On 3 February 2010, the Federal Fiscal Court has ruled (file no. IV R 26/07) on a question heavily disputed between taxpayers and the tax authorities. The scenario is simple:

  • A German Limited Partnership (“LP”) with one Unlimited Partner and one Limited Partner carries on a trade or business.
  • The Limited Partner holds its partnership stake in a fiduciary capacity for the sole benefit of the Unlimited Partner.

The question arises whether the LP is subject to trade tax (for the sake of completion, a LP is transparent for corporation tax purposes). The Court ruled that the LP is not subject to trade tax:

  • It is the entrepreneur which is subject to trade tax.
  • In the case of a partnership, the partnership qualifies as an entrepreneur if there are two or more partners sharing entrepreneurial risk and reward and having entrepreneurial initiative.
  • If the Limited Partner holds his partnership stake as a fiduciary for the Unlimited Partner the Limited Partner neither shares risk and reward nor initiative. Hence, the LP does not qualify as an entrepreneur and is not subject to trade tax.

It should be noted that a scenario vice versa (i.e. Unlimited Partner holds his stake on behalf of the Limited Partner) does not work because the civil-law liability of the Unlimited Partner leaves him always with entrepreneurial risk.

On the basis of the judgment, outsourcing of real estate and entrepreneurial activities in Hive-Down LPs and Joint Venture LPs will be significantly facilitated.