The daily practice of many German companies or entrepreneurs to restructure their securities portfolio, i.e. the purchase and sale of company securities and similar, is associated with considerable tax risks when it comes to company succession.
Securities can be partly transferred without having to pay taxes
Securities can, in principle, be transferred tax-freely to a certain extent as a result of corporate succession. They belong to the so-called administrative assets. These are assets that do not directly serve the productive economic purpose of the company. A tax-free transfer of the administrative assets is – in simplified terms – possible up to an amount of 10 percent of the company value.
No tax-free transfer of “young” administrative assets
However, the “young” administrative assets are excluded from this tax exemption. These are always subject to gift or inheritance tax, even as part of a business succession. The legislator considers “young” administrative assets to be those that were “attributable” to the business for less than two years at the time of the inheritance/gift. The background to this regulation was originally to prevent abuses of the structure, with which private assets could be quickly brought into the business before the inheritance/gift of the business and thus transferred tax-freely.
Restructuring of the securities portfolio leads to “young” administrative assets
The scheme has since moved away from this original purpose. In the opinion of the tax courts and the tax authorities, it is sufficient for “young” administrative assets to be created if existing administrative assets are converted.
The restructuring of the securities account therefore inevitably leads to “young” administrative assets and is therefore no longer tax-privileged!
For entrepreneurs and consultants with sound economic expertise, this is an absurdity which often causes head shaking when we explain this in consultation meetings. However, the legal situation is clear: the decisive factor in determining whether “young” administrative assets are involved is solely whether the specific security has already been attributable to the company for more than two years at the time of the inheritance/gift.
Solution: Conversion of young management assets into beneficiary assets
The taxability of “young” management assets can be circumvented by converting them into so-called preferential assets prior to inheritance or gift.
But how could this look like in practice?
Investment in one’s own company or (share) purchase
The conversion of young management assets into beneficiary assets could be realized, for example, by investing in the company itself. Conceivable would be
- the purchase of capital goods,
- the purchase of the land previously rented for operational purposes,
- the purchase of other fixed assets used for business purposes, or
- a purchase of a company (share), such as the acquisition of another commercial business, the acquisition of an interest in a commercial partnership or more than 25 percent of the shares in a corporation.
The disadvantage, of course, is that this decimates liquidity reserves.
Our recommendation for entrepreneurs
If a company has cash reserves derived from normal sales or asset sales (operational means of production), or if the funds were invested in the company more than two years ago, it should – from the point of view of company succession – under no circumstances regroup these funds and acquire securities.
Company succession issues usually come suddenly and unexpectedly. For entrepreneurs who have recently restructured securities, this can have fatal gift tax or inheritance tax effects, which can also increase if the securities prices fall after the inheritance/gift. Our experts will be happy to assist you in the legally secure planning of company succession.
Comprehensive advice on financial challenges of business succession