In a recently published decision (case reference: 11 K 4386/08), the tax court of Baden-Württemberg ruled on the requirements for a tax neutral contribution of a business to a newly established corporation (GmbH). According to the German Reorganization Tax Act, a tax neutral contribution is only possible if new shares are issued in exchange for the contribution.
The plaintiff in the case formed a GmbH and subsequently, in a legally independent step, contributed a business to the GmbH. No new shares were issued upon the contribution of the business, the contribution amount was fully allocated to the capital reserves. The tax authorities took the position that the contribution of the business should be treated as a disposal and, thus, as a fully taxable transaction, because the GmbH was incorporated by way of a cash subscription only and there was no contribution of the business in exchange for new company shares in the GmbH.
The tax court of Baden-Württemberg agreed with the tax authorities. According to the court, the facts of the case were not comparable to a case decided by the Federal Tax Court in 2010 (see Deloitte Tax-News), because the incorporation by way of a cash contribution and the contribution of the business to the GmbH were two legally separate transactions.
Even though the two contributions were made within a short time of each other and were closely connected economically and the articles of incorporation indicated the plaintiff’s intent to also contribute the business to the GmbH, the court held that the contribution of the business was a fully taxable transaction because, upon incorporation of the GmbH, the plaintiff was not contractually obliged to contribute the business.
The tax court denied an appeal of the decision. Thus, taxpayers that form a corporation and contribute a business into it upon incorporation should carefully review the sequence of steps to avoid any unfavorable tax consequences.
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