Introduction
If a sole proprietor wishes to continue their business in the legal form of a limited liability company (GmbH), various legal structuring options are available. In addition to transferring individual assets to an existing or newly founded GmbH in exchange for new shares, a spin-off under the German Transformation Act (Umwandlungsgesetz, UmwG) may also be considered. In this case, the GmbH assumes the assets of the sole proprietorship through partial universal succession.
The choice of the appropriate method depends on the individual circumstances of each case. A spin-off can be particularly advantageous if contracts or liabilities are to be transferred for which the consent of the contracting parties is uncertain or not required. However, the formal requirements of a spin-off are more complex than those of a simple transfer of individual assets. Moreover, it results in a comprehensive joint liability of the GmbH for all existing obligations of the sole proprietor. Therefore, all advantages and disadvantages should be carefully weighed before making a decision.
Real Estate Transfer Tax Treatment of the Spin-Off
If real estate is part of the sole proprietorship’s assets, the spin-off constitutes a taxable transaction under Section 1 (1) No. 3 Sentence 1 of the German Real Estate Transfer Tax Act (GrEStG). This triggers real estate transfer tax unless an exemption applies. In particular, the exemption under Section 6a GrEStG may be relevant. According to Section 6a Sentence 1 GrEStG, tax is not levied on a taxable transaction under Section 1 (1) No. 3 Sentence 1 GrEStG if the transaction involves only a controlling company and a dependent company. Under Section 6a Sentence 4 GrEStG, the dependent company must have been held at least 95% by the controlling company within five years before (pre-holding period) and after the transaction (post-holding period).
It has long been debated whether this condition is met in the case of a spin-off to establish a new GmbH from a sole proprietorship. In its uniform administrative decree of September 25, 2023 (BStBl. I 2023, p. 995, section 2.1), the tax authorities took the view that the exemption under Section 6a GrEStG does not apply in such cases. In contrast, the Federal Fiscal Court (BFH), in its decision published on September 25, 2024 (II R 2/22), ruled that the spin-off of a sole proprietorship to establish a new GmbH is covered by Section 6a GrEStG. The BFH also held that the pre-holding period in Section 6a Sentence 4 GrEStG does not apply in these cases, since the dependent company only comes into existence through the transformation process (“The impossible cannot be required”). The decisive factor is solely that the five-year post-holding period is observed. This means that the sole proprietor, as the sole shareholder of the newly established GmbH, must retain at least 95% of their shares for a minimum of five years to qualify for the exemption.
Different Treatment of “Economic Re-Foundations”
The Federal Fiscal Court (BFH) takes a different view with respect to shelf companies. In its decision, also published on September 25, 2024 (II R 46/22), the BFH clarified that the principles established for spin-offs involving new formations do not apply to share transfers to shelf GmbHs. Unlike a genuine new formation, a shelf company already exists under civil law. Economic considerations and commercial register practice—which treat economic re-foundations similarly to genuine new formations—are irrelevant in this context.
Practical Implications of the BFH Decision
The BFH ruling reduces uncertainty regarding the application of Section 6a GrEStG to the spin-off of a sole proprietorship into a newly established GmbH. Entrepreneurs considering such a restructuring can now plan with greater legal certainty. However, it remains to be seen whether—and to what extent—the tax authorities will apply this ruling beyond the specific case decided and adjust their previous position. Until then, it may be advisable to obtain binding information from the competent tax office in advance.
Conclusion
The spin-off of a sole proprietorship into a newly established GmbH can be advisable for economic and liability-related reasons. If real estate is part of the business assets, real estate transfer tax considerations play a crucial role. The recent ruling of the Federal Fiscal Court (BFH, II R 2/22) clarifies that the tax exemption under Section 6a of the German Real Estate Transfer Tax Act (GrEStG) also applies to a spin-off forming a new company, provided the post-holding period is met. Nevertheless, business owners should conduct a thorough legal and tax assessment before any restructuring to avoid unintended tax consequences.
