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This article was written by
Certified Tax Advisor, Manager, National Office Tax & Legal
Certified Tax Advisor, Lawyer, Director, National Office Tax & Legal
The German Federal Fiscal Court (Bundesfinanzhof; BFH) had issued several influential decisions in recent years regarding partnerships as controlling entities within an income tax group, and the tax administration largely aligned with these in a German Federal Finance Ministry (BMF) circular dated July 17, 2026.
The minimum term required by Section 14 (1) sentence 1 no. 3 of the German Corporation Tax Act (Körperschaftsteuergesetz; KStG) can only commence with the civil-law effectiveness of the profit transfer agreement that is decisive for tax recognition. Cases are therefore critical in which the agreement is concluded for five years but is only entered in the commercial register in a subsequent year. Practice had used a contractual clause stipulating that the minimum term only begins in the financial year in which the agreement is entered in the commercial register and thus becomes effective, ensuring compliance with the contractual five‑year minimum term. The tax administration now explicitly accepts this approach.
More for completeness and to explicitly record the abolition decades ago of the so‑called multi‑parent tax group with respect to remaining legacy cases, the BMF clarifies that, where a partnership acts as controlling entity, the requirements for financial integration must be met in relation to the partnership itself. Accordingly, at least the majority-mediated voting shares in the group company must be held in the partnership’s community property.
For a partnership to act as controlling entity, Section 14 (1) sentence 1 no. 2 sentence 2 KStG requires its own, not merely minor, commercial activity. In rulings from 2023 and 2024 (case no. I R 16/19 and I R 23/21), the BFH confirmed that this can also be provided by management holding companies or intra‑group services.
For the required commercial activity, mere shareholdings in subsidiaries or a domination agreement are not sufficient in the case of holding partnerships. Instead, the holding must actually operate as a management holding, i.e., manage several subsidiary corporations and actively assume managerial functions. By expressly focusing on the management of several subsidiaries, the tax administration intends to narrow the circle of holding partnerships regarded as commercially active (and thus as controlling entities). This is likely also in the context that the BFH had rejected the additional commercial activities (e.g., fee-based services) previously demanded by the administration beyond managerial activity and clarified that pure managerial influence suffices provided it is externally recognizable.
Notice:
To avoid exit taxation under Section 6 of the German Foreign Tax Act, substantial shareholdings in corporations that are held in private assets are often transferred in advance into the business assets of a partnership. This is only tax-sustainable if the partnership itself establishes a commercial business and the shareholding can be functionally allocated to that business’s assets. The BMF’s current view on when and to what extent a management holding exercises its own commercial activity will likely also apply in the exit taxation context. This yields significant structuring options but also necessitates careful planning and implementation of such structures.
Intra‑group services can constitute an own commercial activity even if provided to only one or a few clients. However, they must be performed and invoiced for a separate, arm’s‑length fee.
A merely asset-managing partnership does not satisfy the required own commercial activity merely because it holds an interest in a commercially active partnership and therefore derives commercial income by way of commercial infection. However, in the case of a business split, the partnership that owns the business may serve as the controlling entity based on its resulting primary commercial activity, even if it otherwise engages solely in asset management.