Avoiding exit tax through contribution to a GmbH & Co. KG

Dr. Oliver Eidel • Designs

🇩🇪 Auf deutsch: Wegzugsteuer vermeiden durch Einbringung in GmbH & Co. KG

In short

You own one or more GmbHs, want to move away from Germany, and do not want to pay exit tax.
To do this, you found a new GmbH & Co. KG and contribute your existing GmbHs into it.
The big advantage is that the contribution of the GmbHs can be done tax-neutrally (!).
The disadvantage is that your GmbH & Co. KG needs substance in Germany and must be commercially active.

In detail

Basically, founding a new GmbH & Co. KG is the "standard solution" for the exit tax. Although the implementation and handling are somewhat cumbersome and involve costs, the great advantage of this solution is that you can implement it almost entirely yourself and that it is generally accepted by the tax office. For example, unlike with a Liechtenstein foundation, you do not have the risk that the tax office wants to look at everything again in detail, and you also have the advantage that you are not entirely dependent on an expensive tax advisor to implement the GmbH & Co. KG here (although you should certainly still seek advice).

Why does this work with the GmbH & Co. KG at all? This is due to how the German exit tax is regulated for GmbHs - it "only" applies when Germany loses the so-called right of taxation on your GmbHs. This would happen if you moved away, but not if you previously contributed them into a GmbH & Co. KG.

For example:

You own a GmbH in Germany.
You move away from Germany. At this moment, Germany loses the right of taxation on your GmbH and your destination country now receives the right of taxation.
So if you now sell your GmbH, for example, this sale is no longer taxable in Germany. The same applies to dividends: Simply put, Germany no longer taxes your dividends; in practice, there is still a 15% withholding tax and it depends on the double taxation agreement between Germany and your destination country.

A concrete example from the past: An owner of a department store chain in Germany moves to Switzerland, then sells his German company and pays no taxes on it because Switzerland has no capital gains tax.

That was one of the reasons why the exit tax was introduced - so it applies as soon as you own a GmbH (more than 1%) and then move away, meaning your ownership of this GmbH (dividends / sale) would no longer be taxable in Germany.

So far, so good - but now the question is why the GmbH & Co. KG represents a solution here. That is relatively easy to explain: A GmbH & Co. KG that is based in Germany and is commercially active is automatically (!) taxable in Germany. I.e., the problem does not arise here that when the owner (= Kommanditist in the KG) moves away, the taxability "migrates" to the destination country. Instead, it remains in Germany.

Thus, one can explain why this works and why the tax office generally also has good reasons to accept this construct - you basically say "I am leaving Germany and you may not be able to tax me in the future, but I am putting all my companies into my KG, which stays in Germany instead of me and continues to pay taxes, including the companies I have put in there".

Overall, therefore, quite a "fair" model, if you disregard all the complexity that setting up the GmbH & Co. KG entails.

Who is the GmbH & Co. KG solution suitable for?

Simply put, one can say that the model is probably suitable for those who have at least one GmbH that they cannot liquidate before moving away and that is worth so "much" that simply paying the exit tax is out of the question. So:

You hold your operative GmbH in a Holding-GmbH that you want to keep for various reasons (distribution from the holding would cost capital gains tax)
You have a GmbH that you "must" keep because you cannot simply liquidate it, for example (ongoing business with clients, employees, etc.), and a sale is out of the question;
Contribution into a newly founded family foundation is out of the question for you because it is either too complex for you or you do not like the family foundation (substitute inheritance tax, ongoing taxation at 15% in Germany, etc.) or because your GmbH is a Holding-GmbH and not operative (operative GmbHs can be contributed tax-neutrally via the Verschonungsbedarfsprüfung, Holding-GmbHs cannot, gift tax applies here)
Founding and contributing to a Liechtenstein foundation is out of the question for you because it is, for example, too expensive (from €10k / year, plus tax advisor costs) or because it is too complex and you prefer a solution that does not entail a high risk of an audit by the tax office;

Requirements

At the same time, the GmbH & Co. KG solution also has some requirements that are not always easy to meet, in particular:

You need a managing director in Germany (not yourself)
You need substance in Germany (e.g., physical office)
The GmbH & Co. KG must be commercially active, i.e., sell products to the subsidiaries, for example.

Among tax advisors, there are certainly different opinions on how pronounced these characteristics must be in practice. The overarching goal is that the GmbH & Co. KG demonstrably has its permanent establishment in Germany (substance, managing director) and is commercially active, so that it remains taxable in Germany.

Conversely, one can argue that during a tax audit, the German tax office has relatively little incentive to doubt the construct and thereby say that the GmbH & Co. KG should not be taxed in Germany - on the contrary, it is absolutely advantageous, you even want it to remain taxable in Germany.

A tax advisor confirmed to me that this is basically seen the same way on the "German side" and is relatively unproblematic. The much bigger question is how your destination country sees it. Depending on the destination country, the view might be taken there that your KG would be taxable in the destination country - and that is exactly what needs to be prevented here, because then you would again have an exit of your KG and the associated unravelling tax (Entstrickungssteuer)!

In short: The German side should be less problematic. If you move to a destination country that does not pursue foreign taxes too strictly (e.g., most developing countries) or even has a non-dom regime like Cyprus and formerly the United Kingdom, then you don't need to worry in the destination country either. However, it becomes significantly more difficult with other countries in Europe or Switzerland, where you then definitely have to have the discussion whether the KG would not also be taxable there.

A tax advisor once gave the example that they usually consider at least 4-6 German employees in a physical office necessary for this substance. Afterwards, they obtain a binding ruling from the tax office as to whether this would be sufficient. However, this is certainly the maximum variant and one really has to ask oneself here whether a much more minimalist variant (e.g., an employed managing director, a small office) would already be sufficient for the German tax office. My feeling is that this should be the case.

Implementation

The implementation of this model is not trivial, but largely doable yourself, depending on how deeply you have familiarized yourself with it. As always, however, you should certainly seek advice from a tax advisor beforehand on such topics.

The following steps:

You found a new GmbH & Co. KG. A GmbH & Co. KG consists of a so-called Komplementär-GmbH, which is a "real", separate GmbH, and a KG. So there are actually two companies that you are founding here. If you already have a Holding-GmbH, you could consider using it simultaneously as the Komplementär-GmbH for your new KG, then you save yourself the founding of the additional Komplementär-GmbH. But bear in mind that the Komplementär-GmbH is liable here, i.e., this would only make sense if the risk of a GmbH & Co. KG being sued is small (e.g., if it only does business with your subsidiaries, see below). For the founding of the KG, you go to the notary; the founding is simpler and faster than that of a GmbH, since only a commercial register entry has to be made.
You contribute your existing GmbHs into the KG. As soon as your GmbH & Co. KG is founded, you contribute your existing GmbHs into it. This is, as written above, possible on a tax-neutral basis. For this you need a notarized contribution agreement. Many notaries have no idea about this and unfortunately do not have suitable contract templates. So it is best to have your tax advisor send you a contract template that has already worked before.
Your GmbH & Co. KG is commercially active. Your GmbH & Co. KG regularly sells products, e.g., to your subsidiaries. Depending on what your GmbHs do, this can either be implemented relatively easily or with great difficulty. You could consider, for example, that your GmbH & Co. KG takes over the web hosting costs of your GmbHs and then in turn sells web hosting products including further services (maintenance, etc.) to your GmbHs.

Further aspects of the GmbH & Co. KG

My impression of the GmbH & Co. KG is that the biggest advantage and at the same time disadvantage of this legal form is ultimately that no human on this planet has fully understood it. Quite apart from the complexity that one even needs another GmbH (the Komplementär-GmbH), there are a wide variety of design options that probably even the people at the tax office do not always know. Here are a few examples:

If a GmbH & Co. KG acts as a pure holding company, it benefits from similar tax advantages to a private individual. It can, for example, sell real estate tax-free after a 10-year holding period. This is not possible with a commercially active GmbH & Co. KG.
A GmbH & Co. KG can be considered "deemed commercial" (gewerblich geprägt). This is something different from "commercially active", but they are not mutually exclusive. The simplest way to make a GmbH & Co. KG "deemed commercial" is to appoint the Komplementär-GmbH as managing director.
As indicated in the previous point, the GmbH & Co. KG can have a legal entity as managing director, e.g., the Komplementär-GmbH. In our case, this would probably be preferable.
There is a wide variety of arrangements for the Komplementär-GmbH. One question, for example, is who owns it. The most common variant is to also contribute the Komplementär-GmbH into the KG, which is also possible on a tax-neutral basis, since it is "only" a normal GmbH. The whole thing is then called a "Einheits-GmbH & Co. KG". However, more complex variants are also conceivable, in which the Komplementär-GmbH is held by private individuals. And if one is in the mood for even more complexity, then one can structure the ownership ratios in the Komplementär-GmbH differently than in the KG. No idea who does something like that..
At the same time, theoretically, the Komplementär-GmbH can have a stake in the KG. That would mean that it also receives distributions (withdrawals) from the KG. For the sake of simplicity, one would rather avoid this as well.

All of this can be quite confusing. So I'll summarize the simplest scenario from my research:

You found a new KG and use your existing Holding-GmbH as the Komplementär-GmbH, which saves you the founding of a new Komplementär-GmbH.
The KG is deemed commercial by appointing the Komplementär-GmbH as managing director.
After founding the KG, you contribute the Komplementär-GmbH into the KG.
The ownership ratios in the KG and the Komplementär-GmbH are identical: You hold 100% of both.

Do you have to contribute the Komplementär-GmbH?

An "interesting" question is whether you have to contribute the Komplementär-GmbH into the KG at all. At this point at the latest, the ambiguity begins, where during research you realize that humanity has not yet fully grasped the complexity of the GmbH & Co. KG.

Strictly speaking, it is the case that a Komplementär-GmbH automatically (!) moves into the so-called special business assets (Sonderbetriebsvermögen) of the KG upon its appointment as general partner (Komplementärin). At this moment, you therefore remain the legal owner, but for tax purposes, it is already "in" the KG.

This at least applies to an "empty" Komplementär-GmbH that has been specifically founded for this purpose. However, if you use an existing Holding-GmbH as Komplementärin, for example, it becomes more unclear: A ruling by the Federal Fiscal Court (BFH) came to the conclusion that it then does not automatically move into the special business assets of the KG, as it has a "not subordinate own business operation", which could certainly be the case with a holding company (management of investments, ETFs, etc.).

So one can definitely say that it is unclear.

In the context of the exit tax, however, one certainly wants clarity, and it is probably not optimal to leave this ambiguity with the special business assets as it is. Therefore, it would probably generally always make sense to contribute the Komplementär-GmbH into the KG after the KG has been founded.

For specialists: Contribution to the Special Business Assets II (Sonderbetriebsvermögen II / SBV II)

An absolute niche topic, which it feels like only a handful of tax advisors in Germany are familiar with, is the contribution to the Sonderbetriebsvermögen II (SBV II) of the KG.

The question is - Why would a rational person voluntarily deal with something like this? The answer is that sometimes for various reasons it is not possible to "normally" contribute a company into a GmbH & Co. KG (as we did above) and one then has to take this route via the SBV II instead.

An example of this are stakes in foreign companies: Sure, a "German" contribution into a German KG is tax-neutral in Germany, but in the case of foreign companies, the law of the respective country of the company also applies alongside German law, and that can view the matter quite differently. Thus, the process, which is a contribution on the German side, could be classified as a sale on the foreign side and taxed accordingly. Then one would have gained absolutely nothing in relation to the exit tax - sure, now the foreign company is in the KG and is not (or no longer) covered by the exit tax, but at the same time, one has paid so much tax abroad in the process that one could have simply paid the exit tax instead.

Or, presented even more provocatively - now you have paid a lot of money in taxes abroad, only to have bought the "privilege" of "being allowed" to continue taxing dividends and sales proceeds in Germany.

Depending on the destination country of the move, it would have been more advantageous to simply pay the exit tax. Two examples:

You hold 100% of the foreign company A. For this example, we hypothetically assume that the contribution of the A-company into a German KG would be taxed on the foreign side as a sale at market value at 30% (purely fictitious).
So if you contribute the company into the KG, you pay a one-time 30% tax on the market value (virtually as much as the German exit tax), but must continue to pay taxes on future dividends and sales proceeds in Germany at approx. 30%.
If you do not contribute the company into the KG, you also pay a one-time approx. 30% tax on the market value, namely the German exit tax, and then do not have to pay taxes on future dividends and sales proceeds in Germany.

The question of whether the latter example is worthwhile therefore depends entirely on the destination country. If, for example, you move to a destination country without capital gains tax (e.g., Switzerland), then the latter scenario would be much more advantageous than the contribution into the KG.

Digressing widely... what does all this have to do with the SBV II?

Quite "simply": The above problem could be solved by not contributing the stake in the foreign company into the KG "normally", but instead into the SBV II. Here is the difference:

"Normal" contribution: The KG becomes the owner of the foreign company and the foreign company is attributed to the KG for tax purposes, so for example, dividends of the foreign company are taxed in the KG.
SBV II contribution: You legally remain the owner of the foreign company (!), but it is attributed to the KG for tax purposes (!!). Here too, for example, dividends are taxed in the KG.

The trick here is therefore that you can "put stakes into the KG" without having to change the legal owner of these stakes. For foreign stakes, this can prevent a huge tax burden, since there is then precisely no change of ownership abroad and it is therefore potentially not taxed there. Theoretically, this can even be helpful for German stakes, as you would theoretically save the notary costs there. Whether one would want to choose such a complicated construct "just" to save a few thousand euros in notary costs is probably another question..

How it works: Contribution into the SBV II of a KG

Above we had already touched on the topic that the stake in a company can in principle "slip into" the KG if the company is "intertwined" with the KG. This is the case, for example, if the stake acts as Komplementärin of the KG.

But this can also happen in completely different scenarios: If the KG, for example, does regular business with companies in which you yourself are privately invested, then these can theoretically also slip into the special business assets of the KG, since an intertwining exists here too. The keyword here is, among other things, that your stake in these companies improves your position in the KG as a limited partner (Kommanditist).

Examples:

You own a 10% stake in A GmbH. Your newly founded KG now provides regular services to A GmbH. A GmbH now slips into the special business assets of your KG. As described above, this then means that you, for example, now tax dividend income from this stake in a KG.
You own a 10% stake in a foreign company. The foreign company could in principle purchase products from your KG in the future. To "secure sales", you therefore shift this foreign company into the SBV of your KG.
You take out a private loan with the goal of providing liquidity to your KG. The loan could move into the SBV of your KG, as it is economically attributable to it and gives you advantages for your position as a Kommanditist within the KG.

As you can probably guess by now, there are different ways to contribute stakes into the SBV of the KG. Roughly speaking, it comes down to the SBV II - there are namely two:

The necessary SBV II (notwendiges SBV II): Here lie things that are "necessary" for the KG. Contributing stakes here is not necessarily easy according to some BFH rulings - there must be, for example, a clear economic dependency between the companies.
The discretionary SBV II (gewillkürtes SBV II): Here lie things that one has "voluntarily" contributed into the KG. Here you have significantly greater freedoms, because the BFH has mostly only commented in passing on the discretionary SBV II in its rulings, or has not committed itself in many aspects here.

After reading some BFH rulings on the SBV during my research, I got the following impression:

In most rulings, the entrepreneur wanted to bring about that something was not in the KG - so basically the opposite of our goal here, since we want to put something into the KG and precisely do not want to argue. So our purpose is for something to be in the KG and not to tell the tax office that something is outside the KG. Generally, it is easier to argue that something is in the KG - which is also logical, because by doing so you are telling the German tax office "look, I want to tax this here in my KG", which is positive for the tax office.
Most rulings were about the necessary SBV II, not the discretionary SBV II. And there the BFH logically rules that it is indeed difficult to contribute stakes here, precisely because the necessary SBV II makes higher demands than the discretionary SBV - so far also logical. But the interesting conclusion here is that the BFH very rarely (if at all) comments on the discretionary SBV II - it basically leaves "the backdoor" open that one can certainly also quite easily contribute things into the discretionary SBV II.
Furthermore, some rulings were about the fact that loss-making things should be contributed into the SBV in order to write off losses in the KG and there logically reduce the tax burden. That is also not the case for us: We want to contribute a "valuable" stake in a company into the discretionary SBV II of a KG, which in the medium term tax-wise leads to dividend income being generated here, which the KG taxes. So the tax burden of the KG increases and we do not want to write off any losses - so nobody can really blame us for that.

What is interesting is exactly that there is no BFH ruling with "our" combination, namely:

Contribution to the discretionary SBV II
Not with the goal of writing off losses, but to pay more taxes through more income in the KG

The observation that such a ruling does not exist suggests that this procedure is generally accepted by the tax offices. Which also makes absolute sense - why should the tax office say here "Wait a minute, we don't want you to voluntarily pay even more taxes in the KG, but you should nicely shift the stakes abroad and rather pay taxes there" - sounds relatively absurd.

One could of course speculate that a tax office might possibly still be incentivized not to recognize the contribution if it wants to generate short-term revenue through the exit tax, which you would then have to pay instead. But that would really be extremely short-sighted, as the tax office would then be fobbed off with a one-time payment (exit tax), instead of continuing to tax the dividends of the stakes in the KG basically "for life", which would probably be significantly more advantageous in most cases.

How does such an SBV II contribution then work in practice? The whole thing is unfortunately a little more complex than one would assume - the ongoing support of the KG is usually done by the regular tax advisor. Strictly speaking, they would then also have to draw up a so-called "special balance sheet" (Sonderbilanz) for the contribution to the SBV II. In reality, however, the regular tax advisor is probably wetting their pants, as they are not familiar with the exit tax and do not want to be liable for a contribution that they do not understand. The somewhat absurd compromise is therefore to find a specialized tax advisor (for the exit tax) who writes an "expert opinion" (i.e.: prompts ChatGPT) that a contribution to the SBV II is feasible in the current situation, plus a kind of "instruction manual" on what the regular tax advisor has to do. As a result, the liability probably diffuses somewhere between these two tax advisors, a bit of money has been earned again, and everyone is suddenly happy.

Conclusion

This is probably my longest article on the German exit tax and partly for good reason - the GmbH & Co. KG is on the one hand so complex that, as said, probably no human has fully understood it yet, and at the same time it can almost be regarded as the standard solution for the German exit tax. Even though the setup involves a fair amount of effort, the costs can sometimes be kept within reasonable limits, especially when compared to a potentially six- to seven-figure exit tax burden.

By the way: Still got questions and want to talk? Send me a message any time, I'm happy to meet fellow entrepreneurs like you! And if you'd like to connect with even more entrepreneurs affected by the German exit tax, join our Telegram community :)