The taxes incurred when purchasing a company are diverse and complex. No wonder, as company sales and equity investments are among the most demanding transactions in Germany. They are also referred to as mergers & acquisitions. Since not all details are regulated by law, a detailed contract must be drawn up to ensure legal protection. Aspects such as the purchase price, purchase motive, and financing are just some of the key elements.
Why M&A-Partner optimizes taxes for you during a company acquisition
Do you want to save taxes when buying a company? Then rely on our decades of experience in tax law, commercial & corporate law, and labor law. From our office in Düsseldorf, our team will accompany you from planning to closing and beyond:
- Structuring a preliminary contract or a soft Letter of Intent
- Tax planning (including tax burden comparison)
- Preparation for Financial, Legal and Tax Due Diligence
- Risk assessment through due diligence documentation
- Structuring the purchase agreement (tax and warranty clauses, lock-up and holdback periods, tax liability allocation, book value continuation, etc.)
- Structuring a confidentiality agreement (Non-Disclosure Agreement)
- Support with acquisition financing (deduction restrictions, interest barrier)
- Tax-optimized integration of the acquired company
Look forward to holistic support that covers the entire spectrum of your company purchase or sale. For an initial non-binding inquiry, we are available by phone, contact form, or email.
1. What is due dilligence?
Due Diligence (careful examination) is a comprehensive risk assessment to avoid unpleasant surprises when buying a company. Economic, legal, and tax aspects are examined – Financial, Legal, and Tax Due Diligence.
As part of Due Diligence, a checklist is usually handed over to the seller. This contains a request to compile the documents and information listed. This information forms the basis for the buyer’s review.
In addition, a Non-Disclosure Agreement is advisable. This agreement primarily offers protection to the seller, who discloses sensitive information during the Due Diligence process.
2. Forms of company acquisition
There are two forms of company acquisition. In a Share Deal, the buyer acquires shares (for example, in a GmbH). The acquired shares cannot be depreciated but can be carried forward as assets. In the case of impending restructurings, the downstream merger model may be used for tax optimization.
In contrast, there is the Asset Deal – here, all individual items, liabilities, and employees are transferred to the buyer (for example, the purchase of land, production facilities, etc.). To understand the differences, we examine both procedures in detail.
A) Share Deal
In a Share Deal, only the owner changes; the company remains. The company can be sold in part or as a whole. The sale only becomes effective through notarization.
Relationships with third parties remain in place in a Share Deal. This includes, for example, contracts, licenses, or industrial property rights. Contracts with a change-of-control clause, however, allow a special right of termination if the majority of the company changes ownership.
Liabilities to third parties are also assumed in a Share Deal. Due Diligence protects against unidentified legacy risks. Representations, warranties, and guarantees can also be included in the purchase agreement – for example, a warranty of operational capability or profitability of buildings or IT systems.
Good to know: Company shares are basically sold at the price of their book value, which corresponds to their proportionate share of the company's equity. On the other hand, there is also the opportunity of a so-called management buy-out, where a company's own shares are repurchased after eight years of existence. The shareholder must then accept the repurchase price to the insolvency administrator.
A Share Deal is typical in the areas of venture capital, private equity, joint ventures, and cross-border transactions – whenever the entrepreneurial risk for the target company is to be limited.
If the company acquisition is financed through a bank loan and the buyer is a natural person, setting up a holding company is advisable, since profits from the sale of a holding company are tax-free (Section 8b Paragraph 2 Sentence 1 KStG). This applies regardless of the shareholding percentage. Profit is defined as the portion of the sale proceeds exceeding the book value (Section 8b Paragraph 2 Sentence 2 KStG). Withdrawals into private assets are not considered disposals.
From a liability law perspective, setting up an acquisition company (NewCo) may also be useful.
If the shareholding is at least 15%, the “Schachtelprivileg” (affiliated company privilege) applies to trade tax when selling a company. According to Section 9 Paragraph 1 No. 2a GewStG, the respective shareholding must exist at the beginning of the financial year.
If more than 25% of the shares of a corporation with a loss carryforward are purchased, the losses are reduced proportionately. If more than 50% of the shares are purchased, the loss carryforward of the target company expires completely.
B) Asset Deal
In an Asset Deal, an entrepreneur sells their assets. That is, all economic goods, including employment, contractual, and legal relationships, are transferred to the buyer. As a result, there is generally no risk of assuming unidentified liabilities. However, contractual relationships with third parties are not automatically transferred. Loss carryforwards and interest carryforwards also do not pass to the buyer.
To correctly record the individual items in an Asset Deal, an inventory list that is notarized is suitable. The purchase price is composed of the prices for the individual assets and can be depreciated for tax purposes.
Additionally, under certain conditions, part of the purchase price may be immediately deductible as a business expense – for example, in a consultancy agreement with the seller.
Debt financing costs are deductible as business expenses for the acquiring company; an interest barrier may apply.
The purchase of a partnership is always treated as an Asset Deal for tax purposes. The purchase price for partnership shares in a limited partnership (KG) can generally be depreciated.
Legal aspects during a company acquisition
- Assumption of insurance contracts: The buyer steps into existing insurance contracts pursuant to Section 69 VVG. Termination is possible but must occur within one month of acquisition or knowledge (Section 70 VVG).
- Assumption of employment contracts: When purchasing a business pursuant to Section 613a BGB, the buyer assumes existing employment contracts. This generally applies if the business is continued unchanged, but must be reviewed.
- Non-compete clause: A contractually agreed non-compete clause can be useful to prevent a competitive situation. The prohibition should be appropriately limited in time and space.
- Liability for liabilities: The assumption of liabilities depends on the type of purchase (Asset Deal or Share Deal). If the seller is a merchant, extensive liability applies. This does not apply when purchasing from a non-merchant.
- Liability for tax debts: According to Section 75 AO, the buyer is liable for business taxes if the company is transferred in its entirety. The purchase price payment can be linked to a certificate of no objection from the tax office.
3. Taxes for the sale of the company
When selling a company, the company profit and the disposal profit are particularly relevant for tax purposes. Income taxes such as income tax and corporation tax, as well as transaction taxes such as value-added tax, play a role here. Sellers and buyers do not always have the same interests.
The taxes due when selling a company vary for the seller, depending on whether it is a private individual (natural person) or a company (legal entity).
A) Taxes in an Asset Deal for private individuals
If a private individual sells their company as part of an Asset Deal, income tax is due on the disposal profit. The profit corresponds to the difference between the disposal costs and the tax book value. Typical disposal costs include, for example, appraiser fees or broker commissions. In addition, trade tax is charged on the disposal profit. Hidden reserves are also taxed.
B) Taxes when selling as a natural person
Partial income method
- When disposing of shares in a corporation by a private shareholder
- 40% of the disposal profit is tax-free if the shares are business assets (trade tax applies)
- 40% of the disposal profit is tax-free if the shares are private assets and there is at least 1% shareholding
Withholding tax
- For a minority shareholding in private assets of less than 1%
- 25% withholding tax on the disposal profit plus solidarity surcharge and possibly church tax
C) Taxing of the sale by legal entities
Taxes on Asset Deal
- Corporation tax and trade tax on the disposal profit
- Hidden reserves are uncovered and taxed
- Partial income method on the profit of each shareholder
- Real estate transfer tax on real estate
Taxes on Share Deal
- Special regulation in the Corporation Tax Act
- When selling shares of a subsidiary by the parent company
- Profit from the sale is tax-exempt
- Actual tax exemption is only 95%, because 5% leads to a non-deductible business expense
D) Tax privileges
Age allowance
In the event of permanent disability or upon reaching the age of 55, there is an allowance on the disposal profit of a maximum of €45,000. This can only be granted once and is reduced from €136,000,000 (Section 16 Paragraph 4 EstG).
One-fifth rule
The one-fifth rule (Section 34 Paragraph 1) treats extraordinary income, such as the disposal profit from a company sale, as tax-privileged. To mitigate tax progression, one-off high incomes can be spread over five years for tax purposes.
Freelancers
Normally, natural persons must pay trade tax on their disposal profit. This does not apply to freelancers.
Reduced tax on extraordinary income
The Income Tax Act (EStG) provides a special regulation for extraordinary income that can be used once. If the extraordinary income does not exceed five million euros, the taxpayer has reached the age of 55 or is disabled, a reduced tax rate of 56% of the actual tax rate may apply (Section 34 Paragraph 3 EStG).
Retention privilege
The retention privilege can be applied to non-withdrawn profits in sole proprietorships and partnerships. According to Section 34a EStG, a reduced tax rate of 28.25% (plus solidarity surcharge) then applies.
Contact
Taxes surrounding a company purchase or sale are a highly complex matter. As specialized attorneys for tax law as well as commercial and corporate law, we are here to support you. Rely on our sound expertise in M&A transactions. We will reliably advise you from the Letter of Intent through Due Diligence and contract negotiations to tax planning and execution.
