Like other European countries, Germany and its economy are severely hit by the spread of COVID-19 around the world. On March 23, 2020, the German government passed the German Economic Market Stabilization Fund Act (Wirtschaftsstabilisierungsfondsgesetz) with the aim of strengthening the German economy against chain reactions caused by the closure of businesses and rapidly decreasing demand in many market sectors. Once adopted by the German legislator, the new law will establish the state-owned "German Economic Market Stabilization Fund" (the "Fund"). The Fund is modelled on the "German Financial Market Stabilization Fund" that was introduced during the financial crisis in 2008, in order to save German financial institutions from bankruptcy, but now grants financial assistance to enterprises of the "real economy", i.e., industry, trade and services. To ensure the liquidity of companies, the Fund can grant guarantees and engage in recapitalisation measures. Access to such financial assistance granted by the Fund is generally limited to companies fulfilling at least two of three criteria in respect of their size (a balance sheet total of more than € 43 million, revenues of more than € 50m and more than 249 employees).

While the grant of guarantees by the Fund does not raise specific tax questions, recapitalisation measures by the Fund can cause detrimental tax consequences. The draft specifically addresses some of these tax issues and provides for a relief insofar:

• The acquisition of shares and other interests in the aided company by the Fund is exempt from German real estate transfer tax.
• German anti-loss buying rules (which generally provide for a       forfeiture of tax losses and loss-carry-forwards of a company on a change of control) do not apply to the acquisition of shares by the Fund. The aided company will be able to continue to utilize such losses even if the Fund acquires a stake in the company which would generally lead to a full or partial forfeiture of such losses. The same exemption applies on a later sale of the shares by the Fund.
• The aided company is not required to pay withholding tax on any dividend or interest paid to the Fund.

In addition to acquiring a genuine equity participation in the relevant company, the Fund can also provide financial assistance through hybrid financial instruments, for instance, by way of silent participations, profit participating loans or subordinated bonds. The issuance of hybrid financial instruments raises a number of complex tax issues for the issuer which are not addressed in the draft law and, hence, need to be considered when structuring the instrument. First of all, it is necessary to ensure that the granted capital does not trigger a taxable profit. This requires that the corresponding repayment obligation is recognized as debt in the company's tax balance sheet or, if the instrument constitutes equity for tax purposes, that the capital is recognized as a tax-neutral contribution. Whether to company's interest expense is deductible will depend on the terms of the financial instrument. The deductibility of the interest expenses should, at least, not be limited under the ATAD rules on hybrid financing; although the Fund will be exempt from income taxation, such non-taxation is based on domestic tax law rather than a different qualification of the payment for tax purposes.