Among other things, the Citizen Relief Act amends the so-called Mantelkauf regulation, which places various restrictions on the use of the loss carry-forwards of companies acquired in share-purchase arrangements. For general information regarding the main regulation, please see our last blog entry from 5 June 2009.

The amendment to the regulation would implement a restructuring clause, initially valid for two years, which would somewhat ease the current restrictions on company restructurings in order to facilitate these during the current economic crisis.

It also provides that the loss carry-forwards of an acquired company could be used by the acquiring company if the share-purchase is directed towards avoiding or resolving illiquidity or over-indebtedness and, at the same time, the essential acquired business of the company is maintained.

The latter prerequisite will be deemed to be the case if one of the following conditions is met:

• an agreement is concluded with the employees of the acquired company in regard to compensation, layoffs, etc. and the agreement is followed;
• during the 5 years following the share-purchase, direct wage costs do not fall below 80% of the cost level at the moment of purchase; or
• the investor makes additional contributions amounting to 25% of the corporation’s assets as shown in the tax balance sheet of the fiscal year ending prior to the year in which the share-purchase occurs.

As noted, only one of these conditions must be met in order for the amendment to apply. The initial draft of the amendment had called for both conditions to be met but required only a 15% additional capital contribution.

The amendment will not, however, apply if the acquired corporation was basically out of business at the time the share-purchase was concluded or if the acquired corporation’s business branch is altered within the 5 years following the share-purchase. The regulation applies to share-purchase transactions concluded between 1 January 2008 and 31 December 2009.

The act passed the German Bundestag on 19 June 2008 and the Bundesrat is expected to decide on the matter on 10 July 2009. If the act is passed, the amendment of the Mantelkauf regulation would take effect shortly thereafter.