During the division of operations, considerable tax disadvantages arise especially for the owner company. On the one hand, the disadvantages of current taxation, such as income tax or business tax, are relevant, but on the other hand, the business and income tax risks in the division of business must also be mentioned. It is necessary to distinguish whether the holding and operating company is a single partnership or a single capital company.

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.

1. Disadvantages of the division of operations in current taxation

1.1.Income tax

1.1.1 Principle of Subsidiarity and Partial Income Procedure

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]

1.1.2. Income of the shareholder of the holding or working capital company

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]

1.2. Trade tax

The profit generated pursuant to § 7 GewStG plus additions 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 interconnected 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]

1.2.1. Visibility of the operating company

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 these into account as an expense for income tax purposes, an addition of the mentioned items is to 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]

1.2.2. View of the holding company

From the point of view of the holding company, which normally only bears the expenses for the fixed assets and, on the other hand, accounts for the income from the operating company, no additional additions normally have to be made 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]

1.2.3. Ownership or operating company as a partnership

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 determined, i.e. 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]

1.3. Corporate 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]

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]

2.2. Income tax risks in the split of operations

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 corporation and no offsetting of losses is permitted among 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]

2.2.1.1. Taxation of the hidden profit distribution

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 expenses reducing profit 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]

2.2.1.2. Taxation of the increase in profit

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 in a profit-reducing manner on the part of the holding company are subject to the partial deduction prohibition according to § 3c (2) EStG and reduce the profit with a share of 60%.[222]

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]

2.2.3. Comparison with rental and lease

2.2.3.1. No incentives for tax-free disposal

The benefits of the tax-free disposals of § 23 EStG are no longer available to the shareholders through the justification of the division of operations, so that any disposal of the assets is taxable. 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]

2.2.3.2. Eligibility of business tax

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]

2.2.3.3. Commercial requalification

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 shareholder in the legal consequences of the division of operations with the controlling shareholder. 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]

Tax consultants to avoid division of operations

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