Shareholder loans to asset-managing partnerships

Debt interest can be considered as income-related expenses as part of income from letting and leasing. For this, there must be an objective connection between the debt interest for a loan and the rental property. Furthermore, the loan relationship must also be recognized for tax purposes. In its ruling of November 27, 2024 (case no. I R 19/21), the German Federal Fiscal Court (BFH) had to clarify whether the latter was the case in the context of a fractional partnership in a loan relationship between an asset-managing partnership and its partner. 

In the case in dispute, a GmbH & Co. KG (KG) rented out a developed property in Germany as an asset-managing partnership. The tax office did not classify the resulting income as commercial profits as declared, but as income from letting and leasing. This was because the KG did not generate any original commercial income and, in view of the management of the KG by both partners - the domestic general partner GmbH not holding an interest in the assets and the limited partner holding a 100% interest in the assets - a so-called commercial character of the KG and thus a reclassification of the rental income as commercial income was ruled out. The limited partner had granted the KG an interest-bearing loan for the acquisition of the rented property. Following an external audit carried out at the KG, the tax office did not take the interest on the loan into account as income-related expenses, as the loan was not to be recognized for tax purposes in this constellation. Both the court of first instance and the BFH dismissed the company's appeal against this as unfounded. 

The KG is indisputably an exclusively asset-managing partnership. While contracts and sales transactions between (commercial) co-entrepreneurships and their partners are to be recognized if they are at arm's length, Section 39 (2) no. 2 of the general tax code (AO) stipulates that in the case of asset-managing partnerships, assets that are owned jointly by several parties are to be attributed to the participants on a pro rata basis for tax purposes. An asset-managing partnership is accordingly treated as a fractional partnership under tax law in accordance with established case law. Therefore, debt relationships between partners and the company are not to be recognized, as there is a lack of the necessary personal difference between creditor and debtor.

These principles established by the BFH also apply to the loan agreement in dispute. Insofar as a loan agreement with its company is attributable to the partner of an asset-managing partnership for tax purposes because of the fractional share approach, the creditor and debtor of the agreement coincide, so that the receivable of the partner and the liability of the company cease to exist for tax purposes as part of the so-called confusion. To this extent, the loan agreement effective under the law of obligations is not to be recognized for tax purposes, with the result that the corresponding interest does not constitute deductible income-related expenses for the KG as the borrower and does not count as income from capital assets for the lender.