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Germany plans to further amend its business taxation system: new tax burdens for corporate minority holdings

By Stefan Süss & Dr. Thomas Fox
Posted: 9th October 2012 08:52
German legislators plan to further amend the German domestic holding privilege. Proposed plans include making capital gains and dividends from certain corporate minority stakes fully taxable. The changes will have a large impact on the German tax landscape, and they bring Germany closer to the ambitious and often-copied taxation system introduced in the early 2000s. This article provides an overview of these changes and their impact on inbound and outbound holding structures.

I. Introduction

In its current draft, Tax Bill 2013, German legislators propose to exclude certain minority stakes held by German and non-German corporate entities from the benefits of the German domestic holding privilege. Unlike other changes made to the German domestic holding privilege, the motivation for this new draft legislation is not primarily to increase tax revenue. In this case, German legislators are striving to resolve the conflict between current German domestic tax law and the rules set by the European Parent Subsidiary Directive, as interpreted by the European courts. Currently, corporate shareholders of German corporate entities that are not German residents are taxed on dividends if their stake does not reach the 10% threshold required by the European Parent Subsidiary Directive. Residents, on the other hand, are able to avoid such a tax burden.

The proposed legislation is designed to eliminate the obvious foreign shareholder discrimination by excluding German resident corporate investors from the domestic holding privilege with respect to dividends from minority shares, and make them subject to German taxation, as well. In other words, the law will eliminate the discrimination not by releasing foreign shareholders from their current tax burden, but by increasing the tax burden on German corporate shareholders.

II. The new provisions in more detail

Consequence of the new law: full taxation of minority shares

Capital gains and dividends from minority shares become fully taxable, and subject to German corporate income and trade tax at a combined rate of around 30% (in the case of German resident corporate investors) or corporate income tax at a rate of 15.8% (in the case of non-resident corporate investors, not protected by a double taxation treaty). Expenses and write-offs relating to minority shares are subject to specific provisions.

Minority shares

According to the proposed new law, minority shares are shares in corporate entities (German resident or not), representing less than 10% of their stated capital, or, in the absence of stated capital, in the net assets of the respective entities, starting the beginning of the fiscal year, not the dividend date or the date of the disposition, in the case of a capital gain. To the extent shares are acquired after the beginning of the fiscal year, only acquisitions of 10% or more provide the domestic participation exemption. Strengthening existing shares by acquisitions of less than 10% provides the domestic participation exemption in the following year.

Only direct shares count

With respect to the 10% threshold, only direct shares count. Indirect shares held through other corporate entities, even if connected through fiscal consolidation, are not taken into account. Indirect shares held through partnerships, however, are allocated pro rata on the basis of the general profit-sharing provisions of the partnership.

Limited-expense deduction

Expenses and write-offs relating to minority shares can only be offset with positive income from these shares, but are barred from being netted with positive income from any other source. To the extent they are not offset with positive income from these shares, they will be carried forward.

Specific rules and date of application

The draft law contains quite a number of specific rules with respect to minority shares, overall leading to a remarkably complex framework of provisions which conflicts with the existing tax system. It is proposed that the new law would come into effect already for the tax year 2012, and therefore, would retroactively cover dividends and capital gains received in 2012. It is expected, however, that due to constraints under German constitutional law, the legislative process will change the date of application, probably with a cut-off date later in 2012. Grandfathering rules are not expected.

III. Impact on tax planning and current structures

Holding structures

Current holding structures for minority shares need to be revisited. For stakes focused on capital gains, the use (i.e. the interposition) of treaty protected non-German holding entities should be considered. For dividend-focused investments, a pooling of the shares with other shareholders through a partnership structure may optimize the tax burden.

The new draft law leads to a clear discrimination of German resident holding structures: whereas non-German holdings would be subject to corporate income tax only, and would therefore have effective taxation of 15.8%, German resident holdings would also be subject to trade tax, which increases the effective tax burden to around 30%.

Step-up structures

Step-up structures increasing the acquisition cost of minority shares should be carefully discussed, as the date of application of the new law is still unclear and step-up structures require proper legal and tax documentation.

Sudden death of equity participation rights?

According to the wording of the new law, instruments such as equity participation rights (Genussrechte) may be treated as minority holdings, as they do not grant a participation in the stated capital of the corporation. Although it is doubtful that the legislators aimed to achieve this effect, the draft law may mean the end of such structures, as they may become extremely inefficient tax vehicles.

Tranching of equity

When structuring corporate shares, creating tranches of equity through share classes using preferential rights should be considered. Although each represent more than 10% of the corporate capital, different share classes may provide for different voting and profit rights, and therefore allow also for tax-optimized investments by minority shareholders .

IV. Outlook

The new draft legislation on minority shares adds another layer of complexity when dealing with German tax structures. As it conflicts with the existing German tax system, it is expected that the changes only mark the beginning of many revisions of the German domestic shareholder participation privilege.

Stefan Süss is a partner in Latham & Watkins' Munich office. He is the Vice Chair of the firm's Global Tax Department. He specializes in German and international tax law, focusing on tax-optimization of private equity and M&A transactions, as well as on structuring funds and financial instruments. Stefan Süss is qualified as a certified tax advisor and specialist tax lawyer and is a member of the International Fiscal Association.
Stefan can be contacted on +49.89.2080.3.8167 or by email at
Dr. Thomas Fox is the Office Managing Partner of Latham & Watkins' Munich office, practicing in the firm's Tax Department. His practice focuses on tax regulations and all tax aspects of  mergers and acquisitions and private equity transactions. Mr. Fox also has extensive experience with advising large multinational corporations and mid-sized German businesses on tax audits and tax controversy matters, as well as on a wide range of tax-related restructurings. He is a member of the International Fiscal Association, the International Bar Association and the German-Italian Lawyers' Association.
Dr. Fox can be contacted on +49.89.2080.3.8166 or by email at

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