Bernhard Schwechel
by Bernhard Schwechel
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. Contact Bernhard.
In the context of a share deal, a large part of the acquisition costs is usually financed by borrowing. A positive leverage effect can be achieved through a so-called debt push-down by combining the interest expenses of the acquirer with the operating results of the target company. In this situation, the company to be acquired virtually buys itself. In order to ultimately ensure a tax-optimised acquisition, there are a number of other considerations in addition to deductible acquisition financing. Taking into account the latest legislative developments on real estate transfer tax tightening for share deals, the downstream merger will be presented as one method of debt push-down.
Downstream merger
One frequently used practice is the implementation of a downstream merger of the acquiring GmbH into the target company. This transfers the liability of the acquisition company to the subsidiary.
In this arrangement, the following should be noted in particular:
It should be noted that shareholding does qualify as “transferring assets” and consequently, due to the loss of the right of taxation, no book value application is formally possible in this respect.
However, the market value (fair market value) corresponds to the book value in the acquirer case, so no tax consequences arise. On the contrary, the downward merger can be carried out in a tax-neutral manner (at book value).
Another positive outcome of the downward merger is that, unlike in the case of a tax group structure, tax-loss carry forwards of the target company (if they have not been eliminated by the acquisition of the acquiring GmbH due to the hidden reserves clause of § 8c KStG) can continue to be used. The downstream merger does not lead to the cancellation of the target company's losses due to the so-called “group clause” in § 8c KStG.
However, caution is advised in the case of a downstream merger if the reserves of the target company are not sufficient to cover the negative net assets (i.e. acquisition liability). This is seen as an impermissible withdrawal under company law, which qualifies as a prohibited disbursement of share capital. The non-enforcement of a compensation claim against the foreign shareholder is treated by the tax authorities as a hidden distribution of profits.
Caution is also required in the case of “valuable” real estate. As of 01 July 2021, the provision for corporations must be observed. According to this provision, the downward merger arguably leads to a transaction subject to real estate transfer tax at the level of the target 2 GmbH. An exemption under § 6a GrEStG cannot be considered, as the five-year reservation period has not been fulfilled.
FACT GmbH Wirtschaftsprüfungsgesellschaft is a tax consultancy, public auditing company, and law firm located in Kassel, known as the heart of Germany. FACT provides German and international accountancy and tax services to companies and individuals. The experienced team works on cross-border issues for German clients as well as for foreign clients. FACT works closely with its clients and responds rapidly to their needs.
GGI member firm FACT GmbH Wirtschaftsprüfungsgesellschaft Kassel, Germany T: +49 561 316 6860 Tax, Auditing & Accounting, Advisory, Corporate Finance, Fiduciary & Estate Planning