With a GmbH & Co. KG you can establish a holding company by dividing and transferring the operative business operations into a subsidiary. The transferred assets comprise the hidden reserves contained in GmbH & Co. KG. Normally, the hidden reserves are taxable as soon as they are revealed, for example, by sale. But now you can use their spin-off from the GmbH & Co. KG to take a tax-free profit in the amount of the value of the hidden reserves. While the conversion to a book approach is tax-free for the GmbH & Co. KG, it can be done commercially at a profit. This can then be deducted from the GmbH & Co. KG as part of a tax-free profit withdrawal. For a GmbH, however, this model is hardly suitable, because this leads to a taxable profit distribution to the shareholders.

On the one hand, a partnership which in the course of its existence formed hidden reserves to a considerable extent represents a treasure. On the other hand, we must also bear in mind that the discovery of hidden reserves leads to taxation by shareholders. Since we want to assume a considerable amount of hidden reserves, we can also expect the top tax rate to be applied to shareholders. Of course, a comparable distribution of profits by a corporation, such as a GmbH, is also taxable. However, the associated capital gains tax is only 25 % instead of more than 40 %.

But what if we could obtain the hidden reserves of a partnership – we assume here in the model of a GmbH & Co. KG – through a tax-free profit withdrawal? Of course, we can read your thoughts on this: Too good to be true! But let us now prove that to you. And in our article we raise the treasure buried in the partnership. So let us act as Long John Silver would act in our place!

Tax-free profit withdrawal from a GmbH & Co. KG – hidden reserves

So if we are considering a tax-free withdrawal of the hidden reserves from a GmbH & Co. KG, we should first reflect on what they could be. For example, these could be properties placed in the operating assets of GmbH & Co. KG. If they have experienced a considerable increase in value over time, then this naturally also has an impact on potential taxation in the discovery of hidden reserves. This usually takes place as part of a sale. But also the transfer by inheritance or donation means that the hidden reserves are taken into account in the taxation. The respective tax is then also correspondingly high. In addition, hidden reserves may be based on intangible assets. For example, these can be trademark rights, patents, Internet domains or simply the customer base.

First, we are doing a conversion. For this purpose, we spin off the assets containing the hidden reserves of GmbH & Co. KG into a subsidiary. However, before we talk about the commercial and tax consequences of the spin-off, we will go into more detail about the subsidiary.

Because the new subsidiary can be established as a partnership as well as a corporation. The establishment of a partnership has the advantage that the conversion remains tax-neutral. This applies both in the event that the parent company only hives off individual assets and in the event that the entire business is transferred to the subsidiary. However, if a GmbH is to emerge as a subsidiary from the conversion, this is only possible in a tax-neutral manner if it receives the entire business operation.

3.2. Valuation of the assets transferred to the subsidiary

3.2.1. Subsidiary balance sheet – Trade balance

First of all, however, we consider our possibilities for valuing the assets transferred to the subsidiary. We note that we are open to all options offered by the Commercial Code. That is why we are now using the very option that allows us to set the value of hidden reserves as high as possible. Because the higher the value of the hidden reserves, the higher the tax-free profit withdrawal from the GmbH & Co. KG can take place.

For this purpose, we carry out an assessment that corresponds to the so-called DCF procedure (DCF means discounted cash flow) of the IDW S1 standard. This method is therefore recognized and permitted in Germany. The DCF procedure now assumes that the future performance of the assets to be valued should also be taken into account. After all, the profit to be generated from these assets in the future also plays a role in determining their value. Especially when evaluating companies you intend to buy, you should consider this method.

In any case, in the case of a GmbH & Co. KG as parent company, which in the past made profits from the assets transferred to the subsidiary, this leads to a higher valuation than the book value shows. Similarly, with an always positive development in value, it should also exceed the present time value of economic goods. Therefore, the value that the DCF procedure determines for the transferred assets is the highest value that can be included in the balance sheet under commercial law. That is why we choose this for the trade balance of the subsidiary.

3.2.2. Subsidiary balance sheet – Tax balance

From a tax point of view, the transfer within the framework of the spin-off for the re-establishment of the subsidiary is both taxable and tax-neutral. It is taxable if we set the value of the assets in the opening balance sheet of the subsidiary at a higher value than that which is in the books of GmbH & Co. KG. However, this also means a discovery of the hidden reserves equal to the difference in their values in the balance sheets of the two companies. But that is precisely what we absolutely want to avoid. Because otherwise we could not take tax-free profits from the GmbH & Co. KG. So we have to take the value of the assets transferred, which contain the hidden reserves of the transferring partnership, with their book value in the tax balance of the subsidiary.

Tax-free profit withdrawal from GmbH & Co. KG – balance sheet of the parent company

But how do we intend to balance the assets transferred to the subsidiary with the parent company? We are doing this in two different ways. Because we distinguish between commercial and tax accounting approaches, we can also use the values in different ways.

3.3.1. Parent company balance sheet – balance of trade

Commercial law, of course, we have to choose the same valuation approach that we apply to the subsidiary. The transfer of assets by transfer to the subsidiary takes place there on the asset side as an acquisition of shares in the subsidiary by exchange. So we also have to create a corresponding offset on the liabilities side. Here we follow the old phrase that everyone who does an education with a tax reference learns: Do not you know where, book on profit! More specifically, the equivalent value obtained with the shares in the subsidiary in exchange for the assets flows as other operating income into the trade balance of GmbH & Co. KG. Thus, a commercial profit equal to the difference between the original book value of the divested assets and other operating income is available.

The advantage here is that the income recorded under commercial law is now considered a liability of the parent company towards the shareholders of GmbH & Co. KG. And the settlement of a liability to the own shareholders is just as tax-free as a loan that you received from them and now repays.

3.3.2. Parent company balance sheet – Tax balance

In the case of the parent company’s tax balance, on the other hand, we choose the book value of the assets as an approach in order to record the transfer of the assets on the balance sheet. This has the advantage that the contribution to the subsidiary is neutral from a tax point of view. Thus, there is no tax on the transfer of assets.

However, the disadvantage of the transfer of assets at book value is that the subsidiary cannot now make a tax-relevant depreciation on them. In addition, from now on, a very precise distinction must be made between the values in the trade balance and the tax balance. But this must always be observed.

Furthermore, the values of the transferred assets are of course preserved, so that in turn they are hidden reserves. However, in this case they are assigned to the subsidiary. Therefore, this is irrelevant for our actual consideration of the tax-free profit withdrawal from GmbH & Co. KG as a parent company.

3.3.3. Tax-free profits from GmbH & Co. KG

Finally, we want to take a closer look at how we take tax-free profits from GmbH & Co. KG. Therefore, we first take a look at the books of the parent company. As we have already described, there is now another operating income as profit in the trade balance. However, since we generated this amount without a tax-relevant discovery of the hidden reserves, we can also extract this amount without tax consequences. The prerequisite is, of course, that the GmbH & Co. KG has sufficient liquid funds to be able to make this payment to the shareholders. However, this amount can also be left on the accounts as a claim of the shareholders and paid out at a later date, if sufficient liquid funds are available.

Division of a GmbH

4th option to set up a holding company

Finally, we would like to go into more detail about the new foundation of the subsidiary. There are two different possibilities.

4.1. Continuation of operations by the parent company

On the one hand, the parent company can still be maintained as an operating company. This requires that the assets necessary for the continuation of economic activity be left in the parent company. Alternatively, you can transfer it to the subsidiary, but then you have to rent it back to GmbH & Co. KG. In principle, however, the intangible assets are particularly relevant when they are transferred to the subsidiary. Because they usually contain the highest hidden reserves of the parent company. And the parent company also needs this to continue its business operations. It is therefore essential that this should be done.

No matter how you proceed, this usually has no effect on the later tax-free profit withdrawal from the GmbH & Co. KG.

4.2 Establishment of a holding company by spin-off to the subsidiary

On the other hand, we can also decide that the newly founded subsidiary will take over the operating business in the future. In a sense, the transfer of operations to the subsidiary constitutes the exact opposite of the abovementioned case. Be that as it may, the GmbH & Co. KG as a parent company is now basically empty. It only holds a stake in its subsidiary. As a parent company, however, GmbH & Co. KG is also a holding company. Because the operative business now takes place through the subsidiary. In this way, further advantages can be considered through the establishment of the holding structure.