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28. December 2021 | Application for the de-entangling of contribution-born shares: How to reduce the tax burden!

Shares born of contributions are shares in a domestic corporation acquired by the vendor or the legal predecessor through a contribution in kind below the partial value before 13.12.2016. However, the regulations for contribution-borne shares still apply according to § 27 UmwStG. Therefore, even today, the taxation date of the hidden reserves contained in the contribution-born shares is freely selectable even without disposal. Required is the submission of an application for the de-engagement of contribution-born units. We explain how to make the most of this application as a design tool and what to look for in order to reduce the tax burden.

The concept of contribution-born shares was used in the former conversion tax law and abolished on 13.12.2016. Nevertheless, the rules for these shares continue to apply according to § 27 UmwStG. The contribution-borne shares were regulated in particular in § 20 (1), § 23 UmwStG old version.

Contribution-borne shares are shares in a corporation arising from the contribution of a business, a branch of business or a shareholding at book value or at intermediate value against the granting of company rights. Consequently, the share is “born”, so to speak, by the transfer of the business to the corporation. For example, contribution-born shares can arise through the contribution of a sole proprietorship at book values to a GmbH. Also by a change of legal form of a partnership to a limited company contribution-born shares could be created. From a tax point of view, this change of legal form is treated as a contribution of co-entrepreneur shares to the corporation. However, the book value contribution of non-material entities against the issue of new shares must meet the requirements of the contribution in kind. Consequently, there is no contribution of a shareholding in the company if, in the event of a change of legal form, not all the main operating bases of the special business assets are transferred to the company.

After 13.12.2016, contribution-born shares can no longer originate. Nevertheless, the status of the share as a contribution-borne share, its acquisition costs and the hidden reserves in the case of a free transfer are in principle transferred to the legal successor. Then, however, it is a condition that Germany’s taxation right with regard to the profit from the sale of the shares is not excluded. In summary, it is therefore not particularly easy to identify the contribution-born shares, in particular because the possibilities for the creation of contribution-born shares are numerous and not always easy to recognize. We are happy to advise you on this.

In addition to the original contribution-born shares, they can also arise through capital measures. This is the case when hidden reserves are transferred from contribution-born shares to other shares in the company. If, in connection with capital increases, there are shifts in value from the contribution-born to the new shares, the latter are tax-related under the old law. Insofar as hidden reserves have been transferred to the young shares, there is talk of derivative contribution-born shares. The separation of the substance leads to a reduction in the acquisition costs of the contribution-born shares and – via the subscription right – to a corresponding increase in the acquisition costs of the young shares.

If contribution-born shares are sold, a capital gain is taxable. The capital gain is generally favoured under § 16 EStG. The shareholder can also apply for these legal consequences according to § 21 (2) sentence 1 no. 1 UmwStG old version without having to sell the shares. The Act on Tax Accompanying Measures for the Implementation of the European Company and the Amendment of Further Tax Regulations (SEStEG) amended the taxation of contributions in kind. Nevertheless, the rules of § 21 UmwStG old version according to § 27 (3) sentence 3 number 1 UmwStG continue to apply. Thus, the application taxation according to § 21 (2) sentence 1 number 1 UmwStG old version can continue to be claimed for original and derivative contribution-born shares from earlier contributions. The same applies to new shares granted thereafter, which are involved under old law, as well as to new derivative-born shares.

The application taxation of hidden reserves triggers the legal consequences of § 21 (1) UmwStG old version. According to this, the profit from the sale of the transferred shares is considered to be capital gain within the meaning of § 16 EStG. However, it cannot be concluded that the holding and management of contribution-borne shares constitutes a commercial activity pursuant to § 15 (1) no. 1 EStG. Whether contribution-born shares of a natural person are attributable to business assets or private assets depends on the generally applicable income tax principles and cannot be presumed in principle.

By means of a request for de-entangling, the shareholder can choose the taxation time of the hidden reserves. As a result, the tax burden can be reduced considerably without the shares having to be sold. Then the amount of tax savings depends on how high the hidden reserves are and what the other fiscal circumstances look like. The main motivation for the voluntary discovery of hidden reserves or hidden charges contained in the contribution-born units is likely to be the use or creation of potential loss compensation.

For example, by applying for the untaking of contribution-born shares, you can set off unrestricted recoverable losses. This can be especially useful if the losses cannot be used for tax purposes for the foreseeable future, as you do not make corresponding profits. With the application for taxation of the hidden reserves contained in the contribution-born shares, a notional gain on capital can be realised, which can then be used to offset losses. At the same time, the acquisition costs of the shares now tax-related under § 17 (1) sentence 1 EStG increase to their common value and thus reduce a subsequent capital gain under § 17 (2) EStG.

3.2.2. Save potential loss on inheritance through contribution-born shares

In addition, the application can also be advantageous for a future decedent. The future deceased may be the holder of contribution-born shares and may have a loss carry-forward that has built up through losses from commercial operations. However, the heir can no longer claim this loss carry forward. The deceased should then submit the application for the de-integrating of contribution-born units. In this way, the otherwise lost potential can be saved by generating a notional capital gain through the application. Then the loss potential that would otherwise disappear can be converted into higher acquisition costs of the shares now tax-related according to § 17 (1) sentence 1 EStG.

3.2.3. Capital gains born as capital losses

Furthermore, fictitious capital losses from the contribution-borne shares can be offset against other profits. The common value of the contribution-borne shares has fallen below the original cost and no future increase in value is expected. Nevertheless, the shareholder makes profits from business operations from a sole proprietorship. Then the realised fictitious loss on sale is available for compensation with the profits from business operations. In addition, the acquisition costs of the shares now tax-related pursuant to § 17 (1) sentence 1 EStG are then reduced to the lower common value of the shares.

Since the profit from the application taxation is subject to the partial income procedure, the tariff reduction of § 34 EStG cannot be claimed.

The profit from the application taxation is considered to be a capital gain within the meaning of § 16 EStG. It is irrelevant whether the contribution-borne shares constitute private assets or operating assets. Consequently, the allowance according to § 16 para. 4 EStG. If the partial income procedure applies to the capital gain, the tax-free part according to § 3 no. 40 sentence (b) EStG shall also not be taken into account in the calculation of the allowance (R 16 para 13 p. 10 EStR 12).

The income tax and corporate income tax associated with the claim taxation on the derailment profit can be paid in annual instalments of at least one fifth each. For this, however, the payment of the instalments must be ensured. Deferral interest does not apply (§ 21 para 2 p. 3 and 4 UmwStG a.F.).

Even today, contribution-born shares make it possible to reduce the tax burden in a variety of ways by submitting the application to untangle their hidden reserves. It is therefore necessary to carry out a careful examination of the date of de-entrapment following the application in order to determine when it is most appropriate. Due to the uniqueness and finality of the application, you must analyse the current and future circumstances sufficiently precisely. We are happy to support you in this.