Tax challenges in cross-border M&A transactions: A German outbound perspective
Andreas Lang
Germany
by Andreas Lang
Cross-border transactions involving German entities – whether share or asset deals – are shaped by a complex mix of domestic tax rules, OECD initiatives (BEPS/MLI), and EU directives (ATAD, DAC6, Parent-Subsidiary Directive). From a German outbound perspective, navigating these overlapping systems is critical to avoid tax leakage, compliance failures, and structural inefficiencies.
Key risk areas
Common challenges in outbound transactions include:
Double taxation due to differing interpretations of residency and source taxation rights;
Withholding taxes on dividends, royalties, and interest – especially when treaty relief is denied due to insufficient economic substance, missing residency certificates, or procedural errors;
Transfer pricing risks, both retrospective (in share deals) and prospective (post-acquisition integration);
Indirect taxes such as VAT or German real estate transfer tax (RETT), triggered based on deal structure; and
Heightened reporting (e.g. DAC6) and economic substance requirements under EU law (e.g. ATAD III).
Share deal vs. asset deal
The choice of the specific deal structure heavily affects tax treatment:
Share deals are legally simpler but transfer all hidden liabilities and rarely allow a step-up in asset values.
Asset deals offer tax depreciation benefits and selective asset acquisition but entail higher administrative complexity and potential VAT or RETT charges.
Hybrid models (e.g. “share deal with asset push”) are often used in practice to balance risk and efficiency.
Double tax treaties and MLI impacts
Germany’s treaty network (currently 90+ treaties) is vital in outbound structuring but is increasingly shaped by the Multilateral Instrument (MLI), a treaty developed by the OECD and the G20 to address base erosion and profit shifting (BEPS), and which introduced, amongst other items:
The “land-rich clause” which allows source states to tax share disposals involving real estate-rich companies; and
Principal purpose tests (PPTs) and German anti-treaty-shopping rules (§50d German Income Tax Act), which deny treaty benefits to entities lacking sufficient substance.
Accurate residency determination (especially in dual-residency cases), proper procedural compliance, and access to mutual agreement procedures (MAP) are essential to securing treaty relief.
Transfer pricing and documentation
Transfer pricing remains a core risk factor, including retrospective exposures in share deals and forward-looking risks in post-deal integration. Improperly documented or non-arm’s-length intercompany transactions can trigger adjustments and penalties, including economic double taxation. Buyers should assess both historical compliance and future transfer pricing alignment in the context of post-deal integration.
Structuring and planning
Effective structuring from a German outbound view should include:
Jurisdiction-specific tax due diligence;
Withholding tax modelling and treaty eligibility reviews;
Attention to interest deductibility limits (§4h German Income Tax Act), exit taxation, and loss carryforward usability; and
Contractual protections such as tax warranties and indemnities where treaty relief may be uncertain.
Conclusion: Why an international network matters
As this overview shows, tax risks in outbound M&A transactions from Germany are rarely isolated; they emerge at the intersection of local regulations and international standards. Navigating these complexities requires not only deep technical expertise but also close coordination across borders. In this environment, a robust international network of tax advisors is indispensable. It enables efficient planning, reduces compliance risk, and ensures that complex transactions are executed with confidence.
XLNC member firm Schlecht und PartnerStuttgart, GermanyT: +49 711 40 05 40 30Andreas is an International Tax Manager at Schlecht & Partner in Stuttgart, Germany. Specialising in transfer pricing and international tax advisory, he worked at a Big4 firm in Germany and Canada as well as for multinational automotive firms in international tax. Contact Andreas.
