Trade tax on sale of partnership interest by corporation in line with Constitution

The trade tax treatment of capital gains arising from the sale of a partnership interest depends on the legal form of the selling partner. A corporate partner that disposes of its interest is subject to trade tax, whereas an individual may sell his/her partnership interest without triggering trade tax. According to a recently published decision by the Federal Tax Court (BFH) (case reference IV R 29/07), the relevant rule in the Trade Tax Code is in line with the German Constitution. More specifically, the different treatment depending on the legal form of the seller does not violate the principle of equal taxation in accordance with the taxpayer’s ability to pay tax.

The BFH emphasized that the legislator did not exceed the boundaries set by the Constitution when introducing trade tax liability only in respect of corporate partners. The legislators’ intent to prevent tax structures that allow for a trade tax-free sale of assets by a corporation by means of an interposed partnership is legitimate, according to the court, and the legislators have the right to provide for different tax treatment of certain transactions depending on the legal form of the taxpayer. The BFH also rejected the argument that individual taxpayers who are invested via multi-tier partnership structures do not benefit from the trade tax exemption because such individuals are compensated by a lump-sum income tax credit and because of the practical difficulties in identifying the ultimate partners in such multi-tier structures.

Consequently, the current trade tax rules, which have been in force since 2002 and which subject capital gains from the sale of a partnership interest by a corporate partner to trade tax at the partnership level have been fully reaffirmed by the BFH.

If you have any questions, please contact the authors of this article at gtln@deloitte.de or your regular Deloitte contact.