Avoiding Operational Splitting: Prerequisite & Avoidance Strategies

A division of operations can cause considerable tax disadvantages and risks. We will show you how to avoid the division of operations by circumventing the prerequisites – in particular the personal and factual connections – in terms of design. We also show you how an existing business split can be dissolved or legally secured.

In the video we show you various strategies to avoid a division of operations in advance, as well as in retrospect or to consciously maintain it.

1st introduction

The division of operations was created by case law of the German courts and the financial administration[1] and is one of the most common tax structures in the field of rental in Germany. [2] The division of operations can be distinguished according to the type of establishment or the legal entities involved. It is possible to create both a wanted and an unintended or unwitting division of operations and to end it again. [3] An operating split is generally simple. There is a transfer of use of the business or private assets, e.g. a property by the owner to the tenant. This simple case develops its complexity of the division of operations only when further prerequisites, on the one hand the factual and on the other hand the personnel connection, are fulfilled.

In a planned business split, this company structure is chosen to realize many positive factors at the same time. The chosen structure combines the tax advantages of a partnership with that of a corporation[4] and forms an alternative to the legal forms GmbH & Co. KG or GmbH. [] 5]

Although the division of operations is very versatile and individually designable, it is often only an unwanted phenomenon, although it contains potential for many companies to combine business and tax framework conditions of a company through good advice and the right application.

The following elaboration will describe the division of operations with its forms, prerequisites and – based on the case law of the Bundesfinanzhof – practical questions. Subsequently, the legal consequences, such as the taxation of the division of operations, are presented and the resulting income tax opportunities and risks are shown. Subsequently, design possibilities of the operating split are presented to avoid favorable ongoing taxation and to maintain the operating split or the hidden reserves. In the final conclusion, the division of operations is assessed on the basis of opportunities, risks and design possibilities from different perspectives.

The concept of business division is not defined by tax law and civil law. There are many synonyms such as disassembly, division or dual enterprise or dual company. [6] As a legal form, the division of operations is not recognised under civil law, since it is only an interconnection of two independent companies. [7] The division of operations is merely standardized by case law and cannot be found in the legal text in this way. Only in the administrative regulation 15.7 (4) EStH from 2010 published by the Federal Government (Finanzverwaltung) did the legislature further explain the division of operations – also in the direction of the legal text. [] 8]

The prevailing opinion of the BFH and the literature proves that a division of operations exists when a holding company transfers an essential operating basis to an operating company for use and that both in the holding company and in the operating company the same person or group of persons can exercise a dominant influence and thus a common will to act in both companies. This refers to the factual and human connections which must be cumulatively present for the legal consequence of the division of operations. It should be noted that despite the close relationship between owner and operating company no economic unit is formed. [9] An operating split between several companies is also possible if the conditions between each owner and operating company are met. [10] The holding company can act in any legal form during which the operating company is obliged by its legal form to generate commercial income. [] 11]

Background 2.2.

The division was first documented in 1924. A taxpayer tried to reduce the high income tax burden of 60% by means of a tax shift to corporate tax i.H.v. 20%. The Reichsfinanzhof (RFH) still came to the conclusion at that time that this redistribution of rental income would have to be recognized, but this is not desirable for the Treasury. According to RFH, there would be no abuse of a tax arrangement. [12] In the years to come, RFH continued to take the view that the lease of an essential operating base did not count as commercial income. [13] Over the years, however, the RFH continued to distance itself from its original jurisdiction until it finally revised it in 1938. From then on, he took the view that the factual and human connections would result in the fictitious creation of a tax company which would have to be taxed jointly. [14] It was only with the resolution of the “Grand Senate” in 1971 that the opinion on the division of operations was fixed. For the first time, the jurisprudence spoke of two independent companies, which are linked by the factual and personnel links, but have to be assessed separately for tax purposes. [15] The questionability of the commercial activity of the owner company was also examined by the Federal Constitutional Court in 1985 with the decision not to deviate from the opinion of the BFH. [] 16]

2.3 Forms

The forms of division of operations can be distinguished by three characteristics: On the one hand, the origin of the division of operations. A distinction is made between genuine and spurious division of operations. However, these two forms do not have different consequences and effects.[17] Furthermore, the division of operations can also be distinguished on the basis of the participating legal entities, so that there can be a joint entrepreneurial or capitalist division of operations. [18] Lastly, the division of operations can also be distinguished by economic characteristics[19], such as setting up a production and distribution company and linking them by means of contracts. [] 20]

2.3.1. True division of operations

A true division of operations is the division of a previously unified company into two or more companies. As a rule, one company takes over the active business part (operating company) and the other company holds the fixed assets (owning company). The required assets are then left to the operating company for use by rental or lease contracts. [] 21]

2.3.2. Improper division of operations

The difference between an improper and a genuine division of operations lies in the fact that at the previous stage there was no single enterprise. Either a new company is founded into the already existing company, which is then connected by the factual and personnel connection, or two already existing companies develop the prerequisites for the division of operations only later. This is possible through a change in the company structure or a re-letting of an essential operating basis.[22] For example, a false division of operations also arises due to a lease of an essential operating basis by shareholders of a GmbH for a commercial purpose. As a result, the GmbH becomes a holding GmbH and the shareholders would operate a partnership as an operating company. [] 23]

2.3.3. Classical division of operations

The classical division of operations describes the division of a sole proprietorship or partnership into an ownership partnership or partnership. sole proprietorship and an operating corporation. This is the most common form of business splitting, because of the advantages of individual enterprises or companies. partnership with that of a corporation. The classical form of division of operations can be established both as a genuine and as a false division of operations, since only the connection of a sole proprietorship or a partnership with a limited company is fundamental for this division. [] 24]

2.3.4. Reverse division of operations

The reverse case of the classical division of operations, i.e. a corporation as a holding company and a partnership in the function of an operating company, is referred to as the reverse division of operations. For liability reasons, this is at first glance an unusual design. However, the auditing and publicity obligations of the corporation can be reduced, since the holding company is generally to be regarded as a small corporation according to § 267 (1) HGB or even as a micro-corporation according to § 267a HGB. If these limited liability companies were to be covered by the simplification arrangements, this arrangement could be a working solution in individual cases. [] 25]

2.3.5. Co-entrepreneurial and capitalist division of operations

The division of the holding and operating company takes place within the framework of the joint entrepreneurial division of operations between two partnerships. The limitation of liability intended within the framework of the division of the company is therefore only achieved by setting up a GmbH & Co. KG as operating company, since the shareholders of the partnerships would be personally liable in full. [26] In the case of the two linked partnerships, however, it is questionable how the provision of § 15 (1) S. 1 No. 2 (2) HS EStG is to be viewed in relation to the case law of the division of operations. In both circumstances, income from the ‘transfer of assets’ is listed, so that the assets are either held in the special assets of the operating partnership or remain in the fixed assets of the holding company. According to the opinion of the BFH from 1996, which continues to this day, the facts are to be interpreted in such a way that, with the present conditions of the division of operations, the remainder of the assets in the fixed assets of the holding company takes precedence over the provisions of § 15 (1) S. 1 No. 2 2 HS EStG has.[27]

The form of capitalist division of operations is determined by the corporations acting as owners and operating enterprises. The holding company’s shares are held in the assets of the holding company. However, the division of operations can only occur in a parent subsidiary. The occurrence of the division of operations in sister companies is excluded. [] 28]

3. Conditions and legal consequences

3.1. Requirements

In order to fulfil the eventuality of the business split, both conditions of material and personnel interconnection must be cumulative.

3.1.1. Material linkage

3.1.1.1. Main operating principle

The basic fact of material interconnection is so legitimate that the holding company of the operating company must leave at least one essential operating basis[29] for use. The property does not have to be owned by the holding company, but can also be rented or leased by the company. [30] The rental of the asset from third parties and the transfer of rights of use to the operating company also fulfils the objective interdependence. [31]

The transfer of use is based either on rental or lease contracts that have a legal effect, or on usufruct or hereditary cultivation law (real law). Furthermore, the amount of the remuneration in return does not constitute a condition of material interconnection. Thus, even a free transfer is sufficient, but the owning company must show a profit intention. [32] According to the case law of the BFH, the profit-making intention with a possible increase in the value of the shares in the operating company on the part of the holding company, despite a free transfer of use, is already fulfilled.[33] A free transfer of use between sister companies, on the other hand, does not lead to any material linkage due to the lack of profit intention. [34]

Decisive is the necessary need[35] for the economic good provided by the operating company, which only then identifies the economic good as an essential operating basis for the operating company. [36] In this case, the transferred asset does not have to form the most important essential operating basis for the operating company, a proven necessity of the asset is sufficient in the opinion of the BFH.[37] The classic case is that immovable property is transferred for use. However, movable assets can also constitute an essential operating basis if, for example, a machine is required for the purpose of the operating company. [] 38]

It is not decisive for the question of an essential operating basis whether the economic asset has high or no hidden reserves. Furthermore, an alternative way of procuring the asset on the market is not relevant if the holding company leaves the asset to the operating company for use.[40] The granting of a loan to the operating company also does not justify the fulfilment of the material link. [] 41

The perspective for assessing an essential operating basis is very crucial. An overall view plays the decisive role, since, for example, a plot of land is not divided into its components, but must be regarded as an entire plot of land and thus must be examined in the light of an essential operating basis. [] 42]

The basic fact of factual interconnection appears to be simply defined, but as a rule an individual case analysis and decision in practice must clarify the question of factual interconnection, as the following practical cases show.

3.1.1.2. Practical material links

3.1.1.2.1. Land undeveloped

In the case of an undeveloped plot of land, BFH considers both the right to a possible development on the part of the operating company and the functional connection with the purpose of the operating company to be the decisive criteria for the existence of a material link.[43] From this it can be concluded that expendability on the part of the operating company contradicts the material link. [] 44

3.1.1.2.2. Land under construction

According to BFH’s case law, production land is not an essential operating basis only in certain individual cases. In the majority of cases, the connection of a factory with the operating company is clear, since the purpose of the operating company cannot be fulfilled without production with the help of the factory.[45] Similar uses such as storage or repair halls also count as an essential operating basis. [] 46]

Office and administrative buildings are equivalent to an essential operating base if the building is the centre of the operations of the operating company.[47] The exception to this principle is, for example, a school building which is not used for commercial purposes[48] or the residence of the built-up property in a real estate park, which then generates a secondary value. [49] In any event, the transfer of a built-up property constitutes an essential operating basis if the operating company could not carry out its activities without it. [] 50

3.1.1.2.3. mixed-use property

A built-up plot of land, which is used both as a production site and as an administrative site by the operating company, is to be regarded as an essential operating basis, except in individual cases. [] 51]

3.1.1.2.4. Building rights

By enacting an inheritance building right contract and thus granting the operating company the right to provide the property with constructions which constitute an essential operating basis, the inheritance building right is equivalent to a transfer of an already built-up property which fulfils the conditions of material interdependence. [] 52]

3.1.1.2.5. Client strain

In 2010, the Munich Finance Court ruled that the transfer of a client base from a self-employed person to a connected GmbH entailed a division of operations, on the grounds that this constituted an essential operating basis for the GmbH. [53] Also for a client base, specifically a tax consultant, the BFH has followed the opinion of the Finance Court Munich. [] 54]

3.1.1.2.6. Intangible assets

Intangible assets, such as patents, are also to be regarded as an essential operating basis if they can be used by the operating company. [55] For a decision whether a patent, a license or a trademark, etc., represents an essential operating basis, is measured according to the case law of the BFH on the basis of the turnover. If the transferred asset generates a share of the turnover of more than 50%, an essential operating basis for the operating company is assumed. [] 56

3.1.1.2.7. Study

In cases where a shareholder carries out the management of a GmbH from his home office, the requirement of material interdependence is in the opinion of the BFH from 1992, if the proportion of the used area of the office is above a value of 10% compared to the other used area of the GmbH. On the other hand, the exception is a ratio of less than 10%, so that in this case there is no factual connection. [58] The already mentioned case that the owner company is not the owner of the transferred asset, can also be concluded for the study that a rented apartment / house, with a separate study for the management, meets the requirements of material interdependence. [] 59]

3.1.2. Personal integration

Personnel integration is the second necessary criterion for the existence of a division of operations. This means that in both companies, i.e. both the owner and the operating company, the same person or group of people can enforce their will. Jurisdiction and literature speak here of the unified will to act.[60] According to the literature, the decisive criterion for the enforcement of the willingness to act is to determine the possibility of the amount of the rent for the transferred assets. [61] For the assessment of personnel interdependence, in addition to the statutory provisions, deviating provisions in the articles of association but also written additional agreements of the parties involved must be included in order to prove or refute a uniform will to act. [] 62]

3.1.2.1. Uniform will to act

The basic case of a uniform will to act is a one-man division of operations, i.e. both the owner and the operating company are 100% controlled by one person. An equal interest on the part of the controlling partner for his holding company and operating company must always be assumed (see Annex – variant 1).

The second non-contestable case of personnel interconnection is a so-called unit operating split. Here, the shares of the operating company are in the assets of the holding company, as a result of which a majority shareholder[63] can enforce his uniform will to act both in the holding company and in the shares of the operating company in the assets (see Appendix - Option 2).

3.1.2.2. Majority

In constellations in which several persons are involved in ownership and operating companies, the voting relationship is considered as a decisive characteristic for the fulfilment of the human connection. [65] Furthermore, both the regulation of the majority form in the case of shareholder resolutions and the question of the extent to which a managing director is allowed to direct the business without the intervention of the shareholders must be observed. [] 66

If a simple majority is required, a control of 51% on the part of both the owner and the operating company is sufficient in principle to meet the requirements of human integration. How many minority shareholders there are in both companies is irrelevant insofar as the controlling shareholder can overrule any decisions of the minority shareholders due to his 51% voting rights (see Annex – Variant 3.1; Annex – Variant 3.2).[67]

3.1.2.3. Person group theory

A group of people who are involved in both the owner and operating company and whose voting rights together amount to more than 51% is the personal interconnectedness based on the group of people theory. It states that an association of persons involved in both companies represents common interests. The relationships of the individual group members in both companies can either be identical (participation identity)[68] (see Appendix - Variant 4), or be structured as a group with different participation rates in the ownership and operating company, as long as control as a group is still fulfilled (see Appendix - Variant 5).[69] According to the BFH judgment of 15.05.1975, the personal connection is also fulfilled if only two persons are involved in both companies and this participation is 50% in one or both companies (see Annex – variant 6.1); Appendix – Variant 6.2.[70] In the opinion of the BFH, there is also a personal connection if, in the case of a group of two participants, one controlling partner is each of the owners and the other of the operating company (see Appendix – Option 7).[71] The above-mentioned examples are to be applied to the personnel interdependence both through their shareholding and through their distribution of voting rights according to these quotas.[72] If a group of persons does not fulfil the required control in one of the two companies, this control can be achieved by means of a power of voting upon acceptance of the received voting rights and a division of operations can be justified.

If, however, the prerequisites already exist and it is planned to prevent the division of operations by the absence of the personal connection due to a power of attorney to vote to a third party, this is in the opinion of the BFH not permitted, since the shareholder is still in possession of the voting rights, this cannot exercise only for the duration of the power of attorney to vote. [] 73

The assumption that there is an equal interest on the part of several persons in connection with the same company shares may, however, be demonstrably refuted,[74] so that the group of persons theory does not apply. For example, a legal dispute between the persons involved can be considered as proof of a conflicting interest. [75] However, an exact individual case should also be considered here, since the submitted proof of a conflicting interest is often rejected in practice by the courts and thus continues to be assumed to be a personal link. [] 76

A large difference in the participation ratios (see Appendix – Variant 8) also cancels out the group theory of people. According to the BFH, in this case the difference between the shareholdings of the individual shareholders in relation to the ownership and operating companies is too large to speak of an equal interest.[77] With a participation ratio of 80% to 20%, as in variant 8, the BFH came to the conclusion in 2001, however, that a personal connection still existed.[78] Due to the unclearly defined limits, in which there is a uniform willingness to act, the literature advises to choose other ways in a avoidance strategy against a company split, since this way does not seem to be 100% secured before a decision by a court. [] 79

3.1.2.4. Specific features of majority requirements

The required 51% of the voting rights apply only to a simple majority vote. In the social contract, however, a different regulation, such as a qualified majority or unanimity, is permitted, which excludes control with 51%. In doing so, the agreement governed by the articles of association is to be set higher than the participation rate. If there is a majority shareholder who holds a 60% stake in the company, but the company contract requires a qualified majority of 66.33% for a company resolution, he cannot enforce his will in this company and the criterion of personal interdependence would not be fulfilled in this case. [80] Another case was last decided by the BFH in 2000. In this case, a majority shareholder was involved in an ownership GbR with more than 51%, but a shareholder resolution had to be made with a majority of 75%. On this basis, a dominant will of the majority shareholder is excluded. [] 81]

The principles of qualified majority are applicable to unanimity requirements. The only difference with the qualified majority is that a shareholder decision must be unanimous. However, it should be noted that an identical interest, for example, of a minority shareholder with another company compared to a controlling group, does not directly enter into a personal connection and thus a division of operations. [82] Because this minority shareholder acted only in his own interest and since he is not a shareholder in the second company, in the opinion of the BFH from 1991, the group of persons, despite the same will, cannot achieve their control on the basis of the unanimity requirements. [83] In the case of a provision in the articles of association that unanimity only has to exist for transactions that go beyond the business of daily life, the BFH[84] considers that there is also a personal connection if there is only a simple or qualified majority. The decisive factor for the existence of the personal connection is that the day-to-day transactions can be carried out by a controlling partner/group of persons. This includes, among other things, control by a shareholder-managing director of a Besitz-GbR, who may conclude everyday legal transactions without unanimity of the remaining shareholders. [] 85

3.1.2.5. Direct control

Indirect control exists if a majority interest in the ownership or operating company involves another company. According to BFH’s case law, an indirect holding in a holding company and in an operating company must be strictly separated. According to the literature, an indirect shareholding with the help of a limited company should be treated equally both in the case of the owner and the operating company. The decision that in the case of the operating company in question an indirect participation was sufficient to establish a personal connection was decided by BFH in several judgments to the contrary for a holding company. [86] In the case of an intermediate partnership, the differentiation need not take place. [] 87)

A BFH judgment from 1992 came to the conclusion that indirect control of a shareholder via a limited liability company in a GbR is not sufficient for the personal connection, since the limited liability company cannot enforce its will due to the unanimity requirement. [88] This judgment is also recognized by the literature, but it offers a need for discussion, as it does not fit other jurisdictions. [] 89

3.1.2.6. Factual control

In individual cases, only one out of two majority holdings in the ownership or operating company is sufficient for human integration. It may be the case that, although there is a minority interest in one of the two companies, the majority shareholder cannot exercise his own will, since the minority shareholder has the opportunity to acquire a majority interest at any time or to lease an essential operating basis, despite the minority rights in the company, a higher position in the company. If these prerequisites are met, there is a personal connection due to de facto control. [91] In the opinion of the BFH, the formation of a group of people between actual and actual controlling shareholders is excluded. [] 92]

3.1.2.7. Family shares

The husband’s participation in the ownership company and the wife’s participation in the operating company brought about a change in jurisdiction. While the shares of spouses were aggregated until 1985, the Federal Constitutional Court made it clear in its decision that this action was unconstitutional, since spouses and single people were not treated equally under Article 3 of the Constitutional Law. [93] However, the marriage entered into should not be completely neglected if there are further indications that the couple pursue a common economic purpose beyond the marriage.[94] However, the principle should be assumed that each person acts in his own interest, even if one spouse is involved in the entire company construct. [95] This is without prejudice to the principle that spouses are not liable for the other spouse without agreement. [] 96

The abovementioned case law also applies to children of age in combination with one or both parents. Whereas in the case of minor children, the shares should be allocated to the parents, as they are also responsible for the child's assets as custodian and can thus increase the benefit of the children's shares together with their own. [] 97

3.2 Legal consequences

3.2.1 Start and end of legal consequences

A planned as well as unplanned division of operations begins at the time when both conditions are met. The classic case is that the factual connection with the transfer of use of the essential operating basis or with the fulfillment of the personnel connection by new distribution of voting rights or new shareholding constellations justifies the division of operations. At this time, the tax consequences also begin. [] 98]

The division ends, both intentionally and unintentionally,[99] with the same reverse criteria. From the time when the material or personal connection no longer exists independently of each other, the division of operations and its tax consequences end.[100] The material connection ends with the termination or expiry of the use of the last essential operating basis[101] or with the termination of the commercial activity by the operating company.[102] In addition, the material connection ends with the loss of the status of the transferred asset as essential operating basis for the operating company.[103] The interdependence of personnel cannot be further fulfilled by various changes. E.g. by sale or merger of the shares and corresponding change in the shares or voting rights[104], donation[105], inheritance[106], coming of age of majority of a child with participating parents or insolvency[107]. According to the BFH judgment of 21.01.2015, there is also to be a termination of the division of operations if a sole proprietorship with the shares in the operating company in the operating assets is transferred under an anticipated succession, but with reservation of usufruct.[108] This opinion of the BFH is not supported by the literature, because the domination of the owner and operating company would continue to exist under reservation despite new owners and usuficiaries.[109]

The audit period for a given division of operations is to be carried out by the tax office every year, regardless of the previous year. It follows that a continuous change between existence and non-existence and the associated legal consequences is also permissible. A retroactive change is legally compliant until the expiry of the limitation periods. [110]

3.2.2. Ownership as a business

The paid rental / transfer of assets is taxed within the framework of private income according to § 21 EStG (rental and lease). The assets (e.g. a property) are in private assets, while a transfer of use of operating assets on the basis of § 21 (3) EStG always constitute income from commercial operations according to § 15 (1) no. 2 EStG. [111]

With the present factual and personnel connection and the associated division of operations, in the classical case (see chapter 2.3.3) a new business activity is founded on the part of the owner company.[112] Thus, the previously private rental by a natural person/partnership becomes a commercially qualified rental.[113] In addition, the previous private property is converted into business assets at the same time in unison. [114]

Furthermore, it should be noted that the shareholders of the holding company who are not involved in the operating company also earn commercial income on the basis of § 15 (3) EStG. [115] Another special feature on the part of the owning company is an additional rental of assets to third parties. According to the theory of infection[116], in partnerships these rental incomes are also to be assigned to commercial income according to § 15 (3) No. 1 EStG.[117] This approach applies not only to rental income but also to all income of the holding company. [118]

It should also be noted that the income of an enterprise which has previously earned either income from self-employment or income from agriculture and forestry is to be attributed to commercial income with the fulfilment of the criteria of the division of operations. [119]

3.2.3. Commercial activity of the operating company

The operating company is a commercial enterprise either according to § 15 (2) EStG, by virtue of coloring according to § 15 (3) no. 1 EStG, by virtue of commercial design according to § 15 (3) no. 2 EStG or by virtue of legal form according to § 8 (2) KStG. Therefore, an operating company that generates income from § 13 or 18 EStG has problems. According to the case law of the BFH[120], a commercial activity of the operating company is obligatory, which then also results in a commercial activity of the holding company. According to the literature, this opinion cannot be followed. On the contrary, the commercial activity of the owning company is of its own accord, since an increased risk is incurred by the rental, which would not arise in the case of an external rental. [121]

3.2.4. Accounting for assets

Due to the separation of ownership and operating companies, these are also to be assessed separately in the corresponding recording and accounting obligations. In general, each company must determine the profit for each marketing year. A commercial accounting obligation according to § 238 HGB and an associated tax accounting obligation according to § 140 AO exists if a commercial business operation or a commercial company exists. In the absence of the above-mentioned criteria, a tax-law accounting obligation is achieved when the size classes of § 141 AO are exceeded. If the size classes are undershot, a profit determination according to § 4 (3) EStG must be carried out. [122]

Due to the strict separation of the two independent companies, however, the assets can only be assigned to one company. These are to be applied to the respective company according to the universal principles. BFH also refused to allocate the main operating base as economic property in 1997. The attribution of the beneficial ownership was to be made despite the use by the operating company in the holding company.[123]

The necessary assets of the holding company include, on the one hand, the essential operating basis of the material interdependence and, in the classical division of operations, the shares in the operating company. According to the case law of the BFH, a loan granted to the shareholders of the operating company is also to be regarded as necessary operating assets of the holding company.[124] Both shares in a corporation which has a dominant influence in the working capital company[125] and shares in a corporation which maintains frequent business relations with the operating company[126] count as necessary operating assets. In addition to the leased essential operating base, all other assets, with connection to the essential operating base, also belong to the necessary operating assets of the owner company.[127] Even arbitrary operating assets are not excluded in the case of the holding company, since the framework of the holding company does not only relate to the operating company, but assets can also be leased by the holding company to third parties, which then qualifies them as arbitrary operating assets. [128]

A possible transfer of assets from the holding company to the operating company in all cases constitutes a sale operation with possible discovery of the hidden reserves – provided that a consideration is paid in return. This operation is also referred to as an open deposit, in which the asset is transferred at the common value according to § 6 (6) EStG.[129] Furthermore, there is an acquisition process on the part of the operating company.[130] In the case of a corresponding concealed contribution, the participation in the operating company is increased by the partial value of the transferred asset according to § 6 (6) S. 2 EStG. [131]

If a claim arose between the holding company and the operating company and the holding company waives this claim, this leads to an increase in the operating company's participation in a possible working capital company to a contribution.[132] The expense on the part of the holding company and the income on the part of the operating company are to be recognised in profit or loss. [133]

A special feature of a working capital company is a tenant renewal claim of the holding company. This means that the operating company must finance the use and wear of a possible repair or even a replacement. For the contractual obligation entered into, an expense-related provision must be made on the part of the operating company. The amount of exposure shall be the relevant amount of the provision. In the case of a new acquisition of a used asset, the acquisition costs are to be offset against the set value in the provision and a value exceeding this value is to be included as an item of debt to the holding company.[134] On the part of the holding company, contrary to the provision at the operating company, an activation of the renewal contract in the same amount is to be carried out. [135]

In the context of the spin-off of a part of the company by the start-up of a second independent company, an accurate assessment of assets is required (see chapter 2.3.1). Due to the new corporate structure, the leasing of the main operating base and other assets, a goodwill (GPF) is often passed on from the holding company to the operating company. However, this approach is not an essential part of the genuine division of operations, since the GuF can remain with the operating company from the outset.[136] However, if the operating company leases all essential operating bases in the long term by the holding company, the case law assumes that the GuF is also left for use in this constellation.[137]

According to the case law of the BFH, this GuF must be defined in such a way that it describes the added value over the assets as well as the profit potential of a company.[138] It is also conceivable that, after the establishment of the real operating split, a new GuF is formed, which exists in addition to the existing GuF.[139] The aforementioned transfer of use, however, ties the BFH to the prerequisites that the operating company can continue on its own without the rental of the company value and the transferred use possibility is contractually determined for a longer period without prior termination. [140] In addition, the transfer of a GuF to the operating company is not permitted if the value is limited only to an asset which remains in the holding company at the time of creation. [141]

In addition, it is necessary to check whether a divestment transaction exists at the time of incorporation – when an asset is transferred to the operating company – and how an asset remains accounted for.

The accounting of an asset that remains in the holding company takes place at the book values (continuation of book values) and there is no profit-realizing situation on the part of the holding company. However, if an asset is transferred to the newly created operating company, the legal consequences of the consideration for the acquired asset are interpreted differently. In the case of consideration in return, a profit-realizing sale process arises from the ownership and a neutral purchase by the operating entity. Instead of a monetary consideration, a debt assumption[143] can also trigger the same legal consequence. The transfer of company rights for the transferred asset is also a sale, with the acquired shares in the operating company being accounted for with the common value of the transferred asset in accordance with § 6 (6) S. 1 EStG. A book value continuation on the part of the operating company according to § 6 (6) S. 3 EStG and no profit realization, on the other hand, is present in the case of a hidden contribution, if no consideration is received from the holding company. Only the acquisition costs of the participation in the operating company increase by the partial value of the asset.[144]

3.2.5. Current taxation

3.2.5.1 Income tax

The income of the holding company in the form of a sole proprietorship is subject to income tax according to § 15 (1) S. 1 No. 1 EStG, while a co-entrepreneurship (partnership) commercial income according to § 15 (1). S. 1 No. 2 EStG. Under the principle of subsidiarity pursuant to § 20 (8) EStG[145], the capital gains (distributions of profits) of the operating company are also added to the profit in the context of commercial income if the shares of the limited company are held in the operating assets. According to § 3 no. 40 d EStG, the partial income procedure applies with a tax-free part of the profit distribution of 40%. In addition, the deduction of the associated operating expenses according to § 3c (2) EStG is limited to 60%. Furthermore, for the holding company, the application of the recovery advantage according to § 34a EStG is permitted for rental income and profit distribution.[146]

In the event of a permanent impairment of the holdings in the operating company, the holding company may write off a partial value in accordance with § 6 (1) No. 2 EStG. However, such impairment is difficult to demonstrate. According to a BFH decision from 2003, only one reason for a total consideration of the income from the operating company should be made.[147]

The income of a shareholder who is employed as managing director for holdings or working capital company is in all cases attributable to income from non-self-employment according to § 19 EStG. A consideration of the entire company structure, which gives rise to a business split, is not applicable in this income determination. [148]

The income (profit distributions according to § 20 (1) no. 1 EStG[149]) of the shareholders with shares in private assets in the working capital company, are taxed with the withholding tax of 25% according to § 32d (1) EStG. According to § 32d (6) EStG, the taxpayer has the right to choose to include income in the income tax assessment (favorable examination). Furthermore, the taxpayer can cancel the payment effect on request pursuant to § 32d (2) No. 3 EStG. The income is then taxed under the income tax assessment with the partial income procedure, if this holds at least 25% or 1% of the shares and is additionally employed for the corporation. [150]

3.2.5.2 Business tax

The profit generated pursuant to § 7 GewStG plus additional charges and reductions (§ 8 in the V.V.m. § 9 GewStG) constitutes the business income, which constitutes the basis for the assessment of business tax.[151] Due to the fact that the integrated companies are nevertheless to be regarded as independent companies, a corresponding business tax liability applies independently of each other to the owner and operating company. [152]

From the point of view of the operating company, which normally pays rent or rent interest as well as fees for debts to the holding company and takes this into account as an expense for income tax purposes, an addition of the mentioned items must be carried out. A quarter of the sum, which exceeds an amount of € 100,000, is added to the preliminary result. The interest paid in full (§ 8 No. 1a GewStG), rental or rental interest paid for movable property at 20% (§ 8 No. 1d GewStG), rental or rental interest paid for immovable property at 50% (§ 8 No. 1e GewStG) and rental or rental interest paid for rights and concessions at 25% (§ 8 No. 1d GewStG) are taken into account as additional charge. [153]

From the point of view of the owning company, which normally only bears the expenses for the fixed assets and counts the income from the operating company, it is normally not necessary to make additional additions due to the operating split received. According to § 9 No. 1 GewStG, a reduction is to be made for land in the company assets.[154] However, the holding company, in the form of a partnership, may not make the additional reduction according to § 9 No. 1 S. 2 GewStG. According to the case law of the BFH, due to the close connection with the operating company, the activity as asset management is exceeded and the reduction should not be made. [155]

The trade tax reduction for dividends pursuant to § 9 no. 2a GewStG is to be applied accordingly for the division of operations, provided that the condition is met that the participation in the corporation was 15% at the beginning of the collection period. [156]

If the owned or operating company is managed as a sole proprietorship or partnership, it can deduct a trade tax allowance of 24,500 € according to § 11 GewStG from the business income.[158] After rounding off the business income to full € 100 and deduction of the allowance, the tax amount is determined on the basis of the multiplication of the tax figure 3.5% according to § 11 (2) GewStG with the business income and finally the tax liability is calculated with the lifting rate of the corresponding municipality (head office of the company). [159]

As a shareholder of a partnership or as a sole proprietor who is liable to trade tax, according to § 35 EStG, trade tax is credited to income tax as a tax reduction in the context of the determination of the income tax to be fixed i.H.v. 3.8 times the trade tax measured amount, but limited to the trade tax actually paid.[160] The credit volume is to be divided among the shareholders in accordance with the general distribution of profits, e.g. in the case of a participation of several persons in the holding company within the framework of the classical division of operations. [161]

3.2.5.3. Corporate income tax

Due to the chosen legal form of a participating company as a corporation according to § 1 KStG, taxation by corporation tax takes place in the case of partnerships or natural persons.[162] The profit is determined according to § 8 KStG from the result of the trade balance with additions and reductions from the Income and Corporate Tax Act[163] and with a corporate income tax of 15% plus. Solidarity surcharge of 5.5% charged.[164]

3.2.6. End of division: legal consequences

Due to the abolition of the division of operations, as described in chapter 3.2.1.1, and the concomitant termination of the commercial activity on the part of the holding company, the tax consequences of an operating task acc. § 16 (3) EStG. [165] This is equivalent to a sale of business. From this point onwards, the activity of the former holding company is again qualified as asset management[166]. The entire operating assets of the company are transferred by a withdrawal into the private assets of the shareholders and the hidden reserves are revealed. [167]

The capital gain is determined in accordance with § 16 (2) EStG,[168] by allocating the partial value of the assets on withdrawal or the selling price on sale less the book values and the costs of disposal as taxable commercial income according to § 16 EStG to the shareholders of the holding company. [169]

These incomes are taxed as part of the income tax assessment. However, if appropriate conditions are met, favourable provisions such as § 3 no. 40 b) EStG, § 16 (4) EStG or § 34 (3) EStG can be used:[170]

3.2.6.1 Partial income proceedings pursuant to § 3 No. 40 b EStG

This type of preferential taxation, which exempts 40% of the profit determined, applies to the part of the withdrawal/sale of the shares in the operating company that were previously in the operating assets in relation to the end of the business split. According to § 3 no. 40 b EStG, this tax exemption is subject to the condition that the sale price within the meaning of § 16 (2) EStG includes income from the sale of shares in a corporation that earned income according to § 20 (1) EStG at the recipient. [171] In return for the tax exemption, the deductible operating expenses are also to be reduced by 40% in the profit determination according to § 3c (2) EStG, so that 60% of operating expenses are deductible.[172] In the case of the classical division of operations, in which the operating company's shares are held in the holding company's assets, this tax deduction applies.[173]

3.2.6.2. allowance according to § 16 (4) EStG

The deduction of a one-time allowance of € 45,000 according to § 16 (4) EStG, which is reduced by the exceeding sale price of € 136,000, is to be granted to a taxpayer if he at the time of sale either the 55. has completed his or her life or is considered permanently incapacitated under social security law.[174]

3.2.6.3. Tariff advantage according to § 34 (3) EStG

Where the taxable income of a taxable person includes extraordinary income pursuant to paragraph 2, a preferential tariff arrangement may be applied upon request, in which the extraordinary income is taxed at 56% of the average tax rate, if the taxable person has either the 55. has reached the age of one year or is considered incapable of working under social security law.[175] According to § 34 (2) EStG, the capital gains under § 16 EStG are among the extraordinary income, with the special feature that included already partially tax-exempt profits through the partial income procedure according to § 3 no. 40 b] EStG is not included. [176]

3.2.6.4. Possibility of combination

In the case of a classical operating split, which was terminated, for example, by a sale of the shares in the operating company, a capital gain I and a capital gain II are to be determined on the part of the shareholder. The capital gain I is determined from the sale of the operating company’s shares and taxed at 60% by the partial income procedure. The allowance cannot be applied to the capital gain I, but only to the capital gain II, which relates to the termination of the holding company and the profit achieved, since the shares in the operating company were in the operating assets of the holding company and are therefore attributable to income under § 16 EStG and not § 17 EStG. In this context, the preferential tariff treatment can additionally be applied to the capital gain I of § 16 EStG, since, unlike the capital gain II, there is no tax exemption under § 3 No. 40 b. EStG is available.[177] According to the BFH jurisprudence from 2015, it is irrelevant for the tax consequences whether the ownership or operating company is first sold or abandoned.[178] There is no trade taxation of the end of the business split.[179]

Both the opportunities and the risks of the division of operations are always examined in the following with regard to one of the following aspects and no consequences for other aspects are presented. The question of which advantages a business operator would like to achieve with the division of operations is to be decided on a case-by-case basis, so that the advantages and disadvantages are only compared to uniform legal forms or legal disadvantages. types of income.

4.1 Opportunities

4.1.1. Business opportunities

The liability risk of company and shareholders is an important criterion for the choice of the legal form of a company. Every company is exposed to entrepreneurial risk, but the aim is to protect both private and operational assets from liability. In the basic case of a commercially active sole proprietor or partnership, the entrepreneur has a very high liability risk, since he is liable personally, directly and, if necessary, in solidarity. In contrast, in the case of a GmbH, the consequences of a liability are designed in such a way that the GmbH is only liable with its own assets.[180] For both cases, the operating splitting model can result in a significant minimization of the adhesive mass. In this case, a sole proprietorship or partnership is formed as a holding company with the assets of the company and a limited liability company is formed as an operating company. In the event of a possible liability situation in the operating company, the former assets of the commercial enterprise are secured and are not part of the liability mass, since the assets have been assigned to the holding company.[181]

A possible generational change can be facilitated by a justification of the division of operations, as long as the prerequisites of the factual and personnel links continue to exist. Often, the protection of the former owner at an advanced age is problematic, because with the transfer of his established company, he can no longer earn income. However, this income can be earned from the holding company as passive income, while the successors manage the operating company and thus the operating business. [182]

Due to the publicity obligations, additional costs for consulting and final services arise from a certain size class of a company, which can be reduced or prevented by achieving a business split. The separation of assets and commercial business activities, and thus the reduction of the balance sheet total, can reduce the previously imposed publicity obligation according to § 1 (1) PublG in accordance with § 265 HGB.

4.1.2. Income tax opportunities

4.1.2.1. Comparison with the Unitary Capital Company

As part of the classical division of operations, a partnership / individual company as a holding company can deduct a trade tax allowance of € 24,500 according to § 11 (1) GewStG. By comparison, a single corporation cannot benefit from this tax relief. The trade tax allowance is deducted in the context of the determination of the business income and directly reduces the business tax burden of the company.[184] Despite the interconnection of two companies through the material and personnel interconnection, two independent businesses are present in a joint entrepreneurial division, each of which can deduct the trade tax allowance, so that this is granted twice in total to the overall construction of the company and an even greater advantage compared to a single company. [185]

In the context of the resulting commercial operation on the part of the holding company and the fulfilment of the requirements of § 35 EStG as a commercial enterprise, the shareholders are entitled to the crediting of trade tax. In contrast, in the case of a unified corporation, which is not one of the beneficiary companies within the meaning of § 35 EStG, the missing accounting potential remains in the GmbH, so that the trade tax represents a pure burden for the corporation. Through a deliberate distribution of profits among the shareholders, a lift of 380% of the burdensome trade tax can be credited in the personal ownership company, so that the credit volume is not lost in the GmbH.[187]

Due to the limitation of liability of a corporation as well as the status as an independent legal object, a loss assumption is only possible within the framework of the GmbH if profits are made in the following years. Despite the shares of the shareholders, an allocation of the loss achieved is not permissible.[188] Unlike in the case of a partnership in which the shareholders have unlimited liability, i.e. both with the operating and with their private assets, an allocation of losses to the shareholders with general liability is permissible (in the case of a limited partnership within the framework of § 15a EStG[189]). The shareholding loss of the shareholders is offset against other income and thus reduces the taxable income and accordingly the income tax burden of the taxpayer.[190] By establishing a classical division of operations, a loss is to be transferred to the shareholders within the framework of the partnership, whereas a possible loss on the part of the working capital company is not attributable. [191] By controlling a shareholder or a group of persons, the profits or Losses are managed and distributed. The amount of the royalty is a direct influence on the profit of the owning company, since it is usually the only source of income of the company. All costs such as depreciation, financing expenses and costs other than expenditure shall be deducted from the revenue. A deliberate loss on the part of the owning company can be generated so that the shareholders can use it to minimize their income tax burden. As a result, this is a real advantage over a unitary corporation.[192]

The formation of a goodwill can be due to the establishment of a business split if a previous sole proprietorship continues its commercial activity in the operating company and also indirectly uses a goodwill (GuF) hidden with the use of the assets of the holding company. For this GuF, however, a corresponding fee must also be paid to the holding company. [193] Generally, company value is the value that the company identifies as added value, such as a good reputation, to its actual assets. Goodwill acquired for remuneration is to be accounted for in accordance with § 246 (2) S. 4 HGB i.V.m. § 5 (2) EStG and written off for 15 years according to § 7 (1) S. 3 EStG, so that the income is reduced by the transfer of the goodwill to the operating company and the holding company receives additional money in addition to the income for the transfer of use of the assets, if this is desired by the shareholders. [195]

The distributions of a Einheits-GmbH are generally subject to the withholding tax of 25% at the level of the shareholders. In the classical division of operations, in which the shares of the GmbH are held in the operating assets of the sole proprietorship, one benefits from the advantage of the partial income procedure. In direct comparison, the distribution with the partial income procedure is more favorable if the income tax burden of the shareholder is less than 41.67%. The partial income procedure is always more favorable if costs for the shares have arisen and these are deductible within the framework of § 3c (2) to 60%. In contrast to the withholding tax, where only the savings lump sum can be deducted 801 € / 1,602 €.[196]

The advantage for non-extracted profits according to § 34a EStG is only available to sole proprietors and partnerships, so that the taxation of profits in the partnership and the associated favorable taxation is not available to a corporation. Although a later withdrawal of the profit share is post-taxed with 25%, the entrepreneur can gain an interest advantage through later taxation. This advantage is denied to shareholders of a corporation. This requirement may be applied to both the owner and the operating company in the event of a joint venture split. [197]

The shown advantages of an allowance according to § 16 (4) EStG or taxation with the reduced tax rate of 56% according to § 34 (3) EStG are granted only capital gains within the meaning of § 16 (2) EStG by partnerships and individual companies. In this respect, the termination of a partnership offers a clear advantage over the termination of a corporation. As a result of the division of operations, the holding company can thus be terminated with benefits for income tax purposes, whereas the relinquishment profit of the working capital company should not be too high, since as a rule there are no assets and thus no hidden reserves in the operating company. [198]

4.1.2.2. Comparison with the unit partnership

An advantage over a partnership is the deductibility of managing directors’ salaries and pension provision in the working capital company in the classical division of operations. While in the case of a single partnership, any payments in the form of salaries to the shareholders as well as additional wage and salary costs are added off-balance sheet, these reduce the tax profit of the corporation and the associated tax burden. This deductibility is legitimised by the fact that the civilly concluded employment contracts are recognised for tax purposes and thus form the basis for the deductibility. The general manager salary according to § 4 (4) EStG and the pension provision according to § 6a EStG are deductible.[199] For shareholders who hold shares in both companies, it is advisable to earn their income from the managing director's salary[200] at the operating company if their income tax rate is 45%.[201] A pension provision is recommended for the corporation both for a tax reduction and for a liquidation advantage.[202]

4.1.2.3. Comparison with the Unitary Capital and Unitary Partnership

Due to the entrepreneurial risks of a commercial entrepreneur, age-appropriate protection is difficult to guarantee. By justifying the split-up of the company and the lease/rental income independent of the economic cycle, it is possible to ensure the family maintenance of relatives.[203]

4.1.2.4. Comparison with rental and lease

According to a BMF letter from 2009, the holding company is entitled to the formation of an investment deduction amount according to § 7g EStG. In contrast, the deduction of an investment deduction amount in the case of private letting and leasing is not permitted due to a lack of factual requirements – no participation in economic traffic.[205] For the division of operations, however, the special feature applies that the size characteristics of § 7g (1) S. 2 No. 1 EStG of the ownership and operating company must be audited separately.[206]

4.2. Risks

4.2.1. Business risks

By forming a second business enterprise in a previous private rental, the taxpayer may incur higher costs for consultancy and closing costs, which in turn are deductible as operating expenses, but initially burden the liquidity as an expense. The obligations incurred, e.g. to prepare at least one profit determination according to 4 (3) EStG, the submission of a trade tax, possibly separate and uniform determination tax, as well as a possible sales tax declaration, are additionally incurred by the justification of the division of operations. In contrast, in the case of the previous rental income, a surplus determination in the context of the income tax returns was sufficient. Since a commercial company rarely does not enjoy any tax advice, the corresponding higher effort on the part of the tax consultant for the preparation of the above-mentioned tax returns and annual accounts increases the invoice amount for the service provided.[207] However, this is usually only problematic for small companies, which may not be able to cover the administrative expenses through the tax savings. Due to their size, larger companies can more easily save a sufficient amount of taxes, which can absorb the costs of administration.[208]

A company is usually financed both by the equity base and by debt capital. The capital can be provided in different ways. The most common form of financing is debt financing via a bank loan (loan borrowing).[209] However, there is no financing without the bank having to be offered a corresponding security, which can cover the outstanding loan in the event of insolvency. Often this security is ensured by the corresponding assets of a company.[210] However, since the division of operations involves separating the company from the assets in order to protect the assets from liability, the operating company does not have any direct assets to cover a new loan with the corresponding security. Although the operating company could access the assets of the holding company, the established division of operations thereby loses the limitation of liability from a business perspective. Thus, such a financing strategy is not recommended.[211]

4.2.2. Income tax risks

4.2.2.1. Comparison with the unit partnership

The full use of losses in a partnership at the level of the shareholders is eliminated if the classical division of operations is justified, since the operating company is operated in the form of a capital company and no loss offsetting is permitted between the shareholders. A corresponding distribution of the loss among the holding company by the controlling partner or group of persons makes it possible to prevent the lack of use of the loss. be able to reduce and use the corresponding loss via the owning company. [212]

The special features of the taxation of a hidden profit distribution (VGA) must also be considered in the context of an operating split. A reasonable fee for the transfer of use between owners and operating companies is often to be determined with a discretionary margin.[213] In principle, however, an external comparison with a third party as a tenant/tenant is to be cited, whereby, in the prevailing opinion, from the point of view of the tenant, it is to be considered whether the fee paid is not appropriate.[214] Although a lease or lease agreement concluded does not need to be in writing, it should always be recorded in writing in order to be able to demonstrate transparency to the financial administration. In addition, as an additional indication, a precise list of the assets transferred should be made, with rules on the running costs, possible replacement purchases or termination of the transfer of use, in order to directly avoid a possible VGA. [] 215) Furthermore, it should be noted that in the case of a transfer of use by a GmbH shareholder, a contractual agreement is concluded in advance, in which both the time and the fee of the transfer of use is clearly defined, since there is a prohibition of retroactive effect for legal transactions between shareholder and company.[216] If the tax office or, in the later course, the court represents the view of an excessively high use fee, which was recorded as operating expense in a profit-reducing manner on the part of the operating company, this must add the difference amount to an appropriate remuneration (critical for external comparison) as a hidden distribution of profit according to § 8 (3) S. 2 KStG to the profit.[217] Both corporation tax (+SolZ) and business tax are levied on this increase in profit. In the case of a subsequent discovery of the facts, the corresponding year is retroactively corrected and interest accrues according to § 233a AO.[218] If there is a hidden distribution of profits, these are to be taxed not only on the part of the company, but also on the part of the shareholder the excessive withdrawal is to be taxed as commercial income[219], unless it is only a repatriation from the tax deposit account (see § 20 (1) No. 1 p. 3 EStG).[220]

Contrary to an increased use fee, a too low use fee may also be paid to the holding company, which does not lead to a use contribution.[221] Consequences from this revenue waiver of the holding company are only that the operating expenses incurred in connection with the transferred assets and recorded on the part of the holding company in a profit-reducing manner are subject to the partial deduction prohibition according to § 3c (2) EStG and reduce the profit with a share of 60%.[222]

4.2.2.2 Comparison with the Unit Capital and Unit Partnership

Due to the justification of the business split, a second business tax on the legal transactions entered into between owner and operating company takes place. The expenses claimed on the part of the operating company are added to the profit to a certain extent (additions of trade tax), but on the part of the holding company are not reduced in the context of the trade tax calculation, so that in an actually internal transaction there is a burden of trade tax, unless the exemption limit of the additions according to § 8 GewStG does not exceed the value of € 100,000.[223]

Due to the provisions of § 8 GewStG, a double taxation of the fees for debts arises in the case of a granted loan between owner and operating company, so it is recommended to keep the loan amounts and the corresponding interest payments low.[224] The corresponding possible negative consequences of the split are due to the fact that there is only an interconnection of two independent companies and no single commercial operation. According to § 2 GewStG, every existing business is subject to business tax, so that both the owner and the operating company are independently taxable.[225]

4.2.2.3. Comparison with rental and lease

The benefits of the tax-free disposals of § 23 EStG are no longer available to the shareholders by the justification of the division of operations, so that any disposal of the assets is taxable.[226] The scope of § 23 EStG extends only to assets in private assets, as a result of which this first criterion is no longer fulfilled after the establishment of the division of operations. It does not matter whether an object or property is affected.[227] If, in comparison, a property is sold after ten years or an asset after one year, the capital gains are 100% tax-free.[228] Especially for the owner-only shareholder of the holding company, who owns all assets, the abolition of § 23 EStG is a major disadvantage of the division of operations, since he can no longer exercise influence after the establishment of the division of operations and its legal consequences, which creates tax-burdening effects for him in a profitable sales transaction.[229]

In the course of the burden of the previous private rental with the trade tax, there is the possibility within the framework of § 35 EStG to allow this to be counted against the income tax of the shareholders of a partnership. However, due to the high lifting rates of the municipalities, the crediting of 3.8 times the trade tax measurement amount (equivalent to 380%) is often lower than the actual burden of the trade tax and thus a disadvantage compared to a rental not subject to trade tax. In addition, the amount of business tax is eliminated if it exceeds the actual income tax payable, which is a further disadvantage with regard to the accounting of business tax, especially for low-income partners (e.g. children).[230]

In the case of the commercial requalification of the holding company as a result of the business split, the company and all shareholders achieve grds. commercial income. The shareholders must be distinguished in their possibilities and functions. In the case of a present division and the fulfillment of a personal connection, a shareholder or a group of persons has at least 51% of the voting rights / shares. Each additional shareholder has the status of a sole shareholder. This means that he is only involved in the holding company and not also in the operating company and the division of operations is not due to his decisions and participations. Despite the lack of decision-making power, the same described legal consequences apply to him as to the controlling partner, which are often associated with a higher tax burden by the business tax as well as other disadvantages described.[231] The literature in most cases does not agree with the opinion of the jurisprudence, which equates a sole owner-partner in the legal consequences of the business split with the controlling partner. According to R. Gluth, the commercial activity of the holding company applies only to the shareholders who are also involved in the operating company and thus act commercially for both companies. A solution according to Gluth would be the requalification of income not at the level of the company, but at the level of the shareholders, whereby a distinction could then be made between only-owning shareholder and controlling shareholder.[232]

5th design possibilities

5.1. Avoidance strategies

5.1.1. Unanimity agreement

If there is a social agreement that there must be unanimity for incoming legal transactions, a division of operations can be prevented in advance. It should be noted that the regulated unanimity must refer to all legal transactions. If it were to relate only to exceptional transactions, there would still be control if shares are owned by at least 51%, since then the transactions of daily life can be determined by this shareholder alone. Also, the regulated unanimity must also be implemented, which is expressly prescribed by the tax court Nuremberg, so that the prevention of the personal connection is then actually achieved.[234] For example, in the case of a holding company under civil law, which is attributable to 2/3 the husband and 1/3 the wife, and a working capital company, in which the husband holds 100% of the shares and an essential operating basis, which is left for use, a division of operations is given, since the husband can enforce his will to do business in both companies. However, if no other provision on the legally standardized unanimity in legal transactions was prescribed in the Besitz-GbR by the articles of association, then the personal connection for a division of operations is not given. The husband holds 2/3 of the shares in the property GbR, but cannot achieve unanimity alone. As already described in chapter 3.1.2.7 – Family Shares, an attribution of the shares of spouses is considered unconstitutional. Due to this contractual agreement, the division of operations with all its legal consequences is avoided and the Besitz-GbR earns income from renting and leasing (§ 21 EStG).

5.1.2. Securing the group of persons

As a avoidance strategy, in order to unbundle the division of operations by eliminating the criterion of human interconnection, a unanimity requirement should be required in the case of a controlling group for a possible sale of shares to a third party. Without this addition, a shareholder can execute a sale of shares with which he was part of a controlling group without further arrangements. This sale may result in the dissolution of the controlling group of persons on the part of a company and the end of the division of operations with all taxation of the hidden reserves. However, if the group of persons has the abovementioned unanimity requirement, the group of persons is protected from a decision of an individual shareholder and can only decide unanimously to sell its shares.[236]

5.1.3. Wiesbaden model

The Wiesbaden model describes a company construct of spouses in which one spouse participates in the ownership and the other spouse in the operating company. The spouse shares are not added together, so that a uniform will to act and thus the personal connection is not fulfilled.[237] A sole fulfilment of the material interconnection by a transfer of use of an essential operating basis has no tax consequences, since a division of operations is only fulfilled if both conditions are met. A participation of both spouses in one of the two companies can already be detrimental to the described model in individual cases, but a division of operations is excluded if the separate participations are carried out exactly according to BFH[238]. The application of this model avoids a business split with its legal consequences, although many of the business and tax advantages are nevertheless present. For example, the limitation of liability of fixed assets is secured by the Wiesbaden model, since the operating company leases them from the holding company. Furthermore, the use of losses from the operating company, which offers a tax advantage for both spouses in the context of the co-investment, is also given by this model. A disadvantage, however, is that a division of operations is only prevented during a lifetime by the model, since the shares are redistributed by an inheritance or a Berlin Testament[239] and a division of operations could arise as a result.[240]

5.1.4. “Kinder GmbH Modell”

A solution for the retirement of a self-employed person offers the following possibility to generate passive income at retirement age and to enable a transfer of the business to the children, as well as to prevent the harmful legal consequences of the division from the outset. The children establish a GmbH, which employs them as managing director – if desired also the father as consulting managing director. This GmbH leases the business of the independent father with the corresponding aim of operating it within the framework of the commercial company. The stay of the property allows a limitation of liability and the father receives passive income through the lease. This model was approved by the BFH in 1984 in the case in which the children are also qualified on the basis of their knowledge to manage the GmbH and accordingly also the company without the intervention of the father. Personnel integration was therefore not given due to the lack of uniform willingness on the part of the owned company, since the children are only involved in the company GmbH. Nevertheless, it should be noted that a loss according to § 10d EStG, e.g. caused by losses from the ownership company, does not pass to the heirs (children in this case) and the offsetting potential of the losses could be lost by this arrangement, although with a different structure the children can make the losses apply.[242] A profit or loss forecast is therefore reasonable to carry out before a planned company postponement.

5.2 Favorable current taxation: separation model

The commercial infection of all income could also be caused by the so-called divestment model in a previous partnership with independent income. In doing so, the “Independent GbR” is managed far away from a holding company and a commercial operating company. The holding company derives commercial income from the letting and leasing and the operating company by virtue of its legal form or activity. The self-employed GbR receives the status of self-employed income and is not burdened with the trade tax liability.

5.3. Division of operations – strategies for conservation / Low-tax dissolution / dissolution without discovery of hidden reserves

5.3.1. Continuation of commercial activity

The avoidance of the legal consequences of the termination of the division of operations on the part of the holding company can be achieved by continuing as a commercial company[244], since the discovery of the hidden reserves would only take place because of the cessation of the commercial activity of the holding company. The preservation of commerciality can be achieved by a further commercial activity of the holding company, in addition to the transfer of use of the essential operating basis, since the discoloration regulation of § 15 (3) No. 1 EStG applies to the entire holding company. Furthermore, a participating GmbH in the holding company (limited partnership), which acts as a personally liable company and the limited partners are additionally not authorized to manage, can result in the preservation of commerciality. Due to the commercial character of § 15 (3) No. 2 EStG, the holding company then continues to generate commercial income despite the termination of the division of operations.[245] According to the literature, it is therefore advisable to provide the holding company in the form of a GmbH & Co. KG, which complicates the company construct even further, but a removal of the prerequisites for the division of operations does not result in the discovery of the hidden reserves. As a further advantage, it is not necessary to carry out a complex introduction process.[246]

5.3.2. conversion / contribution of the ownership company

Avoiding the discovery of hidden reserves can be achieved by converting the holding company (e.g. individual company) into a GmbH & Co. KG. After the foundation of the GmbH & Co. KG[247], the holding company is transferred at book values according to § 24 (2) S. 2 UmwStG, so that the commercial qualification is maintained despite a possible end of the division of operations and the hidden reserves are not revealed. A further advantage in the continuation of the shareholding is the exemption from the real estate transfer tax.[248] Also, a transfer of the holding company to the Betriebs-GmbH is a design possibility not to reveal the hidden reserves, since according to § 20 UmwStG the holding company can be transferred to book values. It should be noted here that the operation must be brought in as a whole, i.e. with all the essential operating bases, since a desired book value continuation is otherwise not permitted. A disadvantage here, however, is the real estate transfer tax liability for transferring real estate, which is triggered by the transfer process.[249]

5.3.3. Special assets Shareholders

A possible strategy for preventing the discovery of hidden reserves is to keep the shares in the operating company in the special assets of the shareholders of the holding company. Despite a possible dissolution of the holding company, the hidden reserves of the shares are then not dissolved until there is a sale to third parties who are not involved in the operating company. The discovery of the hidden reserves of the assets cannot be avoided with this constellation, but with a large increase in the value of the shares the taxation of the hidden reserves can be delayed.[250]

5.3.4. Total operating lease

An operating lease as a whole is in the context of the division of operations if all the essential operating bases that are essential for the operation of the operating company are transferred by the holding company for use. This lease has the advantage, at a possible end of the business split, that the shareholder of the holding company is granted the right to choose, if the transfer of use continues, to continue to obtain commercial income or rental and lease income. If this right of choice is exercised, the taxation of the hidden reserves is eliminated, since the holding company is continued as a commercial enterprise.[251]

5.3.5. Change in voting rights

Before a possible transfer of shares, a change in the voting rights may be a possibility to continue the division of operations. In the case of a sale to a third party, the company’s Articles of Association may be amended beforehand, so that the previous shareholders can continue to have a dominant role, the share buyer will be granted the status of a sole shareholder. A share purchase can also be taken over by an existing shareholder, so that the buyer may control the ownership and operating company alone through the newly acquired shares. In both cases, an end to the division of operations is prevented by a taxation of the hidden reserves.[252]

5.3.6. Regulated succession

The termination of the division of the business by an inheritance is often of an unintended nature, since the distribution of the assets of the vanquisher to different heirs could no longer fulfill the necessary control on the part of the owner as well as the operating company. Therefore, a clearly defined succession by a contract of succession or a will can prevent the termination of the division of operations, since it is ensured that the personnel connection also in relation to the heirs is still fulfilled by the universal succession. An obligatory component of a contract of succession or will should, with regard to avoiding the termination of the division of operations, be a formulation which regulates the transfer of the holding company and shares of the operating company at the same time, so that there is no time difference in the transfer and thus a short-term non-fulfilment of the criteria.[253]

Conclusion 6

From the point of view of the taxpayer, the division of operations compared to other business constellations is a very individual corporate structure that can be very easily adapted to the needs and requirements of the company. Above all, the central business aspect of the limitation of liability can be combined with the components of the tax advantages illustrated. The division of operations also offers a flexible possibility of combining the advantages and disadvantages shown with each other almost arbitrarily and thus making them the ideal company structure for a taxpayer. Above a certain size of the company, the tax savings outweigh the additional administrative and consulting expenses, so that the division of operations basically pays less for smaller companies than for medium-sized to large companies.[254] In general, however, one must always consider the initial situation in individual cases, since first of all the complex factual requirements must be met and in addition to the positive effects a general statement about the possible possibly far-reaching negative effects cannot be made.

The operating split has the decisive advantage that the revenue structure is individually possible for shareholders and this construct may be suitable for crisis companies to protect the assets from insolvency. On the contrary, despite a good preparatory phase, good business and tax options and long-term planning, the division of operations is nevertheless associated with high risks caused by unexpected events. Due to the fact that the prerequisites of factual and personal interdependence must be fulfilled at all times, a division of operations can be ended unintentionally by many events, such as loss of the status of the essential operating basis for the operating company, divorce or succession, with the legal consequences indicated. Even if the preparatory phase was well thought out and all possible events were taken into account in advance in the contract, a change in jurisdiction is not foreseeable and subsequently difficult to take into account. Precisely because the division of operations is not legally standardized and therefore no long-term legislative procedure for a fundamental change would have to be carried out by the legislator, the division of operations as a chosen company construct is associated with a high entrepreneurial risk, which is in contrast to the good tax design possibility. In addition, in the case of the division of operations, if this is not planned or even discovered years later by an audit, more disadvantages than advantages occur, since in this case a retroactive design of the contracts etc. is no longer possible.

The division of operations is regularly overlooked from the point of view of the tax consultant and the Treasury due to their possible hidden nature, since detailed knowledge of the company (for example, in the case of the study) is necessary for the recognition of the division of operations. In addition, this also includes a free transfer of an essential operating basis, which is also not visible from the perspective of the consulted tax consultant on the basis of the balance sheet. This may have the consequence that the detection of the division of operations and the associated mostly negative effects are often only carried out in an operation test.

The key message, developed from the opportunities and risks, is that a single partnership or corporation can have considerable tax and business advantages through an individually designed division of operations – despite many risks – through good advice and appropriate design. The unit companies are thus not competitive from a tax and business perspective compared to an optimally designed division of operations.

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