The German Federal Ministry of Finance published a draft Bill which will probably have broad implications for the taxation of business restructurings. In particular, the draft Bill includes (i) an extension of the so-called "group exemption provision" in the German Corporate Income Tax Act ("CITA") and (ii) a restriction on tax neutral contributions of business units or shares pursuant to the German Reorganisation Tax Act ("RTA").
Group Exemption Provision
Pursuant to the existing legislation, a German corporation's accumulated carried forward losses are forfeited in the event of a detrimental change of ownership. A detrimental change of ownership is a transfer of more than 25% of the shares in such a corporation to another person within a five year period. Such a transfer results in a pro rata forfeiture of the carried forward losses. Where more than 50% of the shares are transferred, all of the carried forward losses will be forfeited. This is subject to the group exemption provision which provides that carried forward losses will not be forfeited if the detrimental change of ownership is within a group of companies (as defined).
However, the current group exemption provision is not applicable if the top group company is a party to the transfer of shares (seller or purchaser). Furthermore, the current group exemption provision is not applicable if the top company is a (commercial) partnership. The draft bill proposes that the "new group exemption provision" will now apply even in the aforementioned cases. As a consequence, there is likely to be a reduction in adverse tax effects arising in the context of intragroup restructurings.
Tax Neutral Contributions of Business Units or Shares
According to the current RTA regulations, a contribution of business units or shares into a corporation in return for the issue of new shares may be performed on a tax neutral basis if the amount of non-share consideration given, if any, does not exceed the book value of the contributed assets or shares.
According to the draft bill, non-share consideration such as cash given for the contribution will not affect the tax neutrality of the contribution if, but only to the extent that, the fair market value of the other consideration does not exceed an amount of:
- 25% of the book value of the contributed business units / shares; or
- EUR 300,000, but not more than the book value of the contributed business units / shares.
As a result, the ability to provide consideration other than new shares and achieve tax neutral contributions will be restricted significantly.
German tax advice should be sought before any group restructuring or reorganisation is undertaken.