The following article is adapted and reprinted from the M&A Tax Report, Vol. 10, No. 9, April 2002, Panel Publishers, New York, NY.

FIZZLED GERMAN TAX LAW

By Robert W. Wood

We at The M&A Tax Report sometimes overreact. We are not alone. Indeed, many people apparently overreacted to the long-planned and much touted German tax legislation. This important change in this important country was expected to have massive effects. See Wood, "Massive German Tax Overhaul," Vol. 9, No. 1 M&A Tax Report, Aug. 2000, p. 1. See also Wood, "More on German Tax Reform," Vol. 9, No. 4 M&A Tax Report, Nov. 2000, p. 8. With changes in the works, there was a stagnation effect as companies waited for the tax changes to take effect in January 2002. In the meantime, Germany faced pressures over a variety of other merger and acquisition related legislation. See Wood, "Germany in the News Again," Vol. 10, No. 2 M&A Tax Report, Sept. 2001, p. 8.

So what about these tax changes? Germany struck down capital gains taxes on corporate shareholdings, effective January 1, 2002. This was expected to cause a wholesale reshaping of the corporate landscape throughout the country, and indeed, to have carryover effects throughout Europe. As it turns out, very few companies have apparently rushed to take advantage of the rule. As some kind of universal affirmation of the "use it or lose it" adage, some members of the opposition party in Germany are now even threatening to reinstate the dreaded capital gains tax if they are successful in the September 2002 federal elections.

The Wall Street Journal reports that no one knows exactly how many German companies are shedding shareholdings in other companies (the so-called interlocking ownership that was viewed as a major impediment to deals there). Anecdotal evidence, however, suggests that there are few sales occurring, despite the tax repeal. See Sims, "German Companies Shrug at Tax Change," Wall Street Journal, Feb. 27, 2002, p. A16. Of course, if this tax relief is not viewed as permanent — and if it turns out to be little more than a temporary tax holiday — perhaps something more will goose companies to start selling. Since the German capital gain rate was as high as 40% on corporate sales, and some transactions were explicitly put off in 2000 and 2001 because of the anticipated tax relief, there is a good deal of head-scratching going on. Stay tuned.

Fizzled German Tax Law, Vol. 10, No. 9, The M&A Tax Report (April 2002), p. 1.