In principle, the transfer of parts of a co-entrepreneur share with retention of special business assets (e.g. real estate) would not be tax neutral. However, § 6 Abs. 3 S. 2 EStG under certain criteria nevertheless a book value continuation. However, this does not apply to the transfer of holdings, branches and entire shares of the co-entrepreneur, because the retained assets can then no longer belong “to the operating assets of the same co-entrepreneurship”. [] 1]

Tax neutrality can only be granted if the share of the co-entrepreneur is not sold or abandoned within five years from the transfer (the economic ownership) (retention period). The retention period begins with the transfer of economic ownership. [2] In addition, the retention period concerns only the legal successor. [3] The retention period ends when the legal successor, in addition to the already transferred share, receives the remaining fraction of the share of the total hand assets. [4] The constellations and the different tax consequences are analyzed in the course of the article on the basis of 4 different case groups: special business assets in which the transfer is quotal (1) / sub- (2) or over-quotal (3) or a joint entrepreneurial division (4) is achieved.

converting EU into GmbH: tax-neutral contribution

1. Quotal transfer of special assets

When transferring part of a co-entrepreneur’s share in the case of the simultaneous existence of functionally essential special business assets, a purely value-based (calculated) consideration is made. [5] Such an valuation shall not be required if the functionally significant special assets are transferred in the same proportion as the transferred part of the share of the total assets in the total assets. The requirements of § 6 Abs. 3 pages 2 EStG, are therefore (only) fulfilled unless at least one share of the special business assets is transferred which corresponds to the transferred part of the share of the transferor’s total hand assets; only after such a situation can only a subquotal transfer (see Chapter 3) in accordance with § 6 para. 3 p. 2 EStG. [] 6]

Example:

Father H is the sole commander of H GmbH & Co. KG. As a general partner, H GmbH does not participate in the assets of the limited partnership. For its operation, H hands over two plots of land (essential operating bases) to the limited partnership, namely plot 1 with an upright production hall and plot 2 with an upright office building and attached storage space. Both plots have the same partial value of € 2 million. H now transfers to his son P, in addition to half the share of the limited partnership, the entire plot 2. However, the first property retains H completely. From a value point of view, there is neither an under- or an over-quotal transfer of special operating assets.

This procedure accordingly leads to a proportionate transfer in the calculated result and therefore not to the discovery of hidden reserves in the existing special business assets (here on lands 1 and 2). § 6 para 3 p. 2 EStG and thus the retention period does not apply because H has transferred a share in the special business assets in terms of value which corresponds to the transferred part of the share in the total hand assets of the transferors.

The legal principles in the example illustrated above apply equally to the case of free admission of a natural person into a sole proprietorship. [7]

2nd subquotal transfer of special assets

In this case, the transfer takes place by completely retaining special operating assets. The transfer may also take place to a lesser extent than the transferred part of the sole proprietorship or the share of the total hand assets. [8] In such a case, the retention period shall apply to the entire excess assets and the material special operating assets transferred with the share of the co-entrepreneur. [9] The amount of functionally significant special assets transferred is no longer to be determined on the basis of an economic good-related consideration, but on the basis of a purely value-based (calculated) consideration. [] 10]

As already mentioned, the prerequisite for the continuation of the book value is § 6 para. 2 EStG that the purchaser does not sell or discontinue the acquired share of the joint venture over a period of at least five years. For the sale of the co-entrepreneur's share, it does not matter whether only the sale of the share in the total assets or a part thereof and/or the functionally significant special assets taken over with the co-entrepreneur's share or a part thereof takes place within the five-year period. [] 11]

If one of these events is fulfilled, the requirements for the continuation of the book value acc. § 6 Abs. 3 S. 2 EStG no longer provides. This means for the entire transfer that the partial values are to be applied retroactively to the original transfer date (§ 175 para 1 p. 1 no. 2 AO). The subsequent profit generated by the transferee constitutes a current profit (§ 16 para 1 p. 2 in the V. m. § 16 para). 3 EStG. 12]

Should a co-entrepreneur already be a co-entrepreneur before the free transfer of the co-entrepreneur's share, a sale of the acquired share is to be assumed only if the share of the share after the sale of the part of the co-entrepreneur's share is less than the share of the acquired share or if the functionally significant special business assets transferred with the co-entrepreneur's share are sold or withdrawn within the five-year period. [] 13]

A sale in the sense of S. d. § 6 para. 3 S. 2 EStG is also a contribution according to § 24 UmwStG, whereby the financial administration assumes by equity that there is no harmful transfer, if the pursuant to § 6 para. 3 S. 2 EStG is transferred by the purchaser at a later date at book values according to § 24 UmwStG into a partnership and the contributor the co-entrepreneur share received for this purpose over a period of at least five years – beginning with the original transfer of the co-entrepreneur share according to § 6 para. 3 S. 2 – does not sell or abandon and the partnership does not sell the transferred share of the co-entrepreneur or the transferred assets within the specified period. [14] A sale for remuneration also exists if the legal successor individual assets of the acquired special business assets against granting company rights according to § 6 para. 5 S. 3 EStG to a third party. [] 15)

Non-remunerated transfers of the entire share of the co-entrepreneur are harmless, but the retention period passes to the legal successor. In this case, the legal successor shall be credited with the retention period of the transferor. [] 16]

The following example is intended to illustrate the case of a sub-quotal transfer of special operating assets.

Example:

Father H and son P are each 50% involved in an OHG. H transfers half (25 %) of his shares to P free of charge. However, he retains special assets, so that H now holds 25 % and P 75 % of OHG. P reduces its shareholding to 20 % within the five-year period and thus sells part of its shareholding.

There is a subquotal transfer from H to P according to § 6 para. 3 S. 2 EStG, in which the retention period must be observed. The 20 % share of P resulting from the sale is lower than the share of the previous shareholding (25 %). Therefore, P has also sold part of the acquired share of the co-entrepreneur, which means that for the original transfer of H to P, § 6 para. 3 EStG is applicable. Consequently, the partial values for the entire transfer are to be applied retroactively to the original transfer date (§ 6 para.). 3 p. 2 EStG, § 175 para 1 p. 1 no. 2 AO. The resulting profit is current profit (§ 16 para 1 p. 2 in the V. m. § 16 para). 3 EStG.

3. Over-quot transfer of special assets

An over-quotal transmission takes place if at the time of transmission according to FIG. § 6 Abs. 2 EStG functionally significant operating assets/special operating assets are transferred to a greater extent (over-quotal) than it corresponds to the transferred part of the sole proprietorship or the share of the total assets. [17] In this case, it is initially agreed that the co-entrepreneur share can also be transferred to the legal successor at book values. A questionable aspect is only whether a retention period must be observed. The BFH considers that this is only an application of § 6 para. 3 p. 1 EStG; Accordingly, no retention period must be observed in view of the over-quotal part. The BFH bases this conclusion on the teleological interpretation of § 6 para. 3 pages 2 EStG, since this scheme is based on the idea of encouraging a proportional (quotal) transfer of special operating assets. [] 18)

According to the general sense and purpose of the standard, this share can only be understood in terms of value and not objectively (economic goods). [19] In addition, the application of § 6 Abs. 5 EStG on an over-quotal part of the special business assets, that this operation is generally to be regarded as the transfer of a share of the co-entrepreneur and therefore not the transfer of individual assets, but the transfer of material groups.[20] The result is now also followed by the financial administration in its recent opinion on this topic. [] 21]

Should the transferor even do more than the § 6 para. 1 EStG and thus proves that a “real” tax transfer is desired, there is no reason to demand an observation period for the use of the book value privilege. [22] Such a restriction makes in the cases of § 6 Abs. 2 EStG Sinn, since, due to the under-quotal or non-participation in the special business assets, there may be doubts as to whether the business unit should remain. Here it is also possible that the hidden reserves should only be realized by a third party. However, there is no room for such doubts in an over-quotal participation.[23] The aforementioned principles in such a situation also apply if the co-entrepreneurship of the recipient is justified for the first time by the transfer of a part of a co-entrepreneur's share. [] 24]

As a result of a free transfer pursuant to § 6 para. 3 EStG may result in a joint venture division. This would then have to be distinguished into 2 different case groups: the transfer of special business assets, which after the transfer.

a) .. in the total ownership of the transferor and the acquirer

If the transferor and the transferee, in view of the proportionally transferred special business assets, form an overall hand property under civil law after the transfer (§ 718 ff. BGB), this property is declared directly as an ownership company. In this case, the under § 6 para. 3 p. 1 EStG an allocation of the assets of the special business assets to the total hand assets of the ownership company according to § 6 para. 5 S. 3 EStG immediately after. [] 26]

In the case of a joint-entrepreneurial division the following after a transfer in accordance with § 6 para. 3 S. 2 EStG, a subquotal transfer of the special business assets to the ownership company does not lead to any harmful sale or abandonment in accordance with § 6 para. 3, p. 2 EStG.[27]

b) .. in fractional ownership of the transferor and acquirer

Should the transferee first of all be transferred a fraction to ownership under civil law in the case of the pro rata transfer of special business assets (§ 741 BGB), a part of a co-entrepreneur share (including special business assets) will first be transferred free of charge to the acquiring shareholder in accordance with § 6 para. 3 S. 2 EStG. Subsequently, both the transferring shareholder and the acquiring shareholder are transferred to the special assets of the holding company (GbR) in accordance with § 6 para. 5, p. 2 EStG.

No change of legal entity takes place in relation to the special business assets (real estate transfer tax free). Rather, only a change of allocation from the special operating assets in the previous partnership to the special operating assets of the ownership company is achieved here. [] 28]

Example (for a quota transfer of special assets) [29]:

H holds a 60 % stake in HP OHG, to which he also leaves a plot of land under special assets for use. In 2018, H transfers half of its share of the co-entrepreneur (1⁄2 of the share of the total assets and 1⁄2 of the special assets) free of charge to P. HP-GbR transfers the property to HPO OHG for use in return for payment.

As already illustrated above, different case groups [a) and b] are justified:

a The property is in the total hands of H and P

b The property is partly owned by H and P

to a:

First of all, a free transfer of a part of a co-entrepreneur share according to § 6 para. 3 p.1 EStG, which necessarily prescribes a book value continuation. Subsequently, due to the tax assessment of the newly created structure as a co-entrepreneurial division, the previous classification of the property as special assets at HP OHG changes. The property is allocated to the total assets of HP-GbR. The associated transfer of the special assets into the total assets of HP-GbR shall take place in accordance with § 6 para. 5 S. 3 No. 2 EStG at book value.

to b:

As already described in a, there is initially a free transfer of a part of a co-entrepreneur share according to § 6 para. 3 p. 1 EStG, which obliges a book value continuation. Due to the tax assessment of the newly created structure as a co-entrepreneurial division, the property is also to be allocated as special assets at HP OHG in the next step. The property becomes – due to the lack of a change of legal entity in the case of fractional ownership – special business assets of the co-entrepreneurs in the “unit-capitalized” HP-GbR. The associated transfer of the special operating assets at OHG to the special operating assets at HP-GbR takes place according to § 6 para. 5 S. 2 EStG at book value.

If there is a situation in which the original co-contractor transfers the last part-co-contractor share, this regularly leads to personnel unbundling and thus to the end of the business split.[31] This leads to the ownership company being deemed abandoned.[32] If the prior transfer pursuant to § 6 para. 5 S. 3 EStG the blocking period of § 6 para. 4 EStG, it is unclear whether the operating task as a whole leads to its violation. A violation of the blocking period by the abolition of the business split leads according to § 6 para. 4 EStG for a retroactive extraction fiction, whereby the continuation of the book value i. S. d. § 6 para. 3 EStG may be denied.[33] Insofar as the tax administration shares this view and maintains the harmfulness of simultaneous removal, it is essential to ensure that the division of operations either remains for the duration of the blocking period or is avoided from the outset in order to avoid risks. [34]

5th Conclusion

The financial administration has already allegedly raised doubts in connection with the application of § 6 para. 3 EStG replied. From the BFH's point of view, this letter has since been commented on in several judgments on the topics contained in the BMF letter, which has led the financial administration to fundamentally revise the BMF letter and publish it on 20.11.2019.[35] However, the facts just explained clearly state that a detailed tax assessment of the facts is indispensable.

In summary, if necessary, dealing with these boundaries must be at the beginning of a consulting activity. Only if the correct standard is subsumed, it is possible to arrive at a legally secure solution.