Selected tax aspects of IPO

In an IPO ("Initial Public Offering"), not only company and financial law aspects but also tax law issues are relevant. These arise not only during the process of implementing the company’s legal structure for going public but also during the IPO process itself. In this article, we therefore discuss selected tax aspects that are important for German companies looking to debut on the stock exchange.

Changing the legal form of a company preparing for an IPO

Since only stock corporations can go public, a company preparing for an IPO but not having a corresponding legal form often first has to transform into a stock corporation, a partnership limited by shares or a European Company (SE). Such changes of the legal form are possible under the German Transformation Act (Umwandlungs-gesetz).

If the company preparing for an IPO is a limited liability company (GmbH), the transformation into a stock corporation (Aktiengesellschaft) is income tax neutral, as the company retains its identity and continues to be taxed as a corporation. Therefore, the change of the legal form will not trigger any property transfer tax, either.

The situation is different if the company looking to go public has the legal form of a partnership, such as GmbH & Co. KG, for example. In this case, an income tax-neutral change of the legal form is only possible if the company is appropriately structured in accordance with the German Transformation Tax Act (Umwandlungs-steuergesetz). It should be noted that special business assets may also have to be transferred to the company looking to go public and that there is a lock-up period for the shares in that company. In terms of property transfer tax, no transfer of property takes place, but existing holding periods may trigger real estate transfer tax (RETT) in individual cases.

For companies looking to trade their stocks on global stock exchanges, the SE may be a suitable option, whereas it is necessary to carefully plan the structure from the aspects of international tax law.

(Tax) due diligence and IPO Readiness

If the company seeking to go public is required to prepare a prospectus in accordance with the German Securities Prospectus Act (Wertpapier-prospektgesetz), due diligence is necessary. In this context, tax due diligence must also be carried out.

The company must therefore be prepared to provide tax documents and infor-mation as well as identify tax risks. Such risks often arise, for example, from

holding periods arising from restructuring measures that were not observed;
incorrect assessment of bulk transactions for VAT purposes;
accidentally triggered real estate transfer tax issues
non-arm's length inter-company relationships;
unrecognised foreign permanent establishments;
internal contracts that do not comply with tax requirements (e.g. profit and loss transfer agreements).

If material tax risks are identified during a tax due diligence, these may have to be included in the prospectus. The identification and settlement of "past tax burdens" should therefore be dealt with even before an IPO. In addition to the structuring of the company looking to go public, this is an essential part of an IPO readiness project.

Does IPO lead to forfeiture of interest and loss carry-forwards?

If more than 50 per cent of shares in a company are transferred to an acquirer or a group of acquirers, tax losses and interest carry-forwards may be forfeited.

At least the interim acquisition of shares by an underwriting bank is treated by tax authorities as a harmless transfer. The acquisition of shares by new shareholders is usually not critical in the end, because it leads only to the creation of minority shareholdings or sufficient hidden reserves within the company can be evidenced. Nevertheless, tax monitoring is important.

Costs of Going Public

Going public involves considerable costs, in particular costs of issuing shares and fees for advisors involved. Costs of increasing capital can be deducted as tax-deductible expenses according to case law. Thus, the costs of going public in the narrower sense are generally deductible at the level of the company seeking to go public. Costs are not tax-deductible only if they are induced by the shareholders and can lead to a hidden distribution of profits.

Costs incurred by the company for going public may entitle the company to deduct input tax. If the raised capital serves to generally strengthen the company's operations, input tax can be deducted according to the allocation key otherwise applied for general costs.

Conclusion

A planned IPO involves many tax aspects that should not be neglected. Already in the early stages of planning, it is reasonable to investigate the tax feasibility of the desired IPO structure chosen under company law in order to avoid surprises.