Federal Ministry of Finance publishes new Reorganisation Tax Decree

On 2 January 2025, Germany’s Federal Ministry of Finance (Bundesministerium der Finanzen – BMF) published the new Reorganisation Tax Decree (Umwandlungsteuererlass – UmwStE), which had been eagerly awaited by practitioners. The new decree takes into account significant changes in legislation and supreme court decisions that have been issued since the publication of the previous Reorganisation Tax Decree of 11 November 2011.

The new Reorganisation Tax Decree is intended to apply to all unresolved cases and replaces the Reorganisation Tax Decree 2011 in this respect (paragraph 00.04a). However, the Reorganisation Tax Decree 2011 remains applicable to certain cases (see paragraph 27.02 on shares originating from contributions and paragraph Org. 35 on tax balance adjustments within consolidated tax groups).

The main changes are:

A. Scope of the Reorganisation Tax Act

The statements on the personal scope of application of the Reorganisation Tax Act (Umwandlungssteuergesetz – UmwStG) will be adapted to statutory changes, especially those on the removal of section 1(2) of the Reorganisation Tax Act and the restrictions to EU/EEA stated in that section, the introduction of the option model in section 1a of the Corporation Tax Act (Körperschaftssteuergesetz – KStG) and the option introduced by the Act on the Modernisation of the Law on Partnerships (Gesetz zur Modernisierung des Personengesellschaftsrechts – MoPeG) for registered civil-law partnerships to act as legal entities suitable for reorganisation as of 1 January 2024. There are also updates to the material scope of application. For example, it is clarified (at paragraph 01.15) that a non-proportional demerger also includes the scenario that a shareholder of the transferring company does not participate in the acquiring company at all (known as a demerger at zero).

With regard to foreign and cross-border reorganisations, the necessary criteria for comparability with a domestic reorganisation are further specified. Compared to the draft of the new Reorganisation Tax Decree of 11 October 2023 (“Draft Reorganisation Tax Decree”), the comparability of mergers and demergers has been simplified (at paragraphs 1.32 and 1.38). In addition, with reference to the CJEU’s ruling of 25 October 2017 in the case C-106/16 (Polbud), the Reorganisation Tax Decree (paragraph 01.38b) clarifies that in cases of homogeneous cross-border outbound changes of legal form, if the corporation continues to have an unlimited or limited domestic corporation tax liability, neither the Reorganisation Tax Act nor the realisation of hidden reserves nor a restriction on loss offsetting options will be applied. Even in the case of a homogeneous cross-border inbound change of legal form (e.g. reorganisation of a Luxembourg S.à r.l. into a German limited liability company), neither the transfer of the place of management nor the transfer of the registered office would lead to the realisation of hidden reserves due to the absence of a limitation of Germany’s right of taxation; any losses incurred within the scope of the limited tax liability would be retained upon the transfer to unlimited tax liability.

B. Tax retroactivity and prohibition of loss offsetting

At paragraph 02.14 of the Draft Reorganisation Tax Decree, the existence of a separable branch of activity in retroactive cases is intended to “also” depend on the circumstances on the tax transfer date (probably in addition to the circumstances on the date the reorganisation becomes legally effective upon registration). The word “also” has been deleted in the final Reorganisation Tax Decree, and thus only the circumstances on the tax transfer date are relevant.

With regard to the prohibition of loss offsetting in the retroactive period pursuant to section 2(4) sentence 3 onwards of the Reorganisation Tax Act, it is clarified that there is no time restriction on the retroactive period for the losses that can be offset, the remaining loss carryforward, the negative income that has not been offset and the interest carryforward of the acquiring legal entity (paragraph 02.40a). Accordingly, profits realised by the transferring legal entity in the retroactive period should not be able to be offset against losses incurred in the retroactive period or against other loss positions of the acquiring legal entity (e.g. loss carryforwards or loss carrybacks). In addition, the prohibition on offsetting losses applies regardless of whether there is a tax abuse intent, as well as in the case of contributions, and also applies to the calculation of the trade tax assessment basis.

C. Requirements for the book value application

The Reorganisation Tax Decree now takes into account the addition of section 3(2a) of the Reorganisation Tax Act by the Annual Tax Act 2024 (Jahressteuergesetz – JStG 2024). According to this, the final tax balance sheet must be submitted electronically by the deadline for submitting the corporate tax return for the tax period in which the tax transfer date falls in accordance with section 149 of the Tax Code (Abgabenordnung – AO) (corresponding changes can also be found in the section on mergers). As before, submitting the tax balance sheet within the meaning of section 4(1) and section 5(1) of the Income Tax Act (Einkommenssteuergesetz – EStG) is to be seen as an implied application to recognise the book values, if the express declaration is made that the tax balance sheet should also be the closing balance sheet (paragraphs 03.01 and 03.29). A corresponding application can now also be made by submitting an e-balance sheet (section 5b of the Income Tax Act, balance sheet type “Reorganisation balance sheet, also year-end financial statements”).

Note that the Federal Fiscal Court (Bundesfinanzhof – BFH) recently issued a ruling on 19 July 2024 (IV R 8/22, BFH/NV 2025, 132) stating that an application under section 3(2) of the Reorganisation Tax Act can also be made in a notarial reorganisation resolution. However, as the judgment has not been included in the Reorganisation Tax Decree, we cannot assume it will be applied except in the individual case already ruled upon, until further notice.

D. Cross-border reorganisations

With regard to the general exit taxation rules / rules on the taxation of hidden reserves, the tax authorities assume in the new Reorganisation Tax Decree (unlike in the Draft Reorganisation Tax Decree) that the fair market value of the asset in question is to be recognised if the German right of taxation is established as a result of the reorganisation, unless a lower value (i.e. under section 6(1) no. 5a of the Income Tax Act) is to be applied due to taxation in the other country (in other words, the value used by the foreign state in the context of its exit taxation according to the second half of the sentence of section 6(1) no. 5a of the Income Tax Act is to be recognised (paragraph 03.09a)).

While the Reorganisation Tax Decree 2011 was still based on the principles of the Federal Ministry of Finance’s letter of 24 December 1999 (Permanent Establishment – Administration Principles – Betriebsstätten-Verwaltungsgrundsätze) and therefore the issue of the continued relevance of the parent company’s central function in the context of the reorganisation arose in practice, the Reorganisation Tax Decree at paragraph 03.20 now refers to the provisions under treaty law as well as section 1(5) of the Foreign Tax Act (Außensteuergesetz – AStG), the Regulation on the Allocation of Profits of Permanent Establishments (Betriebsstättengewinnaufteilungsverordnung – BsGaV) and the Administrative Principles on the Allocation of Profits of Permanent Establishments (Verwaltungsgrundsätze Betriebsstättengewinnaufteilung – VwG BsGa).

If there is exit taxation in the context of a cross-border reorganisation, a possible creation of a tax balance adjustment in accordance with section 4g of the Income Tax Act must also be considered in future (paragraph 03.20a).

E. Distribution of expenses and income under sections 4f and 5(7) of the Income Tax Act

Unlike in the previous Draft Reorganisation Tax Decree, the final Reorganisation Tax Decree stipulates that expenses are to be allocated according to section 4f of the Income Tax Act in the course of the merger of transferred obligations (paragraph 03.05) and also to be continued at the acquiring legal entity (paragraph 04.16). As existing reserves under section 5(7) of the Income Tax Act are only accounting liabilities, these are to be valued at the fair value or intermediate value of €0 in the closing balance sheet of the transferring company.

F. Merger of corporations into partnerships

In the case of mergers of corporations into partnerships, it is clarified that the fair market value is to be reduced for the acquiring legal entity on the tax transfer date if the fair market value of the shares in the transferring corporation is lower than their book value. Section 8b(3) of the Corporation Tax Act or section 3c(2) of the Income Tax Act may apply to the resulting (investment correction) loss (paragraph 04.05).

In addition, foreign shareholders of corporations who become partners of the partnership as a result of the reorganisation are included in the partnership tax assessment pursuant to section 180 et seq. of the Tax Code (gesonderte und einheitliche Feststellung) only insofar as on the tax transfer date, Germany had a right of taxation with respect to the capital gain of the shares in the corporation or the income within the meaning of section 7 of the Reorganisation Tax Act (paragraph 04.23). The Federal Ministry of Finance clarifies that the capital gains tax can then also be credited against the income in accordance with section 7 of the Reorganisation Tax Act as part of the assessment procedure. This is only relevant to cases in which the legal fiction of a contribution under section 5(2) and (3) of the Reorganisation Tax Act does not apply.

Regarding the legal fiction of a contribution in section 5(2) of the Reorganisation Tax Act, according to the Reorganisation Tax Decree (paragraph 05.05, in contrast to the Draft Reorganisation Tax Decree), shares in the transferring company that are held as private assets in accordance with section 20(2) first sentence no. 1 of the Income Tax Act are also included.

In the case of a change of legal form from a corporation to a partnership, the Federal Ministry of Finance applies the Federal Fiscal Court’s ruling of 11 April 2019 (IV R 1/17). According to this ruling, the taxation of the corporation’s open reserves under section 7 sentence 1 of the Reorganisation Tax Act in the case of shares fictitiously treated as contributed in section 5(2) of the Reorganisation Tax Act are treated as the profit of the joint ownership and not as the designated profit of the previous shareholder (paragraph 05.07a).

G. Crediting the holding period for the trade tax participation exemption

As the trade tax participation exemption of section 9 nos. 2a and 7 of the Trade Tax Act (Gewerbesteuergesetz – GewStG) are based on a specific point in time and not period-based (a substantial participation is required at the beginning of the tax period), a holding period credit caused by reorganisation requires a retroactive reorganisation to the beginning of the tax period (paragraph 04.15).

Even if the corporate tax participation exemption (section 8b(4) of the Corporation Tax Act is based on aspecific point in time) is not expressly addressed in the Reorganisation Tax Decree at this point, nothing else is likely to apply from the perspective of the tax authorities.

H. Asset transfer costs

The allocation of expenses to “asset transfer costs” is based on the principle of causation. In implementation of the Federal Fiscal Court’s ruling of 23 November 2022 (I R 25/20), the “triggering momentum” for incurring the expenses and their greater proximity to the sale or current profit must be taken into account (paragraph 04.34).

I. Merger of corporations

In the case of a downstream merger, applying the Federal Fiscal Court’s ruling of 30 May 2018 (I R 31/16), the transferring company’s shareholding in the acquiring company which is transferred directly to the shareholder of the transferring company is also one of the transferred assets within the meaning of section 11(1) first sentence of the Reorganisation Tax Act (paragraph 11.05). The downstream merger of a parent company with shareholders domiciled abroad into its subsidiary can also be done at book values in a tax-neutral manner, according to paragraph 11.09a of the Reorganisation Tax Decree, if the taxation of the parent company’s hidden reserves is assured. As the shareholding in the subsidiary is transferred to the shareholder of the parent company in the course of the downstream merger, it is important for the recognition at book values whether the hidden reserves in the shareholding continue to be subject to German taxation for this shareholder.

J. Demergers of corporations

Furthermore, the Reorganisation Tax Decree now answers a question that is often critical in practice for demergers of separable branches of activity. According to the Reorganisation Tax Decree,an asset that can be allocated based on economic interrelations, and which is used by several separable branches of activityand not divided, must always be allocated to the separable branches of activity where it is predominantly used (paragraph 15.08).

The Reorganisation Tax Decree now expressly states that a takeover gain or loss within the meaning of section 12(2) first sentence in conjunction with section 15(1) first sentence of the Reorganisation Tax Act is to be determined not only in the case of an upstream demerger, but also in cases of a downstream and lateral demerger in which the acquiring corporation did not previously hold an interest in the transferring corporation. Accordingly, in line with the Federal Fiscal Court’s ruling of 9 January 2013 (I R 24/12), the costs of asset transfer are not deductible as a business expense in those cases either (paragraph 15.14a).

The Draft Reorganisation Tax Decree contained hardly any changes or clarifications regarding the anti-abuse rules of section 15(2) of the Reorganisation Tax Act, which are controversial in practice. The second to seventh sentences of section 15(2) of the Reorganisation Tax Act have since been revised as part of the Growth Opportunities Act (Wachstumschancengesetz). The final version of the Reorganisation Tax Decree includes comments on the post-sale lock-up periods of section 15(2) of the Reorganisation Tax Act, presumably as a result. The statements in the Reorganisation Tax Decree are based on the wording of the law and the explanatory memorandum. Thus, the criterion of “preparation of a sale” (section 15(2) second sentence of the Reorganisation Tax Act) is met, if there is already a specific intention to sell at the time of the demerger or if a sale is at least considered, not only hypothetically. The preparation of the sale is deemed detrimental within the meaning of section 15(2) fourth sentence of the Reorganisation Tax Act if shares in a corporation involved in the demerger are sold to external parties within five years of the tax transfer date. In those cases, it is deemed to be irrelevant whether there are other, non-tax reasons for the demerger. The mere consideration, in addition to other motives, that a demerged part of the business could be sold more easily if the opportunity arose, is not meant to fulfil the definition of preparation of a sale. Issues that have been raised for many years, such as the application of lock-up periods in the case of listed companies, remain unresolved. Paragraph 15.35a of the Reorganisation Tax Decree contains detailed statements and a specific application example regarding the exemption from lock-up periods in the case of sale to affiliated companies.

K. Change of legal form and contribution of a partnership interest

In the case of a change of legal form from a partnership to a corporation (section 25 of the Reorganisation Tax Act), it is clarified that the object of the contribution is in each case the partnership interests in the partnership which is changing its legal form. In addition, in these cases, there is a uniform transaction that may fall within section 20 of the Reorganisation Tax Act as a whole, if the transfer of the partnership assets and partner’s special business assets takes place in a temporal and economic context (paragraph 20.05). This is not intended to justify the application of section 6(5) third sentence of the Income Tax Act. If only a part of a partnership interest is contributed, the associated functionally essential asset of the partner’s special business assets must be transferred proportionately, i.e. at least in the same ratio as the transferred part of the share in the joint ownership in relation to the entire share in the joint ownership, in order for section 20 of the Reorganisation Tax Act to apply (paragraph 20.11).

Due to the amendment of section 20(2) of the Reorganisation Tax Act by the Annual Tax Act 2024, the Reorganisation Tax Decree (paragraph 20.19) now clarifies that withdrawals and contributions within the meaning of section 20(5) second sentence of the Reorganisation Tax Act are to be taken into account for the purposes of section 20(2) second sentence, nos. 2 and 4 as well as the fourth sentence of the Reorganisation Tax Act.

L. Contributions for which other considerations are (additionally) granted

The Reorganisation Tax Decree also makes extensive changes for contributions for which other considerations are granted in addition to shareholder / partnership rights, with examples provided. This applies both to contributions under section 20 of the Reorganisation Tax Act (paragraph 20.19a) and section 24 of the Reorganisation Tax Act (paragraph 24.07) as well as to the exchange of shares under section 21 of the Reorganisation Tax Act (paragraph 21.10).

In addition, the Reorganisation Tax Decree clarifies that the contributing / transferring party cannot object to the acquiring corporation’s valuation within its own taxation procedure. However, in implementation of the Federal Fiscal Court’s rulings of 8 June 2011 (I R 79/10) and 15 June 2016 (I R 69/15), the contributing / transferring party as an affected third party is entitled to a third-party right of appeal against the relevant tax assessment of the acquiring corporation (paragraph 20.25).

M. Contribution profit

The contribution profit 1 is not subject to trade tax if the contribution at fair market value would not have been subject to trade tax. This applies even if not all shares received are sold in one transaction (paragraph 22.07). The same applies to the contribution profit 2, which is also not subject to trade tax if the contribution at fair market value would also not have been subject to trade tax under section 7 second sentence of the Trade Tax Act (paragraph 22.13).

The Reorganisation Tax Decree has a supplement for cases in which the contributing / transferring party has already sold all, or part of the shares received before the time of the retroactive taxation of contribution profits. In principle, this does not lead to retroactive taxation of contribution profits (section 22(2) fifth sentence of the Reorganisation Tax Act). However, according to the meaning and purpose of the provision, this only applies if the previous sale of the shares received by the contributing / transferring party resulted in the full realisation of the hidden reserves (paragraph 22.17).

N. Reorganisations and consolidated tax groups

At paragraph Org. 12, the Reorganisation Tax Decree contains a stricter stance on the termination of a consolidated tax group within the five-year minimum term to the effect that the reorganisation-induced termination of a profit and loss transfer agreement “may” be an important reason within the meaning of section 14(1) first sentence no. 3 second sentence of the Corporation Tax Act (wording in the Reorganisation Tax Decree 2011: “is” an important reason). In addition, a change of the legal form of a corporation into another corporation does not constitute an important reason (paragraph Org. 26).

In addition, the Reorganisation Tax Decree contains further explanations in connection with reorganisations of consolidated tax groups, including the transition from the tax balance adjustment method to the contribution/contribution repayment method.