date | theme

26. September 2018 | Typical and Atypical Silent Society

11. November 2018 | Atypical silent company to GmbH: trade tax exemption

10. May 2019 | Benefits of the Silent Society: Trade Tax – Inheritance Tax – Losses – Sale (this contribution)

27. May 2019 | Silent Society: Accounting / Legal / Economical

05. May 2020 | Silent Society: The Contract Design and the Social Contract

A silent partner can participate in a GmbH both typically silent and atypically silent. Both the atypically silent society and the typically silent society offer many advantages in taxation. For example, you can use the trade tax allowance and realize advantages in inheritance tax and loss use. In this case, a typical silent partner receives different tax treatment than an atypical silent partner in various respects. This also applies to his rights and obligations within the silent society.

In the video we explain to you what advantages the atypical silent and the typical silent participation in a GmbH bring to the silent shareholder.

1st introduction

The Commercial Code regulates the legal basis for merchants and so-called commercial trade. Commercial trade can be operated in various corporate forms, for example as OHG, KG or corporations.

The choice of the company form must be tailored to the purpose of the company in terms of business, tax law, commercial law and economics, so that an optimal design is possible. However, the tax consideration is often in the foreground, since significant tax savings are possible through optimal contract design. The general freedom of contract makes it possible for matters regulated by law to be adapted individually in a contract so that, for example, a freely designed social contract achieves the desired result in terms of civil and tax law.

Within the framework of this article, the focus is on the tax aspects of the design instrument and the scope of the silent society. The aim is to provide an overview of the tax options and their effects in their diversity, but not to make a detailed legal or civil assessment.

In the following elaboration, basic characteristics of the silent partnership are explained and transferred in the further course to a tax consideration, since the silent partnership may also become a tax design instrument. Various advantages such as a loss shift, a possible trade tax allowance or a trade tax credit are presented and subsequently evaluated.

2nd basic information

2.1. Silent Society according to §§ 230 ff. HGB

The silent society is a corporate form of the Commercial Code (see §§ 230-236 HGB). This company is a so-called domestic company[1] which, unlike the other corporate forms regulated by the HGB, does not constitute a commercial company.

As part of the establishment of a silent partnership, a capital contribution is made which is integrated into the company’s assets (cf. § 230 HGB). In return for the capital contribution, according to § 231 HGB, the shareholder of the silent partnership[2] participates in the profit or loss of the commercial trade. The participation of several silent partners in a commercial company is also possible.

This share must correspond to an appropriate part of the profit generated and can be determined individually in a contract. At the end of each year, which may be a calendar year or a different marketing year, the pro rata profit shall be paid, or Loss of silent society (cf. § 232 (1) HGB). According to § 231 (2) HGB, the silent partnership can be excluded from the loss participation, but a profit participation must be present.

According to § 232 (2) HGB, the loss participation is capped at the amount of the contribution, even if the contribution was only partially made. In order to protect the contribution, it is provided by law that the contribution reduced by losses is to be absorbed with the further annual profits (see § 232 (2) HGB). Furthermore, it must be explicitly stipulated in the articles of association that the profit shares of the silent partner can also be paid into a retained earnings reserve if the latter makes no claim to the profit share (cf. §232 (3) HGB). Otherwise, the claim of the silent partner will be forfeited. The silent partnership partner’s liability shall be limited to the amount of the contribution.

According to § 233 HGB, the silent partner has only a right of inspection and inspection. This right refers to requesting the “copied communication of the annual accounts and verifying its accuracy by inspection of the books and papers”. In addition, the silent partner does not assume any tasks of a shareholder or managing director, even if these are excluded from the management. Furthermore, all rights of the silent partner can be sued by him in court on request, if there is an "important reason" (see § 233 (3) HGB).

For the dissolution of the silent company, § 234 HGB stipulates that the provisions of a general partner of an open commercial company apply accordingly. The notice period of six months at the end of a financial year is to be applied accordingly to the silent partnership (see §132 HGB). In addition, the company relationship can be terminated six months before the end of the financial year due to a foreclosure of a shareholder (see §135 HGB). Furthermore, an extraordinary termination according to § 723 of the BGB is possible at any time for important reasons (see § 234 HGB).

After the termination of the company relationship, the silent partner is entitled to his share or full share of the profits, depending on the time at which the company is dissolved. It shall also include claims and liabilities in the calculation of profit. Both the amount of his profit share and the status of the pending business, the silent partner has an information right at each end of the financial year (see § 235 HGB).

In the event of insolvency, the silent partner may reclaim his contribution as an insolvency creditor, provided that the contribution exceeds the share of the loss and, accordingly, there is a positive balance of the contribution. In addition, an arrears deposit has to be paid up to the amount that compensates for the amount of the proportional loss. [3] [4]

An elected silent society is possible by shaping the social contract as a typical or atypical silent form of society.

The basic principles governed by law apply only to the typically silent society, since the atypically silent society has fundamental differences to the typically silent society.

These differences relate to the following aspects.

In contrast to the typically silent company, a co-entrepreneur initiative and a co-entrepreneur risk must be present at the atypically silent partner. For example, the atypical silent partner is not only involved in the current profit, but also in the open or hidden reserves, assets or a goodwill. Thus, there is a higher shareholding, which has the consequence that a corresponding assessment of the shareholding relationship with the shareholding in the hidden reserves is regarded as co-entrepreneurship.

An evaluation as a co-entrepreneur also makes it possible for the atypically silent company to have management authority, either in cooperation with the shareholder or independently. Furthermore, the design of the articles of association makes it possible to change the legal status of the silent partner. Also, a previously capped liability up to the amount of the contribution – as in the case of an OHG shareholder – can be converted into an unlimited liability. An individual management option is only possible in the case of the atypical silent partnership, since here the shareholder of the commercial trade only representatively represents the company to the outside world and the silent partner can manage the company (cf. the legal status as at OHG). However, this regulation is only legally effective in the internal relationship, so that the opinion and decision of the shareholder of the commercial sector continues to prevail in the external relationship.

In the case of the participation of several atypical partners by the co-entrepreneurship and a merger of these silent partners, there may also be a quorum, to which the shareholder must adhere in part.

Also, the possibility of limiting the participation to a specific business sector is only possible in the atypical silent society.

In the case of the typical silent partnership and the typification of the contribution as external capital, the paid profit share to the silent partner is deducted as operating expense.

With reference to the regulations of the HGB, the deviations of the atypically silent society are strongly pronounced, but the regulations of §§ 230 ff. HGB continues to be used as a basis on the basis of which an individual regulation of the company relations is possible by freely shaping the articles of association.

Classically, both the typically silent society and the atypically silent society are accounted for as debt capital. Due to its status as a co-entrepreneur, the atypical silent partnership can also be accounted for as equity.

In general, the silent society is a so-called mezzanine financing[5]. Through contract drafting, both own and external financing is possible independently of the co-entrepreneurship. [6] [7]

2.3 Civil grounds for choosing a silent participation

2.3.1. Reasons on the part of the entrepreneur

Unlike other types of financing, in most cases the shareholder can establish a long-term bond with the silent company and thus work with the capital provided to him for a long time. Compared to a normal venture capital[8] as external capital, the shareholder does not always have to fear that he will have to repay the debt early. In addition, there are no ongoing fixed costs, for example for interest on a bank loan. The interest on the received capital is offset annually by a profit share. In addition, no third party can see that the company needs money from third parties.

2.3.2. Reasons on the part of the silent partner

The name of the silent partner is not listed and not mentioned in the commercial register, so that a complete protection of the participation data can be guaranteed.

A silent participation is often chosen as employee participation in order to involve employees in the success of the company, since both the company promises an advantage by increasing the turnover and the employees by increasing compensation. [9]

2.4. Silent partnership partner

Both natural and legal persons can become silent partners. A merchant property is not acquired by this, unless the silent partner already operates a commercial trade. Participation in its own commercial sector is not excluded.

With the simultaneous participation of several silent partners in the same commercial sector, each individual company remains separate. Here, too, no entanglement between silent partnerships is achieved, unless it is regulated by contract.

The involvement of several silent partners is possible, for example, as a company under civil law (GbR), which creates a legal relationship between the commercial sector and the GbR. Here, the function of the association of silent partners as a shareholders’ meeting is possible, which can also be executive-approved. Another possibility would be to appoint a supervisory board to control the commercial sector. [] 10]

2.5 deposit

Only by making the contribution will all the previously explained rights of the silent partner, such as e.g. claim to the share of the profit, be established under civil law.

The deposit, which has been agreed with a value in euro in the articles of association, can be contributed to the company as a monetary benefit, as well as in the form of services, benefits in kind, intangible assets[11] or transfer of rights. Unextracted profits of the silent partner do not increase his contribution, but must be stored separately in an account until the silent partner calls up his balance. This balance is accounted for as a liability to silent partners. An early repayment of the contribution does not have any civil effect on the existing legal relationship, so that the silent partnership remains valid in the internal relationship even without the contribution.[12] [13]

2.6.

In addition to the legal basis of the HGB, the company contract has the task of regulating the legal relationship between the commercial trade and the silent partnership. In general, there is contractual freedom for all parties. The articles of association may contain identical or different provisions to the legal norms of § 230 ff. For a possibly incomplete contract and thus no individual regulation, the legal standards apply accordingly.

Furthermore, prompted by the social contract, there is only a service combination for a common goal and not an exchange of services between silent society and trade.

In general, the social contract is not put under any formal provision, as there is no legal regulation for this. Even if the silent company has entered into a legal relationship with a GmbH or AG, the formal provisions of the silent company remain unaffected.

In relation to an OHG or KG, the drawing up and signing of the articles of association constitutes an unusual legal transaction[14], so that an agreement is necessary from all shareholders and the contract becomes valid in the internal relationship of OHG or KG. In external relations, the contract is always considered valid.[15] [16]

2.7. distribution of profits

The distribution of profit is carried out in the following steps: First, a tax base is determined to which a distribution key is to be applied. In the final step, the entitlement to disbursement of the pro rata profit to the silent partner is checked.

The distribution key is either explicitly regulated in the social contract (usually) or an appropriate part must be accepted. The tax base can be either the commercial or the tax annual profit.

All listed regulations apply accordingly for a loss event, unless a loss participation is excluded by the contract. The amount of the loss is limited to the amount of the deposit. By reducing the deposit in a loss-making year, subsequent profits must first be used to raise the deposit back to its original value. Only through this step is a payment claim considered legally valid and the proportional profit can be distributed to the silent partner. [17] [18]

3.1.1. Income and Corporate Tax

The silent society is in essence not liable to corporate or income tax. The company is replaced by the shareholders.

3.1.2. Business tax

The silent partnership is not subject to trade tax as such, since it is not to be regarded as a business activity under § 1 of the Trade Tax Act (GewStG).

3.2. Aspects at shareholder level

3.2.1. Typically silent society

3.2.1.1. Income tax

Through the sole transfer of capital of the silent partner to the commercial sector and thus lacking property of a co-entrepreneur, the paid profit shares represent income from capital assets according to § 20 (1) No. 4 Income Tax Act (EStG). This is a type of surplus income according to § 2 (2) no. 2 EStG, to which § 11 EStG – “the inflow-outflow principle”[19] – applies. According to § 43 (1) no. 3 EStG, the income tax is levied by the capital gains tax, which amounts to 25 % according to § 43a (1) no. 1 EStG. According to § 44 (1) S. 1 EStG, the capital gains tax is generated by inflow of the profit share. Thus, the tax of 25 % must be withheld directly by the company and paid to the tax office by a capital gains tax application. By deducting the capital gains tax, the income according to § 43 (5) EStG is considered to be paid off.[20] When determining the income, the silent partner is entitled to a lump sum in accordance with § 20 (9) EStG i.H.v. 801 €, which excludes a deduction of actual advertising costs. A special feature in taxation is § 32d (6) EStG. This includes a ‘favourable examination’ scheme, which applies if the personal tax rate is less than 25 % and the inclusion of capital income is subject to lower taxation as opposed to the flat-rate method with capital gains tax of 25 %.

A further peculiarity must be observed if the shares in the silent partnership are held not in private assets, but in business assets. As a result, the subsidiarity principle from § 20 (8) EStG allocates the profit share to commercial income and taxation is carried out by the partial income procedure according to § 3 no. 40 EStG.

By typing the income from capital assets, further income of the typical silent partner from the commercial sector is to be allocated to different types of income. For example, a rental of a property to the commercial sector is attributable to the type of income rental and lease according to § 21 EStG.

A loss offsetting is limited according to § 20 (6) EStG.

In the event of the shares of the typically silent partnership being sold, income from capital assets is present in accordance with § 20 (2) No. 4 EStG.[21] [22]

3.2.1.2. Sales tax

The profit share is not taxable for sales tax, since the typically silent company does not meet the requirements of entrepreneurship according to § 2 Sales Tax Act (UStG)[23]. [] 24]

3.2.2. Atypical silent society

3.2.2.1. Income tax

According to § 15 (1) no. 2 EStG, income from commercial operations is “the profit shares of the shareholders [...] in another company in which the shareholder is to be regarded as an entrepreneur (co-entrepreneur) of the company.” Since the atypical silent partner is to be regarded as a co-entrepreneur, the profit shares and other income from the participation must be declared as commercial income. Losses on the participation are offset against other income.

Due to the existence of the atypical silent partnership, only commercial income is possible, since the private lease to the commercial sector constitutes commercial income according to § 15 (1) No. 2 EStG by the lease of the special business assets[25] of the shareholder. In the case of the sale of the atypical silent partnership, commercial income is available according to § 16 EStG.

If the atypical silent partner participates in his own commercial business, the shares of the GmbH are allocated to the special assets of the silent partner. On the basis of this allocation, any profit distributions[26] are attributable to the commercial income of § 15 EStG.

Furthermore, the atypical silent partner receives a tax reduction through income from business operations according to § 35 EStG. Here, “the share of the trade tax measured amount in the share of the profit of the co-entrepreneurship is based on the general profit distribution key”. This share of the trade tax measure is increased by 3,8 times and is limited by a maximum amount and the pro rata paid trade tax [28].

3.2.1.2. Sales tax

The profit share is not taxable for sales tax, since the atypically silent company does not meet the requirements of entrepreneurship according to § 2 UStG.

4th tax design

4.1 Displacement of loss

A corporation, such as a GmbH, is to be treated as an independent corporation for tax purposes. Both profits and losses of this corporation are available only to this corporation. A transfer of possible losses, for example to the shareholder, is not possible in the case of a classic distribution of shares in the GmbH. Loss offsetting is only permitted with profits of subsequent years.

4.1.1. Atypical silent society

However, a transfer is possible via a co-entrepreneur as an atypical silent partner. Through the participation in the loss of the GmbH and the commercial income according to § 15 EStG of the atypical silent partner, a transfer of the losses of the GmbH to the shareholder level is possible. An offsetting of the loss share with further positive income of the silent partner is limited to the amount of the contribution in accordance with § 15a i.V.m. § 15 (4) S. 8 EStG. A higher loss can only be offset against future profits.

4.1.2. Typically silent society

The selected loss participation of the typical silent partner also makes a loss transfer possible. However, the proportional loss at shareholder level is then within the framework of the capital income. According to § 20 (6) EStG, loss offsetting with other income is excluded. Offsetting is only possible with other positive income from capital assets in current or subsequent investment periods. An exception in the offsetting of losses occurs if the taxation of the shares of the silent partner is not subject to the withholding tax, but to the personal tax rate according to § 32d (2) EStG. Due to the combination of income from capital assets with further income in the context of the income tax return, the proportional loss can be declared as advertising costs (cf. § 32d (2) p. 2).

4.1.3. Common impact

Due to the loss shift for the typical and the atypical silent partner, the level of taxation is shifted so that the silent partner receives tax savings in the context of further positive income through the loss offsetting.

The year in which the loss was recorded is taxable.[29] [30]

4.2. Gewerbesteuerfreigeld GmbH & Still

The trade tax taxes the profits of every business in the country. A business activity is “a commercial enterprise under the Income Tax Act” (see § 2 GewStG). Additions and reductions according to the Trade Tax Act determine a business income.

According to § 11 GewStG, natural persons and partnerships are entitled to claim an allowance of €24,500. In relation to a GmbH, a deduction of an allowance is not possible, since it constitutes a corporation under private law and is therefore not favoured under § 11 GewStG. Thus, the GmbH has to tax its full profit.

A change occurs when an atypical silent partner holds an interest in a GmbH.[31] Due to the aforementioned tax co-entrepreneurship, a separate and uniform profit determination according to § 179 (1), (2) S. 2 in accordance with § 180 (1) S. 1 No. 2 letter a AO now takes place. The co-entrepreneurship thus bears the trade tax. However, the commercial sector is still the debtor of trade tax. [] 32]

The profit determination is thus carried out by adding the profit shares of the GmbH and the profit share of the silent company to a profit of the co-entrepreneurship, so that after additions and reductions the allowance of 24,500 € can be deducted and the corresponding business income is reduced.

Due to the shares of the atypical silent partner in the GmbH, the GmbH receives a clear advantage when taxed by the trade tax by deducting the allowance of 24,500 €.[33] [34]

4.3. Inheritance Tax Benefits

In the context of the taxation of capital transfers in the case of inheritance or donation, inheritance or Gift tax is levied on the amount of the property less an allowance according to § 16 Inheritance Tax Act (ErbStG). Under certain conditions, corporate assets are treated favourably. The prerequisite is the continuation of the company for at least five years and the maintenance of wage levels during these five years. The beneficiary may represent both 85 % under the conditions mentioned and 100 % under other more specific conditions. The operating assets, assets from agriculture and forestry and shares in a GmbH are basically favored. An exception is the administrative assets according to § 13b (2) ErbStG.

4.3.1. Typically silent society

Due to the mere transfer of capital of the typically silent partner, the transfer of the shares does not count as the beneficiary assets according to § 13a in the V.V.m. 13b ErbStG.

4.3.2. Atypical silent society

Due to the co-entrepreneurship of the atypical silent partner, the share meets the conditions of the beneficial assets for entrepreneurial assets. The condition is that an atypical silent society existed at the time of succession both under civil and tax law.

A classification under civil law as a pure company participation of the atypical silent partner in the commercial sector is irrelevant from a tax point of view, since the tax term co-entrepreneur includes the atypical silent participation (cf. § 13b (1) No. 2 ErbStG i.V.m. § 15 (1) No. 2 EStG).[36]

4.4. divestment case

In the event of divestiture, the atypical silent participation can offer a considerable advantage in tax law compared to the typically silent partnership.

While the capital gains of the shares of the typically silent partner are taxed under § 20 (2) EStG with the withholding tax í.H.v. 25%, the capital gains of the atypical silent company are allocated to commercial income under § 16 EStG and taxed at the personal tax rate. Gain on sale shall be the excess of the sale price at cost. Furthermore, there is no business tax on both sales transactions.

An advantage is the allowance for business sales according to § 16 (4) EStG. The co-entrepreneurship of the atypical silent partner constitutes a sale of business, whereas the typical silent partner only sells shares. [37]

A prerequisite for the allowance of 45,000 € is the completion of the 55. the life of the taxable person or the incapacity of the taxable person established in the sense of social security law. The allowance is reduced by the excess of the capital gain of € 136,000.

In addition, taxation of profit after deduction of the allowance is tax-advantageous. According to § 34 (2) No. 1 EStG, capital gains under § 16 EStG are extraordinary income under the Income Tax Act, which are taxed on request under the fifthment scheme[38] under § 34 (1) S. 2 EStG.

A sale of an atypical or typical silent participation is taxed equally in the first step if the shares are kept in the company assets. The profit on the sale is added to the current profit and taxed accordingly. However, in the second step, the typical silent participation is benefited by the partial income procedure pursuant to § 3 No. 40 EStG, so that 40 % of the profit remains tax-free. However, only 60% of the costs of the sale are deductible under § 3c EStG.[39] [40]

4.5. Shifting positive income

By taxing the profit generated at the company level at a GmbH with corporate tax or at the shareholder level with income tax, the profit is usually taxed at 100% there. Especially in the income tax and the tax rate, which increases due to the progression levels, the top tax rate of about 45 % is often reached there.

Through the participation of family members as a typical silent partner, the interest expenses in the commercial sector can reduce profit and thus reduce the tax burden accordingly, whereas on the other hand the interest income is taxed again at a lower tax rate.

By participating as an atypical silent partner, the profit is distributed to the trader and the silent partner in accordance with the distribution key and thus the tax burden of the trader is reduced and the part of the atypical silent partner is taxed at a low tax rate.

Thus, the tax advantage is often dependent on the amount of the personal tax rate of the trader and the person involved. The best tax result is achieved if the person involved has no further income to tax and the basic allowance of 9,000 € [41] can be fully utilized.

In the case of family participation, however, many prerequisites must be met in order to obtain tax recognition of this participation and the arrangement is not suspected of abuse in accordance with § 42 AO.[42] [43]

4.6. business tax assessment according to § 35 EStG

4.6.1. External tax impact

The business income to be determined in the case of trade tax, which serves as a basis for the assessment of the trade tax measurement amount, is extended by special business income[44] of the individual co-contractors. The trade tax measurement amount increases overall and accordingly also the distributed share for the trade tax assessment according to § 35 EStG. Thus, other co-entrepreneurs benefit from extended business relationships of another co-entrepreneur to the commercial trade and receive an increased trade tax credit on their personal income tax.

4.6.2. Credit advantage through contract design

Variant 1

In the case of a company restructuring of a managing director of a GmbH into an atypical silent participation, this triggers a large tax relief at the shareholder level by applying trade tax according to § 35 EStG. Due to a high shareholding (e.g. 70% of the profit of the co-entrepreneurship), 70% of the paid trade tax of the GmbH is also transferred to the silent partner. However, such a high participation is considered unusual, but can be justified by reasoning, such as great commitment to the GmbH and only a result-oriented payment. Although the atypical silent partner takes on a risk, since he does not receive a secure remuneration in contrast to an employee relationship, he can save income tax by the described crediting.

Variant 2

In the case of a silent participation in a commercial trade, the distribution of profits under commercial law is decisive. A different tax distribution of profits is not relevant according to the new version of the Federal Ministry of Finance (BMF). [] 45

If an atypical silent partner has made a contribution of € 1,000 and has received a corresponding shareholding of e.g. 40% in return, the tax structure can be optimized by a further clause in the articles of association. A capping of the win component, e.g. i.H.v. max. 20% of the deposit, brings such a solution. The shareholder receives a business tax credit i.H.v. 40 % lt. contractual regulation, but the tax distribution of profits is limited to € 200,-.

Due to the new decision of the Federal Ministry of Finance, such an increased tax credit is legally effective and also recognized. The arrangement has its effect on the existence of further income from business operations, for which the crediting of business tax can be used.[46] [47]

5th assessment

5.1. Assessment at company level

When looking for new capital, an entrepreneur has many opportunities at his disposal. However, the advantages of a silent partnership – such as the nature of the domestic company or the improvement of the equity ratio – are decisive for choosing this type of investment. The safe and long-term capital increase is also clearly in the foreground.

However, many of the tax-positive effects mentioned require a good relationship of trust between the entrepreneur and the silent partner, so that more rights of the silent partner can benefit both sides more from each other for tax purposes. Participants often consider tax optimization primarily to civil law risks.

Conversely, this means that the more “stranger” the participants are, the less design will be allowed on the part of the entrepreneur so that the stranger is not granted further insights into the company.

Only the trade tax allowance can be used by choosing the atypical silent participation without further clauses. However, the shareholder of the commercial sector will only enter into the contractual arrangements for tax optimization if he, too, will benefit, such as by involving the wife as a silent partner.

In tax law, co-entrepreneurship is generally cheaper than the pure corporate form of a GmbH.

A tax partnership can not only be achieved with the silent participation in a GmbH, but also through the constellation GmbH & Co. KG. The main difference here is that the silent partnership does not appear publicly and the GmbH remains essentially a corporation, whereas the GmbH & Co. KG is a partnership, the liable partner being the GmbH. In both legal forms, both identical and different tax arrangements are possible.

Ultimately, however, the decisive reason for allowing the silent partnership participation is the anonymity of raising capital and thus the preservation of the corporate image.

5.2. valuation at shareholder level

From the silent partner’s point of view, the possible increased profit margin is important first and foremost. While stock transactions or interest on the part of the bank yield little return, a stake in a company can yield a significantly higher annual return at high earned profits. The loss-sharing, on the other hand, can be limited, so that in the classical case the risk of losing the capital employed is also excluded.

A far higher return can be expected by the atypical silent participant by the discovery of hidden reserves in which he is also involved. However, the risk increases accordingly, since he is directly involved as a co-entrepreneur with his contribution.

The legal tax options thus offer further positive aspects for the atypically silent parties. Also, when two shareholders are incorporated, it can be agreed that one shareholder remains and becomes an atypical silent partner in order to save taxes together with the mentioned possibilities from Chapter 4.