Loss utilization after termination of a two-tier limited partnership through merger with a limited liability company
Loss shares attributable to a limited liability co-partner are only taken into account by him/her in the year in which they arise in accordance with Section 15a of the German Income Tax Act (EStG) to the extent that the co-partner is also legally or economically burdened by them. Losses that cannot be offset or deducted in the year in which they arise are offset in subsequent financial years against the co-partner’s share of profits from the same source of income (participation in the same co-partnership). In particular in cases of restructuring, there are always unresolved questions regarding the continuation of this person-related, offsettable loss. The German Federal Fiscal Court (BFH) has now clarified the principles for the utilization of losses after the termination of a two-tier limited partnership (KG) through merger with a limited liability company (GmbH) in its ruling of March 19, 2025 (case no. XI R 2/23).
Facts of the case
In the case in dispute, a general partner GmbH without a share in the assets and a GmbH as the sole limited partner held a 100% stake in a two-tier limited partnership (GmbH & Co. KG) that carried out various activities. On December 30, 2011, the general partner GmbH withdrew from the GmbH & Co. KG without compensation and its assets were transferred to the (remaining) GmbH by way of merger. The question now was whether the existing loss, which was also transferred in the course of the merger, could only be offset against future profits from this activity or against profits from the entire company.
Utilization of only deductible losses pursuant to Section 15a EStG
The tax office’s view that the loss determined for the limited partner at the KG pursuant to Section 15a EStG can only be used by the limited partner if the business of the former KG can still be identified with the remaining GmbH cannot be derived from the law. Rather, it follows from the uniform business operation of a corporation pursuant to Section 8 (2) of the German Corporation Tax Act (KStG) that it is not necessary to continue the specific loss-making business of the KG.
Although the loss transferred on the basis of universal succession is not reclassified from a loss that can be offset to a loss that can be compensated, the remaining GmbH can, in principle, offset the losses taken over by the KG against all profits from its entire business. This is not precluded by the BFH’s strict participation-related approach, according to which loss offsetting is only permitted against profits from the same participation in which the losses were incurred. This is because, since the transfer to the previously limited partner as GmbH, there is now only one source of income whose profits are relevant for a possible offset; Section 8 (2) KStG clarifies that a corporation falling under this provision, as in the present case, has only one uniform business operation.
Treatment of trade tax loss carryforwards
The loss recorded by the KG is also usable by the GmbH for trade tax purposes within the meaning of Section 10a of the German Trade Tax Act (GewStG) as a result of the merger. The tax office had denied the corporate identity, arguing that after the KG was incorporated into the business assets of a GmbH, the corporate identity was lost due to their uniform operation. The BFH also rejected this argument.
In the case of a corporation, corporate identity is generally considered unproblematic because, according to Section 2 (2) sentence 1 GewStG, its activities are always and fully considered to be commercial operations. According to the established case law of the BFH, a change in its economic activities does not affect the corporate identity of a corporation as long as the same uniform commercial operation continues to exist. Accordingly, the criterion of corporate identity is of no significance - at least in principle - for the continuation of the carryforward of trade losses in the case of a corporation.
According to recent supreme court rulings (BFH, ruling of July 25, 2024, case no. III R 30/21), these principles of continuing corporate identity in the case of a corporation also apply if the corporation has assumed a business loss determined for a partnership by way of merger. This could be assessed differently if the business activities of the partnership had already been completely terminated prior to the merger. Since, in the case in dispute, the commercial activities of the KG had only been largely, but not completely, discontinued, the BFH did not need to answer this question.
Procedural aspects
The case in dispute was also somewhat complex because the remaining GmbH had claimed the loss that could only be offset in accordance with Section 15a EStG or the corresponding trade loss that could be carried forward in view of the merger on December 30, 2011, during the 2011 assessment or collection period. However, following an external audit and due to other circumstances, the tax office issued a notice on December 31, 2011, for 2011 on the separate and uniform determination of the basis of taxation and the loss that could be offset in accordance with Section 15a (4) EStG, as well as on the separate determination of the trade loss that could be carried forward. These notices became final.
Although the merger took place on December 30, 2011, meaning that, in accordance with the cut-off date principle, Section 15a EStG would no longer have been applicable to the KG for the whole of 2011. Accordingly, no separate and uniform determination of the basis of taxation and the offsettable loss should have been made on December 31, 2011. Nevertheless, such a notice was issued and became final. It is therefore the binding basis for the further consideration of the losses at the GmbH pursuant to Section 182 of the German Fiscal Code (AO). According to Section 15a (2) EStG, losses that have not been offset or deducted can only be offset against profits in future financial years. According to the wording of the provision, it is no longer applicable if a former limited partner no longer holds this legal position after the merger. However, it follows from the purpose and systematics of the regulation that losses can only be utilized or offset against profits after the date of merger. Since the last – final - separate and uniform determination of the tax bases and the offsettable loss for the KG took place on December 31, 2011, future profits for the GmbH are only those after this date. A deduction of the loss determined for the KG can therefore only be made in the context of corporate income tax for the year 2012.
The same applies to the business loss recorded on December 31, 2011. Its use by the universal successor is also only possible in the next assessment period.
Notice:
This decision, which is very advantageous for the restructuring of partnerships, shows that there is considerable scope for maneuver that can be exploited. The fact that the losses could only be utilized in the following year despite having accrued during the current year is not based on the substantive regulations now clarified by the BFH, but on procedural errors on the part of the tax office and the finality of the corresponding notices, which the taxpayers did not prevent. Precisely planned and well-designed restructurings must be accompanied with particular care throughout the tax procedure until completion.
