The Ministry of Finance (BMF) recently published guidance on open issues relating to the mandatory rollover relief for asset transfers between different businesses of a single entrepreneur and, more importantly, between a partnership and its partner’s business, and vice versa.
Under German tax law, the transfer of single assets from one business to another generally leads to a realization of built-in gains at the level of the transferor. However, if the taxation of the built-in gains is only deferred, such transfers must be carried out at book value (i.e. tax neutral) in specifically defined cases. The rule on mandatory rollover relief applies in the case of a mere asset reallocation between two businesses of a single taxpayer (i.e. in the case of an individual running two different businesses). More importantly, the rule also covers asset transfers from a partner’s own business to his partnership (or vice versa) if the only remuneration is an increase/reduction of partnership interests in the partnership. Likewise, certain transfers of “special business assets” (i.e. assets that are legally owned by the partner but effectively required or utilized for the business of the partnership) into, from or between partners of the partnership also are within the scope of the rule.
The new guidance provides the BMF’s position on various details relating to the application and scope of the rule.
Reallocation of assets of different businesses of the same taxpayer
- In connection with a mere reallocation of assets between different businesses of the same taxpayer (individuals running two different businesses) or in the case of a requalification of assets that have been part of a partner’s own business into special business assets of his partnership (without legally transferring such assets to the partnership), the transferee business may assume liabilities of the transferor business at the same time without jeopardizing the application of the rollover relief.
- The assets transferred may be individual assets.An entire business, a business division or an interest in a partnership interest may be covered by the rules on the reallocation of assets, too.
Legal transfer of assets from partner to partnership (and vice versa)
According to the decree, a legal transfer between the partner and the partnership has the following tax consequences:
- An assumption of liabilities will be considered a harmful remuneration resulting in a (partial) denial of the rollover relief/tax neutrality, but only in the case of the transfer of single assets. If the assets transferred represent an entire business, a business division or an interest in a partnership the rules of the Reorganization Tax Act should apply. As a result, such transactions can take place at book value carryover even if liabilities are assumed by the transferee partnership. Moreover, if the transaction is covered by the Reorganization Tax Act, it also should be possible to step up the assets in the transfer if so desired (e.g. for loss utilization), i.e. to transfer at a value in excess of book value.
- The legal transfer of assets between different partnerships with the same partners is not covered by the language of the law and thus, according to the tax authorities, does not fall within the scope of the rollover relief. In practice, a transfer between partnerships has often been undertaken in several steps (interim acquisition by the joint partners and subsequent contribution). Although the single steps are covered by the wording of the law, the decree advises the tax authorities to review such situations as to whether the transactions would need to be grouped together under anti-abuse principles.
- The mandatory rollover relief generally is subject to a clawback provision, according to which the disposal of the transferred assets within three years from the date the tax return is filed for the FY in which the transfer took place will trigger a retroactive taxation of the capital gains that were deferred upon contribution. However, according to the decree, a transfer within the monitoring period will not be considered harmful if the transfer itself qualifies for the rollover relief (but a new monitoring period should start to run).
- If an asset is transferred to a partnership that has a corporation amongst its partners, the rollover relief generally will not be granted to the extent that the corporation’s ownership interest in the partnership increases through the asset transfer. An increase in the interest of the corporation within seven years from the transfer date also will trigger retroactive taxation of the deferred capital gains. According to the decree, this will also apply to a reorganization (e.g. a contribution or a change of the legal form of a partnership into a corporation), regardless of whether the transaction takes place at book value under the Reorganization Tax Act.
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