Selling a Business: What Transfers, What You Are Liable For, What Is Taxed

Anyone selling a business sells no share and no company interest, but an aggregate of assets: machinery, stock, the customer file, contracts, employees, goodwill. Each item needs its own act of transfer — precisely what sets it apart from any other sale.

This article covers the mechanics: what legally belongs to the business, how it passes to the buyer, what liability follows, and how the proceeds are taxed. The wider process framework sits in the guide "Selling a company", the specifics of owner-managed sole proprietorships in "Selling a sole proprietorship".

What belongs to the business — and what does not

A business is not a legal entity but an economic unit, sold as a bundle of individual items that must be named in the purchase agreement. Whatever is not on the asset schedule does not transfer.

Typically included: fixed assets (machinery, vehicles, operating and office equipment), inventories, intangibles such as trade marks, domains, software licences and recipes, and goodwill — the part of the price exceeding the sum of individual asset values, paid for the customer base, market position and established processes.

Not transferring automatically: receivables and liabilities, unless expressly assigned or assumed; land and buildings, often retained by the seller and let to the buyer; and personal entitlements. A trade licence, an entry in the register of skilled crafts, a concession under hospitality law or a road haulage permit are tied to the person and must be applied for by the buyer. Without the professional qualification the deal fails here — not on price.

Contracts: consent instead of automatic transfer

In practice contracts are the hardest part. Where company shares are sold they continue unchanged: the contracting party stays the same. In a business sale it changes — and a change of debtor requires the creditor's consent under Section 415 of the German Civil Code (BGB).

This affects the lease over the business premises, leasing and finance agreements, supply and framework agreements, insurance, maintenance and software contracts. Every counterparty can withhold consent or attach conditions — the landlord, for instance, a rent increase or additional security.

A sequence follows that is often disregarded: identify the critical contracts before signing and make the consents a condition to completion. Anyone approaching the landlord only after closing negotiates without a negotiating position.

Employees: Section 613a BGB applies of its own accord

For employment relationships the opposite rule applies. Under Section 613a(1) BGB the buyer steps into the rights and obligations of existing employment relationships by operation of law. No transfer agreement is needed, and there is no cherry-picking: the buyer cannot choose the workforce.

Three points matter operationally. First, seller and buyer must inform the employees concerned in text form before the transfer of its timing, reason, consequences and planned measures (Section 613a(5) BGB). Second, each employee may object to the transfer in writing within one month of receiving that information (Section 613a(6) BGB) — the employment relationship then stays with the seller, who usually has no work left for them. Third, a dismissal on account of the transfer is void (Section 613a(4) BGB). Headcount reductions must happen beforehand for independent reasons, or afterwards on the buyer's operational grounds.

Under Section 613a(2) BGB the seller remains jointly liable for obligations arising before the transfer for a further one year — a point that belongs in the price negotiation.

Three heads of liability that fall on the buyer

A buyer takes on three statutory liability risks, independent of the purchase agreement. For the seller they are why an informed buyer asks for discounts or security.

Section 25 of the German Commercial Code (HGB) — continuation of the business name. A buyer continuing a commercial business under the existing name is liable for all legacy liabilities of that business. Exclusion works only if the diverging agreement is entered in the commercial register and published, or notified to the individual creditor. For an unregistered small trader it does not apply, for want of merchant status.

Section 75 of the German Fiscal Code (AO) — business taxes. The buyer is liable for VAT, trade tax and excise duties, and for withheld taxes such as wage tax and capital yields tax. Two limits apply cumulatively: the tax must have arisen since the beginning of the last calendar year preceding the transfer of title, and been assessed or declared within one year of the buyer registering the business. Liability is confined to the assets taken over. Income tax and corporation tax, as personal taxes, are not covered; on an acquisition out of an insolvency estate liability falls away entirely (Section 75(2) AO).

Section 613a(1) BGB — employment obligations. Outstanding wages, holiday entitlements, pension commitments and phased early retirement obligations travel with the business. Pension commitments in particular can consume the price arithmetically and are regularly valued by an actuarial report.

A properly run preparation process anticipates these points instead of leaving the buyer to find them — see "Vendor due diligence".

Purchase price allocation: the quiet negotiating point

The purchase agreement must allocate the total price across the individual assets. That is no formality; it distributes the tax burden between the parties.

The buyer wants as much as possible on short-lived, quickly written-off assets: inventories, operating and office equipment, vehicles. Goodwill must be amortised over fifteen years for tax purposes and is therefore the buyer's least attractive item. The seller, by contrast, wants a larger share on relieved items and avoids items qualifying as ordinary trading profit. Both sides are bound by the agreed allocation; the tax office reviews it for commercial reasonableness.

Opening this point only at the notary appointment negotiates it badly. It belongs in the letter of intent.

VAT: transfer of a business as a going concern

Where the business is transferred as a whole to another entrepreneur for that entrepreneur's business, the transaction is outside the scope of VAT under Section 1(1a) of the German VAT Act (UStG) — not merely exempt. No VAT arises, and the buyer has no input VAT deduction.

The condition is transfer as a functioning unit; retaining essential operating assets loses the benefit and triggers a substantial VAT charge. The buyer also steps into the seller's legal position, and the adjustment period under Section 15a UStG runs on. Contract practice therefore includes a VAT clause for the case where the tax authorities later reclassify the transaction.

What is left of the proceeds

German income tax law gives the seller of a commercial business two reliefs, both tied to a completed 55th birthday or permanent occupational incapacity within the meaning of social insurance law, and each granted only once.

Under Section 16(4) of the German Income Tax Act (EStG) an allowance of 45,000 euros remains tax-free on application. It tapers by the amount by which the capital gain exceeds 136,000 euros — from a gain of 181,000 euros it is fully used up. Under Section 34(3) EStG a reduced rate of 56 per cent of the average tax rate, but at least 14 per cent, may be applied on application to a capital gain up to 5 million euros. Without the age requirement, the one-fifth rule under Section 34(1) EStG remains, applied ex officio in the assessment procedure as part of the more-favourable-treatment test.

For a sole trader no trade tax arises on the gain from selling the entire business: Section 7 sentence 2 of the German Trade Tax Act (GewStG) covers only co-entrepreneurships, co-entrepreneurship interests and general partner interests in a KGaA. Care is needed where parts of the proceeds qualify as ordinary trading profit — for example a compensation claim under Section 89b HGB, or a piecemeal wind-down instead of a single disposal.

Transferring the business into private assets instead of selling it is treated identically under Section 16(3) EStG: the cessation counts as a disposal, valued at the common value at that time. The economic difference nevertheless remains large — see "Business cessation or sale?".

Different rules apply to a business in Austria; that framework is described in "Selling a company in Austria". All provisions mentioned reflect German law and do not replace advice in the individual case; the specific structuring belongs with tax adviser and lawyer.

When there is a GmbH behind the business

If the business has been contributed to a GmbH, a second route exists: selling the shares. The company then remains the contracting party, contracts and permits continue unchanged and consents fall away — but the buyer takes the company with its entire past. The trade-off is described in "Asset deal or share deal?", the process in "Selling a GmbH".

For tax the picture reverses: the sale of GmbH shares held privately falls under the partial income procedure, whereas an asset deal at the level of a GmbH triggers corporation tax and trade tax on the full gain. With corporations, sellers therefore regularly prefer a share sale and buyers an asset deal.

The sequence that protects the price

The mechanics of a business sale punish improvisation. Whoever addresses the consent requirements, the heads of liability and the price allocation only once a buyer is at the table negotiates each point under time pressure, against a counterparty that examined them long ago.

The sensible order is the reverse: first establish transferability, then value, then approach buyers. How to set up the buyer approach is shown in "How do I find the right buyer?"; what a supported process changes is set out in "M&A adviser". Anyone considering a handover within the family or to employees finds the framework in "Business succession".

IGCP Capital Partners supports business owners with exactly this preparatory work — from testing transferability to the negotiation. Confidential and independent. → igcp.at

Frequently asked questions

What passes automatically to the buyer when a business is sold?

Only the employment relationships: under Section 613a(1) BGB the buyer steps into them by operation of law. Everything else — fixed assets, inventories, contracts, trade marks — must be transferred individually in the purchase agreement. Contracts with third parties additionally require the counterparty's consent, and personal permits such as a trade licence or concession must be applied for by the buyer.

What is the buyer of a business liable for?

Three areas, whatever the contract says: legacy liabilities where the business name is continued (Section 25 HGB, excludable by entry in the commercial register or notice to the creditor), business-related taxes within the time limits of Section 75 AO and confined to the assets taken over, and all employment obligations including outstanding wages and pension commitments.

How is the gain from selling a business taxed?

As a capital gain under Section 16 EStG. From a completed 55th birthday, or on permanent occupational incapacity, there is an allowance of 45,000 euros on application (Section 16(4) EStG, tapering from a gain of 136,000 euros) and a reduced rate of 56 per cent of the average rate, at least 14 per cent, up to 5 million euros (Section 34(3) EStG). Both reliefs are granted only once in a lifetime. A sole trader pays no trade tax.

Is VAT payable on the sale of a business?

No, provided the business is transferred as a functioning unit to another entrepreneur for that entrepreneur's business. This transfer of a business as a going concern is outside the scope of VAT under Section 1(1a) UStG. If essential operating assets are retained the benefit falls away — which is why a VAT clause belongs in the contract.

Why does selling a business require the consent of contracting parties?

Because the contracting party changes when a business is sold. A change of debtor requires the creditor's consent under Section 415 BGB. The lease, leasing agreements, supply contracts and insurance policies therefore transfer only with consent. The critical consents belong in the purchase agreement as a condition to completion, not in the period after closing.