The planned Act on the Implementation of the Transformation Directive (UmRUG) unfortunately also fails to create the legal framework under transformation law for cross-border transformations in relation to third countries. This is all the more regrettable in light of the opening of the German Transformation Tax Act (UmwStG) for third-country cases in the course of the German Corporate Income Tax Modernization Act (KöMoG). Due to the lack of an accompanying legal basis in transformation law, the scope of application existing under transformation tax law has so far essentially missed the mark from an advisor's point of view.
Problem in consulting practice: Strict interpretation of third-country companies’ eligibility for participation
In the course of the KöMoG, Art. 1 (2) UmwStG was abolished. Such section limited the law’s scope of application to the European Union (EU)/European Economic Area (EEA). Even if the practice-relevant case group of contributions and exchange of shares pursuant to Art. 20 et seq. UmwStG in the context of third countries is unfortunately still not possible at book values, the amendment as of January 1, 2022 nevertheless enabled a large number of tax-neutral restructurings in third-country cases – so far, however, unfortunately only theoretically.
From a tax perspective, since January 1, 2022, all transformations of corporations within the meaning of Art. 1 (1) sentence 1 UmwStG - i.e., in particular mergers, demergers and changes of legal form that are comparable to a domestic transformation within the meaning of the UmwStG – fall within the scope of the UmwStG worldwide. This opening of the UmwStG for third-country cases clearly meets the needs of internationally operating companies, for example, if they have subsidiaries outside the EU and the EEA area. Therefore, the globalization of the German Transformation Tax Act is in principle very welcome.
In our consulting practice, however, the problem remained that a merger of, for example, a US corporation (for example, in the legal form of an Inc.) into a German GmbH – even if now expressly permitted by the UmwStG – cannot, in our opinion, be implemented with legal certainty from a civil law or corporate law perspective.
The civil law related problem originates from the fact that, with regard to a cross-border merger within the meaning of Art. 122b UmwG, only those corporations are eligible for participation which have been formed in accordance with the law of an EU or EEA member state and have their registered office, head office or principal place of business in an EU or EEA member state. This criterion is interpreted quite strictly in the civil law literature and the ability to participate of such companies, which were established under the laws of a third country, is denied. Unfortunately, a subsequent transfer of the registered office does not solve the problem either.
Planned changes due to UmRUG remain without impact on third country cases
Against the background of the EU Directive UmwRL (Directive (EU) 2019/2121 of the European Parliament and of the Council of November 27, 2019 amending Directive (EU) 2017/1132 as regards cross-border transformations, mergers and demergers), which for the first time permits a cross-border demerger and a cross-border change of legal form and is accompanied by a change of the provisions for cross-border mergers, the German legislator is required to modernize the UmwG accordingly.
The UmwRL is to be transposed into national law by the UmRUG, which is currently available in the form of the RegE of July 6, 2022. With regard to cross-border situations, it is planned to expand the UmwG by a new book, which in future will cover all provisions relating to cross-border transformations (i.e., merger, demerger, change of legal form) (cf. Book Six, Art. 305-345 UmwG-E). The provisions on cross-border mergers are to serve as a regulatory model for the procedure of demergers and changes of legal form (cf. RegE, p. 2).
The standard of Art. 122b UmwG, which is problematic in the context of third countries, becomes Art. 306 UmwG-E, but unfortunately does not undergo any change in terms of content. Pursuant to Art. 306 (1) no. 1 UmwG-E, only corporations which have been established under the law of an EU or EEA Member State and have their registered office, head office or principal place of business in an EU or EEA Member State continue to be deemed eligible for merger.
Should the group of companies eligible for merger not be expanded in the course of the further legislative process, this could be interpreted as a deliberate decision by the legislator not to allow cross-border mergers involving third countries. In our opinion, however, this step would be incomprehensible, in particular in light of the abolishment of Sec. 1 (2) UmwStG. This decision is also unlikely to leave any room for interpretation and would therefore be contrary to any considerations, for example, with regard to analogy, since the legislator has “knowingly” decided to do so against the background of the deviating regulatory regime of the UmwStG as amended by the KöMoG.
Legislator misses opportunity to expand cross-border transformation options in third-country cases
It therefore remains to be hoped that, in the course of the further legislative process, the legislator will decide to extend the possibilities for cross-border transformations also in third country cases and thus deliberately go beyond the implementation of the “minimum program” required under EU law. This applies in particular also in view of the fact that the UmRUG, which is scheduled to enter into force on January 31, 2023, is one of the most comprehensive reforms of the UmwG in recent years. Therefore, in light of the fact that the relevant regulations will become part of a separate book of the UmwG, this is the perfect opportunity to significantly expand the possibilities for cross-border transformations. Otherwise, the globalization of the UmwStG undertaken in the course of the KöMoG and welcomed in practice will unfortunately probably come to nothing, since corresponding tax restructurings will continue to lack a legally more secure foundation under civil law in the future.
In such constellations, companies would still have to use alternative transformation methods. For example, a merger of the third-country company (e.g., in the USA) can be implemented by involving an acquiring EU corporation from an EU country other than Germany, whose corporate law regulations are more open in this respect than the regulations of the UmwG in its current and presumably also in its future form. It should be noted, however, that in this example the foreign merger process must mandatorily be comparable with a German merger in order not to jeopardize tax neutrality with regard to the business assets subject to tax liability in Germany under the application of the transformation tax provisions pursuant to §§ 11 et seq. UmwStG. Only in a final step, one can “build the bridge” to the German UmwG from the other EU country by means of corresponding subsequent transformation processes.