Date:
This article was written by
Certified Tax Advisor, Manager, National Office Tax & Legal
Senior Consultant, National Office Tax & Legal
The German government plans to introduce a novel, original legal form, namely a company with tied-up assets (“Gesellschaft mit gebundenem Vermögen“; GmgV) and has presented a corresponding framework. This expands the range of legal forms available to companies within which they can conduct their business. As with any legal form, however, the planned GmgV is by no means suitable for every business but should fit in with its overarching objectives.
The core idea behind the GmgV is to create a legal form with low capital requirements but an absolute obligation to retain profits, which cannot be waived by the articles of association and is as difficult as possible to circumvent. This is intended in order to shift incentives and prevent executive decisions from being influenced by distribution expectations, especially in comparison to usual corporations such as limited liability companies (GmbH) or public limited companies (AG). It is therefore planned to exclude performance-related components in remunerations and financing agreements, as well as the payment of winding-up profits after the company has been dissolved: Instead, any winding-up profits remaining after creditors have been fully satisfied and members have been compensated are to be transferred either to another GmgV or to tax authorities.
Beyond that, the GmgV shall have the characteristics of a cooperative, and the shareholders shall be its members. There is no upper or lower limit on the number of members; however, each new member must be approved by the GmgV in order to prevent investors from purchasing shares. Membership shall be personal and cannot be freely transferred or inherited. However, a significant difference to a cooperative is that the GmgV is not obliged to promote its members, whereas cooperatives require such a promotional purpose. In addition, unless its articles of association provide otherwise, a cooperative distributes profits to its members and is, unlike the planned GmgV, by no means obliged to retain them.
Furthermore, the GmgV, like a cooperative or a usual corporation, shall be a legal entity and a subject of commercial law. Personal liability of the members is excluded. It shall have a board of directors consisting of at least two members and a supervisory board consisting of at least three members, whereby both, the board of directors and the supervisory board, must be members of the GmgV in the sense of a self-governing body. A GmgV with no more than 20 members can take advantage of organizational simplifications: it can dispense with the supervisory board and only needs a one-person executive board.
For income tax purposes, the GmgV shall be subject to corporation tax and, by virtue of its legal form, to trade tax. Dividends are not taxed, as there are no profit distributions to members. The GmgV is thus taxed in the same way as a limited liability company (GmbH) or public limited company (AG) in case if retaining profits. If the GmgV pursues a non-profit purpose, it is subject to the exemptions of non-profit tax law.
In addition, a regular substitute inheritance tax is to be levied on the GmgV, as there can be no inheritance of company shares. In this respect, the GmgV would be treated like a family foundation.
For shareholders who wish to engage in business with the intention of generating profits or investing capital in a way that increases its value, the GmgV is clearly not a suitable legal form. The situation may be different for companies whose owners or managing shareholders wish to retire but find it difficult to plan for succession. If they fear that subsequent shareholders may fundamentally change the company through high distribution or value enhancement and resale plans, conversion to a GmgV could be an interesting alternative. The GmgV may also be a worthwhile alternative for non-profit companies of all kinds when choosing a legal form.
However, as no further draft legislation is currently available, the details of this planned legal form remain to be seen at this stage.