When selling a sole proprietorship, there are sometimes considerable taxes on the profit. So if you want to save taxes here, convert your own company first into a GmbH. Even better, however, is to transfer the GmbH into a holding structure. Because then only 1.5% of taxes are incurred at the level of the holding company. However, the conversion into a GmbH and the transfer into the holding structure are accompanied by a seven-year blocking period. If the sale takes place within this blocking period, the profit will be taxed subsequently. This tax is therefore in addition to that on the actual capital gain. With a foundation, however, you can cancel the blocking period. Because then the company sale works tax neutral despite the blocking period.

1st company sale despite blocking period – Introduction

A sole proprietorship faces several challenges from a tax point of view. On the one hand, the taxation of business profits takes place at the level of the sole proprietor. The profit is subject to the personal tax rate of the sole proprietor. So the higher the profit generated, the higher the tax that accrues on it. On the other hand, this also applies if you sell your own individual company. Again, the tax depends on the amount of the personal tax rate; It can be correspondingly high.

This is why many sole proprietors are considering whether to convert their sole proprietorship into a GmbH. After all, a GmbH avoids a private liability as a shareholder. The use of accumulated profits is also associated with tax advantages. However, especially with regard to the sale of the company, the tax is considerably higher for a sole proprietorship than if you sell a GmbH.

So what do you do? Right, you convert your own individual company into a GmbH. However, this change of form has a serious disadvantage, namely that one is subject to a seven-year blocking period as a result of the conversion. If you sell the converted company within the blocking period, a tax on the conversion profit is retroactively incurred.

So if you want to convert a sole proprietorship into a GmbH in order to sell the company immediately afterwards, you have to find a way to avoid the additional tax. Therefore, we now show how a company sale succeeds despite a blocking period without tax.

2nd company sale despite blocking period: legal framework

First of all, we go into the legal standards that lead to a company sale within a conversion blocking period to a taxation.

The transformation of a sole proprietorship into a GmbH is a change of form. It takes place in accordance with § 20 UmwStG within the framework of a contribution. You can actually convert a sole proprietorship into a GmbH in two ways. Either you first found a GmbH and then bring the sole proprietorship into the GmbH by way of a capital increase, for which you receive new shares in the GmbH in return. Or one sets up the GmbH by way of a capital formation, using the sole proprietorship as a contribution in kind to cover the required minimum share capital. In the latter case, a second notary appointment is thus saved. However, the costs for determining the impairment of the physical capital to be transferred are then higher. In addition, the company can only act economically in this case if it receives a (new) tax number from the tax office.

Both procedures are tax-neutral. This means that no taxes are incurred on the hidden reserves contained in the individual company. However, this only applies if some conditions are met. No additional consideration should be received in excess of the value of the company's shares. For example, if you let the new GmbH donate a sports car as an additional value for the contribution of the individual company, you leave the path of tax neutrality.

Our model: Company sale through a foundation despite a blocking period

But what to do if you have already converted the sole proprietorship into a GmbH and you still want to sell the company during the seven-year blocking period? In this case, we recommend setting up a foundation and giving the GmbH or possibly the holding company to it.

If you donate the GmbH to the foundation and the latter then carries out the company sale despite the existing blocking period, the tax is due on the amount that the foundation has to pay instead of the sole proprietor. In concrete terms, this means a retroactive corporate tax on the contribution profit. However, the tax rate at which the foundation has to tax this profit is only 15 %, instead of up to about 50 % for a sole proprietor of sales. As you can see, we have already made considerable savings in taxes here.

But the result is even more impressive if we donate a holding company together with the subsidiary GmbH to the foundation and then make the sale. Because then the foundation sells the holding company, for which no blocking period applies. Without the blocking period, the tax which the foundation has to pay as a legal person is only about 1.5%, namely corporation tax and business tax.

In this case, there is even the possibility that one can take the view vis-à-vis the financial administration that the foundation is not a commercial enterprise and therefore the business tax should have no meaning for it. Yes, one can even argue that the foundation is only active in asset management and is therefore also not subject to corporate tax. With a foundation that only manages and sells real estate, this is finally also possible.

4th sale of a company despite a blocking period by foundation: disadvantages

Fine, we have either massively mitigated or even completely circumvented the blocking period violation. Under certain circumstances, we have even managed to pay no taxes on the company sale – despite the blocking period. However, we must pay attention to a few other points.

4.1. Gift tax for gift to family foundation

The first aspect is certainly the most serious. Because the gift to the foundation triggers gift tax. The donation to a foundation is a special case. This applies in relation to the amount of the applicable allowance. For example, a few years ago the Lower Saxony Tax Court ruled that an allowance equivalent to that of grandchildren applies, i.e. EUR 100,000 (order of 19.07.2021, file number 3 K 5/21). This is also astonishing because the applicable tax bracket in a family foundation is based on the beneficiaries in the statutes. Specifically, in our example, this would be tax class I, which accrues with 7% on the asset above the allowance. No wonder, then, that this decision is now before the Bundesfinanzhof for revision.

But it gets even more curious when you consider later donations or other donations to a foundation. Because then the allowance and the tax bracket as it is intended for third parties apply: thus an allowance of only EUR 20,000 and a tax rate of up to 50%. So if you make a donation to set up a foundation, you better transfer the maximum possible assets to them.

4.2. Sale of a company despite a blocking period at the acquisition of a holding company

Another point that should be considered when selling the company despite the blocking period during which the foundation sells its participation in the holding company concerns the buyer. Because the buyer assumes the blocking period of the GmbH with the holding company. The holding company is therefore only after the expiry of the seven-year blocking period in the position to resell the GmbH without a blocking period violation. But the buyer can sell the holding company instead of the GmbH within the blocking period without a blocking period violation occurring.

5th conclusion: tax-neutral company sale possible despite blocking period

As we hopefully were able to show convincingly, a tax-neutral company sale is possible despite an existing blocking period by means of a foundation. Under certain circumstances, the foundation can even reduce taxes on the sale of the company to 0% if a holding company is interposed. But this also results in another tax, namely the gift tax, which is incurred when the GmbH or holding company is transferred to the foundation. Although a certain tax is also to be expected here, we are convinced that this proves to be a worthwhile alternative in individual cases. In any case, if there is an existing blocking period, we should examine all options, including the proposal we have presented here by means of a family foundation.