Capital gains from the sale of a 1 percent or greater ownership interest in a German target by a non-resident are subject to German corporate income tax.
16th September 2013
In general, pre-existing tax losses of a German target company are proportionally forfeited if, within a five-year period, more than 25 percent of the shares of the target company are directly or indirectly transferred to a new sole shareholder or a group of shareholders with aligned interest. If more than 50 percent of the shares are transferred within a five-year period, the entire amount of any pre-existing tax losses may be disallowed. However, a built-in gains exception in the context of an ownership change may apply, whereby any pre-existing tax losses are permittedup to the amount of the built-in gains to the extent that such gains are taxable in Germany. However, the general German loss limitation rules (minimum taxation)have to be followed also after an acquisition.
Often, in order to push down debt on an acquisition, a new domestic German holding company is utilized as an acquisition vehicle so that interest on the acquisition debt can be offset against the German target’s profits. However, such debt pushdown structures require the domestic holding company and the German target to form a tax group. In addition to the financial integration of the German target,the parties must also execute a profit and loss transfer agreement with a minimum duration of at least five years. As an alternative to setting up a tax group, the domestic holding company and the German target may be merged, either upstream or downstream. As general rule, both forms can be accomplished in a tax-neutral manner. In any debt push-down scenario, however, the parties must also consider the general restrictions of the German interest limitation rules.
Step-up for target company
The shares of an acquired German target are reported at the acquisition cost on the books of the domestic holding company. A step-up in basis of the acquired German target assets may be possible in an upstream merger, however, such a structure would create a similar gain in the German target. Beside of that, no special structures or elections are available for a step-up in basis.
Costs associated with the transaction (e.g. due diligence, attorney, and broker’s fees,etc.) are considered part of the acquisition costs if the principal decision to effect the acquisition was made at the time that such costs were incurred. Only costs incurred in advance of the principle purchase decision (e.g., market survey, feasibility study costs)are tax-deductible. From the seller’s perspective, transaction costs that are directly related to the sale of the shares must besubtracted from the consideration.
Exit scenario: capital gains tax on sale of shares by a nonresident
Capital gains from the sale of a 1 percent or greater ownership interest in a German target by a nonresident are subject to German corporate income tax. If the nonresident is a corporate entity, however, 95 percent of any capital gains are generally exempt from corporate income tax. Germany does not impose a withholding tax on capital gains. If an income tax treaty applies, the seller’s resident country typically has the exclusive right to the capital gains (unless German target is a real-estate company), in which case the transaction would not be subject to German tax at all, even in the case of a 1percent or greater ownership interest.
Other special taxes or issues to be considered
Germany does not impose a stamp duty. However, if the German target owns realestate, the transaction may be subject to German real estate transfer taxes. German real estate transfer tax rates generally range from 3.5 percent to 5.5 percent of the asset value, depending on where the real estate is located.
Reference: WTS Legal Consulting