Distribution Modalities Before Sale

Distribution Modalities Before the Sale of a GmbH: Tax-Optimal Planning Is Crucial

When preparing for the sale of a GmbH, the groundwork for the most tax-efficient structuring is ideally laid years in advance. A central role in this process is played by the distribution modalities—that is, the question of how and to what extent profits are distributed to shareholders before the sale. Depending on the distribution policy in the years leading up to the exit, significant tax implications can arise.

Retained Earnings vs. Distribution: Weighing Pros and Cons

Shareholders of a GmbH fundamentally have two strategic options: either they retain the profits within the company, allocating them to reserves (retained earnings), or they distribute the profits to the shareholders. Both approaches have their respective tax advantages and disadvantages.

In the case of retained earnings, profits are initially taxed at the corporate level at approximately 30% (corporate income tax plus solidarity surcharge and trade tax). The advantage: the remaining 70% of the profit remains available to the company for investments and growth. The disadvantage: if the company later distributes the retained earnings, double taxation occurs because the distributions are then subject to capital gains tax at the shareholder level (25% plus solidarity surcharge and, if applicable, church tax).

For example: A GmbH generates a profit of €100,000. With retention, €70,000 remains in the company after taxes. If the GmbH later distributes this €70,000 to the shareholder, the shareholder retains €51,537.50 after deducting capital gains tax (26.375%).

In contrast, with an immediate distribution of the profit, the shareholder would receive €51,750, as the trade tax is deductible as a business expense (assumed multiplier 400%):

Profit: €100,000

• Trade tax (14%): €14,000
  = Profit after trade tax: €86,000
• Corporate income tax (15%): €12,900
• Solidarity surcharge (0.825%): €1,064.25
  = Distribution to shareholder: €72,035.75
• Capital gains tax (25%): €18,008.94
• Solidarity surcharge (1.375%): €991.15
  = Net distribution to shareholder: €53,035.66

If the shareholder’s personal tax rate is below 25%, taxation of the distribution under the partial-income procedure (Teileinkünfteverfahren) may be more favorable (60% of the distribution is then taxable).

Structuring Distributions Before Sale for Tax Efficiency

In practice, a mixed strategy is often employed before the sale of a GmbH: profits are partially retained to finance company growth, but also partially distributed to involve shareholders in the success and to avoid excessive double taxation.

Forward-looking planning that considers individual circumstances is essential. This includes questions such as:

• What is the shareholders’ personal tax rate? (Partial-income procedure vs. capital gains tax)
• What investments are planned in the coming years, and how will they be financed?
• How is the company’s value and, consequently, the potential capital gain expected to develop?
• Can allowances or tax benefits be utilized?
• What impact do distributions have on financing agreements?

Depending on the situation, it may be advisable to increase distributions in the years before the sale to allow shareholders to participate in the company’s success in advance and to avoid excessive taxation of capital gains. Agreeing on advance distributions in the year of sale itself can also offer tax advantages.

“Melting Down” Profits Before Sale

Another aspect relevant to distribution planning before a company sale is the so-called “melting down” of profits. The underlying consideration is this: the higher the reserves of a GmbH, the higher its asset value and thus its purchase price.

For example: A GmbH has an annual surplus of €1 million. Using a 10x EBIT multiple (EBIT = annual surplus + interest + taxes), the company value is €10 million. If the GmbH distributes €500,000 before the sale, its value, ceteris paribus, would drop to €9.5 million.

For shareholders, such a distribution can still be advantageous: the distributed profit would be taxed at approximately 48.5% (corporate income tax, solidarity surcharge, trade tax, and capital gains tax), whereas the capital gain on sale would be taxed at about 30% (partial-income procedure, explained below).

Whether distributions before sale are ultimately worthwhile depends on many factors—not least whether the purchase price truly depends heavily on reserves or if other valuation bases (e.g., EBIT multiple) are used.

Capital Gains: Consider the Partial-Income Procedure

Now to the tax highlight: the taxation of the capital gain. Gains from the sale of GmbH shares are subject to income tax at the shareholder level, with the so-called partial-income procedure (§ 3 No. 40 EStG) applying. This means 40% of the capital gain is tax-exempt, and 60% is taxable at the shareholder’s personal tax rate.

The good news: the allowance under § 16 EStG (€45,000 per person, once in a lifetime) can, under certain conditions, also be applied to capital gains from the sale of GmbH shares. Conditions include, among others, that the shareholder holds at least 1% and has held the shares continuously for the last five years.

Example: A shareholder sells a 50% stake in a GmbH for €1 million. His capital gain is €600,000, with acquisition costs of €400,000. Forty percent of the gain (€240,000) is tax-free; from the remaining €360,000, he can deduct the allowance (€45,000). He must therefore pay tax on €315,000 at his personal tax rate (at a 42% rate, this amounts to €132,300).

Important: These rules apply only to shares held in private assets. If a shareholder holds shares in business assets (e.g., as a sole proprietor), the entire capital gain is subject to income tax, but he may be eligible for benefits such as the reduced tax rate (§ 34 EStG) or the fifth-rule (§ 34 Abs. 1 EStG).

Conclusion

Tax-optimal structuring of distributions before a company sale is a complex challenge requiring careful planning and professional advice. Blanket solutions are inappropriate—interests and circumstances vary greatly on a case-by-case basis.

One thing is certain: those who understand and correctly adjust the tax levers can significantly reduce the tax burden on capital gains and thus maximize the sale proceeds. Early engagement with the topic is therefore indispensable—preferably years before the planned exit.