The GmbH & Co. KG is one of the most popular business structures in Germany, combining the tax advantages of a partnership with the limited liability of a corporation. But what happens when a partner moves their residence abroad, for example to Spain?
Such a move can have far-reaching tax consequences: Could German exit taxation apply? Which tax obligations remain in Germany? And what substance requirements must the GmbH & Co. KG meet in order to avoid being considered as having relocated abroad for tax purposes?
International taxation in particular involves numerous potential pitfalls, ranging from the taxation of unrealised gains to unexpected documentation requirements imposed by the tax authorities. In this article, we examine the key aspects and explain what partners should pay particular attention to when moving abroad.
1. Basic Principles of the GmbH & Co. KG
The GmbH & Co. KG consists of at least two parties: the general partner GmbH (Komplementär-GmbH), which is responsible for the management of the company and whose liability is limited to its corporate assets, and the limited partners (Kommanditisten), whose liability is limited to their respective contributions. This structure makes the GmbH & Co. KG attractive to both medium-sized businesses and family-owned companies.
If a partner is tax resident in Germany, their income from the GmbH & Co. KG is subject to German taxation. However, if the partner moves their residence abroad, complex tax rules and substance requirements come into play.
2. A Partner Moving Abroad: Tax Consequences
Moving to Spain does not automatically change the taxation of the GmbH & Co. KG, as the company will continue to have its registered office and generate its income in Germany provided that sufficient substance is maintained there. However, the partner moving abroad will be treated differently for tax purposes. The most important points are as follows:
a) Exit Taxation (§ 6 AStG)
German exit taxation may apply if the partner holds shares in the general partner GmbH of the GmbH & Co. KG and these shares represent at least 1% of the company's share capital. When the partner moves abroad, the shares are treated for tax purposes as if they had been sold, and the unrealised gains – i.e. the difference between their market value and acquisition cost – are taxed in Germany.
Example: Mr Müller is a limited partner and at the same time holds a 10% interest in the general partner GmbH. He moves his residence to Spain. The market value of his shares in the GmbH amounts to €50,000, while their acquisition cost was €40,000. Upon moving abroad, the difference of €10,000 is, in principle, subject to taxation in Germany.
As exit taxation is intended to bring unrealised gains into taxation, it is advisable to obtain a valuation of the GmbH before moving abroad. This helps determine the actual value of the GmbH and provides a more accurate assessment of the potential tax consequences. In practice, the operational and valuable part of a GmbH & Co. KG is usually located within the KG, while the general partner GmbH often performs only an administrative function and therefore has a relatively low corporate value. A properly substantiated valuation can therefore help prevent an excessively high value from being used for exit tax purposes.
It should also be noted that the application of German exit taxation remains controversial, as its application in the case of a move to another EU Member State may raise questions regarding its compatibility with EU law. It is therefore advisable to obtain professional tax advice and monitor current legal developments.
b) Taxation of Income from the GmbH & Co. KG
The GmbH & Co. KG remains tax resident in Germany. The company's income is attributed proportionately to its partners. Even after moving abroad, the partner remains subject to German taxation on this income under the rules governing limited tax liability.
Under the Double Taxation Agreement (DTA) between Germany and Spain:
- Business income remains taxable in Germany.
- The partner is required to declare this income in Spain. Double taxation is, however, avoided in Spain in accordance with Article 22 of the Germany-Spain DTA by granting a credit for the taxes paid in Germany.
c) Exit Taxation of Business Assets
If the partner holds assets that form part of the business assets of the GmbH & Co. KG, the German rules on the withdrawal of assets from the German taxing jurisdiction (Entstrickung) may apply. This means that unrealised gains may become taxable if Germany loses its right to tax these assets.
3. Substance Requirements for a GmbH & Co. KG
A key issue when a partner moves abroad is whether the GmbH & Co. KG continues to maintain sufficient substance in Germany. In this context, substance refers to whether the company continues to conduct genuine business operations in Germany and performs its essential functions there.
a) Permanent Establishment and Operational Presence
The GmbH & Co. KG must maintain a permanent establishment in Germany in order to continue to be recognised as a German business for tax purposes. This includes:
- A physical address and not merely a letterbox company.
- Employees or other resources supporting the company's business operations.
- Demonstrable operational activities in Germany. However, the fact that the company works mainly or even exclusively for German clients is not in itself decisive.
b) Management in Germany
The operational management of the GmbH should continue to take place in Germany, ideally through persons who are resident there. If the place of effective management is transferred abroad, this could result in Germany losing its right to tax.
c) Risks Arising from Insufficient Substance
If there is insufficient substance in Germany, the German tax authorities may argue that the GmbH & Co. KG has effectively been relocated abroad for tax purposes. This may have the following consequences:
- Loss of Germany's taxing rights.
- Application of anti-abuse rules by the German tax authorities.
- Difficulties in obtaining recognition of the company by the Spanish or German authorities.
Conclusion
The relocation abroad of a partner in a GmbH & Co. KG, particularly when moving to Spain, involves numerous tax and structural challenges. From exit taxation and the continuing taxation of income in Germany to the substance requirements applicable to the company, all these aspects require careful planning.
It is particularly important to analyse the potential tax consequences at an early stage. A valuation of the GmbH can help prevent unexpected tax liabilities arising from exit taxation. It should also be assessed whether the GmbH & Co. KG maintains sufficient substance in Germany in order to minimise tax risks, such as the relocation of a permanent establishment or the loss of Germany's taxing rights.
For companies without sufficient substance in Germany, a move to Spain may also represent an opportunity to restructure their business by establishing a Spanish company. Spain also offers various tax and Social Security advantages for newly established businesses.
Our firm will be pleased to assist you in analysing your specific situation, carrying out the necessary administrative procedures on your behalf and preparing and filing the corresponding tax returns. If you are interested in our services or have specific questions regarding this topic, please do not hesitate to contact us by email or telephone.
Author:
Lisa Wörfel
Tax Advisor
info@sspartners.es
Tel: (+34) 951 12 13 06
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