There are special requirements for hybrid companies to make a tax-neutral contribution under German law. Find out here what a hybrid company is, what requirements are imposed on you, how a tax-neutral contribution can be made under German law and what other special features accompany a hybrid company.

Hybrid companies are characterized by the fact that the company is classified as a corporation in the foreign residence state, but is subject to taxation as a co-entrepreneurship by German standards. [63] Classic examples are the Limited Liability Company under US law and the Limited Liability Partnership under English law.

SEGMENT002 1.1. The hybrid company as the subject of the contribution

The foreign hybrid company can be the subject of the contribution according to § 20 UmwStG if it is qualified as a co-entrepreneurship according to German standards. [64] A possible classification of the foreign company in its home country as a corporation is irrelevant. If the foreign company is assessed as a co-entrepreneurship in accordance with the type comparison[65] from the German point of view, the essential operating bases of the special business assets must also be included. Since foreign tax systems are often foreign to the principle of special business assets, both in the case of corporations and co-entrepreneurships, the special business income generated therefrom is generally not regarded abroad as corporate profits in the sense of Art. 7 OECD-MA, but on the Treaty Override of § 50d para. 10 EStG[66] is registered with the German shareholder.

1.2. Two problems in bringing in hybrid companies

This leads to two problems: On the one hand, the Federal Republic of Germany, by the co-transfer of the domestic special business assets into an EU capital company, as a rule, by § 50d para. 10 EStG has been revoked in accordance with § 20 para. 2 No. 3 UmwStG leads to the discovery of the hidden reserves of the special operating assets. On the other hand, the FRL is not consistently implemented with regard to foreign hybrid companies. Because according to Art. 1 lit. a i.V.m. Art. 2 lit. (c) FRL must allow the transfer of shares in corporations to another corporation in a tax neutral manner if the acquiring corporation holds a majority of the voting rights after the transfer (qualifying exchange of shares). Although the German legislature has transposed this exchange of shares into national law (§ 21 UmwStG), it does not consider its scope of application to be fulfilled if the transferred company is subject to corporate tax abroad, but is assessed as co-entrepreneurship from the German point of view within the framework of the type comparison. [67]

As a result, shares in hybrid companies can be the subject of the transfer according to § 20 UmwStG if they are assessed as co-entrepreneurship from the German point of view. The obligation to transfer the assets transferred by the shareholder to the company is required under national law, but it is questionable under European law. [] 68]

The classification of hybrid companies is carried out in accordance with foreign company law and the relevant social contract. If the change in foreign company law or social contract leads to a requalification of the hybrid company from a co-entrepreneurship into a limited company, it is questionable how this “conversion” is to be assessed from a tax point of view and whether the scope of §§ 20, 25 UmwStG has been opened.

The change of legal form of a partnership into a corporation under German company law (§ 190 para.) 1 UmwG) is equated to the contribution by the reference of § 25 UmwStG to §§ 20 to 23 UmwStG. For foreign transactions this applies according to § 1 Abs. 3 No. 3 UmwStG only insofar as they are comparable with the German change of form. By referring § 25 S. 2 UmwStG to § 9 S. 3 UmwStG, which, in order to determine the period of retroactive effect, is linked to the registration of the change of legal form in a public register, it can be argued that the foreign operation is only comparable to a domestic change of legal form if it requires registration in a public register. [69] However, the notification of the conversion to the public register does not appear to be a condition for the application of the UmwStG, but rather a time point for determining the period of retroactive effect. Otherwise, foreign operations which do not require registration to the commercial register would not be comparable with the German change of form.[70]

2.1 Comparability of the foreign transaction

The decisive factor for comparing the foreign operation with the domestic change of legal form is rather that the conversion is carried out in compliance with the identity of the legal entity, i.e. without transfer of assets. By changing the foreign company law or company contract, only the legal dress of the entity is changed while respecting the identity of the entity. If the hybrid company is reclassified as a result of this by a partnership into a limited company, § 20 UmwStG on the reference in § 25 UmwStG is applicable. [71]