date | theme

21. August 2020 | Converting individual companies: GmbH versus GmbH & Co. KG

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

26. August 2020 | Other consideration for transfer to GmbH: valuation of assets (this contribution)

The granting of other consideration in the case of a contribution to a GmbH can take place tax-free up to a certain amount of the transferred assets. Other consideration means everything that the GmbH grants the contributor in return for his transferred assets, except shares in the company, provided they correspond to the book value of the transferred assets. In principle, all other considerations are taxed. However, a ceiling is provided here, up to the amount of which any other consideration remains tax-free. The legislator defines this maximum limit as a quarter of the book value, but at most up to an amount of EUR 500,000. If the value of the other consideration is higher, taxation is based on the difference between the upper limit and the value of the other consideration in 5 steps.

In the video we explain the tax advantages & disadvantages of converting a sole proprietorship into a GmbH or a GmbH & Co. KG.

Introduction of a partnership into a GmbH

1.1. Introduction: GmbH as a substitute for corporations

Although the contribution of operating assets to a corporation is the focus of this article. But because in the vast majority of cases a GmbH is the goal of the conversion, we only refer to it. Of course, what is described here also applies to all other corporations.

1.2.Legal framework for transfer to a GmbH

On the one hand, the submission is a process based on civil law on the conversion law. In tax matters, however, the conversion tax law is the lead. Strictly speaking, in the aspect we have highlighted here, § 20 paragraph 2 UmwStG in particular is of outstanding importance.

1.2. Definition of ‘other consideration’

When the assets of a sole proprietor or partnership are transferred to set up a GmbH, the contributor receives, of course, an equivalent value for the assets he contributes. As a rule, this includes a participation in the GmbH. However, other compensatory measures are also conceivable. For example, a cash payment or granting a claim to the company is common in such a case. All these alternatives to the shares are called other considerations. Synonymous with this, the term other economic goods is common in literature.

Other consideration when transferred to GmbH

In order to determine whether any other consideration is granted in the event of a contribution that exceeds the upper limit, the values of assets and consideration are first checked. If one finds that the upper limit has been exceeded, one determines with a series of calculation operations the rateable amount and the new valuations of the transferred assets. At the same time, the other consideration received by the GmbH shareholder in return for the contribution is also assessed.

A calculation example is certainly very helpful for this. To keep it as clear as possible, we divide it into 5 commented steps.

2.1. Taxation of other consideration when transferred to GmbH: starting situation

Since the limit above which other consideration is taxed is EUR 500,000 or 25% of the book value of the transferred assets, we want to assume that this book value is EUR 4,000,000. We assume a common value of the assets contributed of EUR 6,000,000.

On the other hand, there are valuations of the consideration received by the transferring GmbH shareholder in return: On the one hand, there are company shares whose value is shown as share capital at EUR 1,000,000 in the balance sheet, the common value being EUR 4,000,000. In addition, the GmbH grants its shareholder a liability of EUR 2.000.000. Finally, in order to provide our example with the appropriate legal framework, the condition is provided that the submission should be made by way of application to book values.

Since common values are often used here, it is a matter of course that the determination of these values corresponds to the practices of the Valuation Act. The company valuation by a tax consultant or auditor is correspondingly complex. On the other hand, our example is simplified to provide clarity.

2.2. Evaluation of other considerations at the GmbH

2.2.1. Step 1: Examination of prerequisites

Because one of the two limits from which taxation of the other considerations occurs when transferred to a GmbH is 25% of the book value of the transferred assets, we now calculate this first: