Planning Ahead: Why the (early) Tax Registration of AcquiCos should be on the Closing Checklist

As of 1 January 2023, financial and strategic investors using an acquisition vehicle (“AcquiCo”) for their M&A transactions face new administrative challenges in Germany. According to a recently published decree of the Federal Ministry of Finance (the “Decree”), companies must be registered for tax purposes and present their tax number issued by the competent tax office when opening a German bank account. Otherwise, funds might not be wired from such account.

1. Background

The Decree published on 15 June 2022 [1] mainly concerns the Act on the Exchange of Financial Account Information (Finanzkonten-Informationsaustauschgesetz – FKAustG) [2]. The Act obliges banks in Germany to collect and report comprehensive account-related data of customers subject to taxation in the participating countries upon opening of an account (so-called “self-disclosure”). Under certain conditions (e.g., if it is impossible for legal or factual reasons to obtain such information when the account is opened), the required data can be obtained within 90 days after the account has been opened. For as long as the self-disclosure is not complete, however, no wire transfers or disposals from the account can be conducted (except a repayment to the depositor).

2. Changes as of 1 January 2023

According to the new Decree the required self-disclosure must also include the tax number of the company requesting the new bank account. The tax number is issued by the competent tax office upon formal registration of the company. In addition, and where relevant, accurate information on the Common Reporting Standard (“CRS”) status of the company must be provided, e.g. active or passive non-financial entity („NFE“) which could lead to further disclosures. Particularly obtaining a tax number from the competent tax office can be lengthy and time-consuming.

3. Impact and recommendation

AcquiCos will not be able to effectively use a new German bank account for wire transfers (e.g. payment of purchase price) before being registered for tax purposes. Depending on the competent tax office and envisaged commercial steps (in the case of a shelf company, e.g. a change in legal seat or place of management which could trigger a change of the competent tax office), the simple tax registration of a company can take several weeks. To ensure a smooth Closing of the transaction, the timely tax registration or potential workaround measures (as described below) should be on the closing checklist.

• If shelf companies without a tax number are used (which regularly is the case), the relevant information for the tax registration should be compiled early, the tax office should be informed, and any steps taken until the receipt of tax number (e.g. relocation of the registered office of AcquiCo to the Target location or change in place of management by appointing new directors from Target) should be carefully planned to not delay the process.
• Where the timely tax registration of the shelf company is uncertain, alternative payment mechanisms should be considered. For instance, purchase price payments could be routed through the bank account of another already existing group company on behalf of the acquisition vehicle (abgekürzter Zahlungsweg). The planned approach should be discussed upfront with the relevant parties involved including the executing bank and properly reflected in the funds flow statement.
• Where practically possible, consideration could also be given to use shelf companies that are already registered for tax purposes and provide for active bank accounts.

Besides the tax registration, it should be checked whether the transaction (i.e. acquisition of the shelf company) changes anything in the CRS status of the acquisition company, as any changes must be reported to the financial institution within a certain deadline. Failure to comply with self-disclosure obligations can be punished as an administrative offence with a fine of up to EUR 10,000.

The relevant administrative procedures towards Closing should be considered early in the process and possible precautions should be included in the transaction documentation such as the share purchase agreement or financing documentation.

Lastly, the timely tax registration is crucial for the company’s ability to file monthly VAT declarations (allowing a timely input VAT deduction on transaction costs), wage tax returns for management salaries, and the application for a VAT-ID (enabling non-German advisors to issue their invoice).

[1] Modifying the original decree of 1 February 2017 on the automatic exchange of financial information in tax matters.

[2] Besides the FKAustG, the Decree also applies to the Foreign Account Tax Compliance Act (FATCA). As FATCA is largely congruent to FKAustG (see Sec. 1 of the Decree), it is only addressed separately insofar it deviates from the FKAustG.