Taxation of the sale and purchase of a limited liability company in Germany
The sale and purchase of a GmbH from a german tax perspective
In the case of company acquisitions and transfers of shareholdings in Germany, the structuring, drafting and negotiation of contracts is often strongly influenced by german tax law. As a law firm specializing in german business and tax law, we work with you to overcome all the legal and tax hurdles involved in the purchase and sale of a GmbH or individual GmbH holdings.
Detailed information on the legal side of the purchase or sale of a GmbH or GmbH shares in Germany can be found here:
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Legal services in german tax law for the structuring of shareholding transactions
Our team of tax advisors, lawyers and certified specialists for german tax law work hand in hand with our corporate lawyers on every complex M&A transaction in Germany. In doing so, we also cooperate very closely with your tax advisor who is to provide ongoing tax advice for the new business. From our offices in Hamburg, Berlin, Munich, Frankfurt and Cologne, we cover the entire tax spectrum of the M&A process for our clients:
- Planning and tax structuring in the run-up to the company acquisition as well as tax burden comparisons
- Drafting of contracts, in particular on important tax issues: Guarantee, tax clauses and tax transfer regulations, blocking and holding periods, book value continuation
- Execution of finance and tax due diligence
- Accompaniment of acquisition financing, taking into account all relevant tax issues, such as deduction restrictions and interest barriers
- Accompaniment of the tax-optimized integration of the acquired GmbH
General legal information on corporate transactions in german practice can be found here:
- Sale of a company, sale of an investment in Germany (seller's perspective)
- Acquisition of a company, acquisition of participations in Germany (buyer's perspective)
- Corporate financing (debt, equity and mezzanine)
- Venture capital, investment agreements and financing rounds
- Due Diligence
- What is the difference between share deal and asset deal?
- What are the most important clauses in a company purchase agreement?
Taxes in the transfer of a GmbH under german law
In the case of a company takeover in Germany, at least two parties, namely the buyer and seller, are faced with the question of what tax effects the transaction will have on them: however, tax effects can also affect the target company itself (e.g. limitation of tax loss carryforwards in the case of higher share transfers).
The two parties to the german purchase agreement pursue different - often even opposing - strategic, economic and tax interests with the company sale or acquisition. While the seller seeks to achieve the highest possible after-tax purchase price, the buyer strives to pay a low price and to claim the payable purchase price from the tax authorities as quickly as possible in order to reduce income. It is important to keep these different positions in mind during contract negotiations and tax planning.
In principle, a company in Germany can be transferred to the buyer side by means of an asset deal or share deal (detailed information on the different contractual structure for asset deals and share deals). If you want to assess the taxation of company sales, the first question to ask is whether individual assets of a company (asset deal) or a GmbH participation (share deal) are being sold. Depending on who is on the seller's side and sells company assets or shares, the taxation turns out differently in german practice.
The following illustration outlines the german income taxation of the seller of a GmbH (see 1.) and the tax treatment of the buyer of a GmbH (see 2.).
1. taxation of the seller side in the sale of a GmbH in Germany
It must be taken into account that the sale of a business in Germany may result in a considerable burden of transfer taxes. If there is a sale of a business as a whole, it will generally be possible to disregard value added tax. If real estate assets are involved in the course of the transfer of shares, a high real estate transfer tax may be triggered. Only a few essential features of income taxation are presented here.
1.1 Taxation: Private Individual Sells GmbH Shares in Germany (Share Deal)
If shares in a GmbH are sold by a german private individual, a distinction must be made as to whether the shares are held as business assets or as private assets of the seller.
If the shares are held as business assets by the private individual, only 60% of the capital gain is subject to german income tax and, if applicable, trade tax (so-called partial income procedure). The hidden reserves in the shares are disclosed, although the hidden reserves in the assets of the corporation sold are not disclosed. The partial income procedure can also apply if the private individual does not hold the capital company share to be sold directly, but via a partnership.
If the GmbH shares are held as private assets by the private individual, in german practice, a distinction must be made as to whether there is a significant shareholding in a corporation (at least 1%). If the seller holds an interest of 1% or more in the GmbH, the partial income procedure applies to the sale, so that 60% of the profit from the sale is taxable.
If, on the other hand, the shareholding is less than 1%, the final withholding tax applies under german law. The final withholding tax on the gain from the sale amounts to 25% plus the german solidarity tax (SolZ) and, if applicable, church tax. A tax-free sale of such a participation is possible if it was acquired before 2009.
1.2 Taxation: GmbH sells its business by way of an asset deal in Germany
If a GmbH sells its entire business or only part of it by selling individual assets (sale of individual patents, licenses, real estate, etc.), this is known as an asset deal in german practice. In the case of an asset deal, the selling GmbH is subject to normal corporate income tax and trade tax on the capital gain. At this point, the capital gain is taxed as current profit of the GmbH. In german practice, the hidden reserves are generally disclosed and taxed by the GmbH.
However, a GmbH does not benefit unlike a private individual as a seller from tax advantages in the asset sale of an entire business or part of a business.
If the profit from the sale is distributed to the shareholders, the profit distribution is subject to the partial income procedure (60% of the distribution amount is subject to taxation at the individual tax rate of the shareholder).
1.3 Taxation: GmbH sells GmbH shares in Germany (share deal)
If the seller is a GmbH that sells the shares in a GmbH (e.g. parent-subsidiary group, family holding), tax-free capital gains arise in Germany. The background to this is a special provision contained in the German Corporation Tax Act (KStG) for the tax treatment of gains from the sale of a share in another corporation. The gain from the share deal is not recognized and is in principle fully tax-exempt. BUT the KStG provides for a corrective: The tax-exempt capital gain is treated as a non-deductible operating expense in the amount of 5 % under german tax law. From an economic point of view, the tax exemption of the capital gain of the selling parent company remains at 95 %.
It should be noted that this corporate income tax exemption on capital gains also applies if the selling GmbH holds an interest of less than 10%. The situation is different in the case of profit distributions in Germany. In the case of profit distributions, the KStG also provides for an exemption. However, this does not apply to profit distributions from free float (shareholding of less than 10%). The capital gain is also only included at 5% in the trade tax assessment basis and is otherwise not subject to german trade tax. The german legislator had also considered introducing a minimum shareholding ratio for the exemption of capital gains. However, after lengthy discussions, this plan was not implemented.
Our M&A and tax advisors are happy to assist you in planning and structuring the sale or acquisition process in Germany, regardless of whether it is a bilateral sale process or a bidding process. We advise you on all tax and corporate law issues.
2. Taxation of the buyer side in the purchase of a GmbH in Germany
With every acquisition of a GmbH in Germany, balance sheet and german tax law effects arise on the buyer's side, which can only be presented here in overview. The interest of the buyer of a GmbH is directed toward the fact that he pays a low purchase price and his purchase price can be considered profit-reducing for tax purposes. Whether the purchaser achieves his objectives depends on his negotiating skills and the structure of the acquisition of the company.
2.1 Tax effects of the purchase of a GmbH business in Germany by way of an asset deal
When a company purchases a GmbH business by way of an asset deal in Germany, the purchased assets are accounted for at the level of the purchaser. In german practice, the classic depreciation methods are used at the buyer level. As a result, the entire purchase price can be depreciated over time to reduce profits. If liabilities are also acquired by the buyer along with the business, the acquisition costs increase in Germany.
If the purchaser finances the purchase price for the business acquisition through bank loans, the financing expense can generally be deducted as an operating expense in german practice. Restrictions may result from the interest barrier. Tax-optimized purchase price financing is recommended. If the target company had a loss carryforward or interest carryforward, these are generally not transferred to the purchaser with the acquisition of the business.
2.2 German tax framework for the purchase of shares in a GmbH (share deals)
Despite the tax advantages of a company takeover by means of an asset deal (high depreciation volume), in individual cases the share deal may represent the more suitable deal structure in german practice. Share deals are indispensable, for example, in the venture capital sector, in many private equity deals and joint venture projects. If the target company is to remain in existence and the buyer side must remain shielded from operational risks of the target company, the takeover of the company by means of share deals is the right way to go in Germany. After all, a GmbH takeover by means of a share deal is contractually easier to implement under german law. Information on share deals can be found here: Asset Deal vs. Share Deal
In the case of a share deal, the purchased GmbH shareholding is included in the balance sheet in the amount of the purchase price. The actual acquisition costs are capitalized in the tax balance sheet of the purchaser. However, unlike in the case of an asset deal, the purchase price cannot be depreciated on an ongoing basis in german practice. At the level of the acquired GmbH, depreciation is continued.
Our team of tax advisors and tax lawyers accompanies large and small business transfers and M&A transactions in Germany. If you have any questions regarding the purchase or sale of a company, please do not hesitate to contact our experienced advisors in one of our offices in Hamburg, Berlin, Munich, Frankfurt or Cologne.