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! (This contribution)

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!

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

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

Brexit is approaching. On 29 March 2019, the United Kingdom will withdraw from the European Union. In German tax law and company law, this has particular implications for the English Limited (Ltd.) with administrative headquarters in Germany. Between 8,000 and 10,000 Limiteds thus threatens the dissolution of the limitation of liability and the taxation of all hidden reserves.

1st recognition of UK-Limited in Germany

British company law follows the so-called founding theory. This means that a company founded in the UK will continue to be recognised under UK Ltd law even if the administrative headquarters are moved to Germany. In other words, the UK allows the Limited to move abroad. For a long time, however, it was problematic that Germany did not accept the influx because Germany pursues the seat theory. This led to the fact that England had the Limited moved abroad (transfer of the administrative headquarters abroad), but Germany did not recognize the influx.

In 1999, 2001 and 2003, however, the European Court of Justice saw Germany’s conduct as a violation of the freedom of establishment. In its triple jurisprudence (Centros, Überseering, Inspire Art), the European Court of Justice forced the German Federal Government to recognise the English Limited with its administrative seat in Germany as a corporation. This is true even if the Limited has almost no points of contact in the UK.

Due to the freedom of establishment within the European Union, many German entrepreneurs founded a limited company in the UK, which they managed exclusively in Germany (administrative headquarters in Germany).

You have a Limited and

are affected by Brexit?

Brexit leaves the freedom of establishment from 29. March 2019 not applicable

With Brexit, the UK will exit the European Union. The above-mentioned case law of the European Court of Justice on freedom of establishment no longer applies to the English Limited. Germany thus falls back into the original state (seat theory) and will no longer recognize the English Limited with administrative headquarters in Germany.

2.1 Limitation of Liability

The limitation of liability is typical for a corporation. However, if the German legislature no longer recognises Limited Companies by Shares as such, the limitation of liability for the shareholders is eliminated. Consequently, the shareholders of the Ldt. are liable with their private assets.

2.2. Management salary

In the case of a corporation, the shareholders’ wages can be deducted as operating expenses. If the Limited is qualified as a partnership, the operating expense deduction is no longer possible. This results in a higher control load.

2.3. Higher control load

A GmbH as well as a Limited are in principle subject to corporate tax with a tax rate of 15%. Through the “Brexit” Ltd. is subject to income tax. A maximum tax rate of 45 % can be applied, which would increase the tax burden for the Limited.

In addition, the 95 % tax exemption for dividends and capital gains of subsidiaries is eliminated.

2.4. Discovery of all hidden reserves

This is the biggest risk. Finally, the transformation of the UK corporation into a partnership leads to the taxation of all hidden reserves, including goodwill (liquidation taxation: § 11 KStG). In fact, it is pretended that the entire company is sold to the partnership at market value. The market value may be determined by a company valuation. The general rule here is that annual profit (according to managing director salary) multiplied by 10 gives the company value.

3rd Brexit tax accompanying law

On 9 October 2018, the Federal Ministry of Finance published a draft bill on the “Draft law on tax accompanying regulations for the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union” (Brexit Tax Accompanying Act). This neutralizes the tax disadvantages of Brexit. The draft contains rules on exit taxation and tax easing. However, the law does not contain advantages for limited companies with a German administrative seat. Supposedly different statements on the Internet and from mediation agencies are unfortunately wrong.

4th draft speaker on the amendment of the conversion law

On 3 September 2018, the Federal Ministry of Justice published a draft bill amending the conversion law. This provides for two advantages:

4.1 Cross-border merger of the Limited into a German limited partnership (KG)

According to this draft bill, a provision is to be included in §§ 122a ff. UmwG, according to which the English Limited can also be merged with German limited partnerships. However, there is no real advantage for clients in this regulation. This is due to the fact that the conversion of the Limited into a limited partnership leads to a fictitious dividend taxation according to § 7 UmwStG and thus all profit carried forwards are subject to a fictitious profit distribution taxation. The merger into a German GmbH remains the preferred variant.

4.2 Transitional rule for merger projects started on German GmbHs

More important is a transitional arrangement of two years for mergers that have already begun before Brexit. However, this draft speaker comes relatively late, after all, a cross-border merger lasts at least six months. In addition, it is questionable whether the speaker’s draft is even approved by the Federal Government. As a result, we cannot rely on this regulation at this stage.