Acquiring a German mid-sized company: Key tax structuring questions for foreign buyers
Dr Benjamin S. Cortez & Ilka Sussek
by Dr Benjamin S. Cortez and Ilka Sussek
Introduction
In current tax due diligence projects with cross-border involvement, the acquisition of German mid-sized companies by foreign investors remains a highly relevant topic. The tax structuring of such transactions comes with several recurring challenges, which foreign buyers should address early.
Legal form and treaty classification
German targets are often organised as partnerships (e.g. a GmbH & Co. KG) or corporations (GmbH). The tax treatment of cross-border investments in partnerships is particularly complex. Different domestic and treaty approaches may lead to qualification and attribution conflicts (notably on who is regarded as earning the income and how double tax treaties apply). Depending on the facts, diverging administrative practice and case law can create material risk, including double taxation.
Share deal vs. asset deal: step-up and depreciation
From a buyer’s perspective, the key objective is usually to make the purchase price tax-effective through depreciation/amortisation. In a share deal, a systematic tax “step-up” at the level of the acquired corporation is typically not available; in an asset deal, the acquired assets can generally be booked up at fair value depreciated. Foreign investors should therefore clarify at an early stage whether strategic reasons for the share deal (e.g. contracts, licenses, approvals) outweigh the more attractive asset deal from a tax perspective.
Acquisition financing and interest limitation
Leveraged acquisitions may fall within German interest limitation rules. If interest deductions are restricted, operating profits are taxed while financing costs may only have a delayed effect. Inbound structures therefore often use a German acquisition vehicle combined with profit/earnings pooling mechanisms (e.g. a tax group – “Organschaft”, or a merger) to align interest expense with the target’s earnings. At the same time, arm’s length requirements, transfer pricing (e.g. intra-group service fees), and hidden profit distribution risks must be considered when designing the capital structure.
Distributions and treaty relief
Dividends paid by German corporations are generally subject to withholding tax. Relief under double taxation agreements (DTAs) and EU rules regularly requires sufficient substance and anti-abuse compliance (e.g. anti-treaty-shopping considerations). Consequently, the holding jurisdiction should be selected with a view not only to future distributions and ongoing cross-border flows (e.g. services), but also to the exit – particularly whether Germany may tax capital gains under treaty rules (e.g. in “real-estate heavy” structures).
Loss carryforwards: value driver with pitfalls
For targets with losses, buyers must assess whether loss carryforwards could be forfeited (in whole or in part) due to a harmful change in ownership (§ 8c KStG), and whether exceptions or continuity relief (§ 8d KStG) may apply. In financial models, losses should be treated as a tax asset only after a robust analysis.
Post-closing reorganisation
Many relevant tax levers (integration steps, debt push-down concepts, changes of legal form) are executed after closing. German reorganisation rules can allow book-value transfers but typically require that Germany’s right to tax hidden reserves is preserved.
Indirect taxes and compliance obligations
If the target holds German real estate, real estate transfer tax effects must be assessed. From a VAT perspective, an asset deal may be neutral if it qualifies as a transfer of a going concern. However, ongoing supply chain topics (chain transactions, triangulations, VAT ID usage, documentation and reporting) remain prone to errors. Foreign investors should also check whether the structure triggers reportable cross-border arrangements (DAC6).
Tax due diligence and the SPATax due diligence is the basis for pricing, guarantees, and indemnities. Key negotiation items typically include (i) open assessment periods and ongoing tax audits, (ii) the reliable treatment of losses/interest attributes in the business plan, and (iii) capital structure covenants to ensure that no unplanned interest barrier or hidden profit distribution effects arise after closing.
Conclusion
Successful inbound acquisitions align tax due diligence, financing, and transaction documentation. If modelling and safeguards are not properly implemented before signing, the post-closing cost is often high. These are frequently high not because of high tax rates, but because of avoidable structural errors.
Schlecht und Partner bundles different specialisations and forms a powerful team in complex consulting assignments. They advise entrepreneurs, companies and individuals in all business and tax matters and conduct audits for medium-sized companies. Based on their broad technical and industry expertise, they have a vast experience in SME consulting.
XLNC member firm Schlecht und PartnerStuttgart, GermanyT: +49 711 40 05 40 30Auditing & Accounting, Tax
Tax advisor Dr Benjamin S. Cortez is a Partner at Schlecht & Partner in Stuttgart, Germany. He specialises in transfer pricing and international tax advisory and previously worked at a Big Four firm. Contact Ben.
Ilka Sussek is a Tax Manager at Schlecht & Partner in Stuttgart, Germany. She specialises in international tax advisory and start-up support and previously worked at a Big Four firm. Contact Ilka.
