Tax-neutral restructuring – formalities to be observed in filing applications

General background to carrying over tax book values in the Transformation Tax Act

A variety of types of business restructurings within and outside the Transformation Act (Umwandlungsgesetz) fall within the scope of the Transformation Tax Act, particularly the following:

• Mergers of a corporation into a partnership or into an individual and changing legal form from a corporation into a partnership (sections 3-9 Transformation Tax Act)
• Mergers/divisions involving corporations (sections 11-16 Transformation Tax Act)
• Transfer of operating business units to a corporation or partnership and exchange of shares and changing legal form from a partnership to a corporation (sections 20-25 Transformation Tax Act)

According to the general tax principles, these actions typically lead to taxable profit of the absorbed or transferring legal entity –similar to exchange transactions. In principle, the taxable hidden reserves of the assets and liabilities of the transferring legal entity must be fully realised by recognising them at fair market value, which is subject to tax (standard assessment). Deviating from this, if certain substantive conditions are met, an application can be made to carry over the tax book values or to recognise intermediate values so that in effect part of the hidden reserves are not realised upon restructuring. The tax application can be made regardless of how it is presented in the financial statements. The recognition of intermediate values, which can be a good idea if there are any tax losses, will not be further discussed.

A summary of the formal conditions for applying for tax book values

As well as fulfilling the substantive conditions, the formal requirements must be strictly adhered to. It is basically possible to carry over tax book values for all the foregoing actions. But the application is connected to the following formal conditions, which vary slightly depending on the type of restructuring. 

• Application authorisation: The application must be made by the correct involved party. Depending on the type of restructuring in question, the particularities must be complied with.
• Form/Unconditionality: No particular form must be kept since none is laid down by legislation. As well as making the application in writing or in electronic text form on the ELSTER portal (electronic submission of tax returns), there is also the option of making an implicit application (less recommended), which can be expressed by recognising book values when submitting the closing tax balance sheet of the transferring entity. The election must be unconditional.
• Deadlines: Application is bound by a deadline. It must be submitted by the time the closing tax balance sheet is initially submitted at the latest. The Annual Tax Act 2024 (JStG 2024) lays down particularities that must be regarded in certain cases.
• Responsibility: The application must be made to the right tax office in charge.
• Irrevocability: Once made, an election cannot be changed, withdrawn or contested.

Particularities for mergers/divisions/changes of legal form under sections 3-9 and 11-15 of the Transformation Tax Act

The formal conditions for applying to carry over tax book values are almost the same for the types of reorganisations covered by sections 3-9 of the Transformation Tax Act (transfer to partnerships or natural persons) and sections 11-15 (merger/division involving corporations). The following particularities must be observed in making the election:

• The application is to be made by the transferring legal entity. Accordingly, the assets to be transferred are to be reported in its closing tax balance sheet at their tax book values.
• Where reorganisations involve corporations, the shares in the transferring legal entity are basically deemed to be disposed of (cf. section 13(1) Transformation Tax Act). To avoid realising a capital gain, the shareholders of the transferring legal entity can also submit a separate application concerning this. If the shares in the transferring legal entity do not belong to business assets (but are shares as defined by section 17 of the Income Tax Act [Einkommensteuergesetz]), the former acquisition costs take the place of book value on application.
• As a rule, application to carry over tax book values must be made by the time the transferring legal entity’s closing tax balance sheet is initially submitted. The Annual Tax Act 2024 further tightened the deadline for application in the cases mentioned here. According to this, the closing tax balance sheet is to be submitted electronically by the deadline under section 149 of the Fiscal Code (usually seven months for management-prepared statements) to submit a corporate income tax declaration for the tax period in which the tax transfer date falls (cf. section 3(2a) Transformation Tax Act).  This new rule implicitly means that a potentially shortened deadline for submitting the application must be heeded. However, this does not apply to any applications made by shareholders under section 13(2) of the Reorganisation Tax Act.
• The application to carry over tax book values must be made to the tax office of the transferring legal entity.  According to the Federal Fiscal Court judgement of 2 October 2025 (IV R 14/25, not officially published), the filing application can also be exercised in the notarial deed concerning the reorganisation, of which the notary sends a notarised copy to the responsible tax office under section 54(1) of the Income Tax Implementation Directive (EStDV). In practice, it is recommended to explicitly include a “tax book value application clause” instead of simply agreeing to carry over book values between the parties.

Particularities concerning transfers under sections 20-25 of the Transformation Tax Act

Sections 20-23 of the Transformation Tax Act govern transfers of operating business units to a corporation and the (qualified) exchange of shares, while transfers to a partnership are governed by section 24. For the change of legal form of a partnership into a corporation (notionally in the case of the corporation tax election for partnerships in section 1a(2) of the Corporate Income Tax Act [Körperschaftsteuergesetz]), section 25 refers back to sections 20-23. If an application is submitted, the following particularities have to be observed:

• Unlike mergers and divisions of corporations, in these cases any applications to carry over tax book values are to be made by the receiving legal entity. When shares are exchanged across borders, it is possible under certain conditions for the transferring party to apply for tax book values in an additional application.
• Application for carryover of tax book values is to be made by the time the receiving legal entity’s final tax balance sheet (i.e. ordinary tax accounts) is initially submitted. The tightening of the deadline introduced by the Annual Tax Act 2024 does not apply to cases related to the interests transferred under sections 20-25.
• The application is to be made to the tax office responsible for the receiving legal entity. The transferring party’s application in a cross-border exchange of shares, however, must be made by the time its tax return is initially submitted to the tax office responsible for taxing the transferring party.
• When a transfer is made/shares are exchanged a tax book values, special minimum holding periods must be observed. If the transaction causes tax benefits, evidence must be provided annually for the seven years following the transfer date under section 22(3).

Practical take-aways

To conduct a restructuring in accordance with the Transformation Tax Act in a tax-neutral way, alongside substantive conditions, a formal application to carry over tax book values is necessary. Since the formal conditions vary to some degree depending on the type of reorganisation in question, this should be checked carefully.

From a practical point of view, the application should always be made in writing or in electronic text form via the ELSTER portal. Even if an application can be made implicitly, any discussion with the tax office and tax risks can be avoided by submitting a written application in advance.

Concerning the deadline for applications, in sections 3-19 of the Transformation Tax Act, the part on mergers, section 3(2a), introduced by the Annual Tax Act 2024, should be observed.  In cases where no external tax advisor submits the tax returns (e.g. statements are prepared by the internal tax department), which consequently do not fall under the extended deadlines of section 149(3) of the Fiscal Code, this can result in a significantly shortened application deadline for carrying over tax book values.

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