The conversion of individual companies into a GmbH can generate tax advantages that can be used in the future. In this way, one can position a claim on the GmbH during the conversion, which later helps to receive profits from the GmbH without capital gains tax. However, this is only possible if the original company had a high level of equity before the conversion. In addition, certain limits must be observed. For example, the exposure may not exceed 25 % of the book value of the assets transferred or the actual book value up to a maximum of EUR 500,000. You have a freedom of choice, which you can exercise according to the respective situation to your own advantage. So instead of paying 25 % capital gains tax on a later profit distribution, you can have this claim paid by the GmbH.

Tax advantages for the conversion of individual companies into GmbH – Introduction

Individual companies are often compared for tax purposes with partnerships or corporations. In particular, the comparison to a GmbH is imperative here, because even in this form of company a single person as an entrepreneur in the background is sufficient. The comparison of the two types of companies shows that the GmbH is significantly more tax-advantageous from a certain annual profit. In addition, there is the limitation of liability that you receive with the GmbH. Often it is only this reason that causes individual entrepreneurs to convert their individual company into a GmbH or immediately into a holding company.

It is best to do this in the first half of the year, retroactively at the turn of the year. Because then you can use the annual balance sheet drawn up anyway as a conversion balance sheet. This saves you additional costs.

But what you should also know is that the conversion of individual companies into a GmbH opens up the potential to create tax advantages. How and why this works, read in our blog post.

2nd conversion of sole proprietorship into GmbH: legal standards

Before we explain in detail the details of our approach to creating tax benefits by converting individual companies into a GmbH, we would like to briefly refer to the regulations governing this. The central importance here is § 20 UmwStG. For such a contribution in kind requires legal requirements as to how the assets to be transferred to the acquiring company should be recognised for tax purposes. In addition, one should also know the value of the shares received by the contribution. All this is regulated in this paragraph by the amount of the market value or the book value of the assets at the time of the transfer. After all, the GmbH should be able to be as much value as the individual company was before.

Generate future tax advantages through conversion into GmbH

Now let’s see how we can get the announced tax benefits by converting a sole proprietorship into a GmbH.

As we reported, the market value of the sole proprietorship is crucial when it comes to determining the value of the shares received thereby. However, § 20(2) of the UmwStG also allows a lower value to be used instead of the market value, namely the book value of the assets of the individual company at the time of conversion. An intermediate value between book value (lower value limit) and market value (upper value limit) is also allowed. And exactly this difference area can be used for tax purposes as a GmbH shareholder or shareholder.

Because if you decide that the former sole proprietorship receives such an intermediate value in the new GmbH guise, then as a shareholder you can demand a further consideration from the GmbH in addition to the lower value shares. After all, the GmbH is now more value than you actually estimate. As a result, the shareholder also deserves a certain added value, namely that which his individual company had previously generated. Because the book value conceals that the individual company still contained hidden reserves.

However, you also have to observe some conditions. In this way, it must be ensured that the newly created GmbH will in future be subject to German corporate taxation. This also applies to a possible subsequent sale of the GmbH. In addition, it must be ensured that the assets are greater than the liabilities, without taking into account the equity.

4. conversion of sole proprietorship into GmbH: amount of consideration

How high the shareholder demand on the GmbH may be also regulates § 20 paragraph 2 sentence 2 UmwStG. There is a requirement here that the consideration in addition to the granting of the company shares may not exceed 25 % of the estimated book value. Alternatively, you can also set the book value, if this is a maximum of EUR 500,000.

This allows you to calculate for a book value of, for example, EUR 800,000 that you can only receive EUR 200,000 in return for an approach of 25%. On the other hand, you can claim EUR 500,000 in return if you exhaust the book value approach up to the mentioned limit.

Let’s take another example: With a book value approach of the transferred operating assets of EUR 6,000,000, you can either use a maximum of EUR 500,000 as legally permitted consideration, or you prefer to take the 25% (EUR 1,500,000).

Conversion of individual enterprises into GmbH: What is the purpose of the claim?

The question now is what is the tax advantage of such a consideration as a substitute for the actually due values of the company shares. For this we look at the taxation of the GmbH.

First of all, the GmbH pays on its current profits annually 15 % corporate tax and a usually similar amount of business tax. Thus, about 70% of the profit remains in the GmbH. If the shareholder now approves a distribution, a further 25% capital gains tax is incurred. We do not take into account any applicable church tax or a solidarity surcharge as well as the savings lump sum. With the claim against the company, however, one can provisionally waive the profit distribution and instead claim the claim created during the conversion.

The higher the claim, the more profit you can draw from the GmbH without having to pay taxes on a private level. To the same extent, the profit remains in the GmbH, so that it can have a positive effect on the sales price in a later company sale.

Tax advantages in the conversion of individual companies into GmbH – Conclusion

The transformation of individual companies into a GmbH has the potential to generate future tax advantages beyond the usually intended goals. This should therefore also always be borne in mind when dealing with the restructuring of one's own individual enterprise. Of course, this is at best a side effect when converting a sole proprietorship into a GmbH. For this tax advantage alone, no conversion is worthwhile. But it is a very nice side effect if you are aiming for a conversion anyway.