Tax advice for foreign investors in Germany
Whether you buy a German company, take a stake in one or hold your investments through a holding company, the structure decides the tax — when you buy, while you hold and when you sell. We provide inbound tax advice on the German side: from tax due diligence to exit.
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The short answer
Three decisions determine what an investment in Germany costs in tax:
- What you buy: the shares in the company (share deal) or its individual assets (asset deal).
- Who buys: you personally, your foreign company, or a holding company set up for the purpose.
- What is checked beforehand: in a share deal you take on the company's tax history — tax due diligence shows what that history contains.
All three questions belong before the letter of intent. After that, the price being negotiated already assumes an answer.
Share deal or asset deal
There are two ways to buy a business. In a share deal you acquire the shares; the company itself stays as it is, with all its contracts, licences and tax positions. In an asset deal you buy the machinery, customer base, brand and workforce individually; the seller keeps the company.
In tax terms, buyer and seller almost always pull in opposite directions. The difference belongs in the price — which means it has to be quantified first.
| Share deal | Asset deal | |
|---|---|---|
| What passes to the buyer | the company, with its entire history | the selected assets |
| Depreciation for the buyer | none — shares are not depreciated | the price is allocated to the assets; goodwill over 15 years (sec. 7(1) sentence 3 EStG) |
| Tax loss carryforwards | forfeited if more than 50% changes hands (sec. 8c KStG) | stay with the seller |
| Historic tax risks | stay in the company — and so with the buyer | stay with the seller, except for the liability under sec. 75 AO |
| VAT | exempt (sec. 4 no. 8(f) UStG) | none if the business is transferred as a going concern (sec. 1(1a) UStG) |
| Real estate transfer tax | only if the company owns German property, and only from 90% of the shares (sec. 1(2b), (3), (3a) GrEStG) | on every property included |
| Gain of a corporate seller | 95% tax-exempt (sec. 8b KStG) | fully taxable |
The loss carryforward you think you are buying
If the target has tax losses carried forward, the seller has often priced them in. Under sec. 8c KStG they are forfeited entirely once more than 50% of the shares go to one acquirer within 5 years. They survive in three cases only: a reshuffle within a group held 100% throughout, to the extent of the company's built-in gains, and — on application — as a business-continuation loss carryforward under sec. 8d KStG, if the company has run only this one business for at least three years and carries it on unchanged.
Whether any of these applies is settled before signing, or not at all.
Purchase price allocation in an asset deal
In an asset deal the price is allocated to the individual assets, and that allocation decides how quickly it reduces tax: inventory as it is sold, machinery over its useful life, goodwill over 15 years, land not at all. The allocation belongs in the purchase agreement and must be defensible — the tax office will recalculate it.
Liability despite an asset deal
Whoever takes over a business or a separately run part of one as a whole is liable under sec. 75 of the Fiscal Code (AO) for its business taxes and withheld taxes — VAT and payroll tax, for instance — that arose since the start of the previous calendar year, limited to the assets taken over. A focused review pays off here too.
Tax due diligence
In a share deal you buy the company's tax history along with it. Whatever a future tax audit assesses for the open years is paid by the company — which by then is yours. Tax due diligence examines that history before you sign.
What we typically review:
- Tax assessments, open years and the outcome of the last tax audit
- Hidden profit distributions: managing director's pay, shareholder loans, transactions with related parties
- Intra-group transfer pricing and its documentation
- VAT: input tax deduction, reverse charge, registrations in other EU states
- Payroll tax, including freelancers and shareholder managing directors
- Whether loss carryforwards survive the acquisition
- Real estate transfer tax where the company owns property
The result is not a report for the file but a list: which risk, how likely, what amount. It feeds into price adjustments, warranties and the tax indemnity in the purchase agreement — the seller's undertaking to bear taxes that arose before the effective date. Your lawyers are responsible for the agreement; we agree the tax provisions in it with them.
We report and discuss in English, German or Russian. The target's own records are almost always in German.
Holding companies
A German corporation that receives dividends or sells shares is effectively taxed on only 5% of them. Sec. 8b KStG exempts dividends and capital gains on shares, and then treats 5% of the amount as non-deductible expenses.
That is the case for a holding company. What an operating company distributes to its holding, or what the holding receives on selling a stake, can be reinvested there almost in full. Full taxation only comes when the holding passes money on to its shareholders — and only when it does.
The thresholds
The 95% is not automatic. For dividends the law requires a minimum shareholding; for capital gains it does not:
| Corporate income tax | Trade tax | |
|---|---|---|
| Dividends | from 10% at the start of the calendar year (sec. 8b(4) KStG) | from 15% at the start of the assessment period (sec. 9 no. 2a GewStG) |
| Capital gains on shares | no minimum (sec. 8b(2) KStG) | no minimum |
Below these thresholds the dividend is fully taxable; for trade tax, sec. 8 no. 5 GewStG adds it back. A stake between 10% and 15% is therefore favoured for corporate income tax but not for trade tax. Acquiring at least 10% during the year counts, for corporate income tax, as holding it from the start of the year.
A foreign holding company above the German company
Many investors hold their German GmbH through a holding company in a state with a favourable tax treaty — Cyprus, the Netherlands, Luxembourg. Whether that reduces German withholding tax on distributions is decided by sec. 50d(3) EStG: relief is denied to the extent that the holding's owners would not be entitled to it if they held the shares directly, and the dividends have no substantial connection with an economic activity of the holding itself. Merely holding shares and passing on income does not count as economic activity. The same rule applies to relief under the EU Parent-Subsidiary Directive (sec. 43b(1) EStG).
A holding company without activities of its own usually gets no more withholding tax relief than its shareholders would get themselves.
How relief is applied for, and what is withheld without it, is set out under The German subsidiary within the group.
Selling and exit
When a foreign investor sells shares in a German corporation, German law treats the gain as German-source income if the investor held at least 1% at any time in the last 5 years (sec. 49(1) no. 2(e) and sec. 17 EStG). For a corporate seller 95% of the gain is exempt; an individual is taxed on 60%.
Whether Germany may actually tax that gain depends on the tax treaty with the seller's state of residence. Under the OECD Model Convention the right generally lies with the state of residence — but for companies deriving most of their value from real estate, with the state where the property is located. Individual treaties depart from the model in both directions.
German law also catches property-rich companies that are themselves based abroad: what counts is whether, at any point in the 365 days before the sale, more than 50% of the shares' value derived from German real estate (sec. 49(1) no. 2(e)(cc) EStG).
The course is set at the time of purchase: who holds, in which state, through how many tiers. Restructuring later is possible, but subject to conditions and rarely free.
Real estate as an investment
Property has rules of its own: real estate transfer tax in share deals, the property-holding GmbH, the holding period for private owners. They are covered on Property in Germany.
What we take on
- Structuring before the acquisition: share or asset deal, directly or through a holding company
- Tax due diligence on acquisitions
- Tax input on the purchase agreement, coordinated with your lawyers
- Purchase price allocation and opening balance sheet after an asset deal
- Review of loss carryforwards under sec. 8c and 8d KStG
- Holding companies: formation, bookkeeping, financial statements, tax returns
- Withholding tax relief on distributions abroad
- Tax planning for the exit
Company law and the purchase agreement are the domain of lawyers and notaries — ones we work with, or your own. Where another country's law is involved, we bring in colleagues there.
Frequently asked questions
What is the difference between a share deal and an asset deal?
In a share deal you buy the shares in the company; in an asset deal you buy its individual assets. For the buyer the asset deal is usually more tax-efficient: the price can be depreciated and historic risks stay with the seller. For the seller it is often the other way round — a corporate seller is taxed on only 5% of the gain from a share deal.
Are tax losses lost when a GmbH is acquired?
Yes, entirely, if more than 50% of the shares go to one acquirer within 5 years (sec. 8c KStG). Exceptions exist for intra-group reshuffles, to the extent of built-in gains, and on application for a business that continues unchanged (sec. 8d KStG).
Is real estate transfer tax due when buying shares in a GmbH?
Only if the GmbH owns property in Germany and at least 90% of the shares pass to new shareholders within 10 years or are united in one hand (sec. 1(2b), (3) and (3a) GrEStG). Until mid-2021 the threshold was 95% over five years — older sources still quote those figures.
What does tax due diligence cover?
The target's tax history: open years and tax audits, hidden profit distributions, transfer pricing, VAT and payroll tax, whether loss carryforwards remain usable and, where there is property, real estate transfer tax. The result is a set of quantified risks that feed into price, warranties and the tax indemnity.
Is a holding company worth it?
Usually, if profits or sale proceeds are to be reinvested: the holding is taxed on only 5% of dividends and capital gains. For dividends that requires a stake of at least 10%, for trade tax 15%. If profits are paid straight out to the shareholders anyway, it achieves little and costs a further set of books and annual accounts.
Does a foreign seller pay German tax on the gain from GmbH shares?
Under German law, yes, if the seller held at least 1% in the last 5 years. Whether Germany may tax it is decided by the tax treaty: usually the state of residence has the right, for property-rich companies often Germany.
When should we involve you?
Before the letter of intent. Structure and price depend on each other; whoever only runs the numbers once the price is agreed is no longer negotiating the tax.
Planning an acquisition or investment?
Tell us about it — the target, the size of the stake, who is to buy. We will tell you which structure works in tax terms and what the review costs.