Mastering Tax Optimisation Potentials

During times of crisis, it is essential for affected companies to restructure their finances and secure liquidity. Key measures can help restore a company’s financial stability and, in turn, maintain its competitiveness. Structuring the tax effects of equity and debt financing helps achieve these goals.

Our services

Our Tax team has many years of experience in designing tax strategies to reduce debt for the benefit of companies in financial trouble. Key measures include:

• Renegotiating and amending syndicated loan agreements
• Capital market measures, such as adjusting bond terms during distressed scenarios and capital increases for restructuring purposes
• Debt forgiveness
• Waiver declarations with betterment clauses
• Repurchasing loans and bonds
• Repaying debt financed by equity contributions
• Assuming liabilities
• Subordination agreements and letters of comfort
• Mezzanine instruments
• Debt-to-equity swaps and debt-to-debt swaps
• Issuing hybrid bonds
  
  

We analyse the tax implications of these measures for your company and work closely with our colleagues from the Restructuring & Insolvency, Banking & Finance, Dispute Resolution and Corporate M&A practice groups when negotiating contracts with creditors. We ensure that measures are correctly documented and that tax regulations are complied with. Of course, we also represent companies before tax authorities and apply for binding rulings from the tax authorities.

Our Tax team delivers quick and efficient results in extraordinary situations. Together with our colleagues from the Restructuring & Insolvency, Banking & Finance and Corporate M&A practice groups, we support the transformation and realignment of affected companies or groups through corporate restructuring measures.

Our services

Our Tax team provides high-level expertise when planning tax strategies for restructuring projects. Key measures include:

• Ring-fencing loss-making, value-destroying business units from healthy ones
• Carving out low-performing areas in preparation for distressed M&A transactions
• Designing trust structures
• Relocating companies
• Liquidating businesses
  
  

Distressed M&A transactions are often performed as asset deals. The advantage of this approach is that only the agreed assets or parts of the business are transferred, meaning that tax risks for the buyer are generally low. In contrast, share deals carry the risk of passing on a company’s historical tax risks. Despite careful tax due diligence, it is therefore advisable to take out a W&I insurance. Earn-out clauses are also an important tool for bridging purchase price gaps in distressed M&A transactions.

In restructuring scenarios, for instance, dual trust structures are used to facilitate M&A processes, debt-to-equity swaps or bank financing. From a tax perspective, it is important that the trust relationship is recognised so that the income remains with the beneficiary. Apart from this, real estate transfer tax aspects have to be considered.

If a company is being liquidated, instead of issuing a waiver, it might be advisable to leave a liability outstanding in order to potentially exclude negative tax consequences.

The interaction of rating, accounting policies and the resulting tax effects is of crucial importance for companies, as these are essential elements of financial stability, financing costs and therefore growth prospects. Our Tax team and accounting experts are well-versed in these interrelationships and work closely with our colleagues from the Banking & Finance and Corporate M&A practice groups.

Our services

Our Tax team and accounting experts possess significant expertise in structuring accounting policy measures and assessing their tax effects and impact on ratings. Examples of potential tools include:

• Hybrid bonds
• Minority interests
• Pension buy-out companies
  
  

Hybrid bonds are financial instruments that combine elements of both equity and debt. The impact of hybrid bonds on a company’s rating varies depending on the bond’s specific characteristics and rating agency criteria; they are regularly counted as 50% equity. From a tax perspective, it is necessary to assess whether withholding tax has to be remitted on dividend payments.

Minority interests represent shareholders’ equity in subsidiaries where less than 50% is held. These minority interests are shown as part of consolidated equity, which enhances financial stability and strengthens the capital structure, improving the company’s rating.

German pension buy-out companies manage the pension obligations of a company’s former employees. The aim is typically to fully offload these obligations, in this way improving the company’s rating. It is also possible to maintain the tax book values of pension obligations.

In challenging economic times, the adjustment and realignment of business models play a key role in ensuring the company’s survival and regaining competitiveness.

Our services

Our Tax team, along with accounting experts and colleagues from other practice groups, are highly familiar with the tax, economic and legal aspects resulting when business models are realigned. We work closely with the affected companies and groups to assist in their transformation. Some of potential measures include:

• Relocating or terminating existing business units
• Creating new business areas
• Digitalising business processes
• Outsourcing or insourcing
• Restructuring
  
  

Relocating business units abroad or adjusting supply chains may lead to the loss of valuable assets from a tax perspective. Alternatively, entering into licensing arrangements with foreign subsidiaries may be a feasible option. In both cases, it is necessary to obtain a valuation of the business to be relocated and to determine arm’s-length transfer pricing between group companies.

Digital business models may impact the tax treatment of revenues. In particular, international digital services are facing more complex VAT regulations. When value chains are redefined, this affects transfer pricing rules, since new value drivers may need to be identified.

In both outsourcing and insourcing of functions, obtaining valuations of assets and service relationships is important in order to document the appropriateness of transfer pricing and to minimise the risk of profit adjustments in Germany and abroad. In addition to this, any obligations to remit withholding tax should be considered when services are sourced from abroad.