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Tax Aspects of cross-border M&A-transactions
IAP International
Associate
Programm
Munich, 2 July 2018
2
OVERVIEW
FIRST PART: CROSS-BORDER M&A: GENERAL STRUCTURES
SECOND PART: POST ACQUISITION STUCTURING
3
FIRST PART:
CROSS-BORDER M&A: GENERAL STRUCTURES
4
A. BASE CASE
The Base Case
Archibald Andrews Racing Ltd. (A-Ltd.), a
London based corporation, considers acquiring
Schumacher Enterprises (SE). Schumacher
Enterprises is a Munich-based enterprise
producing sport and racing cars.
Currently, Schumacher Enterprises is wholly
owned by Mr. Hans Schumacher (HS), the
founder, who lives near Munich.
A-Ltd.
GER
SE
100%
UK
5
B. SHARE DEAL
SE as GmbH
SE is organized as a GmbH.
GmbH: German limited liability corporation
Legal structure form for non-quoted corporations.
A-Ltd. acquires all shares in SE-GmbH.
A-Ltd.
SE-GmbH
100%
6
B. SHARE DEAL
Tax Effects on the company revenue
SE GmbH
Unlimited taxation in Germany.
Corporate Income Tax (CIT): 15.8%
Trade Tax (TT): 7 – 17.7%
No effects of transaction to taxation of SE-
GmbH.
A-Ltd.
GERSE-GmbH
100%
UK
7
B. SHARE DEAL
Tax Effects on the company revenue
A-Ltd.
No taxation in Germany.
No taxation with SE-GmbH- gains/losses in UK.
A-Ltd.
GERSE-GmbH
100%
UK
8
B. SHARE DEAL
Dividends
Withholding tax: 26.4%
DTT UK: Reduction to 5%
EU-Directive: 0%
A-Ltd. has to file an application for full or
partial exemption from German
withholding tax.
A-Ltd.
GERSE-GmbH
100% Dividend
73.6%
Fiscal
Authoritywithholding
tax 26.4%
UK
9
C. ASSET DEAL
Alternative: Asset Deal
A-Ltd. doesn’t acquire the entity but
acquires the assets of the entity.
GER
UK
A-Ltd.
Headquarter
SE-GmbH
10
C. ASSET DEAL
Tax Effects
Permanent establishment in Germany.
PE-income taxable in Germa-ny.
GER
UK
A-Ltd.
Headquarter
11
C. ASSET DEAL
Tax Effects
UK: World income
DTT-UK: PE-income
Credit for German tax
sec. 23 DTT-UK
GER
GER-taxation
UK-taxation
UK A-Ltd.
Headquarter
12
C. ASSET DEAL
Transfer of Gains
No withholding tax
GER
transferred
gain
UK
A-Ltd.
Headquarter
13
C. ASSET DEAL
A-Ltd.
Assets1500
(1100+400)
Equity 1000
Liabilities 500
Assets 1100Equity 600
Liabilities 500
Tax Effects of Transaction
Step-up
Increased depreciation
14
D. ACQUISITION OF PARTNERSHIP INTEREST
SE as Partnership
SE is organized as partnership, German KG,
comparable to LP.
General Partner = GmbH,
Limited Partner = HS.
HS holds 100% of the capital of SE-KG.
A-Ltd. purchases:
• all partnership interest of HS as Limited
Partner
• all shares of HS in General Partner.
A-Ltd.
GER
SE-KG
UK
0%
100%100%
GmbH
15
D. ACQUISITION OF PARTNERSHIP INTEREST
Tax Effects
CIT:
Transparent entity
Branch of A-Ltd.
TT:
KG tax subject
Non-transparent entity.
UK:
Tax credit.
A-Ltd.
GER SE-KG
UK
0%
100%100%
GmbH
16
D. ACQUISITION OF PARTNERSHIP INTEREST
Transfer of Gains
No withholding tax.
No dividend taxation in UK.
A-Ltd.
GER SE-KG
UK
0%
100%100%transferred
gain
GmbH
17
D. ACQUISITION OF PARTNERSHIP INTEREST
A-Ltd.
GER
UK
100%
1100
Assets 1500
600
Equity 1000
Liabilities 500
Tax Effects of Trans-action
CIT
Step-up (like asset deal)
TT
Step-up
Trade Tax on gain of HS born by KG!
GmbH
18
E. SELLERS POSITION
Assets 1100600 Equity
500 Liabilities
Share Deal or Asset Deal?
Purchase Price 1,000 m €
HS’s acquisition cost
(capital contribution) 200 m €
Net equity
of SE-GmbH 600 m €
A-Ltd.
SE-GmbH
19
E. SELLERS POSITION
Share Deal
Capital gain taxation:
gain 1,000 ./. 200 = 800
thereof taxable 60% = 480
tax rate 47.5% = 228
proceeds = 1,000
./. tax = 228
Net cash for HS after tax = 772
SE-GmbH
A-Ltd.
20
E. SELLERS POSITION
Asset Deal
1. SE-GmbH
gain: (1,000 – 600 =) 400
CIT: (15.8%=) 63
TT: (assumed 17%) 68
total tax 131
proceeds 1,000
./. tax 131
Net cash in SE-GmbH 869
SE-GmbH
old
A-Ltd.
21
E. SELLERS POSITIONAsset Deal
1. SE-GmbH
gain: (1,000 – 600 =) 400
CIT: (15.8%=) 63
TT: (assumed 17%) 68
total tax 131
proceeds 1,000
./. tax 131
Net cash in SE-GmbH 869
2. HS personally
Assumption, SE-GmbH distributes its cash.
gross distribution amount 1,000-131= 869
tax free capital repayment 200
taxable gross dividend 669
tax (26.4%) 177
net dividend 492
Net cash for HS 692
(Compare:
Net Cash for HS due to Share Deal: 772)
SE-GmbH
old
A-Ltd.
22
E. SELLERS POSITION
A-Ltd.
SE-GmbH
Share deal better for HS (lower total tax burden).
Asset deal better for A-Ltd. (step-up and additional depreciation).
Commercial aspect. Advantage should be priced in. Rarely seen in
praxis!
P e t r a P a n
t a x a d v i s o r
23
SECOND PART:
POST ACQUISITION STRUCTURING
24
F. LEVERAGED TRANSACTION
Leveraged Transaction
A-Ltd. considers to finance the acquisition of
SE not only with own funds, but also with a
bank loan (so-called “leverage”).
The interest expenses shall be deducted
from the taxable income of the SE-business.
A-Ltd.
GER
UK
S E
Bank Purchase
Price
25
F. LEVERAGED TRANSACTION
I. Base Case
Acquisition of SE-GmbH
No interest deduction in Germany.
Interest deduction in UK.
Solutions?
A-Ltd.
GER
UKBank
SE-GmbH
26
F. LEVERAGED TRANSACTION
GER
UK A-Ltd.
Bank
SE-GmbH
NewCoPurchase
Price
Equity
Closing
A-Ltd.
Bank
SE-GmbH
Merger
Merger
NewCoSE-
business
II. Merger
German NewCo and
Merger
Set-off possible
27
F. LEVERAGED TRANSACTION
III. Fiscal Unity
Fiscal Unity
● Majority of shares
● Profit and loss pooling
agreement
Income consolidation for tax
purposes
A-Ltd.
Bank
SE-GmbH
NewCo
100%
Post-closing
A-Ltd.
SE-GmbH
NewCoBank
Fiscal unity
profit/loss
pooling
agreement
A-Ltd.
Bank
SE-GmbH
NewCo
Tax consolidation
tax
consolidation
UK
GER
28
F. LEVERAGED TRANSACTION
Fiscal unity with A-Ltd.?
No German cross-border fiscal
unity.
(Under discussion!)
A-Ltd.Bank
SE-GmbH
100%
A-Ltd.
SE-GmbH
Bank
A-Ltd.Bank
SE-GmbH
no cross-border
fiscal unity
profit/loss
pooling
agreement
UK
GER
29
F. LEVERAGED TRANSACTION
IV. Change of legal form
For business reasons A-Ltd has to assume the
Bank loan.
Change of legal form
CIT
Allocation of SE-KG’s income to A-Ltd .
Taxable in Germany, SE-KG as German
permanent establishment of A-Ltd.
Bank loan and interest expenses to be
allocated to SE-KG for tax purposes.
TT
KG remains taxpayer, interest expenses to be
allocated to KG.
A-Ltd.
SE-GmbH
A-Ltd.
Bank
SE-KG
Bank Bank
30
F. LEVERAGED TRANSACTION
V. Leveraged Asset Deal
● Permanent Establishment
● NewCo
No PE of A-Ltd.,
No further restructuring,
Allocation beyond doubt.
A-Ltd.
Bank
NewCo
A-Ltd.
Bank
Bank
31
F. LEVERAGED TRANSACTION
VI. Cross Border Debt-push-
down
NewCo acquires German SE-GmbH.
SE-GmbH is mother company of different foreign
subsidiaries.
Subsidiaries represent significant portion of total
value of group.
Interest expenses higher than German EBIT.
Interest deduction not fully usable in
Germany for tax purposes.
SE-GmbH itself does not generate enough cash
to pay off interest and principal of loan.
“Debt capacity” in Germany not sufficient!
NewC
o
Ban
k
SE-GmbH
GER
ES
PBAHUK
S 1 S 2 S 3
A-Ltd.
32
F. LEVERAGED TRANSACTION
1. Gain Distribution
Foreign gains as dividends?
Cash transfer to debt.
Withholding tax?
Dividend (nearly) tax free in Germany.
No set of with interest expenses.
NewCoBank
SE-GmbH
GER
ESP BAHUK
S 1 S 2 S 3
A-Ltd.
33
F. LEVERAGED TRANSACTION
2. Debt-push-down
a) Mega-Dividend
Leveraged “mega-dividend”.
Leverage = New Bank loan.
Partially repayment of Old Bank loan.
Withholding tax?
Equity issues?
NewCo
Old
Bank
SE-GmbH
SubCo
New
Bank
Repay-
ment Dividend
Dividend
A-Ltd.
34
F. LEVERAGED TRANSACTION
2. Debt-push-down
b) Internal Share Deal
NewSubCo acquires SubCo.
Financed by New Bank loan.
Partially repayment of Old Bank loan.
SE-GmbH: Only 5% of capital gain.
No withholding tax.
No equity issues.
Transfer taxation?
NewCo
Bank loan
SE-GmbH
New SubCo
Repayment
SubCo
New
Bank loan
purchase
price
A-Ltd.
35
F. LEVERAGED TRANSACTION
VII. Shareholder Loan
Additional interest.
Interest income in UK.
Bank
SE-GmbH
NewCoPurchase
Price
A-Ltd.
Shareholder
Loan
BankNewCo
A-Ltd.
Shareholder
Loan
SE-
business
Closing Post-Merger
GER
UK
36
F. LEVERAGED TRANSACTION
VIII. Limitation on Interest
Deduction
● Trade Tax: 25%
not deductible
● Shareholder loan:
arm’s length
● Interest barrier
☻
EBIT
minus
interest
expenses
taxable gain
37
F. LEVERAGED TRANSACTION
IX. Interest Barrier
Deduction of net interest expenses: max. 30% of EBITDA
Exception: - Interest expenses (3 m€).
- Equity ratio of German entity equal/
higher than group equity ratio.
If bad economic position of company:
Low EBITDA, but high interest payments
Effective tax rate of more than 80% are possible.
Tax may be payable even no gains are earned at all.
Consolidated group German Co
equity
equity
assets
debt debt
assets
38
G. OPERATING ENTITY AS PURCHASER
A-Ltd. has a German subsidiary, A-GmbH, with
current operating business.
A-GmbH (instead of NewCo) shall acquire SE-
GmbH.
Current income of A-GmbH (highly profitable)
shall be offset with ongoing losses of SE-
GmbH (currently not profitable) to reduce the
tax burden.
Solutions?
SE-GmbH
A-GmbH
A-Ltd.
GER
UK
39
G. OPERATING ENTITY AS PURCHASER
Three Solutions
Merger Fiscal unity
A-Ltd.
SE-GmbH
A-GmbH
Merger
A-Ltd.
SE-GmbH
A-GmbH
Fiscal
unity
A-Ltd.
A-GmbH
SE-KG
Change of legal
form
40
G. OPERATING ENTITY AS PURCHASER
A-Ltd.
SE-GmbH
A-GmbH
Merger
Merger / Fiscal unity
Full consolidation
Risk mixed
A-Ltd.
SE-GmbH
A-GmbH
Fiscal
unity
A-Ltd.
A-GmbH
SE-KG
Partnership
Half consolidation (CIT,
not TT)
Restricted liability of A-
GmbH for SE-KG
41
H. ACQUISITION STRUCTURING
Resume
Acquisition structuring:
tailor-made,
not boiler plate.
Dr. Nico Fischer
CV
Studied law in Passau, Regensburg und Lausanne (Switzerland)
Admitted to bar in 2005
Joined P+P Pöllath + Partners in 2005
Other Activities
Co-Author of the formbook „Recht & Steuern, Teil Unternehmenskauf“
Regular publications as guest author in „Handelsblatt Steuerboard (tax board)“
Associate Lecturer of University of Muenster/ JurGrad for the Master‘s Courese for Tax Sciences/Tax Law
Attorney-at-law
Partner
P+P Pöllath + Partners München
Tel.: +49 (89) 24 240 470
Specialization:
Domestic and International Taw Law
General Tax Planning and Tax Structuring
Tax Structuring with focus on Private Equity
42
