The German ministry of finance has recently published a discussion draft for a circular letter on the Tax Treaty consequences of investing in partnerships. This draft reflects material discrepancies between rulings of the federal tax court and lower tax courts in recent years and the still applicable circular letter published by the ministry of finance in 2010.

A commonly used partnership structure in Germany is a so called limited liability partnership with a limited liability company as its general partner (so called “GmbH & Co. KG”). According to German tax law such limited liability partnership is regarded as a trading partnership just because of its structure and regardless of its actual business activities. 

This legal form has been used for certain tax structuring.  Now, the tax authorities share the view of the federal tax court and lower tax courts in the draft circular letter that the tax treatment of the partnership depends on whether it is actually trading or not eg managing assets.

The income of a trading partnership is treated as the trading income of the partners earned through the permanent establishment in the country of the partnership is located.  The income of other partnerships is attributed to the partners in accordance with the applicable profit sharing ratio without requalification.

Any conflict with the other state are resolved by the switchover provisions of German law substituting the credit method for the exemption method of avoiding double taxation where adherence to the exemption method would lead to effective exemption in both states.