Planning tax goals when acquiring a company

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​​​​published on 18 August 2022 | reading time approx. 3 minutes

German world market leaders continue to buy companies at home and abroad for strategic reasons in order to grow. To ensure that the acquisition of the company is optimal from a tax perspective, the buyer should, however, first take a close look at the target and its own tax structure.

When taking over another company, economic reasons, such as improving the market position, should of course come to the fore. The greatest risks lie in business miscalculations or underestimated cultural differences, not necessarily in taxes.

  • COMPREHENSIVE ANALYSIS OF THE TARGET 
  • DIFFERENT RULES WHEN BUYING A FOREIGN COMPANY 
  • BRINGING FOREIGN INCOME TO GERMANY IN A TAX-OPTIMISED MANNER 

Comprehensive analysis of the target

This is particularly relevant because a tax review of the target is conducted already in advance of a well-considered company takeover. As part of tax due diligence, the tax history for the last three to five years is analysed, the current tax status (status of assessment, any tax liabilities, etc.) is determined and the tax risks for the buyer are assessed on the basis of those data.
 
In the current market environment, it is often necessary to examine the extent to which unused losses of the target company can be utilised. This is problematic when corporations in Germany are taken over as part of a share deal. If more than 50 per cent of ownership interests are acquired, this results, in principle, in the elimination of losses.
 
Nevertheless, in many cases, acquired losses can be preserved (at least partially). If, for example, the purchase price covers hidden reserves, the losses can be transferred to the new corporate structure in the corresponding amount.
 
Even when acquiring companies in crisis, the acquisition of an equity interest, which is in itself "harmful", does not lead to the elimination of losses if the purpose of the acquisition is the reorganisation of the company's business operations. To this end, certain conditions must be met, e.g. jobs must be maintained or the company's equity strengthened. In an acquisition of a company in crisis, a detailed examination verifies whether such conditions are met.

Different rules when buying a foreign company

Each country has its own rules for limiting loss utilisation, including the United States. On that market, German family businesses still buy other businesses particularly often. The U.S. regulations are comparable to those applicable in Germany, so it should be clarified whether the losses of the target can be utilised after the acquisition. This should be checked on a case-by-case basis, depending on the country. Perhaps there are exceptions. If not, and if the utilisation of losses is important from the economic point of view, then the alternative would be an asset deal.
 
In an asset deal, individual assets are taken over, such as key fixed assets, certain trademark or licensing rights, a customer base or goodwill.
 
Advantages: The assets are recognised in the buyer's balance sheet at the acquisition price and (with the exception of land, for example) can be depreciated. By way of the so-called "step-up", loss potential is in a way transferred as part of the depreciation volume. Depreciation reduces the buyer’s taxable profit in subsequent years. In addition, in an asset deal, strategically unimportant assets do not have to be purchased, but remain with the seller. Furthermore, the asset deal is also important in insolvency situations in which certain assets should not be taken over or a transfer of operations is to be prevented.

Incidentally, a step-up automatically arises normally where the purchase price is converted into tax savings, when a German partnership is taken over.
 
Another goal of the buyer is usually to deduct the financing expense for tax purposes. Since, in the case of the acquisition of a domestic or foreign corporation, the interest expense of the buyer can initially only be offset against its own profits, other possibilities should be explored. In Germany, this may be achieved by means of a tax consolidation group or a merger. Forming a tax consolidation group requires a duly concluded profit and loss transfer agreement. However, the buyer must be aware in advance that he then also assumes greater liability risks. This applies analogously to the merger, in which the acquired corporation is merged with the buyer to form one company. Tax advantage of the solutions: The expenses and income arising from the company takeover are then combined within one company.

Bringing foreign income to Germany in a tax-optimised manner

An important aspect of acquisitions of foreign companies is the tax-optimised repatriation of future profits of the new subsidiary to Germany. If, for example, an Indian corporation is to be acquired, it should be noted that withholding tax will be deducted from a distribution. According to the double taxation treaty with Germany, the withholding tax is 10 per cent and the recipient, which is usually a German corporation, may not credit it. The withholding tax therefore becomes a definitive charge.
 
Even when buying a company in Europe, an investment in a partnership is often more advantageous for family businesses from a tax point of view than an investment in a corporation. Example Italy: A German limited partnership (KG) takes over an Italian partnership. In that case, the profits are taxable only in Italy. The transfer of profits to the owner of the German KG is not subject to any further taxation in Germany.
 
Small tax pitfalls should also be considered for cost-related reasons. In the United Kingdom and in some Eastern European countries, for example, stamp duty is payable on the acquisition of a company. If land is also transferred, then it may be also necessary to pay land transfer tax.
 
From a tax point of view, there are a number of questions that need to be asked before buying a company. However, the answers are always case-specific. It is important that the buyer carries out respective tax planning at an early stage.

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