The merger of a GmbH into a partnership is a prime example of the merger of a subsidiary into the parent company. Especially in the design of a commercial rental, the conversion of a corporation into a partnership can offer many advantages. In addition, such a merger is advisable in preparation for the sale of a company by asset deal.

With our contribution we explain to you the special regulations and steps in the merger of a GmbH with a partnership. We will also show you the impact of the merger on taxation. We pay particular attention to the tax-neutral merger and its counterpart, namely the discovery of hidden reserves.

When it comes to the merger of a GmbH into a partnership, then one connection is especially in the foreground: the rental of real estate. In the case of a purely asset management partnership, the property can be sold tax-free after a period of 10 years. The GmbH does not have this advantage, here the sale of the property would be taxable even after 10 years. In addition, all partnerships have an allowance of EUR 24.500.00 in the trade tax, for GmbHs there is no such allowance. However, the extended reduction applies to both types of companies.

As a second important reason for the merger of a GmbH into a partnership, we cite the advantages that a partnership receives when it comes to the sale of individual assets or even the entire company. Because of tax advantages, a potential buyer is more inclined to buy a company by asset deal than by share deal.

Another reason could be that the merger is intended to prepare a planned sale of the business.

2nd Legal Basis for Merger

The legal framework, which also encompasses the merger of a GmbH into a partnership, is to be considered at three levels: civil law, company law and tax law.

2.1. Civil and corporate law requirements for the merger of a GmbH into a partnership

With the conversion law, the legislature has defined the legal guidelines and steps that, among other things, regulate the merger of a GmbH into a partnership. These requirements are accompanied by those that are relevant in company law in this context. In order to merge a GmbH into a partnership, the steps described below must be adhered to.

2.1.1. The merger contract

The first point of our checklist for the merger of a GmbH into a partnership is the merger agreement. It is negotiated and set up by both the GmbH and the partnership. This agreement will then be put to the vote of the shareholders. At the same time, provision is made for the information of any existing works council. The works council must be informed about the content of the contract at least one month before the shareholder resolution. If subsequent changes to the contract take place, the works council must be informed again. Again, a deadline of one month applies. Apart from the right to information, the works council has no further significance in the merger process.

Once the merger contract has been drawn up, a notarial deed is required in order to comply with all legal formal requirements. For this purpose, the managing directors of the GmbH and the shareholders of the partnership must appear at the notary for signature. Only in this way does the contract acquire legally binding effect.

2.1.2 Termination of the merger date

Together with other provisions, the merger agreement also contains the specific date on which the merger of the GmbH to the partnership is to take place. The latest possible date for registration of the merger with the commercial register will also depend on this date. That date may not have elapsed more than eight months before the date of registration.

2.1.3. Preparation of the final balance sheet

By setting the date of the merger, one also sets the date on which the legally required final balance sheet of the GmbH and the partnership must be drawn up. More specifically, this balance sheet shall be drawn up to the date preceding the merger date. Furthermore, the profit and loss account, the notes and a publication can be omitted when drawing up the final balance sheet.

On this occasion we would also like to mention the possibility of the retroactive effect of a merger. As already explained, the merger date can be moved back up to eight months before the registration application. This date is therefore also important for many other aspects of the merger. For example, the retroactive effect also relates to the time at which the final balance sheet is to be drawn up. Since this can be up to eight months before the registration application, ideally the final balance sheet of the last financial year of the respective company can also be used.

2.1.4. Preparation of a merger report

Another legal requirement is the preparation of a merger report. As a rule, this requirement only has to be met if a shareholder requests this report. On the other hand, the report can only be waived if the waiver of all shareholders is notarized.

Concerning the contents of the merger report, it describes the reasons for the merger and the benefits it is intended to bring. Furthermore, the report must also show the risks of the merger, in particular for the respective shareholders. The merger report thus serves as a basis for the decision of the shareholders to accept the merger agreement.

2.1.5. Audit of mergers by auditors

The core of the merger review is the merger agreement. For this purpose, either an auditor or an audit firm shall be appointed. The request for this is made to the respective competent regional court of the two companies. However, it is also possible to submit a joint application.

Similar to the merger report, the merger review is generally provided for by law. However, a waiver on the part of the shareholders of all companies involved can also come into effect here in a notarized form.

2.1.6. Application for a merger with the Commercial Register

The last step in the merger of the GmbH to the partnership is the registration of the merger with the commercial register. In principle, each participating company must file its own application with the relevant local court. However, there is the option that the acquiring partnership also carries out the registration for the GmbH.

Simultaneously with the registration of the merger, the registration of the capital increase by the partnership also takes place. Thus, all obligations regarding the publication are respected and the merger of the GmbH to the partnership is completed.

When examining the effects of the merger of a GmbH on a partnership, several aspects are relevant. They affect several tax laws, of which the special provisions of the conversion tax law have considerable weight.

2.2.1. Corporate income tax

On the one hand, it must be determined to what extent any retroactive effect affects the taxation of the GmbH. For example, the retroactive effect contributes to the fact that the corporate taxation of the GmbH for the period of retroactive effect is eliminated. Any advance payments already made on corporate tax are therefore to be refunded or offset against future taxes.

2.2.2. Business tax

Furthermore, it must be clarified whether a trade tax is payable. If the partnership is a partnership in which only liberal professions are represented, then this tax otherwise due at the GmbH is also waived for the period of retroactive effect. In the case of a commercial orientation of the acquiring partnership, on the other hand, an allowance for trade tax in the amount of EUR 24,500 can be retroactively considered, which is denied to the GmbH as a corporation.

2.2.3 Capital gains tax (taxation of open reserves)

However, the retroactive effect also means that the shareholders now have to tax their income from business operations individually via their income tax. Furthermore, it must be ensured that a possible profit reserve (open reserves) at the GmbH leads to taxation under the capital gains tax due to the merger, without a payment to the shareholders actually taking place. The partnership has to pay the capital gains tax to the tax office. For this purpose, the liquidity of the partnership in the run-up to the merger should also be given due consideration. The open reserves taxed in the context of the merger can then be removed from the partnership by the shareholders without a new income tax burden.

2.2.4. Detection of hidden reserves

Another tax aspect of the merger of a GmbH into a partnership is related to the discovery of hidden reserves. The basic rule for this purpose is laid down in the Conversion Tax Act in such a way that the assets of the GmbH are to be valued at the common value. On request, the lower book values or an intermediate value may be chosen.

3. How to Make the Merger Tax Neutral

Whereas the recognition with book values requires a tax-neutral conversion, the recognition with an intermediate value or the common value leads to a taxation of the amount above the book value. This means that the discovery of the hidden reserves leads to taxation without real profit. However, it should be borne in mind that this also creates the possibility of re-depreciation of the assets. On the other hand, a later sale usually also generates an economic profit.

In the video we explain the advantages & disadvantages of the GmbH and the GmbH & Co. Kg and explain when which legal form makes sense.

4. Further explanation on retroactive effects

The retroactive effect on the transformation of a company regularly leads to inquiries from our clients. Therefore, we would like to explain three things to you.

4.1 Retroactive effect as legal fiction

In principle, retroactive effect is merely an assumption on the basis of which tax considerations in particular are decided. The actual circumstances during the period of retroactive effect are irrelevant. It is important that the retroactive effect fiction applies only to income tax i.e. income tax, corporate income tax and business tax. The retroactive effect does not apply to the VAT, so that in the year of the merger the merged company may in certain circumstances:

what would apply to taxpayers if they anticipated the consequences of the subsequent merger at the given time. On this basis alone, for example, the taxation of partnerships takes place within the framework of trade tax.

4.2. Use of the regular closing balance sheet to the annual accounts

Another point where retroactive effects are often used in the merger is the preparation of the final balance sheet. As already mentioned, the retroactive effect of the merger allows the use of the current regular final balance sheet for the past financial year. Where there are less than eight months between the balance sheet date and the date of the registration application for the merger, that balance sheet shall comply with the legal requirement.

4.3. Retroactive effect in civil law and tax law

Finally, a note regarding the legal provisions. The retroactive effect on the conversion of a company, as it constitutes the merger of a GmbH to a partnership, is the subject of both the Conversion Act and the Conversion Tax Act. Although the same period of retroactive effect is provided for in both cases, the tax date of the merger is defined differently than in civil law. In tax law, the final balance sheet must be drawn up on the date preceding the date of the merger. This avoids creating a gap between the last day on which the two companies are taxed separately and the day on which the merger of the two companies also has to be taken into account for tax purposes.