BFH refers 5% lump-sum add-back on merger gains to the ECJ
The Bundesfinanzhof (BFH, Federal Fiscal Court) has, by order of 20 May 2026 – X R 27/22 – stayed appeal proceedings on points of law and requested the Court of Justice of the European Union (ECJ) to clarify a question of EU law. The subject matter is the compatibility of the German rule under which 5% of a tax-exempt merger gain is deemed to constitute non-deductible business expenses with Art. 7(1) of Directive 2009/133/EC, the so-called Merger Directive.
At its core, the issue is whether Art. 7(1) of Directive 2009/133/EC precludes a national provision that exempts from tax increases in value arising upon the cancellation of a shareholding, but at the same time treats a flat-rate 5% of the tax-exempt merger gain as non-deductible business expenses.
The decision was published by the BFH on 6 August 2026. According to the published list of the Bundesministerium der Finanzen (Federal Ministry of Finance), the decision is intended for publication in the Bundessteuerblatt Teil II (Federal Tax Gazette Part II).
Starting point of the proceedings
Year in dispute and corporate-law background
The year in dispute is 2010. The claimant and appellant on points of law is a Gesellschaft mit beschränkter Haftung (GmbH, German limited liability company) with its registered office in Germany. At the beginning of the year in dispute, it was the sole shareholder of five corporations with registered offices in other Member States of the European Union. These were an Italian S.p.A., a Spanish S.A.U., a Swedish AB, a British Limited and a French S.A.S.
Four of these foreign companies were merged into the claimant in 2010 by way of cross-border merger. The French subsidiary was dissolved under French law by way of a Transmission Universelle de Patrimoine, with all assets and liabilities being transferred without liquidation.
The claimant subsequently continued the former subsidiaries’ existing business operations unchanged as permanent establishments for income tax purposes in the respective states of residence.
Tax treatment of the mergers
In its commercial balance sheet, the claimant recognised the assets and liabilities of the merged subsidiary corporations at their carrying amounts. For tax purposes as well, continuation at book values was elected under § 11(2) sentence 1 UmwStG 2006 (German Reorganisation Tax Act 2006).
The mergers gave rise to merger results. These resulted from the difference between the carrying amount of the shares in the respective transferring corporation and the value at which the transferred business assets had to be taken over.
The Finanzamt (tax office) determined, after deducting the costs of the transfers of assets, a balance of merger results of EUR 28,244,669.21. For the business expenses deemed non-deductible on a flat-rate basis, it applied 5% of the positive merger gains after deduction of the costs attributable to them. The assessment base for this was EUR 30,121,472.41. This resulted in a disputed add-back of EUR 1,506,073.62.
Procedural history before the tax office, Fiscal Court and BFH
Contested corporate income tax assessment notice
The subject of the proceedings is the corporate income tax assessment notice for 2010 dated 13 October 2017, in the form of the objection decision dated 25 November 2019.
The tax office deducted the tax-exempt amount from the tax balance-sheet profit when determining taxable income. At the same time, it took into account the business expenses deemed non-deductible on a flat-rate basis pursuant to § 12(2) sentence 2 UmwStG 2006 in conjunction with § 8b(3) sentence 1 KStG (German Corporation Tax Act).
According to specialist reporting, the add-back had an effect not only on corporate income tax, but also on trade tax.
Extension of the relief sought in the action
The claimant initially challenged the reduction of the tax-exempt amount by the 5% lump sum. It argued that this treatment infringed Art. 7(1) of Directive 2009/133/EC.
In the court proceedings, it extended the relief sought. In addition, it sought to have a further amount of EUR 366,023 left tax-exempt. This amount concerned costs of the transfers of assets. In the claimant’s view, these costs also should not reduce the merger gain to be exempted under Art. 7(1) of the Merger Directive.
The lower court was the Finanzgericht Schleswig-Holstein (Fiscal Court of Schleswig-Holstein). It dismissed the action by judgment of 24 March 2022 – 1 K 181/19 –; the decision is published in EFG 2022, 979.
Relevant national provisions
§ 12(2) UmwStG 2006
Under § 12(2) sentence 1 UmwStG 2006, at the level of the acquiring corporation, no account is taken of a gain or loss arising from the difference between the carrying amount of the shares in the transferring corporation and the value of the business assets to be taken over, less the costs of the transfer of assets.
If the acquiring corporation holds an interest in the transferring corporation, § 12(2) sentence 2 UmwStG 2006 refers, for the corresponding gain, to § 8b KStG. According to BFH case law, this rule takes precedence over sentence 1 for merger gains.
§ 8b KStG and the 5% lump sum
§ 8b(2) sentence 1 KStG excludes gains from the disposal of certain shareholdings in corporations when determining income. However, under § 8b(3) sentence 1 KStG, 5% of the respective gain is deemed to constitute expenses that may not be deducted as business expenses.
In return, § 3c(1) EStG (German Income Tax Act) is not applicable pursuant to § 8b(3) sentence 2 KStG. The German rule therefore does not operate by individually determining the specific expenses related to the shareholding, but by means of a typifying lump sum.
By contrast, according to the legal position described by the BFH, § 12(2) sentence 2 UmwStG 2006 does not apply to merger losses. In this respect, § 12(2) sentence 1 UmwStG 2006 remains applicable.
EU-law framework
Scope of application of the Merger Directive
Directive 2009/133/EC governs the common system of taxation applicable to certain cross-border reorganisations, including mergers, divisions, partial divisions, transfers of assets and exchanges of shares.
Under Art. 1(a) of the Directive, it applies, among other things, to mergers involving companies from two or more Member States. Art. 2(a) of the Directive defines a merger, inter alia, as a transaction whereby a company, on being dissolved without going into liquidation, transfers all its assets and liabilities to the company holding all the securities representing its capital.
The BFH considers these requirements to be generally met for the transactions concerned. With regard to the Spanish S.A.U., the BFH left open whether this legal form falls within the scope of the Directive. It stated that this was not decisive for the relevance of the EU-law question to the decision, because at least several of the other mergers were covered.
Art. 7(1) Directive 2009/133/EC
Art. 7(1) of Directive 2009/133/EC provides that increases in value which may arise for the receiving company on the cancellation of its holding in the capital of the transferring company are not to be liable to tax.
Art. 7(2) of the Directive permits Member States to derogate where the receiving company’s holding in the capital of the transferring company is below the threshold specified there. In the case in dispute, this exception was not relevant according to the BFH’s findings, because the claimant held 100% of each company.
Issue in dispute: lump-sum business expenses or taxation of the increase in value?
Claimant’s position
The claimant takes the view that, economically, the German rule leads to partial taxation of the merger gain. Although the merger gain is formally exempt from tax, the flat-rate add-back of 5% reclassifies part of the tax-exempt gain and ultimately taxes it.
It also pointed out that the Parent-Subsidiary Directive expressly contains an opening clause for dividends under which up to 5% of distributed profits may be treated as non-deductible business expenses. Art. 7 of Directive 2009/133/EC contains no corresponding express clause.
Tax office’s view
The tax office treated the merger gains as tax-exempt in accordance with the national provisions, but added back 5% of the positive merger gains after deduction of the respective costs of the transfers of assets as non-deductible business expenses.
Under German law, according to the system described by the BFH, this add-back does not concern the taxation of the merger gain itself. Although its amount is linked to the tax-exempt gain, it is intended to capture, on a typifying basis, business expenses that are not to be deductible under the national concept.
BFH’s considerations on the German legal position
Application of national law according to the BFH
The BFH considers the tax office’s application of German law in the contested corporate income tax assessment notice to be correct. This is also not disputed by the claimant.
The tax office excluded the four positive merger results, after deduction of the costs attributable to them, from the corporate income tax base pursuant to § 12(2) sentence 2 UmwStG 2006 in conjunction with § 8b(2) sentence 1 KStG.
At the same time, it disregarded the loss from the takeover of the Spanish company under § 12(2) sentence 1 UmwStG 2006. It then added back, pursuant to § 8b(3) sentence 1 KStG, 5% of the positive merger gains after deduction of the corresponding costs as non-deductible business expenses.
Purpose of the lump sum under German law
According to the BFH’s reasoning, § 8b(3) sentence 1 KStG regulates business expenses in terms of the wording, system and purpose of national law. On this understanding, the provision does not result in taxation of the value increases caused by the merger.
The BFH classifies the 5% rule as a typifying provision. In its view, it is intended to capture expenses incurred during the holding period of the shareholding which, in the event of a profit distribution, would have been excluded from deduction in connection with tax-exempt income.
Under the statutory concept, the lump sum is applied to capital gains because undistributed profits can generally be reflected in the value of the shareholding. If a shareholding is later disposed of tax-free or is cancelled in the course of a merger, German law aims to ensure parallel treatment with tax-exempt dividends.
Preliminary EU-law assessment by the BFH
Tendency of the Senate
In its reasoning, the BFH tends to regard the German lump-sum rule as compatible with Art. 7(1) of Directive 2009/133/EC. In its view, the wording of the Directive suggests that only the taxation of increases in value arising upon cancellation of the shareholding is prohibited.
By contrast, Art. 7(1) of the Directive does not expressly contain any rule on the treatment of business expenses connected with the shareholding. The BFH therefore sees indications that the Member States may retain regulatory discretion in this area, provided that the increase in value as such is not taxed.
Connection with the Parent-Subsidiary Directive
A further argument of the BFH concerns the connection between the Merger Directive and the Parent-Subsidiary Directive. According to the BFH’s account, both sets of rules pursue comparable objectives in certain situations, because distributed profits and retained profits included in the value of a shareholding may be economically interchangeable.
The Parent-Subsidiary Directive contains an express option to assess management costs on a flat-rate basis, whereby the flat-rate amount may not exceed 5% of the distributed profits. In the BFH’s view, the close connection between the directives argues in favour of not excluding from the outset corresponding typifying treatment for merger gains as well.
No disguised taxation in the BFH’s view
The BFH does not regard the lump sum as disguised taxation of the increase in value, provided that, in terms of its amount, it can be understood as a realistic typification. The rate of 5% corresponds to the maximum provided for in the Parent-Subsidiary Directive for management costs determined on a flat-rate basis.
Against this background, the BFH also considers the non-recognition of the actual costs of the transfer of assets to be compatible with Art. 7(1) of Directive 2009/133/EC. In its view, the increases in value remain tax-exempt; only corresponding business expenses are non-deductible.
Reasons for doubts regarding the interpretation of EU law
Absence of an express rule in the Merger Directive
At the same time, the BFH explains that there are also considerations supporting the opposing view. A central argument is that, unlike the Parent-Subsidiary Directive, Directive 2009/133/EC contains no express provision on the non-deductibility of shareholding costs and no express authorisation for a 5% lump sum.
From this, it could be inferred that the EU legislature intended to allow such lump-sum treatment only in the area of the Parent-Subsidiary Directive, but not for merger gains under Art. 7(1) of Directive 2009/133/EC.
Different design of the directives
The BFH also points out that shareholding thresholds in both directives have been aligned in the past. It could be concluded from this that where the EU legislature wanted alignment, it expressly took action.
The absence of an express incorporation of a 5% rule into the Merger Directive could therefore be understood as a deliberate decision. According to the BFH’s account, this view is represented to a considerable extent in German legal literature.
Relevance of the ECJ clarification to the decision
Outcome of the appeal on points of law depends on Art. 7(1) of the Merger Directive
The BFH considers the interpretation of Art. 7(1) of Directive 2009/133/EC to be decisive for the outcome. If the provision does not preclude the German rule, the decisions of the tax office and the Finanzgericht Schleswig-Holstein would, in the BFH’s view, be correct. The claimant’s appeal on points of law would then have to be dismissed.
If, on the other hand, the ECJ concludes that Art. 7(1) of Directive 2009/133/EC precludes the German 5% lump sum, the claimant’s appeal on points of law would succeed. The appeal proceedings X R 27/22 are stayed pending the ECJ’s decision.
At the time of the first specialist reports, a case number of the ECJ was not yet known.
First clarification of a long-disputed question
The ECJ will therefore rule for the first time on a question that has long been disputed in German legal literature. The classification under EU law of the flat-rate add-back in upstream mergers may be of considerable importance for comparable reorganisations.
What is in dispute is not the full tax exemption of the merger gains under German law as such. Rather, the decisive issue is whether the add-back of 5% of the tax-exempt positive merger gain as non-deductible business expenses is to be assessed under EU law as a permissible business-expense rule or as impermissible taxation of the increase in value.
Significance for reorganisations and tax planning
The BFH order concerns an interface of German reorganisation tax law, corporation tax law and EU law that is important for cross-border group reorganisations. Cases in which a parent company holds an interest in a subsidiary and that subsidiary is transferred to the parent company in the course of a cross-border merger are particularly relevant.
The focus is in particular on the following points:
- tax-exempt treatment of the merger gain under § 12(2) UmwStG 2006 in conjunction with § 8b KStG,
- flat-rate add-back of non-deductible business expenses under § 8b(3) sentence 1 KStG,
- EU-law prohibition on taxation of certain increases in value under Art. 7(1) of Directive 2009/133/EC,
- relationship between the Merger Directive and the Parent-Subsidiary Directive,
- treatment of actual costs of the transfer of assets.
Until the ECJ has given its decision, the assessment under EU law remains open. The BFH has set out its own tendency, but considers a reference to the ECJ necessary because of the existing doubts as to interpretation and the absence of ECJ case law on Art. 7 of Directive 2009/133/EC.
Tax-law classification by MTR Legal Rechtsanwälte
The BFH order shows that the tax consequences of cross-border mergers cannot be assessed solely under national law. Particularly in reorganisations within international corporate groups, the interplay between reorganisation tax law, corporation tax law, trade tax and EU law can have significant effects on the tax base.
MTR Legal Rechtsanwälte advises companies, investors and high-net-worth individuals on complex tax-law issues in connection with reorganisations, shareholdings and cross-border matters. Anyone requiring a legal assessment on comparable topics can find further information at Legal advice in tax law.
