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Certified Tax Advisor, Manager, National Office Tax & Legal
Certified Tax Advisor, Director, National Office Tax & Legal/Quality Assurance
Income subject to income tax is assessed separately and uniformly if multiple persons are involved and the income is attributable to these persons for tax purposes. In the case of a business enterprise, these conditions are met if multiple persons operate the business as so-called co-entrepreneurs within the meaning of Section 15 (1), sentence 1 no. 2 of the German Income Tax Act (Einkommensteuergesetz; EStG). They generate income from a business operation that is also subject to trade tax. A co-entrepreneur is someone who is a partner in a partnership under civil law or holds a position economically comparable to that of a partner, bears co-entrepreneurial risk, exercises co-entrepreneurial initiative, and has the intention of making a profit.
Co-entrepreneurial initiative primarily refers to participation in business decisions, such as those typically made by shareholders or similar individuals in their capacity as managing directors, authorized signatories, or other senior executives. It is sufficient to have the ability to exercise shareholder rights that are at least comparable to the voting, oversight, and veto rights to which a limited partner is entitled.
Co-entrepreneurial risk refers to a participation, under corporate law or in an economically comparable manner, in the success and failure of a commercial enterprise, as well as in its hidden reserves, including goodwill. This requires a capital contribution that can be charged against the shareholder’s assets; co-entrepreneurial risk may also arise from a liability risk. Merely waiving a right to a future share of profits is not sufficient.
Although these two main characteristics of the status of commercial co-entrepreneur may be more or less pronounced in individual cases, both must be present - as is also the case, for example, with a so-called atypical silent partner. A so-called typical silent partner, however, does not have the status of a commercial co-entrepreneur; he or she generally derives income from capital assets.
Against this background, the German Federal Fiscal Court (Bundesfinanzhof; BFH) had to determine in its decision of November 13, 2025 (case no. IV R 24/23) whether silent partnerships in a limited liability company whose capital contribution is based on the provision of services give rise to typical or atypical silent partnerships.
In the case in question, a limited liability company (GmbH) entered into essentially identical agreements with both its managing director and an authorized signatory regarding a silent partnership. The agreed-upon contribution consisted of the provision of services such as management and the preparation of decisions regarding the purchase and sale, financing, and administration of real estate properties. Furthermore, the agreements provided for a share in profits but did not include a share in losses or an obligation on the part of the silent partner to make additional contributions.
The GmbH treated the silent partnerships it had entered into as so-called typical silent partnerships and withheld capital gains tax on the profit distributions paid out. The tax office, however, viewed these as atypical silent partnerships involving commercial co-entrepreneurial status, in which the tax bases must be determined separately and uniformly. The tax court of first instance concurred with this view, but the BFH disagreed.
In this case, the silent partners did not bear any - or at least any significant - co-entrepreneurial risk. Although they received a substantial share of the profits, they did not make any capital contribution that could encumber their assets. The services to be provided under the partnership agreement were insufficient for this purpose. This is because the promise of future services does not constitute a capital contribution that entails a burden on the silent partner’s assets; no co-entrepreneurial risk is associated with it. The same applies to any (futile) expenses, such as travel costs.
Furthermore, participation in the (current) profits from the sale of current assets did not constitute a stake in the hidden reserves and goodwill that would give rise to a co-entrepreneurial risk, but rather a mere profit-sharing arrangement. Moreover, in this case, the silent partners did not share in the company’s losses and were not required to make additional capital contributions. Liability was also excluded both internally and externally.
Notice:
The BFH remains consistent with its previous rulings: Without at least a minimal co-entrepreneurial risk, even a strong display of co-entrepreneurial initiative is insufficient to establish co-entrepreneur status.