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Certified Tax Advisor, Manager, National Office Tax & Legal
Senior Consultant, National Office Tax & Legal
Business-related interest expenses are not always fully deductible as business expenses for sole proprietorships and partnerships. If withdrawals exceed the sum of profit and contributions, so-called excess withdrawals can limit the deduction of interest expenses under Section 4 (4a) of the German Income Tax Act (EStG). Withdrawals and deposits from previous fiscal years are also taken into account. This rule, however, does not apply to corporations. Therefore, upon the change of legal form of a limited liability company into a limited partnership, the question arises whether the existing equity increases the future withdrawal potential of the limited partnership. The German Federal Fiscal Court (Bundesfinanzhof; BFH) answered this question affirmatively in its decision of September 2, 2026 (case no. IV R 10/24): the positive tax-balance-sheet equity taken over must be treated for these purposes like a contribution.
A limited liability company (GmbH) was converted into a limited partnership with a limited liability company as general partner (GmbH & Co. KG) with effect from January 1, 2010. Its former shareholder, itself a limited partnerhip, subsequently became the sole capital-contributing limited partner. Another partnership in turn held an interest in that upper-tier entity. The converted GmbH had positive taxable equity.
For the tax year 2012 the tax office determined excess withdrawals without taking the GmbH’s equity into account as a contribution. Instead, it assumed an opening balance of EUR 0 and added interest expenses of approx. EUR 52,000 to the profit of the GmbH & Co. KG. Accordingly, it increased the trade tax assessment base. The business-related origin of the interest expenses was undisputed.
The GmbH & Co. KG objected to the addition. It argued that the deduction limitation should not be applicable in its multi-tiered ownership structure. In any event, the equity taken over in the change of legal form must be included as a contribution. The Fiscal Court and the BFH followed this view.
The BFH first confirmed that the deduction limitation also applies to a lower-tier partnership in which no natural person participates. The decisive factor is the individual business, not the legal form of its shareholders. A group-wide view is therefore excluded. Funds that flow to another operating unit and do not leave the group can nevertheless constitute withdrawals at the transferring company.
However, the positive taxable equity of the GmbH taken over must be recognized by the GmbH & Co. KG as a contribution. Although a change of legal form does not constitute a change of legal entity or a transfer of assets under civil law, and the shareholders therefore do not in fact supply new assets to the GmbH & Co. KG, the German Reorganization Tax Act fiscally simulates a transfer of assets because of the different tax systems for corporations and partnerships. For the application of the deduction limitation, the businesses of the GmbH and the GmbH & Co. KG are to be treated separately in this respect.
This result corresponds to the equity model underlying the provision: profits and contributions generally increase the amount that may be withdrawn from the business without adverse effects for the deduction of interest expenses. The positive equity taken over in the change of legal form must therefore not be disregarded. In this respect the transaction is comparable to the opening of a business, where the initial provision of funds is likewise recorded as a contribution.
The GmbH & Co. KG’s entry into the tax position of the GmbH does not preclude this. Since the deduction limitation is not applicable to corporations, there were no excess or deficit withdrawals at the GmbH that could have passed to the GmbH & Co. KG. It is therefore not appropriate to continue an assumed balance of EUR 0. In this respect the change of legal form differs, for example, from the gratuitous transfer of a sole proprietorship, whose existing excesses or deficits are generally continued.
Including the taken-over equity, there were, on calculation, no excess withdrawals in the year in dispute. The addition of the interest expenses therefore fell away both in the profit determination and in the calculation of the trade tax assessment base.
Notice:
The BFH decision contradicts the administrative view (OFD Rheinland of June 29, 2011), according to which no contribution is to be recognized on a change of legal form and an opening balance of EUR 0 is to be assumed for the determination of non-deductible debts. In affected changes of legal form, the positive taxable equity taken over and its consideration in the ongoing calculation of excess and deficit withdrawals should therefore be reviewed. For still amendable assessments, this can result in a higher deduction of interest expenses.
A related question concerns the merger of a GmbH into the sole proprietorship of its sole shareholder. For that situation, the Fiscal Court Berlin‑Brandenburg, in its decision of March 19, 2024 (case no. 15 K 15090/22), also treated the positive equity taken over as a contribution. The appeal is pending before the BFH under case no. III R 19/24. Corresponding cases should be kept open with reference to the appeal procedure.