When individual enterprises are transferred to corporations or partnerships, the sole proprietor transfers his assets and/or material groups to the (new) company and receives shares in the company in return. As a result, a plurality of possibilities already result in the design of the insertion. It is therefore possible to transfer the assets to the acquiring limited liability company both by way of universal succession and by way of individual succession. Therefore, read here what a contribution is and which assets and/or material groups can be brought in as the object of the contribution in (new) companies.

A transfer of operating assets to corporations pursuant to § 20 UmwStG is characterized by the transferring legal entity receiving at least one new share of the business from the acquiring company in return for the transfer of its assets. Thus, the transfer of assets without consideration (concealed contribution) and the mere sale of the assets to the acquiring corporation do not constitute a privileged contribution in this sense.[14] The term “transfer” in accordance with § 20 UmwStG is of a purely tax nature and can be used in accordance with § 1 para. 3 UmwStG be the outflow of various civil law acts[15]:

1.1. Individual succession

On the one hand, the transfer of the object of introduction pursuant to § 1 para. 3 No. 4 UmwStG by way of individual succession. Each asset belonging to the material group must be transferred to the acquiring corporation under civil law in a single transfer act, but economically in a temporal and factual context. [] 16]

1.2. Universal succession

On the other hand, the transfer of the subject-matter of the transfer by way of universal succession[17] under the UmwG leads to the transfer under § 20 UmwStG as well as in particular the separation under § 123 para. 3 UmwG.[18] But also merger, separation and division processes according to §§ 2 and 123 para. 1 and 2 UmwG are treated as contributions for tax purposes if they transfer material groups from a person trading company to a corporation. [] 19]

1.3. Change of legal form of a partnership into a corporation

The change of legal form of a partnership into a corporation according to § 190 ff. UmwG Under civil law, the change of legal form is characterised by legal entity identity and thus does not constitute a form of individual or universal succession.[20] However, the transfer of assets from the partnership to a limited company is fictitious under Section 25 of the UmwStG with the result that the change of legal form must also be assessed as a transfer in accordance with Section 20 of the UmwStG.

1.4. Conditions for submission by way of universal succession

While from the point of view of civil law no territorial requirements are imposed on the transfer by way of individual succession, the transfer by way of universal succession according to §§ 1, 3 UmwG can in principle only take place between the domestic legal entities mentioned there. The cross-border merger introduced in the course of the SEStEG does not change this, as it is only possible under § 122b UmwG between limited liability companies of different Member States, but not with the participation of partnerships. [21] It is true that § 1 Abs. 3 No. 1 and 2 UmwStG also comparable foreign conversion processes benefit from the privileged § 20 UmwStG, but this leaves an application gap for conversion processes by way of universal succession, which are neither purely national nor purely foreign in nature, thus cross-border in nature. For the sake of completeness, it should be mentioned that this legal loophole in company law is questionable under European law[23] and should be closed by a proposal from the European Commission to amend Directive 2017/1132[24] with secondary law requirements at least for cross-border changes of legal form and divisions.[25] However, this issue is not the subject of this elaboration, the title of which focuses on tax easing cases.

2nd object of submission

While individual assets can also be transferred under civil law on the basis of the aforementioned transfer channels, the tax-privileged transfer according to § 20 UmwStG also requires the existence of a material group. For this purpose, § 20 UmwStG contains a final list of the beneficiary contribution items. Therefore, only the contribution of enterprises, branches and co-entrepreneur shares is favoured. Similarly, the application of the sixth part for the transfer of individual assets, i.e. a plurality of individual assets, if they do not constitute a (sub)entity. [] 26]

SEGMENT012. The holding as subject of the transfer

The concept of operation i.S.d. § 20 para. 1 UmwStG is identical to the definition of income tax law as defined in § 16 EStG.[27] Accordingly, it can be a business of agriculture and forestry (§ 13 EStG), a commercial enterprise (§ 15 EStG) or an independent activity (§ 18 EStG). [28] However, the scope of the operation is to be interpreted in a norm-specific manner and, in contrast to § 16 EStG, comprises only the functionally essential operating bases.[29] The quantitative approach is not important in determining the operation for the purposes of § 20 UmwStG.[30] In addition, assets of private tax assets are not privileged contribution objects.

2.2. Partnerships in the Entry

In the case of partnerships, the special feature is that they are also a company in accordance with § 20 para. 1 UmwStG, if they are in accordance with § 15 para. 3 EStG are commercially infected or commercially minted. Owners also have a company i.S.d. § 20 Abs. 1 UmwStG, if the prerequisites for an operating split[31] are met. [32] The same applies to unlimited taxable companies. They achieve on the basis of the fiction of § 8 Abs. 2 KStG always commercial income according to § 15 EStG and thus have – even in the case of exclusively asset management activities – an enterprise in accordance with § 20 para. 1 UmwStG.[33] However, it should be noted that the fiction of § 8 Abs. 2 KStG is limited to unrestrictedly taxable companies, so that the material group held by a foreign company can only benefit if this material group constitutes an original business operation pursuant to § 15 para. 2 EStG or an enterprise within the meaning of § 13 EStG or § 18 EStG. Accordingly, the contribution of assets management objects is excluded from the scope of Section 20 of the UmwStG if they are transferred by a capital company that is not subject to unlimited taxation.

2.3 Cross-border submissions: No territorial requirement

No territorial conditions are attached to the transferred assets themselves. [34] This also covers the contribution of companies, subsidiaries and co-entrepreneur shares in the sixth part of the UmwStG if they are located in the EU/EEA or non-EU countries. If the scope of the UmwStG is not fulfilled for other reasons, the transfer process leads to a fictitious sale and thus to the discovery of the hidden reserves. However, a taxation in Germany is only carried out if the Federal Republic of Germany has a taxation right for the transfer or sale of the foreign business assets. Is the foreign

Assets therefore in a DTA state, the Federal Republic of Germany provides the transfer profit according to art. 13 para 2 OECD-MA tax-free, so that no taxation is carried out in Germany. The question of the applicability of the UmwStG would thus be obsolete – at least in relation to the assets located in the DTA state.

The substantive scope of application of § 20 UmwStG also includes the contribution of a part-operation. Until the introduction of the SEStEG, the definition of the sub-operational term both in the UmwStG (§§ 15, 20 and 24) and in the EStG (§§ 6, 16, 18) and ErbStG (§ 13b) did not have the same understanding, but it did have a similar understanding. In the absence of a legal definition of the sub-operation, this indeterminate legal concept was concretized for all standards by case law and literature. According to this, according to national understanding, a part of the holding is present if it is an organically closed part of a whole holding, has as such all the characteristics of a holding as defined in the EStG and is independently functional and viable. [36] While § 16 EStG covers both quantitative and functional operating bases, the conversion tax sub-operation is characterised exclusively by the functional approach. [37]

In addition to the national definition of the sub-entity characterized by case law, art. 2 lit. j FRL a different provision. This European concept of part of the company is thus ‘the totality of the active and passive assets existing in a part of the company, which in organisational terms constitute an independent enterprise, i.e. a unit functioning from its own resources’. In the opinion of the tax administration, the operation part of FRL is thus narrower than the national operation part in two points in particular. On the one hand, the partial operation requirement must be present at the tax transmission date, so that a partial operation under construction is not sufficient. [38] On the other hand, in addition to the functionally essential operating bases, the “economic goods assignable according to economic contexts” must now also be transferred.[39] Active and passive economic goods, which are economically attributable to a part of the enterprise but are not operationally necessary for it, must therefore also be transferred according to European understanding, but not according to former national understanding. [40]

Within the framework of SEStEG, the FRL was transposed into national law. Since then, it has been controversial whether the concept of part-operation according to § 20 UmwStG for national and cross-border contributions has different definitions or whether it has to be interpreted uniformly. [41]

2.4.1, submissions in Germany

There was no obligation for Member States to transpose the FRL into national law for purely domestic submissions. Accordingly, the European partial operating concept did not necessarily have to be incorporated into the German UmwStG. For purely national contributions, it can therefore be considered that (a) the national sub-operational term continues to exist for this purpose[42], (b) the German legislature has imported the European sub-operational term into national law within the framework of the SEStEG[43] or (c) the more generous definition of the sub-operation always applies according to the principle of most favoured nation. [] 44

According to the opinion here, domestic conversion operations are still to be based on the national partial concept of operation. This is due to the fact that the general adoption of the European partial operating concept for intra-German conversions was neither mandatory nor wanted by the German legislature. [45] According to the explanatory memorandum, ‘the provisions on division [...] were, in principle, adopted unchanged in substance’[46]; Derogations should only be made where required by European law. In its explanatory memorandum, the national legislature clarifies that ‘the functional approach is decisive for the assessment of whether an economic good constitutes an essential operating base of a branch of activity’[47] and thus maintains the national branch of activity concept even after the introduction of SEStEG. [48] In addition, even after the introduction of SEStEG, the legislature continues to allow the co-entrepreneur share and the participation in a limited company comprising the entire nominal capital as fictitious subsidiaries, at least for the purposes of the division pursuant to § 15 UmwStG, although this is not provided for by the FRL.

If, in addition to an acquiring company, Art. 3 FRL (capital company) only natural persons participate in the transfer, the scope of the FRL – in the absence of a second capital company in another Member State – is according to Art. 1 lit. a FRL not opened.[49] In this case, despite the cross-border nature of the transfer, the procedure under section “transfer in Germany” would have to be followed.

2.4.3. Cross-border contribution involving two corporations

If capital companies from two or more Member States are involved in the transfer, the scope of the FRL is opened and the European concept of operation is therefore decisive.[50] Insofar as the national concept of operation deviates from the European concept of operation, the national concept of operation must be interpreted in accordance with the Directive. [] 51]

However, cross-border restructuring is problematic, in which the national partial business concept is more favourable for the taxable person than the partial business concept of the FRL. While in such cases national contributions could take place under § 20 UmwStG at book values, their cross-border counterpart would remain denied the application of the UmwStG. Therefore, insofar as the national partial term is more favourable than its European definition, this is considered to be a breach of the freedom of establishment (Art. 49, 54 TFEU). [] 52]

2.2.4. Residence of the participating companies in the same Member State in case of transfer of EU/EEA foreign assets

If the merging company and the acquiring company are resident in the same Member State, the transfer would not be covered by the FRL, even if the transferred assets were located in another Member State. Given the cross-border nature of the transfer and the objective of FRL to favour cross-border restructurings between limited liability companies[53], it is necessary to extend the scope of the transfer to the same cross-border transfers. [54] Similarly, the European partial operating concept is also applied in these cases.