17.09.2025Federal tax court rules on loss utilization after collapse merger of partnership into limited partner
Remaining partner of limited partnership can use partnership’s loss carryforward after collapse merger
In a decision dated 19 March 2025 and published on 28 August 2025, Germany’s federal tax court (BFH) ruled in a case where a limited partnership was left with only one partner and thus automatically merged into such partner, that the partnership’s net operating loss carryforward attributable to the partner and existing prior to the merger may be used by the partner to offset its own future profits for federal corporate income tax purposes. The federal tax court, in addition, clarified prior jurisprudence related to the transfer of a net operating loss carryforward for local trade tax purposes from the partnership to its remaining partner.
Background and facts of the case
A partnership is treated as a transparent entity for federal corporate income tax purposes, and the income/loss of the partnership that is allocated to its shareholders is subject to such corporate income tax at the level of its partners. For local trade tax purposes, the partnership is treated as not being transparent and is itself subject to such trade tax.
The attributable loss of a limited partner of a German limited partnership cannot be used at the level of the limited partner for federal corporate income tax purposes if the capital account of the limited partner in the partnership becomes negative or their negative capital account increases (referred to as “15a losses” since the rule stems from section 15a of the income tax code). In such a case, this loss must be carried forward for future use at the level of the limited partner. Even though the loss carryforward relates to a loss for federal corporate income tax purposes and despite the transparent character of the partnership for federal corporate income tax purposes, the loss carryforward exists at the level of the partnership itself in such situations.
In the case at hand, a German limited liability company (GmbH) held 100% of the interest in a limited partnership (KG), serving as the sole limited partner of the KG. Due to the GmbH’s negative capital account in the KG, the limited partnership had a net operating loss carryforward for federal corporate income tax purposes (i.e., 15a losses).
At the end of 2011, the sole general partner (which did not participate in the profits of the partnership) withdrew from the KG. As a result, the KG was left with one partner and therefore merged automatically into the GmbH as the last remaining partner (a so-called “collapse merger”).
The GmbH claimed in its 2011 federal corporate income tax return the loss carryforward that existed at the level of the KG (i.e., 15a losses) and argued that the loss carryforward was transferred from the KG to the GmbH as a result of the merger. Additionally, the GmbH claimed a local trade tax loss in its 2011 trade tax return, reflecting the loss carryforward for trade tax purposes transferred from the partnership due to the merger.
The tax authorities did not accept the transfer of the loss carryforward for federal corporate income tax or local trade tax purposes, claiming that such losses cannot be used at the level of the limited partner, since the business of the partnership that generated the losses had already been shut down and, therefore, the required conditions for a loss transfer were not met.
The lower tax court ruled in favor of the taxpayer and attributed the loss carryforward to the GmbH for future use to offset against its profits for both federal corporate income tax and local trade tax purposes. The tax authorities then appealed the case to the BFH.
Decision of the BFH
The BFH upheld the lower tax court’s decision, confirming that the loss carryforward as of the date of the collapse merger does not forfeit and can be used to offset future profits of the GmbH for federal corporate income tax and local trade tax purposes, provided that the KG’s business that generated the losses had not been completely terminated at the time of the collapse merger. The BFH clarified, for local trade tax purposes, that the continuation of the KG’s business that generated the losses is not a prerequisite for the future use of such losses and the condition of “business identity” should be considered satisfied in such a case.
Deloitte Germany’s comments
The BFH’s decision confirmed both the position of the lower tax court and the prevailing opinion in tax literature. Given the practical relevance due to the frequent occurrence of collapse mergers of loss-bearing limited partnerships, it is highly welcome that the BFH has provided further clarity on this matter.
Nevertheless, the BFH did not comment on a scenario in which the business of a partnership had already been fully terminated before the collapse merger, resulting in remaining uncertainty on this point.
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