In a case recently decided by the Federal Tax Court (BFH), a partner retired from a partnership that had a 31 March financial year (case reference X R 8/07). The retirement was effected in December, and the taxpayer claimed that his share of the partnership profits should be taxed in the following year, i.e. in the tax period in which the financial year of the partnership ends. The taxpayer based his position on a provision in the German Income Tax Code, under which business profits generated on a non-calendar year basis are attributed to the tax period in which the deviating financial year ends.
The local tax court accepted the taxpayer’s argument, but the BFH rejected this view and held that when a partner leaves a partnership that has a financial year deviating from the calendar year, the profit share attributable to the retiring partner is subject to taxation in the tax period of the departure, regardless of when the financial year of the partnership ends. The BFH said the provision in the Income Tax Code does not apply to a situation where a partner retires because the rule presumes a going concern, whereas from the retiring partner’s perspective, the source of income is terminated at the time he leaves the partnership. The BFH therefore concluded that the Income Tax Code provision does not cover a profit attribution to partners who are retiring where the partnership follows a financial year that deviates from the calendar year. As a result, the retiring partner is subject to tax on his share of the partnership profits in the tax year of retirement.
The BFH noted that this rule also applies in cases in which the profit share of the retiring partner is contingent on the partnership’s result for the full financial year and thus cannot be accurately determined at the time of departure. The uncertainty as to the precise amount of profit share does not affect the issue of when the profit share is realized by the retiring partner.
If you have any questions, please contact the authors of this article at gtln@deloitte.de or your regular Deloitte contact.
