International M&A Transactions – How to avoid German VAT on Notarial Recording Fees

Foreign direct investments in the German „Mittelstand“ are often made by acquiring existing shares held in German limited liability companies (“GmbH”).

Underlying agreements comprising the obligation to transfer shares of a GmbH and the actual share transfer itself have to be recorded by a notary public (Section 15 Para 4 S.1 and Para 3 German Law on Limited Liability Companies).

Related recording costs are habitually borne by the foreign buyers of the shares, who are regularly surprised by the amount of the value-based recording fees. For example, a share transfer with a value of 10 Mio. Euros will create recording fees in excess of net 22.000 Euros.

On top, German notaries tend to add VAT (currently at 19% of the recording fees) to the recoding fees, even if the buyer is a Non-EU corporate entity. In our above example, an additional amount in excess of 4,180 Euros would be added to the invoice of the notary.

Non-EU Corporate buyers can avoid VAT by providing a confirmation of registration as entrepreneurial tax payer in their home jurisdiction. However, in some jurisdictions it is quite burdensome or even impossible to obtain the required documentation in a form acceptable for the German tax authorities.

In these cases, it can be advisable to negotiate that the notarial recording costs shall be borne by the German seller, who will regularly be entitled to deduct paid VAT as input tax.