In the opinion of many M&A experts, transaction activities in 2012 should be stimulated by spin-offs and carve-outs. However, the Federal Ministry of Finance [Bundesfinanzministerium, BMF] has now issued a decree which is calling the tax-neutral transformation of business units into question more than ever. This will hinder divisions, if not even prevent them entirely.
Divisions as an alternative to asset deals
The separation of a business unit can be conducted in the form of an asset deal by selling the assets of such business unit. The disadvantage of such an individual sale, however, is that essential contractual relationships do not transfer automatically, with the result that lengthy renegotiations are required with individual customers and suppliers. The law on mergers and reorganisations offers divisions ["Spaltung"] as an alternative. Here, a business unit is transferred to a company which already exists or is to be set up. Because the law stipulates partial universal succession in this case, all customer relations automatically transfer with the business unit.
A division is also a possibility in cases where enterprises wish to take on a co-investor for a specific business unit or wish to establish a joint venture: By means of a division, the business unit can be given its own legal form in which the co-investor or joint venture partner can participate. This restructuring possibility was still promoted by the legislator in 2007 through deliberate measures taken in the German Company Mergers and Reorganisations Act [Umwandlungsgesetz, UmwG].
Fundamental tax benefit endangered
In principle, divisions are also more favourable from the tax perspective. Under certain circumstances a division can be executed at book values and therewith ultimately in a tax-neutral manner. In this way, particularly in case of distressed business units, the expensive disclosure of hidden reserves is avoided. The prerequisites for a tax-neutral division are regulated in the German Company Mergers and Reorganisations Tax Act [Umwandlungssteuergesetz, UmwStG]. Since its fundamental reform in 2006, numerous clarification questions have arisen in this connection. The fiscal administration subsequently announced a clarifying decree for 2007. Not only did it take four years before it appeared, namely at the end of 2011, but it also disappointed all hopes of assistance in the implementation of reorganisations.
A substantial prerequisite for tax-neutral divisions is...