The conversion of a company may lead to taxation under the VAT. In our article, we discuss the conditions under which a sales tax is avoidable. In particular, the so-called business sale as a whole and the status as an entrepreneur are relevant here. We also provide guidance on how this can be achieved and what benefits you can gain from input tax in connection with a conversion of your business. Furthermore, it is irrelevant in this context whether the transfer of assets under the conversion takes place with or without remuneration.

In the video we explain the advantages & disadvantages of the commercial stamping of a classic GmbH & Co. KG and the possibilities of avoidance.

1st requirement for VAT-free conversion

1.1. Application of the VAT Act

When considering the existence of a sales tax in connection with the conversion of a company, the corresponding provisions of the Sales Tax Act must be followed (§ 1 paragraph 1a UStG). On the other hand, no other regulations are provided for in other laws.

Paragraph 1(a) of the UStG specifies the conditions under which a conversion can take place without sales tax: in the case of a so-called business sale in its entirety and in compliance with the status of entrepreneur. It is irrelevant whether the transfer under the conversion takes place for remuneration or free of charge.

Strictly speaking, the conversion of a company under the conditions of VAT law usually constitutes a situation that is called tax-correct instead of tax-free as non-taxable. But basically this boils down to the same effect, and only this will be important to an entrepreneur: there is no sales tax.

1.2. Sale of business in whole

Thus, on the one hand, the conversion of a company is spared from sales tax only if it takes place as a so-called business sale in its entirety (GiG). It should be noted in general that this refers to parts of companies that appear as independent entities, which is usually the norm. In particular, economic independence is crucial here. Corresponding examples could be storage and logistics units as well as canteens of larger companies.

1.3. Status as an entrepreneur

Another prerequisite is also important. If the conversion concerns a part of a company and the latter is transferred, this is only possible free of VAT if the recipient of the transfer does so as an entrepreneur in the context of his company. The second condition is therefore that the conversion takes place with an entrepreneur and for his company in connection. In the cases we have mentioned, this is considered to be a precondition.

2nd VAT on the conversion of a company

2.1 Conversion free of VAT by change of form

Change of form is the change of the civil law basis of a company. Thus, a change of legal form can bring about the conversion of a company from a partnership to a corporation and vice versa. Of course, a change of form from one partnership to another partnership is also conceivable. The change of form from one corporation to another is also possible. For example, a KG can convert its company into a GmbH. Similarly, a GmbH could change its company to a GmbH&Co. KG. A third example of a change of form is the conversion of a GmbH into an AG. And of course the change of shape of an OHG into a KG, for example, can also be mentioned.

When a company changes its legal form to another corporate form, the entire company is usually affected. Therefore, such a conversion takes place as a business sale in its entirety. Thus, there is no sales tax.

2.2 Conversion by splitting

The term spin-off refers to the transfer of parts of a company that are taken up by another company. In return, the shareholders of the divestiture acquire equity rights in the host entity, which is thus a sister company.

If such a conversion takes place via a spin-off, it may well be that parts of the company are affected that meet the requirement of a business sale in its entirety. In such cases, the conversion thus takes place without VAT. However, the opposite case is also possible, so that a sales tax is to be expected. So this depends very much on the type of part of the company that has been split off.

To give you an example of this, let us assume that a GmbH that operates two department stores at different locations is planning a spin-off. One department store is to operate independently as a newly founded GmbH, which is equivalent to a business sale in general, on which no sales tax is then incurred.

2.3 Conversion by spin-off or contribution

In principle, separation is a special form of separation, and this form of conversion gives rise to an economically independent subsidiary. In doing so, the parent to be separated out receives equity in the subsidiary. The subsidiary shall continue to be regarded as an independent undertaking. Thus, the spin-off from the parent company leads to the transfer of an economically independent business unit. This therefore corresponds to the condition of a business sale in its entirety. Consequently, there is no VAT.

In addition, there is also a contribution if a sole trader wants to transfer his company to a partnership or commercial company. For example, he could convert his company into a GmbH (capital company) or a GmbH & Co. KG (partnership). This also constitutes a sale of business as a whole, so that the conversion under the VAT keeps tax free.

2.4. Conversion by splitting

The nature of a division is that a predecessor company is the result of a division of two or more successor companies, the successor companies being either existing companies or start-ups. If the successor companies can each have economic autonomy, the condition of a business sale is fulfilled in its entirety. This avoids a sales tax on the conversion.

2.5. Transformation by merger

The principle of a sale of business as a whole is guaranteed especially in the merger. Finally, it is assumed that two or more previously independent companies merge into a single entity. Thus, a sales tax is also to be waived here.

As is now clear, the conversion of a company must meet the requirement of the independence of the economic entity to be transferred in order to avoid VAT. The easiest way to achieve this is to give the relevant share of the company organisational and economic independence. For example, this can be achieved by setting up its own administrative structure. It is particularly important here that there is also economic independence.

The second condition concerns the status of the entrepreneur. While at first glance this may seem like a fact that can be clearly affirmed, it is controversial among lawyers whether this also applies to a small business owner. In case of doubt, this should be clarified in advance in consultation with an experienced tax consultant with the tax office.

4. Accounting of consultancy costs and input tax

Regardless of whether a conversion actually creates a sales tax, the costs associated with converting your business naturally represent a deductible operating expense. This can then be offset against profit in order to reduce operating taxes.

In addition, input tax may be charged for services rendered in connection with a conversion. For example, the consulting fees of your tax consultant in the design and planning of the conversion of your company or the possibly incurred notarial costs within the framework of the input tax deduction are relevant for you.

By the way, we mention here that a conversion can be carried out retroactively for up to eight months (for 2021, exceptionally, even 12 months apply). Therefore, the costs associated with a conversion are also retroactively eligible for the period chosen in this context.