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Voluntary capital contributions to increase the amount of loss relief in the case of partnerships

In the case of partnerships, a partner may normally deduct losses, for tax purposes, solely up to the amount of the contractually agreed capital contribution. Losses that exceed this amount may only be carried forward. The Federal Fiscal Court (Bundesfinanzhof, BFH) recently had to give a ruling on the conditions under which a partner’s voluntary capital contribution could increase the amount of their loss relief.

Issue – Capital contribution made through a reclassification and without a payment transaction

The claimant was a GmbH & Co. KG [German limited partnership with a limited liability company as a general partner] that had generated losses for years. B, as a limited partner, held a 40% stake in this partnership. In 2006, B had contributed rights that he had acquired and whose purchase he had financed by using debt. In return, the partnership assumed a loan to B at the same conditions that B had financed the purchase of the rights. At the end of 2008, it was agreed between the partnership and B that the loan in the amount of €185,000 would be cancelled. 

Furthermore, at the same time, it was agreed that B would make a contribution to his variable capital account II in the amount of €185,000. It was agreed that the payment transaction could be omitted here. The agreement was supposed to be executed via a timely reclassification in the company’s financial accounts. Consequently, B’s share of the claimant’s current losses was treated as if it could be fully compensated for and offset against taxes in the amount of this contribution via reclassification. 

BFH ruling on an (in)effective adoption of a resolution

The local tax office was of the opinion that the accounting transaction in respect of the capital contribution, which was carried out in the relevant year of 2008, should not be regarded as being in accordance with Section 15a(1) sentence 1 of the Income Tax Act (Einkommenssteuergesetz, EStG), that loss relief for B was not possible and that solely the loss that could be offset against future profits would go up. The action brought before the Hessian tax court – after B had failed with his objection against the decision by the local tax office – was successful. However, in the appeal, the BFH, in its judgement of 10.11.2022 (case reference: IV R 8/19) ruled in favour of the local tax office. The tax court had wrongly assumed that B had made a capital contribution within the meaning of Section 15a(1) sentence 1 EStG in the amount of €185,000 and that this had resulted in B being able to fully compensate for and offset against taxes the claimant’s losses that were attributable to B. In their ruling, the Munich-based BFH judges provided a detailed justification – besides the mandatory capital contributions that are posted to the so-called capital account I, other capital contributions (in particular voluntary capital contributions in the variable capital account) are also eligible for loss relief. The conditions require that the capital contribution is able to hold its value and that it constitutes an economic burden for the limited partners. Furthermore, the payment of a voluntary capital contribution by the limited partner has to be admissible. This admissibility can be established via a provision in the partnership agreement or a resolution adopted by the partners.

In the case in question, the partnership agreement did admittedly contain a provision that partners were able to make a voluntary contribution to the joint assets of the partnership; however, this was solely on the basis of an effective supplementary resolution that had to be adopted by the partners. It was not possible to demonstrate that such a resolution had been effectively adopted. There was 

  • neither any indication that the contractual agreement between the company and B, as represented in the partner’s accounts at the end of 2008, met the requirements for a resolution by the partners,
  • nor that the respective supplementary resolution had been adopted by the partners.

Ultimately, the contractual agreement that was specified, at the end of 2008, under the exclusion of the other partners should merely be regarded as an agreement in accordance with the German law governing obligations that does not satisfy the rules under company law on the adoption of partners’ resolutions. By contrast, posting a capital contribution that has been made voluntarily by a limited partner to the variable (equity) capital account II would then only result in a contribution within the meaning of Section 15a(1) sentence 1 EStG if this contribution constituted an admissible contribution to joint assets under company law and, in particular, in accordance with the partners’ agreement.

Recommendations: If a partner is planning to make the partnership’s losses eligible for compensation in the year that they arise via a capital contribution then they should bear in mind the principles set out in the BFH ruling (see, in particular, marginal no. 38f of the statement of justification). An adequate basis under company law could

  • be developed by explicitly allowing, in the partnership agreement, voluntary capital contributions by the limited partners, or by deriving a base from provisions, under company law, on the management of capital accounts (thus, a partnership agreement could, for example, provide for the voluntary capital contributions by the limited partners to be reported as a portion of the equity interests or else as a reserve);
  • lie in the effective adoption of a partners’ resolution on the admissibility of the respective capital contribution. 
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