Business split and extended reduction
Business split and extended reduction
A stock corporation is subject to trade tax on the basis of its legal form. However, if it exclusively manages its own real estate or its own capital assets, Section 9 no. 1 sentence 2 of the German Trade Tax Act (GewStG) provides for the possibility of a reduction of that part of the trade income which is attributable to the management and/or use of its own real estate. This so-called extended reduction is, however, excluded if the activity of a holding company is to be classified as commercial within the framework of a so-called business split/corporate restructuring.
The German Federal Fiscal Court (BFH) ruled on a complex case of an alleged reverse business split in its judgment of 22.02.2024 (case no. III R 13/23). A property-owning GmbH, which indisputably only managed real estate, did not carry out any original commercial activity and therefore applied for the extended reduction of trade income. Nevertheless, it transferred developed parts of the property to an affiliated partnership (the Betriebs-KG), which also indisputably constituted an essential operating basis for the latter and established the factual interdependence. Only the interlocking of personnel was disputed. This was because the Betriebs-KG indirectly controlled the owning GmbH (Besitz-GmbH) via an intermediary holding GmbH ("Beteiligungs-GmbH"). The tax office assumed the presence of a (reverse) interdependence of personnel and thus a business split that was detrimental to the extended reduction. However, the tax court and BFH took a different view.
In principle, a stock corporation can also be the owning company in the context of a business split. On the other hand, the owning GmbH in the current case did not itself hold more than 50% of the business partnership either directly or indirectly via another corporation. The Federal Fiscal Court based its decision on the non-recourse principle applicable to corporations, according to which recourse to the shareholders behind the holding corporation is not permitted in order to assess a possible identity of control. This follows the principle of separation ('independence') of the corporation from the person or group of persons of its shareholders. Consequently, neither the shares in the operating company held by its shareholders nor the control function associated with this shareholding can be attributed to the owning corporation for the purpose of determining whether there is a uniform business and operating will with regard to the activities of the operating company. A business split with the consequence of an original commercial activity of the property-managing holding GmbH was therefore ruled out; the extended reduction was to be granted.
The German Federal Fiscal Court (BFH) ruled on a complex case of an alleged reverse business split in its judgment of 22.02.2024 (case no. III R 13/23). A property-owning GmbH, which indisputably only managed real estate, did not carry out any original commercial activity and therefore applied for the extended reduction of trade income. Nevertheless, it transferred developed parts of the property to an affiliated partnership (the Betriebs-KG), which also indisputably constituted an essential operating basis for the latter and established the factual interdependence. Only the interlocking of personnel was disputed. This was because the Betriebs-KG indirectly controlled the owning GmbH (Besitz-GmbH) via an intermediary holding GmbH ("Beteiligungs-GmbH"). The tax office assumed the presence of a (reverse) interdependence of personnel and thus a business split that was detrimental to the extended reduction. However, the tax court and BFH took a different view.
In principle, a stock corporation can also be the owning company in the context of a business split. On the other hand, the owning GmbH in the current case did not itself hold more than 50% of the business partnership either directly or indirectly via another corporation. The Federal Fiscal Court based its decision on the non-recourse principle applicable to corporations, according to which recourse to the shareholders behind the holding corporation is not permitted in order to assess a possible identity of control. This follows the principle of separation ('independence') of the corporation from the person or group of persons of its shareholders. Consequently, neither the shares in the operating company held by its shareholders nor the control function associated with this shareholding can be attributed to the owning corporation for the purpose of determining whether there is a uniform business and operating will with regard to the activities of the operating company. A business split with the consequence of an original commercial activity of the property-managing holding GmbH was therefore ruled out; the extended reduction was to be granted.
Note:
The Federal Fiscal Court's decision does not contradict the justification of a personal interdependence in the case of a owning partnership (see our Insight on the Federal Fiscal Court ruling from 16.09.2021, case no. IV R 7/18). In that regard, the non-recourse must be breached and an indirect participation in a holding partnership by the shareholders of the operating company via an intermediary corporation must be included in the assessment of an interdependence of personnel.