A division of operations is a serious risk for GmbH shareholders. But often you only discover a business split when you trigger a taxable transaction by sale or transfer. In this case, an operating split can also be dissolved in a control-neutral manner. For this purpose, a double-storey holding company is used, in which the top company, a GmbH & Co. KG, takes over the assets that triggered the division of operations.

1. Dissolve business division – Introduction

Many entrepreneurs simply have a brilliant idea at the beginning of their success story. You might think it’s an idea that ultimately serves to make the world we live in a little better. Because if the offer that you want to develop and market soon offers no advantage, no one will be enthusiastic about it.

So you start a business. Often the initial phase of activity takes place in your own four walls. If you have previously sought tax advice, you found a GmbH right from the start. This is because the GmbH protects its own private assets from possible claims for damages by third parties. Hardly anyone is willing to take the risk of private insolvency. But precisely this constellation, the activity from home in the legal form of a GmbH, creates another risk, namely a division of operations.

2. What is a division of operations and how does it arise?

The term division of operations is not a fixed term derived from tax laws. Rather, this is a fact that Richter am Bundesfinanzhof (BFH) long ago postulated from the application of the tax laws. It is questionable whether the following circumstance was ever intended by the legislature in this form. Nevertheless, it now has some drastic tax consequences. Because the dissolution of a division of operations leads to the discovery of hidden reserves from private assets.

A division of operations arises when an asset is in the private assets of a GmbH shareholder, but is left to the GmbH because it represents an essential operating basis for the operation. The BFH judges recognised that the GmbH shareholder behaved in fact like a sole proprietor when granting this operating basis. In addition, there is a firm connection between the GmbH and this essential operating basis, because without it the GmbH would be unable to pursue its goals. An example of this is the withholding of a patent at a private level, although this would be essential for the GmbH operation. The same applies to the transfer of operating land. Even a small office for management or administration can be affected. In fact, the list of potential problem cases is quite extensive.

3. The moment of truth: dissolving operations involuntarily

Does a business split have negative consequences? At the beginning, when the business asset is transferred to the GmbH, there are no tax consequences. Very often, entrepreneurs do not see any effects. After all, they believe it would be their right as owners to do with the economic good, whatever they plan to do with it. But the tax consequences hide very cleverly. Only when the transfer of the asset or the GmbH takes place, whether through sale, conversion, donation or even inheritance, does the division of operations take place. However, this is then quite surprisingly taxable. Because if they dissolve the division of operations, the tax office may and must assume that the asset practically belonged to the GmbH. The status as private property is thus broken.

So what are the consequences of dissolving the division? The transfer is now considered a taxable transaction. What is subject to the tax? Right, the win. If the value of the economic asset has increased over time, hidden reserves have formed. These are now taxed as fake profit. Whether a payment and thus a liquidity inflow really took place is irrelevant.

4. How to Dissolve a Latent Operations Split

What kind of tax consultancy would we be that would only point to a potential problem but offer no solution? Whatever characterization you come up with, it is irrelevant. Finally, we know the way out. Let us now describe how a division of operations can be dissolved tax-neutrally.

As described above, the entrepreneur has already founded a GmbH. As it happens, he or she learns that there is an operating split. Fortunately, no transfer of the asset has taken place. Another stroke of luck is that we are asked for advice. We recommend building a double-storey holding company. The ultimate parent company is a GmbH & Co. KG, which owns a holding GmbH, which in turn holds one or more operating GmbHs.

First we found the GmbH & Co. KG. Once it has been founded, it now establishes a GmbH as a subsidiary. We need these immediately as a holding company for our existing company. After that, we invest our shares in operative GmbH in this Holding GmbH. Now we transfer the asset that triggered the division of operations from the private assets to GmbH & Co. KG. Since this is possible in a tax-neutral manner, we were able to dissolve the division of operations to the satisfaction of our clients.

5. This is how you can dissolve a division of operations – Conclusion

The transfer of assets to GmbH & Co. KG is tax neutral only because assets are transferred to a partnership. Such a contribution can take place according to § 24 (2) sentence 2 UmwStG at book values. This makes it tax-neutral. At the same time, commercial qualification is maintained, although the division of operations is dissolved by the transfer.

If the asset in question is a property, its contribution to the GmbH & Co. KG also makes sense for another reason. The transfer of land to a partnership can take place without real estate transfer tax. However, a number of prerequisites must be taken into account here.

In addition, we have now established a double holding structure, which, if necessary, ensures that you can emigrate abroad tax-free in the future. Because who is a co-entrepreneur of a partnership, do not affect regulations on the exit tax.