date | theme

06.07.2020 | Locking periods in conversion tax law – contribution in kind and exchange of shares (this contribution)

08.07.2020 | Closure periods for merger and change of form in GmbH & Co. KG: § 6 UmwStG

10.07.2020 | Tax neutral division: What is the blocking period for a split or separation?

12.07.2020 | Conversion of the GmbH into a GmbH & Co. KG: blocking period 5 years!blocking period § 18 Abs. 3 UmwStG

14.07.2020 | Lock period for contributions in kind: § 22 para. 2 UmwStG

16.07.2020 | 7 years blocking period when entering GmbH: § 24 Abs. 5 UmwStG

The transfer of enterprises, branches or co-entrepreneur shares into a corporation or cooperative is possible without the discovery of hidden reserves. This gives the participating shareholders high tax advantages. In order to be able to make full use of these advantages, which include increased liquidity, the blocking period must be observed when selling the shares granted. If the disposal of the shares takes place before the expiry of the blocking period, this leads to a subsequent discovery of the hidden reserves. This results in a high tax burden, which worsens the previously improved liquidity of the shareholder.

In this article you will get a rough overview of the blocking periods in general, as well as a brief insight into the blocking period for the contribution of contributions in kind acc. § 20 Abs. 1 UmwStG. This has a high practical relevance, as companies adjust their structure for a variety of reasons. For example, a changed product or distribution strategy, preparation for the company sale, avoidance of publicity obligations or trade tax allowances can be possible motives for a business restructuring[3]. In addition, the high tax burden in the event of breach of a blocking period poses a liability risk for tax advisors if they overlook a blocking period[4].

Lock periods have the purpose to prevent tax breaks. [5] For example, conversions which are carried out only on the basis of tax arbitrage should not lead to a tax advantage. [6] If no hidden reserves are discovered during the transfer of assets or material, the provisions of the individual tax laws contain blocking periods. If, for example, a blocked asset is resold within the time limit, this subsequently leads to a discovery of the hidden reserves and consequently to a tax burden. In order to avoid this, the period of the blocking period should be precisely identified and recorded. [7] An early planning of e.g. conversion processes is also suitable, so that blocking periods can be circumvented or shortened. [] 8]

However, according to the ECJ ruling of 8 March 2017, there are European legal concerns regarding the agreement of abuse prevention regulations with the freedom of establishment. Under the Merger Directive, there must be no general presumption of tax evasion or circumvention, so that the tax office has to examine the transactions concerned on a case-by-case basis on a mere tax basis. [9]

In addition, the delimitation of the blocking periods to the abuse provision of § 42 AO is important. Section 42 AO is intended to prevent tax losses that threaten by abusive tax avoidance. In this way, the tax revenue and thus the uniformity of taxation in accordance with Art. 3 GG are secured. [] 10]

The provisions of § 42 AO apply without restriction to all types of tax,[11] however, the abuse prevention provisions of the individual tax laws take precedence. [12] However, only to the extent that there are no regulatory gaps. In these cases, there are no more special abuse regulations, which applies § 42 AO. [] 13]

2. blocking periods of § 22 UmwStG

§ 22 UmwStG extends the provisions on the contribution in kind (§ 20 UmwStG) and on the exchange of shares (§ 21 UmwStG).[14] Both according to the abuse provision of para. 1 as well as that of FIG. 2 the fulfilment of a harmful event within the period of seven years leads to a retroactive taxation of the transfer operation. [] 15)

2.1 Classification of the regulation

Shares are often transferred to corporations with the prospect that on sale as a natural person the tax exemption 40 percent according to § 3 no. 40 EStG, or as a corporation the tax exemption 95 percent according to § 8b para. 2 para 3 of the KStG. [16] If a contribution in kind is made pursuant to § 20 para. 1 UmwStG, the capital gain must be taxed in full. The capital gain of the shareholding in a KapG granted for the contribution in kind is in principle pursuant to § 3 No. 40 EStG or § 8b para. 2 KStG tax-free. Without the abuse clauses of § 22 UmwStG, this possibility would lead to predictable tax advantages. [] 17)

Paragraph 3 regulates the obligation to provide proof. The shares granted (para 1) or transferred (para 2) must be attributable to the contributors or the acquiring company. If the proof is not provided annually by 31. In May, the shares are automatically sold. [] 18)

If contributions in kind are made at book or intermediate values, § 22 para. 1 UmwStG the sale of the shares received by the contributor or an equivalent event. If these shares are sold within the blocking period of seven years after the date of the event, the profits are taxed retroactively. [19] In the case of para 1, the so-called transfer profit I at the transferee is recorded as profit according to § 16 EStG. [20] Every year, the difference between the common value of the transferred assets at the time of the transfer and the valuation of the acquiring company (reduced by the cost of the transfer) is reduced by one-seventh. The result is the transfer profit I, which increases the taxable book value of the acquiring company as subsequent acquisition costs. [] 21]

In addition, the legal consequences of the sale of shares subject to a blocking period also occur if substitute events of § 22 para. 1 S. 6 UmwStG. [22] This provision applies to both received and transferred shares (§ 22 para. 2 S. 6 in the same order as § 22 Abs. 1 pp. 6 no. 1 to 5 UmwStG).[23]

3rd Conclusion

As a result, the possibility of converting an asset deal into a share deal immediately became possible due to the blocking period in § 22 Abs. 1 S. 1 UmwStG prevented by the legislature. Furthermore, the shareholder will receive the allowance of 45,000 € acc. § 16 Abs. 4 EStG, which would not be granted in the case of a simple sale. Also the reduced tax rate in the sense of § 34 para. 2 EStG does not apply, so that the breach of the blocking period can have an enormous impact on the tax burden on the shareholder.

Conversion processes should generally be planned early. In this way, blocking periods can be circumvented, which can be especially helpful in designs such as the conversion to prepare for the company sale.