date | theme

08. July 2020 | Gain in receivables for conversions: blocking period according to § 6 Abs. 3 UmwStG

12. July 2020 | Conversion of the GmbH into a GmbH & Co. KG: Closure period 5 years!

24. August 2020 | Transformation of a sole proprietorship: objectives and procedures

22. April 2021 | Option model for corporate tax for OHG & KG – new law

28. June 2021 | 7 years lock period for contribution and share exchange avoid

04. November 2021 | Option model for partnerships: Consideration of problem areas (this article)

The option model for partnerships was adopted by the Bundestag shortly before its summer break. The Federal Council approved the reform on 25 June. It should be noted at the outset that only commercial companies and partnership companies are integrated into the new law according to the PartG. In addition, there are other complicated issues in the fiction of the conversion, which requires both internal and legal clarification. Thus, a direct distinction must be made and important information and consulting services must be passed on to the companies in advance, so that unexpected costs do not influence the final implementation. It is also good to know that a return option has also been integrated into the new law, so this does not have to be a permanent condition. However, various blocking periods must be observed and at best avoided.

Already on April 22, a detailed article was published about the design options for the option model for corporate tax, which result from the new law for the modernization of corporate tax law. Nevertheless, on the other hand, it is also necessary to point out possible complications in the fiction of a conversion. Because of the specific design of partnerships, they are not simply converted into the legal dress of a limited company without preparation, but first require a few precautions for the purpose of proper taxation. By exercising the option of corporation tax, one forms a fiction of the transformation of the partnership into a capital company by a change of legal form.

In particular, the type of partnership must be considered when using the option model. Only commercial companies can make use of this option model. This includes mainly open commercial companies (OHG), limited partnerships (KG) and mixed forms such as GmbH & Co. KG. Previously, § 34a EStG provided an option to adjust the tax treatment of partnerships, which was hardly used. Therefore, this should be simplified by the new law.

Now it is necessary for these companies to submit an application for an optimization for corporate tax pursuant to § 1a (1) sentence 2 KStG at the latest one month before the beginning of the marketing year for which the taxation is to take place afterwards. For this purpose, the officially required data set must be used for remote data transmission at the competent tax office. Thus, there is the first distinction compared to an otherwise usual change of legal form, which is retroactively possible for up to eight months at the beginning of the year. In addition, the option is only possible for the company as a whole and not for individual partners. This is interesting, since a shareholder resolution in partnerships unanimously according to § 709 paragraph 1 BGB, § 119 paragraph 1 HGB, otherwise if regulated in the shareholder contract or an event is interpreted as such and does not have to be explicitly regulated according to a BGH judgment of 21 October 2014.

According to § 1a paragraph 2 sentence 2 KStG, the equity capital shown in the tax balance sheet must be recorded with the partnership when transferred to the tax deposit account of the opting company.

In order to arrive at a general assessment of the advantage of the model in advance, different criteria must be considered. For example, the option model is regularly unfavorable, if profits of a company must be taxed primarily as withdrawal. The use of optimization for corporate tax is usually useful if the withdrawals are made at a low personal tax rate. In addition, the accumulation of profits is more expensive than a partnership if the average tax rate of the shareholders is less than 30%. However, the model is considered interesting if there are remunerations for shareholders, special business assets and special remunerations at a higher average tax rate than 30 %. After using the option model, these are no longer regarded as special operating income and do not increase the profit of the shareholder, but rather reduce the profit of the tax-optimised company as operating expenses.

First of all, there is a need for action if shareholders of the partnership have values in the supplementary balance sheets and these are not identical for all shareholders. There are now different solutions.

On the one hand, a temporary discretionary distribution of profits can be made for the contributing shareholder of multi-capital, as this provides the opting company with a tax saving. On the other hand, the amount of capital participation can be rotated. However, it is necessary in advance definitely a clarification with all shareholders.

It was previously clarified that the equity flows into the tax deposit account. If the equity holdings of the shareholders are different, this entails risks. Because when a shareholder leaves, he receives, just like the remaining shareholders, his share of the capital from the tax deposit account. Thus, a shareholder who contributed less equity could participate in the original equity of the other shareholders.

A point of contention often arises between shareholders, so special company assets are given special attention. This must be placed in the company or transferred to it, otherwise no book value neutrality of the option can be guaranteed. This in turn shifts company rights so that the transfer is reflected in the amount of the shareholding. Otherwise, a disquotal profit sharing would again be conceivable, which under certain conditions, however, constitutes a harmful other consideration according to § 20 (2) sentence 2 no. 4 UmwStG.

In addition, it is necessary to evaluate the special assets for the measurement of company rights, partly an independent evaluation is necessary so that all parties are satisfied.

If an already opted-in partnership carries out a correct change of form under civil law, the question of a possible violation of the blocking period practically arises. Because by exercising the option already exists a 7-year block period, which could be broken by a kind of merger. This presumption is based on the transformation of a limited liability company into a corporation according to § 1a (4) sentence 7 KStG. Special prudence should be exercised in practice. In addition, there will be case law in the future on whether this leads to a breach or not.

Now it is necessary to minimize another risk. If the opting company is embedded in a holding company managing assets, the opting company infects the holding company commercially before exercising the option. By exercising the option, a de-minting could now take place, but this can be avoided by prior commercial stamping of the holding company. If a deformation takes place, this would be associated with an operating split and a concomitant discovery of the hidden reserves. This must be avoided at all costs.

The core areas already mentioned in advance when considering the option to use corporate tax for commercial partnerships are to be clarified in advance by company law regulations.

For example, the new relationships among the shareholders in the transfer of special business assets to a partnership must be clarified precisely. Because if only one shareholder contributes SBV, then he would logically also like to receive a consideration for the use of the company. If other shareholders are affected, which can be assumed, then the exact valuation of the assets and an adjustment of the participation rates must be discussed. Because often this is a very critical topic, especially in partnerships with rather fewer partners.

In addition, it is important to exercise caution when using profits. Because an automatic profit credit on accounts, which the shareholders can access directly, is basically subject to immediate taxation and the deferral effect would be lost. In addition, compensatory agreements can avoid taxation of the non-beneficiary shareholders in the case of hidden profit distributions now in force. In each case, the individual case must be considered. Finally, in the case of an agreed usufruct, partly the permission to amend the social contract must be obtained. This must be taken into account, even if these regulations seem so simple, because otherwise the optimization may be accompanied by unwanted taxation, profit distributions or value losses that occur unintentionally.

In summary, the new option model for commercial companies is an interesting procedure for aligning the taxation of partnerships and corporations. In addition, the practical implementation is also supported by a simpler procedure compared to the previous thesaurierungsbegünstigung according to § 34a EStG. However, practitioners would rather want a procedure that introduces a simple tick after the American model. Compared to the customary change of form from a partnership to a corporation according to § 190 UmwG, § 25 UmwStG, the flexibility of the social condition of a partnership remains here.

If the advantages are balanced against the disadvantages in individual cases, it is important to make exemplary model calculations in order to finally provide a forecast for you as a client. If you have questions about the new option model for partnerships, you can contact us.