date | theme

15.06.2019 | Division of operations: Requirements – Legal consequences – Avoidance (this contribution)

17.06.2019 | Legal consequences in the split of operations

19.06.2019 | Personal interdependence: domination – groups of people – relatives

21.06.2019 | The material interdependence in the split operation

24.06.2019 | The minority shareholder at Besitz-GbR

27.06.2019 | The Wiesbaden model: avoiding the division of businesses with spouses

The division of operations entails considerable disadvantages and risks for many companies in the legal form of the GmbH, because the holding company subsequently generates commercial income. Since the division of operations only exists if both factual and personnel interconnection are given, the legal consequences can simply be avoided by canceling the personnel interconnection through good tax advice. This can be done either through the inclusion of a minority shareholder or through the participation of family members (so-called “Wiesbadener model”).

In the video we show you various strategies to avoid a division of operations in advance, as well as in retrospect or to consciously maintain it.

1st introduction

The division of operations is a construct which denotes the division of an economically uniform operation into two or more legally independent enterprises. One of the most important reasons for the division of operations and thus the division of a business into two companies is to reduce the liability of the operating company.

The operating company holds the operating business and thus also the associated risks and liabilities.

The division of operations is a creature of financial management[1] and jurisdiction[2]. There is no legal basis. The background to the business split is that the person standing behind both of them, or a group of persons has a uniform will to engage in commercial activities. [3] A division of operations exists in the case of renting and leasing, if at least one necessary operating basis of the so-called “referred to” is provided. the holding company is transferred to the operating company. Both companies are controlled by the same person or group of people.

By dividing into two independent companies, the operating company obtains commercial income and the holding company, by mere leasing of the main operating base, income from renting and leasing. In the case of a business split, the non-commercial rental of assets, through a material and personal connection between the lessor (ownership) and the commercial operating company (operating company), becomes a business enterprise in accordance with § 15 para. 1 p. 1 no. 1 and par. 2 EStG and § 2 Abs. 1 % by weight This avoids the benefits of dividing one company into two independent companies compared to sole proprietors and co-entrepreneurships operating in one company.

When the company is split up, a holding company and an operating company are created. In this case, the tasks are divided between both companies forming a dual company, in that the holding company serves as the owner of the company and the operating company carries out the operational business. A holding company may also own more than one operating company. The individual companies of the dual company do not necessarily have to have completely the same owners, but a broad agreement within the ownership is usual.

The operating company is an element resulting from a division of operations. The division of operations divides an enterprise into an operating company and a holding company. The task of the operating company after a business split is the practical implementation of the operational tasks.

The dissolution of the division takes place when the material or personnel connection no longer exists. [4] This can happen both intentionally and unintentionally. If the division of operations is dissolved, this has the consequence of an operational task in accordance with § 16 para. 3 EStG associated with the realization of the hidden reserves. [5] The realization of the hidden reserves exists for both the operating and the holding company. The problem in practice often lies in the fact that the division of operations has not been intentional, but has already arisen. These cases are usually recorded subsequently and therefore it is important and necessary to deal with this legal institution and to choose a clear structure for the client in advance.

In this article, therefore, the factual characteristics of the division of operations are explained and strategies for avoiding the division of operations are presented, in order to avoid the infection of income as well as the unintended dissolution of the division of operations and the associated realization of hidden reserves.

According to the settled case law of the BFH, an operating split exists if there is both a material and a personnel link between a holding company and an operating company. [] 6]

2.1 Objective interconnections in the event of an operating split

A material connection exists if the holding company leaves the operating company at least one essential operating basis for use. The question of whether it is an essential operating basis must be considered only from the point of view of the operating company. A prerequisite for a material interconnection is therefore that it is an economic good which is located in the holding company and the lease to the operating company is an essential operating basis. [7]

2.2 Personnel integration in the event of a business split

In addition to the factual interconnection, the personnel interconnection is also a prerequisite for the division of operations. The human connection between a holding company and an operating company exists when a person or several persons together (group of persons) control both the holding company and the operating company in the sense that they are able to enforce a common will to do business in both companies. [20] It is irrelevant on which company law way the uniform will to do business and activity comes about.[21] The will to control refers in particular to the usage relationship with regard to the essential operating basis, so that this is not contrary to the will of the person controlling the holding company, i.e. group of persons can be dissolved. [22] For the enforcement of the permanent will to control, a majority stake in both companies is generally sufficient. [23] The rules governing the management authority are decisive.

3. Legal consequences of splitting operations

First of all, the question always arises as to whether all the prerequisites for an operating split really exist. If these are fulfilled, for example, a legal consequence is that the holding company is from now on to be regarded as a business enterprise and thus subject to business tax. On the other hand, in the case of an operating split, the positive aspects must also be taken into account, such as the attribution of losses or the deferral advantage.

Read here all the details about the legal consequences and benefits of a business split.

Avoidance of Operational Splitting

In practice, it often makes sense to exclude a company property or other valuable assets from operational liability by transferring them to the operating company. Due to the legal consequences of Chapter 3, attempts are repeatedly made to avoid the occurrence of a division of operations. In this regard, two considerations are presented below:

4.1. Wiesbadener model – shares in the family association

In the design of the Wiesbadener model, one spouse is involved in the operating company and the other in the ownership company. Since the interconnectedness of personnel does not allow the same interests to be assumed, a division of operations can thus be avoided.

4.2 Admission of a minority shareholder

By including a minority shareholder in a partnership, a division of operations can be avoided by the unanimity principle. In this case, a sole shareholder is not involved in the operating company if the holding company is a GbR.

5th conclusion

The reasons for and against a business split can be found in the legal consequences of the business split. There are both situations that speak for and against a division of operations. Often it makes sense to take an operationally used property or another economic asset out of the company liability mass. Furthermore, the tax consequences must be taken into account when considering the division of operations. The division of operations leads to high tax consultancy costs for the design of the company structure and additional costs for the administrative expenses of the two separate accounting and profit determinations.

No blanket statement can be made for the division of operations. It is always necessary to carry out an intensive assessment of the entire circumstances of the individual case. The tax consequences of the business split are difficult to estimate without tax advice and the lack of legal anchoring.

Both the non-recognition and the subsequent registration of the division of operations has tax consequences for the company. The non-recognition results in the operational abandonment with the discovery of the hidden reserves.

Another consideration is whether the separation of the key operating base outweighs the hazards and risks of the strategies for avoiding the separation of operations referred to in Chapter 4. The two models cannot be called ideals. The avoidance can often only be achieved by external participation, which is usually not desired. The numerous dangers such as dispute, separation or divorce can lead to significant disadvantages. Likewise, all contractual agreements must be precisely designed in order to avoid subsequent qualification as a division of operations. Depending on the individual case, it must be decided whether the division of operations is desired or not.