What post-acquisition restructuring, if any, is typically carried out and why?
A typical restructuring measure after the acquisition of a company is a merger of the acquisition vehicle into the target to realise debt pushdown without the adverse tax consequences that a simple assumption of debt would have. Other than in upstream mergers, the existing losses carried forward are not lost in the absorbing company.
Another frequent post-acquisition measure is a change of legal form to change the tax treatment of the profits distributed by the target to the buyer under the relevant double taxation agreement. For example, a transformation of a partnership into a corporation might be sensible if the respective double taxation agreement provides for withholding tax relief for dividends, while a transformation the other way around can be advantageous if there is no withholding tax relief in the double taxation agreement.
An upstream merger of the target into the acquisition vehicle might help avoid the taxation of 5 per cent of the profit distributions of the target to the acquisition vehicle pursuant to section 8(b) of the Corporate Income Tax Act (KStG).
If the target owns real estate that is rented to other parties, it is advisable to transfer the real estate from the target to a separate company. Rental income is free of trade tax (sections 9(1) and 2 to 6 of the Trade Tax Act), but only for companies that exclusively rent out real estate and do not participate in any other business activities.
Another post-acquisition restructuring is the formation of a tax group between the target and the acquisition vehicle for corporate tax and trade tax. This can usually be achieved by signing a profit-and-loss-sharing agreement with a minimum term of five years, but may be achieved retroactively if the profit-and-loss-sharing agreement is properly registered in the commercial register until the end of the respective year, provided that the shares in the target company have been held by the acquiring company since the beginning of the fiscal year of the target company. VAT tax groups arise automatically if the subsidiary is sufficiently integrated into the parent company (section 2(II)(2) Value Added Tax Act).
Tax-neutral spin-offs require the existence and documentation of a separate tax unit (Teilbetrieb).Spin-offs
Can tax-neutral spin-offs of businesses be executed and, if so, can the net operating losses of the spun-off business be preserved? Is it possible to achieve a spin-off without triggering transfer taxes?
A tax-neutral spin-off can generally be achieved under the German Reorganisation Tax Act (UmwStG), but a sale of more than 20 per cent of the shares in the spun-off business within the following five years will lead to retroactive taxation of the hidden reserves (section 15(II)(4) UmwStG).
The net operating losses cannot be transferred in their entirety; rather, they follow the spin-off in proportion to the assets received from the transferring company (section 15(III) UmwStG).
In a spin-off scenario, real-estate transfer tax of 3.5 to 6.5 per cent (depending on the federal state in which the property is located) becomes due on the value of real estate transferred in the course of the spin-off. Spin-offs taking place within a group of companies may be exempt from real-estate transfer tax if 95 per cent of the shares in the spin-off are held for at least five years by the transferring company or another member of the group (section 6(a) of the Real Estate Transfer Tax Act).Migration of residence
Is it possible to migrate the residence of the acquisition company or target company from your jurisdiction without tax consequences?
If a corporation’s residence is migrated from Germany to a state that is not a member of the EU or EEA, the corporation is treated as if it were liquidated (section (12)(III)(1) KStG), pursuant to the market value, and the shareholders are taxed on this basis.
If a partnership’s residence is moved to any foreign state or a corporation’s residence is moved to an EU or EEA state, this will not lead to adverse tax consequences as long as no assets are moved away from Germany or are otherwise to be allocated to foreign jurisdiction. Several recent court decisions suggest that, even when moved away, their hidden reserves remain taxable under section 49 of the Income Tax Act (EStG), but this judicial twist may yet be overturned by new legislation.Interest and dividend payments
Are interest and dividend payments made out of your jurisdiction subject to withholding taxes and, if so, at what rates? Are there domestic exemptions from these withholdings or are they treaty-dependent?
Interest payments are only subject to withholding taxes if either the debtor is a bank or other financial institution or the debt has been registered in a public register (section 43(I)(1)(7) EStG). This restriction applies irrespective of the residency of the lender. If the lender is a foreign entity that is not subject to unrestricted tax liability, the interest payments are, in addition, only subject to withholding taxes if the debt is collateralised by German real estate (section 49(I)(5)(c)(aa) EStG).
Dividends paid by German corporations are generally subject to German withholding taxes under national German law (section 43(I)(1) EStG).
The withholding tax rate for interest and dividends is 25 per cent (section 43(a)(I)(1)(1) EStG). The tax may partly be reimbursed on the grounds of a double tax treaty. If a particular certificate can be obtained before the dividend is paid, no withholding tax will be charged in the first place (section 50(d)(II) EStG).
Dividends paid to shareholders with a shareholding of up to 10 per cent are considered as regular income, whereas capital gains from the alienation of shares remain 95 per cent exempt from tax.
Dividends can only be tax-free if the respective amount has been subject to tax paid at the subsidiary level and further provided that the shareholding exceeds 10 per cent.Tax-efficient extraction of profits
What other tax-efficient means are adopted for extracting profits from your jurisdiction?
Because dividend payments are not tax-deductible on the corporation level but interest and royalty payments are, it is generally more efficient to pay royalties and interest rather than dividends, as long as the relevant double taxation agreement between Germany as the state of residency of the target and the state of residency of the acquirer allocates the right to levy taxes on interest or royalty income to the state of residency of the party receiving the payments. However, the acquirer has to meet certain substance requirements to avoid the application of a special German anti-avoidance rule (section 50(d)(III) EStG, anti-treaty-shopping rule), and the royalties or interest rates must be negotiated at arm’s length to avoid the assumption of hidden profit distributions by the tax authorities.
Section 50(d)(III) has recently been revised after its precursor was deemed too harsh by the European Commission. The latest version denies a foreign company the reimbursement of withholding taxes to the extent that its shares are held by anyone who would not be entitled to a reimbursement him or herself and the company’s income does not stem from its own economic activity. However, the legislator accepts a structuring that shifts dividends out of Germany as long as both a good non-fiscal reason can be shown and sufficient business operation facilities exist to participate in the market.
In addition, a new licence limitation rule has been implemented to be applied for expenses arising from 2018. Licence payments are only limited deductible (section 4j EStG). The new section restricts the deduction of royalties and similar cross-border payments made to related parties if, in the other country, the payments are:
- subject to a preferential tax regime, such as an IP Box regime, and the rules in the other country are not compliant with the OECD nexus approach presented in its base erosion and profit shifting report on Action Item 5; and
- subject to an effective tax rate of less than 25 per cent. A safe harbour exists for royalty payments to a company that carries on substantial research and development activities.
If the law applies, the percentage of the payment that will be nondeductible is calculated by making reference to the percentage shortfall between the effective rate and 25 per cent. Stated mathematically, the formula is (25 per cent – effective tax rate) ÷ 25 per cent. For instance, if the effective foreign preferential tax rate is 10 per cent, German law would regard 60 per cent of all royalty payments as non-deductible. Because 10 per cent amounts to 40 per cent of 25 per cent, the shortfall between the effective rate and 25 per cent is 15 per cent, which is 60 per cent of 25 per cent.
This new legislation also captures indirect licence payments and will apply irrespective of any tax treaties (ie, treaty override).
Law stated dateCorrect on
Give the date on which the information above is accurate.
11 August 2020