Even in the case of third-country conversions, the free movement of capital comes into play, since according to art. 63 TFEU also covers third countries. The conditions between the non-member-country conversion and an actual tax easing or legal tax easing must then be examined and the provisions of the UmwStG must be observed. The objective of tax-neutral conversion or transfer is safeguarded by the free movement of capital.

A transfer can trigger a final taxation if a the assets are de-engaged by an actual act immediately after the transfer, b legal de-engaged retroactively to the transfer date or c the scope of the UmwStG is not opened. In the following, it is examined which of the participating legal entities has to pay the final tax, which legal entity can invoke the fundamental freedoms and which fundamental freedom is decisive.

2. Actual tax easing

If the transfer at the tax transfer date is initially tax-neutral and the German tax law is only limited or excluded by an actual action of the taxpayer after the transfer process, there is a so-called actual de-entrapment, which is to be assessed according to the general de-entrapment regulations (§ 12 para.). This concerns, for example, the retroactive transfer of a German permanent establishment by a German taxpayer to a foreign EU capital company, in which the intangible assets are allocated to the foreign parent company due to the central function of the parent company for the transfer of ownership under civil law (not the retroactive tax transfer date) and by the regulatory example according to § 12 para. 1 S. 2 KStG an immediate taxation is triggered.[431] Since the original transfer operation can initially be carried out in a tax-neutral manner in accordance with Section 20 of the UmwStG, no hidden reserves will initially be discovered and the transferring legal entity will not suffer any tax disadvantages. Instead, the downstream derailment according to § 12 para. 1 S. 1 KStG at the level of the acquiring limited liability company for the discovery of the hidden reserves and thus for taxation. The resulting derailment tax must be paid by the purchaser.

Legally, the transfer operation for the acquiring EU corporation constitutes the acquisition of the German permanent establishment (branch) in return for payment. Immediately after the acquisition of this permanent establishment, due to the central function of the foreign management, the (actual) entrapment tax arises at the level of the acquiring corporation. This additional tax burden could prevent the capital company from acquiring the German permanent establishment, or Establishment is held, so that § 12 Abs. 1 S. 1 and 2 KStG restricts the establishment of the German branch. Since § 12 (1), p. 1 and 2 KStG also tax the flow of capital in the form of the repatriation of the intangible assets to the parent company, there is also a restriction on the freedom of movement of capital.

However, it should be noted that the restrictions associated with the acquisition of a foreign establishment are primarily the secondary freedom of establishment by art. 49 para 1 p. 2 TFEU and possible obstacles to capital flows are therefore of secondary importance compared with the freedom of establishment. This is due to the fact that the acquisition of a branch is always linked to the sole possibility of influence and control by the acquiring parent company and that the intention of investing is secondary, as is usual with portfolio investments. Thus, the scope of the free movement of capital is displaced by the freedom of establishment and ultimately reduced to zero.[432]

In cases of actual de-engagement, the final taxation takes place as a result at the level of the acquiring limited liability company, which can therefore invoke the freedom of establishment. The scope of the secondary freedom of establishment therefore only protects situations in which the assets are transferred from one EU permanent establishment to another EU permanent establishment of the receiving EU corporations.

Legal tax easing

If, on the other hand, the restriction or exclusion of the German taxation law takes place (retroactively) at the filing date, the special de-tricking provision of § 20 para. 2 S. 2 No. 3 UmwStG on final taxation at the level of the transferring legal entity[433] and could thus prevent the transfer from being intended. Since the issue of the new shares in the acquiring company linked to the transfer is equivalent to the formation of a subsidiary, the scope of the secondary freedom of establishment is therefore limited by type. 49, par. 1, p. 2 TFEU. Moreover, since immediate taxation jeopardises the transfer of permanent establishment assets to the limited company, there is also a parallel interference with the free movement of capital (Article 63 TFEU).

The standard in question (§ 20 para 2 p. 2 no. 3 UmwStG) also covers the transfer of companies and subsidiaries as well as the transfer of shares in joint ventures against the issue of at least one new business interest in the acquiring company (§ 20 para 1 p. 1 UmwStG). In this context, the UmwStG does not provide for a minimum shareholding ratio by the transferor in the case of the transferee either in the case of the transferee (operation, part-operation or shareholding) or in the case of the acquiring corporation. § 20 UmwStG therefore also covers the transfer of an interest in a limited partnership of less than one percent against an interest of also less than one percent in the acquiring corporation. The application of § 20 para. 2 S. 2 No. 3 UmwStG does not depend either on the amount of the transferor’s participation in the subject matter of the transfer or on his participation rate in the acquiring limited liability company. It is therefore not necessary for the application of this standard for the shareholder to hold a shareholding to the extent that guarantees him a certain influence on the subject-matter or on the limited liability company. Therefore, cases of legal deregulation must be examined in accordance with the requirements of the free movement of capital.

The tax consequences associated with the discovery of the hidden reserves burden the transferring legal entity in the case of legal unencumbrance – unlike in the case of actual unencumbrance – with the result that the transferring legal entity is restricted to the free movement of capital by § 20 para. 2 S. 2 No. 3 UmwStG. Although the free movement of capital is also applicable to third-country matters and thus not territorially restricted, a third-country capital company will not be able to invoke a restriction on the free movement of capital by § 20 UmwStG, since the scope of the UmwStG is limited to EU matters. Consequently, it is necessary to examine in the following whether the scope of the UmwStG, which is limited to EU matters, is to be measured against the requirements of the freedom of establishment or the requirements of the freedom of movement of capital.

If the personal scope of application of § 20 ff. UmwStG is not opened[434], the contribution is considered an exchange-like process and thus leads to final taxation.[435] The following two case constellations are affected:

Situation 1: An unlimited taxpayer desires the tax-neutral transfer of business assets to a third-country capital company.

Constellation 2: A third-country resident (DTA state) desires the tax-neutral transfer of business assets to a German corporation.

In both case constellations, the scope of application of the UmwStG is excluded, since in case constellation 1 the acquiring company does not meet the foundation and residence requirements of § 1 para. 2 No. 1 UmwStG and in case constellation 2 the contributor does not meet the foundation and residence requirements of § 1 para. 2 No. 1 and No. 2 UmwStG or the requirements for the preservation of the taxation right according to § 1 para. 4 lit. b UmwStG. It is noticeable that the (third-country) location of the permanent establishment is irrelevant and the scope of application of the UmwStG depends exclusively on the founding and residence states of the transferring and assuming legal entity.

In both cases, the final taxation takes place according to §§ 16, 6 para. 6 EStG exclusively at the level of the transferring legal entity, which has to bear all tax disadvantages associated with the conversion. There are no tax obstacles for the acquiring corporation. Discriminated against – and thus prevented from establishing (foreign) permanent establishments or corporations – is exclusively the contributing legal entity. Therefore, in such cases, the contributor can invoke the fundamental freedoms.

The application requirements in § 1 UmwStG do not depend on a specific minimum participation of the contributor in the subject-matter of the transfer and in the acquiring corporation. § 1 UmwStG refuses transfers between third-country participants the tax-neutral transfer irrespective of the actual shareholding, so that it is not necessary for the shareholder to hold a shareholding that grants him a certain influence on the decisions of the subject-matter of the transfer or the limited company. Due to the generality of the standard for both portfolio holdings and control holdings, it must be examined solely with regard to the free movement of capital.

This view was confirmed by the ECJ in Rs. DMC – at least on Case Constellation 2. In the case submitted to the ECJ, foreign taxpayers were denied the tax-neutral transfer of a limited liability company located in the Federal Republic of Germany to a German GmbH because the taxation right of the Federal Republic of Germany with regard to the profit from the sale of the granted shares by the DBA Austria was excluded (§ 20 para 3 p. 1 UmwStG 1995). According to the correct finding of the ECJ, this personal application requirement was “suitable for preventing investors from participating in a limited partnership under German law”[436] and thus restricted the free movement of capital.[437] Since the regulation at that time corresponds to the current § 1 para 4 lit. b UmwStG, the decision can be transferred to the current legal situation, so that the transfer of domestic assets to a German limited company by third-country residents is in principle protected by the freedom of movement of capital. In the opposite case, if pure third-country assets are contributed by a resident in the Federal Republic of Germany (case constellation 1), nothing else can apply, since such a restriction can prevent investors from participating in third-country companies. As a result, not only residents of the Federal Republic of Germany (case constellation 1), but also residents of third countries (case constellation 2) can rely on art. 63 TFEU.[438]