The sale of a GmbH is 40 % tax-free in German tax law through the so-called Parts Income Procedure and offers you as a seller many tax advantages. With holding companies, you even get a 95% tax exemption. Thus, the sale of GmbH shares (also called “share deal”) is more tax-advantageous for the seller than the sale of the individual assets (also called “asset deal”).

Essential for the assessment of the income tax effects at shareholder level is in principle whether the participation is held in private assets or business assets. If the latter exists, a distinction must also be made as to whether a natural or a legal person is the seller of the shares in the company. Since a GmbH must necessarily allocate its investments to the operating assets due to the non-existent private sector, this distinction is not applicable here. The third component must be the participation rate, which is relevant for natural persons holding investments in private assets.

1.2. Capital gains

A gain on sale arises when the sale price or the value replacing it, less the cost of sale, is greater than the carrying amount or amounts of the units sold. [1] Similarly, a loss on disposal occurs when the carrying amounts mark the larger item.

1.3. Taxation of private individuals

1.3.1. GmbH participation < 1 percent

The capital gain of a natural person who holds less than 1% in a GmbH and holds these shares in private assets constitutes income from capital assets (§ 20 para.). 4 EStG.[2] Such income is subject to the separate tax rate according to § 32d EStG i.e. 25% plus solidarity surcharge and, if applicable, church tax. ‘Since this reduced ESt tax rate corresponds to the capital gains tax rate (§§ 43 para 1 no 1, 43a para 1 no 1 EStG), § 43 para 1 no 1 EStG explains. 5 EStG the income tax of the shareholders by the retention of the capital gains tax is basically paid off, from which the designation withholding tax is explained. ‘[3] If the sale leads to a loss, § 20 Abs. 6 EStG the offsetting of losses to the effect that the loss may only reduce other income from capital assets. The exclusion of the actual advertising cost deduction by the savings lump sum[4] (§ 20 para.) 9 EStG) and the severely limited loss offsetting make a tax-optimised sale in this area considerably more difficult. Niehus and Wilke explicitly point out in their monograph that this type of gross taxation should be viewed critically in the case of advertising costs above the savings lump sum, since this overrides the objective net principle in tax law and the principle of taxation according to economic performance. [] 5]

1.3.2. GmbH participation > 1 percent

This problem is circumvented if a natural person holds a stake greater than 1% in his private assets. The associated income is income from business operations (§ 17 para.) 1 and 2 EStG)[6] and are subject to the partial income procedure[7] according to § 3 No. 40 EStG i. EStG. In contrast to income from capital assets, the tariff income tax rate of the vendor plus solidarity surcharge and, if applicable, church tax applies here, but only to 60% of the profit. The remaining 40% were tax-free by the legislature. Similarly, the seller’s advertising costs are only 60% deductible. A loss on disposal can only be offset by the seller if the shares were acquired in return for payment and the shareholding was always above the 1% threshold over the last five years. Irrespective of the distinction by shareholding, the sale of shares is not subject to business tax in either case. [8]

1.4 Taxation of sole proprietorships

The situation is different if the investment is held in the company assets. The main distinguishing feature here lies in the nature of the person of the shareholder. If he is a natural person, he earns income from business operations according to § 15 EStG, which in turn are subject to the partial income procedure. Since the capital gain is equated to the current income from § 15 EStG, neither the allowance according to § 16 para. 4 EStG[9] nor the tax rate reduction according to § 34 para. 1, 3 EStG apply here. An exception is the case that the shareholder owns all shares in his GmbH[10]. This partial operating fiction makes it possible for the capital gain under § 16 para. 1 S. 1 No. 1 EStG[11] falls and thus the allowance according to § 16. Para 4 EStG can be used if all criteria mentioned therein are met. [] 12]

Tax advantage in business assets: tax exemption by § 6b reserve

Furthermore, according to § 6b para. 10 EStG ‘the possibility to transfer the taxable part of the profit from the sale [...] up to an amount of € 500,000 to the purchase or sale’. to transfer production costs of newly acquired shares in GmbHs, buildings or usable movable assets. ‘[13] The conditions for this tax-neutral transfer are the uninterrupted holding period of 6 years of the shares before the date of disposal. The investment must be carried out either in the same marketing year or in the two subsequent marketing years, otherwise it must be discontinued at the end of the fourth marketing year, increasing profits. For each year in which the reserve existed, a profit surcharge of 6% shall be applied. [] 14]

Since the trade tax reduction according to § 9 No. 2a GewStG only includes distributions of the GmbHs, but not capital gains, the taxable share is subject to trade tax. However, the tax reduction according to § 35 GewStG compensates the trade tax burden again.

Taxation of corporations (GmbHs) as shareholders (holding companies)

1.5.1 Principle: 95% tax-free

The sale of shares of a legal person subject to corporate tax (capital company / GmbH) in another GmbH is subject to § 8b para. 2 KStG in principle tax-free, but 5% of the capital gains apply according to § 8b para. 3 sentences 1-2 KStG as non-deductible operating expenses. The aim of this scheme was to avoid a cumulative multiple burden of distribution of shareholding income across several levels of limited liability companies, also known as the cascade effect. This recognition further led to the creation of § 8b para. 2 KStG, which took into account the equal treatment of profit distributions (§ 8b para 1 KStG) and the sale of shares. For the legislator, the sale of shareholdings is only an alternative form of profit realization compared to the dividend, in which the profits are passed on directly. [15] However, the legislature also created § 8b para. 3 KStG, which declared the tax-free shareholding income as a 5 percent non-deductible operating expense. [] 16]

1.5.2. Tax exemption also for business tax

This division into 95% tax-free income and 5% non-deductible operating expenses also applies analogously to business tax (§ 7 GewStG). If, however, the company taxpayer GmbH suffers a loss on sale, this is not deductible either in the case of company tax (§ 8b (3) S. 3 KStG) or in the case of trade tax (§ 7 GewStG).

Important: Only the sale of subsidiaries (GmbHs) is tax-free

The sale of a shareholding in a partnership by a GmbH leads to commercial income, which is subject to the regular corporate tax rate, on account of its corporate tax status.

1.5.4. No tax effects for the shareholder of Mutter-GmbH

In the case of a GmbH, no income tax effects arise at company level due to the paid transfer of shares, since the previous book values are continued by the corporation and no hidden reserves are revealed. A change of shareholder, even if all shares are transferred, does not change the legal capacity of the company as a legal person. Consequently, the loss deduction according to § 8 Abs. 1 KStG in V. m § 10d EStG without restriction. However, the situation is different with regard to the company’s unused loss carry-forwards, which pass indirectly, i.e. economically, through the transfer of shares to the new owner. Since the shareholder was able to use the losses of the old company tax-optimized by offsetting with future profits from it and the transaction volume of Loss GmbHs promised to become an independent business model, the legislature restricted this harmful practice for him and the tax revenue. It created the offence of the harmful acquisition of shares (§ 8c para 1 KStG, § 8a para 1 p. 3 KStG i. V. m. § 4 h EStG, § 10a p. 10 GewStG), which extends to both corporate tax and trade tax loss carry-forwards and severely restricts the possibilities for design. For a transfer of more than 25%, but less than 50% of the shares and voting rights threatens the quota, and for more than 50% even the complete sinking of the loss carry forward. All processes within a five-year period shall be relevant for determining the carry-over rate. If no acquirer/group of acquirers with similar interests reaches the 25% mark, the loss deduction can still be fully used. [17]

Divesting privately owned shares in GmbHs tax-optimized is often relatively difficult in practice. In particular, shareholders with a participation rate of less than 1% in the total capital of the company can hardly improve their situation with the taxation by the withholding tax. Although there is theoretically the possibility of a share increase in order to at least get into the more advantageous part income procedure, this way is usually blocked in tax consulting practice. The lack or lack of willingness to provide more capital, an illiquid share market or simply the risk aversion of the taxpayer often lead to the previous participation being continued unchanged. The same applies in modified form to the shareholder who holds a share greater than 1% in his private assets. The aim of tax optimization here could be the transfer of the shareholding to business assets in order to later transform the assets into another economic good (§ 6b EStG). A second variant is the transfer of the participation in another company, for example in another GmbH. However, expense and yield are probably in most cases in a mismatch. If the shares are transferred to the company assets, the privilege of the tax-free private sale business pursuant to § 23 EStG is waived and, in addition, the hidden reserves of the assets now locked in the company assets are to be realised in a later sale. Maintaining the status quo here is usually the easier and better tax choice, which also applies to the transfer of shares to another company. The costs of a transformation into another society are then disproportionate to the later tax savings.

2.2. GmbH shares in operating assets

Greater room for manoeuvre opens up for investments held in the company assets. The simplest option opens up with a natural person as shareholder who owns all shares in a GmbH. By the partial operating fiction[27] according to § 16 Abs. 1 S. 1 No. 1 EStG, the already explained exemption regulations according to § 16 para. 4 EStG, § 34 para. 1 EStG and § 34 para. 3 EStG, which, provided all criteria of the aforementioned paragraphs are met, have a very acceptable result without complex design means. A second possibility is the formation of a § 6b EStG reserve, which prevents the discovery of the hidden reserves when the sold share is reinvested. In addition to the current tax exemption, the advantage for the vendor is the fact that he can use this reserve several times in his life and restructure his investment in such a way that he ultimately still benefits from the exemption regulations. For shareholders who are about to retire and want to sell their business, both options do not offer a helpful alternative, as they are usually neither sole shareholders nor want to reinvest the amount. In addition, their participation is usually too low in value for major conversions to appear profitable. Consequently, the only way out is usually to tax the capital gain via the partial income procedure.

2.3. Recommendation for action: Tax exemption through holding structure

2.3.1. Transfer of the GmbH shares to Holding GmbH (share exchange)

If it is the case that the participation of a natural person in a GmbH has a very high value and that neither the way through the partial operating fiction nor the way through the formation of reserves is possible, then the means of conversion or reorganisation is available at an early stage. restructuring. According to this tax design model, the shareholder contributes his shares to a newly founded GmbH, of which he is at best the sole shareholder, in accordance with § 21 UmwStG.[28] According to income tax law, this form of conversion is to be classified as an exchange-like sale transaction which, in accordance with general principles, amounts to a capital gain in accordance with § 17 EStG or § 20 para. 2 EStG would lead. Section 21 of the UmwStG, however, invalidates this legal consequence by making it possible to avoid a discovery of the hidden reserves in whole or in part [...] under the valuation choice law, irrespective of the approach taken in the trade balance. ’[29] The conversion tax law operation based on an exchange of shares is not tax neutral for the shareholder, since according to the legal system should in principle be transferred to common values. This would mean realising the hidden reserves. However, the valuation option also allows him to account for book or intermediate values, which gives the tax consultant additional room for manoeuvre for individual adjustment. The rule is certainly the tax-neutral contribution by exercising the right to vote on book values. In addition, if the personal and factual scope of § 21 UmwStG is given, according to which shares in a GmbH are given in return for shares in a new GmbH, the beneficiary conversion tax share exchange can be carried out. [30]

Objective: Tax-free dividends and tax-free capital gains

At the level of the shareholder, the tax structure has the following positive effects: Through the exchange of shares and the associated transfer of the shares to another GmbH, he holds shares only indirectly in his original participation; However, he is directly involved in the old company through the new GmbH. This has the advantage that dividend income and a potential later profit from the sale of the old company shares are initially tax-free not with his individual income tax rate, but according to § 8b KStG (only 5 % of non-deductible operating expenses remain). At what time and to what extent the distributed dividends or the capital gains flow to the shareholder, the shareholder can determine himself. Further transactions by GmbH via the newly founded holding company[31] can be carried out without problems and with tax optimization. If the shareholder wishes to sell all his business interests once, he, as a sole shareholder, will benefit from the partial operating fiction and the associated exemption regulations of the EStG. For clients who are taxed at the top income tax rate and whose shareholding is very valuable, this type of tax optimization represents a perfectly sensible alternative.

2.3.3 Optional: Holding GmbH for several subsidiaries

For investments in GmbHs that are held by other GmbHs, this type of tax optimization only makes limited sense, since they normally already tax their income from the investment according to § 8b KStG at a very low rate. If the shareholder intends further purchases and sales from other companies, the above design model is again suitable. The newly formed company then acts as a holding company of the shareholder and manages its investments. In addition to the tax-advantaged revenues, this construct offers the advantage that profit transfer agreements[32] can be concluded that reduce the tax burden or reduce the tax burden. make losses accountable. Furthermore, the holding company can act as an internal bank and thus control the liquidity of the subsidiaries.

2.3.4. Tax advantage also possible for partnerships

A similar constellation of tax optimization imposes itself on partnerships as shareholders in GmbHs. The partnership has the advantage for the shareholder of the later use of the exemption regulations, but has the serious disadvantage that all economic events affect the shareholder directly for tax purposes. The lack of tax treatment in the area of income tax leads to the fact that both profits and losses from the partnership and its distributing interests flow directly into the income tax of the shareholder. Compared to the GmbH, this means that profits generated in the company usually do not have to be accrued, but must be realized at the shareholders. In particular, if the partnership does not hold a majority interest in a GmbH, inevitable dividend distributions and any sales proceeds lead to a fluctuating tax burden on the co-entrepreneur. Therefore, it also makes sense here to connect a holding company between the partnership and its participation. The partnership can then use this vehicle to bundle its holdings and make further purchases and sales without these directly affecting the shareholders’ income tax burden. For the partnership, this process proceeds according to § 20 UmwStG according to a similar pattern as the share exchange for natural persons in § 21 UmwStG.