Germany: 072. Draft Directive on the Exchange Opinion

Last Updated: 1 July 1997
KPMG Germany Webpage
Click on the above link to visit the KPMG Germany webpage on the Mondaq website
For disclaimer and copyright see end of this article.

1. Introduction

In early April of this year, the Federal Ministry of Finance released a draft directive summarising the position of the tax authorities with regard to the so-called "exchange opinion" rendered by the Federal Tax Court almost 40 years ago. Handed down on 16 December 1958 (BStBl III 1959, 30), the "exchange opinion" is a ruling by an en banc panel (Grosser Senat) of Germany's highest tax court that the exchange of shares in one corporation for shares in a second corporation will by way of exception not result in taxable gain to either party if the shares exchanged are economically equivalent in value, type, and function.

The requirements for coming under the exchange opinion are relatively restrictive, for which reason it is not frequently invoked. Still, taxpayers have successfully relied on the exchange opinion over the years and it has been confirmed by subsequent court decisions, one of which expanded its scope to include contributions of shares to a corporation in return for shares in the receiving corporation (exchange of a direct participation for an indirect one). However, the exact status of the exchange opinion in relation especially to the Tax Reorganisation Act, which also deals with tax-exempt restructuring in general and contributions of shares in particular, has never been entirely clear. The draft directive is welcome above all because it establishes the independent applicability of the exchange opinion in situations which cannot be brought under the Tax Reorganisation Act. The exchange opinion thus offers possibilities for tax-exempt reorganisations in addition to those provided by the Tax Reorganisation Act.

It is recalled that, while an exchange constitutes a disposition under German tax law, not all dispositions of shares are taxable in the first place. Dispositions of shares held as private, as opposed to business property, are non-taxable unless they constitute part of a material ownership interest (over 25 % held any time within the last five years) or were acquired in a tax-free reorganisation or sold within six months of acquisition (speculation period). The exchange opinion is of course relevant only to otherwise taxable dispositions. It is likewise inapplicable to transactions which are covered by the Tax Reorganisation Act.

Like the Tax Reorganisation Act, the exchange opinion shields the participants only against tax on income. The exemption does not cover real estate transfer tax or VAT.

KPMG submitted written comments on the draft directive to an umbrella trade organisation (Deutscher Industrie- und Handelstag) in early May 1997.

2. General scope and requirements of the exchange opinion

2.1 Type of qualifying property

The exchange opinion deals only with the exchange of shares in corporations. The draft directive states that its principles cannot be extended to other types of property, such as interests in partnerships. There is support, however, for extending the principles involved to other like-kind exchanges. KPMG urges that this be done in the final version of the draft directive.

The shares being exchanged need not be held as business property. However, shares held merely as passive investments cannot qualify for a tax-exempt exchange.

The shares being exchanged need not be shares in a domestic corporation. However, the draft directive states that an exchange of shares in a domestic corporation for shares in a foreign corporation will trigger tax in certain instances (see following section).

2.2 Equivalence in value, type, and function

The primary requirement of the exchange opinion is that the shares exchanged be economically equivalent to each other with regard to value, type and function (referred to in German by the somewhat old-fashioned term "Naemlichkeit" meaning identity or strict equivalence of the shares). If this requirement is met, the participants to the transaction carry over their old basis in the shares they tender to the shares which they receive without recognising gain.

Equivalence in value is present according to the draft directive if there is no more than a 10 % difference in fair market value between the shares being exchanged. It is permissible for the party receiving the shares with higher value to compensate his counterparty in cash or other property (boot) for the difference. It is, however, not permissible to divide what is economically speaking a unified transaction into two parts, i.e. an exchange and a sale, so as to stay within the 10 % limit on the exchange part of the transaction. If boot is involved in a qualifying exchange, the draft directive states that gain will be recognised on the transaction to the extent thereof (i.e. if 10 % boot, then recognition of 10 % of the difference between fair market value and tax basis as taxable gain).

Equivalence in type and equivalence in function are lumped together in the draft directive, which provides the following guidance:
  • The degree of shareholder influence conveyed by the shares must be approximately the same.
  • Neither material advantages nor material disadvantages may be created or eliminated as a result of the exchange.
  • No material change in the tax situation with respect to the shares is permitted. For example, the transaction may not create or terminate any participation privilege or create a situation in which a corporation can benefit from the exemption of sec. 8b par. 2 KStG on sales of shares in foreign corporations. Both restrictions operate as a rule when shares in foreign corporations are received by a domestic corporation so as to cause the shareholding to climb from under 10 % to 10 % or more.
  • If the shares tendered are part of a material ownership interest under sec. 17 EStG (shares held as private property exceeding 25 % of the share capital), those received must also form part of such an interest. However, according to the draft directive, the exchange of shares forming part of a material ownership interest in a domestic corporation for shares which are part of a material interest in a foreign corporation will trigger immediate tax.
  • The draft directive states that the analysis of equivalence of type and function must take account of a participant's relationship to other entities, especially that of a group company to other members of the group. A material change affecting another group member could be enough to prevent a tax-free exchange. Account is likewise to be taken of a participant's ownership interests in other companies.
  • On the positive side, the draft directive states that the shares exchanged need not be in corporations belonging to the same industry in order to qualify as equivalent in type and function.

2.3 KPMG comments on equivalence in value, type, and function

KPMG is critical of the strict 10 % limit for boot (the Federal Tax Court spoke merely of "approximate" equivalence in value) and believes that qualifying exchanges involving non-cash boot should be tax-neutral with respect to the boot as well.

Regarding equivalence in type and function, KPMG points out that the relevant issue is whether the advantages created are approximately equal in weight to those surrendered, it being inevitable that new advantages will attach to new shares.

With regard to the requirement of no material change in tax position, KPMG suggests including a clarifying statement to the effect that the creation or destruction of the requirements for a tax consolidated group (Organschaft) is irrelevant to the analysis of equivalence of type and function. For purposes of this analysis, KPMG opposes taking account of intra-group relationships and interests in other companies as it is in practice often difficult to assess the consequences of such factors in advance.

Regarding the situations involving material ownership interests in which the draft directive stipulates immediate taxation, KPMG points out that it would be sufficient to provide for deferred taxation upon disposition of the shares received. This is the solution employed by the Tax Reorganisation Act in similar situations.

3. Special provisions for contribution of shares to a corporation

Under the Tax Reorganisation Act, it is possible to contribute shares in a corporation to a domestic corporation in return for the latter's newly issued shares if, after the transaction, the receiving corporation holds a majority interest in the corporation whose shares are contributed (sec. 20 par. 1 UmwStG). It is also possible to contribute shares tax-free to a foreign European Union corporation. The same condition applies (after the transaction, the receiving EU corporation must hold a majority interest in the corporation whose shares were contributed and the contributor must receive newly issued shares from the receiving EU corporation). The tax exemption is lost, however, if the EU corporation disposes of the shares received within 7 years following the exchange (sec. 23 par. 4 and sec. 26 par. 2 UmwStG).

The exchange opinion permits a tax-free contribution in circumstances where the above provisions cannot apply for one of the following three basic reasons:

  • The shares held by the receiving corporation before the contribution together with those it receives in addition are not sufficient to give it a majority interest; or
  • The receiving corporation is neither a domestic corporation nor a EU corporation (i.e. a foreign, non-EU corporation); or
  • The receiving corporation transfers its own shares in return for those received, but the shares it transfers are not newly issued shares.

The draft directive states generally that no contribution is covered by the exchange opinion unless Germany retains its right of taxation upon ultimate disposition of the shares received. It then goes on to create two additional requirements:

  • If the receiving corporation is an EU corporation, it must show the shares received on its balance sheet at the same value as they had in the hands of the contributor (carryover basis).
  • If the receiving corporation is an a non-EU foreign corporation, the exemption is lost if the corporation disposes of the shares received over the next 10 years for contributions received prior to 1 January 1992 and over the next 7 years for contributions received from this date on.

The two requirements are interrelated. In the case of EU receiving corporations, the draft directive seeks to prevent disposition of the shares received without full taxation by requiring a carryover basis, which would result in a normal capital gain on disposition. For non-EU receiving corporations, the draft directive instead insists on a long holding period.

KPMG considers the contemplated solution infelicitous. The first requirement makes the tax exemption contingent on an aspect of foreign tax accounting law. The foreign treatment should be of no importance for German tax purposes, even in the case of an EU corporation. Even within the EU, harmonisation is still a long way off in the relevant areas of the law.

The second requirement is welcomed to the extent it requires a 7 year holding period. This accords with the holding period under sec. 26 par. 2 UmwStG for a similar transaction. However, the longer holding period of 10 years for pre-1992 contributions should be shortened to 7 years, as this was the period provided for in analogous situations under German tax reorganisation law prior to 1992 as well.

4. Matters not covered by the draft directive

The draft directive does not comment on the application of the exchange directive to an exchange of shares in connection with a division (split-off or split-up) in which the percentage ownership of the owners in the entities created does not mirror their percentage ownership of the entity which was divided. The draft directive on the Tax Reorganisation Act recognises that such transactions can qualify for tax-exempt treatment. The draft directive on the exchange opinion should do likewise.

5. Conclusion

The draft directive will be the subject of debate over the coming months. We will report on this matter as further developments warrant.

For further information, please send a fax stating your inquiry to KPMG Frankfurt, attn. Christian Looks +49-(0)69-9587-2262 or enter text search "KPMG Germany" and "Business Monitor".

You may also wish to visit the KPMG Germany website at Click Contact Link or KPMG's International website at Click Contact Link

Disclaimer and Copyright

This article treats the subjects covered in condensed form. It is intended to provide a general guide to the subject matter and should not be relied on as a basis for business decisions. Specialist advice must be sought with respect to your individual circumstances. We in particular insist that the tax law and other sources on which the article is based be consulted in the original, whether or not such sources are named in the article. Please note as well that later versions of this article or other articles on related topics may have since appeared on this database or elsewhere and should also be searched for and consulted. While our articles are carefully reviewed, we can accept no responsibility in the event of any inaccuracy or omission. Please note the date of each article and that subsequent related developments are not necessarily reported on in later articles. Any claims nevertheless raised on the basis of this article are subject to German substantive law and, to the extent permissible thereunder, to the exclusive jurisdiction of the courts in Frankfurt am Main, Germany. This article is the intellectual property of KPMG Deutsche Treuhand-Gesellschaft AG (KPMG Germany). Distribution to third persons is prohibited without our express written consent in advance.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.