any) are commonly used to minimise the tax burden?

Although it is not binding on the tax authorities, the buyer usually tries to agree with the seller a detailed allocation of the purchase price for the acquired assets and liabilities to achieve a higher amount of depreciation.

 

Legal mergers

Taxes potentially payable

19. What taxes are potentially payable on a legal merger?

RETT and notaries' fees

RETT is triggered if the merged company (transferor) owns German real estate property, unless the newly intragroup exemption applies (see Question 3, RETT). No RETT is triggered to the extent the resulting entity (transferee) owns real estate. Therefore, RETT may be minimised by choosing the merger direction. Significant parts of the merger documents need to be notarised and therefore trigger notaries' fees (see Question 3, Notaries fees).

CIT and trade tax

Generally, any of the original company's built-in gains will be realised and are therefore subject to CIT and trade tax (see Question 4) unless exemptions apply under the Reorganisation Tax Act (Umwandlungssteuer­gesetz) (GRTA) (see Question 20). Any capital gain arising can be set off against current losses or losses carried forward (if any) within the general restrictions (see Question 4). Any of the transferor's remaining loss carry-forwards will be forfeited and cannot be used by the transferee.

VAT

Not applicable.

 

Exemptions and reliefs

20. Are any exemptions or reliefs available to the liable party?

CIT and trade tax

A merger between corporations can be tax neutral (that is, without built-in gains being realised, through rollover of book values) if and to the extent both (GRTA):

  • The German right to tax future capital gains for the transferred assets through the resulting company is not restricted or excluded.

  • Consideration, if any, consists only of shares in the resulting company.

If a transferee holds shares in the transferor (as in an upstream merger), a capital gain is triggered for the transferee to the extent that the tax value of the transferred assets exceeds that of the former shares in the transferor. This capital gain is generally 95% tax exempt.

Generally, the original company's shareholders receive shares in the resulting company in a merger as compensation for their shares in the original company being extinguished (except for upstream and, possibly, sidestream mergers). This is treated as a sale of the shares in the original company at fair market value (and an acquisition of the shares in the resulting company at the same value). However, the shareholders can roll over the book value into the new shares (so that no taxable gain is triggered) if the German right to tax capital gains arising from a later sale of the newly issued shares is not restricted or excluded.

 

Transaction structures to minimise the tax burden

21. What transaction structures (if any) are commonly used to minimise the tax burden?

RETT may be mitigated by choosing the merger direction (depending on which entity (transferor or transferee) holds real estate or, if both do, the most valuable part) (see Question 19). In intragroup restructurings the exemption for real estate transfers may mitigate the RETT (see Question 3, RETT).

Meeting the requirements of the GRTA as listed above (see Question 20) can give the merger tax neutrality.

 

Joint ventures

Taxes potentially payable

22. What taxes are potentially payable on establishing a joint venture company (JVC)?

The joint venture partners can establish their JVC by contributing:

  • Cash.

  • Businesses, business units (Teilbetriebe), partnership interests or shares in corporations.

  • Single or separate assets.

CIT and trade tax

A cash contribution has no tax effects, whereas the contribution of assets generally leads to a realisation of built-in gains for the contributor, and therefore a capital gain which is subject to CIT and trade tax, unless the transfer is exempted under special rules (see Question 23).

RETT

RETT may be triggered if real property, or at least 95% of a real property owning company, is transferred to the JVC (see Question 3, RETT).

VAT

The contribution of assets against shares in the JVC is generally subject to VAT unless exemptions apply (see Question 5).

 

Exemptions and reliefs

23. Are any exemptions or reliefs available to the liable party?

A number of exemptions can apply to transfers, making them potentially tax neutral. Details depend on, among other things, whether the receiver is a corporation or partnership.

Corporations

The transfer or contribution of a business, business unit or partnership interest to a corporation is tax neutral if (GRTA):

  • The contributor receives as con­si­de­ration only new shares in the receiver or another consideration up to the amount of the book value of the contributed business, business unit or partnership interest.

  • The German right to tax the future capital gains of the transferred assets through the receiver is not restricted or excluded.

  • The tax value of the transferred property (assets less liabilities) is not negative.

However, the sale of the new shares received (and certain other actions) within a seven-year period may lead to tax being due on the built-in gains at the time of the original transfer (wholly or in part, depending on the time passed since the transfer).

Similar rules apply if shares in a corporation are contributed to another corporation which owns, as a result of the contribution, the majority of voting rights in the contributed corporation. However, if the contributor is also a corporation the sale of the received shares within a seven-year period is still (subject to some exceptions) tax neutral.

Partnerships

The rules on the transfer or contribution of a business, business unit or partnership interest into a partnership are broadly comparable with the rules for corporations. However, the transfer of shares in a corporation into a partnership is only tax neutral under the GRTA if 100% are transferred. However, in both scenarios the seven-year-period is not relevant.

Further exemptions apply if other assets (including single assets) are contributed (against issuance of shares or for no consideration) into a partnership where additional requirements are met, including if:

  • There is no sale of the asset by the partnership within three years.

  • There is no participation in the receiving partnership by corporations other than the contributor within seven years.

If land or buildings are contributed, any built-in gains may be rolled over or temporarily allocated to a tax-exempt reserve (see Question 15).

Detailed analysis is necessary if the parties are not all German tax residents.

 

Transaction structures to minimise the tax burden

24. What transaction structures (if any) are commonly used to minimise the tax burden?

The parties usually aim to fulfil the requirements for a tax-neutral contribution (see Question 23).

If tax neutrality cannot be achieved, the parties can refrain from actually transferring the assets, and just grant the JVC the right to use them.

 

Company reorganisations

Taxes potentially payable

25. What taxes are potentially payable on a company reorganisation?

Mergers

See Questions 19 to 21.

Contribution of assets into corporations and partnerships

See Questions 22 to 24.

Conversion of a corporation into a partnership

Generally, this is treated as a deemed merger of the corporation into the partnership and any built-in gains are realised and taxed through the corporation. However, the conversion can be implemented as tax neutral if certain requirements under the GRTA are met, in particular, if the following apply:

  • All assets and liabilities of the corporation become business property of the partnership.

  • The German right to tax future capital gains in the transferred assets through the partnership is not restricted or excluded.

  • The consideration, if any, only consists of newly issued shares.

However, even if these requirements are met and no tax is triggered on built-in gains, the corporation's profit reserves (equity which is not share capital or otherwise contributed by the shareholders) are treated as being distributed to the shareholders and therefore taxed as dividends (see Question 8).

Conversion of a partnership into a corporation

This is treated as a contribution of the partnership (or interest in the partnership) to the corporation. See Questions 22 to 24. Conversions do not trigger RETT or VAT. Significant parts of the conversion documents must be notarised and therefore trigger notaries' fees.

 

Exemptions and reliefs

26. Are any exemptions or reliefs available to the liable party?
 

Transaction structures to minimise the tax burden

27. What transaction structures (if any) are commonly used to minimise the tax burden?

The parties usually aim to fulfil the requirements for a tax neutral restructuring or conversion (see Questions 19 to 24).

 

Restructuring and insolvency

28. What are the key tax implications of the business insolvency and restructuring procedures in your jurisdiction?

Germany's tax law does not provide for a special tax regime for the insolvency or financial restructuring procedures of an enterprise. However, if it is envisaged that the company will be liquidated (that is, if it ceases to exist following the insolvency or restructuring procedures) its taxable income is calculated for the period of the liquidation instead of annually. The taxable income for the period of liquidation is the difference between the equity at the beginning and at the end of the insolvency or restructuring procedure.

In all other cases the general rules as described in Questions 3 to 9 apply with the following particulars:

  • A waiver of receivables by a creditor leads to a taxable gain on the level of the debtor company and to tax deductible expense on the level of the creditor.

  • If the creditor is a shareholder of the company the waiver is qualified as a tax neutral contribution to the company to the extent the waived claim was valuable. The exceeding (non-valuable) amount results in both:

    • a fully taxable gain on the level of the debtor company;

    • an expense on the level of the shareholder which is generally not tax deductible if the creditor owns more than 25% of the shares in the company or if the creditor is a related person to the shareholder.

  • The same applies if the company's debt is converted into equity and new shares in the debtor are issued (debt-equity swap).

  • A gain arising from a waiver can be set off against existing losses or loss carry-forwards within the limits of the minimum taxation (see Question 4).

  • Special rules apply if a restructuring qualifies under the restructuring or "bail-out decree" of the Federal Ministry of Finance (Sanierungserlass). However, the preconditions are strict and require, among others, the financial need and the ability for a bail-out, and the creditors' respective restructuring aims. Generally, an external restructuring plan (typically set up by an auditor) is required by the tax authorities. Restructurings in which only shareholders waive claims are generally not accepted as qualifying for the benefits under the bail-out decree. If the decree applies, both the following apply:

    • restructuring gains will be set off against all available loss carry forwards (that is, without the restrictions of the minimum taxation);

    • the tax on any restructuring gain remaining after then will be deferred and later waived.

  • These tax effects of waiver gains are reversed if the parties have agreed on a waiver against debtor warrant (Besserungsschein), that is, the waived debt revives and is reinstated in case the economical situation of the company improves accordingly. If the waiver gain was not taxed according to the bail-out decree the expense arising from the debt revival is not tax deductible.

  • A taxable gain can under certain circumstances be avoided if the shareholder, instead of waiving, assumes the debt of its company. Another possibility to mitigate a taxable waiver gain may be, instead of waiving, to merely subordinate the shareholder's receivable against its company (which, under certain conditions, is sufficient to disregard the liability of the company when verifying if it is over-indebted).

  • The mere contribution of further equity into its company by the shareholder does not generally have any tax effects. However, if it results in a change of the share ownership ratio in the amount of at least 25%, or if a contribution in kind leads to a change in the economic identity of the company, tax loss carry-forwards may cease to exist.

  • Regarding forfeiture of losses in the case of a transfer of 25% or 50% of the shares (see Question 11, Disadvantages) there was a legal provision that losses remain in place if a share transfer took place in the course of a qualified bail-out. However, this provision was challenged by the European Commission and is no longer applicable unless the Courts of the European Union declare the Commission's decision void.

 

Share buybacks

Taxes potentially payable

29. What taxes are potentially payable on a share buyback? (List them and cross-refer to Questions 3 to 6 as appropriate.)

Share buybacks are generally treated as a sale of shares (leading to capital gains taxation) and not as a distribution or partial liquidation. If the shareholder is a corporation the 95% exemption for share transfers generally applies so that only 5% of any capital gain is subject to CIT and trade tax (see Question 4).

As from 1 January 2010 a reform of the German local GAAP was implemented, leading to a share buyback being qualified for GAAP purposes as a (deemed) partial liquidation. It is not yet clear if this GAAP change may have an effect on the tax treatment of share buybacks. According to the majority view in tax literature, this is not the case, that is, the share buyback should still be treated as a sale and acquisition (rather than a distribution or partial liquidation which would result in a withholding tax on the proceeds of up to 26.375% (see Question 8)).

Income tax

The same capital gain qualification applies if the shareholder is a private individual. If the participation amounts to at least 1% of the company's share capital, 60% of the capital gain is subject to tax at the personal tax rate of between 14% and 45% (with a solidarity surcharge of 5.5% on that rate). Otherwise, if the shares were acquired from 1 January 2009, the capital gain is fully subject to income tax and taxed with a flat tax (Abgeltungssteuer) at 25% (with a 5.5% solidarity surcharge on that rate). If the participation amounting to less than 1% of the company's share capital was acquired before 1 January 2009 and was held for a period of at least one year, the capital gain arising from its sale is tax exempt.

 

Exemptions and reliefs

30. Are any exemptions or reliefs available to the liable party?
 

Transaction structures to minimise the tax burden

31. What transaction structures (if any) are commonly used to minimise the tax burden?

Not applicable.

 

Private equity financed transactions: MBOs

Taxes potentially payable

32. What taxes are potentially payable on a management buyout (MBO)?

No special rules apply on an MBO. For tax consequences see Questions 9 and 14. Some particular tax issues can arise for management participations.

Income tax

Management participation often takes place through the grant or acquisition of the acquired or acquisition company's shares or stock options. A manager's acquisition of shares is treated as a regular share acquisition (leading to capital gains taxation if the shares are later disposed) provided the shares are acquired at market value and the manager is accepted as (beneficial) owner of the shares. If the purchase price is below fair market value, the difference can be treated as employment income, which is subject to full taxation at the standard rates.

Tax treatment can be influenced by the circumstances of any financing granted to the manager by the employer company or other (in particular, majority) shareholders. Special beneficial circumstances (such as financing at terms below market value or non-recourse loans) can lead, under certain circumstances, to fully taxable employment income.

If the shares are acquired after 1 January 2009, any capital gain arising from the sale is fully subject to income tax with a flat tax (see Question 29, Income tax).

The granting of stock options at no cost or below fair market value is treated as employment income when the options are either:

  • Granted, provided the options are tradeable.

  • Exercised, if the options are not tradeable.

 

Exemptions and reliefs

33. Are any exemptions or reliefs available to the liable party?
 

Transaction structures to minimise the tax burden

34. What transaction structures (if any) are commonly used to minimise the tax burden?

Where managers acquire shares, the transactions are often structured to ensure that the manager is treated as beneficial owner of the shares and therefore benefits from the (full or partial) exemptions for capital gains for private individuals (see Question 32).

 

Reform

35. Please summarise any proposals for reform that will impact on the taxation of corporate transactions.

The latest fundamental reform of the German enterprise taxes came into effect on 1 January 2008 and made significant changes to the taxation of corporations, including by introducing the "interest barrier" and strict rules for the forfeiture of loss carry-forwards and other tax losses.

In February 2012 the German and French governments issued a "Greenbook". The two countries intend to align their rules for the taxation of enterprises in certain areas. The results of this (so far non-binding) initiative were issued by the German federal government in February 2012. The intended changes to German enterprise tax law include, among other things, changes to the group taxation system and the extension of loss carry-backs on the one hand, though on the other hand debt-financing on LBOs will be further restricted.

However, given the large state deficit it seems unclear if and when reforms will actually be implemented.

 
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