Asset Deal Taxation: Individuals, Corporations and Partnerships Compared

Key takeaways

• In an asset deal, individual assets of the business are sold; the gain arises first at the level of the business and is taxed differently depending on the legal form.

• What matters is who the seller is: for individuals, corporations and partnerships the types of tax, the burden and the scope for structuring each differ considerably.

• The structure of the deal (sale of individual assets versus a business or part of a business) and the allocation of the purchase price determine whether privileged capital gains or ordinary profits fully subject to trade tax (Gewerbesteuer) arise.

What is the basic tax structure for sellers in an asset deal?

In an asset deal the business sells individual assets – for example machinery, inventories, real estate or intangible rights – and the gain arises where those assets belong to the business assets (Betriebsvermögen). For tax purposes the book value of each asset is compared with the proceeds achieved; the difference is a gain or a loss, and the total produces the overall capital gain.

• Individual: If a sole trader sells business assets, the gain flows directly into their income tax return (Einkommensteuererklärung) and, where the activity is commercial, additionally into trade tax (Gewerbesteuer); in the case of a genuine sale of a business or part of a business, preferential tax rates and allowances may apply, but not in the case of ordinary disposal gains. What is decisive for this relief for individuals is whether an entire business or part of a business is transferred as a living organism, or whether only individual items are disposed of: only where the essential operating foundations (wesentliche Betriebsgrundlagen) pass across as a closed whole does a gain on the sale or cessation of a business arise that can be taxed at a preferential rate overall. If, by contrast, individual assets are sold successively, the gains count as ordinary profit and are fully subject to income tax and trade tax; preferential treatment under sections 16 and 34 of the Income Tax Act (EStG) then comes into consideration only exceptionally. In the personal income tax return, the trade tax can be credited against income tax in full or in part, depending on the municipal trade tax multiplier (Hebesatz).

• Corporation: If a GmbH or AG sells its assets, business income arises which is subject to corporate income tax (Körperschaftsteuer) and regularly to trade tax; the profit remaining after tax is taxed again with withholding tax on capital income (Kapitalertragsteuer) at the level of the shareholders only when it is distributed.

• Partnership: In the case of a commercial partnership, the gain from asset sales is assessed uniformly and attributed to the co-entrepreneurs (Mitunternehmer); whether there is a privileged capital gain or ordinary profit depends on whether a business or part of a business, or only individual assets, are sold. Trade tax is levied at the level of the partnership. At the level of the partners this leads to a corresponding reduction of the trade tax.

Which types of tax are particularly relevant for sellers in an asset deal?

Alongside the income tax consequences, VAT (Umsatzsteuer) and real estate transfer tax (Grunderwerbsteuer) are above all relevant:

• VAT: VAT matters to sellers because it either makes the asset deal more expensive or – with the right structure – can be avoided entirely. Where only individual assets are sold, there is regularly a taxable supply, so that the seller owes VAT on the purchase price and the buyer has to claim it as input VAT. If, by contrast, there is a transfer of a business as a going concern (Geschäftsveräußerung im Ganzen) – that is, the transfer of an undertaking or of an independently run part of a business as a whole, with continuation by the acquirer – the supplies are not taxable under section 1(1a) of the VAT Act (UStG) and are therefore neutral for VAT purposes. Sellers should therefore clarify early on whether the asset deal can be structured as a transfer of a going concern, in order to avoid unnecessary VAT burdens and cash outflows, and because buyers typically want to compensate for the VAT burden through a lower net purchase price. This is particularly relevant for buyers without an input VAT deduction, for example in the healthcare professions, insurance and real estate sectors.

• Real estate transfer tax: Real estate transfer tax plays a role whenever land or rights equivalent to land are transferred as part of the asset deal. Unlike a share deal, where real estate transfer tax can be avoided or reduced below certain thresholds and through certain structures, the direct sale of real estate in an asset deal typically triggers real estate transfer tax, which in economic terms effectively reduces the purchase price, since it is generally borne by the buyer. It reduces it because part of the total outlay budgeted by the buyer is in fact spent on this tax: the buyer looks at its overall cost of purchase price plus tax and adjusts the purchase price paid to the seller downwards accordingly. This burden should be expressly taken into account both in the deal structure and in the purchase price negotiations, in particular where real estate makes up a substantial part of the assets being transferred.

Both types of tax are therefore relevant in particular to the negotiation of the purchase price.

What structuring options do sellers have, depending on the legal form?

Sellers can influence the tax burden through the structuring of the deal and through their legal form. A central lever is whether an asset deal is unavoidable or whether a sale of the business or of shares is possible, which may be more favourable for tax purposes; only in the case of a genuine sale or cessation of a business can preferential tax rates be accessed, whereas the sale of individual assets in the course of continuing operations leads to the full tax burden.

In addition, classification as a transfer of a going concern for VAT purposes opens up the possibility of carrying out the asset deal without VAT, where an undertaking or business is transferred as a whole and continued by the acquirer. Finally, the allocation of the purchase price is an important structuring point: under the case law, the assets passing across must be determined objectively and supported by going concern values (Teilwerte); a separate goodwill arises only to the extent that the purchase price is attributable to the transfer of a business.

Depending on the type of seller, the options can be summarised as follows:

• Individual: The sole trader can examine whether the sale can be structured as a sale or cessation of a business, in order to use allowances and rate reductions; at the same time they should plan the VAT structure so that, where possible, a transfer of a going concern can be assumed, in order to avoid VAT on the purchase price.

• Corporation: The corporation can consider structural measures at an early stage (for example a holding structure or the hive-down of business divisions) in order to enable a later share deal; if it has to sell assets, it should price the additional tax burden from corporate income tax, trade tax and distribution taxation into the purchase price negotiations and examine carefully whether the transaction qualifies as a transfer of a going concern for VAT purposes.

• Partnership: Co-entrepreneurs can decide through the structure whether entire partnership interests or only individual assets are sold; the sale of a partnership interest (Mitunternehmeranteil) is treated as the sale of the shares in all the assets of the partnership's property and can trigger a privileged capital gain, whereas the sale of individual assets generates ordinary commercial income.

From a seller's perspective, what are the differences between an asset deal and a share deal for each legal form?

The biggest difference lies in the level at which the capital gain arises and which tax rules apply. In a share deal the shareholders sell their interests; in the case of commercial partnerships this counts for income tax purposes as the sale of a partnership interest, with the special rules of section 16 EStG, whereas in the case of shares in corporations held as business assets the capital gain is always ordinary business income subject to trade tax. In an asset deal the company itself sells its assets; the shareholders receive an inflow only through distributions, which are taxed again. For sellers it is therefore not only the absolute purchase price that is decisive but the tax structure: an economically identical purchase price can result in significantly more net liquidity in a share deal than in an asset deal.