Tax relief when outsourcing a sole proprietorship

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Arbeitsrecht-Anwalt-Rechtsanwalt-Kanzlei-MTR Legal Rechtsanwälte

Tax relief can be claimed in the event of a sole proprietorship being outsourced to a newly formed corporation. That was the verdict of Münster’s tax court – the Finanzgericht (FG) Münster – in a ruling from May 3, 2022 (case ref.: 8 V 246/22 GrE).

Section 6(a) of the German Real Estate Transfer Tax Act (GrEStG) is clear in stating that it is possible to take advantage of tax breaks in the event of restructuring within a group. What has been a source of contention in tax law to date, however, is whether this provision is equally applicable in the context of a sole proprietorship being spun off to form part of a newly founded corporation. The FG Münster has now answered this question in the affirmative, reports commercial law firm MTR Legal Rechtsanwälte.

At the heart of the case in question was a GmbH – a type of German limited liability company – that had recently been established as part of a spin-off and whose only shareholder was the sole owner of several plots of land that he held as business assets through his sole proprietorship, which he outsourced to the newly formed GmbH together with all assets and liabilities back in 2021. Additionally, shares in another GmbH, itself the sole shareholder of various other corporations holding real estate, were also transferred to the newly founded company.

The tax office determined that land transfer tax (Grunderwerbsteuer) was due for the outsourcing and the transfer of the GmbH holding. The new GmbH responded by filing for a stay of execution, arguing that the transactions were tax-exempt pursuant to Section 6(a) GrEStG.

Its arguments found favor with the FG Münster, which also had serious doubts about the legality of the tax assessment notice. The Court noted that while the outsourcing and the transfer of the land would ordinarily be subject to land transfer tax, they were covered by the exemption under Section 6(a) sentence 1 GrEStG, the application of which was not excluded by the fact that it was a sole proprietor who had contributed the land to the new GmbH. This is because all economically active legal entities are to be regarded as companies within the meaning of Section 6(a) GrEStG, irrespective of their legal form. This therefore also includes sole proprietorships, according to the FG Münster, which granted leave to appeal to the Germany’s highest tax court – the Bundesfinanzhof – due to the fundamental importance of the case.

Should tax disputes arise with the fiscal authorities, those concerned can turn to the team of tax experts at MTR Legal for advice.

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