Are you a shareholder-managing director of a GmbH, trying to sell your company because you have no successor, and is your pension commitment proving to be an obstacle? You’re not alone—more and more people in your situation are getting tangled up in the thicket of German law. Yet the situation today is more manageable than it was just a few years ago. Credit for this goes to the Federal Fiscal Court and a landmark ruling (Case No. VI R 18/13).
Background: For managing shareholders of a GmbH, the pension commitment is an essential component of retirement planning; after all, it ensures their financial independence in retirement. However, pension commitments lead to a conflict of interest. Managers leaving the company rely on their pension entitlements remaining intact. Potential buyers, on the other hand, are wary of provisions and future payments—especially when the pension commitment has a funding gap.
Naturally, buyers and successors insist that the transfer of company shares take place without any future pension entitlements. Until now, a severance payment has been considered as a stopgap solution. In the event of a successful sale of the company, the shareholder-managing director could therefore waive his pension entitlements and receive a severance payment in return.
However, according to a ruling by the Federal Fiscal Court (BFH), this generally results in a hidden capital contribution on the company’s side and an inflow of wages for the managing director (Case No. VI R 4/16). This means the managing director must expect to pay high income taxes. This burden is somewhat mitigated by the fact that the “one-fifth rule” applies in such cases, which can slightly reduce the tax burden depending on the individual circumstances.
Another option frequently considered is circumventing the “pension commitment”: The shareholder-managing director completely waives his or her claims to pension payments from the GmbH. In return, the potential buyer pays a higher purchase price than would result based on standard valuation criteria. Disadvantage: The value of waiving the pension benefits is taxed in full as part of the purchase price. In practice, with this arrangement, the former shareholder-managing director forfeits a good 50 percent of the pension entitlements he had earned up to that point.
Not satisfied with this—and rightly so? GmbHs can now transfer a pension commitment to another company in exchange for a buyout payment. The judges of the Federal Fiscal Court do not consider this to be a wage payment. A wage payment is deemed to exist only if the beneficiary has the option to alternatively have the buyout amount paid directly to them. The Federal Fiscal Court judges do impose one restriction: the individuals in question must be managing partners of a controlling company. The Federal Ministry of Finance has already responded to the ruling with a circular (Ref. No. IV C 5 - S 2333/16/10002). For some tax experts, this development could revive the so-called “retiree GmbH.” This structure involves the establishment of a new GmbH B prior to a planned transaction by GmbH A, with the sole purpose of assuming the pension commitment of the controlling shareholder-managing director.
Apart from this provision, an asset deal remains a viable option. In this scenario, the potential buyer can select which assets it wishes to acquire from the company. The remaining company is either continued as a “retiree GmbH” or merged with a third company.
