Back to articles

Debt push-down application under BEPS regulations in Germany

by Bernhard Schwechel

In the context of a share deal, a large part of the acquisition costs is usually financed by borrowing. A positive leverage effect can be achieved through a so-called debt push-down by combining the interest expenses of the acquirer with the operating results of the target company.

In this situation, the company to be acquired virtually buys itself. In order to ultimately ensure a tax-optimised acquisition, there are a number of other considerations in addition to deductible acquisition financing. Taking into account the latest legislative developments on real estate transfer tax tightening for share deals, the downstream merger will be presented as one method of debt push-down.

Downstream merger

One frequently used practice is the implementation of a downstream merger of the acquiring GmbH into the target company. This transfers the liability of the acquisition company to the subsidiary.

In this arrangement, the following should be noted in particular:

  • The risk of possible tax deprivation in the case of a downward merger with foreign shareholders (as confirmed by the German Federal Fiscal Court in 2018) should not pose any difficulty if the merger takes place at short notice or on a merger date close to the acquisition date.

  • The court has clarified that the constituent element “transferred assets” listed in § 11 of German Reorganisation Tax Act also includes shareholding in the subsidiary – which might be distributed to the parent company of the acquiring GmbH.

  • Prior to the merger, shares in the target companies are taxed in Germany, even if ultimately only 5% would be taxed in the event of a sale pursuant to § 8b of the Corporate Tax Act.

  • After the merger, Art. 13 OECD-DTA will regularly assign the right of taxation to the state of residence of the new direct foreign shareholder, so that the German right of taxation on the hidden reserves resting in the subsidiary is excluded.

It should be noted that shareholding does qualify as “transferring assets” and consequently, due to the loss of the right of taxation, no book value application is formally possible in this respect.

However, the market value (fair market value) corresponds to the book value in the acquirer case, so no tax consequences arise. On the contrary, the downward merger can be carried out in a tax-neutral manner (at book value).

Another positive outcome of the downward merger is that, unlike in the case of a tax group structure, tax-loss carry forwards of the target company (if they have not been eliminated by the acquisition of the acquiring GmbH due to the hidden reserves clause of § 8c KStG) can continue to be used. The downstream merger does not lead to the cancellation of the target company's losses due to the so-called “group clause” in § 8c KStG.

However, caution is advised in the case of a downstream merger if the reserves of the target company are not sufficient to cover the negative net assets (i.e. acquisition liability). This is seen as an impermissible withdrawal under company law, which qualifies as a prohibited disbursement of share capital. The non-enforcement of a compensation claim against the foreign shareholder is treated by the tax authorities as a hidden distribution of profits.

Caution is also required in the case of “valuable” real estate. As of 01 July 2021, the provision for corporations must be observed. According to this provision, the downward merger arguably leads to a transaction subject to real estate transfer tax at the level of the target 2 GmbH. An exemption under § 6a GrEStG cannot be considered, as the five-year reservation period has not been fulfilled.

Photo: Lapping Pictures -


15 December 2022

Bernhard Schwechel

FACT GmbH Wirtschaftsprüfungsgesellschaft, Managing Partner | Chartered Tax Consultant

FACT GmbH Wirtschaftsprüfungsgesellschaft