When transferring assets and/or material groups to corporations, in addition to the material requirements (object of the transfer), the personal requirements must also be checked. The personal requirements must be met by both the acquiring company and the contributor. Read here which domestic and foreign persons and companies fall within the personal scope of application for a contribution to corporations under German conversion tax law.

According to the old conversion tax law, the tax-neutral transfer – with the exception of the special cases of § 23 UmwStG 1995[72] for transfers by EU corporations – was effectively limited to domestic matters. [73] This was due to the fact that according to § 20 Abs. 1 S. 1 UmwStG 1995 was the unrestricted corporate tax liability of the acquiring corporation mandatory. If the transfer was made to an unlimited company subject to corporate tax, the transferor was allowed to be resident abroad, tax neutrality came in accordance with § 20 para. 3 UmwStG 1995, however, applies only if the right of the Federal Republic of Germany to tax the shares received was not excluded. Thus, the tax neutrality of the transfer was ruled out for all cases in which the acquiring corporation was not subject to unlimited corporate tax or the transferor’s State of residence had concluded a DTA appealing to the OECD-MA with the Federal Republic of Germany.

Due to the Europeanisation of the UmwStG within the framework of the SEStEG with effect from 13 December 2006, the material and personal scope of the UmwStG was extended to contributions within the EU and the EEA. In certain cases, entries from third countries are now also covered:

1.1. The acquiring company as domestic legal entity

According to § 20 para. 1 S. 1 UmwStG, the operating assets must be transferred to a corporation or cooperative. The acquiring company is therefore the AG or GmbH established under German law, which have their registered office, administrative seat and place of management in Germany. The same applies to the cooperative established under German law as well as to the European Company and European Cooperative Society.[74] The KGaA can acquiring company i.S.d. § 20 Abs. 1 S. 1 UmwStG, if the contributor is granted shares for this and there is no contribution in kind from the personally liable partner. [] 75

1.2. The acquiring company as foreign legal entity

The sixth part of the UmwStG basically also includes the transfer to legal entities with an international connection, if they were formed under the law of a Member State of the EU or the EEA (companies in accordance with Art. 54 TFEU) and as a corporate tax entity in accordance with § 1 para. 1 KStG are qualified. [76] Whether the foreign legal entity is to be treated as a corporation tax entity or co-entrepreneurship is not determined by foreign company and tax law, but by the evaluations of German tax law.

1.2.1. Comparison of legal types with foreign companies

As part of the legal type comparison, the company contract and foreign company law are compared with the company law of the German capital companies or partnerships on the basis of nine criteria and the company is accordingly qualified as a transparent or non-transparent tax subject. [77] In addition, the personal scope of application according to § 1 Abs. 4 No. 1 in accordance with § 1 Abs. 2 No. 1 UmwStG, according to which the assuming legal entity must maintain both its registered office and its place of management in an EU or EEA Member State (double residence requirement). Consequently, according to § 20 UmwStG, the operating assets can in principle also be transferred to foreign EU/EEA corporations – such as a Dutch besloten vennootschap (B.V.) or a Spanish Sociedad Limitada (S.L.) – at book values. The transfer to a third country capital company is de lege lata not possible. [] 78]

1.2.2. Double resident corporations

Since it is not necessary for the statutory seat and the place of management to be located in the same Member State, double-resident corporations may also be acquiring legal entities under § 20 UmwStG. Dual-resident companies are first established under the law of a state before they move their place of management and thus usually also their administrative seat to another state. However, it should be noted that the company must not lose its qualification as a corporation by relocating the place of management.

In the case of German corporations, the transfer of the administrative headquarters abroad under old law until 2008 led to the deprivation of legal personality and thus to the loss of qualification as a corporation. By deleting § 4a para 2 GmbHG and § 5 para. 2 AktG within the framework of the MoMiG, the German legislature has now allowed the removal of the German GmbH and AG since 1.11.2008 by relocating the administrative headquarters to EU, EEA and non-EU countries.[79]

Due to the favourable jurisprudence of the ECJ in cases Centros[80], Überseering[81] and Inspire Art[82], the EU applicant state may not revoke the legal personality of the German corporation – regardless of whether it applies the domicile or founding theory – but must continue the corporation as such. [83] Accordingly, a GmbH or AG established under German law can also be acquiring company in accordance with § 20 UmwStG if its place of management and thus its administrative headquarters are located in EU/EEA countries. [84] Although the transfer of the administrative seat to a third country would also be possible under German company law, the German limited company would thus lose its ability to be an acquiring company under § 20 UmwStG due to the third-country involvement of the management.

1.2.4. Foreign corporations: seat theory vs. founding theory

If foreign corporations have moved their place of management and thus their administrative headquarters to another Member State, the legal personality of the foreign corporation will generally only be preserved if the country of departure applies the founding theory. This is due to the fact that, when applying the founding theory, the retired corporation always falls under the company law of the departing state, regardless of the actual location of the administrative seat. If, on the other hand, the departure state follows the seat theory, the capital company loses the protective umbrella of domestic company law and thus – in accordance with the case law of the ECJ[85] – its legal personality with the consequence of a change of statutes. Along with the loss of legal personality, the departing corporation thus also no longer has the possibility of being an acquiring company under § 20 UmwStG.

2. The submission

The assets can in principle be transferred to the acquiring company by a natural person, corporation, association of persons or assets as well as by a partnership according to § 20 UmwStG:

2.1. The natural person as contributor

According to § 1 para 4 no. 2 lit. a lit. bb i.V.m. § 1 (2) No. 2 UmwStG can be a natural person contributor i.S.d. § 20 UmwStG if he has his residence (§ 8 AO) or his habitual residence (§ 9 AO) on the tax transfer date in an EU/EEA country and is not deemed to be resident there on the basis of a DTA with a third country. [86] Accordingly, according to § 20 UmwStG, natural persons resident abroad can now also contribute business assets to a corporation if they have a tax connection point – i.e. their place of residence or habitual residence – within the EU or the EEA. For dual residents who also have a tax link to a DBA third country, the Tie Breaker Rule of the relevant DBA must be observed. Then, according to type, 4, par. 2 lit. (a) OECD-MA result in residency in the third country, in particular in cases where the centre of vital interests is located there. The EU/EEA residence of a third-country resident would therefore not be sufficient to fall within the scope of § 1 para. 4 No. 2 lit. a lit. bb UmwStG.

Are the residency requirements of § 1 para. 4 No. 2 lit. a lit. bb UmwStG does not comply, the application of the sixth part may derive from the special standard of § 1 para. 4 No. 2 lit. b UmwStG. According to this special rule, persons resident in a third country may, by way of exception, also transfer business assets to a corporation under Section 20 of the UmwStG if the right of the Federal Republic of Germany to tax the profit from the sale of the shares received is not excluded or limited. This regulation is similar to § 20 Abs. 3 UmwStG a.F. and usually includes those cases in which the shares received are attributable after the transfer of a German permanent establishment of the transferor and thus the taxation law acc. Art. 13 para 2 OECD-MA remains the Federal Republic of Germany. [87] This case is particularly important if the assets are transferred to a capital company by a domestic partnership of the third-country shareholders. [88] Also included are the rare cases in which a domestic corporation is an acquiring company and the Federal Republic of Germany has either not concluded a DTA with the transferor’s State of residence or the DTA has the taxation right exceptionally in deviation from art. 13 para 5 OECD-MA to the local state (Federal Republic of Germany).

Advice in International Tax Law

2.2. The capital company as a contributor

corporations, assets and associations of persons which, in accordance with § 1 para. 4 No. 1 in accordance with § 1 Abs. 2 UmwStG meet the requirements as an acquiring company, according to § 1 Abs. 4 No. 2 lit. a lit. aa UmwStG also be a contributing company.[89] For transferring corporations, assets and associations of persons, the scope of application is defined by the special regulation of § 1 para. 4 No. 2 lit. b UmwStG extended. According to this, third-country corporations are also covered by Part Six if the right of the Federal Republic of Germany to tax the shares received is unlimited.

2.3. The partnership as contributor

Domestic and foreign partnerships or transparent companies can also be contributors in accordance with § 20 UmwStG.[90] The prerequisite is that the company not only operates in asset management, but also generates income according to §§ 15 or 18 EStG and continues to exist with an operating asset after the contribution. [91] Due to the transparent taxation of partnerships, the residency requirements of § 1 para. 2 UmwStG both by the transferring partnership itself and by the natural and legal persons involved in it directly and indirectly through another partnership. [] 92]

In the case of domestic partnerships with third-country partners, the special regulation of § 1 para. 4 No. 2 lit. b UmwStG. Due to the third-country reference of the shareholders, the residency requirements of § 1 para. 4 No. 2 lit. a lit. bb UmwStG at shareholder level, so that an application of the UmwStG would be excluded in this respect. However, the new shares are issued to the domestic partnership and are therefore basically allocated to the domestic operating assets. According to Art. 13 para. 2 OECD-MA, the domestic tax law therefore remains in force and the UmwStG applies.