Judgment raises the opportunity to influence the attribution of income within a fiscal unity.
In a fiscal unity (Organschaft), the income of the controlled entity (Organgesellschaft) is only attributed to such partners of the controlling partnership (Organträger-Personengesellschaft) that hold partnership interests in the controlling entity at the time the fiscal unity income is attributed to the controlling entity. In a case recently decided by the German Federal Fiscal Court (IV R 50/09), the sole limited partner of the controlling limited partnership had sold his partnership interest (also including the right to share in profits for the fiscal year ending on 31 December) to the purchaser with such sale becoming effective as of 29 December. The controlling limited partnership had been the sole shareholder of three limited liability companies (GmbH) that were consolidated for tax purposes in a fiscal unity.
The Court considered decisive that the controlling partnership’s entitlement to profits of the controlled entities does not arise until the end of the fiscal year. Accordingly, it is not until this moment that the tax group income is attributed to the controlling entity for tax purposes. In order to attribute the tax group income to the partners of the controlling entity, it is thus relevant by whom the partnership interests in the controlling entity are held at the time the fiscal unity income is attributed to the controlling entity.
The Federal Fiscal Court rejected the view of the lower fiscal court and part of the academic community pursuant to which the fiscal unity income should be attributed to the controlling partnership according to the partnership’s general rules for distribution of profits and in proportion to the duration of the participation in the controlling entity of each partner during the fiscal year. Instead, the income of the controlled entity is only attributed to such partners of the controlling partnership that hold a partnership interest at the time the income is attributed. Otherwise, it would be necessary to require the controlled entity to prepare interim financial statements at the time of the exit of the partner from the controlling partnership. However, no such requirement currently exists. Furthermore, the Federal Fiscal Court emphasized that practical difficulties would occur from any other method of income attribution.
Hence, the Court applies civil law principles for purposes of the attribution of fiscal unity income to the partners of the controlling entity.
The ruling does, however, create room for tax structuring:
If a partner of the controlling entity sold his partnership interest (including his right to share in profits) by the end of the fiscal year, the fiscal unity income would be regarded as current earnings of the partner. A capital gain (eligible for tax benefits) of the partner would be reduced accordingly. Hence, by transferring partnership interests within the fiscal year, partners can deliberately influence the attribution of income within a fiscal unity. The amounts paid by the acceding partner for the right to share in profits is considered capital gain (eligible for tax benefits). From an economic perspective, such amounts do, however, also constitute consideration for the tax group income accrued to the controlling partnership. As a result, the requalification of current earnings into capital gains becomes possible.
Accordingly, the purchaser of an interest in a controlling partnership should turn his attention particularly to the provisions in the sale and purchase agreement regarding the allocation of taxes in order to ensure that the agreement does properly address the attribution of the fiscal unity income.
Should you have any questions regarding this jurisdiction or potential tax structuring, please do not hesitate to contact us at any time.