Germany: 028. Share Deal Purchases under the Tax Reorganisation Act

Last Updated: 6 October 1995
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.

The new Tax Reorganisation Act which went into effect in January of this year has opened up an important new possibility for purchasing the shares in a German corporation and then stepping up the basis of its assets to the full purchase price so as to be able to depreciate them with tax effect.

1. Share deals and asset deals in general

In general, a change in the shareholders of a corporation affects neither the legal identity nor the tax status of the company. The purchase price is attributable fully to the shares acquired, which are not subject to scheduled depreciation, although they may be written down to their fair market value. Unlike the goodwill element in a payment for the assets of a business (including acquisition of a partnership interest), which can be depreciated for tax purposes over a period of 15 years, the goodwill element in a payment for shares may not be depreciated. Generally, the purchaser of a corporation is strongly interested in generating depreciation expense based on the full purchase price, not just on the historical book values of the corporation's assets. Goodwill and other self-generated intangible assets not even appearing on the balance sheet of the target corporation are especially important.

The Tax Reorganisation Act presents a major new possibility for reconciling the share deal with the purchaser's desire for full depreciation expense. The fundamental advantage of this new step-up model over the old "internal asset deal" model heretofore employed is that the new structure produces full depreciation of the purchase price without triggering a substantial trade tax in the process. It also does not suffer from an added drawback posed by the solidarity surcharge with respect to internal asset deals.

2. Outline of the step-up model

The new model has several variants, but functions basically as follows:

a) X-GmbH purchases the shares in Target GmbH.

b) Target GmbH is converted into e.g. a limited partnership = Target GmbH & Co. KG. (A new general partner GmbH must be organised; X-GmbH becomes the sole limited partner of Target GmbH & Co. KG).

c) Target GmbH & Co. KG assumes most tax attributes of Target GmbH (but not e.g. its loss carryforwards).

d) The shares in Target GmbH are deemed contributed to the partnership with a book value equivalent to the price just paid for them by X-GmbH. As a result of the conversion, these shares disappear and are replaced by the book values of the assets of Target GmbH. Since these are typically lower than the book value of the disappearing shares, the difference is applied pro rata to the reserves hidden in these assets. The remaining excess is applied to goodwill and other intangibles not previously capitalised by Target GmbH, making the step-up complete.

e) Any excess not attributable to an asset, including the above intangibles, is a tax deductible loss. (This is not likely in transactions implemented shortly after acquisition of Target GmbH.)

By this means, a stepped up basis can be obtained at no income tax cost. This applies both to the corporate income tax and to the trade tax on earnings. The step-up is, however, subject to certain restrictions and, for non-resident persons, to certain uncertainties (see sections 4 and 5 below).

Instead of converting Target GmbH into a limited partnership, it could also be merged into an existing German partnership. Furthermore, Target GmbH could be purchased from the start by a German partnership (so that the GmbH's shares become part of the partnership's German business property) and then merged into this partnership.

3. Retained earnings of the target corporation

The retained earnings of German corporations are for tax purposes divided up into different equity accounts (baskets) depending on the German corporation tax imposed on the revenue earned. Generally, there is an adjustment in this tax burden upon distribution and the recipient of the dividend is, if a resident person, entitled to a credit in the amount of the corporation tax associated with the distribution.

Upon merger of a corporation into a partnership, these equity accounts have to be dissolved, because partnership income is, for tax purposes, attributed directly to the partners and not held in equity accounts pending distribution. The Tax Reorganisation Law takes account of this by providing that the corporation tax paid by a GmbH with respect to its retained earnings is treated as income to the partners upon merger of the GmbH into a partnership. Simultaneously, the partners are entitled to a credit in the same amount, i.e. in the amount of the tax reserves (sec. 4 par. 5, 10 par. 1 UmwStG). The net result of these two provisions in the context of a share deal purchase followed by merger of the acquired GmbH into a partnership is generally a refund of the full amount of the tax reserves to the partners of the acquiring partnership, as is illustrated by the following example:

DM (millions)

Share capital                            10.0
Retained earnings
 Earnings before corp. tax   18.2
 Less 45 % corp. tax         -8.2        10.0
Tax reserves                              8.2
Hidden reserves in tangible assets        6.8
Goodwill (self-created, not capitalised) 65.0

Purchase price                          100.0
Net asset value of GmbH (at book value) -20.0
Tentative loss on merger                (80.0)
Deemed income from tax reserves           8.2
Step-up in basis, fixed assets            6.8
Step-up in basis, goodwill               65.0

Net gain / loss on merger                 0.0
Tax owing thereon                         0.0
Tax creditable                            8.2
Tax refund on merger                      8.2

The above example simplifies the valuation of the tax reserves in determining the purchase price. In practice, the tax reserves must be discounted to take account of the timing of the tax refund they lead to. Depending on the circumstances, the refund could come as early as a few months after the merger or be delayed for years.

4. Restrictions imposed by sec. 50c EStG

Section 50c EStG is intended to prevent circumvention of provisions in the tax code denying any credit for corporation tax paid to certain recipients of dividends from German corporations. Most non-resident persons, natural and legal, fall into the category of dividend recipients not entitled to corporation tax credit. An exception exists only if a non-resident holds shares in a German corporation in a domestic permanent establishment, including the domestic permanent establishment of a partnership in which the non-resident person is a partner.

Section 50c EStG provides that a shareholder who has purchased shares in a German corporation from a person not entitled to the corporation tax credit may not write down the value of the shares purchased by reason of a dividend distribution. Otherwise, a resident GmbH could purchase shares in a corporation with retained earnings from a non-resident, whose capital gain on sale would typically be exempt from German tax under a tax treaty, distribute these retained earnings to itself and claim the corporation tax credit which would not have been available to the non-resident seller had he distributed the retained earnings before making the sale. The buyer GmbH could then, in addition, write down the value of the shares just purchased on its books to reflect the diminished value of the purchased corporation after distribution of its retained earnings. Such a write-down, if permitted, would completely neutralise the dividend and in effect result in a refund of corporate tax to the buyer.

Section 50c EStG prevents this result. The statute is a long and complicated one, operating as well when there is any person not entitled to the corporation tax credit in the seller's chain of title for the past 10 years.

Section 4 par. 5 UmwStG provides that no step-up in basis is available upon merger or conversion of a German corporation into a partnership if the sec. 50c EStG would have prevented a write-down of the sort described above after purchase of the merged corporation's shares. Generally speaking, this means that no step-up is permitted following purchase of shares from a seller not entitled to the corporation tax credit or from a seller who has such a person in his chain of title for the last ten years.

The 1996 Tax Act recently adopted by the German legislature originally contained a provision which would have extended sec. 50c EStG to cover purchases from certain resident sellers who, while entitled to the corporation tax credit, are not taxed on their capital gain. The provision was removed from the law, but may be reintroduced at a later time. (See our article on the 1996 Tax Act.) Any extension of sec. 50c EStG would automatically constitute a new restriction for the step-up model.

5. Uncertainties for non-resident purchasers

The section above is concerned with problems posed when the target corporation is purchased from non-resident persons. There are in addition a number of less well-defined problems raised when the target GmbH is purchased by non-resident persons and then converted into a partnership.

If a non-resident person, e.g. a foreign corporation, purchases the shares of a German target corporation from a person entitled to the German corporation tax credit, this transaction in itself poses no problems under sec. 50c EStG. However, if the purchased corporation is then converted or merged into a partnership, the tax consequences become highly controversial.

Before the conversion or merger, the shares in the target corporation belong to a foreign corporation, i.e. not to the partnership into which the target is being merged or converted. The Tax Reorganisation Law (sec. 5 par. 2, 3 UmwStG) provides that the step-up is only available in such cases if the interest held by the shareholder in the disappearing corporation constitutes a "material share" within the meaning of sec. 17 EStG or if the interest is part of the shareholder's domestic business property. In the case of non-resident shareholders, the second condition can only be fulfilled if they have a German permanent establishment and the shares are business property of this permanent establishment. The controversy here surrounds the first condition, i.e. whether a foreign shareholder can hold a "material share". For domestic tax purposes, a "material share" under sec. 17 EStG is any share in a corporation exceeding 25 %, and some authorities contend that a foreign shareholder who meets this quantitative test qualifies for the step-up in the situation posited. However, the tax authorities and other experts have taken the position that a foreign shareholder only holds a "material share" if the gain on sale of this share is subject to German taxation. This is not the case under most of Germany's tax treaties for foreign resident shareholders.

A second much discussed issue relates to sec. 50c EStG. The sixth paragraph of this complicated section provides that it operates when a person not entitled to the corporation tax credit with respect to a particular shareholding becomes entitled to the credit with respect to this shareholding. The intention is to prevent foreign shareholders who contribute their shares to domestic permanent establishments, thereby qualifying for the corporation tax credit, from taking a write-down on the shares to offset a dividend distribution. The controversy here involves a highly technical point. If the foreign shareholder's 25+ % share in a domestic corporation constitutes a "material share" within the meaning of sec. 5 par. 2 UmwStG, then the share is deemed contributed to the receiving partnership in the moment of the merger/conversion. While it then immediately disappears, because the corporation has ceased to exist, certain authorities nevertheless contend that, for a logical second, it was part of the shareholder's domestic permanent establishment, hence conferred a right to a corporate tax credit, and so triggered sec. 50c EStG, precluding the step-up in basis which the foreign shareholder hoped to achieve.

If a foreign shareholder has no "material share", some writers further contend that any retained earnings of the disappearing corporation are deemed distributed to the shareholder under sec.7 UmwStG, while others believe that no such adjustment should take place. It seems relatively clear, however, that most foreign shareholders will not have deemed income to the extent of any tax reserves of the disappearing corporation and will not receive any credit for this tax because the relevant provisions only apply if gain on sale of the shares would have been subject to German tax. This is not the case under most German tax treaties, hence the provisions do not apply to most non-resident persons (sec. 10 par. 2 UmwStG).

To summarise, it appears inadvisable for foreign persons to acquire shares in German corporations directly with the intent of profiting from the step-up possibilities presented by the Tax Reorganisation Act. Alternative structures (purchase through an interposed German GmbH, purchase through a German partnership so that the shares purchased become part of the partnership's German permanent establishment) are as a rule readily available.

6. Other considerations

The same basic model discussed above with respect to a single German corporation applies as well when purchasing a German holding company under which several operating subsidiaries are held. By converting all the companies in the purchased group into partnership form, a step-up in basis can be obtained for all entities purchased.

After having converted to partnership form, it appears necessary to do business in this form, at least for a time. Immediate reconversion to corporate form would probably lead to attack by the tax authorities under Germany's general anti-abuse provision, sec. 42 AO. Once lapse of time or changed circumstances permit reconversion to corporate form as a general matter, a number of possible methods exist for accomplishing this. One of the most interesting of these for a partnership with e.g. two partners, one resident in Germany (a management GmbH) and the other resident in another EU member state (the non-resident limited partner) involves withdrawal by the German partner. This terminates the partnership (for want of a second partner) and causes the partnership property to pass by operation of law to the non-resident partner, who now has a German permanent establishment, which can be converted into a GmbH under a special provision in the new Tax Reorganisation Law (sec. 23 par. 2 UmwStG).

If a corporation is converted/merged into a partnership and the partnership's business is thereafter sold or terminated within five years, any resulting gain will be subject to trade tax (sec. 18 par. 4 UmwStG). The situation on sale of an interest in the partnership is unclear.

Finally, achieving a successful step-up in basis using the Tax Reorganisation Act is not the only consideration when planning the acquisition of a German company (or group of companies). Careful attention must in particular be given to financing costs, to the German thin capitalisation rules, and to the differences in the tax rates for German corporations (30 % distribution rate + withholding tax) and for German permanent establishments (partnerships) of foreign corporations (42 %). Furthermore, partnerships under German law can be the lead or dominant member of a consolidated tax group, but not subordinate members. The step-up model may thus pose loss-sharing problems under certain circumstances.

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. 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”

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
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 you may opt out by clicking here

    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.

    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.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    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.

    By clicking Register you state you have read and agree to our Terms and Conditions