equity in the final balance sheet of the GmbH (including retained earnings) | EUR | 75,000

– | Stock of the deposit account in the final balance sheet of the GmbH | EUR | 25.000

= | Capital assets | EUR | 50.000

book value of assets to be transferred | EUR | 175.000

– | Cost of conversion | EUR | 500

– | Acquisition costs of the shares in the GmbH (here: stock deposit account) | EUR | 25,000

= | Preliminary Takeover Profit | EUR | 149,500

– | Capital assets | EUR | 50.000

= | Takeover profit | EUR | 99,500

The merger of a GmbH into a sole proprietorship can be a good alternative to a complex liquidation. Special features must be considered in the implementation as well as in the legal succession or the takeover of the assets in the opening balance sheet and any loss carry forward. In particular, the impact of negative equity on the receiving individual company deserves particular attention.

Many reasons can cause the merger of a GmbH to a sole proprietorship. On the one hand, this can be the exemption from the obligation to publish the balance sheet. In addition, the reason may be detachment from the rigid accounting obligations imposed on a GmbH, but may be less strict for a sole proprietorship. A third reason exists if the economic situation of the GmbH is unfavorable and thus the expense of managing a GmbH turns out to be too high. Incidentally, from this point of view, the merger of a GmbH into a sole proprietorship represents a favorable alternative to liquidation. Fifthly, there is also the preferential taxation of 28.25% of accrued profits in the income tax, which the sole proprietor can then use. However, a number of conditions must be met. In addition, there will also be a 25 % re-taxation under the income tax, if the profits taxed in a favourable manner are taken in later marketing years.

In this context and all the following considerations, it seems only logical to assume that the GmbH is previously held by a sole shareholder.

Legal aspects of the merger of a GmbH into a sole proprietorship

2.1. Exclusion of a change of form

The only legally feasible way to convert a GmbH into a sole proprietorship is the merger. A change of shape as an alternative to this is therefore not provided by the legislator.

2.2. Three scenarios in the merger of a GmbH into a sole proprietorship

In order to clarify the merger of a GmbH into a sole proprietorship, it is helpful that we first distinguish between three possible conditions.

2.2.1. Merger into an existing sole proprietorship

In scenario one, the shareholder also manages a sole proprietorship in parallel with the GmbH. This is then the goal of the merger. The sole proprietorship thus takes over the assets of the GmbH. Furthermore, it assumes legal succession in all respects that were previously associated with the GmbH. What implications this has, we show you separately in the fourth section.

2.2.2. Merger into a newly created sole proprietorship

In scenario two, however, there is still no individual company into which the GmbH can be merged. Therefore, according to the general provisions of the Commercial Code, the sole proprietorship has yet to be established for this purpose. This is then done in the course of the merger, so that in the end no significant differences between the two previously mentioned scenarios occur.

2.2.3 Freelancer merger

Finally, we come to scenario number three. On the one hand, it seems a bit more complicated at first glance, but in the end it is also easy to implement. Here, the sole shareholder of the GmbH is a freelancer who as such does not establish a business after the conversion and therefore does not have to register a sole company in the commercial register. In this case, the merger takes place in accordance with § 122 (2) UmwG by simply registering the merger with the commercial register, which is responsible for the GmbH. The merger is therefore considered to have been implemented.

In order to draw up the legally prescribed and legally binding merger agreement between the GmbH and the sole shareholder, the determination of a deadline is necessary. Thus, from this date onwards the GmbH should cease to exist and now continue as a sole proprietorship.

3.2. Notarisation of the merger agreement

First of all, a merger agreement between the GmbH and the sole shareholder must be drawn up. If a works council exists in the GmbH, it must be informed about the content of the contract at the latest one month before the resolution of the shareholders’ meeting of the GmbH. Otherwise, the merger agreement can be notarized immediately.

3.3. No requirement to draw up a merger report

Fortunately, the fact that only one shareholder is involved in the GmbH makes it possible to waive the preparation of a merger report. Nevertheless, such an intermediate step is legally possible.

3.4. No merger test requirement

In addition, the same argumentation that justifies the waiver of a merger report also applies to the legal requirement of the merger review.

3.5. preparation of a final balance sheet

As with other conversions, in the case of a merger of a GmbH to a sole proprietorship, a final balance sheet must be drawn up to the date preceding the merger. A date can be chosen which is up to eight months before the application for registration in the commercial register. With this retroactive effect, the use of the current annual balance sheet of the GmbH is also possible, provided that it is less than eight months old at the time of registration with the register.

3.6. Application for a merger with the Commercial Register

Finally, the registration of the merger with the commercial register sets the end of the merger. However, this is only a formal step, because the merger may have already taken place at an earlier point in time within the past eight months.

4. Civil aspects of the consequences of the merger of a GmbH into a sole proprietorship

In general, the merger of a GmbH to a sole proprietorship is to be regarded under civil law as a universal succession. In other words, all claims and liabilities of the GmbH are transferred to the sole proprietor on the merger date. In addition, this means that the sole proprietor assumes the depreciation of the acquired assets and the reserves of the GmbH. Consequently, all previous mutual claims and liabilities between the GmbH and the sole proprietor expire at the time of the merger.

If the GmbH is over-indebted, its merger with the sole proprietorship initially represents an improvement in the situation of the GmbH’s creditors. Finally, the sole proprietor, unlike the GmbH, is fully liable with his private assets for liabilities assumed by the GmbH. However, there is also the risk that the merger of an over-indebted GmbH could lead to a private insolvency of the sole proprietor. So in this extreme case, the creditors of the GmbH have the disadvantage. It is therefore also necessary to consider whether the offence of bankruptcy has been delayed.

Since a sole proprietor enters as a full proprietor through the legal provisions of the Commercial Code, the decision to merge the GmbH is of far-reaching consequence. Thus, the decision to take such a decisive step should then also be correspondingly well-founded.

Tax consequences of the merger of a GmbH into a sole proprietorship

5.1 Real estate transfer tax on transfer of real estate

If the transfer of real estate takes place within the framework of the merger of a GmbH to a sole proprietorship, these are in principle the subject of the real estate transfer tax. It is irrelevant that the sole proprietor is also the sole shareholder of the GmbH.

5.2. Accounting for assets in the event of a merger of a GmbH into a sole proprietorship

The tax consequences in the merger of a GmbH to a sole proprietorship relate in particular to the accounting of the assets in the final balance sheet of the GmbH and thus also in the opening balance sheet of the sole proprietorship as well as the transfer of any loss carry-forwards of the GmbH.

However, if the acquiring sole proprietorship is an undertaking in which there is no registration in the commercial register, then the transferred assets will be deemed to be transferred directly to the sole proprietor. However, this has the consequence that on the part of the GmbH this means a discovery of the hidden reserves, which leads to the taxation of the transferred assets.

5.3 Cancellation of any loss carry forward

First of all, loss carry forwards subject to corporate and trade tax cannot be transferred to the sole proprietorship. Thus, the loss carry forward and the current loss of the GmbH are basically lost in the year of the conversion. If the GmbH still has hidden reserves, these should be discovered before the merger. The discovery of the hidden reserves does not lead to a tax burden, but rather to the individual company benefiting from a higher depreciation base.

5.4. Taxation of GmbH profit reserves

When a GmbH is merged into a sole proprietorship, profits from previous years previously withheld by the GmbH are taxed directly. The difference between the equity according to the final tax balance of the GmbH and the stock of the deposit account forms the taxable capital assets.

An example:

5.5 Taxation of a takeover profit in the case of a merger of a GmbH into a sole proprietorship

Furthermore, a situation in the merger of a GmbH to a sole proprietorship can also lead to taxation, namely the so-called takeover profit. The takeover profit is an amount resulting from offsetting the capital assets and the provisional takeover profit. The preliminary takeover profit is to be determined from the difference between the book value of the assets to be transferred including the hidden reserves and the costs of the conversion as well as the acquisition costs of the GmbH of the sole shareholder. In this respect, it is irrelevant whether the GmbH was founded by the sole proprietor or previously purchased. Thus, the takeover profit is the difference between the provisional takeover profit and the capital assets.

An example of this, where we connect to the one from the previous section:

5.6. offsetting a takeover loss in the case of a merger of a GmbH to a sole proprietorship

If, however, a takeover loss is established in the determination of the takeover profit, this can be taken into account in half, but only up to a maximum of 50 % of the transferred capital assets. However, it should be noted that the crediting of the takeover loss depends on two conditions. On the one hand, the GmbH must have been acquired more than five years before the date of the merger. If it was acquired free of charge, then this period applies only if the previous owner could not have claimed a loss. Otherwise, this is not an exclusion criterion. In addition, the participation of the sole proprietor must have been at least 1 % during this period.

5.7 Taxation on sale or cessation of the sole proprietorship after the merger

Finally, an indication of another deadline. If a sale or abandonment occurs within five years of the merger of the GmbH on the sole proprietorship, the profit made is subsequently subject to trade tax. In this case, the crediting of the paid business tax to the income tax is also excluded. The legislator thus intended to prevent potential misuse of design with the help of this conversion.

In the video we explain what in civil law & notarial must be observed & how such a merger can be made tax-neutral.

6. Relevance of retroactivity

Since the retroactive effect of merging companies is incomprehensible to many of our mandates, we include this explanatory section.

In principle, retroactive effect as a so-called legal fiction constitutes an assumption on which all tax and legal effects affecting the acquiring company in the period of retroactive effect are based.

A very special, but initially confusing example is the existence of the individual company before its foundation. In this case, we assume that the GmbH is to be merged with the sole proprietorship, but the latter does not exist at the time of the decision. The retroactive effect comes into play in such a way that one simply assumes that the individual company already existed at that time. Instead of the GmbH having to pay corporation tax for the period of retroactive effect, this is waived by the sole proprietor.