In the early years, an entrepreneurial activity is often carried out as a sole proprietorship or in the legal form of a company under civil law (GbR). As soon as entrepreneurial success increases, many entrepreneurs want to convert their individual company into a GmbH (limited liability company). In addition to the limitation of liability, the GmbH also has certain tax advantages compared to a sole proprietorship, namely the salvaging effect (only about 30% tax), advantages of holding structures and tax advantages for a GmbH sale.

The conversion of a sole proprietorship into a GmbH takes place for tax purposes by way of transfer. In the following article, we therefore introduce you to how to convert a sole proprietorship into a GmbH. The article also focuses on the tax neutrality of the transfer of a sole proprietorship to a GmbH, which is carried out with the aim of securing tax advantages in the long term.

The transfer to a corporation pursuant to § 20 UmwStG covers a large number of civil law processes which can be carried out both by way of universal succession under the conversion law and by way of individual succession, e.g. by creation in kind and increase in capital in kind, outside the conversion law. Irrespective of the civil treatment, § 20 UmwStG enables tax-neutral conversion on request and under certain conditions while continuing the book values.

The requirements and legal consequences of the transfer to a corporation are regulated in §§ 20 – 23 of the UmwStG and require notarization. The law on tax accompanying measures for the introduction of the European company and the amendment of further tax regulations (SEStEG) of 07.12.2006[1] fundamentally changed the conversion tax law. Pursuant to § 27 (1) UmwStG, the new version of the UmwStG is to be applied to all conversion and entry processes in which the application for registration in the public register which is relevant for the validity of the respective operation takes place after 12 December 2006.

With the Tax Amendment Act 2015 of 02.11.2015 [2], the valuation choice rights in §§ 20, 21 and 24 of the UmwStG were restricted insofar as other consideration granted in addition to new company rights exceeds certain relative or absolute maximum limits. This applies to transfers in which, in cases of universal succession, the conversion decision takes place after 31.12.2014 or the transfer contract was concluded after 31.12.2014.

In the case of civil treatment, a distinction must be made between the conversion of a sole proprietorship and the conversion of a partnership when transferred to a limited liability company. Both transactions can be carried out tax-neutrally under certain conditions according to § 20 UmwStG. However, the following comments are limited to the conversion of a sole proprietorship.

Individual merchants who are registered in the commercial register can according to §§ 123 (3) i.V.m. §§ 124 (1) and 152 ff. UmwG, part or more of its assets are transferred to a limited liability company by means of a hive-off by universal succession. In addition, both for merchants registered in the commercial register and for sole proprietors not registered in the commercial register, a conversion can take place by way of individual succession by way of incorporation in kind of a limited liability company or an increase in capital in kind in an existing limited liability company, the contribution in kind consists in the previous sole proprietorship.

Derivation

In the context of the hive-off, a final balance sheet must be drawn up for the hive-off date in accordance with § 125 § 17 (2) UmwG. The annual balance sheet rules shall apply to the final balance sheet. In accordance with the requirements of § 20 (2) S. 2 UmwStG, the previous book values can be shown in the final balance sheet in order to avoid a discovery of the hidden reserves. The final balance sheet may be drawn up on a date which is not more than 8 months before the registration of the spin-off to the commercial register.

2.2.

In the case of a contribution in kind by merger, division, separation or hive-off, according to § 20 (5) u. (6) UmwStG at the request of the acquiring limited liability company the possibility to withdraw the transfer transaction for up to 8 months. If the balance sheet is to serve as the final balance sheet on 31.12., the registration of the spin-off to the commercial register must take place no later than 31.08. of the following year. Thus, the commercial spin-off date is i.S.d.

§ 124 i.V.m. 5 (1) No. 6 UmwG the 01.01. of the following year and the tax transfer date the 31.12., i.e. one day earlier.

If, on the other hand, the contribution is made by way of the contribution in kind and the associated new establishment or In return for a capital increase, § 20 (6) S. 3 UmwStG provides for a special retroactive effect regulation. Thereafter, the contribution may be returned to any day which is no more than 8 months before the date of conclusion of the transfer agreement and no more than 8 months before the date on which the transferred assets are transferred to the acquiring company.

3rd tax treatment

In contrast to civil law, which distinguishes between individual and collective succession, in tax law, irrespective of the civil treatment, the conversion of a partnership into a corporation is treated, under certain conditions, as a contribution according to §§ 20 et seq. § 25 UmwStG orders the application of §§ 20 – 23 UmwStG. The applicability of the tax standards for transfer to a corporation presupposes that both the material (§ 1 (3) UmwStG) and the personal scope of application (§ 1 (4) UmwStG) are fulfilled.

3.1. Objective and personal scope acc. § 1 UmwStG

The application and thus the tax-neutral transfer according to the UmwStG is only possible if the requirements of the factual and personal scope of application are fulfilled. Before the conversion, the requirements of § 1 UmwStG must therefore be examined. The requirements for the material scope of application in the context of the transfer of a sole proprietorship to a GmbH are regulated in § 1 (3) UmwStG. According to this, in addition to processes of universal succession under conversion law, the transfer of operating assets is also favored by mere individual succession. The personal requirements for the application of the UmwStG are regulated in § 1 (4). They limit the scope of the UmwStG to EU/EEA companies.

3.2. Application of §§ 20 ff. UmwStG

The submission according to § 20 UmwStG requires the following conditions: