InfoPAKSM Joint Ventures International …...Joint Ventures International Transaction Guide: Germany August 2015 Provided by the Association of Corporate Counsel 1025 Connecticut Avenue,

By in-house counsel, for in-house counsel.®

Association of Corporate Counsel 1025 Connecticut Avenue, NW, Suite 200

Washington, DC 20036 USA tel +1 202.293.4103, fax +1 202.293.4701

www.acc.com

By in-house counsel, for in-house counsel.®

Association of Corporate Counsel 1025 Connecticut Avenue, NW, Suite 200

Washington, DC 20036 USA tel +1 202.293.4103, fax +1 202.293.4701

www.acc.com

InfoPAKSM

Joint Ventures International Transaction Guide: Germany

Sponsored by:


Copyright © 2015 Practical Law Company (PLC) & Association of Corporate Counsel

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August 2015

Provided by the Association of Corporate Counsel 1025 Connecticut Avenue, NW, Suite 200 Washington, DC 20036 tel +1 202.293.4103 fax +1 202.293.4107 www.acc.com

This InfoPAKSM provides a practical guide to joint ventures, including practice notes and standard documents for cross-border deals with detailed drafting notes highlighting the main legal, commercial and negotiating issues. The standard documents and drafting notes are specifically adapted from the UK versions to provide a plain English, jurisdiction-neutral starting point for local counsel to adapt for cross-border deals.

Country-specific commentaries on the practice notes giving a step-by-step guide to each stage of the joint venture are available for Australia, Canada, China, France, Germany, Hong Kong, India, Italy, Japan, Mexico, The Netherlands, Russia, Singapore, UK and US (New York).

The information in this InfoPAKSM should not be construed as legal advice or legal opinion on specific facts, and should not be considered representative of the views of PLC or of ACC or any of its lawyers, unless so stated. This InfoPAKSM is not intended as a definitive statement on the subject but rather to serve as a resource providing practical information for the reader.

This material was developed by PLC. For more information about PLC, visit their website at http://www.practicallaw.com/.

Contents

I. Structures .......................................................................................................................................... 8

A. What Are the Most Common Legal Structures for Joint Ventures? .......................................................................... 8

B. Are There Different Forms of Corporate Entity? If so, Which Form Is Most Likely To Be Used for a Joint Venture? ..................................................................................................................................................................................... 8

C. Are There Any Minimum/Maximum Capital Requirements? ......................................................................................... 9

D. Can Shares Be Issued in Consideration for the Contribution of Assets or Services (Present or Future)? Are Any Formalities Required if Shares Are Issued for Non-Cash Consideration? .............................................. 10

E. Are There Any Specific Restrictions on the Form of Management Structure? ....................................................... 11

F. Are There Any Restrictions on the Age, Nationality or Identity of Directors or Managers? ............................. 12

G. Do Employees or Shareholders Have the Right to Appoint a Certain Number of Directors? .......................... 12

H. What Formalities Are Required for the Establishment of a Partnership? ................................................................ 13

I. Are There Any Restrictions on the Age, Identity or Number of Partners? ............................................................ 13

J. What Is the Extent of Each Partner's Potential Liability in Respect of the Partnership Business? ...................... 14

K. In What Circumstances Is a Partnership Structure More Likely to Be Used than a Company for a Commercial Joint Venture? ................................................................................................................................................. 14

L. Are There Any Circumstances in Which a Contractual Joint Venture Could be Categorised as a Partnership (and the Parties Therefore Become Jointly Liable in Relation to the Substance of the Contract)? ................................................................................................................................................................................ 15

M. Is It Possible to Have a Limited Partnership in Your Jurisdiction? If so, What Are the Main Characteristics of a Limited Partnership? ...................................................................................................................................................... 15

N. What Formalities Are Required for Establishing a Limited Partnership? .................................................................. 16

O. Are There Any Restrictions on the Identity of Partners or Their Role in a Limited Partnership? .................... 16

P. In What Circumstances Is a Limited Partnership Structure More Likely to Be Used than a Company for a Commercial Joint Venture? ................................................................................................................................................. 16

II. Shareholders' Agreement and Bye-laws ...................................................................................... 17

A. What Are the Main Documents that Regulate the Constitutional Arrangements and Day-to-Day Operation of a Joint Venture Company Incorporated in Your Jurisdiction? (Please Answer This and Other Questions in Respect of the Corporate Vehicle That Is Most Likely to Be Used for a Private Joint Venture with Two or More Corporate Shareholders.) ................................................................................................................................... 17

B. Is It Possible to Amend the Constitutional Documents of a Company? If so, What Are the Relevant Voting Requirements? ........................................................................................................................................................................ 18

C. Is Every Shareholder Automatically Bound by a Company's Constitutional Documents? ................................... 19



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D. Is It Necessary for a Company's Constitutional Documents to Be Registered and Open to Public Inspection? ............................................................................................................................................................................... 19

E. Is It Necessary for a Shareholders' Agreement to Be Registered and Open to Public Inspection? ................... 19

F. Is a Company Bound by Its Constitutional Documents? .............................................................................................. 19

G. Is It Common Practice for a Joint Venture Company to Be a Party to a Shareholders' Agreement Relating to the Joint Venture? ............................................................................................................................................................. 19

H. What Are the Remedies for Breach of a Shareholders' Agreement? ........................................................................ 20

I. What Are the Remedies for Breach of a Company's Constitutional Documents? ................................................ 20

J. In Which Document Would You Commonly Insert the Following Provisions: ..................................................... 20

K. In the Event of a Conflict Between a Shareholders' Agreement and a Company's Constitutional Documents, Which Document Is Likely to Prevail? ...................................................................................................... 22

L. About the Authors of Section II ......................................................................................................................................... 22

III. Control and Minority Protection .................................................................................................. 24

A. In the Absence of Specific Provisions in the Shareholders' Agreement or Bye-Laws of a Company, What Protections Are Automatically Given to a Minority Shareholder under Local Law? ............................................. 24

B. Are Specific Voting Majorities Required by Law for Any Corporate Actions (for Example, Increasing Share Capital, Changing the Company's Constitution, Appointing and Removing Directors and so on)? ................... 25

C. Are There Any Statutory Restrictions on Quorum or Voting Requirements at Director and Shareholder Meetings? Do They Need to Be Proportionate to Shareholdings? ............................................................................ 25

D. Can Voting Majorities Required by Law Be Disapplied to Protect a Minority Shareholder (for Example, Through Class Rights or Weighted Voting)? ................................................................................................................... 26

E. About the Author of Section III .......................................................................................................................................... 26

IV. Competition .................................................................................................................................... 28

A. What Are the Triggering Events/ Jurisdictional Thresholds for the Application of National Competition Rules to a Joint Venture? ...................................................................................................................................................... 28

B. Is Notification Mandatory or Voluntary, and Is There an Obligation to Suspend? Where Notification Is Mandatory, What Is the Deadline for Notifying and What Sanctions Can Be Imposed for Failure to Notify?30

C. Who Notifies? ......................................................................................................................................................................... 31

D. What Authority Do You Inform? ....................................................................................................................................... 31

E. What Is the Substantive Test? ............................................................................................................................................. 31

F. What Is the Time Limit for the First Stage Decision? ................................................................................................... 32

G. What Is the Time Limit for a Final Decision and What Decisions Can Be Made? ................................................. 32

H. Who Do You Appeal to? ..................................................................................................................................................... 32

For more ACC InfoPAKs, please visit http://www.acc.com/infopaks

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I. What Are the Filing Fees? .................................................................................................................................................... 32

J. Can You Complain About Competitors? ......................................................................................................................... 33

K. What Are the Penalties for Implementing a Transaction Before It Has Received Clearance? ............................ 33

L. About the Author of Section IV ......................................................................................................................................... 34

V. Employees ....................................................................................................................................... 35

A. What Level of Statutory Employment Protection Do Employees Receive in Your Jurisdiction? Are There Provisions of 'Mandatory Law' That Apply to All Workers in Your Jurisdiction, Regardless of the Choice of Law in the Employment Contract and the Identity, Place of Incorporation or Location of the Employing Entity? ....................................................................................................................................................................................... 35

B. Please Give Details of the Following in Your Jurisdiction (if Applicable): ................................................................ 35

C. What Statutory Rights Do Workers Have Against Dismissal in Your Jurisdiction? .............................................. 36

D. What Rights Do Workers Have to Be Consulted or Participate in the Management of Companies Incorporated in Your Jurisdiction? (In Particular, Do They Have to Be Consulted in Relation to Redundancies or Disposals)? ............................................................................................................................................... 37

E. What Is the Basis of Taxation of Employment Income in Your Jurisdiction? Please Distinguish Between Foreign Nationals Working in Your Jurisdiction and Nationals of Your Jurisdiction Working Abroad. .......... 38

F. What Is the Rate of Tax on Employment Income? Are Any Other Taxes (such as Social Security Contributions) Levied on the Employment Relationship? ............................................................................................ 38

G. If an Individual Employee Agrees to Transfer Employment to a New Entity, Should Any Formalities Be Followed to Prevent the Employee from Later Bringing a Claim in Respect of Termination of Employment? (Assume That the Transfer Is Not Part of a Transfer of a Business as a Going Concern.) ................................. 39

H. What Benefits (if Any) Does a Period of Continuous Employment Bring for an Employee in Your Jurisdiction? If an Individual Employee Is Transferred to a New Entity, in What Circumstances (if Any) Will the Employee Be Deemed to Retain His Continuous Period of Employment? (Assume That the Transfer Is Not Part of a Transfer of a Business as a Going Concern.) ........................................................................................ 39

I. What, if Any, Remedies Are Available to an Employer, if an Employee Refuses to Transfer to a Joint Venture Entity? (Assume That the Transfer Is Not Part of a Transfer of a Business as a Going Concern.) ... 40

J. If a Business Is Transferred from a Joint Venture Party to the Joint Venture Entity, Is There Any Statutory Protection of Employees Working in the Business? Are They Automatically Transferred with the Business? Are They Protected Against Dismissal? Do They Need to Be Consulted? ............................................................. 41

K. If Employees Are Transferred to a Joint Venture Entity by Different Parties, Are There Any Legal Restrictions on Harmonising Their Terms of Employment? ....................................................................................... 42

L. Are There Any Restrictions in Your Jurisdiction on an Employer Seconding an Employee to Another Organisation on a Temporary Basis? ................................................................................................................................. 42

M. Does an Employer That Seconds an Employee to Another Organisation Remain Vicariously Liable for the Acts of the Employee (Even if the Employee Is Acting in Accordance with Instructions from the Other Organisation)? ......................................................................................................................................................................... 43



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N. If an Employee Creates Intellectual Property Rights in the Course of His Employment, Who Owns the Rights? Would the Answer Be Any Different if the Employee Is Seconded to Another Organisation When the Rights Are Created? ....................................................................................................................................................... 43

O. How Are Fees for Seconded Employees Taxed in the Hands of the Employing Company? Does Value Added Tax Apply to Secondment Fees? ........................................................................................................................... 44

P. Is It Common (or Compulsory) for Employees to Participate in Private Pension Schemes Established by Their Employing Company? Are Any Tax Reliefs Available on Contributions to Such Schemes (by the Employing Company and Employees)? .............................................................................................................................. 44

Q. Can Employees That Are Working Abroad and Employees of a Subsidiary Company in a Different Country Participate in a Pension Scheme Established by a Parent Company? Are the Same Tax Reliefs Referred to in Section V.P. Still Available in These Circumstances? .................................................................................................... 45

R. If an Employee Is Transferred as Part of a Business, Is the Transferee under an Obligation to Honour Existing Pension Rights or Provide Equivalent Rights? .................................................................................................. 45

S. Are Employee Share Option Schemes Common in Your Jurisdiction? If so, Are There Any Tax Benefits and Can Options Be Granted to Employees of Group Companies? ......................................................................... 45

T. If an Employee That Participates in a Share Option Scheme Is Transferred as Part of a Business, Is the Transferee under an Obligation to Provide an Equivalent Scheme? If so, How Is This Dealt with in Practice?46

U. Do Foreign Nationals Require Work Permits and, if so, How Difficult Are They to Obtain and How Long Does the Process Take? ....................................................................................................................................................... 46

V. Are There Any Restrictions on Foreign Managers or Directors for Companies in Your Jurisdiction? ............ 47

W. Are There Any Circumstances in Which Directors or Managers Can Be Personally Liable in Respect of the Actions of a Joint Venture Company That Is Incorporated in Your Jurisdiction? .................................................. 47

VI. Tax ................................................................................................................................................... 48

A. Are Partnerships Tax Transparent in Your Jurisdiction? .............................................................................................. 48

B. Can Losses of a Foreign Partnership Be Offset Against the Profits of a Corporate Partner That Is a Tax Resident in Your Country? .................................................................................................................................................. 48

C. Do Partnerships That Are Tax Resident in Your Country Generally Receive Similar Benefits to Companies under Double Tax Treaties? ................................................................................................................................................ 49

D. Does Your Country Have Rules That Restrict the Proportion of a Company's Capital That Is Comprised of Loans by Affiliates (Thin Capitalisation Rules)? If so, Please Explain in What Circumstances These Rules Apply and Whether They Can Be Circumvented. ......................................................................................................... 50

E. If a Company That Is a Tax Resident in Your Country Transfers Assets (Including Shares) to a Company That Is Tax Resident in Another Country, What Taxes Might Arise? Are Reliefs Potentially Available? (Please Distinguish, if Relevant, Between Assets That Are Located in Your Country and Assets Located in a Foreign Country.) ............................................................................................................................................................... 52

F. Is Any Tax or Duty Payable on the Issue of Shares by a Company That Is Incorporated in Your Country? .. 55

G. What Rate of Tax Do Companies Pay in Your Jurisdiction and How Is It Assessed? ........................................... 56

H. Can Losses of a Company That Is Tax Resident in Your Country Be Surrendered for Tax Purposes to Another Company? If so, What Conditions Apply? Can Losses Be Carried Forward for Tax Purposes? ....... 57


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I. Are Interest Payments Tax Deductible in Your Country? ........................................................................................... 59

J. Are Withholding Taxes Applied to Dividends, Interest and/or Other Payments Made by a Company That Is Tax Resident in Your Country to a Foreign Company? If so, What Rates Apply? Can They Be Reduced or Eliminated in Any Circumstances? ................................................................................................................................ 59

K. What Is the Tax Treatment of Dividends Paid by a Company That Is Tax Resident in Your Country to a Corporate Shareholder (Domestic or Foreign)? ............................................................................................................ 61

L. What Is the Tax Treatment of Dividends Received by a Company That Is Tax Resident in Your Country from a Foreign Company? .................................................................................................................................................... 62

M. Are There any Circumstances in Which (Undistributed) Profits of a Company in a Foreign Country Can Be Imputed to a Corporate Shareholder in Your Country by Tax Authorities (Controlled Foreign Company Rules)? .................................................................................................................................................................... 62

N. Does Your Country Have Transfer Pricing Rules? If so, Please Explain Broadly How They Apply? ................. 63

O. About the Author of Section VI ......................................................................................................................................... 64

VII. Deadlock and Termination .................................................................................................................. 65

A. In the Absence of Specific Provisions in a Company's Bye-Laws or a Shareholders' Agreement, Are Any Remedies Available at Law in the Event of an Unresolved Dispute Between Shareholders Resulting in Deadlock? ................................................................................................................................................................................. 65

B. Is It Common Practice Expressly to Provide for a Dispute Resolution Process in a Joint Venture Company for an Unresolved Dispute Between Shareholders Resulting in Deadlock? If so, Are Any Procedures Commonly Adopted? In Which Document Would the Relevant Provisions Commonly Be Drafted? ............. 66

C. Is It Common to Provide for the Compulsory Transfer of Shares in a Joint Venture Company in Any of the Following Circumstances? In Which Document Are the Relevant Provisions Likely to Be Drafted and Are They Likely to Be Enforceable? (a) Insolvency of Shareholder. (b) Change of Control of Shareholder. (c) Material Breach of the Shareholders' Agreement or Bye-Laws. ................................................................................. 66

D. Is It Common in a Joint Venture Company to Impose Restrictions on the Transfer of Shares? If so, What Sort of Restrictions Are Commonly Imposed and in Which Document Are They Likely to Be Drafted? ...... 67

E. If Shares Are Transferred to a Third Party in Breach of Restrictions on Transfer (in a Shareholder's Agreement or Bye-laws), What Remedies Are Available to the Remaining Party? ............................................... 67

F. Is It Possible to Provide That in the Event of a Joint Venture Company Being Wound up, Certain Assets (such as Intellectual Property Rights) Will Be Transferred to a Specific Shareholder? Will such a Provision Be Enforceable in a Winding-up? ........................................................................................................................................ 68

G. About the Authors of Section VII ...................................................................................................................................... 68



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I. Structures

A. What Are the Most Common Legal Structures for Joint Ventures?

The three most common structures are:

■ Corporation.

■ Partnership.

■ Contractual arrangement.

B. Are There Different Forms of Corporate Entity? If so, Which Form Is Most Likely To Be Used for a Joint Venture?

The three most common forms of joint venture entity are:

■ GmbH (Gesellschaft mit beschränkter Haftung). The GmbH is comparable to a private limited company under English law.

■ AG (Aktiengesellschaft). The AG is comparable to a public limited company under English law.

■ GmbH & Co. KG, a limited partnership (Kommanditgesellschaft,KG) with the general partner being a GmbH. The GmbH & Co. KG is a hybrid between a partnership and a GmbH and allows the flexibility of a partnership combined with the limited liability status of a GmbH.

The GmbH is the corporate form most commonly used for joint ventures because its internal organisation can be more easily adapted to the individual needs of its shareholders.

The AG is a rarely used joint venture entity due to the comparably strict rules governing its internal organisation.

As in other jurisdictions, the appropriate form for any joint venture will depend on the specific needs of the JV partners, such as the size, duration and nature of the venture.

Under the terms of the recent amendments to the Foreign Trade and Payments Act (Außenwirtschaftsgesetz) the German Federal Ministry of Economics and Technology (Ministry) may investigate any transaction where an investor that is not domiciled in the European Union (EU) or European Free Trade Association (EFTA) (or an entity domiciled within the EU or EFTA in which such an investor holds at least 25% of the voting rights) acquires at least 25% of the voting rights in a German company. As a result of an investigation, the Ministry may authorise, or, upon approval of the Federal Government,


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impose conditions on, or prohibit the transaction, to protect "public security and order". The investigation must be:

■ Initiated within three months of the signing or publication of the resolution relating to the transaction, and then completed within a period of two months; or

■ Completed within one month if the transaction has been notified to the Ministry by parties to the transaction.

C. Are There Any Minimum/Maximum Capital Requirements?

1. GmbH

A GmbH must have a minimum share capital of EUR25,000. A private limited company with a share capital of less than EUR25,000 is required to use the affix Unternehmergesellschaft (haftungsbeschänkt) (UG) and cannot trade under the affix GmbH. The UG is not a separate legal form, but can be regarded as a variation of the GmbH for start-up businesses which may have difficulties complying with minimum capital requirements of the GmbH. Until a

minimum share capital of EUR25,000 is achieved, the UG is obliged to allocate one-quarter of its annual profits to the capital reserves of the UG.

If the GmbH has not more than three shareholders and only one managing director, the formation process of the GmbH can be accelerated and fees can be reduced by using standard articles of association. This may prove useful for formation of JV vehicles as the key JV provisions can be incorporated in a shareholders' agreement and do not have to be filed with the commercial register as part of the articles of association. Therefore, key JV arrangements will remain private and are not publicly available.

2. AG

An AG must have a minimum share capital of EUR50,000.

3. GmbH & Co. KG

KGs are not subject to minimum capitalrequirements. In the case of a GmbH & Co. KG, the GmbH as the general partner must have a minimum share capital.

There are no maximum caps for capital contributions to a GmbH, AG or GmbH & Co. KG.



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D. Can Shares Be Issued in Consideration for the Contribution of Assets or Services (Present or Future)? Are Any Formalities Required if Shares Are Issued for Non-Cash Consideration?

1. GmbH and AG

Shares can be issued in consideration for non-cash contributions subject to the following conditions:

■ Any non-cash contribution to the capital of a GmbH or an AG must be effected before the application with the commercial register for an incorporation or for any subsequent increase in the share capital is made.

■ Non-cash contributions to the capital of:

• an AG cannot include an obligation to provide services; and

• a GmbH cannot include services to be provided by a shareholder.

Non-cash contributions require a valuation report to be prepared by the founders of a GmbH or AG (internal verification). In the case of an AG, the valuation has to be verified by an independent and experienced expert or a certified auditor appointed by the local court (external verification). Because local courts have the authority to dismiss an application for the registration of a non-cash contribution to the capital of a GmbH or an AG, in practice, the external verification has been carried out by a certified auditor.

After the recent amendments to the German Stock Corporation Act, it has become easier to make non-cash contributions to the capital of an AG. Transferable securities and money market instruments can now be contributed without the need of a valuation report. The contribution can be made at the weighted average market price of the shares in the three-month period prior to the contribution. For other assets a valuation report is still required but there is no need for an external verification if the internal verification is made by an independent and sufficiently educated and experienced expert.

2. GmbH & Co. KG

The limited partner's liability is determined by a fixed amount to be registered with the commercial register, such amount to be contributed in full to obtain limited liability. If a limited partner enters a partnership without being registered with the commercial register he may be fully personally liable for all debts of the partnership.

Under certain conditions, services that are provided on the basis of an arm's-length transaction can be contributed to the capital of a KG. If all general partners of the KG are GmbHs, the restrictions applicable to such companies may restrict the provision of services.


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E. Are There Any Specific Restrictions on the Form of Management Structure?

1. GmbH

A GmbH must have at least one managing director who represents the company. The articles of association of a GmbH can provide for the GmbH to have a dual management structure with a voluntary supervisory board. Such a voluntary supervisory board must have at least one member.

If the GmbH is subject to the co-determination rules a GmbH always has a separate supervisory board. The application of the co-determination rules depends on the sector, type of company and number of employees. There are three types of co-determination:

■ companies with 500 to 2,000 employees are subject to the One Third Participation Act (Drittelbeteiligungsgesetz) whereby one-third of the members of the supervisory board must be employee representatives. The supervisory board must have between three and 21 members, and the total must be divisible by three;

■ under the Co-Determination Act (Mitbestimmungsgesetz), companies with more than 2,000 employees must have a supervisory board consisting of 12, 16, or 20 members depending on the numbers of employees and with half of the members being employee representatives;

■ the Coal and Steel Co-Determination Act (Montan-Mitbestimmungsgesetz) takes precedence over the other rules of co-determination. The supervisory board of companies in this industry sector with more than 1,000 employees in the coal and steel industry has at least 11 members. The appointment procedure is very complex. In simple terms, five members nominated by trade unions or elected by the company's works council. The other six members of the supervisory board are elected by the shareholders.

2. AG

An AG always has a dual board structure consisting of a management board and a supervisory board.

The management board must have at least one member. The supervisory board must have between three and 21 members and the total must be divisible by three.

The composition of the supervisory board depends on the share capital of the AG and whether or not the rules of co-determinations apply.



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A member of the management board cannot be a member of the supervisory board and vice versa.

3. GmbH & Co. KG

A GmbH & Co. KG is managed by its general partner (a GmbH) to which the above mentioned rules apply.

F. Are There Any Restrictions on the Age, Nationality or Identity of Directors or Managers?

There are no age limits and no nationality requirements, although the prevailing view is that a managing director of a GmbH or a member of the management board of an AG must not be subject to travelling restrictions to Germany. The law only requires that a managing director of a GmbH or a member of the management board of an AG must have full legal capacity.

Individuals who are convicted of bankruptcy offences or who are prohibited by a court or a public authority from exercising a profession or pursuing a trade are disqualified by law from acting as management director of a GmbH or member of the managing board of an AG.

G. Do Employees or Shareholders Have the Right to Appoint a Certain Number of Directors?

1. GmbH

Managing directors of a GmbH are appointed and can be removed by shareholders' resolution at any time. Minority shareholders only have a special right to appoint or remove managing directors if this is provided for in the articles of association. Unless the GmbH is subject to the co-determination rules, employees have no right to appoint or remove managing directors of a GmbH.

2. AG

The members of the management board of an AG are appointed by the supervisory board for a renewable period of no longer than five years; they can only be removed for good cause unless they resign voluntarily.


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Individual shareholders have no right to appoint or remove members of the management board. They may be able to indirectly influence the composition of the management board by appointing members of the supervisory board.

If the company AG is subject to the co-determination rules, the employees are entitled to appoint a certain number of supervisory board members. The chairman of a co-determined supervisory board is elected by the shareholders and under the terms of the Co-Determination Act (Mitbestimmungsgesetz) has a casting vote. In other cases the shareholder representatives constitute the majority. Therefore, employee representatives will not be able to appoint or remove the members of the management board against the votes of the shareholder representatives.

H. What Formalities Are Required for the Establishment of a Partnership?

There are several forms of partnership:

1. oHG (offene Handelsgesellschaft).

An oHG is formed whenever at least two persons enter into an agreement to jointly engage in a trade or a business. There are no formal requirements for the partnership agreement itself. The oHG must be registered with the commercial register, although the oHG comes into existence irrespective of this requirement.

2. KG

A KG must be registered with the commercial register. Prior to the registration, it is treated as an oHG (all partners, including the limited partners, have unlimited liability).

3. GmbH & Co. KG

The same rules apply as for a KG. However, the GmbH as the general partner has to be formed in accordance with the rules that apply to a GmbH.

I. Are There Any Restrictions on the Age, Identity or Number of Partners?

There is no restriction on age, identity or number of partners of an oHG or KG.



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J. What Is the Extent of Each Partner's Potential Liability in Respect of the Partnership Business?

Each partner is jointly and severally liable for the debts and other liabilities of the oHG. The same applies to the general partner of a KG. A limited partner is not liable in any event if he has fully contributed the amount stated in the commercial register (Haftsumme) (see Section I.D).

K. In What Circumstances Is a Partnership Structure More Likely to Be Used than a Company for a Commercial Joint Venture?

The main reason for using an oHG rather than a GmbH or an AG is that an oHG is tax transparent for income tax purposes (not, however, for trade tax purposes). Subject to certain restrictions, it is possible to offset German profits and losses for German income tax purposes at shareholder level. If expenses accrue at shareholder level, they can generally be deducted from the German taxable income, provided they are to be classified as special business expenses relating to the partnership interest (Sonderbetriebsausgaben) for example interest expenses with respect to the acquisition financing.

However, a sale of the partnership interest is fully taxable in Germany while a sale of the shares in a corporation may be (partly) tax exempt.

Any advantages in taxation depend on the individual structure, in particular whether or not the shareholders are individuals or corporations.

Further reasons for using an oHG are that there are no legal requirements for a minimum share capital of an oHG and that neither an oHG nor a KG (except where the general partner of the KG is a GmbH) are covered by the legislation of co-determination by employees.


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L. Are There Any Circumstances in Which a Contractual Joint Venture Could be Categorised as a Partnership (and the Parties Therefore Become Jointly Liable in Relation to the Substance of the Contract)?

A contractual arrangement is categorised as a civil law partnership (Gesellschaft bürgerlichen Rechts (GbR or oHG) if the contracting parties oblige themselves mutually to achieve any joint purpose under the contract. An express intention of the parties will be disregarded. The decisive criterion is the mutual obligation of the contracting parties to promote the agreed joint purpose.

The consequence is that the contracting parties become jointly and severally liable for the debts and other liabilities of the GbR. If the joint venture involves a commercial business or trade, it is categorised as an oHG irrespective of a registration with the commercial register.

M. Is It Possible to Have a Limited Partnership in Your Jurisdiction? If so, What Are the Main Characteristics of a Limited Partnership?

The KG is the only form of limited partnership.

Although the general partner of a KG can be a GmbH, the GmbH & Co. KG is not a separate form of limited partnership but a hybrid between limited partnership and a GmbH (see Section I.B).

A KG is formed whenever at least one general partner and at least one limited partner enter into an agreement jointly to engage in a trade or business.

The general partner has unlimited liability to the KG's creditors, although in the case of a GmbH & Co. KG, the unlimited liability of the general partner is de facto limited to the GmbH’s share capital. The limited partner's liability is limited to the nominal amount of its partnership interest (Kommanditeinlage). The limited partner is not liable in any event if he has fully contributed the amount stated in the commercial register (Haftsumme) (see Section I.D).

A KG must be managed solely by its general partner(s).



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N. What Formalities Are Required for Establishing a Limited Partnership?

There are no formal content requirements for the limited partnership agreement and no minimum capital requirements. A KG, however, must be registered with the commercial register. Before registration, it is treated as an oHG (unlimited liability of all partners).

O. Are There Any Restrictions on the Identity of Partners or Their Role in a Limited Partnership?

There are no restrictions on the identity of partners in a KG. Limited partners can usually not participate in the management of the KG (in order to act on behalf of the KG, they need to obtain a power of attorney).

P. In What Circumstances Is a Limited Partnership Structure More Likely to Be Used than a Company for a Commercial Joint Venture?

A KG has no minimum capital requirements and is only covered by legislation for co-determination by employees if the general partner is a corporation.

The GmbH & Co. KG combines some advantages of a GmbH and a partnership. Although the KG's general partner (the GmbH) incurs unlimited liability, the liability of the GmbH's shareholders is limited to the amount of share capital to which they subscribe. Because the limited partners are usually also the shareholders of the GmbH, they in fact participate in the management of the KG (through the GmbH) but still enjoy limited liability.

In a GmbH & Co. KG, the general partner usually holds no capital in the KG and does not participate in the KG's profits or losses. Only the limited partner is therefore taxed. (For further information on the taxation of partnerships, see Section I.K).


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II. Shareholders' Agreement and By-laws

A. What Are the Main Documents that Regulate the Constitutional Arrangements and Day-to-Day Operation of a Joint Venture Company Incorporated in Your Jurisdiction? (Please Answer This and Other Questions in Respect of the Corporate Vehicle That Is Most Likely to Be Used for a Private Joint Venture with Two or More Corporate Shareholders.)

The corporate vehicle that is most likely to be used for private joint ventures with two or more corporate shareholders in Germany is the limited liability company (Gesellschaft mit beschränkter Haftung (GmbH)). The answers below are therefore only given with respect to a GmbH.

1. Deed of Establishment

This document, together with the extract from the Commercial Register, evidences the formation of the company. It contains, among other things:

■ The initial articles of association.

■ The initial share capital with which the company has been registered.

■ The name(s) of the founder(s) of the company.

■ Appointment of initial directors (Geschäftsführer).

2. Articles of Association

These govern the day-to-day management of the company.

Provisions must include:

■ Name of the company.

■ Total share capital.

■ Financial year.

■ Rules regarding the representation of the company.

Provisions also commonly include:



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■ Rules regarding shareholders' resolutions (notice, proceedings, quorum and voting).

■ Shareholder exclusion and termination rights.

■ Rules regarding appointment and dismissal of directors.

■ List of transactions that require prior consent of the shareholders' meeting.

■ Rules regarding the transfer of shares (veto, right of first refusal, pre-emption rights).

■ Majority rights.

■ Rules for supervisory/advisory board.

■ Rules on profit distribution.

3. Shareholders' Agreement

The shareholders' agreement may contain provisions also commonly found in the articles, as the shareholders' agreement does not have to be filed with the Commercial Register. Other provisions might include:

■ A more detailed description of the object and scope of the venture.

■ Obligations regarding the further funding of the company.

■ Interest pooling arrangements.

■ Put and call options.

■ Other confidential issues (as the shareholders' agreement does not have to be registered).

All documents except the shareholders' agreement have to be notarised by a notary public. The shareholders' agreement would also have to be notarised if it is strongly linked to an agreement which has to be notarised (such as a transfer agreement regarding shares in a GmbH).

B. Is It Possible to Amend the Constitutional Documents of a Company? If so, What Are the Relevant Voting Requirements?

The articles can generally be altered by a shareholders' resolution which needs to be notarised. Any change to the articles of association requires a majority of at least 75% of the votes cast (§ 53 II GmbHG). This qualified majority can be increased but cannot be reduced by the articles of association.

A shareholders' agreement can only be amended if all shareholders agree, unless otherwise provided for in the agreement.


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C. Is Every Shareholder Automatically Bound by a Company's Constitutional Documents?

Yes, by the articles of association. The shareholders' agreement is only binding on shareholders who are party to it.

D. Is It Necessary for a Company's Constitutional Documents to Be Registered and Open to Public Inspection?

The articles must be registered at the Companies Registry. They are open to public inspection.

E. Is It Necessary for a Shareholders' Agreement to Be Registered and Open to Public Inspection?

As a general rule, shareholders' agreements are not publicly registered. In fact, the main purpose of the shareholders' agreement is often to avoid publicity.

F. Is a Company Bound by Its Constitutional Documents? Yes - the articles bind the company, the directors that represent the company and the shareholders.

G. Is It Common Practice for a Joint Venture Company to Be a Party to a Shareholders' Agreement Relating to the Joint Venture?

The joint venture company can be but is rarely a party to the shareholders' agreement.



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H. What Are the Remedies for Breach of a Shareholders' Agreement?

The most common remedy is an injunction for specific performance which is available at the discretion of the court, for example, to ensure that each party takes the necessary voting action when voting as a shareholder of the joint venture company to give effect to the terms of the shareholders' agreement. In addition, damages can be awarded.

I. What Are the Remedies for Breach of a Company's Constitutional Documents?

Articles of association are a contract between the shareholders. The standard remedies for breach of contract are an injunction for specific performance and, under certain circumstances, damages. Specific sanctions may be imposed by the articles (for example, forfeiture of shares for non-payment of amounts payable in respect of the shares). The main advantage of incorporating rights in the articles is that the company and all its current shareholders are automatically bound by the articles of association and may therefore sue or be sued under them.

J. In Which Document Would You Commonly Insert the Following Provisions:

There are few hard and fast rules but the following is a common division.

1. Object and Scope of the Company.

Articles of association.

2. Capitalisation and Funding.

Articles of association. Future funding obligations might be dealt with in detail in the shareholders' agreement.

3. Board Composition and Management Arrangements.

Articles of association. The right to appoint directors and member(s) of the supervisory board may also be provided for in the shareholders' agreement.


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4. Distribution of Profits (Including Dividend Policy).

Articles of association. Rules on future distribution policy may also be contained in the shareholders' agreement.

5. Provisions for Dealing with Deadlock.

Articles of association. It is also possible to provide for this in the shareholders' agreement if confidentiality is required.

6. Termination Provisions.


7. Restrictive Covenants.

Restrictions on the management may be imposed in the articles of association (list of transactions that require the prior consent of the shareholders' meeting).

8. Rights to Appoint and Remove Directors.

Articles of association or shareholders' agreement.

9. Quorum for Board and Shareholder Meetings.

Articles of association. There may be special internal rules for the management board.

10. Procedures for Shareholders' Meetings.


11. Division of Shares into Classes.

Articles of association (uncommon).

12. Chairman's Casting Vote.

Articles of association (common only for the chairman of the supervisory board).



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13. Notice Provisions.


14. Share Transfer Provisions.

Articles of association, or the shareholders' agreement if confidentiality is required.

15. Minority Protection (Veto Rights and so on).


K. In the Event of a Conflict Between a Shareholders' Agreement and a Company's Constitutional Documents, Which Document Is Likely to Prevail?

The legal effect of a shareholders' agreement and articles of association is different. The shareholders' agreement imposes contractual obligations on the shareholders whereas the articles of association regulate the constitutional structure of the company. Generally speaking, the articles of association will prevail in case of direct and clear conflict. However, the German courts take into account provisions of a shareholders' agreement when interpreting the articles of association. Further, depending on the circumstances of the case, the provision of the shareholders' agreement may finally give claims against a shareholder even if these obligations are not in compliance with the articles of association. Therefore, it is important and essential when drafting to avoid inconsistency between these documents.

L. About the Authors of Section II

1. Ralf Kurney, Lawyer / Equity Partner

CMS Hasche Sigle

T +49 30 20360 1706 F +49 30 20360 2000 E [email protected] W www.cms-hs.com


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Professional qualifications. Germany, 1988. Partner and head of the corporate practice in CMS’ Berlin office since 1995.

Areas of practice. Corporate; Mergers and acquisitions; Private equity.

Non-professional qualifications. Studied law and economics at the Universities of Münster, Speyer and Hagen.

Recent transactions. Advising on major M&A and private equity transactions, and post-merger integration for domestic and international clients.

Languages. English, German.

Publications and lectures. Various seminars and lectures on "Mergers & Acquisitions".

2. Jens Moraht, Lawyer / Equity Partner

CMS Hasche Sigle


Professional qualifications. Germany, 1995. Joined CMS in 1996. Partner since 2000.

Areas of practice. M&A; Corporate finance; Banking & finance; Syndicated loans.

Non-professional qualifications. Studied law in Heidelberg and Freiburg im Breisgau. Assistant lecturer at the chair of Prof. Hans Stoll (conflict of laws and comparative law) from 1991 to 1995.

Recent transactions. Advising German and international banks, other financial institutions, investing companies and private equity houses in the context of international corporate and finance transactions.

Jens Moraht is constantly listed in legal publications as a leading and recommended German finance lawyer, including in the latest JUVE handbook 2011/2012 as one of the leading German lawyers for financing transactions.

Languages. English, French, German.

Publications. Co-author of Beck'sches Mandatshandbuch Unternehmenskauf; Verlag C. H. Beck (2. Überarbeitete und erweiterte Auflage 2013).



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III. Control and Minority Protection

A. In the Absence of Specific Provisions in the Shareholders' Agreement or Bye-Laws of a Company, What Protections Are Automatically Given to a Minority Shareholder under Local Law?

Note: the answers below are only given with respect to a GmbH (see Section II.A).

1. Majority Requirements

Some shareholder resolutions require a 75% majority (see Section III.B).

2. Requisition of a Meeting

Holders of at least 10% of the shares in a company can requisite a general shareholders' meeting.

3. Violation of Articles of Association

If the majority acts in violation of the articles of association, a minority shareholder can claim specific performance or damages if a provision is violated and affects the position of the shareholder.

4. Information Rights

The managing directors of a GmbH are obliged to inform each shareholder on the business of the company and to allow the shareholder to inspect the company's books (§ 51 a I GmbHG)

5. Deadlock

For the case of a deadlock, please see Section VII.A.


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B. Are Specific Voting Majorities Required by Law for Any Corporate Actions (for Example, Increasing Share Capital, Changing the Company's Constitution, Appointing and Removing Directors and so on)?

Specific voting majorities are required by law for a number of corporate actions.

A 75% majority is required for:

■ Amendment of the articles of association including increase or reduction of share capital (§ 53 II GmbHG).

■ Dissolution of the company by shareholders' resolution (§ 60 I GmbHG).

■ Merger and transformation of the GmbH (for example, transformation into a stock corporation (AG)).

■ Exclusion of a shareholder for important decisions (the excluded shareholder may not vote).

■ Entering into a control and transfer of profits agreement with another GmbH (75% of the shareholders of the controlling GmbH and 100% of the shareholders of the controlled GmbH).

(Note: a company's articles of association can specify a lower majority for dissolution of the company (but not less than a simple majority). The articles cannot provide a lower majority for amendments to the articles or a merger or transformation).

Ordinary resolutions can be passed by a simple majority if the articles of association do not provide otherwise. A director can be appointed and removed by a simple majority vote.

Quorum and voting requirements for shareholder meetings are contained in a company's articles of association.

C. Are There Any Statutory Restrictions on Quorum or Voting Requirements at Director and Shareholder Meetings? Do They Need to Be Proportionate to Shareholdings?

Quorum and voting requirements for shareholders' meetings may be contained in the articles of association.



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The quorum and voting requirements for board meetings can be regulated in the internal rules of the management board. Voting rights do not have to be proportionate to parties' shareholdings.

D. Can Voting Majorities Required by Law Be Disapplied to Protect a Minority Shareholder (for Example, Through Class Rights or Weighted Voting)?

Yes, the articles of association can provide for an even higher majority than is required by law.

E. About the Author of Section III


CMS Hasche Sigle









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CMS Hasche Sigle











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IV. Competition

A. What Are the Triggering Events/ Jurisdictional Thresholds for the Application of National Competition Rules to a Joint Venture?

The creation of a joint venture is subject to German merger control under the German Act against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen (GWB); see sections 35 and following) if it leads to a concentration and if the relevant turnover thresholds are met. So-called non-full-function joint ventures, that is, joint ventures that do not perform all the functions of an autonomous economic entity on a lasting basis, also have to be notified to the Bundeskartellamt. Note that:

■ Under German merger control law the term "concentration" is not interpreted in line with EC competition law. Under the GWB, concentrations may be notifiable even where they do not lead to the acquisition of control of one or several entity/entities over another entity. The creation of a joint venture constitutes a concentration within the meaning of German merger control law if two or more companies:

• jointly acquire all or an essential part of the assets of another company;

• acquire joint direct or indirect control of another company. Joint control usually exists where two or more companies are in a position to exercise decisive influence over important business decisions of the joint venture, for example, through the exercise of veto rights, such as in relation to the business plan or budget of the target company;

• acquire shares in another company provided that the interest of each acquiring company, alone or together with another interest already held, reaches 25% or 50% of the capital or the voting rights in the other company. The acquisition of the shares may occur simultaneously or successively. If two or more companies acquire simultaneously or successively the amount of shares stated above in another company, this transaction is also deemed to constitute a concentration among the acquiring companies with respect to those markets in which the other company operates. This situation also occurs if the seller of the shares keeps at least a 25% interest in the target company; or

• establish any other relationship between themselves and/or between themselves and another company as a result of which they may directly or indirectly exercise a competitively significant influence on the other company. This can be the case even if a minimal stake in that company is acquired.

■ For German merger control law to apply, the following turnover thresholds must be met in the financial year preceding the transaction:


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• the combined aggregate worldwide turnover of all participating companies (that is, depending on the specific form of the transaction, the acquired company and the acquirer or a jointly formed company and its parents) is more than EUR500 million (as at 24 October 2014, EUR1 was about USD1.26) in the financial year preceding the merger;

• the domestic turnover in Germany of at least one participating company exceeds EUR25 million; and

• the domestic turnover in Germany of a second participating undertaking exceeds EUR5 million.

Even if the creation of a joint venture constitutes a concentration and the turnover thresholds are met, the joint venture will not be subject to German merger control if:

■ One party to the transaction that achieved a worldwide turnover of less than EUR10 million in the last financial year merges with another company (de minimis merger). This exemption does not apply if both acquiring parties trigger the turnover thresholds. In this case even a target which would qualify for the de minimis exemption cannot exclude the applicable merger control rules.

■ The merger has no measurable effect on the market in Germany (no domestic effect). In September 2014, the Bundeskartellamt published a new guidance document "Domestic Effects in Merger Control" which replaces the previous document and gives examples and criteria on how to identify or rule out domestic effects in typical constellations and on a case-by-case assessment. In relation to joint ventures, the Bundeskartellamt states that if the joint venture is at least active in Germany, sufficient domestic effects can clearly be identified if the turnover achieved by the joint venture in Germany exceeds EUR5 million. In cases where the joint venture's domestic turnover is lower (for example in cases with newly formed joint ventures) and which do not meet the conditions described by the Bundeskartellamt to rule out a sufficient domestic effect, the analysis has to be assessed on a case-by-case basis. For more details, please refer to the Bundeskartellamt's guidance document which lists examples of joint venture constellations which may or may not have sufficient domestic effects (to be found on the Bundeskartellamt's website).

■ The merger falls within the exclusive jurisdiction of the European Commission under the EC Merger Regulation.

Before the 8th Amendment of the GWB, transactions which exclusively affected a market on which goods or commercial services had been offered for at least five years and which had sales volumes of less than EUR15 million in the last calendar year (de minimis market) were not formally subject to merger control proceedings. This changed with the 8th Amendment of the GWB which came into force in June 2013. The question of whether the de minimis market clause applies is now made part of the substantive merger control assessment. Therefore, mergers relating exclusively to de minimis markets must now be notified to the Bundeskartellamt. Even though such mergers cannot be prohibited if the conditions are



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fulfilled, the question of whether the conditions for a de minimis market are in fact met still requires an extensive analysis of the market and its environment. The Federal Supreme Court clarified that the scope of the de minimis market rule is limited to Germany. Thus, only German revenues on the market concerned have to be taken into account. On the other hand, the so called "bundling theory", according to which the turnover of neighbouring geographical and product markets in Germany has to be added, still applies. Therefore, in determining whether the volumes achieved remain within the limits that mark them as de minimis markets is still the subject of thorough investigations.

Joint ventures may also be subject to the German rules on cartels and fall under the prohibition contained in section 1 of the GWB. The creation of a concentrative joint venture that fulfils all the functions of an independent economic entity generally does not, as such, fall within the scope of section 1 of the GWB. However, where concentrative joint ventures have any co-operative effects, these effects must also be assessed under section 1 of the GWB. Co-operative joint ventures, for example joint distribution agreements, where the parents and the joint venture are active on the same markets and, thus, actual or potential competitors, are generally caught by section 1 of the GWB.

B. Is Notification Mandatory or Voluntary, and Is There an Obligation to Suspend? Where Notification Is Mandatory, What Is the Deadline for Notifying and What Sanctions Can Be Imposed for Failure to Notify?

Notification is mandatory if German merger control applies. There is no deadline, but a concentration must not be put into effect prior to the approval of the Bundeskartellamt or the expiry of certain waiting periods starting with the receipt of the complete notification by the Bundeskartellamt.

Legal transactions infringing this prohibition will be of no effect. For further details in this regard, see Section IV.K. In addition, early completion may be punished by a fine of up to EUR1 million and, in excess of this amount, up to 10% of the aggregate turnover of the undertaking concerned in the preceding business year. In January 2011, the Bundeskartellamt imposed a fine of EUR414,000 against an undertaking for completing the acquisition of a substantial part of the assets of another undertaking prior to receiving the Bundeskartellamt's competition clearance. In another recent case (May 2011) the Bundeskartellamt imposed a fine of EUR206,000 against an undertaking for such infringement. In 2008 and 2009, the Bundeskartellamt issued two decisions where companies who failed to file on time (not in joint venture related cases) were fined more than EUR4million.


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C. Who Notifies? In principle, the joint venture partners and the joint venture itself must notify. In practical terms, one such party will notify for all parties.

D. What Authority Do You Inform? Notification must be submitted to the Bundeskartellamt in Bonn. Its contact details are:

Bundeskartellamt

Kaiser-Friedrich-Str. 16

D-53113 Bonn

T +49 (0)228 9499 0

F +49 (0)228 9499 400

W www.bundeskartellamt.de/

The Bundeskartellamt may provide informal (confidential) guidance and appreciates pre-notification contacts in complex cases.

E. What Is the Substantive Test? The substantive test for assessing whether a proposed merger has to be prohibited is whether the merger will lead to a "significant impediment to effective competition" (SIEC test), in particular as a result of the creation or strengthening of a dominant position on the relevant markets that will not be outweighed by improvements to the conditions of competition. The SIEC test was incorporated into the GWB by the 8th Amendment of the GWB in order to further align German merger control rules with the EU framework.

Under German competition law, an undertaking is presumed to be dominant if it has a share of at least 40% of the relevant market.

A number of undertakings are presumed dominant if either:

■ Three or fewer undertakings reach a combined market share of 50%.

■ Five or fewer undertakings reach a combined market share of two thirds.



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However, these presumptions can be rebutted if the undertakings demonstrate that competition between them will not be lessened, or that they have no dominant market position in relation to their competitors.

F. What Is the Time Limit for the First Stage Decision? A Phase I decision must be made within one month of receipt of a complete notification. If the Bundeskartellamt does not launch an in-depth investigation, clearance will usually be granted within Phase I by way of an informal letter.

G. What Is the Time Limit for a Final Decision and What Decisions Can Be Made?

If a Phase II investigation is conducted, the waiting period is four months from receipt of a complete notification, which may be extended with the consent of all notifying parties. The examination deadline may be suspended if the parties fail to provide a complete response to an information request by the required deadline, unless they are not responsible for this failure. The deadline for Phase II will automatically be extended by one additional month if the parties submit remedies for the first time during Phase II proceedings. The Bundeskartellamt can approve the merger, prohibit it or clear it subject to conditions and obligations (for example, divestitures). Conditions and obligations must not lead to continued control of the Bundeskartellamt over the conduct of the participating companies.

H. Who Do You Appeal to? Appeals against formal clearance decisions (Phase I clearances are not formal decisions) can be lodged in writing within one month with the Düsseldorf Court of Appeal (Oberlandesgericht) and, from there, with the German Federal Supreme Court (Bundesgerichtshof). Prohibition decisions of the FCO relating to mergers between public health insurance companies can only be appealed to social courts.

I. What Are the Filing Fees? The amount of the fee depends on the economic significance and value of the transaction, taking into account the financial strength of the parties. It must not exceed EUR50,000 (or


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EUR100,000 in exceptional cases). The filing fees for an average-sized merger amount to approximately EUR25,000. For merger transactions of "minor importance", the fees usually range between approximately EUR2,500 and EUR15,000.

J. Can You Complain About Competitors? Yes. In addition, individuals and associations whose interests will be substantially affected by the decision can apply to the Bundeskartellamt to be admitted to the proceedings. If admitted, they become a party to the proceedings, and gain the right to appeal the Bundeskartellamt's decisions.

K. What Are the Penalties for Implementing a Transaction Before It Has Received Clearance?

A transaction that is subject to merger control must not be put into effect prior to the approval of the Bundeskartellamt or the expiry of certain waiting periods. Legal transactions infringing this prohibition are "pending void", in other words not valid and therefore unenforceable under German law. If unwinding proceedings are initiated on the grounds of a merger having been completed without prior clearance, and if such unwinding proceedings are subsequently closed due to the absence of competition concerns, the closing proceedings will have the effect of a clearance.

As indicated above (see Section IV.B), infringements of the prohibition on putting the concentration into effect may also be punished by a fine of up to 10% of the aggregate turnover of the undertaking concerned in the preceding business year. For examples of two recent cases where fines were imposed against undertakings for infringing the prohibition on early completion, see Section IV.B.



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L. About the Author of Section IV

1. Marc Besen, Partner, Duesseldorf and Brussels

Clifford Chance

T +49 211 4355 5324 T +32 2 533 5977 F +49 211 4355 5600 E [email protected] W www.cliffordchance.com

Professional qualifications. Rechtsanwalt.

Areas of practice. European and German competition and anti-trust law; Merger control; Investigation proceedings; Multi-jurisdictional notifications; Joint ventures; Cartels; Compliance systems.

Sectors: Healthcare; Chemicals; Food; Retail; Industrial.


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V. Employees

A. What Level of Statutory Employment Protection Do Employees Receive in Your Jurisdiction? Are There Provisions of 'Mandatory Law' That Apply to All Workers in Your Jurisdiction, Regardless of the Choice of Law in the Employment Contract and the Identity, Place of Incorporation or Location of the Employing Entity?

In Germany employees are well protected in a number of areas, particularly with regard to protection against dismissal (see Section V.C), minimum wage, sickness, holiday pay, working hours and equal treatment, as well as workplace safety.

Under German law, parties to an employment contract can choose German or a foreign law, but many protective regulations under German law cannot be waived by choosing a foreign law. It is very rare for an employment relationship in Germany to be governed by foreign law.

B. Please Give Details of the Following in Your Jurisdiction (if Applicable):

1. Maximum Working Week

The maximum working day is eight hours (but an extension to up to ten hours is permissible if this is balanced out over a six-month period (24 weeks). Often, collective agreements provide for a shorter working day or week.

2. Minimum Wage

Since 1 January 2015 all employees are entitled to a statutory minimum wage of EUR8.50 per hour. There are a few transitional arrangements and exemptions for certain employees (such as minors and trainees) and industry sectors (for example, newspaper delivery staff).

Besides that, a minimum wage above EUR8.50 per hour is in many cases stipulated by collective bargaining agreements that differ from sector to sector. This minimum wage generally applies only to employees who are members of the union that concluded the



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respective collective bargaining agreement. But it must be paid to all employees when collective bargaining agreements are declared by state decree to be universally binding (this is rare but currently applies to, for example, electricians, painters, varnishers, roofers, miners, cleaners, care/nursing workers, security service providers and laundry workers).

3. Minimum Holiday Entitlement

By law this is at least 24 working days (for employees working a six-day working week) or 20 working days (for employees working a five-day working week). In practice, the amount of holiday is often determined by collective bargaining agreements and is commonly 30 days (six weeks). Wages must be paid during holidays and holiday cannot be substituted by pay in lieu except when the employment relationship is terminated.

C. What Statutory Rights Do Workers Have Against Dismissal in Your Jurisdiction?

Except for an instant dismissal for good cause without prior notice, which is always possible and cannot be excluded by agreement, there are various statutory rights against dismissal, provided that either:

■ The employment relationship has been in existence for more than six months and the employment relationship commenced after 31 December 2003, and the workplace has more than ten employees.

■ The workplace has more than five employees and the employment relationship commenced before 1 January 2004.

If these conditions are met, the dismissal is valid only if one of the following grounds for dismissal exists:

■ Dismissal based on conduct. The employee's conduct provides grounds for dismissal if the employee has knowingly and seriously breached his contractual obligations (for example, stealing or repeatedly arriving late for work). A prior warning is regularly required.

■ Dismissal on personal grounds. It is possible that the employee's personality or physical condition may provide grounds for dismissal. The main instance of dismissal on personal grounds is for illness (subject to very strict conditions).

■ Dismissal for operational reasons. Grounds for dismissal for operational reasons exist where the employment situation in the workplace changes and jobs are lost, unless it is possible to assign the affected employee(s) to another position. However, the employer cannot freely decide which employees to dismiss, but must make a social selection among comparable employees (see Section V.H).


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Specific categories of employees are protected against dismissal with notice, for example members of a works council, women on maternity leave, parents on parental leave and severely disabled employees.

An employee can bring an action for unlawful dismissal before the labour court within three weeks of the date he was notified of the dismissal.

The law does not contain any provisions regarding severance payments. In practice, however, 80% to 85% of all employment relationships end through the conclusion of a termination agreement (either before or after the issuance of a dismissal) where a severance payment is generally agreed. A common formula to calculate severance payment is: length of service (years) x gross monthly salary x negotiable factor (standard factor 0.5 to 1.0; however, it is not unusual for the factor to exceed 1.0).

In the event of mass dismissals for operational reasons, the employer and the works council must draw up a redundancy programme (social plan), which generally includes severance payments for dismissed employees. If the employer does not have a works council, there is no such obligation. However, the employer still needs to notify the Employment Agency of the intended mass dismissals before they take effect.

D. What Rights Do Workers Have to Be Consulted or Participate in the Management of Companies Incorporated in Your Jurisdiction? (In Particular, Do They Have to Be Consulted in Relation to Redundancies or Disposals)?

Employees have rights of co-determination in many areas. The seats on the supervisory board of certain forms of company must, depending on the size of the company, be filled to one-third (in a company with more than 500 employees) or one-half (in a company with more than 2,000 employees) by representatives of the employees.

In addition, the employees may elect a works council, which has rights of co-determination in many areas. In particular, in the event of mass dismissals, the works council must be heard and consulted beforehand and has the right to negotiate with the employer about the implementation of the restructuring (reconciliation of interests) and a social plan. It is possible to force an employer to implement a social plan by referring the matter to a conciliation board. The same rule does not apply to a reconciliation of interests.



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E. What Is the Basis of Taxation of Employment Income in Your Jurisdiction? Please Distinguish Between Foreign Nationals Working in Your Jurisdiction and Nationals of Your Jurisdiction Working Abroad.

If an individual is resident in Germany, he will be liable to tax on all his income. All employment-related emoluments (including, for example, basic salary, additional remuneration, for example Christmas and vacation allowances, bonus, private use of a company car and benefits in kind) are subject to income tax.

A non-resident is generally subject to tax only on certain income arising in Germany. For taxpayers who live or work abroad, there are often double tax treaties that stipulate in which country tax must be paid.

All emoluments of employment (including, for example, salary, bonus, private use of a company car and benefits in kind) are subject to income tax.

F. What Is the Rate of Tax on Employment Income? Are Any Other Taxes (such as Social Security Contributions) Levied on the Employment Relationship?

The income tax rate at present is between 14% and 42% (45% in exceptional circumstances, this is the maximum tax rate). In addition, a 5.5% surcharge (so-called solidarity tax) is levied on the value of personal income tax. Depending on the employee's religious beliefs and the federal state of residence, church tax is charged at about 9% (8% in Bavaria and Baden-Württemberg) of the value of personal income tax.

Social security contributions must be paid from gross income up to the income limit for the assessment of contributions. In 2015, these amount to:

■ 14.25% for health insurance (general contribution rate). The reduced contribution rate is 14%.

■ 18.7% for pension insurance.

■ 3% for unemployment insurance.

■ 2.35% for nursing care insurance (2.6% for employees who do not have children).

■ 0.15% contribution to the insolvency fund (Insolvenzgeldumlage).

The contributions for statutory accident insurance and the insolvency fund are paid solely by the employer. The other amounts are paid half by the employer (in addition to the wage paid) and half by the employee. Since 1 January 2015, health insurance companies are,


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however, entitled to charge earning-related additional contributions from employees. In 2015, these additional contributions amount, on average, to 0.9%.

G. If an Individual Employee Agrees to Transfer Employment to a New Entity, Should Any Formalities Be Followed to Prevent the Employee from Later Bringing a Claim in Respect of Termination of Employment? (Assume That the Transfer Is Not Part of a Transfer of a Business as a Going Concern.)

A termination agreement should always be concluded with the present employer and a new employment contract with the new legal entity. The termination agreement should provide that all claims of both sides based on the former employment contract are settled.

A termination agreement is effective only if concluded in a written form. The employee may not be maliciously deceived about the grounds for termination of the employment relationship; if this is the case, he has the right to appeal against the termination agreement, which would have no effect.

H. What Benefits (if Any) Does a Period of Continuous Employment Bring for an Employee in Your Jurisdiction? If an Individual Employee Is Transferred to a New Entity, in What Circumstances (if Any) Will the Employee Be Deemed to Retain His Continuous Period of Employment? (Assume That the Transfer Is Not Part of a Transfer of a Business as a Going Concern.)

A period of continuous employment gives various benefits:

■ An employee is protected from dismissal once he has been with the company/business for more than six months (see Section V.C). In the event of dismissals for operational reasons, employees with longer service periods effectively have greater protection because the criteria for determining the level of protection in a social selection are:

• the duration of the employment relationship;

• the age and the maintenance obligations of the employee; and



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• in the case of a severely handicapped employee, his severe handicap.

■ Notice periods become longer in accordance with the length of the employment relationship. The standard legal notice period is at least four weeks to the fifteenth day or the end of a month, but this is extended to two months to the end of a month when the employment relationship has existed for five years, and to six months to the end of a month when the employment relationship has existed for 15 years.

■ Employees do not receive full holiday entitlement until the employment relationship has existed for six months. Prior to that, the employee can take holiday only in proportion to the length of time worked.

■ Full entitlement to sickness pay does not exist until the employment relationship has lasted for four weeks without interruption. The employer must pay wages during an illness for a maximum of six weeks.

■ Company pension entitlements acquired during the employment relationship become vested if the pension commitment has existed for at least five years and the employee is at least 25 years old.

■ Only employees that have worked in a business for at least six months can be elected as members of the works council.

Normally the duration of the employment relationship and the advantages connected to it are not taken into account if an individual employee transfers to a new entity unless the employee is employed by another group company.

I. What, if Any, Remedies Are Available to an Employer, if an Employee Refuses to Transfer to a Joint Venture Entity? (Assume That the Transfer Is Not Part of a Transfer of a Business as a Going Concern.)

An employee cannot be forced to join a new employer, unless there is an explicit right of assignment to another group company in the employment contract. Even then, there may be a breach of the implied duty of trust in the current employment relationship if the request is unreasonable and does not give due consideration to the employee's legitimate interests.

If the function that the employee performs is no longer required (because of the establishment of the joint venture or otherwise) and if he cannot be assigned to another position within the company, the employer may be able to make the employee redundant (dismissal for operational reasons, see Section V.C).


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J. If a Business Is Transferred from a Joint Venture Party to the Joint Venture Entity, Is There Any Statutory Protection of Employees Working in the Business? Are They Automatically Transferred with the Business? Are They Protected Against Dismissal? Do They Need to Be Consulted?

The existing employment relationship is automatically transferred to the buyer of the business (economic unit). All provisions of the employment contract apply after the transfer just as in the past.

A dismissal based on a business transfer is impermissible. However, the right to dismiss employees for other reasons remains untouched (see Section V.C).

Joint venture parties and the joint venture entity are obliged to inform those employees concerned about the transfer prior to its happening. Such information must comprise:

■ The date (or planned date) and reason for the transfer.

■ The legal, economic and social consequences of the transfer for the employees.

■ The name and full address of the party acquiring the operations.

■ Any envisaged measures with regard to employees.

The employees cannot prevent the transfer itself, but can object to the transfer of their employment relationship within a period of one month after being properly informed in the manner described above. The German Labour Courts are extremely strict when deciding whether the information obligation has been correctly fulfilled. If the obligation is not fulfilled in a proper manner, the period within which the employees must object to the transfer of their employment relationships does not start running. The employees are then entitled to object to the transfer of their employment relationships for a long period after the transfer of business has taken place. The right of objection is only limited by forfeiture which, however, occurs very rarely in practice.

In case of a valid objection, the employees continue being employed by the old employer. However, the old employer can then dismiss them for operational reasons (see Section V.C) if there is no longer any need for their employment after their position has been transferred as part of the business.



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K. If Employees Are Transferred to a Joint Venture Entity by Different Parties, Are There Any Legal Restrictions on Harmonising Their Terms of Employment?

If employees are transferred as part of a business transfer, the pre-existing provisions of their employment contracts are preserved. The new employer may not implement any amendments to the detriment of the employee for one year after the transfer of the business if the provisions were based on a collective bargaining agreement or works agreement entered into before the transfer. Any such amendments are ineffective even if the employee consents to them.

However, if different collective provisions exist at the new employer (collective bargaining agreement or works agreement), these apply to the new employees immediately from the time of the transfer, even if they constitute a disadvantageous arrangement.

Terms of employment based on individual agreements may be modified by the new employer, either by mutual agreement (if the employee accepts to waive his rights) or unilaterally by dismissal for variation of contract, provided that there are compelling operational reasons for the modification.

L. Are There Any Restrictions in Your Jurisdiction on an Employer Seconding an Employee to Another Organisation on a Temporary Basis?

The secondment of employees of one company to another is permissible subject to strict limitations. The employer needs a special state authorisation for the secondment of employees. In addition, the secondment is only permissible if it is temporary and not permanent. This does not apply if employees are seconded within a group of companies for a limited period, unless those employees were hired with the sole purpose of being seconded or they are employed for such purpose only. However, since the exemption for group companies is likely to be in breach of European secondment law, its application is highly controversial and should therefore be kept to a minimum.

Seconded employees have to be treated equally to any employee serving a comparable function within the company to which the employee is seconded. As a result, payment and working conditions must be the same both for seconded and permanent employees of a company (principle of equal pay and equal treatment). In addition, seconded employees have specific information and access rights vis-à-vis the employer to which they are seconded.

An exemption from the equal pay and treatment obligation is permitted, if collective bargaining agreements contain provisions to that effect. However, the exemption does not


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apply to those seconded employees who had already been taken on by the employer to which they are seconded, or by a group of company of that employer, within the six-month period preceding the secondment. There are some agreements between employers, Employers Federations and the unions which make use of this possibility in various industry sectors. In practice, in 2012 the option of deviating from the equal pay and treatment obligation to the detriment of the seconded employee by means of collective bargaining agreements was to a large extent limited by many collective bargaining parties.

M. Does an Employer That Seconds an Employee to Another Organisation Remain Vicariously Liable for the Acts of the Employee (Even if the Employee Is Acting in Accordance with Instructions from the Other Organisation)?

The employer is liable for the employee in the case of culpable breaches of contract even when he is seconded to another organisation. This can be different in individual cases if the employee acts on the instructions of the secondee organisation depending on the facts.

The seconding employer must select a capable and willing employee for secondment. If it infringes this obligation culpably, it may be held responsible for the non-performance, poor performance or harmful actions of the seconded employee. However, if the seconding employer carefully selected the employee, it will not be liable for any acts of the latter. In such a case, only the seconded employee may be held responsible for any damage caused.

N. If an Employee Creates Intellectual Property Rights in the Course of His Employment, Who Owns the Rights? Would the Answer Be Any Different if the Employee Is Seconded to Another Organisation When the Rights Are Created?

The employer has rights over employee inventions and the usage rights in the copyright on work results. The transfer of the usage rights in the copyright is usually already compensated by the salary paid. The employer must, however, pay the employee remuneration (inventor's compensation) for the rights to employee inventions if it is an invention according to the Law on Employees' Inventions.

The position is the same if the employee is seconded. If a seconded employee creates IP rights during his secondment, the organisation to which the employee is seconded is deemed to be the employer.



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O. How Are Fees for Seconded Employees Taxed in the Hands of the Employing Company? Does Value Added Tax Apply to Secondment Fees?

Secondment fees, as operating income, are subject to the usual taxation (15% corporate tax, trade tax, whose amount depends on the location of the employing company, and 5.5% solidarity surcharge on the corporate tax). The fees are also subject to value added tax.

P. Is It Common (or Compulsory) for Employees to Participate in Private Pension Schemes Established by Their Employing Company? Are Any Tax Reliefs Available on Contributions to Such Schemes (by the Employing Company and Employees)?

In Germany there is a state pension system in which all employees are compulsorily insured (statutory pension insurance). In addition, there are voluntary private pension schemes (such as “Riester” and “Rürup”), as well as company pension schemes in various sectors, the coverage of which varies greatly. Altogether, around 50-60% of the employees in Germany have been granted a pension commitment. The introduction of pension schemes by the employer is in principle voluntary. Since 2002, however, the employer is obliged to make a pension scheme available on the request of an employee. But the employer does not have to pay any contributions to such a scheme. The contributions are deducted from the employee's salary (deferred compensation).

In terms of taxes, contributions to pension schemes are favoured/promoted in different ways depending on the form of the pension scheme.


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Q. Can Employees That Are Working Abroad and Employees of a Subsidiary Company in a Different Country Participate in a Pension Scheme Established by a Parent Company? Are the Same Tax Reliefs Referred to in Section V.P. Still Available in These Circumstances?

The pension scheme of a German company can also favour employees who have been sent abroad or are working for a subsidiary company (even if abroad) depending partly on whether the pension commitment is governed by German or foreign law.

The tax privileges of German tax law will generally apply to employee’s contributions (deductions from salary) if the salary is taxed in Germany. The tax treatment of contributions by the employer depends on the circumstances of the individual case. For instance, it can be important whether the dispatch occurs in the interests of the dispatching German company or the accepting foreign company.

R. If an Employee Is Transferred as Part of a Business, Is the Transferee under an Obligation to Honour Existing Pension Rights or Provide Equivalent Rights?

Pension rights that have already arisen are, like all other vested rights of the employee, carried over to the new employment relationship with the transferee. If the transferor has established a pension scheme which cannot be transferred to the transferee (for example, the transferee has no pension fund), the transferee must offer equivalent rights to the transferred employee (for future and past services).

S. Are Employee Share Option Schemes Common in Your Jurisdiction? If so, Are There Any Tax Benefits and Can Options Be Granted to Employees of Group Companies?

Employee share option schemes exist primarily for executives and other managerial employees. Otherwise they are rather rare.

The exercise of share options is promoted by the state with EUR360 per year. It is advantageous from a tax perspective if shares are allotted to the employee during the time limit within which shares must not be disposed. For a sale, the so-called "half-income



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procedure" applies, which means that only half of the capital gain realised in the disposal is taxed.

T. If an Employee That Participates in a Share Option Scheme Is Transferred as Part of a Business, Is the Transferee under an Obligation to Provide an Equivalent Scheme? If so, How Is This Dealt with in Practice?

In Germany there is still little experience in this area. Taking over the same share option scheme may in many cases not possible due to different legal structures, but the obligation can exist to offer substitute benefits of comparable value. In the event that a share scheme is only provided by the parent company of the transferor the transferee is neither obliged to provide an equivalent scheme, nor is he liable for any obligations resulting from such a scheme.

U. Do Foreign Nationals Require Work Permits and, if so, How Difficult Are They to Obtain and How Long Does the Process Take?

Foreign employees from an EU member state, an EEA country or Switzerland do not in principle require a work permit to be employed in Germany. Transitional regulations apply to some new member states of the EU. A Croatian citizen, for instance, still needs an EU work permit to work in Germany (until 30 June 2015). The working permit will be granted if there is a need in the area in which the employee works, in other words if there are no employees in Germany who can fill the relevant position.

By contrast, strict rules apply to third-country nationals (non-EU/EEA/Swiss citizens), who must obtain a residence and work permit. Such a permit is granted if there is a need in the area in which the employee works, for example if there are no employees in Germany who can fill the relevant position. In some cases, the Aliens Office may only grant the residence and work permit to a third-country national after it receives approval from the Federal Employment Agency.

The grant of a work permit can take between two weeks and several months, depending on the circumstances of the case and the efficiency of the office involved.


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V. Are There Any Restrictions on Foreign Managers or Directors for Companies in Your Jurisdiction?

In principle, there are no special restrictions for foreigners (for example with regard to nationality, domicile, habitual abode, German language skills). However, the managing director or chairman must genuinely be capable of properly fulfilling his legal duties (for example, obligation to keep accounts and provide information). For this reason, some argue that only individuals who may legally reside in Germany can be a managing director. But this issue is highly controversial. In practice, there are no legal restrictions preventing the appointment of foreigners as managing directors of a company.

W. Are There Any Circumstances in Which Directors or Managers Can Be Personally Liable in Respect of the Actions of a Joint Venture Company That Is Incorporated in Your Jurisdiction?

In the case of a limited liability company, normally only the company (GmbH) is liable (to the extent of its assets). The managing director can be held responsible vis-à-vis third parties in exceptional cases, in particular if he has not applied for the opening of insolvency proceedings in time and a harm arises.

Criminal responsibility on the part of directors or managers exists under specific circumstances. This is particularly the case if employer contributions to social security are not paid and in the event of crimes relating to insolvency, corruption or the environment.

To prevent managing directors from being personally liable vis-à-vis third parties, companies normally provide directors and officers insurance (D&O, financial loss liability insurance). This type of insurance, however, does not cover damages based on intentional acts or omissions on the part of a managing director.



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VI. Tax

A. Are Partnerships Tax Transparent in Your Jurisdiction? The following partnership structures are all transparent for (corporate) income tax purposes with profits and losses subject to tax at the level of the partners:

■ Limited partnership (Kommanditgesellschaft, KG).

■ Limited partnership with limited liability company as its general partner (GmbH & Co. KG).

■ General partnership (offene Handelsgesellschaft, OHG).

■ Civil law partnership (Gesellschaft bürgerlichen Rechts, GbR).

■ Professional partnership (Partnerschaftsgesellschaft, PartG).

■ European economic interest group (Europäische Wirtschaftliche Interessenvereinigung, EWiV).

■ Atypical silent partnership (debt instrument under which the lender qualifies for tax purposes as a partner in the debtor's trade or business, atypisch stille Gesellschaft).

However, if a partnership carries on a trade or business, or is deemed to carry on a trade or business due to its legal structure (gewerblich geprägt) or the nature of its investments (gewerblich infiziert), it is subject to trade tax (see Section VI.G).

B. Can Losses of a Foreign Partnership Be Offset Against the Profits of a Corporate Partner That Is a Tax Resident in Your Country?

An interest in a foreign partnership which carries on a trade or business qualifies as a permanent establishment for German tax purposes. Under domestic law this is also true for a partnership that is deemed to carry on a trade or business. However, in a treaty context such a deemed trading partnership does not qualify as a permanent establishment according to current case law. The Income Tax Act (Einkommensteuergesetz) provides for a restriction on the deduction of losses attributable to a foreign permanent establishment for German tax purposes. However, the restriction does not apply to permanent establishments located in an EU/EEA member state (in the case of an EEA member state, subject to further conditions).


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1. Non-EU/EEA Member State

If the foreign partnership (the permanent establishment) is situated in a country (other than an EU or qualifying EEA member state) with which Germany has either no double tax treaty or a double tax treaty providing for the imputation method (Anrechnungsmethode), its business operations have to qualify as active (for example, not from the mere administration of funds) in order for losses to be immediately deductible from other profits. If the operations of the foreign permanent establishment do not qualify as active, losses incurred by the permanent establishment are ringfenced and can only be offset against (subsequent) profits of the same kind of income generated in the same country as the losses (item by item and country by country limitation).

In respect of countries with which Germany has double tax treaties which provide for the exemption method (Freistellungsmethode) for income derived from a permanent establishment, losses cannot be offset against profits of a German resident corporate partner, regardless of whether they are considered active or passive.

2. EU/EEA Member State

Losses incurred in a permanent establishment located in an EU/qualifying EEA member state do not fall in the scope of application of the loss ringfencing provision. Therefore, if the foreign partnership is situated in an EU- or qualifying EEA member state with which Germany has either no double tax treaty or a double tax treaty providing for the imputation method, losses can be offset against any profits of a corporate partner tax resident in Germany. In respect of countries with which Germany has double tax treaties which provide for the exemption method for income derived from a permanent establishment, losses cannot generally be offset against profits of a German resident corporate partner. However, according to case law of the ECJ and the German Supreme Tax Court, subject to certain conditions, losses incurred in an EU permanent establishment can be offset against profits of a German taxpayer, provided the losses ultimately cannot be used in the jurisdiction of the permanent establishment.

C. Do Partnerships That Are Tax Resident in Your Country Generally Receive Similar Benefits to Companies under Double Tax Treaties?

Under German double tax treaties, partnerships are not generally deemed to be tax resident in Germany for double tax treaty purposes and therefore are not entitled to treaty benefits; however, their interest holders may benefit from an applicable treaty.



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D. Does Your Country Have Rules That Restrict the Proportion of a Company's Capital That Is Comprised of Loans by Affiliates (Thin Capitalisation Rules)? If so, Please Explain in What Circumstances These Rules Apply and Whether They Can Be Circumvented.

The interest ceiling (Zinsschranke) rule significantly limits the deductibility of financing costs for businesses taxable under German tax law. In contrast to the former thin capitalisation rules on shareholder debt financing (in force until 2007), the scope of application of the interest ceiling rule is not limited to loans provided by shareholders or related parties, but also applies to loans granted by third parties.

According to a circular issued by the Federal Ministry of Finance (BMF) (dated 4 July 2008, IV C 7 – S 2742 – a /07/10001), among other things, corporations and partnerships carrying on a trade or business (or deemed to carry on a trade or business) qualify as businesses. A German tax group (Organschaft) is deemed to be one business for the purposes of the interest ceiling rule.

1. General Rule

Interest expenses of a business can be deducted up to the amount of the interest income generated by the business. Any amount in excess is subject to a deduction of interest expenses in an assessment period limited to 30% of the earnings before interest, taxes, depreciation and amortisation as determined for tax purposes (taxable EBITDA). The interest ceiling rule applies to the net interest expenses, in other words the excess of the interest expenses over the interest income. Interest expenses are generally defined as remuneration for use of debt granted, as well as expenses resulting from the discounting of interest-free or low-interest-bearing debt instruments.

According to the BMF-circular, under certain circumstances the following may give rise to interest expenses for purposes of the interest ceiling rule:

■ Interest contained in leasing payments.

■ Certain types of factoring.

In contrast to the former thin capitalisation rules, there are no exemptions for the short-term provision of capital.

If the negative interest balance of a business exceeds 30% of the business' taxable EBITDA, the excess amount will not be deductible in the assessment period unless an exception from the general rule applies (see below). Therefore, the taxable income of the business will be higher and the tax burden in the respective assessment period will be increased. However, it is possible to carry forward the excess amount (Zinsvortrag), as well as the portion of the 30% of the taxable EBITDA exceeding the net interest expenses (EBITDA-Vortrag), and use them in future assessment periods within the limits of the interest ceiling rule. The interest


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carried forward will in future periods increase the interest expenses but not affect the taxable EBITDA used for later assessment periods.

The EBITDA carried forward will be added to the taxable EBITDA in the following assessment period (up to a maximum of five periods) and will therefore increase the amount of deductible net interest expenses in these years.

If an exception to the interest ceiling rule applies (see below) in the subsequent assessment period, the net interest expenses (consisting of interest carried forward and net interest expenses occurring in the next period) are fully deductible. If no exception applies, the net interest expenses, including interest carried forward, will only be deductible up to an amount of 30% of the taxable EBITDA of the subsequent assessment period plus EBITDA carried forward from the previous five years, and the excess amount will again be carried forward. The interest and the EBITDA carried forward will expire if the business is closed down or transferred. If (directly or indirectly) more than 25% but not more than 50% of the shares in a business (or voting rights, participation rights, membership rights or the like) are transferred to a new shareholder, related shareholders or a group of shareholders acting in concert within five years, the interest carried forward (but not the EBITDA carried forward) will expire on a pro rata basis. If more than 50% of the shares (or voting rights, participation rights, membership rights or the like) are transferred in such a way within five years, the entire interest carried forward will cease to exist. A capital increase is regarded as a transfer of shares if the ratio of shareholding is altered.

Exemptions to the forfeiture of interest carried forward may be available in case taxable built-in gains are available at the level of the business transferred, or for certain intra-group reorganisations. See Section VI.H for details on exemptions from the loss limitation rules that apply mutatis mutandis to interest carried forward.

If a partner in a trading or deemed trading partnership transfers its partnership interest or resigns from the partnership, the interest carry-forward and the EBITDA carry-forward of the partnership cease to exist in an amount equal to the quota of the resigning partner's interest in the partnership. In the case of a corporation being a partner in a trading or deemed trading partnership, changes in the corporation's shareholder structure may also have an impact on the partnership's interest and EBITDA carry-forwards.

2. Exceptions

The interest ceiling rule does not apply if one of the three following conditions is met:

■ De minimis rule. Businesses with net interest expenses of less than EUR3 million are not subject to the rule. According to the explanatory notes (amtliche Begründung), this provision only applies to interest expenses subject to a domestic (German) determination of taxable income.

■ Non-group member exception. The rule does not apply if the business does not belong to a consolidated group for accounting purposes (Konzern) or is only



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partly consolidated. A business belongs to a group if it is or could be consolidated with one or several other businesses in accordance with the International Financial Reporting Standards (IFRS), the reporting standards of an EU member state or the US Generally Accepted Accounting Principles (US-GAAP). If the business does not belong to a group, it must meet additional conditions if it is a corporation.

■ Consolidated group escape clause. The business does not suffer a limited deduction if it is fully consolidated and its equity in relation to the balance sheet total at the end of the previous fiscal year is equal or higher than the corresponding equity ratio of the consolidated group accounts (a shortfall of up to 2% is considered irrelevant). Therefore, the indebtedness within the consolidated group must be less than that of the relevant business. In principle the equity ratio must be determined in accordance with IFRS, and the consolidated group will be defined accordingly. Alternatively, where no IFRS accounts have been established during the last five years but consolidated accounts have been prepared in accordance with the reporting standards of an EU member state, such rules can be used to determine the equity ratio and the consolidated group for purposes of the interest ceiling rule. US-GAAP may be applied where no accounts under IFRS or the rules of an EU member state exist. In each case certain modifications to the accounting standards will apply for the purposes of the interest ceiling rule. If the business is a corporation, additional conditions must be met for the exception to apply.

E. If a Company That Is a Tax Resident in Your Country Transfers Assets (Including Shares) to a Company That Is Tax Resident in Another Country, What Taxes Might Arise? Are Reliefs Potentially Available? (Please Distinguish, if Relevant, Between Assets That Are Located in Your Country and Assets Located in a Foreign Country.)

The tax consequences of transfers will depend on the nature of the assets (shares or other assets) and the type of consideration received.

1. Outbound Asset Transfers

Capital gains arising on the transfer of assets (other than shares) are subject to corporate income tax and trade tax. In cases where the assets belong to a foreign permanent establishment in a treaty jurisdiction, the capital gain may be protected under the respective treaty, subject to various conditions.


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Capital gains arising on the sale of shares of a German company in a German or foreign company are generally exempt from corporate income tax and trade tax, but 5% of the capital gains are deemed business expenses, which are not deductible. Therefore, in practice the capital gain is only 95% tax exempt. Losses from the disposal of shares are not deductible in the cases described above. Capital gains are also 95% exempt from trade tax where the shares are held indirectly through a German trading partnership.

The capital gains exemption does not apply to short-term capital gains realised by banks and financial institutions (including holding companies involved in short term trading) from the sale of their commercial share portfolios. Special rules also apply to insurance companies.

Germany also has a general exit tax rule that comes into play whenever business property leaves the German tax net and Germany's right to tax the unrealised built-in gain of the asset is thereby restricted, for example if the asset is transferred to a permanent establishment in a country with which Germany has a double tax treaty which provides for the exemption method.

The limitation of Germany's taxation rights results in a deemed disposal of the asset. As a consequence, any gain covering the difference between the fair market value of the asset and its tax basis must be recognised. As a limited exception to the gain recognition rule, a German-resident taxpayer has the option to defer taxation of the gain over five years in equal annual instalments for fixed assets that are transferred to a permanent establishment within the EU. In cases where the asset transferred belongs to a foreign permanent establishment in a treaty jurisdiction, the capital gain may be protected under the respective treaty, subject to various conditions.

2. Reorganisation Tax Rules

The benefits of the Reorganisation Tax Act (Umwandlungssteuergesetz, RTA) which allows (subject to certain conditions) for tax-neutral reorganisations, also apply to certain transactions within the EU/EEA. Reorganisations involving entities outside the EU/EEA area are, except in two very limited situations, not treated as tax-neutral reorganisations.

3. Business Transfers

A business transfer is the transfer of a business undertaking, a branch of activity or a partnership interest into a corporation or co-operative society (acquiring entity) in exchange for new shares. The scope of the business transfer regime is extended to contributions to any corporation resident within the EU/EEA.

As a consequence of a business transfer in general, the gain, in other words the difference between fair market value and the tax basis, must be realised. However, the acquiring entity may choose to continue the tax basis of the contributor on the condition that Germany's taxation right with regard to the contributed assets is not restricted. The value



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accounted for by the acquiring entity will determine the contributor’s book value of the new shares (in other words, the contributor will record the shares with the same value as the acquiring entity accounts for the assets). However, the disposal of the new shares may be subject to tax if the contribution of the assets was not recorded at fair market values (in other words, if unrealised built-in gains were not realised in their entirety upon contribution).

The unrealised built-in capital gains of the contributed assets (Contribution Gain I, Einbringungsgewinn I) will be taxed retroactively if the acquired shares are sold within seven years of the contribution. However, the taxable capital gain is reduced by 1/7 for each year elapsed since the contribution.

4. Share for Share Exchange

The share for share exchange rules apply whenever shares of a corporation (acquired entity) are acquired by an EU/EEA corporation (acquiring entity) in exchange for newly issued shares of the acquiring entity. A share for share exchange under which the acquiring entity acquires, or increases its holding in the acquired entity to, the majority of the voting shares of the acquired entity is defined as a qualified share for share exchange. Only qualified share for share exchanges can be accomplished tax neutral; otherwise a share for share exchange results in gain recognition based on fair market value for the contributor.

In principle, the acquisition of shares by an EU/EEA corporation in exchange for new shares is accounted for at fair market value. A carry over of book values is available for qualified share for share exchanges, provided either Germany's taxation rights with regard to the shares received are not constrained or the gain could not be taxed in any event in accordance with the amended EU Merger Directive (Directive 90/434/EC).

The value accounted for the shares in the acquired entity by the acquiring entity is deemed to be:

■ The sale price for the shares disposed of; and

■ The acquisition costs for the newly acquired shares.

each on level of the contributor, in order to ensure that built-in capital gains can be taxed properly at a later point in time.

Whenever the acquiring entity disposes of shares acquired at an amount below fair market value before seven years have elapsed since the tax-effective date, and the contributor is not a corporation, the difference between the fair market value of the shares contributed less the tax basis the contributor must ascribe to the new shares received (Contribution Gain II, Einbringungsgewinn II) will be taxed retroactively. However, the taxable capital gain is reduced by 1/7 for each year elapsed since the contribution.

Special rules may be applicable to contributions that took place prior to 13 December 2006.


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5. Stamp Duty

Germany does not levy stamp duty. However, certain reorganisation steps and the transfer of shares (other than shares in stock corporations (Aktiengesellschaft, AG)) or interests in German partnerships trigger court or notarial fees.

6. Value Added Tax

The German system follows the general EU system of VAT. Assets transferred on an acquisition are in principle subject to VAT (Umsatzsteuer) at the rate of 19%, with the exception of supplies subject to real estate transfer tax (see below) and cash. The sale of shares is exempt from VAT unless the seller opts to waive the VAT exemption. The sale of an entire business or branch of a business unit as a going concern is outside the scope of the German VAT Act.

7. Real Estate Transfer Tax

All business transfers are subject to real estate transfer tax (Grunderwerbsteuer) if German immovable property is part of the transferred assets. Depending on where the real estate is located, the rate of tax currently ranges between 3.5% and 6.5%, assessed on the consideration paid for the property.

If German real estate is owned by a partnership, real estate transfer tax is also charged if the identity of the partners changes (legally or commercially) by at least 95% in a five year period. The same applies if a share or interest holder obtains (legally or economically) at least 95% of the shares in a company or partnership that owns real estate situated in Germany. In these cases the tax rate, ranging between 3.5% and 6.5%, is applied to a special tax value which is generally between 70% and 80% of the fair market value of the real estate.

An exemption from real estate transfer tax applies to certain intra-group reorganisations (subject to strict prerequisites).

F. Is Any Tax or Duty Payable on the Issue of Shares by a Company That Is Incorporated in Your Country?

No.



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G. What Rate of Tax Do Companies Pay in Your Jurisdiction and How Is It Assessed?

1. Corporate Income Tax

a. Residents

Companies that are incorporated or centrally managed and controlled in Germany are subject to corporate income tax (Körperschaftsteuer) on their worldwide income, unless otherwise provided in tax treaties.

Corporate income tax is payable at the rate of 15% regardless of whether the income is distributed. A further solidarity surcharge (Solidaritätszuschlag) of 5.5% on the corporate income tax is also levied, resulting in an effective tax rate of 15.825%. Pre-payments of corporate income tax are also subject to this charge. If withholding tax has been withheld (for example on dividends) such withholding tax will upon application be credited or refunded in a subsequent tax assessment, as it is effectively a pre-payment of corporate income tax (and solidarity surcharge) owed by the relevant corporate taxpayer.

b. Non-Residents

A non-resident company, in other words a company that has neither its legal seat nor its place of management in Germany, is subject to corporate income tax only on certain items of income derived from German sources (for example, income from the operation of a German permanent establishment) within the limits of any tax treaties and EU Directives.

The tax is levied by assessment at a rate of 15% (plus solidarity surcharge, resulting in an effective tax rate of 15.825%) if the type of income derived from German sources is not subject to withholding tax. If withholding tax has to be withheld, the tax rate generally amounts to 25% plus 5.5% solidarity surcharge (in total 26.375%) (see below for different types of income).

However, with regard to certain types of income the non-resident corporate taxpayer can apply for a refund of two fifths of the tax withheld so that effectively German tax at a rate of 15.825% will be levied, unless an applicable double tax treaty (or EU Directive such as Directive 2011/96/EU on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States) provides for a greater refund. The application for refund must be filed with the German Federal Tax Office (Bundeszentralamt für Steuern). The two fifths refund applies regardless of any double tax treaty or EU Directive; it applies, among other things, to dividends, distributions on profit participating rights, convertibles or silent participations. However, to obtain the refund, certain requirements must also be met. Otherwise, the withholding tax will settle the non-resident's tax liability.


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2. Trade Tax

Municipalities impose trade tax (Gewerbesteuer) on income from any business carried on in Germany in a fixed place of business, whether by a resident or non-resident. However, for the purposes of this tax, taxable income is subject to certain adjustments, such as a 25% add-back of remuneration for debt. The trade tax rate varies from 7% to about 17.5%, depending on the municipality in which the business is carried on.

Certain enterprises such as banks, leasing and real estate companies receive privileged treatment under the trade tax law.

H. Can Losses of a Company That Is Tax Resident in Your Country Be Surrendered for Tax Purposes to Another Company? If so, What Conditions Apply? Can Losses Be Carried Forward for Tax Purposes?

1. General

For corporate income tax purposes, net operating losses (NOLs) of up to EUR1 million will be carried back for one year prior to the year in which the losses have been incurred. The remaining NOLs will be carried forward indefinitely.

For the purposes of trade tax, losses may only be carried forward.

However, the use of tax losses carried forward is curtailed for corporate income tax and trade tax purposes. Loss carry-forwards may only offset 60% of a taxpayer's income in subsequent years to the extent it exceeds EUR1 million (minimum taxation).

2. Group Taxation

German companies are generally treated as separate entities for tax purposes. However, group taxation is permitted where a parent company holds directly or indirectly more than 50% of the voting rights in its subsidiary. A partnership can also be a parent of a tax group, provided it has its own trade or business. The parent and subsidiary must also enter into a profit and loss transfer agreement (Ergebnisabführungsvertrag).

The conditions for a tax group (Organschaft) for trade tax and corporate income tax are the same (but the conditions for a VAT group differ). In case of a tax group for corporate income tax and trade tax purposes, the companies determine their income separately but



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the subsidiary's income is attributed to the parent company for tax purposes, with the result that the losses of one group company can be offset against profits of the other.

3. Loss Limitation Rules

The current loss limitation rule, applicable from 1 January 2008, provides that losses of a corporation may cease to exist if the business is transferred:

■ If (directly or indirectly) more than 25% but not more than 50% of the shares (or voting rights, participation rights, membership rights or the like) in a business are transferred to a new shareholder, related shareholders or a group of shareholders acting in concert within five years, the losses will cease to exist on a pro rata basis.

■ If (directly or indirectly) more than 50% of the shares (or voting rights, participation rights, membership rights or the like) are transferred in such a way within five years, the entire losses will cease to exist altogether.

A capital increase is to be regarded as a transfer of shares if the ratio of shareholding is altered.

Certain exemptions apply to the application of the loss limitation rules:

■ Intra group transfers. Intra group transfers will not result in the forfeiture of losses if the transferring and the acquiring entity are directly or indirectly wholly owned subsidiaries of the same entity or person.

■ Built-in gains. If the loss limitation rules in principle apply to a transfer, NOLs will be preserved in an amount equal to part (in a transfer of more than 25% but less than 50%) or all (in a transfer of more than 50%) of taxable built-in gains of the transferred corporation.

In a merger or a spin off or split off, accrued losses and losses carried forward cannot be carried over from the transferring company to the absorbing company. In addition, the accrued losses and losses carried forward of the absorbing company cannot be offset with profits of the transferring company, unless the transferring company and the absorbing company are related parties on the tax effective date of the reorganisation.

A carry-over is also not permitted when a company is converted into a partnership and vice-versa.

Trade tax NOLs of a partnership are cancelled if and to the extent the identity of the partners changes.


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I. Are Interest Payments Tax Deductible in Your Country? Interest payments on straight loans (like other expenses related to the income of the taxpayer's business) are generally deductible for (corporate) income tax purposes, subject to the interest ceiling rule (see Section VI.D).

For trade tax purposes, a 25% add-back of interest payments and similar expenses to the trade tax basis applies, in other words, for trade tax purposes effectively only 75% of the interest expenses are deductible (subject to the interest ceiling rule).

There are also special rules limiting the deduction of interest expenses for partnerships in certain scenarios.

J. Are Withholding Taxes Applied to Dividends, Interest and/or Other Payments Made by a Company That Is Tax Resident in Your Country to a Foreign Company? If so, What Rates Apply? Can They Be Reduced or Eliminated in Any Circumstances?

1. Dividends

A 25% withholding tax (effectively 26.375%, including the 5.5% solidarity surcharge) applies to dividends (and payments on equity-like profit participating rights) paid to foreign shareholders. Non-resident corporate shareholders are generally entitled (upon application) to a refund of two fifths of the withholding tax withheld. Further reduced rates of withholding tax may apply to dividends paid to a recipient resident in a country with which Germany has a double tax treaty.

There is no withholding tax on dividends paid to EU resident companies where the EU Parent/Subsidiary Directive applies.

Generally Germany applies a retain and refund regime. Certain exemptions and reductions at source require a certificate previously issued by the German Federal Tax Office on application of the shareholder.

2. Interest

In principle no withholding tax applies to interest payments. However, in respect of profit participating loans, debt-like profit participating rights and similar instruments, the interest payments are subject to a 25% withholding tax (increased to 26.375% by the solidarity surcharge).



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Interest paid on coupons of bearer bonds cashed in (Tafelgeschäft) are generally also subject to a withholding tax of 25% (increased to 26.375% by the solidarity surcharge).

Reduced rates or an exemption from withholding tax may apply to interest paid to a recipient resident in a country with which Germany has a double tax treaty. Germany has also adopted the EU Directive on intra-group royalty and interest payments. Accordingly, subject to the pre-requisites of the EU Directive (as implemented in German law) no withholding tax applies to interest payments to related parties within the EU.

If a foreign corporation is subject to German non-resident tax liability with interest payments received because the underlying loan is secured by real estate situated in Germany, or a ship registered in Germany, such tax is generally levied by way of assessment. However, if the German tax authorities consider their tax claim at risk they at their discretion charge the debtor with withhold tax on the interest payments at a rate of up to 15% (plus solidarity surcharge) in the case of non-resident corporations.

3. Royalties

Royalties are subject to withholding tax at a rate of 15% (15.825% including solidarity surcharge) for certain non-resident corporations.

Reduced rates of withholding tax may apply to interest and royalties paid to a recipient resident in a country with which Germany has a double tax treaty. Germany has also adopted the EU Directive on intra-group royalty and interest payments. Accordingly, subject to the prerequisites of the EU Directive (as implemented in German law), no withholding tax applies to royalty payments to related parties within the EU.

4. Other Payments

Payments to non-residents for artistic, sports, literary, journalistic services and the like are subject to withholding tax at a rate of 15% (15.825% including solidarity surcharge). Payments for the use of movable assets are no longer subject to withholding tax.

A withholding tax of 15% (no solidarity surcharge) is levied on construction work undertaken in Germany.

Fees paid to non-resident members of supervisory boards of stock companies and limited liability companies are subject to withholding tax at the rate of 30% (increased to 31.65% by the solidarity surcharge).

Again, reduced rates of withholding tax may apply to these payments if paid to a recipient resident in a country with which Germany has a double tax treaty, provided that the recipient can produce a relevant certificate issued by the German Federal Tax Office. Alternatively, the recipient may claim for a refund of such taxes.


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K. What Is the Tax Treatment of Dividends Paid by a Company That Is Tax Resident in Your Country to a Corporate Shareholder (Domestic or Foreign)?

Dividends paid by a German tax resident company are generally subject to a withholding tax at a rate of 26.375% (including solidarity surcharge).

Dividends (other than portfolio dividends, in other words, dividends received on a direct shareholding of less than 10%) received by a company that is tax resident in Germany are generally exempt from tax, but 5% of the dividend is added back to the taxable income of the recipient as a non-deductible business expense; therefore, in practice, only 95% of the dividend is tax exempt. Portfolio dividends are subject to tax in full.

With regard to German tax resident corporate shareholders, the withholding tax withheld is, upon application, credited or refunded in full or in part in a subsequent tax assessment, as it is effectively a pre-payment of corporate income tax (and solidarity surcharge) owed by the relevant corporate shareholder.

The German recipient of dividends can deduct any expenses that are related to the shareholding. Special rules apply to financial institutions (including holding companies involved in short term trading) and insurance companies.

Given a compound tax rate of about 30% for corporations (corporate income tax and trade tax), tax is effectively levied at a rate of 1.5% on dividends received (other than portfolio dividends, which are fully subject to tax). The rule may adversely affect groups with multiple tiers of corporations where earnings must be distributed through several incorporated entities before they are available at the parent level. Unless the requirements for group taxation under the Organschaft rules are met, the 1.5% tax will be levied at every tier if a dividend is distributed from a lower tier company up to the parent.

Non-resident corporate shareholders are generally subject to withholding tax at a rate of 26.375% (including solidarity surcharge) but are otherwise exempt from German tax. Non-resident corporate shareholders are upon application under domestic law generally entitled to a refund of two fifths of the withholding tax withheld (subject to further requirements). In addition, more beneficial tax treaty provisions may apply.

The treaty withholding rate is generally lower for substantial investors than for portfolio investors. There is no withholding tax on dividends paid to EU resident companies where the EU Directive 2011/96/EU on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States applies.



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L. What Is the Tax Treatment of Dividends Received by a Company That Is Tax Resident in Your Country from a Foreign Company?

Foreign source dividends (other than portfolio dividends) received by a company that is tax resident in Germany are generally exempt from tax regardless of whether the distributing company is located in a treaty country, but 5% of the dividend is added back to the taxable income of the recipient as a non-deductible business expense so that in fact only 95% of the dividend is tax exempt. The German recipient of dividends can deduct any expenses that are related to the shareholding. However, foreign withholding tax on dividends received may neither be credited nor deducted for determination of the taxable income of the domestic company.

Special rules apply to financial institutions (including holding companies involved in short term trading) and insurance companies.

M. Are There any Circumstances in Which (Undistributed) Profits of a Company in a Foreign Country Can Be Imputed to a Corporate Shareholder in Your Country by Tax Authorities (Controlled Foreign Company Rules)?

Germany has provisions for the imputation of certain retained profits derived by controlled foreign companies (CFC) located in low-tax countries. The provisions apply if:

■ One or more German residents hold directly or indirectly in total more than 50% of the share capital or voting rights in the foreign company.

■ The CFC yields passive income (mainly rent, interest and royalties).

■ The passive income is subject to a tax rate of less than 25%.

If these conditions are fulfilled, the retained earnings are attributed to the corporate shareholder as a deemed dividend; however, such deemed dividend does not benefit from the 95% exemption generally applicable to dividend income of corporate shareholders.

The CFC rules do not apply if the passive income does not exceed EUR80,000 and 10% of the gross domestic income of the CFC. In addition, the CFC rules do not apply to companies resident in an EU or qualifying EEA country, provided the corporate shareholder can provide evidence that such company conducts a real business activity in such country.

Special rules apply if the foreign company has income derived from liquid assets, for example income from money-market instruments, securities and derivative transactions (referred to as portfolio income or Einkünfte mit Kapitalanlagecharakter). In this case the CFC regime applies whenever a German resident taxpayer holds 1% or more of the equity


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(voting or non-voting) in a foreign corporation, provided the gross portfolio income of the foreign corporation represents more than 10% of its total passive income. The CFC regime for portfolio income is applicable without any minimum ownership requirement, whenever 90% or more of the gross income of the foreign corporation constitutes portfolio income, unless the shares of the foreign corporation are traded on a recognised stock exchange.

N. Does Your Country Have Transfer Pricing Rules? If so, Please Explain Broadly How They Apply?

Yes. Transactions between related parties must be on an arm's length basis. Apart from specific transfer pricing provisions in the Foreign Tax Act (FTA, Außensteuergesetz), excessive transfer pricing charges to a German subsidiary or below arm's length charges by the German subsidiary may also be treated as a constructive dividend distribution (verdeckte Gewinnausschüttung). If the parent company grants an advantage to its subsidiary, this may constitute a constructive capital contribution (verdeckte Einlage). However, if an income adjustment under the provisions of the FTA is greater than the adjustment under the other provisions, then the adjustment under the provisions of the FTA will also apply.

For the purposes of the arm’s length test, a presumption applies to the effect that unrelated third parties are aware of all essential circumstances of the transaction (presumption of transparency) and will act with the care and judgment of a diligent and conscientious managing director.

The presumption of transparency makes it more difficult for the German affiliate of an international group to defend its position by arguing that it does not have full information about the intra-group transaction.

The provisions include an order of priorities on how transfer prices must be determined.

Exact comparables. If exact comparables are available, one of the following standard methods must be used:

■ Comparable uncontrolled price method (the price that has been paid between other companies in the market for such an asset).

■ Resale price method (the price the buyer has received from an unrelated third party on a resale deducting the usual margins for a reseller and his risk).

■ Cost plus method (cost of production plus usual profit margin for such a product).

Inexact comparables. If no exact comparables are available, an adequate transfer pricing method must be used after making some appropriate adjustments.



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No comparables available. If neither exact nor inexact comparables are available, an hypothetical arm’s length analysis must be applied, taking into account the presumption of transparency. Therefore, the lower and upper marginal transaction value must be determined. The lower marginal transaction value is the minimum price the supplying party can expect and the upper marginal transaction value is the maximum price the purchasing party can be expected to pay on the basis of projected earnings. The statute presumes that the appropriate transfer price is the average between the upper and the lower price limit. In other words, the taxpayer has the burden of proof if it does not use the average of the upper and lower price limit.

As part of the revised transfer pricing rules, measures against the transfer of functions (Funktionsverlagerung), referred to as business migration, have also been enacted. A business migration means that an operational part of the business is shifted to a foreign related party. If a business migration takes place, an appraisal based on discounted earnings of the transferred business unit using a discount rate commensurate with the functions and risks inherent to the business unit will be required. The appraisal must also ascertain the lower and upper marginal transaction values. The average between both values is presumed to be appropriate.

Besides these rules, German law contains comprehensive documentation requirements with regard to arm's length dealing with foreign related parties. A violation of such rules can result in fines and punitive taxation (taxation on a best estimate basis not favourable to the taxpayer).

O. About the Author of Section VI

1. Dr Heike Weber, Partner

Allen & Overy LLP

T +49 69 2648 5879 F +49 69 2648 5279 E [email protected] W www.allenovery.com

Professional qualifications. Germany, Rechtsanwältin; Germany, Steuerberaterin; Australia, LL.M. (University of Adelaide).

Areas of practice. Tax

Recent transactions


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■ Advising an investor on the acquisition of a famous building on Frankfurt's shopping boulevard Zeil. The acquisition was carried out by a newly formed joint venture and completed as a share deal.

■ Advising Bilfinger on the sale of material parts of its construction business to Implenia.

■ Advising HGV Hamburger Gesellschaft für Vermögens- und Beteiligungsmanagement mbH (HGV), a holding company of the Free and Hanseatic City of Hamburg (FHH), on an option agreed for the purchase of 74.9% of Hamburg Netz GmbH, which operates the gas grid in the area of the FHH, from HanseWerk AG (formerly E.ON Hanse AG).

■ Advising IMI on the USD1.1 billion disposal of its beverage dispensing and merchandising businesses to The Marmon Group, a Berkshire Hathaway company.

■ Advising Lone Star on the purchase of the "Excalibur" commercial real estate loan portfolio secured over property in Germany, France, Spain, Italy and Holland.


VII. Deadlock and Termination

A. In the Absence of Specific Provisions in a Company's Bye-Laws or a Shareholders' Agreement, Are Any Remedies Available at Law in the Event of an Unresolved Dispute Between Shareholders Resulting in Deadlock?

The answers below are only given with respect to a GmbH (see Section II.A).

Shareholders can vote for the company to be wound up (75% majority required) (§ 60 GmbHG). Alternatively an individual shareholder holding at least 10% of the company's shares can apply to the court for the company to be wound up (for example, if there is an unresolved dispute resulting in deadlock (§ 61 GmbHG)).



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B. Is It Common Practice Expressly to Provide for a Dispute Resolution Process in a Joint Venture Company for an Unresolved Dispute Between Shareholders Resulting in Deadlock? If so, Are Any Procedures Commonly Adopted? In Which Document Would the Relevant Provisions Commonly Be Drafted?

Most joint ventures provide for some form of dispute resolution process in the event of unresolved deadlock. This is usually inserted in the shareholders' agreement and is drafted according to international standards.

C. Is It Common to Provide for the Compulsory Transfer of Shares in a Joint Venture Company in Any of the Following Circumstances? In Which Document Are the Relevant Provisions Likely to Be Drafted and Are They Likely to Be Enforceable? (a) Insolvency of Shareholder. (b) Change of Control of Shareholder. (c) Material Breach of the Shareholders' Agreement or Bye-Laws.

(a) Yes, it is common to provide for forfeiture of the shares on the insolvency of a shareholder. Compulsory transfer is also possible.

(b) Yes, forfeiture or compulsory transfer is possible on a change of control.

(c) Yes, forfeiture is common for material breach. Compulsory transfer is also possible.

The provisions are in principle enforceable but should be carefully drafted. For example, a badly drafted change of control clause can easily be circumvented. They are usually inserted in the articles of association.


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D. Is It Common in a Joint Venture Company to Impose Restrictions on the Transfer of Shares? If so, What Sort of Restrictions Are Commonly Imposed and in Which Document Are They Likely to Be Drafted?

Yes, restrictions on the transfer of shares are commonly imposed although intra group transfers are usually permitted.

The restrictions are usually inserted in the company's articles of association. Common restrictions are:

■ Veto right.

■ Right of first refusal (pre-emption right). This can be drafted in various ways:

• a right to purchase the shares on the same terms offered by a third party purchaser.

• an obligation on the selling shareholder to offer shares to other shareholders before selling to a third party.

Other rights and restrictions such as drag-along, tag-along or liquidation preferences and other preferences in case of sale of shares and assets are usually contained in the shareholders' agreement.

E. If Shares Are Transferred to a Third Party in Breach of Restrictions on Transfer (in a Shareholder's Agreement or Bye-laws), What Remedies Are Available to the Remaining Party?

If the restrictions are included in the articles of association, the transfer of the shares to the third party will be invalid if carried out in violation of the articles. No remedy needs to be claimed since under German law the third party will not become a shareholder unless the third party is registered in the shareholder list and the shareholder list is filed with the competent commercial register. To avoid a bona fide acquisition of the shares from the third party by others, it is advisable to file an objection with the commercial register. In addition, it is possible to ask the court for a declaration that the third party has not become a shareholder.

If the restrictions are only included in the shareholders' agreement, the only remedy for the continuing shareholder is likely to be an action for damages against the selling shareholder. As a rule, damages will be the only remedy even if the third party has notice of the restriction unless very special circumstances imply a breach of good faith.

Often, the shareholders' agreement will provide:



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■ An obligation on shareholders to offer shares to other shareholders before selling to a third party (pre-emption rights).

■ Drag-along and tag-along rights.

■ Liquidation and preference rights with regard to the liquidation proceeds.

F. Is It Possible to Provide That in the Event of a Joint Venture Company Being Wound up, Certain Assets (such as Intellectual Property Rights) Will Be Transferred to a Specific Shareholder? Will such a Provision Be Enforceable in a Winding-up?

A shareholder can purchase specific assets of a company in liquidation at fair-market value. Such an option right can be granted to the specific shareholder and the liquidator would be bound by the option.

Any cash left after payment of creditors or similar is usually distributed among the shareholders in proportion to their shares. But the articles of association may determine a different proportion for the distribution and can also provide that assets should be distributed to specific shareholders. Such a right can be inserted in the articles of association if it is made clear that the entitlement is subject to rights of creditors and that the fair market value of the asset received will be counted against the shareholder in assessing the shareholders' entitlement in the distribution. Such a provision also has to include an obligation on the respective shareholder to reimburse other shareholders if the value of the asset exceeds its proportional entitlement in the distribution.

In an insolvency scenario, any such option or preference right in respect of certain assets may be challenged by the administrator.

G. About the Authors of Section VII


CMS Hasche Sigle



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CMS Hasche Sigle







