Risks arising from special assets

or | or

EStG | Income Tax Act

if applicable | if applicable

i. S. d | in the sense of

i.V. m. | in conjunction with

nwN | among other proofs

paragraph | recital

Lange, Joachim/ Bilitewski, Andrea/ Götz, Hellmut | partnerships in tax law, 10. Coverage

Hern 2018

Niehus, Ulrich/ Wilke, Helmuth | Taxation of partnerships, 8.

location Stuttgart 2020

Blümich, Walter | commentary on the EStG, 153. Munich 2020

Herrmann, Carl/Heuer, Gerhard/Raupach, Arndt | Commentary on the EStG/KStG, 300. Delivery 10.2020

Rössler, Rudolf/ Troll, Max | Commentary on the BewG, 31. Munich 2020

Dennerlein, Brigitta | special assets,

https://wirtschaftslexikon.gabler.de/definition/sonderb

etriebsvermoegen-43176, on-demand on 29.11.2020

The special assets of co-entrepreneurs of partnerships are subject to special tax regulations. Risks arising from special assets exist in particular in the transfer of co-entrepreneur shares, whether in return for payment or free of charge. If one treats special assets, which represent both the company's assets and the property of a shareholder, differently than the shares in the company, this can lead to the discovery of hidden reserves. Even if no transfer of special business assets takes place while co-entrepreneur shares are transferred, an initially tax-free treatment of special business assets can result in a subsequent taxation. This is the case if new shareholders transfer the special assets within a blocking period of five years. The tax risks associated with special business assets are therefore complex and varied.

1st Introduction

1.1. Problem

Special assets are assets that a co-entrepreneur makes available to the partnership for operational use. In doing so, it remains the property of the co-entrepreneur and is not transferred to the collective ownership. In order for sole proprietor and joint proprietor to be treated equally for tax purposes, the special business assets belonging to the joint proprietor but used by the company must constitute business assets. If a co-entrepreneur share consisting of a company share and special business assets is transferred, various risks must be taken into account. In particular, undesirable detection of silent reserves occurs in certain transmission processes. However, a clever design can avoid the risk of the discovery of hidden reserves.

1.2. Objective and course of work

This work deals with the risks that can arise from special business assets. First, a definition of special assets is given. The special assets are divided into special assets I and II and into necessary and arbitrary assets. In addition, priority is given to the risks that can occur in the transfer of co-entrepreneur shares. For this purpose, the term co-entrepreneurship is first defined. In the case of a transfer, a distinction must be made between the transfer of the co-entrepreneur's share and special business assets, whether in return for payment or free of charge, at the same time or at intervals. The cases in which hidden reserves are discovered are shown. The focus is on special operating assets. Finally, a conclusion is drawn. Sources can be found in the appendix.

2. special assets

2.1. Definition of special assets

Special assets are a tax term for assets which are economically and/or civilly attributable to one or more co-entrepreneurs of a partnership.1

Even if the term originally derived from case law is already used in legal texts, there is no official legal definition of special business assets.2

To be divided into special assets I and II as well as arbitrary and necessary. Both necessary and arbitrary BV can be classified in special assets I and II.3 The distinction between special assets I and II is of practical importance for accounting treatment.4 The only distinction is that arbitrary special assets are only conceivable for special assets II.5 Economic assets of special assets II cannot constitute an essential basis for operations.6 The special operating assets are in accordance with § 97 Abs. 1 sentence 1 no. 5 sentence 2 BewG always to be assigned primarily to the business assets of a partnership and a tax balance sheet.7

Special assets I include assets of one or more partners, which are transferred to the partnership for operational use.8

Special assets II include assets which promote the participation of the shareholder.9 The assets do not have to serve direct operational purposes, but are already in a direct economic connection with the participation.10

This includes e.g. B. Participations in a limited liability company11 such as the shares in the general partnership GmbH12 or the shares of a silent partner of a GmbH and atypical silent company in a GmbH.13 A loan taken out by a shareholder to acquire or increase the shareholding is also part of the necessary special operating assets; also loans from the partner to his partnership.14

Required special assets are assets which are transferred to the company by a shareholder and actually used by the company for operational purposes.15 Rental or lease contracts are conceivable.16 However, the civil law structure of the transfer of use is not decisive.17 It is not necessary for a fee and to comply with civil law requirements.18 According to the BFH jurisprudence, it is already sufficient for a shareholder to make a piece of land available to the company.19 Even if the asset is not needed, but is used for operation in some way, it is declared necessary.20 Even if it is not used for operation, but is designed in principle to do so, it is considered as such.21

Special business assets, which are crowned by weight, are available as soon as the asset can serve the participation of a co-entrepreneur.22 The prerequisites for arbitrary special assets are sufficiently defined in the case law of BFH23.24 The asset must have an objective connection with the company’s operation and be suitable for becoming the partnership’s assets.25 This is usually the case if it is in a spatial or factual context.26 In addition, the economic good must be subjectively intended to be used for the operation of the partnership or partnerships. 27 For example, voluntary special business assets include motor vehicles which are used for at least 10% and at most 50% for operational journeys.28

As soon as a shareholder and owner of an economic good leaves the partnership, the declaration ends as special business assets.29 If a co-entrepreneur dies and the company is continued without its heir by the previous shareholders, the economic good is transferred to the private assets of the heirs.30 If a co-entrepreneur gives away special business assets to his members, a transfer to private assets also takes place. The withdrawal profit is recorded in the year of completion of the donation.31

Risks in the transfer of a co-entrepreneur share

3.1. Definition Share of co-entrepreneur

Co-entrepreneurship is defined as the co-entrepreneurship of a shareholder in a company. However, the term co-entrepreneur share also includes special business assets.33

If the share of the co-entrepreneur is to be transferred, it must be clarified whether the special business assets should also be transferred.

From a tax point of view, when a co-contractor leaves, there is either a remunerated disposal or a free transfer.34

If a co-entrepreneur share is transferred in return for payment, it is questionable whether for the granting of the benefits of § 16 para. 4 EStG and § 34 para 1 or para 3 EStG the special assets must also be transferred.

If the assets of the special company assets are sold, taken over into private assets or transferred to another company assets, the question arises whether all hidden reserves of the entire share of the co-entrepreneur may be discovered.35

3.2. Transfer of a share of the company

3.2.1. Benefits §§ 16, 34 EStG

If a share of the co-entrepreneur is transferred for payment, the seller is liable for the allowance in accordance with § 16 para. 4 EStG and a tariff-reduced taxation according to § 34 para. 1 V. m. § 34 Abs. 1 or 3 EStG. The benefits §§ 16 para 4, § 34 para. 1, i.e. 3 EStG shall mitigate the realisation of hidden reserves.36 The benefits can only be claimed if all hidden reserves are discovered both from the share of the company and from the special assets of the outgoing co-entrepreneur.37

3.2.1.1. Transfer of the entire share of the company

The sale of the special business assets and the company share in a uniform economic process is a favourable sale of the entire share of the co-entrepreneur.38 Since all hidden reserves are discovered, in this case the benefits of § 16 para 4 and § 34 para 1 or 3 EStG are granted.

3.2.1.2. Transfer of shareholding and withdrawal of special business assets

If the share of the company is transferred and special business assets, which constitutes an essential basis for the operation, are retained in order to withdraw it into the private assets of the retiring party, this is not a sale of the entire share of the joint venture, but this operation is instead a beneficiary task of a share of the joint venture in accordance with § 16 para. 1 EStG.39 According to § 16 para. 7 EStG, the hidden reserves of the assets transferred to private assets are realised by an approach with the common value.40 In this case, the benefits of § 16 para 4 and § 34 para 1 or 3 EStG.41

3.2.1.3. Transfer of the share of the company and transfer of the special business assets to another business asset

If the share in the company is sold and in the temporal context the assets of the special business assets, which constitute an essential operating basis, are retained and transferred to another operating assets of the resignee, the realization of the entire hidden reserves is not given.42 Thus the benefits of §§ 16, 34 EStG may not be granted.43 The transfer of the assets of the special business assets to another operating assets of the resignee takes place according to § 6 para. 5 ESt necessarily at book value.44 In this respect, there is no discovery of the hidden reserves. This applies both in the event that the assets are transferred to a different business assets from the sole proprietorship of the retiring company and to the special business assets of the retiring company in the case of another co-entrepreneurship.

3.2.1.4. Previous hive-off of part of a co-entrepreneur's interest

If the co-entrepreneur first transfers a part of his co-entrepreneur share free of charge, the transfer takes place according to § 6 para. 1 EStG at book value.45 No hidden reserves are realized.46 Hidden reserves are only discovered to the extent that the co-entrepreneur subsequently sells the remaining co-entrepreneur share in return for payment.47 The beneficiaries of §§ 16, 34 EStG are not entitled to the vendor.48 This is attributable to the general planning case-law of the Bundesfinanzhof, judgment of the BFH vom. 17.12.2014 – IV R 57/11, BStBl. II 2015, 536.49 The co-entrepreneur should claim the benefits of §§ 16, 34 EStG only if all hidden reserves of the entire co-entrepreneur share were discovered.50 However, if a part of the co-entrepreneur share is already transferred free of charge before the actual sale, the concealed reserves are not realised.51 According to the BFH’s general planning case-law in its judgment of 17.12.2014 – IV R 57/11, BStBl. II 2015, 536, the two operations, the free transfer of one part of the co-entrepreneur's share and the sale of the remaining part of the co-entrepreneur's share, are to be assessed in a uniform manner, with the result that all hidden reserves of the original co-entrepreneur's share are missing, so that the benefits of §§ 16, 34 EStG cannot be granted.52

3.2.1.5. Transfer of part of a co-entrepreneur's share

The profits from divestments of partial shares in a co-entrepreneurship that were concluded after 31 December 2001 are made in accordance with § 16 para. 1 S. 1 No. 2 and S. 2 EStG declared as current profits.53 In this case, therefore, no allowance in accordance with § 16 para. 4 and no tariff reduction in accordance with § 34 para. 1 or para 3 EStG.

3.2.2. Tax consequences 54

If the profit from the sale of the co-entrepreneur share does not fall on a natural person who is himself involved, it is taken into account in the business income of the co-entrepreneurship in accordance with § 7 S. 2 No. 2 GewSt. A trade tax burden on the co-entrepreneurship therefore always arises if the sale or abandonment of the co-entrepreneur share takes place by a corporation or, in the case of double or multi-storey partnerships, by the upper company.56 According to § 5 para. 3 GewStG is, however, the company liable for trade tax.57 Here, however, contractual agreements can be concluded according to which the seller assumes the trade tax liability.58

The same applies to the sale of special operating assets, even for arbitrary special operating assets II.59 § 7 sentence 2 no. 2 GewStG is relevant.60

According to § 7 sentence 1 GewSt, profit is subject to business tax because the joint entrepreneur does not terminate his joint entrepreneurial activity in the case of a partial sale of shares.61

3.3. Transfer of a co-entrepreneur's interest free of charge

Free of charge is usually spoken of when a service, here the transfer of shares, takes place without consideration. However, it must also become clear that the transferor wants to enrich the recipient of his share of the company and intends to leave it to him as a gift in accordance with § 516 BGB.62

The free transfer of a share of a co-entrepreneur does not entail any income tax consequences.63 The assets of the retired person are transferred in accordance with § 6 para. 3 sentence 1 EStG with book values.64 No hidden reserves are realized.65

It must also be examined whether this provision will be maintained even if the co-entrepreneur retains assets which were previously assigned to the co-entrepreneur's share or transfers only a part of his co-entrepreneur's share.66

3.3.1 Transfer of the entire share of the co-entrepreneur

If a co-entrepreneur transfers his entire co-entrepreneur share, including the company share and the special business assets, free of charge, the hidden reserves are not revealed.67 According to the so-called book value privilege, the transfer of the entire co-entrepreneur share is in accordance with § 6 para. 3 EStG with book values.68 This regulation primarily includes functionally essential assets.69 If the special assets are functionally insignificant, they do not have to be transferred at the same time free of charge.70 § 6 para. 3 EStG applies to the transferring share of the company without impairment.71

3.3.2. Transfer of a co-entrepreneur share with retention of special business assets transferred to another business asset

If a co-contractor transfers his co-contractor share free of charge and transfers his functionally essential special business assets to one of his other business assets, it must be checked whether the remaining co-contractor share can nevertheless be transferred at book values. The Bundesfinanzhof and the Finanzverwaltung have previously come to various judgments on the retention of individual functionally essential assets of the special business assets.72 According to the BFH, the judgment of 02.08.2012 IV R 41/11, BStBl. II 2019, 715 as well as the from 30.06.2016 – IV B 2/16, BFH/NV 2016/1452 would be a prior or also day and simultaneous book value separation of individual functionally significant assets according to § 6 para. 5 EStG of a book value transfer of the remaining share of the co-entrepreneur according to § 6 para. 3, first sentence of the EStG

nothing to oppose.73 The tax administration refers to the so-called general planning jurisdiction and, on the other hand, takes the view that § 6 para. 3 EStG should not be applied. Accordingly, a profit under §§ 16, 34 EStG would not be favoured.74 On the grounds that the factual conditions were met and both § 6 para. 3 as well as para. 5 EStG contained congruent legal orders on mandatory book value approach, the BFH considers it justified to apply the two aforementioned laws side by side.75 The conditions at the time of the free transfer are decisive for the applicability of § 6 Abs. 3 EStG, according to which only the transfer of the operating assets that still exist at the time of transfer is to be required.76 The recognition with the book value according to § 6 para. 3 EStG is negated only if the share of the joint venture, which remains after individual assets have already been hived off, has lost so blatantly in economic efficiency for the partnership that the share of the joint venture could in principle be considered abandoned.77

For a long time, the financial administration issued non-application decrees. Only with BMF from 12.09.2013, BStBl. I 2013, 1164 she reacted to the BFH judgment and now shares the opinion of it.78 In the meantime, a newly written BMF letter, BMF v. 20.11.2019, 1291 paragraphs 10 et seq., has become § 6 para. 3 EStG, in which BFH and the financial administration are now obviously of the same opinion.79 Officially § 6 Abs. 5 EStG and § 6 Abs. 3 EStG have since been applied at the same time, i.e. that the book value privileges are granted as long as this does not bring about the dismantling of enterprises.80 This means the still existing operational business unit after assets of the special business assets have already been removed.81 § 6 para. 5 EStG and § 6 Abs. According to the prevailing opinion of the tax administration, the EStG should apply not only if the transfer took place before the transfer of the share of the company, but also in cases where the transfer of the share of the company takes place at the same time as the transfer of the special business assets.82 This reinforces the regular BFH jurisprudence, the transfer also at the same time pursuant to § 6 para. 3 EStG after already completed transfer in accordance with § 6 para. 5 EStG allows.83

3.3.3. Transfer of a share of the co-entrepreneur with retention of special assets which are sold or withdrawn

If a co-entrepreneur transfers his co-entrepreneur share free of charge, but retains functionally significant special business assets that are to be sold or withdrawn, the question arises whether the remaining co-entrepreneur share may continue to be transferred at book values.84 According to the prevailing opinion of the BFH, the exact time must be examined.85 According to § 6 Abs. 3 EStG depends on the extent of the transfer of the operational population at the time of the economic transition.86 § 6 para. 3 is therefore also applicable if the co-entrepreneur first sells or withdraws individual assets, in this case the special business assets, and only then transfers his remaining co-entrepreneur share free of charge.87 This is permissible as long as a functional operating unit is granted and the co-entrepreneur share is not dismantled.88 This means that transfers in the form of withdrawals or disposals before the transfer of the other co-entrepreneur share according to § 6 para. 3 EStG as long as they are not harmless at the same time.89 This view is now shared by the tax administration, it also classifies the transfer in the form of sale or transfer. removal of individual assets before the transfer of the remaining share of the co-entrepreneur as harmless for the subsequent application of § 6 para. 90 Only the simultaneous or equal-day transfer of the share of the co-entrepreneur with the sale or withdrawal is harmful.91 If a sale or withdrawal of individual assets is arranged in such a way that § 6 para. 3 EStG does not apply to the transfer of the co-entrepreneur's share, the co-entrepreneur's share is relinquished by realizing all hidden reserves.92 According to §§ 16, 34 EStG, the relinquishment profit is deemed to be favoured.93

3.3.4. Transfer of part of a co-entrepreneur's share

Even if only a part of the share of the co-entrepreneur is transferred, applies according to § 6 para. 3 sentence 1 half sentence 2 EStG the approach with the book value or its continuation.94 This serves primarily to promote a phased transfer of a share of the company to subsequent generations.95

Taking into account that the functionally significant assets of the special business assets are included as an important component in the co-entrepreneur's share, the consequence can be concluded that the co-entrepreneur's share now consists of the transferred part of the company's share and the partial special business assets.96 If, however, the special business assets consist of several assets, it remains to be examined whether the concept of a so-called quotal transfer of the special business assets requires that all functionally significant assets of the special business assets be transferred without exception, or whether it depends on the value.97 Accordingly, a quotal transfer would also occur if only some assets of the special business assets or even none are transferred.98 Formerly, the financial administration represented a consideration, whereas the BFH argued in its judgment of 02.08.2012 that § 6 para. 3 EStG rather aims at a value consideration.99 By means of the updated BMF letter on § 6 para. 3 EStG, the financial administration is now also clearly in favor of the value consideration.100 This means that the transfer ratio is to be measured depending on the ratio of the proportionally transferred functionally significant assets of the special business asset to the full special business assets.101 After the quota has been determined, it remains to differentiate whether it corresponds to the extent to which the transferred share of the company is to the total share of the company, so-called proportionate transfer, or whether an over- or under-quotal transfer of the special business assets prevails.102

Such a proportionate transfer of the share in the company and the functionally essential special business assets takes place in accordance with § 6 para. 3 sentence. 1 half sentence 2 EStG on book values.103 As a result, no hidden reserves are realised.104

In constellation with over-quotal withdrawal of special assets, the over-quotal transferred part of special assets § 6 para. 3 sentence 1 UStG.105 The financial administration has expressed this view in the BMF letter of 20.11.2019, BStBl. I 2019, 1291, the financial administration has adopted the following view: The transfer of a share of the company is linked to an over-quota transfer of functionally essential assets of the special business assets, which is linked to the free transfer of a part of a share of the joint venture as defined in § 6 para. 3 sentence 1 half sentence 2 EStG to be equated.106

Even if the special operating assets are transferred to a smaller share or not at all, the valuation is carried out in accordance with § 6 para. 3 sentence 2 EStG nonetheless at book value.107 However, this only applies if the retained special business assets continue to be held in the business assets of the co-entrepreneurship.108 In addition, the recipient of the transferred co-entrepreneur share may not sell or abandon it within the next five years.109 If, contrary to expectations, he nevertheless sells the transferred co-entrepreneur share within five years after the transfer, partial values shall be set retroactively to the original reference date of the transfer in full.110 The transferee will subsequently make a current profit.111 Since the original transfer is in accordance with § 6 para. 3 EStG is no longer regarded as a beneficiary, but now a withdrawal of the economic goods

is assumed by the transferor, which is usually to be valued at the partial value, the retroactive recognition of the partial value is justified.112 All hidden reserves of the pro rata transferred assets are realised.113 However, since this is only a transfer of a part of a co-entrepreneur share, not all hidden reserves of the original co-entrepreneur share are uncovered.114 Therefore no benefits can be used and a current profit is to be taken into account.115

4th Conclusion

Problems arise when the shareholder does not want to transfer the special business assets, but wants to keep them themselves or sell them. In the case of the transfer of a share of the co-entrepreneur in return for payment, there is a risk that the discovery of the hidden reserves will not occur in accordance with § 16 para. 4 and § 34 para. 1, i.e. Para 3 EStG is favourable if the special business assets are simultaneously transferred to another business assets of the vendor. Then the transfer of the special assets according to § 6 para. 5 EStG at book values, but the sale of the remaining share of the co-entrepreneur is not tax-advantaged. If the co-entrepreneur's share is to be transferred in return for payment, but the special business assets are retained and transferred to another business assets of the vendor, it is advisable to outsource the special business assets a certain time beforehand, i.e. to transfer them to another business assets of the vendor a certain time before the planned sale of the remaining co-entrepreneur's share. The sale of the remaining share of the co-entrepreneur is then in accordance with § 16 para. 4 EStG and § 34 para 1 or para 3 EStG.

In the case of the free transfer of a co-entrepreneur share, there is the risk that all hidden reserves of the entire co-entrepreneur share may be discovered and § 6 para. 3 EStG does not apply as a whole if special operating assets are sold or withdrawn at the same time/day. However, a detection of the hidden reserves of the remaining share of the co-entrepreneur can be avoided by a clever design. If the co-entrepreneur share is to be transferred free of charge but the special business assets are to be sold or withdrawn, it is advisable to sell or withdraw the special business assets a certain time before the sale of the co-entrepreneur share. The free transfer of the remaining share of the co-entrepreneur shall then take place in accordance with § 6 Abs. 3 EStG without disclosure of hidden reserves at book values. Only the withdrawal or sale of the special business assets lead to current profit. Only in this respect does it come to the discovery of hidden reserves to book values. If a co-entrepreneur share is to be transferred free of charge, but a functionally significant special business assets are transferred at the same time of the day to another business assets or special business assets of a partner by another partnership, there is no risk that the hidden reserves will be unwantedly discovered. In this case, the transfer of the special assets takes place in accordance with § 6 Abs. 5 EStG on book values and the transfer of the co-entrepreneur share according to § 6 para. 3 EStG also at book values.

If only a part of a co-entrepreneur share is transferred free of charge, but the special business assets are transferred to a smaller extent or not at all, there is a risk that later events, over which the transferor has no influence, will nevertheless result in the discovery of hidden reserves. Although the transfer of the share of the co-entrepreneur share also takes place in this case according to § 6 Abs. 3 sentence 2 EStG at book value, if the retained special business assets continue to belong to the business assets of the co-entrepreneurship and the transferee does not sell or abandon the acquired co-entrepreneur share within a period of five years. However, if the transferee sells the co-entrepreneur share taken over within five years, then the partial values for the entire transfer are to be applied retroactively to the original transfer date, so that the transferor generates a current profit that is not favoured under §§ 16, 34 EStG. This risk should be taken into account in the free transfer of a share of a co-entrepreneur's share if the special business assets are to be transferred to a smaller share or not at all.