date | theme

24. August 2018 | UK-Limited and Brexit: Cross-border merger helps!

November 1, 2018 | Consequence of Brexit 2019: Limited no longer recognized in Germany!

4. November 2018 | Merger after share exchange violates lock period at GmbH & Limited

30. November 2018 | Limited conversion to Brexit: Avoid these 5 mistakes! (This contribution)

December 6, 2018 | Short-term solutions: converting Limited into GmbH (6 possibilities)

29. January 2019 | Limited in Germany no longer recognized after Brexit!

15. March 2019 | Brexit Tax Accompanying Act – Can the UK-Limited still be saved?

11. April 2019 | Brexit extension until 31.10.2019: merger of the Limited to GmbH possible again!

Both on the Internet and by many consultants, various solutions are proposed for the conversion of the Limited into a German GmbH. In the following, we present the five models that cannot be implemented tax-neutrally from the German point of view.

1st error: asset transfer to new GmbH

First of all, you can consider establishing a new company (e.g. GmbH). Subsequently, the Limited transfers all its assets to this GmbH. However, the Federal Ministry of Finance already issued an instruction in 2014, according to which this transaction is fully taxable (BMF letter of 6 January 2014). In the case of such a transfer of assets, a customary remuneration must be paid, in particular all assets must be valued at market value. In addition to tangible assets (cars, office equipment, etc.), this also includes intangible assets (brand, patents, domain, customer/supplier base, company value, etc.).

This inevitably leads to the discovery of all hidden reserves.

2nd error: mother-daughter merger

Up to now, it has been particularly often recommended to start a German GmbH. Subsequently, the English Limited was incorporated into this new GmbH, so that a parent-subsidiary structure was created. Subsequently, the daughter was fused to the mother GmbH. This parent-daughter merger was particularly easy to carry out in English company law, as problems with English creditor law are unnecessary.

However, this leads to the following problem: The transfer of a Limited to a GmbH is only tax-neutral according to § 21 UmwStG if the acquiring GmbH does not sell the shares in the Limited for a blocking period of 7 years. Although the intended upward merger of the Limited to the parent GmbH does not constitute a ‘sale’, the financial administration nevertheless sees in this merger a breach of the blocking period (paragraph 22.23, BMF letter of 11 November 2011 – UmwSt waiver), which leads to the discovery of all hidden reserves. On January 24, 2018, the BFH unfortunately confirmed this view of the financial administration (reference I R 48/15).

We have already written an article on this blocking period violation. This variant is now completely eliminated.

As a result of the aforementioned BFH judgment, some limited mergers are currently in “floating condition”. Here, the entrepreneurs have already brought the Limited into a GmbH (with a blocking period) and can now not merge with the GmbH as intended. These clients are currently investigating the establishment of a second GmbH (as a subsidiary of the previous GmbH and as a sister company of the Limited), so that the Limited can then be merged sideways into the second GmbH. This would lead to the result that the parent GmbH remains as an empty company and the subsidiary (second GmbH) with the operational business operations of the former Limited.

But even in this procedure there is a risk of a blocking period violation: the financial administration clearly states in paragraph 22.23 (BMF letter of 11 November 2011 – UmwSt decree):

The shares in [Limited] are subject to a lock-up period. The transfer of the shares in the [Limited] in the R.R. d. merger of the GmbH constitutes a sale operation in the sense of § 22 (1) sentence 1 UmwStG. If, in accordance with § 11(2) of the UmwStG, the book values are used, in accordance with the situation of the individual case and in the presence of the above conditions, the application of § 22 (1) sentence 1 of the UmwStG at the GmbH may be waived.

In this scenario, the financial administration can therefore refrain from taxing the hidden reserves within the framework of an equity regime, depending on the situation of the individual case and if there are other conditions. The emphasis is on the word “can”. The taxpayer is not entitled to the competent tax officer to recognise this sideways merger in a tax-neutral manner. Such conversion measures are agreed in advance with the financial administration in the design consultancy (request for binding information). However, such a procedure takes 1-6 months. The undertaking of such a merger on “good luck” can only be discouraged.

4.Mistake and liquidation / growth

In an article on Grunderszene.de, the recommendation was recently made to transfer the Limited shares to a GmbH and then wait for Brexit or liquidate the Limited. However, it must also be taken into account in this project that a 7-year blocking period runs after the transfer. During these 7 years, the GmbH may not sell, merge or dissolve the shares in the Limited. In this regard, the Financial Administration clearly states in paragraph 22.23 (BMF letter of 11 November 2011 – UmwSt decree):

‘The dissolution and winding up of a limited liability company in which the blocked shares exist triggers in full the retroactive transfer taxation (§ 22 (1) sentence 6 no. 3 and paragraph 2 sentence 6 UmwStG) on the date of the final distribution of the assets. This applies regardless of who is a shareholder of the corporation at this time. The insolvency proceedings do not trigger the substitute event due to lack of resolution (§ 11 paragraph 7 KStG).

So this approach is also discouraged.

5th Error: Cross-border Change of Form

In theory, a cross-border change of form of the Limited into a GmbH is possible. This has already been recognised by the European Court of Justice in the legal case VALE (ECJ of 12 July 2012 – C-378/10). In addition, the OLG Nuremberg (order of 19 June 2013 – 12 W 520/13) and Kammergericht Berlin (order of 21 March 2016 – 22 W 64/15) confirmed this possibility. But this approach lacks practical experience overall. Apart from the two aforementioned German procedures, no cross-border changes of form have been registered in Germany so far.

Proper solutions

In a separate article, we have detailed the five possible solutions.