Transfer of a corporation's trade tax loss when transferring its entire business
Transfer of a corporation's trade tax loss when transferring its entire business
When the entire business of a corporation is transferred to a partnership, the question often arises as to how trade losses are to be dealt with. In case law, it was previously an undecided question whether the trade loss determined for the corporation is transferred to the partnership or remains with the corporation and is therefore only available for offsetting against its future profits if it subsequently ceases to operate. The BFH has now ruled in its judgment of 01.02.2024 (IV R 26/21) and continues the case law of the IV Senate (judgment of 04.05.2017 - IV R 2/14) and the III Senate (judgment of 17.01.2019 - III R 35/17).
In the disputed matter, a limited liability company (LLC) established under US law - comparable to a German corporation – transferred its German permanent establishment to a GmbH & Co KG pursuant to Section 24 Transformation Tax Act (UmwStG). The LLC was the sole limited partner and sole shareholder of the general partner GmbH of the GmbH & Co. KG. After the transfer, the GmbH & Co KG continued the operations of the LLC in full. The LLC itself no longer carried out any operational commercial activities in Germany. It limited itself to holding the shares in the general partner GmbH and managing its co-entrepreneurial position. The LLC's registered place of business in Germany was deleted.
The transfer of the trade loss determined for the LLC to the GmbH & Co KG for use or continuation requires business identity (Unternehmensidentität) and entrepreneurial identity (Unternehmeridentität).
The BFH considers the business identity to be given. This stipulates that the business operation existing in the reduction year must be identical to the business operation that originally existed in the year in which the business loss was incurred. The BFH emphasizes that the transfer pursuant to Section 24 UmwStG does not involve the automatic transfer of the transferor's carryforward losses within the meaning of Section 10a Trade Tax Act (GewStG). Instead, the general principles of business identity shall apply. In the case of a partnership, it must be determined whether the commercial activity actually carried out has remained the same. This must be assessed based on the overall picture of the activity, considering its key attributes. In the case at hand, the business activity was seamlessly continued by taking over customer relationships and contracts.
However, the case law stating that the deduction of a trade loss in the case of corporations does not require a business identity due to the fiction of commerciality in Section 2 para. 2 sentence 1 GewStG, only applies to cases in which the corporation still carries out an activity. However, if the corporation transfers its entire business to a partnership, it no longer maintains a business after the transfer. In this case, the fiction recedes behind the actual identity-preserving continuation of the business by the partnership. The presumption of business identity implies that the trade loss that can be carried forward can no longer be used at the level of the corporation - not even optionally.
In the opinion of the BFH, the holding of the joint partnership shares is not of independent significance for trade tax purposes. The shareholding in the general partner GmbH constitutes special business assets II (Sonderbetriebsvermögen II) of the partnership and is therefore not part of the business assets of the corporation.
Furthermore, the BFH states that the entrepreneurial identity is also established. This means that the entrepreneur who wishes to claim the loss must have previously suffered it in his own person. The LLC, which suffered the trade loss, is the sole limited partner of the GmbH & Co KG and holds a 100% interest in its assets; it therefore remains the (co-)entrepreneur of the trade even after the transfer of its business to the partnership to the extent that it holds an interest in the partnership.
In the disputed matter, a limited liability company (LLC) established under US law - comparable to a German corporation – transferred its German permanent establishment to a GmbH & Co KG pursuant to Section 24 Transformation Tax Act (UmwStG). The LLC was the sole limited partner and sole shareholder of the general partner GmbH of the GmbH & Co. KG. After the transfer, the GmbH & Co KG continued the operations of the LLC in full. The LLC itself no longer carried out any operational commercial activities in Germany. It limited itself to holding the shares in the general partner GmbH and managing its co-entrepreneurial position. The LLC's registered place of business in Germany was deleted.
The transfer of the trade loss determined for the LLC to the GmbH & Co KG for use or continuation requires business identity (Unternehmensidentität) and entrepreneurial identity (Unternehmeridentität).
The BFH considers the business identity to be given. This stipulates that the business operation existing in the reduction year must be identical to the business operation that originally existed in the year in which the business loss was incurred. The BFH emphasizes that the transfer pursuant to Section 24 UmwStG does not involve the automatic transfer of the transferor's carryforward losses within the meaning of Section 10a Trade Tax Act (GewStG). Instead, the general principles of business identity shall apply. In the case of a partnership, it must be determined whether the commercial activity actually carried out has remained the same. This must be assessed based on the overall picture of the activity, considering its key attributes. In the case at hand, the business activity was seamlessly continued by taking over customer relationships and contracts.
However, the case law stating that the deduction of a trade loss in the case of corporations does not require a business identity due to the fiction of commerciality in Section 2 para. 2 sentence 1 GewStG, only applies to cases in which the corporation still carries out an activity. However, if the corporation transfers its entire business to a partnership, it no longer maintains a business after the transfer. In this case, the fiction recedes behind the actual identity-preserving continuation of the business by the partnership. The presumption of business identity implies that the trade loss that can be carried forward can no longer be used at the level of the corporation - not even optionally.
In the opinion of the BFH, the holding of the joint partnership shares is not of independent significance for trade tax purposes. The shareholding in the general partner GmbH constitutes special business assets II (Sonderbetriebsvermögen II) of the partnership and is therefore not part of the business assets of the corporation.
Furthermore, the BFH states that the entrepreneurial identity is also established. This means that the entrepreneur who wishes to claim the loss must have previously suffered it in his own person. The LLC, which suffered the trade loss, is the sole limited partner of the GmbH & Co KG and holds a 100% interest in its assets; it therefore remains the (co-)entrepreneur of the trade even after the transfer of its business to the partnership to the extent that it holds an interest in the partnership.
Notice:
The ruling is to be commended, as it opens the possibility of utilizing the established trade losses in the absorbing partnership if the entire business of a corporation is transferred. It is crucial to ensure that the corporation no longer carries out any independent commercial activity after the contribution but is limited exclusively to the management of its co-entrepreneurial shares and the holding of the participation in the general partner GmbH.
The BFH's statement that trade losses incurred by a corporation can be used by a partnership after the transfer of the entire business is particularly welcome, as such an effect is due to the different treatment of partnerships and corporations under trade tax law. This means that start-up losses that are not relevant for trade tax purposes, which a partnership generates during the establishment of its business operations prior to the commencement of trade tax liability, could be utilized for trade tax purposes if, instead, a corporation, which is already subject to trade tax upon entry in the commercial register, establishes the business operations and subsequently transfers them to a partnership.
The ruling is to be commended, as it opens the possibility of utilizing the established trade losses in the absorbing partnership if the entire business of a corporation is transferred. It is crucial to ensure that the corporation no longer carries out any independent commercial activity after the contribution but is limited exclusively to the management of its co-entrepreneurial shares and the holding of the participation in the general partner GmbH.
The BFH's statement that trade losses incurred by a corporation can be used by a partnership after the transfer of the entire business is particularly welcome, as such an effect is due to the different treatment of partnerships and corporations under trade tax law. This means that start-up losses that are not relevant for trade tax purposes, which a partnership generates during the establishment of its business operations prior to the commencement of trade tax liability, could be utilized for trade tax purposes if, instead, a corporation, which is already subject to trade tax upon entry in the commercial register, establishes the business operations and subsequently transfers them to a partnership.