The abolition of capital gains tax on the sale of corporate assets is eagerly anticipated among many in the private equity market and it is hoped that this abolition will spark significant restructuring within major quoted German companies. From January 2002, it will be possible to sell non-core stakes in other incorporated companies without paying any capital gains tax. To what extent the private equity market will benefit however, remains to be seen.
Included in the reform is the tax exemption for capital gains on the sale of shares in both German and foreign corporations arising from a sale made by a German corporation. This means there is no longer a disincentive to divest the network of cross-shareholdings prevalent in Germany’s Mittelstand except where a book value loss would result. The new tax provisions also incorporate a change whereby the losses from the sale of shares or the write-down of the book value in a corporation to the lower fair market are no longer tax deductible.
According to a report by Commerzbank, the German Mittelstand faces a tough transition period with the large number of non-incorporated businesses expected to incorporate. Small businesses will benefit from the tax reform and these constitute 95 per cent of SMEs but these are not all relevant to the private equity market, which is focused on larger companies.
Many players believe the attention surrounding the tax reforms has been overhyped as far as the private equity market is concerned. “The tax reform is not something that is really driving private equity,” says Peter Cullom of 3i. Commerzbank suggests the German private equity market will benefit from an estimated e600 billion disposal of shares/businesses, mainly in the mid-market, so whether there is anywhere near e600 billion interesting mid-market businesses out there worth buying is debateable and should be viewed in the context of a total European buyout market from 1996 to 2000 equating to e200 billion.
Mark Elborn of Electra Europe is one of several players who, while recognising that the tax reforms will act as an impulse to the market, does not consider the tax reform to be the main driver for the German buyout market. Rather the market is being driven by an increased focus on shareholder value, M&A activity of the merchant banks and the volume of money dedicated to European buyouts, which has increased the credibility of finance investors.