Federal Tax Court judgement: Taxation of the takeover profit on upstream mergers doubtful under EU law

“Profits” in the Reorganisation Tax Act

For reorganisations of assets and persons covered by reorganisation tax law (section 1), it forms an “independent body of law governed by special statute...which takes precedence over the general rules on the determination of profits (Federal Fiscal Court judgement of 21 Feb 2018, file ref. I R 46/16, Federal Tax Gazette [Bundessteuerblatt–BStBl.] II 2020, p. 412, para. 24). In the part concerning mergers (sections 3-19), there are four types of possible profit: “transfer profit” (e.g. section 3(1) and (2)), “shareholding adjustment profit” (e.g. section 4(1) sentence 2 f.; Federal Fiscal Court judgement of 30 July 2024 – file ref. I R 58/12), “takeover profit” (e.g. section 4(4) and following) and “subsequent takeover profit” (consequences partly governed by section 6; most recently by the new section 8b(3) sentence 9 of the Corporate Income Act [Körperschaftssteuergesetz–KStG]); Federal Fiscal Court judgement dated 11 Mar 2026, file ref. I R 10/23). All of these types of profit arise on the “tax transfer date” of section 2(1) sentence 1 of the Reorganisation Tax Act and section 17 of the Reorganisation Act (e.g. Federal Ministry of Finance Circular dated 2 Jan 2025, Federal Tax Gazette I 2025, 92, para. 04.26; 06.01; 12:05).

While transfer profit can be prevented by the transferring corporation requesting it (under strict conditions – section 3(2) sentence 1, section 11(2) sentence 1 Reorganisation Tax Act), this does not apply to the other three types of profit. In this context, the takeover profit of section 4(4) and following has most recently attracted attention, which arises when a corporation is reorganised into a partnership or natural person (section 3(2) no. 2 Reorganisation Act) under the Reorganisation Tax Act (section 1(1) sentence 1)— deducting the notional dividend of section 7 in the “second stage” often results in a takeover loss (section 4(5); schema in Federal Ministry of Finance Circular of 2 Jan 2025, Federal Tax Gazette I 2025, 92, para. 04.27). This loss is always disregarded for trade tax purposes (section 18(2) sentence 1; Federal Fiscal Court judgement of 2 Oct 2025, file ref. IV R 14/25) and for corporate income tax purposes (section 4(6) sentence 1) (corresponding to section 8b(3) sentence 3 of the Corporate Income Tax Act).

By contrast, for income tax purposes deductibility is reduced to 60% in section 4(6) sentences 4 and following (corresponding to section 3 no. 40 and section 3c(2) sentence 1 of the Income Tax Act [Einkommensteuergesetz–EStG]). In addition, the second alternative of the first half of sentence four of section 4(6) sentence four, first clause, second alternative, of the Reorganisation Tax Act imposes a further restriction, in that no more than 60% of the notional dividend under section 7 is defined as deductible (held constitutional by Federal Fiscal Court judgement of 22 Oct 2015, file ref. IV R 37/13, Federal Tax Gazette II 2016, p. 919).

For income tax purposes, by contrast, the loss is not deductible at all (section 4(6) sentence 6, second alternative) “to the extent that the shares in the transferring corporation were acquired for consideration within the last five years before the tax transfer date”. In that respect, the lack of deductibility (including for trade tax purposes, see section 18(2) sentence 1) leads, for income tax purposes, to the acquisition costs for the holding in the transferring corporation being eliminated (held constitutional by Federal Fiscal Court judgement of 5 Nov 2015, file ref. III R 13/13, BSBl. II 2016, p. 468, paras. 54 and following).  Because of the fiction of section 5(1), Federal Fiscal Court case law holds that this also applies when the acquiring entity only actually acquires the shares after the tax transfer date (section 2(1) sentence 1; Federal Fiscal Court judgement of 17 Aug 2023, file ref. III R 37/20, Federal Tax Gazette II 2024, 16).

Takeover profit when corporations are reorganised into corporations

If, on the other hand, corporations are reorganised into corporations under the Reorganisation Tax Act (section 1(1) sentence 1), section 12(2) sentence 1 always gives rise to takeover profit “in the amount of the difference between the book value of the shares in the transferring corporation and the value at which the transferred assets are to be taken over, less the costs of the transfer of assets” (including in a sidestream merger, in which there is no holding between the transferring and the acquiring company, Federal Fiscal Court judgement of 9 Jan 2013, file ref. I R 24/12). Under this provision, this is tax-exempt (R 7.1(1) sentence 2 line 17 of the Corporation Tax Guidelines [Körperschaftsteuer-Richtlinien–KStR]). This also applies to trade tax (section 19(1)).

However, this tax exemption also means that the “costs of the transfer of assets” are not deductible (on scope, see Federal Fiscal Court judgement of 23 Nov 2022, file ref. I R 25/20, Federal Tax Gazette II 2023, 612). In addition, losses are not then deductible, which brings the prohibition on deduction of section 8b(3) sentence 3 of the Corporate Income Tax Act into reorganisation tax law (for cases falling under section 8b(8) of the Corporate Income Tax Act, see Federal Fiscal Court judgement of 30 Jul 2014, file ref. I R 58/12).

The tax exemption in section 12(2) sentence 1 is, however, restricted by sentence 2. According to this, section 8b of the Corporate Income Tax Act is to apply to the extent that the profit as defined by section 12(2) sentence 1 of the Reorganisation Tax Act corresponds to the acquiring corporation’s holding in the transferring corporation less the proportionate costs of the transfer of assets attributable to it. Similarly to section 12(4) and section 29(2) sentence 2 of the Corporate Income Tax Act, this means that upstream mergers are treated differently from other mergers. Section 8b(3) sentence 1 of the Corporate Income Tax Act means 5% of the takeover profit is taxable in an upstream merger (R 7.1(1) sentence 2 line 20 of the Corporate Income Tax Guidelines; also for trade tax purposes, section 19(1) of the Reorganisation Tax Act; there is no reduction for capital gains, H 9.3 of the Trade Tax Explanatory Notes [Gewerbesteuer-Hinweise–GewStH], “Ver..”). According to settled Federal Fiscal Court case law, this is not to be understood as a restriction of the tax exemption but as an “aliud” to it (e.g. Federal Fiscal Court judgement of 30 May 2018, file ref. I R 31/16, Federal Tax Gazette II 2019, p. 136, para. 41).

Whether this taxation of the takeover profit is compatible with the EU Merger Directive (2009/133/EC; section 1(5) no. 1 of the Reorganisation Tax Act) has, until now, been an open question. For example, Berlin-Brandenburg Fiscal Court (17 Sep 2025, file ref. 10 K 10003/22) did not consider itself obliged to refer it to the European Court of Justice (Art. 267(2) TFEU). The tenth chamber of the Federal Fiscal Court has now taken a different view (file ref. X R 27/22) and has referred to the European Court of Justice the question of the relationship between the German “5% taxation” and the Merger Directive, particularly Art. 7 (Art. 267(3) TFEU).

Article 7(1) of the Merger Directive reads: “Where the receiving company has a holding in the capital of the transferring company, any gains accruing to the receiving company on the cancellation of its holding shall not be liable to any taxation.” In this respect, the terminology of the Directive (defined in Art. 2) must be observed to apply its terms to the German Reorganisation Tax Act. The specific case concerned the mergers of European subsidiaries into their German parent company (sections 122a and following (rescinded); now sections 305 and following of the Reorganisation Act), with the result that the “transferring company” under the Directive corresponds to the “transferring company” under section 11 of the Reorganisation Tax Act (Art. 2(f) of the Directive). The “receiving company” (Art. 2(g) of the Directive), by contrast, is consistent with the terminology used in reorganisation tax law (section 12 of the Reorganisation Tax Act).

Doubts with regard to EU law concerning the provisions of the Reorganisation Tax Act

The German legislator has recently opened up the balance sheet item under section 4g of the Income Tax Act, which is motivated by EU law, to also include exit taxation events under the Reorganisation Tax Act (section 4g(1) sentence 4 of the Income Tax Act). The referral by the tenth chamber of the Federal Fiscal Court to the European Court of Justice is, however, in line with numerous other decisions subjecting reorganisation tax law to appraisal by EU law. In its judgement of 29 October 2025 (9 K 1153/21; appeal on points of law pending under file ref. I R 30/25), Münster Fiscal Court had to answer the fundamental question whether the forfeiture of losses under section 4(2) sentence 2 and 18(1) sentence 2 of the Reorganisation Tax Act is permissible in the case of reorganisations involving an EU element.  Permissibility under EU law was affirmed.

Hesse Fiscal Court, too, in its judgement of 22 May 2025 (3 K 778/21; appeal on points of law pending under file ref. X R 18/25), took the view that in the case of an exchange of shares (section 21) within the scope of the Merger Directive, the taxation of contribution profit 2 [Einbringungsgewinn II] (section 22(2)) infringes the Directive if the personal and substantive scope of the Directive also applies (on scope see, Federal Ministry of Finance Circular of 2 Jan 2025, Federal Tax Gazette I 2025, 92, para. 21.15; on requests under section 21(2) sentence 3 no. 2 of the Reorganisation Tax Act, see most recently Federal Fiscal Court judgement of 2 Dec 2025, file ref. X R 32/23).

Under national law, a constitutional complaint against the Federal Fiscal Court judgement of 30 July 2014 (file ref. I R 58/12) concerning section 12(2) of the Reorganisation Tax Act was recently still pending: the Federal Constitutional Court [Bundesverfassungsgericht–BVerfG], however, declined to accept it for decision by an order of non-acceptance issued on 17 June 2026 (file ref. 2 BvR 84/17). The complaint had criticised, from a constitutional perspective, the asymmetry of the reference in section 12(2) sentence 2 of the Reorganisation Tax Act to section 8b of the Corporation Tax Act, which only covers takeover profit but not takeover losses.