Germany: 095. Tax Realisation On Transfer Of Legal Seat To A Foreign Country

Last Updated: 8 December 1997
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1. Legal seat and seat of management

Corporations organised under German law (stock corporations and limited liability companies) are required to designate a domestic "legal seat" (statutarischer Sitz). The Commercial Register where the legal seat is located has jurisdiction over the corporation, that is, the legal seat determines the Commercial Register in which the corporate formation is recorded and to which subsequent actions requiring registration or notification are reported. The courts where the legal seat is located have general jurisdiction to try all suits filed against the corporation (sec. 17 ZPO). The legal seat must be designated in the articles of incorporation of stock corporations and limited liability companies. The law of stock corporations (sec. 5 AktG) provides that the articles must "as a rule" designate a location where the company has a business establishment (Betrieb) or where its management or administration is located. The law of limited liability companies contains no specific provision, but is not materially different. German corporations generally select a legal seat where they have their main establishment or principal place of management. If the corporation later moves to another domestic location, it will generally have its legal seat transferred.

A distinction is drawn between a corporation's legal seat, which is largely a formal matter, and its "effective seat of management" (effektiver Verwaltungssitz). The latter term is commonly defined as the place at which fundamental management decisions are effectively translated into externally recognisable actions, generally the place at which the management body and its members are located as a factual matter. The location of the dominant or sole shareholder is, however, not relevant unless the shareholder intervenes in the management of the company's ordinary or day-to-day business (cf. Ebenroth/Auer RIW Beilage 1 1992 pp. 5, 14, 15; Debatin BB 1988, 1155, 1159). The term "seat of management" is at least as a rule synonymous with the tax term "principal place of management" (Ort der Geschaeftsleitung").

2. Dissolution upon transfer abroad of the legal seat

A recent decision of the Hamm Regional Court of Appeal (DB 1997, 1865 - 30 April 1997) involved a German limited liability company (GmbH) which had filed an application with the Commercial Register at its legal seat (Bielefeld, in north central Germany) for registration of transfer of its legal seat to Luxembourg pursuant to shareholder resolution. At the same time, the GmbH intended, or so the court found, to transfer its seat of management to Luxembourg as a factual matter.

The court upheld the refusal of the Commercial Register in Bielefeld to record the transfer of legal seat. It stated that the Commercial Register had correctly concluded that transfer of the legal seat to a foreign country resulted in the dissolution of a corporation formed under German law. Such dissolution is a tax realisation event triggering liquidation taxation under sec. 11, 12 KStG. This in effect means that the tax price of transfer of the legal seat to a foreign country is realisation of all hidden reserves (unrealised appreciation).

It is important to note that the result might have been different if merely the (formal) legal seat had been transferred to Luxembourg while the (factual) seat of management remained in Germany. The court assumed that both were being transferred and expressly stated that it might have decided differently if only the legal seat had been moved.

Indeed, the grounds of its decision have more to do with the transfer of the seat of management than with that of the legal seat. The court's conclusion that the corporation had been dissolved rests on the so-called "seat of management" theory of German international private law (conflict of law rules). Under this theory, the company law applicable to a corporation is the law in force at the location of its seat of management, which can change, not that at its place of incorporation, which is essentially unchanging. Moving the seat of management to Luxembourg thus causes Luxembourg law to replace German law as the governing company law. While it is possible for the law at the new seat of management to refer back to German law, no such renvoi occurs as a result of the move to Luxembourg because Luxembourg's international private law likewise follows the seat-of-management theory. See in general article no. 40.

Under German case law, a change in the governing law of a corporation results in its dissolution and winding up notwithstanding any provision to the contrary in the articles or the desire of the shareholders to continue the corporation. While the line of cases relied on by the Hamm Regional Court of Appeal is criticised by some commentators, it still represents the majority view.

3. No preemption by European Union law

The court further held that the principle of freedom of establishment in Articles 52 and 58 of the European Community Treaty does not preempt German law in this area and require Germany to permit the transfer of legal seat and seat of management to another EU country without dissolution of the corporation in question. The court's holding on this issue is based on its reading of the 1988 "Daily Mail" decision of the European Court of Justice (DB 1988, 2621 - 27 Sept. 1988). Essentially, the court relied on dicta of the ECJ to conclude that the ECJ saw no conflict between German law and European Union law in the area in question.

The planned 14th EU Guideline on the transfer of the legal seat of an EU company from one EU country to another will permit transactions of the sort involved in the decision reported on to be accomplished without dissolution. This guideline is still in the draft stage, however.

This article treats the subjects covered in condensed form. It is intended to provide a general guide to the subject matter and should not be relied on as a basis for business decisions. Specialist advice must be sought with respect to your individual circumstances. We in particular insist that the tax law and other sources on which the article is based be consulted in the original, whether or not such sources are named in the article. Please note as well that later versions of this article or other articles on related topics may have since appeared on this database or elsewhere and should also be searched for and consulted. While our articles are carefully reviewed, we can accept no responsibility in the event of any inaccuracy or omission. Please note the date of each article and that subsequent related developments are not necessarily reported on in later articles. Any claims nevertheless raised on the basis of this article are subject to German substantive law and, to the extent permissible thereunder, to the exclusive jurisdiction of the courts in Frankfurt am Main, Germany. This article is the intellectual property of KPMG Deutsche Treuhand-Gesellschaft AG (KPMG Germany). Distribution to third persons is prohibited without our express written consent in advance.

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