Corporates

The interests of companies are often not aligned with those of the tax authorities and this can lead to circumstances where tax related disputes between companies and tax authorities cannot be resolved by way of an ongoing tax field audit and, in order to protect the rights of companies, may instead need to be escalated to appeal or legal proceedings. Further, in some cases, companies may have a legitimate argument for protection or exemption from taxes due to the uncertainty of application of tax laws and regulations based on constitutional or European law grounds. As an example of this, it was unclear for many years as to whether the so-called restructuring clause of sec. 8c para. 1a Corporate Income Tax Act constituted inadmissible state aid under European law and therefore could not be applied. This meant that sec. 8c para. 1a Corporate Income Tax Act was suspended and could not be applied before the Court of Justice of the European Union made its final decision in this case. After years of uncertainty, the Court of Justice of the European Union’s ruling in June 2018 clarified this situation. Pursuant to this ruling, the German tax legislator revised and clarified the application of this restructuring clause to provide further certainty to businesses and individuals. Hofmann Klafsky & Fertig have and will continue to follow the developments in this regard.

When founding a company, questions regularly arise as to the appropriate legal form. Furthermore, investments shall be structured in tax-optimized manner. To finance business ideas, traditional start-ups often organise so-called financing rounds, in which investors usually provide the necessary financial resources in return for shares or silent partnerships.

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In the case of cross-border activities of companies, there is basically the opportunity of not recording the same facts but also the risk of the same facts being recorded in two jurisdictions. Germany has concluded conventions for the avoidance of double taxation with most industrialized countries for income tax purposes. These agreements thus form the regulatory basis between the states in order to share the tax substrate between the states in the case of cross-border activities of companies.

The applications are manifold. Essentially, the rights of taxation shall be allocated to one or the other state, for example which portion of the profits of a company shall be allocated to the enterprise and which portion shall be allocated to a permanent establishment; which state has the right to tax dividends, interest or licenses. Can the state of source withhold taxes and, if so, to what extent, and can the taxes withheld be reimbursed or credited in the home country?

When acquiring target companies, investment structures are generally established in which the income from repatriation and sale is burdened as little as possible by taxes. At the target company, the remaining tax risks must be allocated through appropriate tax clauses in the purchase agreement between seller and buyer.

In cases where a company’s equity is almost or already used up and restructuring measures are pending, transaction costs from restructuring such as taxes should be avoided wherever possible in order to protect the proceeds of the company.

This can involve a wide range of tax issues. For example, there are often shareholder loans that shall be restructured in order to prevent the company from over indebtedness. In this context, subordination agreements are regularly concluded or waivers of claims by the shareholders are examined. After the application so-called restructuring decree of the tax authorities was denied by the Federal German Tax Court in 2017 (most recently, for example, Federal German Tax Court resolution of 16 April 2018, X B 13/18), the legislature has now created statutory provisions in sec. 3a ITA and § 7b TTA according to which restructuring profits are not subject to tax under the conditions described therein. However, the provisions of sec. 3a ITA and § 7b TTA can only come into force after approval by the EU Commission.

The reasons are manifold. While in some cases personal liability should be limited to the proceeds of a company, in others the structure should be simplified or prepared for possible purchasers or successors. In cases of reorganization, transaction costs such as taxes should usually be avoided wherever possible. In depth know-how and experience are therefore required, particularly in the areas of reorganisation tax and real estate transfer tax law. Here you can see some examples of reorganizations that we have accompanied for tax purposes.

Hofmann Klafsky & Fertig advises on the identification and quantification of tax risks in connection with acquisitions in order to determine the purchase price and negotiate the tax clause in the purchase agreements. The scope and intensity of the tax due diligence are determined according to the needs of the acquirer. Depending on the scope of the investment and the possible risks associated with it, the results of the tax due diligence can be summarized in so-called red flag reports or in detailed reports.

In some cases, legal uncertainties remain despite thorough research undertaken, for example because there are no relevant or contradictory court rulings or opinions provided by the tax authorities. In order to exclude or at least minimize remaining risks, it may in some cases make sense to apply for so-called binding ruling from the responsible tax office. Binding rulings can only be given if it refers to a planned action and therefore was not implemented yet. The tax office charges a fee for processing the binding ruling.