Conversion of the GmbH & Co. KG into a GmbH
One of the most common types of restructuring is the conversion of a GmbH & Co. KG into a traditional limited liability company (GmbH). There are many reasons for this; in addition to tax considerations—such as the goal of achieving non-transparent taxation at the corporate level—there are often civil law reasons for choosing a capital-based corporate form.
There are generally several ways to carry out the conversion to a GmbH:
- Classic change of legal form, Sections 190 of the German Transformation Act (UmwG)
- Mergers, e.g., with the complementary GmbH
- Growth
The subject of this article is the so-called accretion model.
As soon as the “penultimate” partner leaves a partnership, all of the partnership’s assets automatically vest in the last remaining partner. This allows a partnership to be dissolved without a prior liquidation. The practical advantage of vesting, compared to conversions under the Conversion Act, is the minimal formal requirements and the resulting cost savings.
In the case of a GmbH & Co. KG, simple accretion occurs when all limited partners withdraw; the assets are thus transferred to the GmbH. From an income tax perspective, however, simple accretion results in the recognition of a gain to the extent that hidden reserves are realized. Another disadvantage is the lack of retroactive options (under both tax and civil law); the timing of the transfer can only be controlled for the future through appropriate contractual provisions.
For this reason, a so-called “extended merger” is regularly carried out in practice. In this process, the limited partners contribute their limited partnership interests as a contribution in kind (or, in the context of a capital increase, with a premium on the contribution) to the general partner GmbH. As part of the contribution of the limited partnership interests, the partnership’s assets are also automatically merged into the GmbH by way of universal succession. In this case, however, the integration occurs as a consequence of the contribution in exchange for the grant of corporate rights; this ultimately results in the applicability of the provisions of the Transformation Tax Act (UmwStG) and thus in the possibility, pursuant to § 20(2) UmwStG, to apply for the carryover of book value with respect to the contributed assets. Consequently, the transformation can be carried out in a manner that is neutral for income tax purposes. Under the extended accretion model, there is also the option of (tax) retroactive application to a reference date up to 8 months prior to the contribution.
The merger can thus—in accordance with a conversion under the German Conversion Act—be structured in such a way that it can be carried out retroactively and without any income tax implications. Compared to a conversion under the German Conversion Act, the expanded accretion model offers time and cost savings, making it an extremely attractive structuring option (also) in the context of corporate transactions, with the aim of subsequently transitioning from the legal form of a GmbH & Co. KG to a corporate structure.
However, special caution is warranted when real estate is part of the company’s assets; in such cases, an alternative structure may be necessary and advisable for real estate transfer tax purposes.
