date | theme

24. August 2018 | UK-Limited and Brexit: Cross-border merger helps!

November 1, 2018 | Consequence of Brexit 2019: Limited no longer recognized in Germany!

4. November 2018 | Merger after share exchange violates lock period at GmbH & Limited

30. November 2018 | Limited conversion to Brexit: Avoid these 5 mistakes!

December 6, 2018 | Short-term solutions: converting Limited into GmbH (6 possibilities)

29. January 2019 | Limited in Germany no longer recognized after Brexit! (Comprehensive contribution)

15. March 2019 | Brexit Tax Accompanying Act – Can the UK-Limited still be saved? (This contribution)

11. April 2019 | Brexit extension until 31.10.2019: merger of the Limited to GmbH possible again!

The Brexit Tax Accompanying Act (Brexit-StBG) is intended to avoid tax disadvantages due to Brexit. This contains numerous regulations, all of which provide additional protection for the taxpayer. However, the original draft did not contain any measures to secure the Limited. However, on 21 February 2019, there was still a short-term change in favour of the UK-Limited in the Brexit-StBG. However, the question is whether these measures really save the Limited.

Due to the current relevance, we have already published several contributions on this topic:

1st draft of October 2018 on the Brexit tax accompanying law

European fundamental freedoms require that German tax laws favour measures within the European Union. This means, for example, that the sale, transfer or transfer of registered office within the European Union has many tax advantages compared to a transfer of registered office to a third country. With the withdrawal of the United Kingdom from the European Union, therefore, there are considerable tax disadvantages for German taxpayers if they have a connection to the United Kingdom. In order to avoid these effects on the taxation of German taxpayers, the Federal Ministry of Finance already drafted a draft bill on the so-called Brexit Tax Accompanying Act in October 2018.

The Federal Ministry of Finance has tried to neutralize as far as possible all tax disadvantages caused by Brexit. Unfortunately, however, no regulation for the English Limited was included in this draft of the Brexit StBG, so that it will also be (tax) recognized in Germany after Brexit.

On 20 February 2019, a slightly adapted Brexit tax accompanying set was presented to the Bundestag.

These small changes mainly affect the English Limited with administrative headquarters in Germany. For this purpose, Article 2 paragraph 2 of the PDF document is of particular importance (page 3 in the document). Therefore, in § 12 para. 4 Corporate Tax Act introduced the following scheme:

‘An unrestricted taxable entity domiciled in the United Kingdom of Great Britain and Northern Ireland shall, after the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union, be uninterruptedly attributable to its operating assets already attributable to it before the withdrawal.’

The Bundestag approved this bill on 21 February 2019 and the Bundesrat on 15 February 2019. March 2019 (today) approved. Thus, this regulation is in § 12 para. 4 KStG final recorded and can be read here.

2.2. Provisions of the Brexit tax accompanying law are too vague

At first glance, the Limited seems to be rescued in Germany. In the context of a detailed legal examination, however, four risks or Problem areas of this new regulation:

2.2.1. No rules on limitation of liability

Since the new regulation is a provision in the Corporate Tax Act, the Brexit Tax Accompanying Act does not change the fact that the limited company becomes a partnership or a sole proprietorship in the course of Brexit. The shareholders of the Limited are thus liable with their entire private assets after Brexit.

2.2.2. Only old assets of the Limited

The legal wording favours only the operating assets that were “already attributable to the Limited before the withdrawal”. It is thus unclear how asset reallocations, income and other future assets should be treated for tax purposes. Imagine that a limited company has a share portfolio worth EUR 1 million and generates annual dividend income of EUR 50. Now the new regulation in § 12 para. 4 KStG that the previous assets (share deposit, EUR 1 million) are still tax attributable to the Limited after the project. However, this scheme does not specify how dividend income (TEUR 50) is to be recognised for tax purposes. It is also questionable whether § 12 Abs. 4 KStG also applies if the share portfolio is sold and new/other shares are acquired for the proceeds of the sale (asset reallocation).

2.2.3. No corresponding provisions in the Income Tax Act

In addition, the question must be clarified if hidden reserves are also at the private level in society. If, for example, the shareholder founded the Limited with a share capital of GBP 100.00 and the Limited is today worth EUR 100,000.00, Brexit leads to a tax conversion of the Limited into a sole proprietorship or partnership and thus to the discovery of hidden reserves at shareholder level.

To avoid these disadvantages, the Brexit tax accompanying legislation unfortunately does not provide for a corresponding regulation in the Income Tax Act.

2.2.4. Unfortunate interaction

As a result, this now leads to the following unfavorable constellation: