There are three ways to convert a company by division: division, separation and spin-off. Often this leads to a new start-up of a company with the aim of receiving the separated assets. It is irrelevant whether the undertakings concerned are partnerships or capital companies. In addition, the division of a company can in principle be carried out in a tax-neutral manner. For this, it is sufficient to adhere to a few simple prerequisites. Furthermore, there is the option to carry out the division retroactively for up to eight months. This makes it possible, for example, to set the final balance of the previous year for conversion. Also in the case of taxation, you can use tax benefits for a period of eight months.

In the video we explain to you the three different types of splitting, splitting, splitting and spinning and their advantages and disadvantages.

1. Division in conversion law

Apart from the change of legal form, the merger, the transfer of assets and the transfer of assets, the division of an enterprise is a partial aspect of the conversion law, which is standardized in the conversion law. In addition, all aspects of tax relevance are specifically bundled in the Conversion Tax Act.

The division involves the separation of assets from a previously existing operational context. In contrast, merger and transfer constitute an association of assets into a common operational unit. For this reason, a division takes place either in connection with the commencement of the assets in another company or there is a targeted new creation in order to transfer the assets in question. This latter case is at the forefront of our considerations.

Just as conversion stands as the generic term for the five very different variants change of form, merger, division, transfer of wealth and transfer, so also division is only the roof under which the three subtypes of division, separation and separation are classified. It is irrelevant whether the original company to be divided previously existed as a partnership or a corporation. The form of the undertakings resulting from the division shall also be freely selectable as partnerships or capital companies. Equally flexible is the participation in the companies compatible between the shareholders.

2nd split

2.1 The nature of division

The division is to be understood as the separation of two or more branches within an enterprise. This leads to the creation of new companies, whereby the existing company ceases to exist. Because the divided economic goods are now part of the new foundations. The shareholders of the original company receive shares in the newly created companies.

2.2. Example and practical tips for a split

An example of this:

A-GmbH is 50% owned by the two shareholders Ms. X and Mr. Y. It consists of two independently operating branches. One branch is set up as a research facility and the second is used for marketing.

Now the two shareholders decide to split this GmbH. For this purpose, the shareholders establish B-GmbH, which is to host the research institution, and C-GmbH, which is located in the marketing segment. The latter receives for this purpose the marketing department of the original company, which can now be dissolved.

In the division of the shares in the two newly created companies, the following two variants are conceivable. On the one hand, the shareholders could also agree to hold 50% of the shares in both companies in the future. On the other hand, a division is also conceivable in which Ms. X holds a 100% stake in B-GmbH and Mr. Y receives 100% of the shares in C-GmbH in return. Thus, the two former co-shareholders could now go entrepreneurially separate ways. However, this applies on condition that the two branches are of equal value. Otherwise, compensation payments must be made between the shareholders in order to implement such divisions as have been described here as an example.

In contrast to the split, the original company will remain in a split. Provided that the asset to be separated off is an autonomous branch of activity, a new start-up takes place in which the shareholders of the original company also participate in the newly created company.

3.2. Example and practical tips for a split

The following example serves as an explanation:

A-GmbH provides consulting services on the one hand, but is also specialized in sales in the other segment. It will now expand. For this purpose, several branches are to be opened throughout Germany. Therefore, a new B-GmbH & Co. KG will only be established for the sale, with A-GmbH still limited to consulting services.

4th spin-off

4.1. The nature of separation

The spin-off is listed for a good reason immediately after the spin-off, because it is in a sense a subform of its own. Here too, as in the case of the spin-off, there is a new establishment. However, instead of the shareholder, the original company is a shareholder in this new company. Thus, one also speaks of a relationship between parent and subsidiary.

4.2. Example and practical tips for a spin-off

To give you an example, we take the basic situation from the one that served to explain the split:

The shareholders of A-GmbH decide instead of the spin-off to establish the branches in the sales segment. So the GmbH itself founds the B-GmbH instead of its shareholders. The parent company thus holds a 100 % stake in the subsidiary.

The spin-off is also the perfect approach to creating a holding structure from a GmbH. It is sufficient for the original GmbH to spun off all subsidiaries, even if it is only one. In this way, the purpose of the now empty GmbH is limited to holding and managing the investments in the subsidiaries.

5. Requirements for a tax-neutral division of companies

5.1. Division of separate branches

With the exception of the change of legal form, in all conversions the part-operation as an economic asset is in the foreground when it comes to the question of whether the conversion can take place in a tax-neutral manner. In this context, a sub-operation is to be understood as a sub-unit of an undertaking capable of acting independently. He must therefore be able to act independently economically. In addition to the production or execution of services, this includes, for example, management. Only under the condition that such an autonomous partial operation exists can a conversion – and thus also a division – be carried out in a tax-neutral manner.

5.2. Preservation of taxation law in Germany

Another condition of the tax neutral division must also be fulfilled; it concerns national taxation law. The division must ensure that the newly founded companies remain subject to German tax law with regard to a possible profit for the company. If a new establishment takes place abroad in the context of a division, then this also creates a tax that is levied on it in Germany, because this leads to a repeal of the national tax law. In the event of a sale of the company, it is the responsibility of the foreign tax authority to levy a tax on a related profit instead of Germany.

5.3 Scope of rights granted to shareholders

The third requirement for tax-neutral division is usually also easy to comply with. This concerns the rights granted to shareholders in the course of the division. It must be ensured that only shares are granted. Other or other rights in return, however, result in taxation.

6. A division is retroactively possible for up to eight months

6.1. Use of the annual balance sheet for conversion

Another peculiarity that divides with the other forms of conversion is the reaction. The conversion law provides that this is retroactively possible by up to eight months. This opens up the possibility that the balance sheet to be submitted for conversion may also be the balance sheet of the last year, which is to be drawn up anyway. Therefore, it must of course not have been more than eight months before the date of conversion to be used for this purpose. In this way, the costs incurred with the preparation of a separate conversion balance sheet are saved.

6.2 Tax Effects on Shareholders and Companies

The retroactive effect also has other positive implications. In all tax matters, it is assumed that the companies involved in the conversion already existed eight months ago in the converted constellation. Even if one or more of the companies concerned were founded less than eight months ago, the assumption that they already existed at the given time is a so-called legal fiction. In this way, for example, the way in which shareholders or companies are taxed can be optimised.