Transfers between Sister Partnerships
Transfers between Sister Partnerships
Whether transfers of assets between the joint assets of partnerships with identical participations as co-entrepreneurships should also be included under Section 6 (5) EStG was controversial due to the lack of an explicit reference in the wording of the law. The First Senate of the German Federal Fiscal Court denied this in its ruling of November 25, 2009, case no. I R 72/08; the Fourth Senate of the German Federal Fiscal Court, however, expressed constitutional doubts about the legal situation in its ruling of April 15, 2010, case no. IV B 105/09. Ultimately, the legal question was submitted to the German Federal Constitutional Court for review against the standard of constitutional law, which took a position on this in its decision of November 28, 2023, case no. 2 BvL 8/13.
In the case in dispute, a German commercial limited partnership with a limited liability company as general partner (GmbH & Co. KG) sold two developed properties from its joint assets to a partnership with the identical participations at a price equal to the sum of the book values shown in the balance sheet. For tax purposes, the selling limited partnership treated these transfers as not affecting profit or loss. The tax office, on the other hand, took the view that the hidden reserves contained in the transferred properties had been fully disclosed and determined a substantial taxable profit for the selling limited partnership. The transfer between two partnerships without appropriate consideration is deemed to be free of charge if the consideration falls short of the going concern value. In the absence of a provision in Section 6 (5) EStG, the tax office assumed a withdrawal at partial value. The German Federal Constitutional Court considers Section 6 (5) EStG to be unconstitutional due to the non-inclusion of this constellation and made a transitional provision in favor of the transferring partnership.
The fact that the transfer of individual assets between the joint assets of partnerships with identical participations is not possible at book value - unlike the other transfers of assets covered by Section 6 (5) EStG - constitutes constitutionally significant unequal treatment within the meaning of Article 3 (1) of the German Constitution in terms of economic performance. The exclusion of preferential treatment at issue also appears arbitrary because the same result - the tax-neutral transfer at book value - can be achieved through a combination of the asset transfers favored by Section 6 (5) sentence 3 EStG, which, however, is associated with significantly higher transfer costs for those affected and can also be associated with legal and economic risks. It is therefore not clear why, according to the wording of the law, the individual steps can each be carried out at book value, but a direct transfer of individual assets between partnerships with identical participations should lead to the disclosure of hidden reserves.
There is also nothing to suggest that a tax-neutral transfer of assets between sister partnerships would typically not be undertaken with the legitimate business purpose of restructuring, but with the aim of abusively obtaining tax advantages.
Notices:
In its current decision, the German Federal Constitutional Court also instructs the legislator to adopt a new regulation retroactively for transfer transactions after December 31, 2000. Until this comes into force, Section 6 (5) sentence 3 EStG remains applicable in its current version with the condition that the provision also applies to transfers of assets between partnerships with identical participations after December 31, 2000. The current decision of the German Federal Constitutional Court thus contributes to the fact that restructuring of sister partnerships can already be carried out with greater legal certainty and without the detour of chain transfers.
However, while the cases regulated by legislation do not require a comparable identity of participation, but also allow a transfer of hidden reserves between individual co-entrepreneurs, the wording of the decision of the German Federal Constitutional Court presupposes that there is a complete identity of participation. Minor deviations in the participation quota can therefore continue to lead to the complete exclusion of book value continuation in the event of a transfer between two joint assets. It remains to be seen whether the alignment of the participation quotas in preparation for such a transfer will be recognized by the tax authorities as a harmful overall plan or Section 42 of the German Tax Code.