Taxing a company acquisition in Germany

In a corporate transaction, at least two parties – namely the buyer and the seller – are confronted with the question of the tax implications of a transaction. However, tax consequences can also affect the target company itself (e.g. in the form of a limitation of tax loss carryforwards in the case of higher share transfers).

As a rule, the two contracting parties to a German corporate transaction pursue different, often even opposing, strategic, economic and tax interests with the sale or acquisition of a company. While the seller seeks to achieve the highest possible after-tax purchase price, the buyer is interested in paying a low price and being able to claim the payable purchase price as quickly as possible against income.

This in itself creates a conflict of interest between the parties, as the seller generally wishes to enter into a share deal, since this results in a lower tax burden for them than would be the case with an asset deal.

Thus, acquiring a company involves complex taxation considerations, depending on whether it is an asset or share deal. Asset deals generally trigger taxes on hidden reserves and real estate transfer tax (RETT), while share deals (typically )90% acquisition) are often more tax-efficient, especially for corporate sellers, but may still trigger 3.5%–6.5%.

Key tax aspects of acquisitions in Germany

1. Asset deal (acquisition of assets):

The buyer acquires individual assets. This allows a “step-up” in tax basis, permitting depreciation on the stepped-up value (goodwill/assets).

Seller: Capital gains are taxed at the seller's normal corporate income tax (CIT) and trade tax (TT) rates.

Buyer: Generally subject to value-added tax (VAT), but not if the transaction is considered a sale of a business as a “going concern”.

2. Share deal (acquisition of shares):

The buyer acquires the company entity (e.g. GmbH).

Seller: If a corporation sells its shares, 95% of the capital gain is tax-exempt, meaning only 5% is taxed. If a private individual sells a stake of more than 1%, 40% of the profit is tax-exempt, resulting in a tax rate of around 28%.

Buyer: No depreciation of the target company's underlying assets.

3. Real estate transfer tax (RETT): Both asset and share deals can trigger RETT if the target company owns real estate. RETT applies if 90% of shares (or more) are transferred, with rates ranging from 3.5% to 6.5%.

4. Taxation on profits of the target company in Germany ( corporation/e.g. GmbH) is approximately 30% (CIT + TT).

5. Tax liabilities: Buyers often inherit the tax history of a company. In particular, in a share deal, all past tax liabilities are transferred to the buyer, as it remains in the target company. Therefore, share purchase agreements (SPAs) typically include robust tax indemnification clauses for pre-closing tax liabilities.

Important considerations

• Financing: If the acquisition of the company is financed by external funds, there are several ways to claim tax relief on the interest payments in Germany. However, from a certain level, interest payments on debt may be subject to limitations (interest barrier rules).
• VAT: Asset deals are generally exempt from VAT if they are classified as a Geschäftsveräußerung im Ganzen – a transfer of going concern(TOGC).

Acquisitions in Germany are therefore always structured with tax implications in mind, as the consequences for the buyer – in terms of the target company’s tax burden and cash flow –can be significant.

Bernhard Schwechel is a Managing Partner of FACT GmbH and is experienced in the field of International Taxation. His areas of expertise include tax and business advice for large multinational corporations and mid-size companies, as well as for internationally-oriented individual clients. He supports his clients in inbound and outbound M&A projects.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.