International Tax Review is part of the Delinian Group, Delinian Limited, 8 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2023

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Germany: Tax neutral cross-border downstream merger

Linn-Alexander
Braun

Alexander Linn

Thorsten Braun

In a decision dated April 22 2016 (6 K 1947/14 K, G), the Tax Court of Duesseldorf ruled that in the course of a cross-border downstream merger, the shares in the surviving entity must be capitalised at book value.

In the case, a German resident GmbH (limited liability company) was merged cross-border into its wholly-owned subsidiary, a corporation resident in Luxembourg. The shareholder of the GmbH was resident in the US. The court had to decide whether the shares in the Luxembourg subsidiary would have to be capitalised at book value or at fair market value in the closing balance of the disappearing German GmbH. A capitalisation at fair market value would have resulted in the disclosure of built-in gains and an effective taxation of 5% of such gains.

In guidance issued on the matter, the fiscal authorities had said the shares should be capitalised at fair market value. The interpretation of the legal provisions by the tax authorities was mainly driven by the fact that the merger would result in a loss of German taxation rights.

However, the Tax Court of Duesseldorf (the Court) decided, in contradiction to this earlier opinion, deciding not only to capitalise the shares at book value, but also explicitly rejecting the interpretation as published in the decree on the tax implication of mergers (Umwandlungssteuererlass), issued by the German Federal Ministry of Finance on November 11 2009. The court stated that in a down-stream merger the shares in the surviving entity (the Luxembourg subsidiary) can be capitalised at their book value in the disappearing parent company. According to the court, the shares would neither directly nor in analogous interpretation qualify as passing over assets in the sense of Section 11 para 1, para 2, s1 of the German Transaction Tax Act. Instead, the shares would have to be valued separately according to Section 11 para 2, s2 of the Transaction Tax Act, and increased by any write-downs and deductions according to the applicable provisions in the Income Tax Act. In the case at hand, no write-downs or other deductions had been made.

The first instance decision by the court answers a heavily discussed question on the implication of cross-border downstream mergers. The Federal Tax Court will have the final word in its proceedings on an appeal pending under I R 31/16.

Alexander Linn (allinn@deloitte.de) and Thorsten Braun (tbraun@deloitte.de)

Deloitte

Tel: +49 89 29036 8558 and +49 69 75695 6444

Website: www.deloitte.de

more across site & bottom lb ros

More from across our site

Two months since EU political agreement on pillar two and few member states have made progress on new national laws, but the arrival of OECD technical guidance should quicken the pace. Ralph Cunningham reports.
It’s one of the great ironies of recent history that a populist Republican may have helped make international tax policy more progressive.
Lawmakers have up to 120 days to decide the future of Brazil’s unique transfer pricing rules, but many taxpayers are wary of radical change.
Shell reports profits of £32.2 billion, prompting calls for higher taxes on energy companies, while the IMF warns Australia to raise taxes to sustain public spending.
Governments now have the final OECD guidance on how to implement the 15% global minimum corporate tax rate.
The Indian company, which is contesting the bill, has a family connection to UK Prime Minister Rishi Sunak – whose government has just been hit by a tax scandal.
Developments included calls for tax reform in Malaysia and the US, concerns about the level of the VAT threshold in the UK, Ukraine’s preparations for EU accession, and more.
A steady stream of countries has announced steps towards implementing pillar two, but Korea has got there first. Ralph Cunningham finds out what tax executives should do next.
The BEPS Monitoring Group has found a rare point of agreement with business bodies advocating an EU-wide one-stop-shop for compliance under BEFIT.
Former PwC partner Peter-John Collins has been banned from serving as a tax agent in Australia, while Brazil reports its best-ever year of tax collection on record.