Transfers within Germany are usually made from a sole proprietorship to a corporation. Here, the scope of § 20 UmwStG is opened, which guarantees the tax-neutral contribution if the conditions (e.g. the corporate tax liability of the receiving company) are fulfilled. Tax neutrality is ensured by the so-called book value continuation. The acquiring corporation takes over the assets of the (former) sole proprietorship at book values – there is no discovery of hidden reserves and therefore no capital gain according to § 16 EStG at the level of the sole proprietor (fictitious operational task). As mentioned above, several conditions for tax neutrality are required, which are explained individually in this contribution.

Also in the field of application of the UmwStG, the transferor achieves a capital gain within the framework of the exchange-like divestment business in accordance with § 16 EStG. Finally, he transfers his operating assets to the acquiring limited company and receives new shares from the latter in return. The value with which the corporation recognises the acquired operating assets constitutes in accordance with § 20 para. 1 UmwStG represents the value which applies to the transferor as a sale price.[104] In principle, the company has the operating assets according to § 20 para. 1 UmwStG with its common value, which at the level of the contributor leads to the discovery of the hidden reserves arrested in the company assets. Thus, the transfer pursuant to § 20 UmwStG triggers the taxation of the hidden reserves, as the transfer pursuant to general income tax principles.[105]

According to § 20 para. 2 S. 2 UmwStG, however, the acquiring company has the right to choose, upon request, to recognise the book value or intermediate value and thus reduce the capital gain accordingly to zero. This so-called book value continuation thus leads to income tax neutrality of the transfer process, but is linked to the following prerequisites as well as the recognition of an intermediate value.

2. corporate tax liability of the receiving company

According to § 20 para. 2 S. 2 Nr. 1 UmwStG must be ensured that the business assets are later subject to corporate tax at the acquiring company. According to the HL, it is irrelevant whether the business assets of the receiving corporation are subject to taxation with domestic or foreign corporation tax. [106] Thus, the standard is not based on a national reference, so that even a (non-resident) corporation subject to corporate tax abroad in principle meets the conditions of No. 1.

However, if the acquiring corporation is exempt from corporation tax pursuant to § 5 KStG, this can lead to the discovery of the hidden reserves in the transferred assets if the transferred operation, part-operation or co-entrepreneur share does not constitute an economic business operation for the acquirer. [107]

If the income of the acquiring company is allocated to the organ carrier on the basis of an organizational relationship, the acquiring organ company is liable for corporate tax and, according to h.L., the condition of No. 1 is fulfilled.[108] However, the tax administration also considers the corporation tax liability of the organ carrier as a condition of No. 1.[109] If the organ carrier is subject to income tax, the discovery of the hidden reserves can be avoided in the opinion of the tax administration only by an equity measure and under other conditions. [110]

In contrast, the factual characteristic in No. 1 often leads to the refusal of tax neutrality in the case of the contribution to real estate investment trusts, which according to § 16 para. 1 REITG are exempt from corporate tax. [111]

3. Positive value of the transferred assets

According to § 20 para. 2 S. 2 Nr. 2 UmwStG tax neutrality is only possible insofar as the tax equity of the transferred business assets is not negative. It takes into account all domestically tax-related assets, including those tax-related assets at the transfer level. [112] Assets withdrawn from German taxation law are not to be included in the determination of capital.[113] The transferred assets of a DBA exemption establishment can therefore also be negative without having an impact on the book value contribution. This only seems appropriate, since the Federal Republic of Germany is not entitled to taxation for such assets anyway and a book value approach would have no effect on the transfer profit taxation.

Set up a tax-neutral holding company with 1-50 % GmbH share

4. No exclusion and no restriction of German taxation law

Furthermore, the continuation of the book value for the transferred operating assets acc. § 20 Abs. 2 S. 2 No. 3 UmwStG is only possible insofar as the right of the Federal Republic of Germany with regard to the taxation of the profit from the sale of the transferred business assets in the receiving company is not excluded or limited. Condition for the refusal of tax neutrality according to § 20 para. 2 S. 2 Nr. 3 UmwStG is therefore that the Federal Republic of Germany has so far had a right to tax the assets concerned and this is excluded or restricted in the course of the transfer. A conversion-related tax easing can therefore only be triggered for domestic assets and foreign business assets located in a non-DBA state or in a DBA state with a credit method. [114] For foreign assets of an exemption establishment, the Federal Republic of Germany has no taxation right that could be excluded or limited. [115]

If the Federal Republic of Germany loses the right to tax the transferred assets in the course of the transfer, § 20 para. 2 S. 2 No. 3 UmwStG in principle for taxation of the transfer operation. Decisive for the question of whether the German tax law is excluded or restricted in the course of the transfer is the tax transfer date.[116] This means that it is not the transfer of economic ownership that is relevant to the decision, but the transfer pursuant to § 20 para. 5 and 6 UmwStG basically freely selectable transmission date. [117]

The shares in the acquiring corporation received in return do not in principle have to be subject to German taxation law. Ensuring the German taxation law for the shares received is only necessary if the transferor is not resident in a Member State (§ 1 para.). 4 no. 1 lit. a UmwStG) and the scope of application of the sixth part therefore derives from the special standard of § 1 para. 4 No. 1 lit. b UmwStG. [118]

5th interim result

If the transfer takes place outside the scope of the UmwStG, this constitutes a divestment-like operation that always justifies the discovery of the hidden reserves. Only if the UmwStG applies and the requirements of § 20 Abs. 2 pp. 2 no. 1 to 3 UmwStG, the transfer can be made to book values. The income tax neutrality of cross-border contributions is therefore dependent in particular on whether the Federal Republic of Germany retains the right to tax the hidden reserves created in Germany or in an accounting permanent establishment. If the German taxation law for the transferred business assets is excluded or limited by the transfer on the tax transfer date, the income tax neutrality of the transfer operation de lege lata according to § 20 para. 2 S. 2 No. 3 UmwStG. This also applies to retroactive contributions. [119]