Share Deal: Tax structuring opportunities

The tax optimisation of the transaction is essential for a successful share deal. In this process, the seller strives to achieve the lowest possible tax burden on the capital gain. But also for the buyer, the structuring of the transaction is an often  underestimated aspect of setting the course for future tax outcomes: In addition to the acquisition process itself (e.g. avoidance of real estate transfer tax), the transaction structure has an impact on the future regular taxation of the target company (e.g. deduction of financing costs, utilisation of losses), on the taxation of profit distributions, and on an tax optimized exit – especially for private equity companies. Below, the holding structure and the simple accrual model (a model of allocating the exiting shareholder's shares in the company's assets to the remaining shareholder) are presented as two buy-side structuring scenarios.

Holding structures as corporate structuring model

In the case of a corporate structure organised purely as non-transparent corporations, the implementation of a holding structure can bring considerable advantages for the buyer with regard to the taxation of distributions, but also in the event of an exit: in the case of individuals, dividends are generally subject to the final withholding tax of approx. 25 per cent (plus solidarity surcharge and church tax, if applicable). In the case of a two-tier corporate structure, the effective corporate income and trade tax burden plus solidarity surcharge, if applicable, amounts to approx. 1.5 per cent. While 60 per cent of the profits from the sale of shares in corporations by individuals are generally subject to the personal income tax rate  (resulting in a tax burden of approx. 28 per cent at the maximum tax rate plus solidarity surcharge and church tax, if applicable), only 5 per cent of these capital gains are subject to taxation in the case of corporations acting as shareholders (resulting in an effective corporate income and trade tax burden plus solidarity surcharge of approx. 1.5 per cent). As shown above, the implementation of a holding structure, leads to significant lower taxation rates for future profit distributions and exit scenarios for corporations acting as shareholders compared to the direct participation of individuals.

However, in the case of such holding structures, the tax treatment of any financing costs (e.g. interest) can be problematic. The financing costs associated with the share purchase are covered by the buyer and thus they are incurred at the level of the holding company. In contrast, the operating profits flow to the target company. Accordingly, the holding company´s possibility to offset the financing costs is limited. This can lead to structural loss and interest carry-forwards. Scenarios like these can be prevented by the so-called debt push-down. The aim is to shift the financing costs from the acquiring shareholder to the target company. This enables offsetting the costs against the operating profits of the acquired company. One of the variants of the debt push-down structure is the merger of the holding company and the target company after the transaction. In general, such a merger can be conducted income tax neutral. It should be noted, however, that in the case of real estate holding companies, such post-acquisition measures can trigger real estate transfer tax again.  

Another variant of a debt push-down is the establishment of a tax group between the holding and the target company. For this, however, the requirements for forming a tax group for income tax purposes (financial integration from the beginning of the financial year as well as the structuring and implementation of the profit and loss transfer agreement) must be fulfilled. 

Simple accrual model

If the target company has the legal form of a GmbH & Co. KG, this circumstance opens up further opportunities for structuring the acquisition transaction. The so-called simple accrual model enables continuing operations of the acquired partnership in the legal form of a limited liability company (e.g. GmbH) without great effort. First, the limited partner’s shares in the limited partnership are acquired by a newly founded GmbH. In the second step, the GmbH acting as the general partner exits the GmbH & Co. KG. As a result, all assets of the target company accrue to the newly founded GmbH as its only shareholder. The new GmbH becomes the universal successor to the assets and liabilities of the GmbH & Co. KG. From a tax point of view, the share deal means the transformation of the purchase price into depreciation potential (step-up) due to the transparent taxation of partnerships. At the same time, the buyer can easily integrate the target company into its existing non transparent corporate structure and, for example, benefit from the tax advantages of a holding structure.