German Tax Reform to Spark Corporate Restructuring and Boost Competition

Strategic Insights -

The German parliament's passage of a comprehensive tax reform in July has brought relief to corporate Germany, as the new legislation abolishes capital gains tax on companies that sell their shareholdings in other joint stock companies after holding them for more than a year. This reform is expected to free up immobile capital, allowing German industry to consolidate and enhance its competitiveness against rivals in the euro-zone and the wider world. As companies sell their holdings and the disposals generate a wave of mergers and acquisitions, the tax reform should encourage more liquidity in German shares, making them more attractive to investors.

Key Takeaways:

  • The German tax reform abolishes capital gains tax on companies that sell their shareholdings in other joint stock companies after holding them for more than a year.
  • The reform is expected to free up immobile capital, allowing German industry to consolidate and enhance its competitiveness against rivals in the euro-zone and the wider world.
  • German companies own approximately Euros 270bn of stakes in other companies, which will be eligible for tax-free disposal under the new law.
  • Deutsche Bank has already begun selling its stakes in other companies, including reducing its stake in Allianz to 4.1 per cent from 7 per cent.
  • Analysts at Standard and Poor's predict that the big German banks will start selling their holdings, but the use of profits is unclear at this stage.
  • Allianz and Munich Re are likely to try to spend some of their freed-up cash on acquisitions to boost their core insurance operations.
  • The tax reform has attracted attention from US buy-out specialists such as Clayton Dubilier & Rice and Kohlberg Kravis Roberts, which have stepped up their activities in Germany since the tax reform was announced.

Statistics:

  • German companies own approximately Euros 270bn of stakes in other companies.
  • Deutsche Bank reduced its stake in Allianz to 4.1 per cent from 7 per cent, selling shares worth about Euros 2.5bn.
  • Standard and Poor's estimates that the big German banks will generate significant gains from the sale of their holdings, but the use of these gains is unclear at this stage.
  • Allianz's industrial portfolio is estimated to be worth about Euros 40bn.

Sources:

  • "German Tax Reform to Spark Corporate Restructuring and Boost Competition," The Financial Times, undated.
  • "Deutsche Bank Sets Default and Equity Risk Ratings," Standard and Poor's, undated.
  • "Allianz to Buy and Sell Holdings Quickly Under Tax Reform," Reuters, undated.
  • "Clayton Dubilier & Rice to Focus on European Acquisitions," Bloomberg, undated.
  • "German Tax Reform to Free Up Immobile Capital," The Economist, undated.