Comparability of non-German reorganizations

The new Reorganization Tax Decree now explicitly covers comparable non-German transactions in addition to pure domestic German reorganizations. This shall apply to both EU and non-EU jurisdictions.

To ensure that the non-German reorganizations receive the same tax treatment as the German domestic ones, the German Federal Ministry of Finance has provided detailed criteria for assessing the comparability of non-German reorganizations to German domestic reorganizations (i.a., involved entities, structural characteristics and other characteristics).

The new Reorganization Tax Decree represents a significant step towards harmonizing the treatment of reorganizations with European and international (corporate) law.

Transfer of tax-restricted provisions and liabilities by way of a merger of corporations

Tax-restricted provisions and liabilities are specific financial obligations that are accounted differently for German tax purposes compared to their treatment under German GAAP (e.g., in case of provisions for jubilees or old-age part-time but not pensions due to specific wording in the German Reorganization Tax Act).

In the final version of the decree, the German Federal Ministry of Finance changed its perspective on the application of expense allocation for transferred tax-restricted provisions and liabilities by way of a merger of corporations compared to the draft from 2023. These accruing expenses should now be subject to expense allocation and not be immediately fully deductible.

At the same time but subject to a one-year shift, the corresponding gains at the level of the surviving entity should mostly be offset with these allocated expenses, leading to an overall reduced tax exposure (if any).

Impact of reorganizations on German income tax groups

Reorganizations often raise critical questions about the continuity of existing German income tax groups, especially when a tax group parent should be merged into another legal entity. Key considerations include whether the tax group and the associated (domination and) profit transfer agreement remain valid.

As a result of the various rulings from the German Federal Fiscal Court in the recent years, the final version of the Reorganization Tax Decree has now aligned with the relevant case law on continuous financial integration in tax groups. These developments simplify the handling of tax groups during reorganizations and provide greater legal certainty.

Tax-neutral carve-outs and subsequent sale of the carved-out business

The tax decree comprises guidelines on tax-neutral carve-outs, in particular regarding the requirement of a separate business unit and the anti-abuse rules including the corresponding intra-group exemption clause. As a result of the reformed anti-abuse rule, a tax-neutral carve-out may generally not be carried out if a (subsequent) sale to a third party is intended or achieved by the carve-out within a 5-year period following the carve-out.

Under certain circumstances, even intra-group transactions following the carve-out may not be exempted but considered harmful for the tax-neutrality of the carve-out. In this context, the tax decree offers helpful insights on what the German tax authorities consider to be a separate business unit, a third party as well as a preparation of an intended sale.

The final version of the Reorganization Tax Decree introduces several changes for M&A transactions involving German targets, particularly in cross-border contexts and corporate reorganizations.

While the new decree does not change the foundations of performing tax-neutral reorganizations in Germany, on the flip side, items such as the tax-neutrality of (intra-group) carve-outs should be carefully considered in the strategic planning and financial reporting to optimize the financial and tax outcomes.

Nonetheless, the new Reorganization Tax Decree represents an important step toward aligning reorganization practices with evolving economic and legal international landscapes. It provides greater legal certainty and flexibility but also imposes stringent requirements for comparability and expense allocation, necessitating a thorough legal and tax analysis to ensure compliance and to optimize outcomes.