Representative cases

In this case concerning the consequences of a business split-up, our client first engaged us to review the transaction after the tax assessment notices that had been issued were already final.

Some preliminary remarks: A business split-up can be beneficial from a tax standpoint. What does that entail? A business is divided into two companies: a holding company and an operating company. The following case is typical:  A holding company formed as a partnership is the owner of the business property which it in turn leases to the operating company (typically organised as a GmbH) which, for example, operates a factory on the property.

One tax benefit may be the circumstance that the holding company can claim the trade tax exemption as a partnership. In addition, this structure has the benefit of protecting a valuable asset from the liability exposure associated with plant operations. Recognition for tax purposes requires close factual and personnel inter-company dependence such that the shareholders of one company may also make decisions at the other company.

In the case of our clients, based on a change in shareholder the auditor from the tax office concluded that the business split-up had ended because both companies were no longer controlled by the same shareholders. The tax adviser concurred with this result. The consequences were: The tax office presumed that the business property had been transferred to personal property for tax purposes thus triggering taxation of hidden reserves. Because the value of the property had risen significantly the difference would have to be taxed as profits.

However, the auditors’ conclusion was wrong: As had the tax adviser, they had overlooked the circumstance that a change in shareholders had occurred at both companies which restored identical ownership.

However, by the time clients engaged us to review the circumstances, the tax assessment notices issued following the audit had unfortunately already become final. The tax office conceded the error but was unwilling to amend the incorrect tax assessment notice. This was consistent with prevailing law and corresponds to the principle of period-based taxation. Once an incorrect assessment has become final, it may only be amended with prospective effect; excess tax paid is lost.

Nonetheless, we were still able to accomplish a great deal for our clients: We asserted a claim for damages against the tax adviser. At trial, the tax adviser unsuccessfully argued that his liability was limited to his insurance cover and that he had no personal fault because he should have been entitled to rely on the (incorrect) conclusion of the auditor. In addition, we were able to convince the court-appointed expert that the damages he had calculated were too low to the detriment of our clients.

The fact that we were able to aid our clients in this case was based on our comprehensive expertise in the legal, tax advisory and auditing fields. Complex matters like this one are our speciality.

Background information: A married couple and their two children were living happily in their apartment building purchased from an elderly woman with whom they were acquainted for € 400,000.00 eight years earlier when suddenly investigators from the tax office appeared.

Why? The tax investigators had examined the bank where the couple maintained their account in connection with a different matter. They discovered that shortly after the purchase of the building the sum of € 350,000.00 was deposited to an account maintained by the husband at a different bank. The transfer was from the elderly woman. The transfer involved a loan which was expressly noted on the transfer order. Repayments were subsequently made in relation to the loan.

Nevertheless, the tax investigators characterised the transaction as a disguised gift and initiated criminal tax evasion proceedings - namely against both spouses even though the wife had not received any of the money. The tax office assessed more than € 30,000 gift tax against the husband and the same amount for the wife even though she had not received any of the funds.

However, that’s not all: Seven amended income tax assessments followed with total additional tax due of some € 60,000.00. Grounds: Financing costs and depreciation deducted in relation to rental income were disallowed because, in the view of the tax office, the building had been (largely) gifted to the couple. Given that the couple was not able to produce some € 120,000.00 immediately and out of thin air, the tax office began to make arrangements to auction the building.

At the outset, the couple believed that they were capable of handling everything themselves when dealing with the tax office because they had nothing to hide. However, once they received notice that criminal proceedings had been commenced and were showered with tax assessments, close to a nervous break-down they realised that there was no way out of this disaster without professional help.

With the aid of an extensive analysis we were first able to raise some doubt in the conclusions of the tax investigators on the part of the tax office. This enabled us to stop the auction. This was followed by a dispute over the legal assessment of the transaction that lasted for years and saw the tax office change its rationale on several occasions.

Ultimately, the wait - which at times was quite nerve-racking - was worth it for our clients: We were able have the gift tax assessments and the income tax assessments set aside.

The simple answer to this question is what a buyer is willing to pay.

However, the answer becomes more difficult in situations where a buyer is neither desired nor intended. An example of this is where the business needs to be valued because the distribution of surplus must be calculated in the event of a divorce.

In such cases, we have often had the experience that expectations can diverge in amounts reaching six figures.

It is relatively easy to value machinery, real estate and inventory that make up such an enterprise. However, the problems start when determining whether there is any so-called “goodwill” to be valued.

And that’s not the end, but rather: If yes, how should it be calculated? What should be understood under earnings value? Can such a value even be assumed if the business is entirely based on the person of the owner?

Those are some of the questions we can address for our clients, and for which we can find solutions that are favourable to our clients, based on our expertise in the fields of family law, tax law and accounting.