“Securing corporate succession is the biggest entrepreneurial challenge”. [1] Tax advice for sole proprietorships and partnerships often requires restructuring and, if possible, a tax-neutral continuation of book value after transfers. The partnerships (often also called co-entrepreneurships) include GbR, OHG, KG and GmbH & Co. KG. This wish of the taxpayer is understandable, since the mere restructuring does not create additional liquidity that can be available for tax payments. Various means are available for the transferor in this respect. The concrete procedure in the application of § 6 Abs. 3 and paragraph 5 EStG were unclear for a long time. With the BMF letter of 03.03.2005, the financial administration has already allegedly raised questions of doubt in connection with the application of § 6 para. 3 EStG commented. In the meantime, however, from the BFH’s point of view, several judgments have been made on the topics contained in the BMF letter. This led the financial administration to fundamentally revise the BMF letter and publish it on 20.11.2019. [3] In our view, the revised opinion is positive and can be received with legal certainty, because the tax consultants who deal intensively with the company reorganisation and the existing income tax regulations have now the opportunity to understand the understanding of the financial administration. In this article, the goal is to give you a deeper look into the topic of company succession. In particular, it should be made clear which problem areas a tax consultant or a tax consultant can use. the transferor is confronted at all and what opportunities they offer to circumvent them.

The provision of § 6 Abs. 3 EStG enables a free transfer of enterprises (Alt. 1), branch enterprises (Alt. 2) and shares of a co-entrepreneur share in an enterprise (Alt. 3).[4] The three offences listed are so-called generalities which constitute an independent unit of economic goods. [5] In the context of the Corporate Tax Reform Act, the catalogue of facts was extended by the free transfer of parts of a share of a co-entrepreneur (Alt. 4) and free admission to a sole proprietorship (Alt. 5). [6] This considerably facilitates the succession of operations, since the material population is transferred to the legal successor in a book value-neutral manner. [7] At the same time, hidden reserves are thus transferred to the purchaser and consequently no longer taxed by the person who generated them. This violates § 6 Abs. 3 EStG the principle of individual taxation, in that the provision prevents the discovery of hidden reserves in the case of free business and business successions by ordering the continuation of the book value. [8] The provision does not include the right to choose to use the partial or common values of the assets instead of the book values (§ 6 para 3 p. 3 EStG). However, the continuation of book value is excluded if the taxation of hidden reserves is not ensured. [9] Accordingly, in the application of § 6 para. 3 EStG does not realise profits by uncovering the hidden reserves at the transferee and thus neither a sale of business nor an operating task or a withdrawal by the transferee.[10] In situations of para 3, incidents of the Inheritance Tax Act can generally also occur, whereby the transfer of business assets can usually be arranged free of inheritance tax. [] 11]

For the applicability of § 6 para. 3 EStG, the question of whether there is unlimited or limited tax liability is not decisive.[12] As a transferor and acceptor for the transfer of one of the permissible groups of subjects, natural persons, partnerships and corporations (e.g. a GmbH or private-benefit or charitable foundations)[13] are generally considered. In the case of a transfer involving a foundation, company rights cannot be imparted and the principles of discreet deposits do not apply. However, the book values can also be continued in such a situation by the newly issued opinion of the financial administration of 20.11.2019 (§ 6 para.). 3 EStG), insofar as the taxation of the hidden reserves is ensured.[14] This also applies if the receiving foundation is tax-exempt and the transferring share of the co-entrepreneur establishes a taxable economic business operation with the foundation. [15] On the other hand, the participation of a charitable foundation in a commercially oriented asset management partnership does not constitute an economic business operation.[16] The transmission process would in this case lead to the discovery of the silent reserves, since otherwise the control of the silent reserves would be thwarted. [17] According to the wording of the law, a natural person is expressly required in the case of the transfer of a part of a share of a co-entrepreneur as well as the free admission to a sole proprietorship as a receiver (§ 6 para. 3 S. 1 2. EStG).[18] The § 6 para. 3 EStG applies both to the determination of profits by comparison of operating assets (§ 4 Ab. 1, § 5 Abs). 1 EStG) as well as for the revenue surplus account (§ 4 para. 3 EStG.[19]

In this case, the entire viable operating unit must always be transferred, which first requires the transfer of the functionally essential operating bases.[20] In this context, all essential operating bases, such as e.g. the business organization, the customer base or the essential contractual relationships, can be transferred in a uniform operation to the legal successor, so that the business organization, the business can be maintained. [21] Only the continuation of the operation is the justification for the non-discovery of the hidden reserves, which would in principle be required if transferred to another person under the principle of individual taxation. Several successive individual transfers are also to be regarded as such a uniform transfer operation, insofar as they are in temporal and factual connection and are based on a uniform decision of will. [] 23]

In addition, the view that the functionally essential assets must be transferred only from the point of view of the transferor. In the case of several receiving persons, it is sufficient if the functionally essential operating principles are transferred to one of these persons. [24] Operation must still exist at the time of transfer. In this case, the condition is always that the person to whom the establishment is transferred can continue the same operation; the legal successor must accordingly be able to enter the position of legal predecessor, which means that the transferor must cease his previous operational activity.[25] When the company is discontinued, there is therefore no more operation i. S. d. § 6 Abs. 3 EStG.[26] An operation no longer exists in the case of a deposit in a GmbH, since the deposit is preceded by an operating task. [27] Again, such a consequence does not exist in a dormant operation, because this has not yet been abandoned and is still the subject of a transfer in accordance with § 6 para. 3 EStG can be.[28] Furthermore, the concept of operation is time-related.

In this context, it is only essential that there is an operation at the time of transfer. [29] According to the BFH, this procedure does not preclude § 42 AO nor the figure of the overall plan. [30] This is justified; where the transfer transaction is genuinely intended, neither retention nor disposal nor the transfer confers a particular tax advantage. [31] The detention of assets which do not constitute an essential operating base in the transfer of business is not detrimental to the tax neutrality of the transfer of business. The assets retained in the course of the business transfer are considered as transferred to private assets – with the possible consequence of the taxation of a withdrawal profit. This can be avoided by transferring the (functionally non-essential) assets to another business asset of the same taxpayer. [] 32]

Since § 6 para. 3 EStG presupposes a continuation of the same operation in the form in which it was transferred, changes in the essential operating bases of the operation may therefore be detrimental to the continuation of the book value. A crucial condition is that the taxation of hidden reserves is guaranteed. However, difficulties are also understood from the point of view of the case-law if the operating entity is not transferred to another taxpayer who is subsequently responsible for taxing the hidden reserves. As a consequence, the name of the holding should be given by activity; i.e. the purchaser must continue the specific activity with the same essential operating bases in order to comply with the provision of § 6 para. 3 EStG. [33]

As in the case of a business transfer, the free transfer of branches takes place according to § 6 para. 3 EStG on book values. A sub-entity can be understood as an organisationally closed part of an overall holding, which is equipped with a certain degree of autonomy and which, in itself, has all the characteristics of an establishment as a whole and is viable as such.[34] A part of a business is considered to be capable if, in its structure, it provides the basis for an independent business activity of the taxable person. The operating part must form a sub-unit in the sense of an independent branch within the framework of an entire enterprise, which could also exist as a separate enterprise. [] 35

Within the framework of the whole enterprise, the assets transferred must serve, in their summary, an activity which is clearly distinct from the other commercial activity of the vendor. Possible delimitation features can be the geographical separation from the main operation, a separate accounting, own staff, own administration, independent organization, own fixed assets, or also a own customer base. [36] When it comes to the question of whether there is a partial operation, the perspective of the transferor is also important here.[37] Rather, there is no longer a partial operation if a unit is transferred which, as an independent activity, cannot be assessed as commercial. The legal principles of the maintenance of the business entity or the single transfer operation apply as a whole, as in the case of the transfer of business.

Finally, § 6 para. 3 EStG also shareholders. This means, according to the wording, the entire share of the co-entrepreneur, i.e. the participation of a co-entrepreneur in a co-entrepreneurship which maintains a business enterprise, a business of independent work or the country and forestry. [38] The legal principles of the maintenance of the business entity or the unitary transfer operation apply as a whole, as in the case of the transfer of business.[39] A co-entrepreneur share includes both the share of the total hand assets and the special business assets attributable to the individual co-entrepreneur.[40] It is crucial that the functionally essential operating principles of both asset groups are transferred, i.e. the total hand range and the special operating assets. [] 41

In addition, the functionally essential special assets of the co-entrepreneur are an inseparable part of the co-entrepreneur’s share. [42] If essential operating bases are retained in the course of the transfer, the application of § 6 para. 3 S. 1 EStG excluded; There is then a profit-realizing task of the co-entrepreneur's share.[43] This operation is taxable in accordance with § 34. In this case, it does not matter whether the vendor extracted the asset or assigned it to another business asset.[45] If functionally non-essential operating assets are retained, it is subject to the application of § 6 para. 3 S. 1 EStG. Accordingly, it may be sold or in accordance with § 6 Abs. 5 EStG are transferred to book values. [] 46]

The provision of § 6 para. 3 EStG links to the concept of transmission without defining it. However, this is the transfer of the in § 6 Abs. 5 p.1 EStG related concept of transfer.[47] It is based on the legal principles of § 39 para. 2 No. 1 AO. This is because it is decisive that the acquirer exercises actual control for the normal period of use in such a way that he himself has become the owner under civil law or can economically exclude him from the influence on the economic good for the normal period of use. In this respect, it is not sufficient that an essential operating basis is not transferred in rem, but that the receiving taxpayer is granted a mandatory right of use thereon. [] 48]

The trend is to check whether the acquirer receives a functional population.[49] In the case of a transmission which is carried out stepwise, there is nevertheless a uniform transmission process if there is a close factual and temporal relationship between the individual partial acts and these are based on a uniform decision. [50] Another requirement is that the acquirer becomes a co-entrepreneur.[51] Finally, it should be mentioned that a transfer to several acquirers is possible. [] 52]

The gratuitousness of a transfer i.S. d. § 6 para. 3 EStG is an important requirement. In this respect, however, it is not only gratuitousness that is necessary; Rather, the transferor should be imputable to a will to effect the capital transfer without any consideration. [53] Accordingly, the transfer operations of the material groups are subject to civil law, namely the donation (§ 516 BGB), which requires a willful donation. [54] If this transfer of assets does not take place as a pure donation, a donation under condition (§ 525 BGB)[55] can also be made under civil law.

In such a case, the condition reduces the value of the grant, so that the value of the grant from the outset is solely the difference between the value of the assigned asset and the value of the condition. [56] If, in addition, operating liabilities are assumed in this operation, they are subject to § 6 para. 3 EStG is not in return. This net consideration is intended to enable the applicability of book value continuity in the transfer of material aggregates even if – as in most cases – the assumed unit also includes debts.[57] In contrast, there are transfers for remuneration – including transactions similar to exchange, if the consideration consists in company rights – which no longer fall within the scope of § 6 para. 3 EStG fall.[58] In a situation of partial payment transfer – unlike in the context of § 6 Abs. 5 EStG – according to the constant jurisprudence of the BFH, the so-called unity theory.[59] In such a case, the gain on sale shall be determined by comparing the sales price with the book value of the assets. As long as the received remuneration is lower than the tax book values or it corresponds to it, a free transaction can be assumed on which the § 6 para. 3 EStG is applicable. [60] In this context, it is irrelevant whether the part of the transaction in return for payment or free of charge predominates. [61] If there is a remuneration received that exceeds the tax book values, there is a full remuneration transfer.

It is therefore a sale within the meaning of § 16 EStG. The purchaser shall distribute the agreed purchase price among the acquired assets of the holding. [62] In the case of a remuneration received that exceeds the book value but not the common value, the hidden reserves are only partially revealed, since a transfer for remuneration and free of charge takes place together. [] 63]

Upon fulfillment of all conditions, the assets are to be valued at the transferor’s book values for determining the transfer profit (§ 6 para 1 p. 1 half). EStG. In the case of such an operation, there is neither a sale of business nor an operation task.[64] Operation shall be continued without interruption by the legal successor. [65] Therefore, the facts of the withdrawal and subsequent deposit are not fulfilled. [66] Taxation is ruled out in the absence of a profit.[67] Consequently, the transferor does not achieve a capital gain or a loss in this transaction. [68] However, if not all the essential operating bases are transferred during the transfer, this leads to a profit-making abandonment of the company or share of the company and thus to the conclusion that § 6 para. 3 cannot be applied.

The legal successor has to continue the book values of the transferor for the material population and may therefore not accept the higher partial values and deduct the AfA from them (§ 6 para.) 3 S. 3 EStG.[69]

According to constant jurisprudence, ruling literature and financial administration is a process which is subject to § 6 para. 3 EStG falls to judge both the transferee and the transferee according to the unity theory. As a result, the acquirer has no acquisition costs due to the gratuitousness.[70] In the case of a remuneration provided by the acquirer below the book value, a non-negligible contribution in accordance with § 12 No. 2 EStG arises from the point of view of income tax. Therefore, the offsetting of the book values via a negative supplementary balance sheet is ruled out.[72] Subsequently, the acquirer enters fully into the legal position of the transferor (so-called footsteps theory). [73]

The legal successor has neither a paid acquisition nor a deposit or opening of operations.[74] Rather, the balance sheet relationship is maintained in an object- and income-source-related view. [75] The legal successor also enters the legal position of the legal predecessor with regard to all accounting characteristics, in particular with regard to belonging to the company assets, the AfA method, compliance with the blocking period according to § 6 para. 5 S. 4 EStG,[76] as well as the provisions in § 7g para. 2 EStG required size characteristics.[77]

The legislature wanted with the provision of § 6 para. 3 EStG enable or facilitate restructuring in order, for example, to avoid the free transfer of business (especially in the succession of generations) of tax burdens. The fact that this is not always problem-free or unquestionably possible even with extensive legal knowledge has been confirmed by the recent opinion of the financial administration on § 6 para. 3 EStG proved. The BFH jurisprudence, which is generally favorable and consolidated for taxpayers, is consistently implemented in this respect. The BMF letter, which is relatively extensive with 16 pages, is intended for tax consultants with regard to future corporate reorganizations that require the free transfer or transfer of funds. Granting of (partial) co-entrepreneur shares of this, constitute an indispensable guide. Especially in the field of restructuring and the income tax regulations in income, corporate and conversion tax law, taxpayers and their consultants are dependent on a reliable and predictable legal interpretation.