Taxation: Purchase/sale of a GmbH & Co. KG in Germany
Tax optimization when buying and selling a company in german practice
The GmbH & Co. KG is considered to be the corporate form that plays an important role in german medium-sized and family businesses. It combines important characteristics, such as a limitation of liability and establishes tax leeway. With different forms of the GmbH & Co. KG specific goals can be achieved.
In german legal practice, the commercial partnership is recommended by lawyers and certified specialist in special situations and for certain projects. When buying or selling a GmbH & Co. KG in Germany, the question of tax burden and tax optimization always arises for both parties to the purchase agreement.
A separate page for the taxation of transactions concerning individual limited partnership shares can be found here: Purchase/sale of limited partnership interests in Germany (folloeing soon)
For a non-binding inquiry, please contact one of our experts directly by phone or e-mail or use the contact form at the bottom of this page.
Tax law advice for M&A transactions with partnerships in Germany
Our team of tax advisors, lawyers and certified specialists for tax law advises medium-sized clients across all sectors on the transfer of partnerships, in particular GmbH & Co. KGs. Our practical experience ranges from planning in the run-up to the sale of the company to contract drafting and post-contractual tax optimization:
- Identification of tax risks in connection with the sale and purchase of the GmbH & Co. KG
- Preparation and drafting of due diligence; compilation of documentation for finance and tax due diligence
- Tax planning and structuring of the company takeover
- Accompanying the company valuation and contract negotiations
- Drafting of the company purchase agreement
There are many tax stumbling blocks for the seller in the transfer of partnerships. In addition, the seller also has to consider many legal aspects in order to limit his liability risks in connection with the sale of the company in Germany. Our team of tax advisors and tax lawyers works in close coordination with the M&A lawyers, which ensures comprehensive advice on company sales.
Important information on the legal aspects of a company sale under german law can be found here:
- Sale of a company from a legal point of view (seller's perspective)
- Advice on private equity
- Legal due diligence
- What is the difference between an asset deal and a share deal?
- What are the most important clauses in a company sale agreement?
In the following presentation you will find the germsn income taxation of the seller of a GmbH & Co. KG (see 1.) and the tax treatment of the buyer of a GmbH & Co. KG (see 2.).
1. Taxation of the seller of a GmbH & Co. KG under german law
Our following presentation focuses on the income taxation of a sale of a GmbH & Co. KG in Germany. It should be noted that, in german practice, the taxation of the seller of a GmbH (i.e. corporation) is fundamentally different from the taxation of the sale of a GmbH & Co. KG (partnership).
Background information on the taxation of a GmbH sale can be found here: Taxation of the sale of a GmbH in Germany
If one wants to understand the taxation system of the sale of a partnership, one must first ask whether the GmbH & Co. KG is sold by a private person or a corporation. Therefore, a distinction must be made in german practice as follows.
1.1 Private individual sells GmbH & Co. KG in Germany
In the case of the sale of a commercial partnership, it is not decisive from a german tax point of view - in contrast to the sale of a GmbH - whether the shares of the GmbH & Co. KG (share deal) are sold or the business is sold by transferring the individual assets (asset deal). From an german income tax point of view, share deals and asset deals are generally treated in the same way when transferring a partnership.
If a private individual sells the operating business of the GmbH & Co. KG by means of an asset deal or share deal, income tax is payable on the capital gain under german tax law. The question therefore arises as to how the capital gain is determined in german practice. The capital gain results from the difference between the selling price on the one hand and selling costs (including legal and notary fees) and the tax book value on the other hand. The hidden reserves of the GmbH & Co. KG must be disclosed and taxed upon sale. If the GmbH & Co. KG is held by a partnership, the capital gain is taxed in the same way as the current profit of the company (§§ 15, 18 EStG; the tax burden depends on the individual income tax rate of up to 42 % or 45 % "wealth tax"). No trade tax is payable on the capital gain if the entire co-entrepreneurial share is sold.
Tax concessions for disposals of partnerships in Germany
It must be taken into account that the sale of entire businesses or entire co-entrepreneurial shares by private individuals may be subject to income and trade tax in Germany:
Under german tax law, tax allowance of a maximum of 45,000.00 EUR arises, which, however, is subject to a reduction in the case of a capital gain of 136,000.00 EUR or more (Sec. 16 (4) EStG). Thus, this preferential tax treatment of the tax-free amount ceases to apply from a capital gain of 181,000.00 EUR. In addition, there is a reduction of 56 % of the average income tax rate for capital gains up to 5.0 million EUR. However, a minimum tax rate of 14 % applies in Germany. However, this tax concession is only granted if the seller has reached the age of 55 (Section 34 (3) EStG) and the concession can only be applied for once. In addition, the German Income Tax Act provides for the so-called one-fifth rule, which reduces the tax progression (Sec. 34 (1) EStG). Finally, the profit attributable to a private individual as a co-entrepreneur can be exempted from trade tax. The prerequisite for this exemption is that the entire co-entrepreneurial share, including the special business assets, is sold. If only a part of the co-entrepreneurial share is sold, the preferential tax treatment is generally denied.
In the case of the sale of a GmbH & Co. KG in Germany, the shares of a general partner GmbH constitute special business assets. In order to claim the tax benefit, the GmbH shares must therefore generally be sold at the same time. The special business assets must also be sold in order to qualify for tax relief. If the special business assets are to be retained (e.g. often in the case of real estate), there is a need for structuring, which we can implement through our team of lawyers and tax advisors.
1.2 Taxation: GmbH sells a GmbH & Co. KG in Germany
If a GmbH holds a partnership, for example a GmbH & Co. KG, and the subsidiary is sold to a third party, the capital gain is subject to ordinary corporate income tax and trade tax. This applies regardless of whether the shares in the partnership are sold by way of a share deal or the assets constituting a business are sold by way of an asset deal. The capital gain of the GmbH resulting from the share deal or the asset deal is taxed like the current profit of the corporation. The hidden reserves are generally disclosed and taxed in the case of a company purchase in Germany.
Our tax lawyers and tax advisors have many years of experience in the sale of companies and shareholdings in Germany. We put together a suitable team - depending on the size and complexity of the planned transaction. We prepare a transaction from a tax and legal point of view and accompany the contract negotiations.
2. Tax effects for the buyer of a GmbH & Co. KG in Germany
From a german tax perspective, the purchase of a GmbH & Co. KG is reflected in the balance sheet of the buyer. Regardless of whether the business/partial business of a GmbH & Co. KG is acquired by way of an asset deal or a share deal, the acquired assets are capitalized in the balance sheet and depreciated over time in accordance with standard depreciation methods. In this way, the buyer of a GmbH & Co. KG in Germany can achieve its objective of writing off the purchase price against taxable profits.
Even though only the principles of income taxation are presented herein, it should be noted that the acquisition of a GmbH & Co. KG can lead to a high transaction tax burden under german tax law. If the sale of the GmbH & Co. KG is linked to a sale of a business as a whole, sales tax will generally not be payable. However, if real estate assets are affected by the transfer of the business, a high real estate transfer tax burden may arise in german practice.
Our team of tax advisors and tax lawyers has many years of experience in large and small business transfers and M&A transactions in Germany. If you have an assessment on the procedure of a business transfer or any other tax-related questions, please feel free to contact us at one of our offices in Hamburg, Berlin, Munich, Frankfurt or Cologne.