date | theme

11. November 2018 | Save the loss carry forwards at the GmbH: the new § 8d KStG helps!

22. March 2021 | Tax-free withdrawal of hidden reserves from GmbH & Co. KG

06. July 2021 | Silent reserves in the balance sheet: emergence / education / dissolution (this contribution)

Hidden reserves represent the difference between equity and actual assets. These are not shown in the balance sheet, as they can arise, for example, from valuation differences. In addition, hidden reserves often play an important role in conversions, since in most cases no income is recorded and a very heavy and unintended tax burden is incurred by a discovery of the hidden reserves. It is therefore important to know how hidden reserves can be uncovered before aperiodic company transactions, such as conversions, company acquisitions or relocations, and a departure of the shareholder, are carried out.

Starting with the concept of hidden reserves, it is important to clarify that these are capital reserves that are not listed in a balance sheet as a separate breakdown point. This is also referred to as the difference between the current market value of the asset or liability and the recognition, i.e. the carrying amount, in the balance sheet. Because these differences arise over time, for example, through the exercise or non-exercise of various evaluation selection rights or activation selection rights. Thus, in some cases, a much higher value slumbers in an operation than can be read in the balance sheet. Furthermore, the hidden reserves will usually build up partly from the foundation of a company and reduce again in the course of time. At the latest when the company is sold, the hidden reserves are generally discovered and taxed.

Nevertheless, in the course of the activity of a company, situations may arise in which the taxation of hidden reserves would be considered. In principle, the goal of a taxpayer and his tax advisor is that the hidden reserves are treated tax-free. For example, in conversion operations, there is often a taxation of hidden reserves, but there are some exceptions. For example, the transfer of holdings and the transfer of assets can often take place at the accounting book values. Not infrequently, the tax-exempt § 6 Abs. 5 EStG and § 6 Abs. 3 EStG.

In addition, an immediate depreciation of low-value assets is often possible, which can create hidden reserves at the end of the year if these assets continue to hold value.

In addition, there are further parades of the formation of hidden reserves, on the one hand in stocks and on the other hand in provisions. For inventories, an underestimation by not allocating all redistributable overheads may result in a difference between book values and market values. Furthermore, a possible difference may arise from the valuation methods for stocks. Possible price increases due to the Corona pandemic may, for example, result in hidden reserves in the stored stocks when using the LIFO method, as the market values of these reserves increase. Otherwise, Corona may no longer be able to sell stocks, resulting in their book value exceeding the market value and resulting in hidden charges.

For provisions, an estimate is often necessary, hidden reserves arise if this estimate is higher than the actual costs of the commitment later. Furthermore, in the case of some provisions, percentage shares of the turnover must be effectively recognised (for example in cases of warranty), if these are then also lower, hidden reserves also arise, which must be dissolved in the future.

In principle, it is not in the sense of the legislature to accumulate excessively high hidden reserves in a company and thus delay taxation. Nevertheless, in the case of hidden reserves, it must be noted that these can also be quickly realised in the case of restructuring, in the transfer of assets, in the replacement of assets or in the transfer of co-entrepreneur shares and businesses and that the legal regulations for avoiding taxation must be strictly observed. These exceptions have been created specifically by the legislature, so that outside the sale of companies and the sale of assets, the taxation of hidden reserves can usually be avoided.

Furthermore, one objective of the annual financial statements is the plausible presentation of the earnings, assets and financial position. This is made much more difficult by hidden reserves, since these are not reflected in the balance sheet. But the precautionary principle is only a vague requirement without legal binding for the balance sheet preparers, so the room for manoeuvre is correspondingly large and often advantageous for non-capital market-oriented small and medium-sized enterprises. This often leads to a late profit realization by the discovery of hidden reserves in assets, which often corresponds to the company's final departure.

Hidden reserves are usually a temporary shift in profits. Because the dissolution of these reserves leads to a final profit realization. In some cases, operating losses are offset by the realisation of hidden reserves and thus a profit is finally reported. In addition, in some cases the liquidation of hidden reserves can be avoided. The focus here is on the formation of a reserve according to § 6b EStG for outgoing assets and for the sale of GmbH shares. In this case, hidden reserves are initially exempted from taxation and placed in a reserve in a tax-neutral manner. The acquisition costs of certain newly acquired assets are then reduced by the reserve. This transfers the reserve and a de facto unrealised profit remains untaxed.

If hidden reserves are available in the event of a harmful acquisition of a shareholding within the framework of §8c KStG, the so-called silent reserve clause can take effect effectively and an acquired loss deduction can be used for the last time.

The acquisition of a shareholding includes the acquisition of shares in corporations and the acquisition of cooperative shares. However, a harmful acquisition of a shareholding only exists from an acquisition of more than 50% of a corporation, according to which an existing loss carry forward would then disappear. The acquisition can also take place over a period of five years and would still be harmful. Now existing hidden reserves can be offset and used when buying the shares with an existing loss deduction. Thus, a loss reduction can also be avoided outside the Group clause.

The value correction bid according to § 253 para. 5 S. 1 HGB aims exclusively at unscheduled depreciation of usable assets. Because excessively high scheduled depreciation does not fall under the obligation to recover value.

Therefore, the reasons for the impairments are to be examined in particular, if they have been omitted, an impairment adjustment must be made. It is necessary to examine to what extent the depreciation and the resulting book value of the assets in question reflect the current market value of these assets. If the book value is significantly lower than the market value, hidden reserves have therefore been built up in the assets. It is necessary to reverse these so that the balance sheet provides more accurate information on the values of these assets.

For usable assets, reversals may be made only up to the current market value, which may also be lower than the original book value after a scheduled linear depreciation.

The prohibition on the recovery of value is to be applied decisively to derivative goodwill. Because here it is necessary to carry out the scheduled depreciation stringently. The special prohibition on the accounting of original goodwill also prohibits a possible reversal of the value of the derivative GoF. Derivative goodwill means that a purchase price exceeding the operating assets is recognised and written off over a statutory period of use. Therefore, a reversal of this business value would be the recognition of an original goodwill from operating activities. Thus, instead of a value reversal, the formation of non-visible reserves takes place. A future sale of the company will result in higher profits.

The hidden reserves represent important hidden capital reserves for companies. Because by avoiding accounting, there is no unintended realization and thus taxation of these reserves. The discovery of hidden reserves is used to compensate for liquidity shortages for profit generation or to avoid loss reporting. As a result, these reserves constitute a form of internal financing and can be used instead of loans or capital increases.

Nevertheless, in most cases withdrawals or disposals are circumvented. This approach is supported by many tax regulations. We are happy to help with a tax-neutral design of economic processes, so that you do not reveal and tax hidden reserves. By contacting them early you can avoid unpleasant future tax payments.