With the draft (and also the final bill) of the “Act to Modernise Corporate Income Tax Law” (Gesetz zur Modernisierung des Körperschaftsteuerrechts, in short: KöMoG), which was the subject of a public hearing of the Finance Committee on 3 May 2021, the Federal Government has set itself great goals. Thus, in addition to the also significant introduction of an opportunity for commercial partnerships and partnership companies to opt in for corporate taxation, the Reorganisation Tax Act is to be globalised. Already with the “Act on Tax Measures Accompanying the Introduction of the European Company and on the Amendment of Other Tax Provisions” (Gesetz über steuerliche Begleitmaßnahmen zur Einführung der Europäischen Gesellschaft und zur Änderung weiterer steuerrechtlicher Vorschriften, in short: SEStEG) of 7 December 2006, the scope of application was essentially extended to the territory of the member states of the European Union and the European Economic Area – although globalisation was discussed at the time. Now, certain conversions involving Non-EU/EEA countries are also to be subject to the regulations of the Reorganisation Tax Act. Along with this, the hitherto applicable, partly controversial regulations on Non-EU/EEA country-mergers (section 12 (2) Corporate Tax Act) and on the dissolution of a company in the event of the transfer of its registered office or management to a Non-EU/EEA country or its domicile in a Non-EU/EEA country (section 12 (3) Corporate Tax Act) must be completely abolished. But one after the other…
Globalisation of the Reorganisation Tax Act
The German Reorganisation Tax Act is intended, on the one hand, to remove tax obstacles, inter alia, in the case of cross-border and purely foreign reorganisations of companies and to improve the possibilities of free choice of legal form. This is achieved in principle by the possibility of continuing book values in the (tax) balance sheets of the companies involved in reorganisations, subject to application, or of continuing the acquisition costs in the case of certain shareholders.
On the other hand, however, the German tax base is also to be consistently safeguarded (sometimes too much), especially in the case of cross-border conversions. For example, the possibility of perpetuate the book values or acquisition costs (instead of using the market value) is linked to sometimes strict conditions or, in the event of a later actual sale, a German right of taxation is secured irrespective of any provisions of a generally applicable double taxation agreement.
The KöMoG does not change any of this. However, the change in the scope of application of the Reorganisation Tax Act, which at first glance seems to have little impact, is quite considerable.
Up to now, in particular mergers as well as splits and spin-offs of corporations or their change of legal form into partnerships have only been possible in certain cases under the Reorganisation Tax Act.
For example, the transferring and acquiring or transforming legal entity must be an EU/EEA company whose registered office and place of management are located within the EU/EEA. Alternatively, the acquiring entity may also be a natural person. However, its domicile or habitual residence must also be within the EU/EEA and it may not be deemed to be resident outside the EU/EEA on the basis of a double taxation treaty with another state. European Companies (SE) and European Cooperatives (SCE) are considered as corresponding companies.
However, mergers, demergers and changes of legal form of corporations, associations of persons and estates that were founded outside the EU / EEA and have neither their management nor their registered office in Germany, have not been covered by the Reorganisation Tax Act so far. Only in the case of
- foreign (i.e. not cross-border) mergers of these companies
- into a company subject to German non-resident taxation (i.e. not to associations of persons and estates),
- which has its registered office in the same state,
- in the context of a transfer of the entire assets by means of an operation similar to a merger (within the meaning of section 2 of the German Reorganisation Act) and
- in which in particular the taxation of the built-in reserves is ensured, i.e. taxation with corporation tax, no limitation (Beschränkung) of the German right of taxation, and
- in which any consideration is only in the form of shares,
the following results: A perpetuation tax book values is mandatory in the German (tax) balance sheet of the acquiring corporation, e.g. in the case of a German permanent establishment. Hence, in particular no recognition of an interim value or the fair market value is possible. Any tax losses carried forward by the domestic permanent establishment are thus lost!
With regard to the effects of such a Non-EU/EEA country-merger on the shareholder (taxable in Germany) of the transferring corporation, reference is already made to the Reorganisation Tax Act. According to this, a perpetuation of book values or acquisition costs is now possible in most cases. After considerable criticism from literature and practice, the tax authorities now also follow the approach that it does not depend on the German non-resident taxation requirement of the transferring or acquiring corporation (cf. marginal no. 13.04 of the Reorganisation Tax Decree after amendment by circular of the Federal Ministry of Finance dated 10 November 2016, Federal Tax Gazette I 2016 p. 1252). Furthermore, the tax neutrality of the transaction for the shareholder is also to be made possible in the case of cross-border Non-EU/EEA country-mergers if the German right of taxation with regard to the shares in the acquiring corporation is not excluded or limited!
Due to the planned extension of the scope of application of the Reorganisation Tax Act as a result of the KöMoG
- the same rules will apply to Non-EU/EEA country-mergers (irrespective of limited tax liability or the residence of the acquiring corporation) as to national, cross-border or foreign EU/EEA mergers!
- Non-EU/EEA country-demergers as well as Non-EU/EEA-country changes of legal form and the shareholders involved in the conversion will now, in principle, also have the option of a tax-neutral conversion (subject to the restrictions of the Reorganisation Tax Act!).
- the mandatory order of a final taxation due to (assumed) liquidation in the case of a transfer of the administrative or statutory seat of a corporation, association of persons or estate to a Non-EU/EEA-country – in this case even independent of the securing of German taxation rights! – deleted without replacement!
However, the (demanding) prerequisite for tax neutrality remains that the respective conversion in particular has the structural characteristics of a German domestic conversion and that no German taxation rights are limited or excluded in the future.
No changes for contributions and exchanges of shares!
The scope of application of contributions and exchange of shares, which already does not generally exclude conversion participants resident in Non-EU/EEA-countries, remains unchanged. According to the explanatory memorandum, a complete globalisation of the transformation tax law has been refrained from, as a tax revenue-neutral uniform regulation would be associated with limitations for contributors from the EU / EEA compared to the current legal situation.
Impact on practice
The (partial) globalisation of the Reorganisation Tax Act is quite welcome, as it now allows for a uniform application of the norms of the Reorganisation Tax Act to basically comparable situations. It also eliminates numerous questions of doubt in the case of Non-EU/EEA country-mergers and transfers of the registered office of corporations – even though the Reorganisation Tax Act (still!) contains many questions of doubt.
Against the background of the legislator’s aim to comprehensively globalise a set of rules that is no longer up to date in view of advancing globalisation, the current draft has, however, turned out to be rather restrained. For example, the (double) branch of activity requirement for demergers (doppeltes Teilbetriebserfordernis) remains problematic in many cases – and thus also tax neutrality. This is particularly the case because the specifics of German tax law will have to be applied to Non-EU/EEA-country conversions and these countries will not follow the German requirements. The relevant European branch of activity concept does not change this much. In view of the fact that already the purely domestic German case of a split-up or split-off leads to significant legal uncertainty as to whether the (double) partial holding requirement is fulfilled, this will be even more difficult to implement in the case of Non-EU/EEA countries. Also, the proof that a conversion under foreign law must in particular also have the structural features of a domestic conversion will lead to further difficulties and legal uncertainties due to the extension to Non-EU/EEA countries. Nevertheless, the door has been opened for conversions with a tax transfer date after 31 December 2021.
It seems helpful – at least for cross-border demergers (unfortunately only for new formation!) and changes of legal form of EU corporations within the territory of the EU – that Directive (EU) 2019/2121 of the European Parliament and of the Council amending Directive (EU) 2017/1132 as regards cross-border transformations, mergers and divisions has entered into force on 1 January 2020. This will – also in part – advance the Europeanisation (and possibly also the globalisation) of German company law (unfortunately only for EU corporations). Should the German legislator set out to regulate partnerships and demerger for incorporation beyond the Directive, this would be a big step in the right direction, also in view of ECJ case law! Implementation of the complex directive requirements in the member states is to take place by 31 January 2023.
It remains to be seen – as always – whether the steadily growing globalisation will also increase the courage of the legislator to give (even) higher priority to the goal of enabling tax-neutral (and globally) simpler business transformations without losing sight of the goal of securing the right of taxation. Supplementary tax balance sheets for corporations could be one approach.
This article was first published in: Handelsblatt online, Steuerboard, 3 May 2021 (in German)