Mergers and acquisitions (M&A) in Germany involve intricate financial and legal processes, with VAT considerations playing a critical role. Missteps in VAT treatment during these transactions can lead to significant financial and legal repercussions. This article explores common VAT issues encountered in German M&A transactions and offers guidance on managing them effectively, including relevant legal references and official guidelines.
Recovering VAT on Deal Costs
Recovering VAT on deal costs is a primary challenge in M&A transactions. These costs, which often include fees for legal, financial, and advisory services, can be substantial. The ability to recover VAT depends on their direct attribution to taxable supplies.
In many M&A transactions, the sale of shares is a central component, and this is exempt from VAT (§ 4 Nr. 8 UStG). Consequently, VAT on related costs is generally irrecoverable unless it can be proven that the costs directly relate to taxable activities. For example, if a holding company provides genuine management services to its subsidiaries, VAT on related costs can be recovered. However, the German tax authorities (Bundeszentralamt für Steuern) closely scrutinize such claims and may challenge the recovery if there is no clear economic activity between the entities. This scrutiny aligns with the principles outlined in the VAT Act (Umsatzsteuergesetz – UStG) and further specified in the VAT Application Decree (Umsatzsteuer-Anwendungserlass – UStAE).
Structuring the Transaction
Proper structuring of the transaction can significantly impact VAT treatment. Here are two common scenarios:
- Share-for-Share Exchanges: This involves exchanging old shares for new ones and can generate input tax issues, potentially incurring VAT on the deal’s fees. This scenario is governed by § 1 Abs. 1 Nr. 1 UStG, which outlines the taxable nature of such transactions.
- Transfer of Trade or Business: Transferring part of a business to another entity can qualify as a VAT-free Transfer of a Going Concern (TOGC) under § 1 Abs. 1a UStG. The VAT recovery on associated costs depends on the ongoing VAT position of the transferred business. If the business is VATable, the input tax on related costs may be recoverable.
VAT on Holding Companies
Holding companies are frequently used in M&A transactions. However, they are not automatically entitled to recover VAT on their costs. Recovery is possible if there is a clear, direct, and necessary connection to taxable activities (§ 15 Abs. 1 UStG). The German tax authorities have been targeting holding company structures to limit VAT recovery, requiring solid justification for VAT claims, as outlined in various communications and guidelines by the Federal Ministry of Finance (Bundesministerium der Finanzen – BMF).
Tripartite Arrangements and VAT
In complex M&A deals, tripartite arrangements can arise where services are provided to multiple parties, such as both the buyer and seller. The VAT implications of such arrangements depend on the contractual terms and the economic reality of the transactions. Careful drafting of contracts is essential to ensure clarity on VAT responsibilities and entitlements. Misinterpretation can lead to significant VAT recovery issues, as detailed in the case law and BMF writings on the subject.
Due Diligence and VAT Compliance
Conducting thorough VAT due diligence is crucial in M&A transactions. This process involves assessing the target company’s VAT compliance, identifying potential liabilities, and ensuring that all VAT obligations are met. Failure to address VAT issues can result in unexpected costs and liabilities post-transaction. Engaging VAT specialists early in the process is advisable to navigate these complexities effectively.
Practical Steps for Managing VAT in M&A
- Early Consultation with VAT Experts: Engaging VAT specialists early can help structure the deal to optimize VAT recovery and compliance.
- Detailed Documentation: Maintain comprehensive documentation to support VAT recovery claims, including evidence of economic activities and management services.
- Clear Contract Terms: Draft contracts with clear terms regarding VAT responsibilities and the nature of services provided.
- Regular VAT Audits: Conduct regular audits to ensure ongoing VAT compliance and to identify any issues promptly.
Conclusion
VAT considerations are integral to the success of M&A transactions in Germany. Mismanagement can lead to significant financial repercussions and legal challenges. By understanding the complexities of VAT in M&A, engaging experts, and maintaining thorough documentation, companies can navigate these challenges effectively.
For further assistance and queries on managing VAT in M&A transactions, please contact us at WW+KN, a Baker Tilly Company, via email at info@vat-germany.com.
