Modified separation theory in the case of partial payment transfer of special business assets

In its decision of December 11, 2025 (case no. IV R 17/23), the German Federal Fiscal Court (Bundesfinanzhof; BFH) had to clarify whether, in the case of the transfer of individual business assets for partial payment within the scope of application of Section 6 (5) sentence 3 no. 2 of the German Income Tax Act (Einkommensteuergesetz; EStG), i.e., in the case of the transfer of special business assets, the profit should be determined according to the so-called strict separation theory or according to the so-called modified separation theory.
The strict separation theory divides the transaction into a paid part (sale of the asset with disclosure of hidden reserves) and an unpaid part (book value transfer in accordance with Section 6 (5) sentence 3 EStG). To determine the payment ratio, the partial payment is set in relation to the market value of the asset. The book value is also divided into this ratio, so that the partial payment is only offset by a proportionate book value. Like the strict separation theory, the modified separation theory divides the partial transfer into a paid and an unpaid part. However, it allocates the book value of the asset to the partial payment in a different way, according to which a profit ultimately only arises if and to the extent that the payment exceeds the book value.
 

Facts of the case

In the case in dispute, a property with a book value of EUR 920,217 was transferred from the special business assets of a co-partner to the joint assets of a sister partnership. The book value was agreed as the purchase price. The market value was EUR 1,028,011. In the opinion of the tax authorities, in this partially paid transaction, the book value must be divided between the paid and unpaid parts in accordance with the payment ratio (strict separation theory). Accordingly, the paid portion (sale for EUR 920,217) would be allocated a book value of EUR 920,217/EUR 1,028,011 = 89.51% of EUR 920,217, i.e. EUR 823,686.24, and this would result in a capital gain of EUR 96,530.76.
 

Decision and reasoning of BFH

According to the ruling of the BFH, the book value must first be allocated to the paid portion of the transfer up to the amount of the partial payment, and since the partial payment corresponded to the book value in the case in dispute, no capital gain arose.

This should be viewed against the backdrop that an asset belonging to special business assets can be transferred in various ways to a partnership in which the co-entrepreneur himself has a stake:

• A sale for payment may take place as between unrelated third parties, so that a capital gain arises in the special business assets if the payment exceeds the tax book value.
• If an asset is transferred free of charge or in exchange for the granting or reduction of company rights from the special business assets of a co-partner to the joint assets of the same co-partnership or another co-partnership in which he or she has a stake, and vice versa, Section 6 (5) sentence 3 no. 2 in conjunction with Section 5 sentence 1 EStG mandatorily requires the carrying amount to be used, so that no hidden reserves are disclosed.

However, Section 6 (5) sentence 3 EStG does not directly address the income tax treatment of a transfer of individual business assets for partial payment within its scope of application, as in the case in dispute. According to the decision of the IV. Senate of the BFH, in the case of the transfer of individual business assets for partial payment within the scope of application of Section 6 (5) sentence 3 EStG, preference should be given to the modified separation theory. This does not follow from the wording or from legal considerations, but from the meaning and purpose of § 6 (5) sentence 3 EStG. The decisive factor here is the meaning and purpose of Section 6 (5) sentence 3 EStG, which is to enable restructuring of partnerships within the scope of this provision by transferring individual assets without triggering income tax liability. The BFH thus expressly rejects the contrary opinion of the tax authorities (German Federal Ministry of Finance, December 8, 2011, Federal Tax Gazette I 2011, 1279, margin number 15).


 

Notice:

In contrast, partially paid transfers of economic assets from private assets subject to taxation are recognized for tax purposes according to the strict separation theory.
It now remains to be seen how the tax authorities will respond, i.e., whether they will follow the BFH’s opinion. Planning security would be very important in practice.