date | theme

22. September 2018 | Asset Deal at the GmbH purchase: Purchase price tax depreciation

26. October 2018 | Share Deal: Company Purchase & Sale of a GmbH

09. November 2018 | Share Deal at the GmbH: 3 designs for tax optimization

17. May 2019 | Purchase of GmbH: Share Deal and Asset Deal – 3 designs for the buyer (this contribution)

When purchasing the GmbH, the buyer can in principle agree both a share deal and an asset deal with the seller of the GmbH. The buyer acquires all shares in the GmbH in the share deal. In the asset deal, on the other hand, he founds a new GmbH and then acquires all assets. We explain that the asset deal is the better solution for the buyer and how buyers and sellers can use three designs together in the share deal.

When it comes to acquiring a GmbH, different starting situations have to be distinguished. Since they are relevant in terms of tax implications, we present them to you briefly.

1.1. Sale of a partnership

One possibility is the sale of a partnership. In this case, the transfer is to be assessed equally for tax purposes for both the seller and the acquirer. Therefore, neither one nor the other can count on tax advantages or disadvantages.

1.2. Sale of a GmbH

However, if it is the sale of a GmbH, two different variants are possible for sale: the share deal and the asset deal. In contrast to the purchase of a partnership, share deal and asset deal lead to different tax effects with advantages but also disadvantages.

1.2.1. GmbH Purchase by Share Deal

In the share deal, the GmbH is sold to itself. The seller benefits from the fact that the tax burden remains in the order of about 25% of the sales proceeds. The buyer, on the other hand, has two disadvantages. First, it cannot depreciate the assets of the acquired GmbH. Secondly, any financing costs for the purchase of the company are also excluded from taxation.

Example of the Share Deal

An entrepreneur holds 100% of a GmbH in his private assets. He agrees the sale to another entrepreneur and agrees with him a selling price of EUR 1,000,000. For the seller, only 60% of this is subject to tax: EUR 1,000,000 x 60% = EUR 600,000 taxable profit. Assuming the unfavorable case that the taxable profit is subject to the highest tax rate of 42%, it follows: EUR 600,000 x 42% = EUR 252,000. In short, the seller achieves a net profit of about 75% of the sales proceeds, but often more. If the buyer had acquired a partnership, he would have been able to make a write-down on the goodwill and financing costs. However, the share deal of a GmbH excludes this.

As you can see, the share deal is particularly advantageous for the seller, while the buyer only receives advantages when buying a partnership.

1.2.2. GmbH Purchase by Asset Deal

In contrast to the share deal, the asset deal sells the assets of the GmbH. In other words, the GmbH is sold piecemeal. In the end, the empty GmbH remains behind and can be liquidated. It should also be noted that all rights and obligations of the GmbH effectively sold by Asset Deal remain incumbent upon it.

In this constellation, tax advantages on the part of the buyer are to be expected. In fact, it can recognise both the financing costs associated with the purchase and the depreciation for tax purposes in its favour. Unlike the share deal, the buyer is excluded from the transfer of the legal succession in the asset deal. In other words: He must transfer the existing contracts with the acquired GmbH to his own company. This often leads to adverse changes, such as rent increases or other renegotiations.

The seller, on the other hand, must take into account certain disadvantages of the asset deal compared to a share deal. While the seller can assume a tax of at most about 25% of the sales proceeds in the share deal, he has to calculate with an approximately twice as high tax burden in the asset deal. On the one hand, the GmbH has to pay corporate tax and trade tax on the sales proceeds. The resulting profit is then distributed to the seller, who is still a shareholder of the now empty GmbH. Since this is income from capital income, capital income taxes of lump sum 25% as well as solidarity surcharge and church tax are incurred. In the end, this amounts to a tax burden of approximately 50% of the original sales proceeds.

Example of the asset deal:

Buyer and seller agree to sell a GmbH as part of an asset deal. The selling price of the assets is EUR 1,000,000. The GmbH has to pay corporate tax and trade tax on this. The corporate tax rate is uniformly 15%, but the levy rate for business tax is determined by each municipality itself. A realistic assumption of 15% business tax thus leads to a taxation of 30% of profit. Profit is the difference between the proceeds of the sale and the book value of the assets sold. If the book value corresponds to the equity capital and this in turn corresponds to the minimum share capital of a GmbH of EUR 25,000, a profit of EUR 975,000 is thus incurred. 15% corporate tax and business tax reduce it to EUR 682,500. The GmbH should now distribute the profit to the selling shareholder. If we calculate in a simplified manner without church tax with 25% capital gains tax (EUR 170.625) and 5.5% solidarity surcharge (EUR 9.384), the total tax burden amounts to EUR 472,500. The seller thus only EUR 527,500 net remains.

The buyer can write off the goodwill, i.e. the difference between the book value of the purchased assets and the total purchase price, over a period of 15 years. Assuming that the book value of the acquired assets is 70%, in our example there is a tax saving of EUR 300,000 over the entire term of the depreciation. In addition, the buyer can also save taxes due to the possible financing costs, because these reduce the current profit of the acquired GmbH.

The asset deal leads to a tax burden on the seller about twice as high as the share deal. The buyer, on the other hand, can use both the financing costs and the depreciation of the goodwill assets for tax purposes.

There are three ways to make the purchase of a GmbH tax more attractive for both the seller and the buyer than in a classic share deal or asset deal. Two of these recommendations address the seller and one is more interesting for the buyer.

2.1. GmbH-Purchase Design I: Conversion into a partnership

If the seller has reached the age of 55 years or is permanently incapacitated, he can benefit from the advantage of a reduced tax rate, which is granted once under § 34 EStG. In principle, this stipulates that the seller, upon request from the tax office, is subject to a reduced tax rate of 56% of his average tax rate when taxing the sales profit. This applies under the condition that the sales proceeds are less than EUR 5.000.000 and the tax rate is at least 14%. However, a prerequisite for this is the sale of a partnership or individual company. So the shareholder should convert the GmbH into a partnership or a single company before the sale. However, if profit carried forward is present in the GmbH, its conversion into a partnership leads to a legally enforced profit distribution and consequently to a capital gains tax at the shareholder.

The conversion of a GmbH into a partnership (e.g. GmbH & Co. KG) or into a single company, however, includes another tax consequence that you should know. If the sale of the converted company takes place within the next five years after the conversion, trade tax is incurred. In addition, their crediting to the seller’s income tax is excluded. Therefore, when planning the sale, the seller should consider these limitations.

2.1.1. Calculating example for taxation in the sale of the GmbH

Consider the tax implications on the part of the seller if he opts for the early conversion of his GmbH:

In order to offer you comparable data, this sale of a GmbH takes place for a proceeds of EUR 1,000,000. In addition, their transformation into a single company took place more than five years ago. Furthermore, the seller is older than 55 years. All the conditions for avoiding business tax and applying for the reduced rate are thus met. Incidentally, we consider the worst case for the seller and assume the top tax rate of 42% for him. This results in the following calculation of the capital gains tax and the solidarity surcharge: EUR 1,000,000 x 42% x 56% = EUR 235,200 capital gains tax, EUR 235,200 x 5.5% = EUR 12,936, in total EUR 248,136 tax burden. In other words, the seller has a net result of EUR 751,864.

2.2. GmbH purchase Design II: transfer to a holding company before the company sale

In this possibility of taxing the sale of a GmbH, the seller also sets up a holding company as early as possible. He then brings the corporation into this holding company. A largely tax-free sale of the corporation by the holding company is then possible after seven years. However, if the sale is to take place before the expiry of this period, then the corporate tax savings will be one-seventh lower for each year elapsed after the transfer.

The sale of a GmbH by a holding company after the blocking period of seven years is almost tax-free because the profit is subject to taxation only 5%. Assuming that corporation tax and business tax together amount to 30%, this results in a tax of just 1.5% of the sales profit at the holding company. Accordingly, the income tax of the shareholder of the holding company is of course also low.

2.2.1. Calculation example for taxation in the sale of companies

The transfer of a GmbH to be sold into a holding company had already taken place more than seven years ago in this example. The sales price was also set at EUR 1,000,000. The holding company incurs a tax burden of 5%: EUR 1,000,000 x 5% = EUR 50,000 This results in a profit distribution by the holding company to the selling shareholder in the amount of EUR 950,000. This triggers a capital gains tax of 25% and a solidarity surcharge of 5.5% (simplified calculation without church tax): EUR 950,000 x 25% = EUR 237,500 capital gains tax, EUR 237,500 x 5.5% = EUR 13,063 solidarity surcharge, in total EUR 250,563 tax burden. In other words, the net result of the shareholder is EUR 749,437.

Assuming the sale takes place one year after the contribution, only one-seventh can be taken into account in the calculation of income tax: EUR 1,000,000 x 15% = EUR 150,000 corporate tax in total, of which 6/7 corresponds to approximately EUR 128,571.

2.3. GmbH purchase Design III: Debt-push-down-model

In the model presented here, the acquisition of the GmbH takes place in such a way that the buyer establishes a holding company in order to acquire the GmbH. For this purpose, the holding company takes out a loan corresponding to the selling price. In a second step, the purchased GmbH now takes out a loan that corresponds to 100.75% of the sales price. In the third step, the GmbH pays out a profit in the amount of this loan to the holding company. Thus, the liability associated with the purchase practically passes to the purchased company – it pays itself.

Since the holding company holds an interest of more than 10% in the acquired company, the profit distribution is 100% tax-free. However, 5% is a statutory flat-rate expense, which is subject to corporate tax. Under the realistic assumption that the holding company holds at least 15% of the acquired GmbH, only this 5% is subject to the trade tax on the distribution. Thus, the 5% lump-sum statutory expenses are only corporate tax of 15% and business tax of 15%. The total tax burden is thus only 1.5%. For this reason, the loan should be 101.5% of the purchase price.

But there is still one condition to consider: The profit distribution to the holding company is exempt from corporate tax only if the participation was already present at the beginning of the calendar year. A corresponding coordination between seller and buyer is therefore certainly appropriate.

With this model, the buyer gets the advantage that the interest expense associated with the loan from the acquired company reduces the current profit, which thus leads to a lower tax overall. Furthermore, the repayment of the liability also takes place before taxation.

2.3.1. Calculating example for taxation in the sale of companies

To show the tax consequences of this model on the buyer’s side, we give you the following example:

In the run-up to the purchase of a GmbH, the buyer establishes his own company, which in the future will function as a parent company. This parent company continues to take out a loan equal to the sale price of EUR 1,000,000. After the acquisition of the GmbH, it then takes out its own loan in the amount of 100.75% of the purchase price, i.e. EUR 1,000,750. The GmbH will then pay this amount to the parent company. The distribution is exempt from both corporate tax and trade tax due to the parent company’s 100% shareholding in the GmbH. However, the statutory expense over 5% of the distribution must be applied to corporate tax: EUR 1,000,000 x 5% = EUR 50,000 statutory expense, EUR 50,000 x 15% = EUR 7,500 corporate tax and EUR 50,000 x 15% = EUR 7,500 business tax, in total EUR 15,000. This amount corresponds to the 1.5%, which is the loan of the GmbH above the purchase price.

Conclusion on the options for the GmbH purchase

The calculation examples show that the sale of a GmbH five years after conversion into a partnership or individual company is the most favorable tax option for the seller. However, for the sake of simplification, details have been omitted. For example, a comparison of taxation between the GmbH and its counterparts after the conversion in the period of the five-year blocking period has been omitted. Furthermore, this option can only take place under the stated conditions. However, if the seller is younger than 55 years of age, for example, the transfer to a holding company is an alternative that results in only a slightly higher tax burden. The difference is about 2%.

Furthermore, the buyer of a GmbH can also benefit from tax through clever advance planning. The establishment of a parent company as a future buyer of a company under the described debt push-down model is certainly a possibility that needs to be examined more closely. We would be happy to introduce you to other alternatives personally. Of course, we also advise and support you when setting up a holding company – for example when setting up a GmbH.