The merger of one GmbH into another GmbH is possible both while retaining the acquiring GmbH and by incorporating a newly founded GmbH. In both cases, civil, company and tax aspects must be taken into account. For example, there is a requirement for a merger agreement to be concluded and notarized, for final balance sheets to be drawn up and for retroactive taxation to be possible for up to eight months. We outline the process of such a merger on the basis of a detailed checklist.

Fusion GmbH on GmbH

In the video we explain all relevant aspects of the merger of two GmbHs.

1st Benefits of a Merger

A significant advantage of transferring assets from one GmbH to another GmbH by merger is that the costs are significantly lower than for a purchase. In particular, the merger avoids a costly liquidation of the transferring GmbH. If a loss carry forward is also to be taken into account, then the possibility is given for this in a merger. In addition, a merger can even take place retroactively for up to eight months.

2. Legal aspects of mergers of limited liability companies

In the merger of corporations, three views are important: civil, corporate and tax aspects.

2.1 Civil and Company Law Provisions in Merger

The conversion law enshrined in civil law governs the operation of the merger in general and thus also specifically the merger of one GmbH to another GmbH. This also contains all requirements that are to be implemented gradually by both companies. Therefore, we go through the following checklist in chronological order.

2.1.1. Contractual basis for the merger

The procedure begins with the drafting of the merger agreement. If all shareholders of the company agree to the contract and if the works council has also been informed in good time, then the merger contract requires notarization.

If a works council is involved in this matter, it must be informed about the contract at the latest one month before the resolution by the shareholders. This must then also be demonstrated. However, if there is an amendment to the contract in the meantime, the works council must be informed again with the same deadline. However, the works council does not have a say in the merger.

2.1.2 Determination of the merger date

The next item on our checklist is to set the deadline for the merger. The content of the contract is, among other things, the date on which the two companies merge. This merger date may not be more than eight months before the merger is entered in the commercial register.

2.1.3. Preparation of the final balance sheet for the merger date

If the GmbHs to be merged have agreed on a date for the conversion, then both parties must draw up a final balance sheet on the day preceding this date. This is then the last day on which the GmbHs act independently and are taxed accordingly. From the merger date, the GmbHs are therefore considered to have been merged.

The closing balance sheet does not require a profit and loss statement, notes or own publication. Therefore, the effort to prepare them is less than in the case of ordinary annual accounts. However, even this effort can be completely avoided if the merger date is set at the first day of the current financial year, which for most companies falls on 1 January. The merger of two GmbHs with different marketing years, on the other hand, means that at least one of the GmbHs to be merged has to draw up a separate final balance sheet.

2.1.4. Preparation of a merger report

Furthermore, a merger report must be prepared explaining why the merger is intended in the envisaged form. However, the report can be waived if all shareholders so wish and also notarized, or if a parent GmbH merges as the only shareholder with its subsidiary GmbH.

2.1.5. The merger test

It is generally required by law that an auditor or audit firm carry out an audit in a merger. But there are exceptions here too. In the case of the merger of two GmbHs, an examination is only carried out if this is desired by at least one shareholder. In fact, this is also used for the merger of a parent GmbH with a subsidiary GmbH, so that the merger test is also unnecessary here.

2.1.6. Application for registration of the merger with the Commercial Register

The last item on our checklist is the registration of the merger with the commercial register. This officially ensures the announcement of the merger of the two GmbHs. For this purpose, the managing directors of the GmbHs must submit all necessary documents. In particular, the final balance sheet of the merging GmbHs is important here, because the date on which these balance sheets are issued may be no more than eight months before the date of registration. This then also establishes a retroactive effect of the merger of the GmbHs. A merger balance of the GmbH resulting from the conversion, on the other hand, is unnecessary.

2.2. Tax aspects of the merger

With regard to the tax consequences of a merger, the conversion tax law applies. It regulates the application of business tax and corporation tax to undertakings affected by a conversion.

In the case of the merger of two GmbHs, these three things are of particular importance: firstly, that a retroactive effect of the merger is also possible in tax matters for up to eight months; secondly, the provisions in which form the transferred assets are to be recognised in the balance sheets; and thirdly, that any loss carry-forwards by the merging GmbH are in principle lost.

The merger of one GmbH to another GmbH usually leads to the discovery of hidden reserves. This discovery of hidden reserves is taxed as a transfer profit and thus taxed accordingly.

3.1. Balance sheet approach with common value

In principle, the balance sheet approach of the final balance sheet with the common value has to be taken. The common value here represents the value that another entrepreneur would value in the purchase price when purchasing the GmbH for the relevant assets. If the common value is above the previously accounted book value, the difference is discovered as a hidden reserve. This amount is then subject to business tax and corporate income tax as transfer profit. Thus, although there is a taxation without actually making a profit, it should be noted that the hidden reserves would be discovered anyway at the latest at a later sale and thus taxed. A further consequence is that, after the merger, the assets affected by the taxation will henceforth be written off with the common value at the acquiring GmbH.

In the case of a merger, however, a lower value than the common value in the final balance can be chosen on request. There are two options available. Either the transferred assets are recognised at book value or at an intermediate value between book value and common value.

3.2. Tax neutrality when recognised with book value

The advantage of the book value approach is that no hidden reserves are revealed. However, the hidden reserves thus “hidden” before taxation are discovered at the latest at the time of sale and thus taxation.

3.3. Balance sheet approach with an intermediate value

Of course, this also applies to the approach with an intermediate value freely selectable within the given limits, with part of the hidden reserves then already subject to taxation at the merger.

4th retroactive merger for up to eight months

Since the retroactive effect of a merger is a situation that regularly encounters incomprehension among our clients, we would like to discuss this in more detail here.

The reaction is simply explained by a state assumed for the past. Lawyers also speak of a so-called fiction.

As you now know, at the merger, the determination of this assumed state goes back a maximum of eight months. Assuming a subsidiary GmbH merges with the parent GmbH and the application for registration of the merger in the commercial register takes place, for example, on 31.08.2019, then the retroactive effect has the resulting GmbH already since 01.01.2019 as a tax subject. Even if two GmbHs merge and a newly founded GmbH emerges, the newly founded GmbH is taxable from a tax point of view already from the merger date. On the other hand, the merging GmbH’s tax liability expires on the preceding day. It is therefore irrelevant whether the newly founded GmbH actually already existed at this early stage.