In a recently published decision concerning the hive-down of pension liabilities and pension assets, the Tax Court of Munich disagreed with the tax authorities’ position on the availability of retroactivity for tax purposes if single assets are contributed to a corporation, and on the tax treatment of pension liabilities after such a hive-down (case reference: 7 K 555/09).
According to the German Reorganization Tax Law, most qualifying reorganizations can be achieved with up to eight months’ retroactive effect. Based on the wording of the law, however, retroactive effect of a hive-down is possible only if qualifying assets (i.e. a business, a branch of activity or a partnership interest) are contributed. By contrast, the law also states that retroactive effect is possible for a demerger, even if only a single asset is transferred.
The Tax Court of Munich held that – despite the clear wording – the provisions disallowing the retroactive effect of a hive-down of a single asset cannot be interpreted literally. Instead, the retroactive effect may be granted based on an analogous interpretation of the law.
The Tax Court also had to address the tax treatment of pension liabilities that are transferred together with pension assets (i.e. assets used to back up pension liabilities, such as pension plan reinsurance, securities, etc.). Pension liabilities must be recorded at a special value for German tax purposes, which is usually lower than their actuarial net present value. The tax authorities took the position that, upon transfer, the recipient entity had to record the pension liabilities at their fair market value but had to record these liabilities at their (lower) tax value in the first balance sheet after the transfer, the result of which would be a significant capital gain.
The court held that, if pension assets are transferred together with pension liabilities, the pension liabilities assumed by the recipient entity have to be treated as consideration for the transfer of the pension assets. As such, the regulations on the tax value of pension liabilities do not apply to the recipient entity, and that entity has to record the pension liabilities at the acquisition cost, i.e. with their actuarial net present value.
The decision has been appealed by the tax authorities (case reference: I R 28/11), the further proceedings should be monitored closely as the case can be expected to be highly relevant in practice.
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