Participation in pure asset managing partnership harmful for trade tax privilege

Real estate companies with a German permanent establishment (e.g. management based in Germany) may qualify for an extended trade tax deduction, thus effectively paying no trade tax on rental income. Under the extended trade tax deduction, lease income derived by entities whose activities are limited to the administration of their own property is exempt from trade tax. Although certain other activities may be carried out (such as the administration of the entity’s own capital), income derived from such activities do not qualify for the benefit. Activities that can jeopardize the availability of the extended trade tax deduction include the renting out of business fixtures (e.g. a loading ramp) and property trading activities. In addition, German courts have regarded the participation in a trading or deemed trading partnership as harmful for the trade tax privilege, on the grounds that the partner is tainted by the trading nature of the partnership.

The German Federal Tax Court (BFH) recently ruled that the extended trade tax deduction will not be available to a non-managing general partner in a limited partnership (KG) that is not deemed to be trading (case reference: I R 67/09). In the case, the taxpayer (a GmbH) only engaged in the administration of its own property. The sole activity of the KG was the renting out of an office building. The KG in which the GmbH was a general partner was established as a pure asset managing partnership, i.e. it was totally transparent for tax purposes and not subject to trade tax. The BFH concluded that the participation in a KG is not an activity allowed by the literal wording of the law, and it rejected any different approach based on the transparency of the KG for tax purposes. The KG’s property should not be regarded as the property of the partners. The BFH’s ruling seems to be based more on civil law than tax law, so the decision also should apply to a participation in a KG as a limited partner, as well as a participation in a GbR (unincorporated civil law association).

Ansprechpartner

Dr. Bettina Lieber | Düsseldorf
Maryna Shekhovtsova | Düsseldorf