Mr Robert E. Tromp

KPMG Germany Webpage
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  1. Reorganisation Step-Ups

The German tax rules in force prior to enactment of the landmark German tax reform package reported on in article no. 209 generally permit the purchaser of a German corporation to reorganise the corporation as a partnership at no income tax cost and thereby obtain a step-up in the basis of the disappearing corporation's assets. The step-up includes previously non-capitalised intangibles, such as self-generated goodwill, and creates additional depreciation volume for personal or corporate income tax purposes, but not trade tax purposes, where the disappearing corporation's outside basis (price paid for its shares) exceeds its inside basis (book value of its assets).

  1. New Law And Transition Rules

The new tax reform legislation eliminates this step-up. However, possibilities still exist to obtain a step-up following a corporate acquisition, provided the fiscal year of the target corporation is not identical to the calendar year. Generally speaking, the reorganisation of a non-calendar year corporation as a partnership is potentially subject to the old reorganisation law and hence may qualify for a step-up if two primary conditions are met:

  • The application for entry of the reorganisation in the Commercial Register must be filed by the close of the corporation's 2000/01 fiscal year.
  • The effective date of the reorganisation (up to eight months prior to entry of the reorganisation in the Commercial Register) must fall in the corporation's 2000/01 fiscal year.

Under the law as enacted in July 2000, not just the filing, but also the actual entry of the reorganisation in the Commercial Register had to occur by the end of the 2000/01 fiscal year in order for the old reorganisation law to apply. This rule was criticised because the taxpayer has control only over the date of filing, not the date of actual entry, which is generally a month or more after filing, depending on the work load and efficiency of the Commercial Register in question.

In response to this criticism, the tax authorities announced in mid-November 2000 that they would apply the old tax reorganisation law at the request of the parties if all requirements for application of the old law were met except that of timely entry in the Commercial Register.

With respect to reorganisations of calendar-year corporations, the tax authorities' announcement meant that a reorganisation filed with the Commercial Register by the end of 2000, but not entered until 2001, could potentially qualify for a step-up. With respect to corporations with a fiscal year ending on 31 December 2000 for which no such filing occurred, it is, however, now almost certainly too late to achieve a tax-effective reorganisation step-up. Nothing is gained by changing the fiscal year of such corporations so that it no longer coincides with the calendar year. However, there may be a slight chance that ambiguity in the wording of the relevant statute would permit one to reach the desired result on other grounds.

  1. Alternative Acquisition Structure

Where a reorganisation step-up is impossible, the next best alternative is to delay the effective date of a share-deal purchase so that the vendor is able to sell the shares tax free to the buyer. The new German tax reform creates an exemption for gain on the sale of corporate stock (50 % exemption if the seller is an individual, 100 % exemption if the seller is a corporation), but the exemption does not become available until 2002 at the earliest. While the vendor's capital gains exemption is of no direct tax benefit to the purchaser, the purchaser can claim a share of the vendor's new tax break in the form of a lower purchase price while leaving the vendor with the same net proceeds as before. Tax professionals have devised structures which permit the parties to bind themselves today to a contract of sale to take effect at the appropriate time in the future.

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