Share deals and tax: how to plan the tax burden on a share purchase correctly

Key takeaways:

• In a share deal, shares in the company are sold; what is taxed is the capital gain – that is, the purchase price less acquisition costs and disposal costs – not the entire purchase price.
• Corporations as sellers pay tax on gains from the sale of shares in corporations on only a very small part of the gain, typically an effective rate of around 1.5 % (corporate income tax (Körperschaftsteuer) and trade tax (Gewerbesteuer)).
• An asset deal can be more advantageous for the buyer in tax terms, but for a seller in the legal form of a corporation it carries a considerably higher tax burden.
• Alongside income tax and corporate income tax, share deals can also trigger real estate transfer tax (Grunderwerbsteuer).

How high are the taxes in a share deal?

The tax burden of a share deal depends above all on the legal form of the buyer, the seller and the company being sold, and on the size of the capital gain. The capital gain is always the difference between the disposal proceeds and the acquisition costs, less the disposal costs.

In a share deal the seller disposes of shares in a company rather than of individual assets. For tax purposes a distinction has to be drawn between the sale of shares in a corporation and the sale of an interest in a partnership.

Sale of shares in a corporation

The tax arising on the sale of shares in a corporation depends in particular on the shareholder. In detail:

• Corporations: For corporations (for example a GmbH selling shares in a subsidiary GmbH) the following applies: gains from the sale of shares in corporations are 95 % exempt. The remaining 5 % of the capital gain is subject to corporate income tax and trade tax. At a corporate income tax rate of 15 %, this means an effective burden on the capital gain of around 0.75 % corporate income tax; together with trade tax, the effective taxes are regularly in the region of about 1.5 % or slightly above, depending on the municipal trade tax multiplier (Hebesatz).
• Individuals: In the case of a substantial shareholding (at least 1 % within the last five years), the gain is captured under section 17 of the Income Tax Act (EStG) as income from a commercial business; the tax base is the disposal price less acquisition costs and disposal costs. This gain is subject to the partial income procedure (Teileinkünfteverfahren): 60 % of the gain is taxable and 40 % exempt, which at a top tax rate of 45 % results in an effective income tax burden of 27 % on the gain. The solidarity surcharge (Solidaritätszuschlag) and church tax (Kirchensteuer) may be added.
• Partnerships: In the case of partnerships, the burden depends on whether the shares are held as business assets and on the shareholder structure, because partnerships are transparent for both income tax and corporate income tax purposes. Taxation then takes place at the level of the partners, with income tax or corporate income tax.

Trade tax, by contrast, is levied at the level of the partnership. Depending on the municipal trade tax multiplier, the trade tax on the capital gain amounts to roughly 15 %.

Where an individual is a partner in a partnership, 60 % of the capital gain is subject to income tax under the partial income procedure, which at a top tax rate of 45 % results in an effective income tax burden of 27 %. In their income tax return, an individual can credit trade tax of up to 14 % (at a trade tax multiplier of 400 %) against income tax. A higher trade tax rate can increase an individual's effective tax burden.

Where a corporation is a partner in a partnership, the capital gain from shares in corporations is 95 % exempt under section 8b of the Corporate Income Tax Act (KStG), so that, depending on the trade tax multiplier, the effective overall rate from corporate income tax and trade tax comes to approximately 30 %.

Sale of an interest in a partnership

The sale of an interest in a partnership likewise varies according to the partner. In detail:

• Individuals: The capital gain from the sale of an entire interest in a commercial partnership – consisting of the partnership interest and the special business assets (Sonderbetriebsvermögen) – is subject to preferential taxation in the form of allowances or a reduced income tax rate. On application, an individual who is at least 55 years old or permanently unable to work may, once only, have a capital gain of up to EUR 5 million taxed at a reduced rate of 56 % of their average tax rate, subject to a minimum of 14 %. If the average tax rate is, for example, 40 %, the capital gain of up to EUR 5 million is taxed not at the marginal rate of 45 % but at a reduced rate of 22.4 %. Where the entire interest is not sold, but only part of a partnership interest (Mitunternehmeranteil), the capital gain does not benefit from the relief. The general rules then apply (see above).
• Corporations: Where a corporation sells a partnership interest, the capital gain is fully subject to corporate income tax; an exemption of the kind that applies to the sale of shares in corporations under section 8b KStG does not apply to partnership interests. The effective rate from corporate income tax and trade tax then comes to approximately 30 %, depending on the trade tax multiplier.

Trade tax, by contrast, is determined and levied at the level of the partnership being sold. The capital gain is included in the trade income to the extent that it is attributable to a corporation. Where the capital gain is attributable to a directly participating individual, it is not included in the trade income, so that no trade tax is levied on it.

Which tax aspects does the seller have to consider in a share deal?

For the seller, the legal form and the allocation of the shares (private or business assets) determine how the capital gain is taxed. Corporations benefit from the far-reaching exemption under section 8b KStG.

The following aspects should be highlighted:

• A commercial partnership or sole trader sells shares in a corporation: To the extent that the capital gain is attributable to individuals, taxation can be deferred up to a capital gain of EUR 2 million by rolling the gain over into reinvestments in newly acquired shares in corporations, depreciable movable assets (for example  machinery, vehicles, operating equipment) or buildings. Where the gain is rolled over into depreciable movable assets or buildings, only the taxable portion of 60 % of the capital gain can be transferred after application of the partial income procedure. The rollover need not take place in the year of the sale; it can also be effected through a reinvestment reserve (Reinvestitionsrücklage) within the following 2 years (for shares or depreciable movable assets) or 4 years for buildings. If the reinvestment is not carried out, the reserve must be released through profit or loss, plus interest of 6 % per year. The special rule does not apply to corporations, because the capital gain is 95 % exempt under section 8b KStG.
• Blocking periods: Conversions, for example from a partnership into a corporation or vice versa, can in principle be carried out tax-neutrally at the time of the conversion under the Reorganisation Tax Act (Umwandlungssteuergesetz). On a sale, the seller must examine in particular whether its shares are subject to a blocking period (Sperrfrist). A share deal within the blocking period can trigger extensive retrospective taxation of the hidden reserves (stille Reserven) from the original contribution.
• Certain credit institutions, financial services providers, insurers and pension funds: Gains from the sale of shares in corporations do not benefit from the relief; section 8b(2) KStG does not apply.  

Which tax aspects matter for the buyer in a share deal?

Depending on the legal form of the target company acquired, the tax aspects for the buyer differ as follows:

• Acquisition of a corporation: What is decisive for the buyer is that, on acquiring a corporation, it does not acquire the individual assets but the shares in the company – and thus indirectly its assets, liabilities and tax history. The acquisition costs for the shares cannot in principle be depreciated directly. A write-down outside the ordinary depreciation schedule is possible only where there is an expected permanent impairment in value. However, such a write-down of a shareholding does not reduce taxable income.
• Acquisition of a partnership: The acquisition of an interest in a partnership is treated for tax purposes as an asset deal. The purchase price is allocated to the acquired assets of the partnership. Where the purchase price exceeds the book value, this results in an increase in the acquisition costs for the acquirer (a step-up), which is reflected in a separate supplementary balance sheet (Ergänzungsbilanz).  

Hidden risks also matter to the buyer: in a share deal it takes on liabilities, tax risks  and liability for the company's earlier tax positions. A share deal can also cause the target company's loss carryforwards (Verlustvorträge) to lapse. The purpose of tax due diligence is therefore to examine in detail loss carryforwards, hidden reserves, open disputes, real estate transfer tax risks as well as any blocking periods and special rules. The tax risks identified in the tax due diligence should be addressed through suitable tax clauses in the share purchase agreement.

What further tax consequences does a share deal have (real estate transfer tax, VAT, etc.)?

Share deals regularly raise complex questions in connection with real estate transfer tax. The legislature has responded to tax avoidance strategies in which large real estate portfolios were transferred by way of share deals without any real estate transfer tax arising; the lost revenue was estimated at around EUR 1 billion per year. The Act amending the Real Estate Transfer Tax Act of 12 May 2021 lowered the shareholding thresholds and extended the time limits, so that even lower participation quotas and certain intra-group restructurings can trigger real estate transfer tax.

For buyers and sellers this means:

• If the share deal fulfils a taxable acquisition event for real estate transfer tax purposes, real estate transfer tax arises on the relevant property value, typically at a rate of 3.5 % to 6.5 % depending on the federal state.
• Specific reliefs, for instance for intra-group restructurings under section 6a of the Real Estate Transfer Tax Act (GrEStG), can avoid the real estate transfer tax in whole or in part, but they presuppose an economic activity and certain participation and holding requirements; the tax authorities adjusted their application decrees on this point in 2023 and clarified, among other things, the economic activity and the relevant participation level.

For VAT purposes a distinction has to be drawn:

• In principle subject to VAT, but exempt: In principle, the transfer of shares in a corporation or of an interest in a partnership constitutes a taxable supply which is, however, exempt.
• Waiver possible: The exemption can be waived under section 9 of the VAT Act (UStG) where the acquirer is an entrepreneur and acquires the shares for its business; the supply then becomes taxable and the seller can claim input VAT on transaction costs.
• Special case: transfer of a business as a going concern: In special cases in which a business or undertaking passes across, a share deal can be treated as a non-taxable transfer of a business as a going concern (Geschäftsveräußerung im Ganzen).

The VAT aspects therefore also have to be addressed in the share purchase agreement.