KG share: Purchase and sale of limited partner shares in Germany
Contract drafting & taxes under german law
The purchase and sale of limited partnership shares plays a major role in the practice of german lawyers. Medium-sized entrepreneurs very often do not use the KG but the special form GmbH & Co. KG as the corporate vehicle. By linking the general partner GmbH with the operationally active KG, all advantages under german company law and tax law can be used. Therefore, both commercially active and asset-managing GmbH & Co. KGs are the subject of share transfers.
Buyers and sellers of KG shares are repeatedly confronted with the following questions in Germany:
- How are limited partnership interests valued and what is the fair purchase price for the KG shares in german practice?
- How does a sales process work and what information can the buyer demand from the seller?
- Are there legal restrictions for the seller of limited partnership interests that prevent a sale under german law?
- What tax backgrounds must be taken into account when transferring limited partnership shares?
- How can the buyer of limited partnership interests protect himself against hidden risks at the corporate level?
Further information on related topics can be found here:
- Purchase of a GmbH & Co. KG in Germany
- Sale of a GmbH & Co. KG in Germany
- Taxation of the purchase/sale of a GmbH & Co. KG under german law
- Purchase of a GmbH or GmbH shares in german practice
- Taxation of the purchase/sale of a GmbH under german law
For a non-binding inquiry, please contact one of our experts directly by phone or e-mail or use the contact form at the bottom of this page.
Valuation of limited partnership shares: what are the KG shares worth in Germany?
The correct valuation of the limited partnership shares is of enormous importance for the buyer and seller in the case of a planned transfer of shareholdings in german practice. It is important to know that there is no such thing as the one correct company and participation value. The value of an investment always depends on different and also subjective factors. Basically, there are no valuation problems if the investment is traded on the stock exchange or if an investment acquisition has just taken place. In these cases, a reference value can be used for the KG share transfer in Germany.
In all other cases, the limited partnership interest must be valued. Classic valuation methods are the capitalized earnings value method or the discounted cash flow method (DFC method). The capitalized earnings method bases the valuation on the future earnings of the german limited partnership. The DCF method bases the investment value on the discounting of the future cash flows to the partners determined over the longer term to a specific valuation date. You can find background information on the two common valuation methods here: Company valuation, Share valuation. In atypical cases, the net asset value method can be used, which focuses on the market value of all assets less liabilities.
Evaluation by our expert!
In our team, tax advisor Martin Stürmer takes care of the company valuation for the determination of the purchase price. As a specialized expert, he works together with our lawyers in german corporate law. You can also engage him independently of a legal mandate.
Ask for a quote for a business valuation or a cost-effective indicative business valuation:
Framework for the acquisition of an equity interest in Germany
Classically, the buyer and seller agree on the following procedural framework when transferring a valuable equity interest in a company: In german practice, the seller will generally provide the buyer side with a Non-Disclosure Agreement (NDA) before disclosing the complete structure of the company and trade secrets to the buyer side.
Since it has little information about the KG shareholding to be acquired, the buyer side will have all value-determining factors and risks examined by specialized advisors and lawyers as part of a so-called due diligence analysis. The results of the company analysis are summarized in a due diligence report for the buyer. On the basis of these findings, the buyer in german practice will agree the details of the purchase agreement with the seller. In principle, the transfer of limited partnership shares does not require notarization in Germany. However, the transfer of the limited partnership shares is often notarized in order to legally secure the sale.
Participation purchase agreement KG-share under german law
For both parties, the participation purchase agreement is the central working document for the planned transfer of the participation. The share purchase agreement in Germany regularly contains the following provisions:
- Guarantee clauses, by which the buyer is secured with regard to specific risks
- Purchase price and payment terms
- Contractual conditions, such as antitrust requirements and the consent of shareholders and third parties (e.g. banks), after which the shares are transferred to the buyer.
- German tax law regulations
- Statute of limitations
- Restrictions on competition to the detriment of the seller, if applicable
- Arbitration agreements
Risks, guarantees, seller liability in german practice
In principle, the annual financial statements of the last few years show the economic situation of the company whose shares are to be purchased. The balance sheets and income statements should give as realistic a picture as possible. Therefore, every buyer will insist that the seller of the limited partnership shares guarantees the correctness of the limited partnership annual financial statements in the form of an independent guarantee within the meaning of Sec. 311 (1) of the German Civil Code (BGB) (this is effective irrespective of fault). If it transpires after the takeover of the limited partnership shares that, for example, the equity capital was incorrectly presented in the annual financial statements, the seller is liable to the buyer for the corresponding financial loss. In german practice, the buyer will also demand such independent contractual guarantees for other aspects as part of the purchase agreement. Often, the buyer's lawyers will identify risks in the business as part of the due diligence process. If these risks are not immediately priced in (e.g., because the occurrence of the risk is unlikely), the buyer will demand collateral, usually through the warranty provisions.
Hidden risks can arise in particular for a company in the form of a GmbH & Co. KG if there have been high excess withdrawals by the seller. According to the case law of the German Federal Court of Justice (BGH), the strict capital protection of the general partner GmbH (§§ 30, 31 GmbHG) affects the operative KG level, so that the excessive withdrawals in the past can lead to limited partner liability, which can also affect the buyer after the share purchase in Germany. The buyer can reduce his risks by means of appropriate purchase agreement provisions.
Tax effects on the buyer side under german tax law
In addition to the risks and liabilities assumed on the buyer and seller side documented in the purchase agreement, both contracting parties are also always interested in the tax level in geman practice. In the case of the buyer, the purchase of the limited partnership shares has an effect to the extent that he acquires depreciation volume. The assets acquired with the limited partnership interest are capitalized in the buyer's balance sheet and depreciated over time. The buyer can therefore depreciate his purchase price over time, reducing profits for tax purposes, when he acquires the KG shares.
Tax effects on the seller side under german tax law
When a private individual sells KG shares in Germany, german income tax is due on the capital gain. In principle, hidden reserves are disclosed and taxed upon sale. The tax burden under german law depends on the individual income tax rate, i.e. up to 42% or 45% in the case of the wealth tax. No trade tax is payable on the capital gain if the seller has sold his entire co-entrepreneurial share. In certain constellations, the seller can take advantage of tax benefits. The two most important of these are set out in Sections 34 (3) and 16 (4) of the German Income Tax Act (EStG). It is conceivable that the seller can claim a reduction of 56% of the average income tax rate for the capital gain up to 5.0 million EUR (the minimum tax rate is 14%). It is also conceivable to claim an exemption amount of a maximum of 45,000.00 EUR. Further details on the taxation of the seller under german tax law can be found here: Taxation: Sale/purchase of a GmbH & Co. KG in Germany
In principle, the shares of the general partner GmbH represent special business assets in the case of an acquisition of shares in connection with the GmbH & Co. KG. In order to claim the tax privileges, the GmbH shares should therefore also be sold.
Our expertise in the purchase and sale of KG shares in german practice
The ROSE & PARTNER team of specialized attorneys, certified specialists and tax advisors drafts all necessary contracts and assists in the contract negotiations. We cover all german legal and tax fields when accompanying the acquisition of companies and shareholdings. In particular, our advisory services in the purchase and sale of limited partnership interests in Germany include the following framework:
- Structuring of the sale of the participation, drafting of an offer document concerning the limited partnership interest
- Preparation of the sale of the limited partnership interest, in particular due diligence documentation
- Valuation of the limited partnership and limited partnership interest
- Accompaniment of the contract negotiation
- Drafting of the share purchase agreement
- Tax support for the acquisition of the GmbH & Co. KG shareholding
If you require further information on the purchase or sale of limited partnership interests in Germany, please do not hesitate to contact us. Our attorneys and certified specialists for german corporate law are available to you at any time with advice and assistance in our offices in Hamburg, Berlin, Munich, Frankfurt or Cologne.