EU: CJEU referral on taxation of upstream merger gains (Germany)
Referral concerns whether Germany's 5% add-back on merger gains is compatible with the EU Merger Directive.
The German Federal Tax Court on August 6, 2026, referred a question to the Court of Justice of the European Union (CJEU) regarding whether the German tax treatment of upstream mergers involving EU subsidiaries is compatible with Article 7(1) of the EU Merger Directive.
The case involves a German parent company that merged several EU subsidiaries into itself at book value. Under German reorganization tax rules, merger gains are generally exempt from corporate income tax, but 5% of the exempt amount is treated as non-deductible expenses and therefore effectively subject to tax.
The taxpayer argued that merger-related gains should remain fully tax neutral under the EU Merger Directive. Although the court noted similarities with the treatment of exempt dividends under Germany's participation exemption regime, it also acknowledged that the Merger Directive does not expressly permit a comparable add-back.
Given differing views and the absence of CJEU case law on the issue, the court referred the matter to the CJEU.
Read an August 2026 report prepared by KPMG's EU Tax Centre