Deals Tax Newsflash

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PwC Germany I September 2024

Tax-neutral reinvestments:

New draft law foresees extended option for tax-neutral reinvestments

An attractive alternative to the standard roll-over steps for founders, management and key personnel?

In brief

With the current draft law for a Future Financing Act II, the Federal Ministry of Finance is planning to improve the tax framework for reinvestments, also in the Venture Capital and the Private Equity sector. Against this background, it is envisaged to adjust the option for tax-neutral reinvestments for individuals. Under the new law, founders, management or other key personnel may be able to reinvest capital gains from the sale of shares in corporations of up to EUR 5 million into other shares in corporations in a tax-neutral manner. The limit for the reinvestment amount would be increased significantly compared to the current limit of EUR 500k. As an alternative to the roll-over under the German Reorganization Tax Act, the reinvestment clause has less complex requirements, does not trigger tainted shares and a reinvestment is also possible in shares of non-EU/EEA corporations. According to the current first draft, the first-time application is planned for 2025.

General German tax implications

Background

In principle, the reinvestment clause enables the tax-neutral transfer of capital gains which are realized on the sale of shares in corporations to other shares in corporations acquired by the individual. The so-called reinvestment should therefore not trigger taxation. The Federal Ministry of Finance has now recently announced that the limit for the transfer of capital gains shall be raised considerably.

Scope of application

The reinvestment clause can inter alia be utilized by individuals having their permanent residence or running a business in Germany, i.e., there needs to be a tax liability in Germany. Capital gains derived from the sale of shares in German or non-German corporations can be deducted from the acquisition costs of newly acquired shares in German or non-German corporations (so-called reinvestment assets).

From a timing perspective, the reinvestment must take place:

in the financial year prior to the sale, or
in the same financial year as the sale or
within the following two financial years by recognizing a special reserve.

With regard to the shares sold, it should be noted that these shares had to be economically attributable to a German permanent establishment of the individual for six years prior to the sale without interruption. It should be noted that shares resulting from the conversion of convertible loans would be deemed to be held since the point in time of providing the loan and not only since the conversion. The shares acquired need to be economically attributed to a German permanent establishment in the same way. The reinvestment clause also applies if the individual holds the shares to be sold via a partnership (e.g., via a German MIP KG).

The current reinvestment clause contains a value transfer limit according to which capital gains are only transferable up to an amount of EUR 500k.

Drafted amendment

Under the draft law published in August 2024, the possibility of transferring capital gains from the sale of shares in corporations shall be increased significantly from EUR 500k to EUR 5 million. This increase is intended to create a wider scope for business reinvestments, especially relevant for Venture Capital and Private Equity investors.

Deal implications

The proposed draft law offers more structural flexibility regarding a potential roll-over or re-investment and thus, the incentivization of founders, management and other key personnel. In contrast to the roll-over under the German Reorganization Tax Act, the reinvestment would not trigger tainted shares and additional compliance obligations. Furthermore, the reinvestment clause enables the acquisition of shares in corporations residing outside the EU/EEA. A reinvestment would therefore be facilitated and would become an attractive and flexible structuring alternative in the context of international M&A transactions with a German nexus. As the proposed amendment is currently only in draft status, it remains to be seen when and to what extent the reinvestment clause may become a viable alternative to the standard roll-overs in Germany.