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Draft Amendments to the German Reorganisation Tax Act Leaves Questions Unanswered


With effect of 13 December 2006, the German Reorganisation Tax Act was significantly amended in order to facilitate new possibilities for tax-neutral cross-border reorganisations (mergers, spin-offs, split-offs and hive-downs). Taxand Germany looks at the draft amendments in detail, and what reliance can be placed on it ahead of its publication in September.

The decree issued by the German Federal Ministry of Finance in 1998 which provides guidance for the interpretation and application of the Reorganisation Tax Act has not been adapted so far and is therefore outdated to a large extent which led to significant uncertainties as regards tax planning. In draft guidance published on 2 May 2011, the German Federal Ministry of Finance now comments on issues related to the taxation of cross-border reorganisations, as well as cases that were common practice even before the 2006 reform.

In essence, apart from commenting on the provisions which were introduced in 2006, the draft decree is based on the decree of 1998 and includes many aspects which have been developed in the past by tax literature and the fiscal courts. Unfortunately, most of the positions taken by the tax authorities in the draft guidance follow a rather restrictive approach.

The draft comprises a total of 177 pages and includes information on:

i) Definition of branch
ii) Reorganisations at book value for tax purposes and at FMV for GAAP purposes
iii) Holding periods for shares received in tax neutral contribution in kind
iv) Downstream merger in case of non-resident shareholders.

Taxand's Take

Even though the draft decree clarifies some of the open items, many of the questions in dispute in literature remain unanswered. Since the guidance is still in draft form and may be subject to change, no reliance should be placed on it.

Final rules are announced to be published in September 2011. Until its publication in final form, it is rather unlikely that tax offices will answer applications for binding rulings.

Your Taxand contacts for further queries are:
Peter Sch?ffler
T. +49 89 23714 17375

Jens R?hrbein
T. +49 511 5458 20129

Taxand's Take Author