Post merger integration – tax actions required

Tax Compliance is a critically important part of any corporate transaction. In most cases, there is a general need for action when considering the results of the due diligence and the following transaction phases. In order to integrate the target company in a tax-optimised manner into the existing structure after purchase, the purchaser should deal with the target and the appropriate tax structure at an early stage in order to avoid tax disadvantages.

Tax compliance when selling a company

The sale of a company can have various implications in the areas of income taxes, real estate transfer tax, inheritance tax and value added tax. When acquiring a company by way of a share deal, the purchaser assumes all existing historical tax obligations of the company being acquired, which means he assumes extensive responsibility for the tax matters and thus tax liability. In the case of an asset deal, on the other hand, the purchaser’s liability is limited to certain types of taxes and certain time frames. The purchaser has an obligation to notify the transfer of business under Section 153 AO (Tax Code) in order to prevent any risks for the company, its management bodies and employees.

A Due diligence can deliver first indications of errors that happened in the past at the target company, e.g. in preparing the tax balance sheet or the tax declarations, which may trigger a need for action on the part of the new owner of the company.

In addition, the accounting system of the target company may need to be reshaped to match the group accounting practices. This may give rise to interfacing problems and/or a change of accounting system may be required.

Furthermore, the acquisition structure and the tax-optimum integration of the target company into the existing company may result in deadlines for notifications and vesting or holding periods, e.g. in relation to real estate transfer tax or conversion tax. As of 2020, there is also the new EU obligation for the reporting of cross-border tax structures.

Setting up an optimum tax structure

In addition to Tax Compliance, a transaction also offers an opportunity for the integration of the target company in a way that optimises tax.

The purchaser will normally be seeking to deduct the financing costs of the transaction (in an international context ideally even doing so multiple times, referred to as “double dipping”). Since each company is in principle an independent tax entity and can therefore only offset expenses against its own income, it is advisable to look for offsetting opportunities outside the company as well. In Germany, a “debt push down” is possible e.g. by using a tax group or a merger.

Another important aspect in the acquisition of a foreign company is how to structure the transfer of future profits to the German shareholder in a tax-optimised way. Thereby, the burden of withholding tax should be reduced as far as possible or even eliminated by a smart combination of bilateral double taxation agreements and within the EU by applying the Parent-Subsidiary Directive.

The choice of legal form must also be born in mind when seeking an optimum tax structure. Hence, it can be advantageous to transfer a newly acquired corporation into a transparent or hybrid taxation structure or to select a suitable acquisition structure for this. For medium-sized entities, which often operate in the legal form of partnerships in Germany, a transparent tax structure via foreign partnerships can be advantageous in order to limit the overall tax burden to profits from abroad when they are repatriated to the German shareholder to the (usually lower) local tax level.

As part of the tax structure, special attention must be paid to checking whether the EU reporting obligation is triggered for cross-border tax planning arrangements.

Conclusion and outlook

The Tax Due Diligence represents a source of information which feeds into the tax compliance system, especially because the timely identification of the tax risks of a company and the completion of the “Action Items” it raises are decisive for its success. From a tax perspective, for example a transparent tax structure using partnerships may be advantageous. The specific action items, the determination of the optimum structure and its implementation require individual advice.