date | theme

25. April 2017 | Use loss carry forward in the GmbH purchase

23. August 2018 | GmbH loss carry forwards: § 8c KStG unconstitutional -> objection & deadline

11. November 2018 | Save the loss carry forwards at the GmbH: the new § 8d KStG helps!

17. February 2019 | Buy loss carryforwards from GmbH: 6 new strategies for the use of losses

16. February 2021 | Use loss carry forward in the GmbH purchase (this contribution)

Companies that are about to convert and carry forward losses also face the challenge of preserving them. Because the legislator has designed the regulations in such a way that loss carry forwards are lost in a conversion in principle. Under certain circumstances, however, a loss carry forward can be used. It depends on how the conversion takes place. In the case of conversion by change of form, fusion or splitting, the loss carry forward can be offset against any hidden reserves. When submitting, however, the entrepreneurial identity must be preserved as a prerequisite. So read here how you can save loss carry forwards when converting your business from going down.

Buying GmbH with loss carry forward: Paying out profits tax-free

Legal aspects of loss carry forward in the event of a company’s conversion

The conversion of a corporation is the legal subject of both the Conversion Act (Civil Law) and the Conversion Tax Act (Tax Law). The question of how such a conversion affects a loss carry-forward has only been clarified by case law before the Bundesfinanzhof. Meanwhile, the legislature has adapted the law to the judgment. In principle, the transfer of any loss carry forward was excluded. In detail, however, the handling of a loss carry forward looks much more complicated, because it is more differentiated to consider.

While the terms change of form, merger and division originate from the conversion law, the contribution is a purely tax-legal aspect. Therefore, it is hardly surprising that in certain constellations the introduction is also related to processes in the other types of conversion. These include the merger of a partnership into a limited liability company or another partnership, the division or separation of a commercial partnership, the change of legal form of a partnership into a limited liability company and the separation in all possible combinations.

2. The loss carry-forward in the case of change of form, merger, division and introduction

2.1 Loss carry forward in the event of a transformation of an enterprise: change of legal form

First of all, with regard to the change of legal form, it should be noted that this only changes the legal provisions under which a company is to be treated. Thus, both a change of legal form from a partnership to a corporation and vice versa, as well as each other, comes into consideration.

In the conversion tax law, in connection with a loss carry forward, the case of a change of legal form from a corporation to a partnership is of particular importance (§1 (1) No. 2 UmwStG). § 4 (2) sentence 2 UmwStG stipulates that in such a case a loss carry forward from the takeover into the partnership resulting from the change of legal form is excluded in principle. However, if there are hidden reserves in the corporation, these can be offset against the loss carry-forwards from business tax and corporate tax. However, the prerequisite for this is that the hidden reserves are discovered during the conversion and thus taxed. However, such a taxation is only possible if the hidden reserves are taxed at their common value, but at least at an intermediate value. If, on the other hand, the hidden reserves are applied with the book value, this represents a tax-neutral conversion; an offsetting of the loss carry forward is thus omitted.

The reverse case of a change of legal form of a partnership into a corporation is of course also possible. However, as already explained above, this constitutes a contribution within the meaning of the Conversion Tax Act. Therefore, we refer here to the section that deals with the rescue of the loss carry-forward in the case of a contribution.

2.2. Loss carry-forward on conversion of an entity: merger

In the merger, the treatment of a loss carry forward is given in a similar manner. In this case too, the law stipulates that loss carry-forwards can only be counted on the condition that hidden reserves are discovered. It does not matter whether the merger takes place to create a new entity or whether one company merges with another. The merger of a subsidiary to the parent company is also covered by this rule.

2.3. Loss carry-forward on conversion of an entity: division

In the case of a division of an enterprise, a distinction must be made between the division or separation of a commercial partnership or a corporation. If this is the case for a commercial partnership, the result of the conversion is regarded from a tax point of view as a contribution. However, if there is a division of a corporation, this is to be regarded as a transfer of assets. It does not matter whether the acquiring company is a corporation or a partnership.

Regarding our issue of loss carry forward, we point out in connection with a spin-off that only part of the loss carry forward remains with the transferring entity. The amount of the share of the loss carry-forward that is retained depends on the percentage of assets transferred by the separation. If, for example, a GmbH splits 40% of its assets into a GmbH or a limited partnership, it still retains 60% of its original loss carry-forward after the split. However, the remaining 40% are lost.

In the latter case, the same rules apply as for the merger. Consequently, a loss carry-forward is relieved of the risk of loss only if it can be compensated with hidden reserves. Losses that exceed the amount of hidden reserves discovered, on the other hand, are forfeited.

2.4. Loss carry-forward in case of conversion of an entity: contribution

Contrary to the previously described requirements for the conversion of companies with loss carry forwards, a different regulation applies to the contribution. In this case, a loss carry-forward is disregarded in the business tax and thus disappears, unless the transfer is accompanied by a continuation of the business identity. Silent reserves therefore have no balancing effect here. A loss carry-forward in the case of corporate tax, on the other hand, can be compensated with the hidden reserves.

The requirements imposed by the legislator for the use of loss carry forwards are thus known. Therefore, we now deal specifically with the possibilities available in a conversion in order to be able to use a loss carry forward. We would like to explain these relationships to you using the following exemplary case constructions.

3.1. Use of loss carry forward in the event of a change of form

If, for example, Shape Shifter-GmbH plans to convert to BEORN GmbH & Co. KG, this represents a change of form within the framework of the Transformation Act. On the tax date of the conversion, the GmbH has a loss carry-forward of trade tax and corporate tax of a total of EUR 50,000. Usually this goes down in the conversion. However, let us assume that the GmbH also has hidden reserves of EUR 45,000. This opens up the possibility of at least partially averting the imminent loss carry-forward. The following step is crucial: In the transfer, the GmbH balances its hidden reserves with the common value, so that only EUR 5,000 of the loss carry forward is lost. Alternatively, instead of the approach with the common value, an (almost) freely selectable intermediate value could be accounted for, but this must be above the book value. The disadvantage here, however, is that a higher proportion of the loss carry forward is thereby lost.

3.2. The loss carry forward at the merger

In the merger, several variants can be considered in connection with the rescue of a loss carry forward. Let us give you a few examples.

3.2.1. Loss carry forward in the event of a merger of a subsidiary GmbH to the parent company (upstream merger)

To give an example of saving a loss carry forward in a merger, we construct Filia-Rheni-GmbH as a wholly owned subsidiary of Germania-Mater-AG. The subsidiary has a carry-forward loss of EUR 45,000 and is now to be merged into the parent company. Incidentally, this process is also called an upstream merger. In contrast, the merger of two sister companies is also known as side-stream merger.

In order to save the loss carry forward from sinking, in this example too, an accounting with hidden reserves of EUR 55,000 should take place. However, we modify this example to the effect that instead of the common value of EUR 55,000, an intermediate value of exactly EUR 45,000 is in the final balance sheet at the transmission date. From a tax point of view, therefore, the loss carry-forward balances with the hidden reserves discovered and thus taxable; The loss carry forward was used completely and thus saved. The EUR 10,000 difference between the hidden reserves is exempted from taxation in the context of the conversion, but is subject to full taxation in the event of a later discovery.

3.2.2. Loss carry forward in the event of a merger of a parent to the subsidiary (downstream merger)

This is now the reverse case, which is also called downstream merger. The parent undertaking is therefore to be dissolved by the merger into the subsidiary. Little original we call the two companies Mutter-KG and Tochter-GmbH. The parent company carries forward a loss carry forward of EUR 50,000 and hidden reserves of EUR 50,000 at the tax date of the conversion. In this hypothetical case, too, it is possible to offset the hidden reserves against the loss carry forward, provided that the reserves are discovered. This saves the loss carry forward of the parent KG.

3.2.3. Use of loss carry-forward in the case of a merger of two unrelated undertakings

Of course, the offsetting of a loss carry forward is also possible in the case of the merger of two unrelated companies. This is done in the same way using hidden reserves, which come to the discovery. Since this is pretty much the same as the other two examples of parent-subsidiaries merging (and we’re running out of fancy names for companies), we’re omitting another example at this point.

3.3. avoidance of loss carry-forward in the event of division

Here we distinguish between separation, separation and separation. Accordingly, we also structure the examples that we offer you for explanation.

3.3.1. Breakdown of an entity using loss carry forward

A company is split if it transfers all economic components to other, start-up or existing companies. In return, the shareholders of the split entity receive equity rights in the acquiring entities. As in the following example:

Schisma GmbH is subject to a loss carry forward of EUR 50,000 and is to be split up. The companies Schluck-und-weg GmbH and Mit-einem-Happen-KG each receive half of the shares arising from the split. Furthermore, there are hidden reserves with a common value of EUR 50,000 in the Schisma GmbH. However, they should be transferred completely to Schluck-und-weg GmbH. Here, the advantage is now given that the loss carry forward together with the hidden reserves can be transferred to Schluck-und-weg GmbH. This leads to a use of the loss carry forward by uncovering the hidden reserves at Schluck-und-weg GmbH. Thus, the hidden reserves revealed cancel the loss carry forward. Otherwise, the book values can also optionally be set in the plus-one-happen-KG. Only the valuation within the same transfer must be uniform.

3.3.2. Consideration of a loss carry forward in the case of a spin-off

For this purpose, we are mentally establishing Whitewater GmbH. Without wanting to surprise you, we also miss a loss carry forward of EUR 50,000. A division of the GmbH is now to be split off to Schaffhausen KG. In order to determine the loss carry-forward transferable in the spin-off, the assets of the division are compared with those of the GmbH. It is important here that the common values are to be used for this, regardless of whether these or the book values or intermediate values are preferred in the final balance sheet for conversion. In our example, the assets of the sub-operation amount to 10% of the common values of Whitewater GmbH. Thus, only 10% of their loss carry forward can be transferred to Schaffhausen KG. The remaining loss carry forward of Whitewater GmbH will then amount to EUR 45,000.

3.3.3. Derivation

Since a spin-off is always a contribution, we consider the spin-off as part of our explanation of the contribution.

3.4. The rescue of loss carry-forward in the case of a contribution

The preservation of loss carry forward in the case of trade tax requires a continuation of the business identity. This is ensured in particular in the case of the spin-off, as a parent-subsidiary relationship is created between the undertakings affected by the conversion. In addition, the change of legal form of a partnership into a capital company also constitutes a transfer in which the identity of the entrepreneurs is preserved. And, of course, this also applies to the merger of a partnership with another partnership or corporation, as well as the division or separation of a partnership. In all these cases, the business tax can be offset against a loss carry-forward by the acquiring company in the event of a transfer. On the other hand, a loss carry-forward is lost if assets are to be transferred from a corporation to a partnership in the event of a transfer.