Concept and definition of the ‘Entsteinerungsklausel’
Die Entsteinerungsklausel refers to a contractual provision, applied especially in corporate law, in particular in the context of the transformation of corporations into partnerships. The term is predominantly used in German law and is significant in connection with the so-called ‘Steinernes Unternehmen’ (literally, ‘stone company’), a concept from transformation tax law. The Entsteinerungsklausel governs the tax consequences that arise if, within a certain period after the transformation, the acquired assets—typically business real estate or assets with hidden reserves—are removed from or sold out of the company.
Legal background
Transformation law and transformation tax law
In the context of transformation processes, particularly in cases of legal form changes or the merger of corporations into partnerships, hidden reserves may be transferred tax-neutrally to the acquiring company. Transformation tax law allows in these cases a so-called carryover of book values, provided that certain conditions are met. This means that the hidden reserves contained in the assets are not subject to immediate taxation.
‘Steinernes Unternehmen’ and Entsteinerung
A corporation, the assets of which—such as real estate—are transferred to a partnership taking advantage of tax privileges, is referred to as a ‘Steinernes Unternehmen’. The concept serves to protect the state’s tax revenue by ensuring subsequent taxation of previously tax-neutrally transferred hidden reserves, should an ‘Entsteinerung’ occur within a legally stipulated period.
Die Entsteinerung describes the disposal, sale, or withdrawal of the transferred hidden reserves—often contained in real estate—from the business assets of the acquiring company within a tax-relevant period.
Content and function of the Entsteinerungsklausel
Safeguarding tax neutrality
The Entsteinerungsklausel is typically included in transformation agreements or resolutions. Its purpose is to ensure that the benefits of book value continuation, granted in the course of the tax-neutral transfer, are not abused. In essence, the Entsteinerungsklausel stipulates that, if the relevant assets are sold, withdrawn, or otherwise transferred within a certain period, the hidden reserves must be disclosed and subject to tax retroactively.
Statutory basis
The legal foundations primarily arise from the regulations of the Corporation Tax Act (KStG), the Income Tax Act (EStG), and the Transformation Tax Act (UmwStG), in particular from:
- § 22 UmwStG (Transfer of assets in the course of transformations)
- § 15 (1) UmwStG (Transformation of corporations into partnerships)
- § 6 (5) EStG (Transfer of assets between participating entities at book value)
As a result, it is mandatory to implement the tax consequences stipulated in the Entsteinerungsklausel. The main period relevant for applying such a clause is often seven years from the effective tax transfer date.
Purpose of use in corporate law
In the context of corporate law, the Entsteinerungsklausel also serves as a safeguard between companies and third parties. Contractual parties may be obligated to provide tax compensation or settlement in the event of a subsequent withdrawal to distribute tax burdens fairly and avoid disputes.
Effects of the Entsteinerungsklausel
Tax consequences in case of breach (subsequent taxation)
If entsteinerung occurs within the relevant period, this results in subsequent taxation of the previously tax-neutrally transferred hidden reserves. In particular, profits realized through the sale or withdrawal of the relevant assets are affected. The additional tax burden is then attributed to the party whose transaction led to the entsteinerung.
Civil law and contractual legal consequences
In addition to tax consequences, the Entsteinerungsklausel is also relevant for any liability or compensation claims between contracting parties. The clause can, for example, stipulate that the party responsible for triggering the event is liable for all resulting tax damages. It can also contain rules regarding the bearing of costs and the obligation to inform others about instances of entsteinerung.
Practical importance and areas of application
Cases of application
The Entsteinerungsklausel is particularly applied in the following scenarios:
- Change of legal form from corporation to partnership taking advantage of book value continuation
- Mergers or demergers involving immovable assets
- Spin-offs of business units with substantial hidden reserves
- Conclusion of corporate agreements with transfers intended to be tax-privileged
Importance for contracts and tax planning
The Entsteinerungsklausel is a subject of careful contract design and is relevant for tax restructuring reviews. It ensures compliance with statutory requirements and protects contracting parties from unexpected tax disadvantages. Proper and transparent structuring can minimize risks and provide certainty in tax planning.
Case law on the Entsteinerungsklausel
The jurisprudence of the German tax courts and the Federal Finance Court specifies the interpretation and application of the Entsteinerungsklausel, especially concerning the relevant periods, calculation bases for subsequent taxation, and the requirements for a tax-neutral transformation and the occurrence of an entsteinerung event.
References and further provisions
- Transformation Tax Act (UmwStG)
- Corporation Tax Act (KStG)
- Income Tax Act (EStG)
- Federal Finance Court (BFH) judgements on transformations and entsteinerung
Summary
The Entsteinerungsklausel is a key instrument for ensuring tax equality and preventing misuse of structuring during the transfer of tax-sensitive assets in the context of corporate restructurings. Its legal function lies in securing subsequent taxation should premature asset withdrawals—so-called ‘entsteinerung’—occur. Thus, it is an integral part of contract drafting and of significant importance for tax and legal planning in company restructurings.
Frequently asked questions
What legal consequences can arise from violations of the Entsteinerungsklausel?
A breach of the Entsteinerungsklausel can have far-reaching legal consequences. Initially, violating such a clause can be considered a breach of contract, entitling the injured party to a claim for damages. In many cases, contracts containing an Entsteinerungsklausel explicitly provide for contractual penalties or the right to immediate termination. Additionally, a violation may result in revocation of certain tax benefits and demands for repayment or other sanctions by the tax authority. In the context of company law, shareholders risk the loss of granted legal positions—such as regarding transferability of shares—if they disregard the clause. Consequences can be particularly severe in employment or tenancy law, for example, if the clause is disregarded during corporate restructuring measures, which may render entire restructuring actions invalid. However, the specific consequences depend on the individual case and should be reviewed with legal counsel as needed.
When is the Entsteinerungsklausel invalid?
The invalidity of an Entsteinerungsklausel may arise for various legal reasons. In principle, such clauses are only legally binding if they are expressly and clearly stipulated in the contract and do not violate statutory provisions. They may, for example, be invalid if they contravene mandatory legal regulations, such as the prohibition of immoral contracts (§ 138 BGB), the General Act on Equal Treatment (AGG), or competition law provisions. The clause may also be deemed invalid if it constitutes an unreasonable disadvantage for one contracting party in accordance with § 307 BGB. Transparency and clarity of the clause are also essential, as lack of transparency can lead to invalidity according to settled case law. In employment contracts and general terms and conditions, the Entsteinerungsklausel is subject to particularly strict AGB scrutiny. If these requirements are not met or a clear agreement is lacking, the clause will regularly not be legally enforceable.
Does an Entsteinerungsklausel have to be notarized?
Whether an Entsteinerungsklausel must be notarized depends on the contract type and subject matter of regulation. In company law, for example, including an Entsteinerungsklausel in the articles of association requires notarization if notarization is required for the contract itself, as in the case of forming a GmbH or real estate transactions (§ 311b BGB). In employment or lease agreements, notarization is generally not necessary unless the law explicitly requires it for the contractual type concerned. Nevertheless, for evidential purposes, it may be advisable to document the agreement in writing and have both parties sign it. However, compliance with formal requirements may be decisive for tax effectiveness or legal validity in company law; thus, it is always advisable to check the respective statutory requirements in cases of doubt.
What role does the Entsteinerungsklausel play in corporate restructurings?
In corporate restructurings—such as mergers, demergers, or changes of legal form—the Entsteinerungsklausel fulfills a central tax and liability function. It ensures that tax book values or privileged legal positions—the so-called ‘Steinzeiten’—are preserved when transferring assets or rights. Observing the clause can be decisive for maintaining certain tax benefits, for example under transformation tax law (UmwStG). If the clause is disregarded, it can result in retroactive taxation or realization of latent hidden reserves. Furthermore, the Entsteinerungsklausel safeguards the continued validity of contractual and corporate law obligations during a restructuring. This particularly includes the assumption of contracts, liabilities, and in some cases employment obligations. For this reason, thorough legal review and implementation of corporate Entsteinerungsklauseln is indispensable in practice.
Does the Entsteinerungsklausel also apply retroactively to already concluded transactions?
Whether an Entsteinerungsklausel applies to already concluded transactions generally depends on whether the parties have expressly agreed to this and whether the law permits retroactive effect. As a rule, the clause only applies to legal transactions or measures carried out after it comes into effect. Retroactive application is generally not permitted under German civil law, unless it is explicitly contractually regulated and does not violate mandatory legal rules, in particular the prohibition of retroactivity. In tax law, an Entsteinerungsklausel can, in narrowly defined exceptional cases, have retroactive effect if specifically permitted by law (e.g., in certain transformation transactions under § 2 UmwStG). However, it must always be ensured that such retroactivity does not unduly disadvantage third parties or circumvent statutory deadlines. In cases of doubt, an individual legal review should be carried out.
What legal requirements must be observed when drafting an Entsteinerungsklausel?
Legally compliant drafting of an Entsteinerungsklausel requires that it clearly, unequivocally, and comprehensively regulates the intended legal consequences. It should precisely specify its material and temporal scope of application. Legally, it is particularly relevant that the clause is not too far-reaching and does not contain unexpected or ineffective provisions. To protect against invalidity, regular adjustment to the latest case law and statutory requirements is advisable. The parties should also determine which rights, obligations, or book values are ‘de-entsteined’ or retained and which consequences a breach will entail. It is also advisable to coordinate the Entsteinerungsklausel with existing principal contracts and align it with their overall structure, so it cannot be interpreted in isolation or contrary to the contractual context in the event of a dispute. If in doubt, legal expertise should be sought for drafting, particularly in complex corporate, tax, or employment law matters.
