The German Federal Tax Court had to decide in its judgement as of 16 December 2015, whether the assets of a limited liability partnership can be tax neutrally transferred by way of partnership division under Sec. 16 para. 3 Sent. 2 German Income Tax Act (GITA) in case of a preceding exchange of the partnership’s partners.
The partners of the limited liability partnership (private individuals, participation 50 percent each) had each founded a new limited partnership and transferred their respective partnership shares in the old partnership to their respective new limited partnership. Afterwards the assets of the old partnership were transferred from the old to the new companies at book values. The tax audit found in this process an abusive structuring because of the previous exchange of the partners and did not allow the transfer at book values.
The German Federal Tax Court disagreed with the tax office and has ruled as follows:
The contribution from the old partnership shares in the new companies in close timely and factual context does not prevent a continuation at book values under Sec. 16 para. 3 Sent. 2 German Income Tax Act (GITA). There is no legal principle which summarizes several transactions to one uniform process for their evaluation under tax law. If an abusive structuring is given has to be always reviewed based on the individual circumstances.
Condition for a tax neutral partnership division is that the hidden reserves before and after the partnership division are attributable to the partners participating in the division. For this, it is not harmful if the hidden reserves are transferred from one partner to the other.