GERMANY LAW AND PRACTICE Contributed by: Daniel Möritz, Jan Bonhage, Hendrik Bockenheimer, Carl-Philipp Eberlein, Markus Ernst, Matthias Rothkopf, Christoph Wilken and Alexander Rang, Hengeler Mueller
purpose, that are intended to reduce taxes and that cannot be justified by significant non-tax reasons. • The Controlled Foreign Corporation (CFC) Rules – certain low-taxed passive income of German-con - trolled foreign corporations is subject to a pick-up and taxation with (corporate) income and trade tax at the level of the German shareholder. • Cross-border business relationships between relat - ed parties not at arm’s length will be taxed under arm’s length conditions – ie, deduction of unjustifi - ably high payments is disallowed and treated as a hidden dividend distribution. • The 95% tax exemption for dividends received is only granted if the distributing entity has not deducted the dividend for tax purposes and if the receiving shareholder holds more than 10% in the distributing entity. • A hybrid mismatch provision provides that pay - ments on hybrid instruments are not tax deductible at the level of the payer in the case of mismatches, such as non-inclusion of the interest income at the level of the recipient. • A defence mechanism makes it more difficult for individuals and companies to avoid paying taxes in Germany through business relations with countries and territories that are on the EU list of non-coop - erative tax jurisdictions. • The German rules on Pillar Two ( Mindeststeuerge- setz ) ensure a global minimum level of taxation. 10. Employment and Labour 10.1 Employment and Labour Framework German employment law is strongly regulated and based on a variety of sources, including statutory law as well as collective bargaining agreements and agreements with works councils. Statutory law is highly dynamic and under constant revision by jurisdiction and legislation. It generally pro - vides for strong protection of employees (eg, termina - tion protection, special protection of works council members and employees during maternity and paren - tal leave, continued compensation in the case of an illness, minimum vacation, minimum wages) and has a tendency to be interpreted in an employee-friendly manner.
The trade unions and works councils exert a strong influence through collective bargaining and works council agreements. Consequently, the relationship with the trade unions and works councils can be cru - cial for business. Principally, employing someone is simple; termination of employment is rather more difficult. Each employee has an employment contract (ie, at-will employment does not exist in Germany). There is a distinction between employees and freelancers, however – the latter are not subject to employee protection laws and enjoy less legal protection. 10.2 Employee Compensation Compensation for employees in Germany commonly consists of several elements – ie, fixed salary, vari - able compensation and additional compensation ele - ments. Variable compensation, as well as additional elements such as Christmas or vacation bonuses, non-cash compensation (eg, company car) or other benefits (eg, an employer-financed pension scheme) are, in principle, discretionary. The compensation received by employees must fulfil the prerequisites of the German Minimum Wage Act, whereby the minimum wage currently amounts to EUR13.90 per hour as from 1 January 2026. As a general rule, the compensation of employees should not be affected by an M&A transaction. An acquirer would, however, typically consider whether existing compensation plans should be amended as part of the integration process; what the legal require - ments for such amendments are; and, further, whether there are any employment-related liabilities pertaining to the period prior to acquisition (eg, accrued pension and similar liabilities) that would reduce the purchase price. 10.3 Employment Protection The legal consequences of an M&A transaction for employees depend on the type of transaction – in par - ticular, whether it is a share or asset deal. Share Transaction In a share transaction, the identity of the employer remains unchanged. A share deal will neither affect
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