The Issue of Tax-neutral Contribution
A primary concern for many businesses considering this move is the tax-neutral contribution of the GmbH into the foreign holding company. „Tax-neutral“ means that the transfer of assets (or shares) from the GmbH to the holding company doesn’t result in immediate taxation.
In principle, Germany allows tax-neutral contributions under certain conditions. These are designed to prevent potential capital gains taxation upon the transfer of assets or shares. However, this tax neutrality can become complex when involving a non-German holding company, primarily due to differences in valuations, tax laws, and regulations between countries.
Review of tax law of other states might be necessary
Contributions are often treated as an exchange of shares and might trigger capital gains tax. Since the taxation rights for such capital gains are usually allocated to the state of residency, the tax law of other states than Germany become relevant when non-German shareholders are involved.
European Merger Directive (EMD)
A crucial tool in this arena is the European Merger Directive (EMD). The EMD aims to eliminate obstacles to cross-border reorganizations involving companies from different EU Member States. Specifically, it focuses on mergers, divisions, partial divisions, and the contribution of assets.
For the contribution of a German GmbH into a non-German holding company within the EU to be tax-neutral, it should adhere to the EMD. The Directive ensures that capital gains resulting from such reorganizations are deferred until the assets are actually sold or the recipient company disposes of the acquired assets.
Here’s the catch: The application of the EMD can be intricate. Companies must ensure that they satisfy the Directive’s requirements, which might involve:
- Proving that both companies are, for tax purposes, resident in their respective EU Member States.
- Ensuring the transaction constitutes a genuine reorganization.
- Confirming that the assets or shares transferred to the holding company are connected to a permanent establishment of the GmbH in the holding company’s state.
- The reiceiving company might have to receive the majority in the transferred company.
Consider also other German tax issues
When performing such a contribution, there are other German tax issues to consider. For example, such a contribution can trigger German real estate transfer tax. Moreover, tax loss carryforwads might be lost after the contribution. Therefore, shareholders and directors should always involve German tax advisors when planning such contributions.
Best Practices and Considerations
- Legal Consultation: It’s imperative to consult with tax professionals familiar with German tax law, the tax law of the holding company’s jurisdiction and the tax law of the shareholder’s jurisdiction. GHS can cover the German tax law part. Feel free to contact us. Due to our international network, we can also cover other jurisdictions with our partners.
- Valuation: It might be an advantage to ensure that the assets or shares of the GmbH are valued to avoid potential disputes.
- Documentation: Maintain thorough documentation of the entire process, including valuations, decisions, and justifications, as they can be essential in case of future audits or disputes.
- Stay Updated: Tax laws and regulations, including the specifics of the EMD, can change. Staying updated will help ensure continued compliance and minimize potential tax liabilities.
Favourable holding jurisdictions
Holding company jurisdictions are often chosen based on a combination of political stability, favorable tax regimes, strong legal frameworks, and other business-friendly attributes. Nowadays, from a tax point of view, the most important factor is that you have a certain economic substance in the state of the holding company. Also, always taken into account that the actual place of management plays an important role in international tax law.
Here’s a list of some well-regarded holding company jurisdictions, along with a brief explanation of their advantages:
- Tax Advantages: Offers an extensive network of double taxation treaties, exemptions from withholding taxes on dividends, and a participation exemption regime.
- Legal Framework: Known for its sophisticated legal and regulatory environment, particularly regarding corporate finance and investment funds.
- Tax Advantages: Holding company privileges provide relief from cantonal and communal taxes. Federal tax is also considerably reduced.
- Stability: Known for its political and economic stability.
- Tax Advantages: Features a beneficial participation exemption regime and an extensive network of double taxation treaties.
- Legal Framework: Transparent and reliable legal system.
- Tax Advantages: Very favourable tax rules for holding companies. It also has an extensive double taxation treaty network.
- Business Environment: Renowned for its ease of doing business and robust legal system.
- Hong Kong:
- Tax Advantages: A lot of tax exemptions and territorial tax system.
- Strategic Location: Ideal gateway for investments into and out of Mainland China.
- Tax Advantages: Features one of the lowest corporate tax rates in the EU and many tax exemptions.
- Legal Framework: Based on English Common Law.
- Tax Advantages: Features an imputation system, whereby the company pays the corporate tax and the shareholders get a credit for the tax paid by the company when they receive dividends. This can effectively result in a low net effective tax rate.
- EU Membership: As an EU member, Malta-based companies have access to EU directives and benefits.
It’s crucial to note that while these jurisdictions offer several advantages, the appropriateness of a particular jurisdiction will depend on the specific needs and circumstances of the business. Factors like the nature of the business, target markets, expected sources of revenue, and future plans for expansion should all be considered. Furthermore, as global tax rules and transparency standards evolve (e.g., BEPS initiatives by the OECD), the benefits and perceptions of certain jurisdictions may change. As always, businesses should seek expert advice when setting up holding structures in these or other jurisdictions.
Planning to set up an international tax structure with a German GmbH? Feel free to contact the international tax experts from GHS
The contribution of a German GmbH into a non-German holding company can be an enticing strategy for many businesses looking to diversify, manage risks, and allocate capital more efficiently. However, the tax implications are intricate and demand careful attention. Entering the strucutre tax neutral must be planned. GHS can help you to optimize German taxes. Please feel free to contact us.