Selling a partnership abroad normally leads to a taxation of capital gains. After all, this is also regulated in Germany. Even if a double taxation agreement has been concluded with Germany with the state in which the company to be sold is located, this is usually unavoidable. However, a cross-border conversion of the partnership abroad into a capital company can be used to make the sale both abroad and in Germany tax-free.

In the video we explain the advantages & disadvantages of the commercial stamping of a classic GmbH & Co. KG and the possibilities of avoidance.

starting position for the sale of a partnership abroad

If you have a shareholding in a partnership based abroad, then a sale of your shareholding in it is normally associated with a taxation of capital gains. In the best case, there is a double taxation agreement between the country in which your foreign company is based and Germany, so that you are spared double taxation. Otherwise, they are even threatened with taxation in both countries.

But we now want to show you that a cross-border conversion of the partnership abroad into a corporation can even make the sale completely tax-free. We would like to explain this to you with this contribution using an example.

2nd framework for our example of a sale of a foreign company

To give you a realistic example, let’s assume that Ms. Tulpenbach operates a partnership in the Netherlands. She herself is resident in Germany and is also taxed here regularly. Since Ms. Tulpenbach now wants to retire into the well-deserved retirement, she plans to sell her foreign company. In fact, it soon settles with a buyer on a sale price of EUR 1,000,000. Originally, she had acquired the company with acquisition costs of EUR 100,000. From a purely mathematical point of view, this therefore results in a capital gain of EUR 900,000, which is taxable after the sale.

Although there is a double taxation agreement between the Netherlands and Germany, so that the taxation of the profit only takes place in one of the two countries involved, the prospect of making the sale completely tax-free, makes Ms. Tulpenbach at least curious. We are now accompanying them on this path.

Before the actual sale, Ms. Tulpenbach converts her partnership into a corporation. As in Germany, a conversion of a partnership into a capital company is also possible in the Netherlands at book value. Since the book value of the partnership is to be recorded at the acquisition cost of EUR 100,000 before the conversion, the company also assumes the book value in the same amount. In this way, the conversion in the Netherlands remains without tax burden. After all, the conversion in this way did not cause an increase in the company's value, which should have been taxed.

3.2. Conversion of the foreign company: once at book value and once at market value

Due to the double taxation agreement, there is no taxation jurisdiction in Germany in this case. Because the partnership has its registered office in the Netherlands, only this country can be granted a right of bestowal in the conversion.

However, it is also necessary in Germany for Ms. Tulpenbach to provide the competent tax office with information about the transformation of her company. But now Ms. Tulpenbach decides that instead of the book value, she sets the market value of EUR 1,000,000. Normally, the tax office would rub its hands, because this approach usually leads to a taxation of the conversion profit of EUR 900,000. However, since the double taxation agreement does not recognize Germany’s taxation sovereignty in this case (Art. 13 para 2 DTA), no taxation takes place in this country.

3.3. The tax-free sale of the foreign company

Finally, the sale of the foreign company can take place in the legal form of a corporation. But before Mrs Tulpenbach can enjoy the EUR 1,000,000 paid to her, the question of the taxation of this profit must be answered. Since it is based in Germany, a look at the double taxation agreement is sufficient to establish that Germany now has the right to tax the capital gains (Art. 13 para 5 DTA).

And now it shows why Ms. Tulpenfeld was wise to report the conversion to market value to the tax office in Germany responsible for her. Because now the market value at the time of the conversion in the amount of EUR 1,000,000 minus the sales proceeds in the same amount gives a profit of exactly EUR 0. In other words, Ms. Tulpenbach actually sold her company at its own value, so she did not generate a profit and consequently she does not have to pay tax. Therefore, she receives the sales proceeds of EUR 1,000,000 practically tax-free.

4. Final observations