Receivership and operational initiation of land charges in the event of a co-entrepreneurial division of operations

Not least for liability reasons, real estate used for business purposes is often held in a separate company and made available to the operating unit on a rental basis. In practice, however, these arrangements often reach their limits because the operating company does not have sufficient collateral for operating liabilities and the real estate must serve as collateral. If the operating company then finds itself in financial difficulties and the collateral is called upon, it is important from a tax perspective to claim the resulting asset losses accordingly.

The German Federal Fiscal Court ruled on such a constellation in its decision of June 25, 2025 (case no. IV R 1/23). The facts of the case were, in simplified terms, as follows:

• As part of a co-entrepreneurial division of operations, G-KG, as the holding company, leased land belonging to its joint property to K-KG, as the operating company. In addition, K-KG's operating liabilities were secured by land charges on G-KG's real estate.
• K-KG then ran into financial difficulties and insolvency proceedings were opened against its assets in June 2012. Also beginning in 2012, the bank pursued foreclosure proceedings against K-KG for outstanding loan claims secured by land charges on the properties of G-KG. In January 2013, the local court ordered receivership for the properties of G-KG. The properties of G-KG were later sold.
• The rental payments collected by G-KG, which were to be forwarded to the receiver after deduction of costs, became a matter of dispute. The proceeds from the sale of the properties, which ultimately did not benefit G-KG either, also became a matter of dispute.

In this respect, the Federal Fiscal Court had to deal with the question of the tax allocation of operating income and operating expenses to the holding company in the context of this co-entrepreneurial division of operations. The Federal Fiscal Court essentially made the following findings, which are significant beyond the case decided:

• The rental income generated in the years in dispute as part of the receivership of G-KG's business premises is attributable solely to G-KG as operating income from its rental activities. The receivership does not change this. 
• Similarly, the proceeds from the sale of G-KG's real estate are also attributable to G-KG as operating income.

• The land charges on the real estate assets of G-KG were business-related in this case, at least since the co-entrepreneurial division of operations came into being. This is because a land charge that serves to secure a non-operating liability is incurred by the operating partnership in the case of a co-entrepreneurial division of operations if the land charge (continues to) serve to improve the operating company's financial and earnings position. Consequently, G-KG had to recognize a profit-reducing provision for the obligation arising from these land charges in 2013 at the latest due to the ordered receivership.

• This applies regardless of the fact that the land charges may have already existed before the co-entrepreneurial division of operations was established. Even if the land charges were originally incurred outside of business operations, the establishment of the co-entrepreneurial division of operations would have led to a reclassification of the land charges and thus to a business-related cause, as the German Federal Fiscal Court points out.

Notice: 

This ruling makes it clear that the operational reasons for such land charges in favor of another (affiliated) company must be carefully examined. Above all, this situation has an impact on the balance sheet if it is likely that the security provided will be called upon, which must then be taken into account by recognizing an expense through the creation of a provision.