Capital gains on double-tier partnerships in trade tax

The tax office then retroactively applied a so-called contribution gain I for 2010 in accordance with Section 22 (1) sentence 6 no. 6 UmwStG, as the conditions linked to residence in the EU or EEA pursuant to Section 1 (4) UmwStG were no longer met with regard to the natural person living in the third country. In the opinion of the tax office, this contribution gain I also had to be taken into account at the trade tax level. The Munich Finance Court and the Federal Fiscal Court agreed.

For trade tax purposes, the gain from the sale of a co-partner’s share (in this case: contribution gain I as a gain within the meaning of Section 16 of the German Income Tax Act) is included in trade income pursuant to Section 7 sentence 2 no. 2 of the German Trade Tax Act (GewStG), unless it is attributable to a natural person as a directly participating co-partner. In the present case, however, the natural person living in the third country is not to be taken into account, but rather the foundation (subject to corporation and trade tax) as the contributor at the time of the original contribution, since the contribution gain I arises retroactively in the course of and thus in the fiscal year of the contribution.

In the case of double-tier partnerships, the German Federal Fiscal Court had already ruled that, upon the sale of a share in the superior partnership, the capital gain is only to be determined at that level. In addition, it now rules that the gain from the sale of a co-partner’s share (in this case in the form of a contribution gain I) in the case of double-tier partnerships constitutes a single sale transaction (and not several sales) and therefore no “pass-through” of the capital gain occurs. This is because Section 7 sentence 2 no. 2 GewStG contains no indications for a (partial) allocation of the gain on the sale or abandonment to the business operations of the subordinate partnership; such an allocation would be particularly prone to errors in multi-tier structures and therefore impractical. If shares in a superior partnership are sold, the income generated as a result is realized solely at the level of the superior partnership. In this situation, the subordinate partnership is neither the subject nor the object of the sale; neither the subordinate partnership nor its shareholder (superior partnership) realize any proceeds from the sale.

Therefore, the business income of the superior partnership is not subject to trade tax reduction pursuant to Section 9 No. 2 GewStG with regard to the capital gains or contribution gains to be recognized by it, insofar as it is attributable to hidden reserves of the subordinate partnership. Similarly, a tax exemption applicable to the subordinate partnership (in this case: Section 3 No. 20 letter b GewStG) cannot be applied (in part) to the capital gains or contribution gains accruing to the superior partnership, which is not itself eligible for tax relief.

Notice:

With this ruling and the parallel ruling IV R 9/23, the German Federal Fiscal Court clarified several practical issues regarding how profits from the sale of a co-partner’s share within the meaning of Section 7 sentence 2 no. 2 GewStG are to be treated in the case of double-tier partnerships. In addition, the German Federal Fiscal Court will be able to clarify in appeal proceedings X R 8/24 whether Section 22 (6) UmwStG is to be interpreted as meaning that, in the case of a transfer of rights free of charge, a contribution gain I triggered by the successor is deemed to be a gain of the successor rather than a gain of the original contributor.