Beyme Simon | exemption of a GmbH liquidator from the prohibition of self-contracting, Zeitschrift, NWB, Nr. 6, v. 07.02.2020, p. 406, (quoted: Beyme, exemption of a GmbH liquidator from the prohibition of self-contracting, Zeitschrift, NWB, v. 07.02.2020, p. 406.)

Frotscher Gerrit/Drüen Klaus-Dieter | Commentary on the Corporate Tax, Trade Tax, and Conversion Tax Act, Delivery No. 156, November 2020, Volume 2 §§ 8a to 40 KStG, Freiburg: Haufe-Lexware GmbH & Co.KG, (quoted: Processor in: Frotscher/Drüen, KStG/GewStG/UmwStG, §, paragraph 1)

Gehrmann Reinald | GmbH-Liquidation, infoCenter, NWB, as of March 2020, NWB BAAB – 54645, (quoted: Gehrmann, GmbH-Liquidation, infoCenter 03/2020, NWB BAAB – 54645)

Gosch Dietmar | Corporate Tax Act Comment, 4th edition, Munich: C. H. Beck Verlag oHG, 2020, (quoted: Edited in: Gosch, KStG-Komentar, §, paragraph)

Grobshäuser Uwe / Maier Walter / Kies Dieter | Taxation of Companies, 5th edition, Stuttgart: Schäffer-Poeschel Verlag 2017, (quoted: Grobhäuser / Maier / Kies, Taxation of Companies, S.)

Edited by: Kirchhof/Seer, EStG commentary, §, paragraph

Köllen Josef/Vogl Elmar/ Wagner Edmund | Textbook Corporate Tax, 2nd edition, Herne: NBW Verlag GmbH & Co. KG, 2010, (quoted:

Köllen/Vogl/Wagner, Corporate Income Tax, S., paragraph 1

Kußmaul Heinz / Schäfer René / Delarber Christian / Palm Tim | liquidation of a company, commercial and corporate obligations in the liquidation and

tax consequences of the liquidation, infoCenter NWB, Grundlagen v. 21.07.2017, (quoted):

Kußmaul/Schäfer/Delarber/Palm, liquidation of a company, infoCenter 21.07.2017, NWB, paragraph

Mössner Jörg Manfred/Oellerich Ingo/Seeger Siegbert | Corporate Tax Act Comment, 4th edition, Herne: NBW Verlag GmbH & Co. KG, 2013, (quoted:

Edited by: Mösser/Oellerich/Seeger, KStG commentary, §, paragraph

Niehus Ulrich/ Wilke Helmuth | The taxation of corporations, 5th edition, Stuttgart: Schäffer-Poeschel Verlag, 2018, (quoted:

Niehus/Wilke, Steuer KapGes., S.

Schnitger Arne/Fehrenbacher Oliver | comment Corporate Tax, 2nd edition, Wiesbaden: Springer Verlag, 2018, (quoted: Edited in:

Schnitger/Fehrenbacher, KStG-Kommentar, §, paragraph

In order to understand the liquidation of a GmbH in tax law and to transfer it into practice, a large number of regulations must be observed. On the one hand, the shareholder resolution is already necessary to terminate the commercial activity and dissolve a GmbH. For this purpose, corresponding standards exist in the GmbHG. Furthermore, the resolution must be entered in the commercial register. For this purpose, liquidators are responsible, who are usually the former managing directors. In addition, specific time limits must be adhered to. Separate rules also apply to accounting, which deviate to a large extent from those of commercial law. Finally, all remaining hidden reserves in the GmbH are subject to final taxation. Therefore, a large number of special rules also apply at fiscal level. A distinction must be made between the taxation of the GmbH in liquidation and its shareholders. The shareholders continue to differentiate between natural and legal persons.

1st Introduction

The termination of the company gives the legislature the last chance to tax any unrealized profits and to subject the hidden reserves in the respective company to taxation.1 The possibility of access prevents an uncontrolled untwisting of the hidden reserves bound in the operating assets.2 The scheduled termination is referred to as the liquidation of companies.3 This takes place at certain stages, which I will present in the form of a limited liability company. In addition, I will deal with the tax consequences of termination at company and shareholder level.

2 Dissolution and winding up of a limited liability company

For the liquidation of a corporation, a separate taxation procedure is provided for in the Corporate Tax Act. The purpose of § 11 KStG is to dissolve a limited liability company in formal proceedings and to distribute its assets to the shareholders.4 It must be in accordance with § 11 Abs. 1 S. 1 KStG for an unlimited taxable capital company i.S.v. § 1 Abs. 1 no. 1 to 3 KStG. However, the dissolution does not directly mean the termination, but only the end of their advertising activity.5 The dissolution is to be regarded as a willful act, which is contained in the resolution of dissolution according to § 60 para. 1 No. 2 GmbHG.6 The resolution to dissolve shall stipulate that from a certain point in time the original purpose of an advertising activity shall be replaced by the intention to terminate the company.7 This is mandatory in the commercial register according to § 65 Abs. 1 No. 2 GmbHG. However, the limited company is neither civil nor tax terminated at this time. With the dissolution, the company enters the stage of liquidation.8 As part of the winding-up, current transactions are terminated, the company assets are collected and converted into money and all creditors are satisfied.9

2.1 Reasons for dissolution

The reasons for dissolving a GmbH are manifold. This includes, among other things: the expiry of the period specified in the articles of association, the resolution of the shareholders with a majority of 3⁄4 of the votes cast, the occurrence of a ground for dissolution specified in the articles of association.10 A further cause for dissolution according to § 60 GmbHG may lie in the opening of insolvency proceedings (§ 27 InsO), or in the legally binding rejection of the opening of insolvency proceedings due to lack of assets (§ 26 InsO). In addition, the dissolution may be based on a measure of public authority, such as the order of a registry court, the judgment of an administrative court or the decisions of an administrative authority, as soon as the company is declared null and void or the company has acted contrary to law.11

On the contrary, impotence or over-indebtedness, without the district court having ruled on this, do not lead to dissolution.12 Nor does the cessation of business constitute dissolution. This can be done with so-called "English". “Retention GmbHs” which are only spun off in the event of expansion or serve for possible corporate restructuring.13

2.2. Procedure

The entire liquidation process goes through certain stages and is subject to a number of special formalities. Compliance with all regulations shall be carried out in accordance with §§ 60 ff. GmbHG is examined by the registry court. As a rule, the first condition is the aforementioned resolution. The shareholder resolution for the release of a corporation must be certified by a notary and registered as a commercial register in accordance with § 65 GmbHG. However, the GmbH initially continues in the case of dissolution. However, from the time of the decision, the purpose of the corporation changes, which must be announced externally for business transactions.14 This is done according to § 71 para. 5 GmbHG with the addition to the existing legal form – “in liquidation”, “i.L.” The new company name must be indicated in all business documents and documents.15

In addition, the liquidation procedure is carried out by one or more liquidators.16 In principle, these are the managing directors of the GmbH.17 The task can be performed by deviating provisions in the articles of association or by a shareholder resolution in accordance with § 66 para. 1 half sentence 2 GmbHG can also be transferred to other persons. Both the liquidators themselves and the scope of their powers of representation must comply with § 67 para. 1 GmbHG in the commercial register. In principle, according to §§ 70 – 73 GmbHG, the liquidators are obliged to: terminate current transactions, ensure the settlement of liabilities, if necessary, ensure the collection of receivables and sell the realizable assets.18 Finally, the liquidation balance sheet and the Lagebricht must be prepared by the liquidators.

The legal norm of § 73 para. 1 GmbHG orders the so-called blocking year. Only after its expiration and the termination of all business can the remaining assets be distributed among the shareholders according to the proportion of their shares.19 After the distribution of the remaining assets has taken place, the liquidation is ended. After completion of the liquidation and preparation of the final invoice, the liquidator must register this with the commercial register.20 With the deletion in the commercial register, the liquidation is then also terminated under civil law.

3. Liquidation taxation

The deletion of the company in the commercial register is to be given only declaratory importance in tax law.22 According to the Bundesfinanzhof, the corporation continues to exist in the commercial register despite liquidation and cancellation until all tax obligations are fulfilled.22 The unlimited corporate tax liability of a GmbH in the sense of R 11 para. 2 KStR until the liquidation is legally concluded. A special taxation procedure is also provided for liquidation. In the following, I will present the tax aspects of liquidation.

3.1. Taxation period

The taxable profit of an accounting GmbH is usually to be determined for the marketing year for which the GmbH regularly makes financial statements (§ 7 para 4 KStG). The liquidation taxation leaves the corporate tax period within the meaning of § 7 Abs. 3 KStG, thus the calendar year.23

3.1.1 Start of the liquidation period

The start of the liquidation period starts according to R 51 para. 1 S. 1 KStR at the time of dissolution. In cases where the winding-up date is the same as the end of the regular financial statements or the start of the liquidation period is linked to the expiry of a regular profit determination period, the chronological sequence is straightforward.24 Otherwise, a truncated economic year may be formed if the date of winding-up is in the middle of a marketing year (R 51 (1) p. 2 KStR). The corporate tax guidelines explicitly refer to the corresponding application of the regulations on truncated economic years according to § 8b EStDV. Due to the fact that neither a sale nor an operational abandonment takes place with the resolution of dissolution, the direct application of § 8b S. 2 No. 1 EStDV is not permitted. The truncated marketing year may be: 25 The treatment of the under-year dissolution of a GmbH and the concomitant formation of a hull economy year lead to controversy in jurisprudence and literature. Jurisdiction prefers the obligation to draw up a liquidation opening balance sheet and thus the formation of the core economic year for tax purposes.26 The obligation to draw up a corresponding tax balance sheet is derived from the binding effect of commercial law, in which the drawing up of a liquidation opening balance sheet is explicitly prescribed, for tax law.27

On the other hand, a right to vote was created by the tax administration, which gives rise to the possibility of forming a core economic year for the period between the end of the last marketing year and the actual dissolution date.28 In the case of the company to be dissolved, the right to vote leads to various consequences. In the formation of the hull year, the annual shooting must be made and thus the profit is taxable more quickly.29 In the other case, the proportional result of the advertising company is included in the liquidation period. During this period, only profits generated in the marketing years ending before the date of dissolution are distributed.

3.1.2. Duration of the liquidation period

According to § 11 Abs. 1 S. 2 KStG, the liquidation period should not exceed three years. If the three-year period for winding up is exceeded, the further taxation periods starting thereafter are, according to R 11 para. 1 KStR is generally limited to one year each. This corresponds to the transition to a regular annual corporate tax assessment.30 The above-mentioned period is three years and not three marketing years.31 The extended period is at the discretion of the tax authority. Due to the appropriately exercised discretion, the tax administration is able to assess individual cases correctly.32 If the extended winding-up period is accepted, the overrun is included in the liquidation proceeds.33 If the overrun is rejected, a marketing year identical to the calendar year or different from the calendar year applies to the profit determination.34

3.2. Determination of the liquidation profit

The determination of the liquidation profit is regulated by the legal norm of § 11 KStG. Accordingly, the other applicable provisions are applicable to the profit determination, unless otherwise provided in § 11 KStG. This includes, among other things, the regulations regarding non-deductible operating expenses (§ 10 KStG, § 4 para 5 EStG), the deduction of donations (§ 9 para). 1 no. 2 KStG) as well as for making a loss deduction according to § 10d EStG.35 The settlement profit is determined by an asset comparison.36 However, in deviation from an inventory comparison within the meaning of § 4 para. 1 EStG is not to compare the operating assets at the end of the marketing year with those at the end of the previous marketing year, but instead to compare the winding-up final assets with the initial assets.37 Various corrections are to be made for the quantities in question.

3.2.1. Winding-up final assets § 11 Abs. 3 KStG

The definition of the winding-up final assets is in § 11 para. 3 KStG. Accordingly, the final assets consist of the assets to be distributed, reduced by the tax-free increases in assets received by the taxpayer during the winding-up period.38 The distribution of the assets to the shareholders does not necessarily take place at the so-called end of the enterprise, first the assets are silvered and the debts paid.39 Only then is the remaining final assets identified by those assets which are distributed to the shareholders within the framework of the final distribution.40 This also includes all assets which have already been transferred to the shareholders as open or concealed liquidation rates since the beginning of the winding-up.41 The aforementioned concealed liquidation rates refer to all contributions to the shareholders or persons close to them, which, for example, are within the meaning of § 8 para. 42 It should be noted here that open distributions of profits distributed during the winding-up period for a previous marketing year do not reduce the computed value of the final liquidation assets.43 The reason for this is that otherwise the winding-up profit resulting from the balance would be reduced as a result of a mere early distribution of assets.44

§ 11 Abs. 3 KStG does not contain an explicit statement for the valuation of the assets to be distributed. The provisions of § 8 Abs. 1 S. 1 KStG in conjunction with § 6 EStG do not apply here, since by way of final taxation all hidden reserves of the capital company are transferred to taxation.45 For this reason, the provisions of the BewG.46 Lack of continuation of the company apply here, however, the real assets are not to be valued with the partial value according to § 10 BewG, but with the common value (individual sale price) according to § 9 BewG.47 The valuation shall be based on the date of transfer to the shareholder.48 Accordingly, each asset must be valued at the time when it is actually distributed. This is done either within the framework of the final settlement or by way of a prior open or hidden settlement rate.49 Given the specific objective of recording the hidden reserves in the settlement profit, the principle of the trade balance is not applicable to the tax balance.50 For this reason, the valuation should not only include the value-enhancing circumstances.51 This is a temporarily unlimited increase in value or a theory of a special kind, since the valuation must take into account all knowledge which has become known to the wound-up corporation up to the time of investment.52 By contrast, a continuing operation need only take into account the circumstances of which it has become aware up to the date of drawing up the balance sheet.53

The goodwill can be lost in the settlement final assets.54 The loss of an original goodwill will therefore not increase the settlement profit.55 The goodwill amounts to €0 in cases where all assets are sold individually.56 As soon as the goodwill or individual business-generating factors are sold in the course of liquidation, the final assets are increased.57

3.2.2. initial liquidation assets § 11 para 4 and 5 KStG

Initial liquidation assets shall be considered in accordance with § 11 para. 4 KStG the operating capital used for the assessment of corporation tax at the end of the marketing year preceding the dissolution.58 The preceding marketing year is the last full marketing year or a truncated marketing year, if the right to choose pursuant to R 11 para. 1 KStR was exercised.59

The size of the business assets and the valuation are to be measured on the basis of the last tax balance.60 The book values which, as a result of the comparison with the winding-up final assets valued at the common value, ensure the complete recognition of the hidden reserves are therefore relevant.61 In principle, the initial liquidation assets comprise the company’s own shares, since they disappear in the course of the liquidation and therefore do not increase the final liquidation assets.62 This mathematically results in a liquidation loss. According to RFH, this book loss must be neutralized, since this is caused by company law as a result of the winding-up.63 The neutralization is effected either by reducing the initial liquidation assets by the book value of the own shares or by off-balance-sheet addition of the loss incurred by the loss of the own shares to the tax trigger result according to § 8 b para. 3 S. 3 KStG.64 Profit neutrality is due to the commercial law treatment of own shares according to the BilMoG as an accounting item for equity capital § 272 para. 1a HGB guaranteed.65 The own shares are no longer to be classified as assets. Instead, they are deducted directly from the freely available reserves and the nominal capital. For this reason, they are no longer included in the initial settlement assets.

3.2.3. Principles of profit determination

The above-mentioned remarks on the taxation characteristics according to § 11 para. 2 – 5 KStG are rounded off by paragraph 6. According to § 11 Abs. 6 KStG are to be applied for the determination of profit the otherwise generally applicable provisions.66 The principle applies unless the special provisions of §§ 11 (1) to 5 KStG provide otherwise. This means, among other things, that the provisions on deductible or non-deductible expenses (§§ 9, 10 KStG), applicable income tax standards according to § 8 para. 1 KStG and a loss according to § 8 para. 1 KStG must be taken into account.67 The liquidation period constitutes an extended investment period. For this reason, the previous loss amounts should be taken into account under the ceiling.68 An interest carry forward and EBITDA carry forward according to § 8 para. 1 pages 3 and 4 KStG.

3.2.4. Business tax liability

The trade tax liability of the corporation in the case of liquidation remains according to R 2.6 para. 2 GewStR also exist until the assets have been distributed. For the determination of commercial income, the principles of § 11 KStG must also be observed. In addition, however, the modifications resulting from additions and reductions pursuant to §§ 8 and 9 GewSt cannot be disregarded.69 In addition, the business income is, unlike the income taxable for corporate income, according to § 16 para. 1 GewStDV to be distributed over the years of the processing period.70 Accordingly, the tax return must be submitted annually for trade tax purposes.71

3.2.5. Settlement profit scheme

The determination of the winding-up profit within the framework of the liquidation taxation according to § 11 para. 2 KStG can be represented by the following scheme:72

General value of settlement final assets

./. tax-free capital increases

SEGMENT005 = Settlement final assets

./. initial settlement assets

./. distribution of profits of previous marketing years during processing

= preliminary winding-up profit according to § 9 para. 1 No. 1 KStG

+ donations made

./. according to § 9 Abs. 1 No. 2 KStG deductible donations

+ non-deductible operating expenses

+ book value of own shares included in initial settlement assets

./. loss deduction according to § 10 d EStG

= rateable settlement profit

4. Tax consequences for shareholders

Having described the taxation of liquidation profits at company level, I will now present the tax consequences at shareholder level. The liquidation of a company also raises the question of how shareholders are taxed. The inflows may represent, on the one hand, capital gains and, on the other hand, capital repayments.73 The division is necessary because both components are treated differently for both natural persons and corporations.74

4.1. Capital repayments

The concept of capital repayments refers to the cancellation from the tax deposit account (§ 27 KStG) or the return of nominal capital. Whereby the restitution of the nominal capital via § 28 para. 2 KStG also takes place as a service from the tax deposit account.75 The design of this depends on whether the holdings belong to private or business assets.

4.1.1. Private assets

In the case of natural persons who hold the investment in private assets, the amount of the investment must be taken into account.76 If a shareholder has held at least 1% of the shares in the GmbH within the last 5 years, the profit from the sale of the shares according to § 17 para. 1 S. 1 EStG on income from business operations. This also applies to the profit or, as the case may be, loss that is achieved in the course of the dissolution. The nominal capital issued to the shareholder or amounts from the tax deposit account belong to the capital gain/loss only insofar as they do not belong to the acquisition costs of the participation.77 In this case, the partial income procedure may be used for the sale.78 According to § 3 No. 40 S. 1 letter a in conjunction with § 3c para. Consequently, 60 % of the costs of dissolution borne by the shareholder must be included in the profit assessment. In addition, the allowance according to § 17 Abs. 3 EStG to be observed. This allowance rule stipulates that the profit on dissolution is used for income tax insofar as it exceeds the part of EUR 9,060 corresponding to the share of the shareholder in the corporation. According to the legal norm of § 17 para 3 S. 2 EStG, the allowance must be reduced if the dissolution profit exceeds the part of 36,100 euros, which corresponds to the participation rate.

If the participation rate of 1% is undershot, the participation from private assets falls within the scope of § 20 para. 2 p. 1 no. 1 EStG. Consequently, the transaction is not treated as an event of sale and is therefore classified as non-taxable. The shareholder achieves in the case of § 20 Abs. 1 EStG neither income from business nor capital assets.79

4.1.2. Operating capital

The above-mentioned legal provision of § 17 EStG does not intervene if the shares in the corporation are held in the company’s assets. The general rules for determining profits according to §§ 4, 5 EStG are applicable here and the result is calculated by the difference between the amount of the capital repayments and the book value of the shareholding. In this case, the partial income procedure applies, according to which 40% of the income is tax-free, while the expenses associated with them are accordingly 40 % subject to a deduction ban.

A special feature exists when a shareholder holds a 100% interest in a corporation in the company’s assets. Here comes § 16 Abs. 1 No. 1 S. 2 EStG to carry and fictitate the existence of a branch. The economic importance has currently decreased due to the introduction of the Parts Income Procedure, but nevertheless has the in § 16 para. 4 EStG regulated allowance still has a certain relevance.80 If the sole shareholder has fulfilled the corresponding conditions, he can make use of the allowance. However, the tariff reduction according to § 34 Abs. 1 EStG is excluded, since otherwise there would be a double benefit of the task profit.

4.2. Investment income

The emoluments on the occasion of the dissolution of a corporation, which do not consist in the repayment of nominal capital and are not contribution repayments, constitute according to § 20 para. 1 no. 2 EStG taxable income of the shareholder.

4.2.1. Private assets

The shareholder who holds his interest in private assets has income from capital assets.81 The capital income is usually subject to § 32 d para. 1 EStG of the withholding tax.

4.2.2 Operating assets

If the participation is in the operating assets, the liquidation proceeds are treated as an operating income acc. § 20 Abs. 8 EStG is assigned to a profit income type. The partial income procedure results in a partial tax exemption for shares in the company assets according to §§ 3 no. 40 letter. e, 3 c para 2 of the EStG in conjunction with § 3 No 40 of the EStG. This applies regardless of the respective participation rate. In the case of income from business operations, it should be noted that the trade tax assessment is based on §§ 8 no. 5 and 9 no. 2 a GewStG. The capital gain is then free of trade tax for the share of at least 15 %.

5th Conclusion

The liquidation of a limited liability company is a multifaceted and very complex process. In particular, numerous special features in the field of tax law must be considered. Both the necessary determination of the settlement result and the tax consequences of the distribution of the same represent an extensive problem. The final taxation of a limited liability company must necessarily respect time limits and stages, without which the objective of deleting the company in the commercial register cannot be achieved. The complete recording of the total profit of a corporation is an independent taxation procedure, which is largely detached from commercial accounting. The core problem is that all profit must be subject to taxation. As a result, all hidden reserves in the corporation must be raised and valued at the same time. Also in the subsequent transfer of assets to the shareholders must be obligatory and strict attention to the different tax consequences.