Tax aspects of acquisitions in Germany.

• Author: Ditsch, Stefan

Traditionally, tax planners have not viewed Germany favorably, primarily because of its high tax rates and relatively complicated administrative rules. However, companies wanting to invest in Germany may be able to use various planning techniques intended to reduce the effective tax burden following an acquisition.

A foreign investor wanting to establish itself in Germany can do so either by forming a new subsidiary or other entity or by acquiring an existing business. Acquisitions usually cost more than forming new entities, but can reduce the German operation's startup efforts and may also lead to future synergies. Further, German tax rules offer a variety of incentives (such as amortization of goodwill, tax-free step-up of asset book values to the purchase price paid and generous debt pushdown possibilities) that may result in a narrower tax base than would be available in many other countries.

Tax considerations in planning a German business acquisition concentrate mainly in three areas:

* Tax due diligence.

* Negotiation of tax clauses and indemnities.

* Transaction structuring.

The tax due diligence review should identify all tax exposures to avoid surprises in future tax audits, describe the tax history and status of the target and comment on opportunities for the future. The tax due diligence group should work closely with the financial and legal teams to present an overall analysis. The results of the due diligence review and the projections of the future tax position can help reduce the risks inherent in an investment decision, as they will be reflected in the target valuation and, therefore, form the basis for the final negotiation phase.

With the target's tax risks generally transferred to the acquirer, the purchaser needs to ensure that all critical matters are covered appropriately by guarantees or "hold harmless" clauses in the purchase agreement. While standard tax clauses exist, each transaction is unique and requires contractual provisions specific to the individual case (e.g., consequences of hidden profit distributions, warranties for the existence of loss carry-forwards or the amount of retained earnings, etc.). In any event, indemnities can only supplement, but never substitute for, a thorough tax due diligence procedure.

The final task is designing tax-efficient acquisition and disposal structures that add value to the transaction. The tax planner must address at least five objectives: (1) maximizing the loan interest...