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Basis rollover (Buchwertfortführung) when gifting stakes in partnerships

The transfer of stakes in commercial partnerships (Mitunternehmerschaften, or co-entrepreneurships) for no consideration is a transaction that, in principle, does not result in the realisation of hidden reserves that are subject to income tax. Difficulties in relation to rolling forward carrying amounts could nevertheless then arise if there are ‘special business assets’ for tax purposes that will not be transferred. Special business assets are deemed to be those assets (frequently property) owned by a partner that are made available for use by the partnership. In the Federal Ministry of Finance’s circular from 5.5.2021, the fiscal authority has now adjusted its view in this respect and brought it into line with the current case law of the Federal Fiscal Court.

The problem with ‘special business assets’

From a tax point view, a partnership stake includes not just the holding in the partnership itself but also the ‘special business assets’. If these are special business assets that are essential for operations - this is usually the case with properties -, then these, too, generally have to be passed on to the beneficiary in order to ensure the overall tax neutrality of the transaction. However, frequently, there is no desire to transfer these assets. Yet, if the special business assets are simply retained then not all the business assets that are essential for operations will have been transferred and, consequently, all the hidden reserves will be realised, namely, those that form part of the stake as well as those deemed to be special business assets and, consequently, tax would be payable on these reserves.

The timing is crucial

Therefore, if, with regard to the special business assets, there is to be a withdrawal in private assets or a sale to a third party then, in terms of timing, such a measure would have to be carried out prior to the transfer of the stake. In that case, the stake in the partnership may be transferred with a basis rollover if the remaining transferred business assets, in any event, still constitute a functioning operating entity. This would have to be judged on the precise date of the transfer and it would also be sufficient if the withdrawal or the sale had taken effect ‘one legal instant’ prior to the transfer of the partnership stake. This has now been conceded by the fiscal authority and declared to be generally applicable.

Recommendation: Therefore, in respective cases, particular attention should be paid to the precise contract arrangements.

An alternative solution is the transfer to businessassets

If the aim is to likewise roll over the hidden reserves in the special business assets, then, in parallel, these can be transferred to the taxpayer’s other business assets, e.g., to a newly founded single-member GmbH & Co. KG [German limited partnership with a limited liability company as a general partner]. Unlike in the case of a withdrawal/sale, this does not necessarily have to occur prior to the transfer of the stake but can, in fact, happen at the same time. 

Please note: This would no longer be viewed as an overall plan that constitutes a harmful tax measure.

Excursus - Option for corporation tax

The above considerations regarding the separation of special business assets could also become relevant for partnerships that are thinking about making use of a new option model that is planned for 2022 (electing to be taxed as a corporation). Exercising this option should be treated like a notional change of legal form and, therefore, requires that, in the run up, a solution be found to existing special business assets that are essential for operations - as in the case of gifting - so as not to jeopardise the tax neutrality of the overall option mechanism.

Recommendations: In this case transferring assets to a new GmbH & Co. KG could constitute an appropriate arrangement.

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