Definition and legal basis:

A business split is a construct under tax law in which a single business is divided into two legally independent companies: an owning company and an operating company. The owning company (usually a partnership or a natural person) rents or leases essential operating assets to the operating company (usually a corporation), which carries out the operational business activities.

The business split is not regulated by law, but was developed through the case law of the Federal Fiscal Court (BFH). It is applied in income tax, corporation tax and trade tax law.

Prerequisites for business splitting:

Two main requirements must be met for a business split to exist:

1. material interdependence:
– The owning company transfers at least one material business asset to the operating company for use.
– Material business assets are assets that are necessary for the business and are of particular importance (e.g. land, patents, know-how).

2. personal interdependence:
– The person or group of persons who controls the owning company must also be able to exercise a controlling influence over the operating company.
– This is usually achieved through a majority of voting rights or management authority.

Forms of business splitting:

There are three main forms:

1. genuine business split:
– splitting of an existing uniform company

2. non-genuine business split:
– establishment of a new operating company and transfer of assets by an existing owner company

3. co-entrepreneurial business split:
– the owner company is a partnership

Tax consequences:

The business split has far-reaching tax consequences:

1. income tax/corporate income tax:
– The owning company generates commercial income (even if it only has rental income).
– Hidden reserves in the owning company remain subject to tax.

2. trade tax:
– Both owning and operating companies are subject to trade tax.

3. sales tax:
– The letting/leasing is subject to sales tax (option for sales tax possible).

4. inheritance and gift tax:
– Possible application of concessions for business assets

Advantages and disadvantages:

Advantages:
1. limitation of liability for the operating business
2. flexibility in the distribution of profits
3. options for succession planning
4. tax optimization options (e.g. for trade tax)

Disadvantages:
1. Complexity of the structure
2. Risk of unintentional disclosure of hidden reserves on termination
3. Increased administrative expense
4. Possible trade tax disadvantages for the owner company

Design options and pitfalls:

There are various aspects to consider when structuring a business split:

1. careful drafting of contracts between the owning and operating companies
2. Observance of arm’s length principles for rent/lease payments
3. Avoidance of unintentional splitting of the business
4. Planning the termination (e.g. in the event of a generational change)

Particular caution is required in the case of:
– Changes in shareholdings
– Disposal or withdrawal of material business assets
– Reorganizations

Current developments and case law:

The case law on business splitting is constantly evolving:

1. clarification of the requirements for an interlocking of persons
2. Questions on business splitting in an international context
3. Effects of increasing digitalization on the materiality of business assets
4. Discussions on a possible legal regulation of business splitting

Practical significance for companies:

Business splitting is an important instrument in corporate structuring:

– Relevant for the formation and restructuring of companies
– Significance for succession planning in family businesses
– Opportunity to optimize the corporate structure and risk distribution
– Consideration in due diligence audits and corporate transactions

Companies and their advisors must carefully weigh up the pros and cons and carefully analyze the tax consequences.

Summary and outlook:

The business split is a complex but flexible corporate structuring instrument that offers both opportunities and risks. It makes it possible to separate assets and operating business while maintaining a single tax entity. However, correct handling requires careful planning and ongoing monitoring.

In view of the ongoing digitalization and internationalization of the economy, it is to be expected that the case law on the splitting of businesses will continue to develop. In particular, questions regarding the materiality of intangible assets and cross-border applicability are likely to become more important in the future. Companies should follow these developments closely and adapt their structures if necessary.