New regulation is excessive and may cause problems also in structures already implemented.
After several attempts and a lengthy legislative procedure the German parliament passed an Act concerning, inter alia, the prevention of so-called Cash-GmbH structures. The new rules apply to structures implemented after 7 June 2013.
The term “Cash-GmbH” describes a structure that allowed a tax-privileged or even tax-free transfer of liquid assets for Inheritance and Gift Tax purposes. The structures made use of certain provisions in the Inheritance and Gift Tax Act allowing, under certain conditions, to transfer shares with little or no Inheritance and Gift Tax burden. One of these conditions is that the company assets do not contain more than a specific percentage of so-called administrative assets (Verwaltungsvermögen). If the proportion of administrative assets does not exceed the threshold of 50 %, the transfer of shares is eligible for tax benefits. If such proportion is 10 % or less, the transfer is Inheritance and Gift Tax free (given that all other requirements are met). The Inheritance and Gift Tax Act defines the assets qualifying as administrative assets. According to the former provisions, liquid assets such as cash, cash in bank or trade receivables did not form part of the administrative assets. Therefore, it was possible to reduce the proportion of administrative assets through the contribution of liquid assets into the company. This not only allowed the implementation of a tax beneficial succession of operating companies, but also the transfer of liquid assets in a tax optimized manner. For the latter purpose, a German limited liability company (GmbH) could be founded and funded with liquid assets only. Such structuring allowed the transfer of shares in the GmbH by inheritance or way of gift without triggering any Inheritance and Gift Tax liability even if the company assets predominantly consisted of cash. Hence, the Cash-GmbH model provided an economically similar but tax-efficient alternative to the direct transfer of liquid assets.
According to the new law, liquid assets form part of the administrative assets as far as they exceed the percentage of 20% of the company assets. Therefore the possibility to reduce the proportion of administrative assets by contributing cash to the company is now very limited. The setting up of a GmbH that only holds liquid assets should even have no more tax beneficial effects at all.
The new law provides for exceptions for banks, insurance companies and group financing entities. However, especially the group financing exception may lead to problems in practice. Moreover it can be noticed that the already complex legal situation has become yet more complicated and that the new legal provision overshoots the mark.
With regard to the the legal situation in Cash-GmbHs set up before 7 June 2013, the following applies: the amendment came into force without retroactive effect. Furthermore, the Federal Fiscal Court ruled that the Cash-GmbH structure is not an abuse of tax planning schemes within the meaning of Sec. 42 of the General Tax Code (Abgabenordnung). Moreover, the redeployment of liquid assets in administrative assets does not trigger retroactive taxation, as the conditions for the tax benefit must be met only at the time of the transfer of assets. This applies also if such asset redeployment is deemed to be a sale of essential business assets (Veräußerung wesentlicher Betriebsgrundlagen), as tax liability additionally requires distribution to the shareholders. However, companies should be careful with the distribution of surpluses within the retention period. Such distributions usually lead to retroactive taxation