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Contributions – Blocking period violation in the case of a merger at book value

There are a number of German Reorganisation Tax Act provisions that have to be taken into account in the case of reorganisations. In particular, blocking periods have to be observed in order to prevent or mitigate the supposed abuse of tax structuring options.

One of the most relevant blocking periods, in practice, applies to contributions to a corporation. If a (divisional) business operation or co-owner’s shareholding is contributed at book value or an intermediate value in return for new shares in a corporation then the shares received in return would be subject to a seven year blocking period at the shareholder level. In the event of a sale of the shares by the shareholder within this period, the hidden reserves would have to be realised retroactively back to the date of the contribution and, in fact, reduced by one seventh of the hidden reserves per year.

The relevant provision for a blocking period violation is very broadly defined and includes many substitute realisation situations. For example, if a profit distribution that is too high has been made out of the contribution account for tax purposes then this would trigger a blocking period violation. Recently, the Münster tax court had to decide what constitutes a harmful (from a tax viewpoint) event in its ruling from 19.5.2020 (case reference 13 K 571/16 G, F). In the case in question, a subsidiary German limited partnership [KG] contributed a business operation into a newly founded lower-tier subsidiary German limited company [GmbH] in return for new shares at book value. A year later, the subsidiary KG was merged into its parent GmbH, namely, at book value. There was no capital increase at the parent GmbH. Nonetheless, the judges recognised that there had been an exchange here that they classified as an event that had violated the blocking period.

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