Why would a sole pro­pri­etor con­sid­er trans­fer­ring their busi­ness to a GmbH?

Sole pro­pri­etors often choose to restruc­ture into a GmbH for sev­er­al reasons:

• Lia­bil­i­ty pro­tec­tion – per­son­al assets are shielded
• Growth poten­tial – eas­i­er access to cap­i­tal and partners
• Brand con­ti­nu­ity – firm name and good­will can be preserved
• Auto­mat­ic con­tract trans­fer – pos­si­ble via spin-off under § 152 UmwG

Legal ref­er­ence: § 152 UmwG, § 20 UmwStG

Exam­ple sce­nario:
Tax advi­sor “A” runs a suc­cess­ful finan­cial ser­vices busi­ness reg­is­tered as a sole trad­er (einge­tra­gen­er Kauf­mann, e.K.). Due to growth and ris­ing lia­bil­i­ty risks, A con­sid­ers form­ing “A GmbH”. The firm name and client base hold sig­nif­i­cant value—A wants to keep both intact and avoid land­lord approval for the office lease. A spin-off into a GmbH pro­vides an ide­al path.

What legal options exist to trans­fer a sole pro­pri­etor­ship into a GmbH?

There are four main methods:

1. Spin-off by reg­is­tered sole pro­pri­etor (Aus­gliederung nach § 152 UmwG)
   • Enables auto­mat­ic trans­fer of con­tracts, lia­bil­i­ties, and assets via uni­ver­sal suc­ces­sion (Gesamtrecht­snach­folge).
   • No need for third-par­ty con­sent (e.g., land­lords, banks).
   • Requires notar­i­al deed and val­u­a­tion report.
   • Legal basis: § 152 UmwG
2. For­ma­tion of a GmbH via con­tri­bu­tion in kind (Sach­grün­dung)
   • The busi­ness is trans­ferred asset by asset into a new­ly formed GmbH.
   • Requires val­u­a­tion report and notar­i­al deed.
   • The GmbH only legal­ly exists after registration.
3. Step-up foun­da­tion (Stufen­grün­dung)
   • A shelf GmbH is acquired and then cap­i­tal is increased by con­tribut­ing the business.
   • Com­bines flex­i­bil­i­ty of exist­ing GmbH with effi­cien­cy of contribution.
   • Imme­di­ate legal exis­tence and low­er risk dur­ing transition.
4. Barkap­i­taler­höhung with con­tri­bu­tion into cap­i­tal reserve
   • A shelf GmbH is acquired, and a small cash cap­i­tal increase is resolved.
   • The busi­ness is con­tributed not as share cap­i­tal, but into the cap­i­tal reserve (Agio).
   • Less for­mal, often cheap­er, and no val­u­a­tion need­ed if the con­tri­bu­tion has no neg­a­tive value.
   • Cau­tion: This route still requires prop­er legal struc­tur­ing to avoid tax pitfalls.

Each method varies in terms of com­plex­i­ty, tim­ing, and flex­i­bil­i­ty. The choice depends on the busi­ness sta­tus, urgency, and finan­cial structure.

How does § 20 Umw­StG enable a tax-neu­tral trans­fer into a GmbH?

§ 20 Umw­StG allows a busi­ness trans­fer in exchange for GmbH shares with­out trig­ger­ing imme­di­ate tax­a­tion, if:

• The entire busi­ness is transferred
• New shares are issued
• The GmbH remains under Ger­man tax jurisdiction
• A book val­ue option is requested

Retroac­tive appli­ca­tion (up to 8 months) is allowed under § 20 Abs. 5 Umw­StG.

What are the main require­ments for tax neutrality?

1. Com­plete busi­ness trans­fer:
   All essen­tial busi­ness assets must be includ­ed — e.g. key con­tracts, client rela­tion­ships, brand rights, office infra­struc­ture.
   Excep­tion: Non-essen­tial assets (e.g. excess cash) may be exclud­ed with­out harm­ing the tax-neu­tral status.
2. Exchange for shares:
   The trans­fer must result in the issuance of new GmbH shares.
   Addi­tion­al ele­ments like share­hold­er loans or cap­i­tal reserves are allowed but must not exceed cer­tain limits.
3. Prop­er appli­ca­tion and timing:
   • The con­tri­bu­tion may be back­dat­ed for tax pur­pos­es (max. 8 months), see § 20 Abs. 5 Umw­StG.
   • The book val­ue option must be request­ed explic­it­ly or implic­it­ly when sub­mit­ting the first tax bal­ance sheet of the GmbH.
4. No loss of Ger­man tax juris­dic­tion:
   The GmbH must remain sub­ject to Ger­man cor­po­rate tax (Kör­per­schaft­s­teuer) on the trans­ferred assets.

Can the con­trib­u­tor receive any­thing besides shares with­out los­ing tax neutrality?

Yes, under § 20 Abs. 2 Nr. 4 Umw­StG (“Lex Porsche”), the con­trib­u­tor may receive:

• Cash
• Shere­hold­er loans
• Con­tri­bu­tions to cap­i­tal reserves

Lim­its for tax neutrality:

• Max 25% of book val­ue or
• €500,000 (absolute cap)

One of the fol­low­ing thresh­olds must not be exceeded:

Cri­te­ri­on	Val­ue Limit
Rel­a­tive limit	25% of the book val­ue of the con­tributed business
Absolute lim­it	€500,000

Exceed­ing these trig­gers par­tial taxation!

Exam­ple 1:
Book val­ue of con­tributed busi­ness: €400,000
Addi­tion­al loan received: €100,000 → 25% = tax neu­tral­i­ty (full book val­ue trans­fer) is possible

Exam­ple 2:
Book val­ue: €2 mil­lion
Con­trib­u­tor receives a €700,000 share­hold­er loan → 35% = ❌ BUT under €500,000 = ❌ → No full book val­ue trans­fer → Par­tial tax­a­tion required

What hap­pens if the con­trib­u­tor sells their GmbH shares with­in 7 years?

Per § 22 Umw­StG, this trig­gers a pro­por­tion­ate tax­a­tion of hid­den reserves (“Ein­bringungs­gewinn I”). The tax­able por­tion decreas­es by 1/7 per full year.

Oth­er trig­gers: liq­ui­da­tion, cor­po­rate inher­i­tance, redemp­tion of shares, or vio­la­tion of § 20.

How does the rule work:

• The con­trib­u­tor must report annu­al­ly that they still hold the GmbH shares.
• If the shares are sold or a trig­ger­ing event occurs, a por­tion of the deferred tax is due — called Ein­bringungs­gewinn I.
• The tax­able amount decreas­es by 1/7 each full year after the con­tri­bu­tion date.

Exam­ple:

• Trans­fer date: 01.01.2025
• Sale date: 01.08.2029 (after 4 full years)
• 3/7 of hid­den reserves are still sub­ject to tax
• 4/7 are exempt

How are con­tributed busi­ness assets val­ued for tax pur­pos­es – and what changed in 2024?

Book or inter­me­di­ate val­ues may be used if the GmbH remains tax­able in Germany. 

Option	Tax Effect	When Allowed?

Fair Mar­ket Value

Imme­di­ate taxation

Default

Inter­me­di­ate Value

Par­tial taxation

On request, if rules met

Book Val­ue

Full tax defer­ral (pre­ferred)

On request, if rules met

Since 2024, if with­drawals reduce net equi­ty, a manda­to­ry step-up of val­ues applies. See § 20 Abs. 2 and § 27 Umw­StG.

What are com­mon pit­falls – and how can they be avoided?

• ⛔ Missed retroac­tive dead­line – Nota­rize with­in 8 months
• ⛔ Miss­ing book val­ue request – Ensure it’s includ­ed in tax filings
• ⛔ Post-trans­fer with­drawals – May trig­ger upvaluation
• ⛔ Exceed­ing 25%/€500k lim­it – Leads to par­tial taxation
• ⛔ Share sale with­in 7 years – Caus­es deferred taxation

Tip: Work close­ly with a tax advi­sor and notary, and doc­u­ment all steps carefully.

How to con­tin­ue / con­tact to us

We as eng­lish speak­ing tax advi­sors who can advise you about con­vert­ing a sole pro­pri­etor­ship into a GmbH in Ger­many and com­mu­ni­cate with the finan­cial author­i­ty on your behalf.

You can con­tact us by using one of these phone num­bers or the mail address.