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Tax-exempt discontinuation of an operational split

When the preconditions for an operational split cease to exist this usually results in the realisation of hidden reserves at the property company. In the following section, first of all, we discuss these pre-conditions. We subsequently analyse the options that would make it possible to avoid the realisation of hidden reserves when the sharing of personnel ceases. In the wake of a recent Federal Fiscal Court (Bundesfinanzhof, BFH) ruling, the focus here is on the leasing out of a business.

Preconditions for an operational split and ...

The legal consequence of an operational split is that the letting or leasing activities of the property company are considered to be commercial. An operational split would accordingly be deemed to exist if there was a relationship of interdependence in terms of material resources and personnel.

There is material interdependence if the property company makes essential business assets available to the operating enterprise. From the viewpoint of the operating enterprise, essentiality is determined on the basis of a functional assessment perspective, e.g., if a plot of land that has been developed constitutes assets that are essential for operations for the operating enterprise.

Interdependence in terms of personnel would be assumed if an individual or group of individuals controls both companies in such a way that it is possible for this individual or group to enforce consistent business and operational intentions in both companies.

... their ceasing to exist as the termination of a business

When the preconditions for an operational split cease to exist then this can be viewed as the discontinuation of business operations with the consequence that the assets of the property company will be considered as having been transferred to private assets and its hidden reserves would have to be realised.

The property company’s specific classification as a business

If, prior to the creation of the operational split, the property company’s activity had already been deemed to be commercial then, in the event that the operational split were to be discontinued, this characteristic feature would be restored once again and the company would continue to be classified as a business. Moreover, classification as a business due to the legal form of a GmbH & Co. KG [German limited partnership with a limited liability company as a general partner], or the property company engaging in a new commercial activity could prevent the release of hidden reserves.

A business can been leased out even ...

If, when an operational split is discontinued, the preconditions exist for a business to be leased out in its entirety then it could be possible to avoid terminating the business. The BFH, in its ruling from 17.4.2019   (case reference: IV R 12/16), confirmed its earlier decisions. The ruling specified that Section 16(3b) of the German Income Tax Act had to be applied to operational splits discontinued after the 4.11.2011. The judges confirmed the previous rulings according to which a commercial leasing out of a business is deemed to exist if the items essential for operations that give the business its character are leased out. When the lease is terminated it should be possible for the lessor to continue business operations as before. If merely a business property has been leased out then for wholesale and retail companies, in any case, the business will be deemed to have been leased out if the property constitutes the sole asset that is essential for operations. The business will be deemed not to have been discontinued until the lessor submits a statement of termination to the local tax office, or if other facts become known to the tax office accordingly.

... in the case of a simulated operational split

If, for the operational split, the property company and the operating enterprise did not emerge from a single business (simulated operational split), nevertheless, an operational split can still thus be deemed to be harmless (from a tax point of view). For the assessment of the leasing out of the business this will depend on when the operational split was terminated. The property company would ultimately have to continue the previous commercial activity.

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