Tax Structuring of Business Acquisitions -- Share Deal vs. Asset Deal

Tax Structuring of Business Acquisitions -- Share Deal vs. Asset Deal

The sale or acquisition of a business is one of the most complex transactions in commercial life. Alongside corporate law, employment law and liability questions, tax structuring stands at the heart of the considerations. The fundamental choice is: share deal or asset deal? This decision materially affects the tax burden on all parties and can account for differences running into millions.

Fundamentals: Share Deal and Asset Deal Compared

The Share Deal

In a share deal, the buyer acquires the shares in the company (e.g. GmbH shares, stock). The company as a legal entity remains unchanged. The buyer steps into the shareholder position and thereby also assumes all liabilities and risks of the company.

The Asset Deal

In an asset deal, by contrast, individual assets of the business are transferred: machinery, inventory, receivables, contracts, trademark rights and, where applicable, real estate. The seller remains as the legal entity; the buyer builds a new or expanded business with the acquired assets.

Tax Consequences for the Seller

Share Deal: Disposal of Shares

The tax treatment depends decisively on the identity of the seller:

Corporate seller (§ 8b KStG): When a corporation sells shares in another corporation, the capital gains are 95 per cent tax-exempt under § 8b(2) KStG. Only 5 per cent is treated as non-deductible business expenses and is subject to corporate income tax and trade tax. This makes the share deal particularly attractive from the seller's perspective in group structures.

Individual seller (§ 17 EStG): Where a natural person holds a shareholding of at least 1 per cent in a corporation, the capital gain is taxable under § 17 EStG. The partial income method applies: 60 per cent of the gain is taxable, 40 per cent is tax-exempt. With a substantial shareholding, the effective tax rate including solidarity surcharge and church tax can nevertheless be considerable.

Shareholding below 1 per cent: For shareholdings below 1 per cent, the flat-rate withholding tax of 25 per cent plus solidarity surcharge and, where applicable, church tax applies (§ 32d EStG).

Asset Deal: Disposal of Individual Assets

Sole proprietorships and partnerships (§ 16 EStG): When a sole proprietorship or partnership sells an entire business or business division, § 16 EStG applies. The capital gain benefits from reduced taxation: a tax-free allowance of EUR 45,000 (which is reduced for gains exceeding EUR 136,000) and the one-fifth rule under § 34 EStG are available. Additionally, persons over 55 or those permanently incapacitated may apply for the reduced tax rate under § 34(3) EStG.

Corporations: When a corporation sells individual assets, the hidden reserves are subject to standard corporate income tax and trade tax. Tax exemption comparable to the share deal under § 8b KStG does not exist here.

Tax Consequences for the Buyer

Share Deal: Limited Depreciation Potential

The central disadvantage of the share deal from the buyer's perspective is that the acquisition cost of the shares cannot be allocated to individual assets and depreciated. The book values of the assets within the company remain unchanged. The buyer can only identify a potential goodwill through a purchase price allocation, but this is generally not deductible for tax purposes in a share deal.

Asset Deal: Step-Up of Book Values

In an asset deal, by contrast, the buyer can allocate the acquisition cost to individual assets (the so-called purchase price allocation). This results in a step-up of book values and enables substantial depreciation:

• Tangible fixed assets: Depreciation over the useful life
• Intangible assets: Depreciation, e.g. customer base over 15 years, brands over 10 years
• Goodwill: Tax depreciation over 15 years (§ 7(1) sentence 3 EStG)

This depreciation advantage reduces the buyer's effective tax burden over years and significantly increases after-tax cash flow.

Real Estate Transfer Tax as a Decisive Factor

Asset Deal

In an asset deal, real estate transfer tax (RETT) is triggered upon the transfer of real estate. The tax rate varies between 3.5 and 6.5 per cent of the purchase price attributable to real estate, depending on the federal state.

Share Deal and § 1(2a)/(2b) GrEStG

In share deals, RETT was traditionally avoided through certain structuring techniques. However, the legislator significantly tightened the rules with the revised § 1(2a) and (2b) GrEStG effective 1 July 2021:

• § 1(2b) GrEStG: For corporations, RETT is triggered when at least 90 per cent of the shares change directly or indirectly within ten years
• RETT blocker structures have thereby become largely ineffective

For property-rich companies, RETT can therefore be a decisive factor against a share deal.

VAT Aspects

Asset Deal

The transfer of individual assets is in principle subject to VAT. However, the transfer of a business as a going concern (§ 1(1a) UStG) may render the transaction outside the scope of VAT if an entire business or business division is transferred and the acquirer continues the business.

Share Deal

A share deal is VAT-exempt as a disposal of shares (§ 4 No. 8(f) UStG). This significantly simplifies the transaction.

Trade Tax Particularities

Share Deal

In a share deal by a natural person or partnership, the capital gain is in principle exempt from trade tax, provided it involves the disposal of an entire co-entrepreneurial interest or that of a natural person.

Asset Deal

In an asset deal, the capital gain from a commercial sole proprietorship or partnership is in principle also subject to trade tax, although allowances may apply.

Practical Decision Matrix

The optimal transaction structure results from a holistic assessment of both parties' interests:

Share deal preferred when:

• The seller is a corporation (95 per cent tax exemption under § 8b KStG)
• The company holds no significant real estate
• The buyer wishes to take over existing contracts and permits
• Rapid completion is desired
• Employment law continuity is to be ensured (no business transfer under § 613a BGB required)

Asset deal preferred when:

• The buyer wishes to utilise depreciation potential (step-up)
• Legacy liabilities and risks are not to be assumed
• The seller is a sole proprietorship or partnership and can use the tax-free allowance under § 16 EStG
• Only certain parts of the business are to be acquired (cherry picking)
• A reorganisation of assets is desired

Structuring Models in Practice

Combination of Share Deal and Asset Deal

In complex transactions, hybrid forms are frequently chosen. For example, a target company can be split into an operating company and a property company, with the operating company transferred by share deal and the real estate by asset deal.

Pre-Transaction Reorganisations

Through tax-neutral reorganisations under the Reorganisation Tax Act (UmwStG) (e.g. contribution, merger, change of legal form), the conditions for optimal taxation can be established prior to a transaction. However, lock-up periods (in particular the seven-year lock-up under § 22 UmwStG) must be observed.

Earn-Out Clauses

Variable purchase price components (earn-out) become relevant for tax purposes at the time the entitlement arises. The tax treatment is complex and should be clearly regulated in the contract.

Conclusion

The choice between a share deal and an asset deal is not a purely tax question but requires a holistic assessment of all legal, commercial and strategic aspects. However, the tax differences can be so significant that they materially affect the overall economics of the transaction. Early and interdisciplinary advice -- ideally already during the transaction structuring phase -- is therefore indispensable.

At compleneo, we combine tax law and corporate law expertise under one roof. We accompany business sales from the initial structuring idea through to closing and ensure that the chosen transaction form is tax-optimal for both buyer and seller.