Germany: Contribution gain II due to change of legal form (court decision)

A court decision concerning whether change of legal form triggers a contribution gain II

A court decision concerning whether change of legal form triggers a contribution gain II

The Lower Tax Court of Münster held that a change of legal form of a limited liability company (GmbH) into a limited partnership (KG) immediately after a qualified exchange of limited liability company shares within the meaning of Section 21 (1) sentence 2 of the German Reorganization Tax Act (UmwStG) triggers a contribution gain II.

The case identifying information is: file ref. 4 K 1512/15 F (30 December 2021).

Summary

According to marginal ref. 22.23 of the German Tax Decree on Transformations (UmwSt-Erlass) 2011, any transformation (reorganization) or contribution (transfer) by both the transferring company and the acquiring corporation following a contribution to a corporation, as well as the transfer of restricted shares as a result of the transformation, leads to a disposal within the meaning of Section 22 (2) sentence 1 UmwStG. The taxation of gains arising from contributions (contribution gain) can only be waived for reasons of equity if the specific individual case is comparable in all respects with the exemptions under Section 22 (1) sentence 6 nos. 2, 4 and 5 UmwStG.

In this case, a qualified exchange of shares pursuant to Section 21 (1) sentence 2 Um[1]wStG was followed in 2010, on the same day, by a change of the legal form of a corporation (whose shares were contributed as part of an exchange of shares) into a partnership. In dispute was whether this procedure triggers a contribution gain II within the meaning of Section 22 (2) UmwStG 2006 (superseded version) and, if so, whether a different assessment of tax bases should be considered for reasons of equity in this respect.

The Lower Tax Court concurred with the opinion of the tax authorities and affirmed that there was taxation of contribution gain due to the change of legal form, which could not be avoided for reasons of equity, as a change of legal form is not comparable to the exemptions under Section 22 (1) sentence 6 nos. 2, 4 and 5 UmwStG.  

An appeal of the Lower Tax Court’s decision is pending before the German Federal Tax Court (BFH) under file number I R 10/22.

Read a May 2022 report [PDF 338 KB] prepared by the KPMG member firm in Germany

 

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