Taxes When Selling a Business: A Comprehensive Guide for Entrepreneurs

The sale of a company is a major milestone in the life of an entrepreneur. Beyond strategic and emotional considerations, the tax implications play a crucial role in determining the financial success of the transaction.

In this article, we provide a detailed overview of the tax aspects of selling a business in Germany – enriched with examples, common pitfalls, and a practical checklist.

> Note: This article does not constitute personal tax advice. Please consult your tax advisor for a tailored assessment.

1. Overview of Relevant Tax Types

When selling a business, different types of taxes may apply depending on the legal structure and the parties involved:

• Income tax: Applies to individuals selling their company or ownership stakes.
• Corporate income tax: Applies to corporations selling shares or company assets.
• Trade tax: Relevant when business assets are sold by corporations or commercial partnerships.
• Capital gains tax: Applies to distributions of profits to shareholders following the sale.
• Inheritance and gift tax: Applies in cases of transfers without consideration, such as succession planning.

Example: A business owner sells her sole proprietorship for €1.2 million. The book value is €400,000, and selling costs amount to €50,000. The taxable gain is therefore €750,000.

2. Impact of Legal Form on Taxation

a) Sole Proprietorships and Partnerships

The capital gain is calculated as the difference between the sale price and the book value, minus transaction costs. The resulting gain is subject to the individual’s personal income tax rate.

Advantages:

• Tax exemptions of up to €45,000 under § 16 EStG (German Income Tax Act)
• Reduced tax rate available under § 34 EStG for entrepreneurs over 55

b) Corporations (e.g., GmbH)

When individuals sell shares in a corporation, the gain is subject to income tax. In these cases, the partial income method applies: 60% of the gain is taxable.

If the company itself sells assets (an asset deal), the gain is subject to corporate income tax (15%) plus trade tax (typically 7–17% depending on the municipality).

Example: A shareholder sells 100% of his GmbH shares for €2 million. The book value of the shares is €200,000. The taxable gain is €1.8 million; 60% of that (€1.08 million) is subject to income tax.

3. Asset Deal vs. Share Deal – Key Tax Differences

When selling a business, structure matters – for both tax and legal purposes. The two most common forms are the asset deal and the share deal. Here's a practical comparison:

Asset Deal

The company sells individual assets (e.g. equipment, inventory, IP, customer contracts). The buyer does not acquire the entire company, only selected components.

Key Features:

• What is sold?
  Specific assets (not the legal entity).

• Who is the seller?
  The company itself (e.g., GmbH or partnership).

• Tax implications:

  • Gains are subject to corporate income tax (or income tax for partnerships).
  • Trade tax often applies as well.

• Buyer advantage:
  Purchased assets can typically be depreciated.

• Contractual complexity:
  Each asset must be individually transferred – this increases the legal and administrative workload.

Share Deal

The shareholder(s) sell company shares, typically in the form of GmbH shares. The legal entity remains unchanged – only the ownership is transferred.

Key Features:

• What is sold?
  Shares in the company.

• Who is the seller?
  The individual shareholder(s).

• Tax implications:

  • Gains are subject to income tax.
  • The partial income method applies: 60% of the gain is taxable.

• Seller advantage:
  Simpler contract structure, less administrative effort.

• Buyer limitation:
  Shares cannot be depreciated.

Conclusion:
While asset deals can offer tax benefits for buyers, many sellers prefer share deals – especially in larger companies or when a clean break is desired. Optimizing the tax outcome depends heavily on the specific case and should always be discussed with an expert in advance.

Tip: Buyers often favor asset deals, while sellers lean toward share deals – aligning both interests can become a major negotiation point.

4. Tax Optimization Strategies

1. Use of tax exemptions (§ 16 EStG):
Up to €45,000 in tax-free gains may be available depending on the entrepreneur’s age and circumstances.

2. Reduced tax rate (§ 34 EStG):
Applies to one-time extraordinary income, such as the sale of a business by entrepreneurs over 55.

3. Holding structure:
Selling via a holding GmbH can significantly reduce tax liability. Under certain conditions, 95% of capital gains may be tax-exempt at the holding level.

Example: An individual first transfers shares to a newly formed holding company, which later sells the business – significantly reducing tax exposure.

4. Tax deferral through installment payments or earn-outs:
If sale proceeds are received over multiple years, smart contract structuring can ease the tax burden through timing.

5. Common Tax Planning Mistakes

• Failing to involve a tax expert early
• Vague earn-out clauses in contracts
• Overlooking hidden reserves
• Choosing the wrong deal structure (asset vs. share)
• Ignoring pension obligations or deferred taxes

6. Special Considerations for Succession (Tax-Free Transfers)

In family succession scenarios, different tax rules apply:

• Up to 85% tax relief may apply (if wage conditions are met)
• Tax deferral options if the business is continued for 5–7 years
• Risk: Early discontinuation of business can retroactively eliminate tax benefits

✅ Checklist: Tax Planning for a Business Sale

• Speak with a tax advisor or M&A expert early on
• Choose the right deal structure (asset or share deal)
• Analyze your company’s legal and ownership structure
• Check for exemptions (§ 16, § 34 EStG)
• Consider a holding structure
• Address tax issues in the sales contract
• Identify hidden liabilities or reserves
• Meet conditions for tax relief in case of succession

Conclusion: Planning Pays Off

Selling a business is not just an economic and emotional milestone – it’s a tax challenge, too. Proper planning and professional guidance are essential to avoid costly mistakes and maximize the net proceeds.

At Carl Finance, we support business owners throughout the entire process – from valuation and buyer identification to transaction structuring in collaboration with experienced tax professionals.