Post-merger integration: tax-efficient cross-border restructuring via a German limited partnership

By Andrea Vitale and Svenja Schmitt
PwC, Düsseldorf

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When integrating a target into an existing group or restructuring and reorganizing a group of companies after an acquisition or merger, there are many different aspects to be considered before choosing a corporate structure. Taxes are one of the key factors and often the crucial argument for a certain structure. Whenever real estate property located in Germany is a noteworthy factor in the group of companies, a cross-border structure may be worth considering. This is because German tax law provides for a company’s income tax to consist of both corporate income tax and trade-income tax, and the latter can possibly be avoided for a real estate company under certain circumstances. As a consequence, the return from German real estate could be exempt from trade income tax. The most common way to avoid trade tax on income from German real estate is the so-called trade tax exemption for pure real estate companies (erweiterte Kürzung für Immobilienunternehmen). However, this exemption has very narrow prerequisites that in practice often prevent the application of this exemption. Furthermore, the legislation with regard to this exemption has become tighter in recent years. It is therefore worth thinking about alternatives. One possible way to work around trade income tax is the implementation of a cross-border structure using a German limited partnership (a so-called No-PE-KG). Under German law, the seat of the limited partnership is automatically located at its place of administration. This place of administration constitutes a permanent establishment (PE), which is the requirement for levying trade income tax. Real estate property itself does not constitute a permanent establishment. Thus, in order to avoid trade income tax, only the place of management/ administrative seat itself must be located outside of Germany.


The possibility to move the administrative seat of a German limited liability company (which is considered the permanent establishment for tax purposes) across the German border and to another jurisdiction was laid down in section 4a of the Limited Liability Companies Act (Gesetz betreffend die Gesellschaften mit beschränkter Haftung, or GmbHG) in 2008. However, no such legislation has been introduced with regard to limited partnerships. Consequently, the possibility of moving the administrative seat of the German limited partnership to a destination outside of Germany has been disputed ever since. From a European law point of view, part of this dispute has been decided by the case law of the European Court of Justice: As far as the legal system of the state in which a company was incorporated allows for it to move to another jurisdiction, the freedom of establishment demands that the right to move the seat of the company must not be restrained. The state to which the company intends to migrate must accept it (see the Überseering decision of the European Court of Justice dated Nov. 4, 2002 (C-167/01)). Since the European Court of Justice does not interpret the freedom of establishment as allowing any European company to move its actual seat to a different jurisdiction if its home jurisdiction does not already provide for such possibility (see the Cartesio decision of the European Court of Justice dated Dec. 16, 2008 (C-210/06)), there is a certain need for national legislation.

>> There is no law that explicitly permits or prevents a German limited partnership from moving its administrative seat to another jurisdiction <<

However, a manageable amount of precautions can enable the management to opt for such a structure without taking major legal or financial risks.

Practical measures and precautions

First of all, a new administrative seat must be basically selected according to two aspects. First, from a tax point of view, this new jurisdiction must not tax income from foreign real estate (for example, due to a double taxation treaty). Second, from a corporate law point of view, it should apply the legal principle that the laws of the jurisdiction where a company was incorporated remain relevant for its legal survival. This is the case in the Netherlands, in the United Kingdom, in Ireland and Denmark, for example.

Registration in the commercial register

There is no requirement to inform the commercial register about the change of a limited partnership’s administrative seat. Thus, it is questionable whether a starting point for an investigation by the commercial register or any other authority actually exists. If, however, the commercial register does receive information on the change of the administrative seat by way of an informal notice or other circumstances, there is a chance it might be of the opinion that the limited partnership has entered the state of liquidation by moving its administrative seat to another jurisdiction. In order to be prepared for this, there are some consequences to be observed and dealt with in advance of moving so that any legal risks arising in connection with the state of liquidation of the company can be easily avoided:

_ Registration of the dissolution of the limited partnership

If one were of the opinion that moving the administrative seat of a limited partnership to a foreign jurisdiction leads to its dissolution and liquidation, the initial resolution regarding the change of the administrative seat must consequently be understood as the decision to dissolve the company. As such, it would have to be registered with the commercial register. In the event that company management does not comply with its obligation to register this change with the commercial register, it can be charged with an up to €5,000 fine in accordance with Section 14 of the German Commercial Code (Handelsgesetzbuch, or HGB) and Section 388 of the German law on procedure in family issues and matters of voluntary jurisdiction (Gesetz über das Verfahren in Familiensachen und in den Angelegenheiten der freiwilligen Gerichtsbarkeit, FamFG). Registration may be done ex officio if the threat as well as the determination of the fine remains without consequence. However, there is no financial risk in this as the application can be filed after receipt of the first fine notice, if any. As a consequence, the fine would not be due.

_ Labeling as a Liquidationsfirma (i.L.)

If, due to the commercial register’s opinion as set out above, the company is registered as being in a state of liquidation, Section 153 of the HGB stating that a company in the state of liquidation must labeled as such applies. This is done by using the abbreviation “i.L.” when acting on behalf of the company. However, this abbreviation is an immediate consequence of the decision to dissolve the company and therefore does not need to be registered in the commercial register separately. In addition, it does not form a part of the company name.

_ Time limit for liquidation of a company

There is no time limit for the liquidation of the company.

_ Enforcement of deletion from the register

The termination of a company must be registered with the commercial register. However, the company is only terminated when liquidation procedures are finalized and the company no longer has any assets. Only then are the directors in charge of the liquidation obliged to file for registration with the commercial register in accordance with Section 157 of the HGB. Based on Section 14 of the HGB, together with Section 388 of the FamFG, the commercial register court may threaten and charge a fine of up to €5,000 if notice of the termination of a company is not filed with the commercial register despite an actual termination occurring. It may even delete a company from the register ex officio in accordance with Section 393 of the FamFG if the management fails to file for such registration. Once the commercial register court delivers a notice announcing the deletion ex officio, the directors of the company can always object to such deletion. Deletion must be canceled as soon as there is doubt about the existence of the company. That means that as long as the company has assets, the commercial register does not have the power to delete the company.

Consequences with regard to the articles of association

_ Directors in charge of liquidation

According to Section 146 of the HGB, all partners of a limited partnership are jointly in charge of liquidation. When considering the use of a structure that includes a change of the administrative seat to a foreign jurisdiction, not only is it favorable, but it is even mandatory from a legal and tax perspective to change this by amending the articles of association. They should state that only the general partner of the limited partnership is the liquidator, meaning that this person is in charge of liquidation and the sole person authorized to represent the partnership in liquidation procedures. It is mandatory to ensure that business actions and decisions are not at risk to be viewed as provisionally ineffective if they were made by the general partner during that time period when the administrative seat of the limited partnership was already located in a foreign jurisdiction and thus possibly in a state of liquidation.

_ Change of purpose of the enterprise

The purpose of the enterprise as set out in the articles of association sets the frame for the authority of the directors in charge of liquidation. When first entering the state of liquidation, the purpose of the enterprise is automatically changed from general business operations to the winding-up of the partnership and its assets. In this context, a broad interpretation is recognized. As a general rule, any action is considered as promoting the winding-up if it is the goal of the transaction to achieve the largest revenue possible for the partners and to satisfy the company’s creditors, that is, the directors are allowed to conclude new lease agreements or acquire new real estate.

_ Continuation of the company from the state of liquidation

It should be included in the articles of association that even when in the state of liquidation, it may be resolved by the partners to abort liquidation and continue the partnership. This provision enables the partners to continue the partnership and move the administrative seat back to Germany at any time, even in a situation in which judicial proceedings are pending with regard to the existence and state of the company.

Legal relations _ Legal capacity

The limited partnership remains legally capable even in the state of liquidation. Only the deletion of the company from the commercial register will result in the loss of the legal capacity.

_ Registration in the land register

Since the suggested structure is especially useful for limited partnerships owning real estate property, it is of great relevance that a company’s ability to be registered in the land register is not hindered by possible liquidation procedures. The company can remain registered in the land register as the owner of real estate and can even be registered as the new owner while in the state of liquidation.

_ Information on business letters

The requirement to indicate the seat of a company on its business letters according to Section 125a of the HGB refers to the actual registered seat of a company as tied to the company’s place of jurisdiction. Since the essence of the suggested structure is that the registered seat remain in Germany while the administrative seat is moved to a foreign jurisdiction, there is effectively no change regarding the information that needs to be included in business letters. Reference to the administrative address is not mandatory but possible as an addition.


As long as there is no law that positively allows for a German limited partnership to move its administrative seat to another jurisdiction, there is a certain risk that the limited partnership be considered under liquidation after executing such a structure. However, the actual legal and financial risk in connection with this structure can be considered minor as long as certain precautions and preparatory measures are observed. The most important measure is the adaptation of the articles of association of the company. This will ensure that management remains capable of acting for and on behalf of the limited partnership and avoidable uncertainties can be worked around from the beginning.


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