The German Federal Tax Court (BFH) recently ruled on the conditions for making a tax-neutral contribution of a partnership interest to a corporation (case reference I R 55/09).
The case involved an individual taxpayer who was a limited partner in a German Kommanditgesellschaft (KG) and a 100% shareholder in a German private limited company (GmbH). A shareholders’ resolution approved a capital increase of Euro 1,000 and the taxpayer declared in a written agreement that he would pay in the full amount of the capital increase in cash and contribute his interest in the KG as share premium to the GmbH, also obliging the GmbH to carry over the book value of the KG interest for tax purposes. There were two more subsequent contributions of the partnership interest based on the same general terms as the first contribution.
Under the rules of the Reorganization Tax Act in effect at the time, a partnership interest could be contributed to a German resident corporation provided new shares in the corporation were granted to the contributing individual/entity in return for the contribution.
The German tax authorities took the position that the conditions for such a tax-neutral contribution were not fulfilled in the case and they issued a tax assessment for capital gains triggered by the contribution of the partnership interest.
The BFH, however, ruled in favor of the taxpayer, stating that the term “contribution” is specifically defined in the Reorganization Tax Act, which characterization is different from and independent of the civil law characterization. A tax-neutral contribution of a partnership interest to a corporation is therefore possible if the nominal amount of the capital increase is paid in cash and the contribution of the partnership interest is made only as a share premium (Agio) and booked in the capital reserves in the balance sheet of the GmbH. Because the GmbH also carried over the book value of the partnership interest, all of the requirements for a tax-neutral contribution were met, according to the BFH.
Because these conditions did not change in the 2006 Reorganization Tax Act, the BFH decision also should apply to contributions made since 13 December 2006.
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