The acquisition of the Porsche company by the VW Group in 2012 would normally have incurred EUR 1.5 billion in taxes. However, by cleverly exploiting a legal loophole in the conversion tax law, what became known as the Porsche/VW tax trick, taxation could be circumvented. The key to this can be found in the choice of transmission. This was because they used the so-called share exchange to carry out a tax-neutral transfer of the Porsche company to VW. However, this possibility is also available for all other projects in which one capital company is to be transferred to another. In addition, this is also possible in the case of the conversion of a sole proprietorship or partnership into a capital company. Thus, you can also benefit from the Porsche/VW control trick.

For the following explanations, it should be noted at the outset that this is a simplified representation of a very complex process in detail. Through the deliberately chosen simplification, we would like to remove the fear of this complex topic and thus ensure that you gain a general understanding of the framework conditions of conversion tax law. Finally, you should recognize the tax advantages relevant to you in order to be able to use the associated potential.

Historical background to the Porsche/VW control trick

Porsche and VW were originally two independent companies. A few years ago, Porsche tried to secretly take over the much larger VW Group. However, this attempt failed and plunged Porsche into a debt crisis. However, the idea of merger did not stop. Many benefits were expected from this, even if the implementation of such a merger is associated with many difficulties. In particular, the issue of taxation that such a merger would trigger employed both shareholders and board members. In 2012, it was the VW Group that performed the trick of taking over Porsche without having to pay taxes.

3. The structure of the companies at the time of the takeover

3.1. The development of the corporate structure at Porsche

Prior to the takeover, Porsche AG was 100 % owned by Porsche SE as an operating company. Thus, the negotiations on the merger with VW took place at this level. However, this structure was only created in 2007, when Porsche SE transferred all assets to Porsche AG by transfer. According to § 20 UmwStG, this contribution is generally tax-neutral. However, in such a case there is a blocking period of 7 years. If Porsche SE sells its shares in Porsche AG within this period, the taxation of the contribution would follow retroactively as a consequence. Thus, a merger with the VW Group would have caused significant tax burdens.

3.2. The VW Group as a public limited company

On the other side of the merger negotiations, VW was a group. Attention also had to be paid to the shareholders, because a considerable tax burden in the merger with Porsche would also have had serious effects in relation to the shareholders. On the other hand, they did not want to wait until the blocking period had elapsed after the conversion at Porsche, which would have lasted until 2014. Thus began the search for a way around this tax obstacle.

The problem was solved by cleverly exploiting a tax loophole in the conversion tax law. Initially, Porsche SE and VW AG founded a joint venture, Porsche-Interwischenholding. VW held 49,9 % of the shares and contributed the necessary capital to its creation. The remaining investments were contributed by Porsche SE. This happened when Porsche SE transferred its shares in Porsche AG, which it owned 100%, to the intermediate holding company. Normally, this transaction would have been taxable because it would have violated the 7-year blocking period, but in this case the law does not, provided that the blocking period is now complied with instead for the holdings in the intermediate holding. Nevertheless, the goal was to achieve exactly this before the expiry of the blocking period.

4.2. implementation of the Porsche/VW control trick

The highlight was that the shares held by Porsche SE in the intermediate holding were transferred to VW as part of a contribution. In return, it received a VW share and EUR 4.5 billion. The decisive factor here was that this new VW share in the sense of conversion tax law (§ 21 para 1 UmwStG) is considered to be the issue of new shares. This paved the way for a tax-neutral transfer. Although other requirements have to be observed for an effective execution of a tax-neutral transfer, these are only small hurdles overall. For example, a book value application must be submitted to the tax office in good time. Ultimately, the financial administration could only watch as the VW Group, taking advantage of the legal loophole, saved about EUR 1.5 billion in taxes.

5. The Consequences of the Legislative

Now it is easy to imagine that the legislature had to act after this tax disaster to prevent a similar repetition. In the meantime, the conversion tax law has been amended accordingly. Although the possibility of a tax-neutral conversion was wanted by the legislature and should continue to be possible, in the future a maximum limit for the tax-free share exchange should rule out the abuse of this goodwill. A regulatory ceiling was therefore introduced in 2015. Only up to this limit can such a share exchange remain tax-free.

To be more precise, they even decided on two approaches. The first approach is designed to protect smaller companies from taxation in conversion. Up to an object value of EUR 500,000, everything remains as before in compliance with the given conditions. A tax-free conversion is still possible within this framework. However, if the acquisition costs exceed this amount, the new regulation provides that the share of the book value, which is over EUR 500,000, remains tax-free only 25%. However, the remaining 75% will be subject to regular taxation.