Germany: Tax neutral cross-border downstream merger
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.
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