The ban on physical meetings of shareholders resulting from the Corona crisis is causing difficulties for companies planning a transformation, particularly with regard to meeting deadlines. The“Law on Mitigation of the Consequences of the COVID 19 Pandemic in Civil, Insolvency and Criminal Proceedings Law” of 25 March 2020, which was subsequently adopted, was intended to remedy this situation:

The amendment, notwithstanding Section 17 (1), (2) and (3), does not affect the company’s position as a result of the amendment. 2 sentence 4 Umwandlungsgesetz (UmwG), now provides for an extended period for the preparation of the closing balance sheet – at least in principle for certain types of conversion – of twelve instead of eight months.

In detail, it is explained that because of the Corona crisis, the extensive planning and preparation, as well as the holding of the necessary meetings often lead to delays.

The deadline extension applies until further notice to such notifications made in 2020, but an extension until the end of 2021 may be made if necessary, as provided for in Section 8 of the new Act.

However, an adjustment of the German Reorganisation Tax Act (UmwStG) is not planned.

How does such a transformation proceed?

It concerns the conversion of sole proprietorships into a limited liability company, whereby the conversion methods of incorporation and spin-off are available under civil law. The conversion offers growing companies the possibility of liability advantages, as well as tax advantages or the advantages of holding structures, which are particularly useful if a possible exit is sought later. Therefore the conversion is an interesting topic especially for startups. Thus, after conversion into a limited liability company (GmbH), the sole entrepreneur is no longer liable with his entire private assets, but only with the company assets. A growing start-up in the form of a sole proprietorship therefore has an increasing need to adapt.

Contribution to a GmbH

The contribution of a sole proprietorship to a GmbH can be made by means of a formation in kind or a capital increase in kind.

A capital increase in kind is possible if a GmbH already exists to which the company is to be contributed. The entire individual enterprise (e.K.) acts here as a contribution in kind. The capital increase in kind must be notarised. The contribution increases the share capital of the GmbH, which is checked by the registration court and finally entered in the commercial register. However, the contributed company may also constitute a shareholder loan or an allocation to the capital reserve.

On the other hand, a non-cash formation is possible if no GmbH exists yet. When a new GmbH is founded here, the sole proprietorship acts as a contribution to the share capital. Here, too, an examination is subsequently carried out by the court of registration and with the entry in the commercial register, the sole proprietorship (e.K.) is transformed into a GmbH.

The principle of certainty under civil law must be observed during the incorporation process, which can create a considerable amount of work. Because, strictly speaking, every thing, every right and every obligation is transferred here individually. All this must be specified precisely, a mere reference to the annual accounts is not sufficient. In addition, the consent of each individual contractual partner of the sole trader is required for current contracts.

Spin-off of the registered merchant (e.K.) to the GmbH

Another way of conversion is the spin-off of the registered trader to the GmbH under the UmwG. The spin-off constitutes a subset of the demerger pursuant to §§ 123 et seq. UmwG. Here the merchant can transfer his entire assets to a new or already existing GmbH, which is done by way of a partial universal succession. A carve-out results in the transfer of not only the assets but also all liabilities and contracts with third parties. This can be done without the consent of the respective contracting parties, which is a major advantage over integration.

A precondition for the spin-off is that the businessman is also entered in the commercial register.

Insofar as a GmbH does not yet exist, i.e. is only to be newly founded through the spin-off, a spin-off declaration is necessary, which must be notarised. In addition, the usual procedure under the law on limited liability companies must be observed, including the drafting of a memorandum of association.

If the sole proprietor transfers part or all of his business for tax purposes, he has the advantage for tax purposes that the hidden reserves with the corresponding taxable profit do not have to be disclosed.

Tax law

Under tax law, irrespective of the above-mentioned civil law treatment, the conversion is subject to the specific conditions of §§ 20 et seq. German Reorganization Tax Act (UmwStG).

A qualified contribution must first be made. This can be a company, a part of a company or a joint venture. The contribution must be made to a corporation with unlimited tax liability or to an EU/EEA corporation. Finally, the transferring entrepreneur must receive new shares in the receiving company. If the conditions are met, a tax-neutral transfer can be made.

The acquiring company may then recognise the transferred assets at their book value or interim value. There are some special features to be considered.

As a rule, the contribution is made at the time when the beneficial ownership of the contributed business assets is transferred to the receiving company. In this case, a tax retroactive relationship is possible, for which a favourable reference date should be chosen.

Ultimately, however, there are many individual peculiarities in terms of tax law. The choice of the ” correct ” approach cannot be made in a general way and depends on many individual circumstances.

We will be pleased to advise you on civil law and tax issues from a single source in order to find the most cost-efficient and tax-efficient way for you from the above-mentioned options.

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