The tax-free transfer of operating companies to a holding company is associated with a blocking period of 7 years. This applies to the contributor for the shares of the operating company transferred to the holding company by exchange of shares. During the period following the transfer of assets, a proportion of the tax amount otherwise due shall be regarded as tax-free. This means that the blocking period has a melting rather than an absolute character. Therefore, if the holding company wishes to sell the transferred assets before the expiry of the entire blocking period, the transferor is likely to tax the transferred assets subsequently. The profit calculated in accordance with the statutory norms is also called in the law profit II. Every year that has elapsed after the contribution reduces the tax by one-seventh.

Converting individual companies into holding company!

1st legal basis for the blocking period for transfer to a holding company

The rules of conversion tax law affect all tax aspects of the conversion of companies. All civil law peculiarities, on the other hand, are embedded in the conversion law. However, the subject we are considering in this contribution is the blocking period, which should be considered if you want to avoid taxation after a capital company has been transferred to a holding company. Because the contribution is only completely tax-free if you adhere to a blocking period of 7 years after the transfer of the assets. It provides for § 22 UmwStG.

2.7 years blocking period for transfer to a holding company

For example, if a GmbH shareholder wants to set up a holding company by contributing his operating GmbH there, he will receive shares in the acquiring holding company in return. So instead of continuing to be a shareholder in operative GmbH, he is now at the holding company. For this, the holding is now the shareholder of operative GmbH. This requires the transfer of all shares in operative GmbH to the holding company.

By contrast, the transfer of all shares in one corporation to another corporation constitutes a merger. Should only a part of the shares of one corporation be transferred to another, this process is called separation. However, the merger ends the continuation of the independent identity of the transferred assets as a company, whereas this is the case, for example, with the transfer of an operative GmbH to a holding company. Although a ceding GmbH continues in the second case, in this form of conversion the transferred part of the company, which also had no prior autonomy, merges with the acquiring limited company into a single entity.

First of all, we consider the question of why a transfer to a holding company can lead to taxation. This is only the case if the transferred assets are recognised at a lower value at the holding company than that which, under realistic conditions, can be recovered from a sale at the time of the transfer. However, this also includes the recognition of the book value of the transferred assets. Usually, this is the preferred assessment because it leads to a tax-free conversion. Although costs incurred in connection with the contribution are acceptable, they are usually of negligible size.

Thus, the blocking period applies only to a valuation with the book value or with an intermediate value. As the term implies, the intermediate value lies between the book value, as the lowest limit, and the common value. Thus, the common value as the maximum value is representative of the market value to be assumed at the date of the transfer of the assets in the course of the conversion, i.e. the notional sales value of the shares. In fact, the law provides for the valuation of the shares transferred to the common value as the rule for such a conversion. On the other hand, the recognition with the book value or an intermediate value is only possible by application. Three other conditions must also be met.

3.1 Qualified Exchange of Shares

For this you have to meet a simple requirement. The capital company which takes over the transferred shares must hold a majority of the voting rights in the transferred capital company immediately after the transfer. However, since this must also be assessed in terms of the size of the shareholding, the one acquiring holding company must hold more than 50 % of the shares in the acquired company. Under the term qualified share exchange, this criterion received its own name in the law.

3.2. Amount of other consideration

In addition to the granting of new shares in exchange for the transferred participation by the acquiring corporation, the latter can also grant other equivalents. Such values, which also flow to the contributors, are called other considerations. This includes, for example, cash payments, valuables, such as real estate, or the granting of a claim.

In order to be able to make either the tax-free recognition with the book value or an intermediate value, the other consideration may only flow to the contributor up to a certain limit. Here again it is the common value, but this time it is the other considerations that play a role. These may either amount to a maximum of 25% of the book value of the contributions, or, alternatively, up to an amount of EUR 500,000, but not more than the book value.

3.3 Annual proof of continued participation as at 31 May

Furthermore, a special feature within the 7-year blocking period for transfer to a corporation is remarkable. Because the contributor has annually unsolicited until 31. Proof to the tax office that he still holds the shares received in exchange in the acquiring corporation. In addition, it is also necessary to demonstrate that the limited liability company to which the assets were transferred also retains these shares in its assets. However, if he fails to do so, the tax administration assumes on the basis of § 22(3) UmwStG that the shares received are deemed to have been sold. Consequently, the taxation of these shareholdings is the consequence of this.

4.7 years blocking period for submission: The melting effect

In most cases, a sale of the shares is avoided within the 7-year blocking period when transferring company shares to a corporation. Otherwise, the sale will lead to retroactive taxation of the shares transferred by the contributor. This retroactively taxable profit is known by the law under the term transfer profit II.

However, it depends on how long the acquiring corporation holds the shares in it since the conversion. For each year within the blocking period, which has elapsed for sale, the tax is one seventh lower. Therefore, in the case of retroactive taxation within the 7-year blocking period for transfer by share exchange, this property is called a merging effect. Thus, the blocking period is not a period that must necessarily be adhered to in full in order to avoid the tax. Rather, this only applies if you want to exclude the tax 100%.

5th example of taxation within 7 years blocking period for transfer to a holding company

In order to demonstrate the merging nature of retroactive taxation in the event of a sale of the transferred shares, we will give you an example.

5.1 7 years blocking period for transfer to a holding company: the starting position for taxation

For this we assume the following starting position: Mr Egon Eilig has In April 2020, Eilig Velos GmbH will be transferred to its holding company Eilig Future Investment GmbH. Since Mr. Eilig wishes a tax-neutral contribution, the transferred Eilig Velo GmbH shares are transferred to book value. With an approach to the common value, as the law usually requires, Mr. Eilig would have had to pay a tax of EUR 7,000,000.

5.2. Taxation before the expiry of the 7-year blocking period for transfer to a holding company

Although his tax consultant advised him to keep the transferred shares in his holding company within the 7 years lock-up period, after a short time a solvent interested party offers him a very lucrative offer, which he intends to accept. For example, he plans to sell the stake in Eilig Velos GmbH as of 1. April 2023 through his Eilig Future Investment Holding. Subsequently, taxation takes place as it would have taken place in the case of the transfer at common value on the reference date of the conversion. However, the limitation applies here that the portion that has been merged in the meantime remains tax-free. Since exactly 3 years have passed between the transfer and the sale, the tax that Mr. Eilig has to pay on the conversion is still EUR 4.000.000.