1st Introduction

The right of real division has always been characterized by the lack of a legal definition of the concept of real division. [1] Although the term has been mentioned in the EStG for more than fifteen years now, it has been disputed how it should be understood. [2] The focus of the discussion was essentially two questions: On the one hand, it was unclear whether there would be a real division if the co-entrepreneurship was dissolved under civil law, but the previous operation of the co-entrepreneurship continued. On the other hand, it was discussed under which conditions a real division exists if the company does not expire under civil law, but one of the shareholders resigns against real value compensation and the other shareholders continue the company.

The financial administration has for this statutory regulation of § 16 para. 3 sentences 2 to 4 EStG in realteilungsreich I of 28.02.2006. [3] After the BFH had ruled in judgment of 17.09.2015[4] that the resignation of a co-entrepreneur against property severance compensation can also constitute an application of the real share, the financial administration was forced to recast the real share order with BMF letter of 20.12.2016 (real share order II).[5] Although the above-mentioned statements of the BFH of 17.09.2015 were taken into account, the financial administration maintained its narrow interpretation of the concept of real division. The BFH has now rejected this in two fundamental judgments of 16.03.2017 and 30.03.217.

In the following, the author will define the necessary, civil and tax law bases of the real division. Subsequently, the previous possibilities of tax-neutral transfer in partnerships up to 2017 are shown. The resulting tax consequences of the new BFH case-law on real sharing with the judgments of 16.03 and 30.03.2017 and the resulting design possibilities as well as a critical debate follow.

The concept of real division is neither defined in civil law nor in tax law, civil jurisdiction sees this process as another type of dispute within the meaning of § 145 para. 1 HGB, whereby conceptually speaking not of real division, but of natural division. [] 6]

The division of real estate is based on the consideration that, in the event of a resolution to dissolve a partnership, the shareholders of a partnership are free to agree on another form of dispute instead of liquidation. [7] One of these types of disputes is the real division, in which there is no realization of the company’s assets by sale to third parties, but rather a natural division of the company’s assets to the partners.

From a tax point of view, the division of real estate requires not only the individual or collective succession of the assets of the co-entrepreneurship to the individual co-entrepreneurs, but also the retention of the assets in a business asset. [8] Thus, the real division in the sense of § 16 para. 3 sentence 2 EStG is a tax term in itself

2.2. Real Division of a Partnership

The explanations presented in this section relate to the case of complete abandonment of co-entrepreneurship without continuation of this by an existing shareholder.

When co-entrepreneurs agree to dissolve their co-entrepreneurship, they usually wind up the company by selling their assets, paying off their liabilities and sharing a possible surplus among themselves. [9]

Tax law, this process is a task of the business acc. § 16 Abs. 3 sentence 1 EStG. As a result, all silent reserves are realized. [10] Alternatively, the shareholders can also deal by dividing the assets of the company among themselves. In this constellation, there is also an operating task that would actually be realized at common values. However, insofar as these assets are transferred to the respective operating assets of the shareholders and the taxation of the hidden reserves is ensured, the real distribution takes place with continuation of the book values tax-neutral according to m. § 16 paragraph 3 sentence 2 EStG.[11]

It must be assumed that at least one essential operating basis continues to be the operating assets of a real divider. [12] It is not necessary for each real divider to receive essential operating principles of the total handhold. The restriction to “substantial” operating bases is controversial and will be considered in more detail in the further course of the work.

Deviating from § 16 (3) sentence 2 EStG, a retroactive profit realization for the respective transfer process is required, as far as certain assets (buildings, land and other essential operating bases) are sold or removed within a blocking period of three years acc. Section 16(3), third sentence of the EStG.[13] Procedural law, an event with retroactive tax effect would be before § 175 Abs. 1 sentence 1 no. 2 AO.[14] Furthermore, a continuation of book value in the case of the transfer of individual assets to a corporation in accordance with § 1 KStG is excluded, which has assets in the partnership acc. § 16 paragraph 3 sentence 4 EStG is involved. [] 15)

Frequently, the distribution of assets among the shareholders of the co-entrepreneurship cannot be arranged in such a way that the market values of the acquired assets correspond exactly to the respective dispute claims of the co-entrepreneurs. [16] In these situations, the co-entrepreneur, who receives more assets in value than he is entitled to according to the amount of the shareholding, pays out of his own resources an amount to the co-entrepreneurs, who take on less assets in value than they should actually be entitled to, a so-called peak compensation. The real division can be divided accordingly into two groups: the real division without peak compensation and the real division with peak compensation.[17] The peak compensation leads in full to operating income of the beneficiary and to corresponding acquisition costs of the real divider liable for compensation. [] 18)

In summary, the real division deals with the question of the discovery of hidden reserves in the transfer of assets attributable to a partnership and the associated considerable risks resulting from the lack of release of additional assets upon termination of the company. [19] In this respect, there is no inflow of capital associated with a sale process.

For the further course of the work, a property severance payment is available if a co-entrepreneur leaves a multi-party co-entrepreneurship against transfer of (substantial) operating basis of the total assets and this co-entrepreneurship is otherwise continued by the remaining shareholders. [20] A property severance payment is manifested as a rule with subsidiaries, co-entrepreneur shares and individual assets.

3rd division of a partnership according to the BFH judgment of 17.09.2015

As a result of the BFH judgment of 17.09.2015 and the BMF letter of 20.12.2016, the scope of application of the implementation principles has significantly expanded. [21] A continuation of the book value is therefore also possible if the PersG is not dissolved in the event of the departure of a shareholder, but is continued by the remaining shareholders, and the resignee receives a partial operation or co-entrepreneur shares as a real-estate severance payment.

The departure of a shareholder from a continuing company is thus equivalent to the dissolution of a company with subsequent distribution of assets.

The BFH stated in its explanatory statement in judgment of 17.09.2015 that the concept of real division is a tax concept that must be interpreted independently of civil law – and thus independently of the natural division once referred to.[22] In addition, the court gave the systematic status of § 16 para. 3 sentence 2 EStG and also quoted from the government draft,[23] in which the content was justified not to burden economically meaningful restructuring processes as long as the securing of hidden reserves is guaranteed. Furthermore, restructuring must not necessarily be brought about by the dissolution of the co-entrepreneurship, but can also be carried out sensibly by the departure of a co-entrepreneur taking a part of the company. Whether, on the other hand, the departure against severance payment with individual assets constitutes a case of real sharing, the BFH left open with judgment of 17.09.215.

As before, therefore, in the Realteilungsabsatz II of the BMF of 20.12.2016 there remains the indication that the transfer of individual assets to a retired shareholder, if the co-entrepreneurship continues at the same time, with the consequence of the applicability of the blocking period, cannot take place in the course of the favored real division. [24] The further retention of the financial administration in contrast to the wording of § 16 Abs. 3 sentence 2 EStG is to be emphasized in particular in the present case with the threatened legal consequence of taxing the extracted or sold assets as non-tariff-privileged. [] 25]

4. realteilung of a partnership according to the BFH judgments of 16.03 u. 30.03.2017

The granting of a partial operation as a severance payment for the retired shareholder is also to be qualified as a real division, insofar as the co-entrepreneurship is continued with a reduced shareholder portfolio. [26] Why should this not also be considered a severance payment in the form of individual economic goods? The legal wording unquestionably speaks of subsidiaries, co-entrepreneur shares or individual assets.

The financial administration wanted the new principles with BFH judgment of 17.09.2015 explicitly understood only on subsidiaries and consolidated this in its BMF letter of 20.12.2016 in the so-called “Federal Law”. Decree of Real Division II.[27]

By judgment of 16.3.2017, the BFH responds that § 16 para. 3 sentence 2 EStG applies both to a real division and to a so-called improper real division. [28] As already explained, there is a real real division if the business is abandoned and the assets are divided between the real dividers (this is the variant of the natural division standardized in civil law[29]), while there is a false real division if a share of the co-entrepreneur is abandoned while continuing the previous share of the co-entrepreneurship. [] 30]

Furthermore, in the judgment of 16.03.2017, BFH stated that it is not decisive for the existence of the facts of the division of real estate if the outgoing shareholder of the co-entrepreneurship takes over essential operating bases in his operating assets. [31] The decisive factor is much more that the business assets cease to serve the commercial activity of the person to whom the business was imputed. This is especially true if a co-entrepreneurship – as a subject of profit determination – ceases to exist due to its dissolution and dispute. After the dissolution and dispute of the co-entrepreneurship, the business assets serve the commercial activity of the sole proprietorship and no longer that of the co-entrepreneurship. [32]

With BFH judgment of 30.03.2017 it was clarified in accordance with the wording of the law that the nature of the transferred real assets (sub-entity, co-entrepreneur shares or individual assets) has in principle no significance for classification as real division.[33] In this judgment, the BFH now extends the application of § 16 para. 3 sentence 2 EStG also applies to cases of real value compensation in which only individual assets of the company assets are transferred to the retired person for severance payment and continue to be used by him. [34] Thus, a performance-neutral exit of individual assets is legally possible. Previously, this was only about § 6 Abs. 5 sentence 3 no. 1 EStG feasible, with the clear limitation that the assumption of liabilities was contrary to the standard for non-remuneration, so that in this case a continuation of book value was not feasible. [35] Now the provisions of § 16 para. 3 sentence 2 EStG for the transfer of individual assets and in the event of leaving the co-entrepreneurship lex specialis the application of § 6 para. 5 sentence 3 EStG.

Open questions and design possibilities according to the latest BFH judgments

5.1. Sister partnerships

Furthermore, it is not possible to transfer individual assets of the total assets of the realteilungsgesellschaft into the total assets of another co-entrepreneurship, in which one or all real dividers are also involved, at book values. 3 sentence 2 expressly requires the transfer to the respective operating assets of the individual co-entrepreneurs. [38] This remains even after the recently passed BFH judgments. As a way out, a transfer of the real divided assets into own (special) business assets comes into consideration, which is tax-neutral according to § 6 Abs. 5 sentence 3 no. 1 or 2 EStG, then after expiry of the retention period into the sister partnership also acc. § 6 Abs. 5 sentence 3 no. 1 or 2 EStG at book value. [] 39]

With regard to the assessment of real shareholdings i.Z. with shareholding partnerships, the BFH submitted the question to the BVerfG by resolution of 10.04.2013 whether the provisions of § 6 para. 3 EStG against the general principle of equality of art. 3, par. 1 GG violates.[40] Until the decision of the BVerfG, pending proceedings before the BFH for the tax-neutral restructuring of sister companies are postponed.

5.2.

The controversial overall planning case-law has been rejected in the area of real division with the latest BFH judgments. [41] Again, the BFH refused to combine designs based on a uniform plan into a uniform economic process and to subsume as such under a tax event.[42] Indications for an abusive design according to FIG. § 42 AO saw the BFH also not available. In the context, a one-man GmbH & Co. KG was interposed a logical second before leaving against property severance. Behind the intermediate company was the same person who had previously been the direct partner of the parent company. Thus, misuse of design can only be detected in exceptional cases. [43]

5.3 Exit against cash compensation

So far, the BFH in judgment of 17.09.2015 assumes that there is no real division if the retiring person receives liquid funds in the company assets as severance payment. [44] It also sometimes sees the dominant literature; in case of departure against cash compensation, this should therefore indisputably represent a sale of the co-entrepreneur part acc. § 16 Abs. 1 p. 1 no. 2 EStG.[45]

Since the BFH assumes that the departure of a co-contractor against severance payment from the company assets constitutes a case of abandonment of a co-contractor share, Stenert considers that it is also consistent if any type of (non-cash or cash) severance payment falls under the circumstances of § 16 para 1 no. 2 i.V. 3 sentence 1 EStG is taken.[46] Accordingly, in the case of a cash severance payment, a real division must be possible, since the law does not distinguish between cash and real value severance payment. Rather, we are talking about individual goods. These economic goods also include liquid funds.[47]

In its judgment of 17 September 2015, the BFH states: Money and claims can be freely allocated to the shareholders as part of the (non-remunerated) assets, like other tangible or intangible assets, in the course of a real division. “[48]” According to Stenert, this applies not only in the case of the transfer of a branch of business, but also when the person leaving the company is redeemed with liquid funds available in the company assets. [49] In the quotation shown, the BFH does not speak of allocation of money and claims to subsidiaries, it clearly speaks of allocation to shareholders. The BFH follows the same direction in judgment of 16.03.217, according to which there is an improper division of real estate “when a co-entrepreneur leaves a co-entrepreneurship that continues between the other co-entrepreneurs while taking away co-entrepreneurial assets (also in monetary form). ‘ [] 50

The same opinion is Jacobsen, according to which in § 16 para. 3 sentence 2 EStG real divisions with (any type of) individual goods are to be privileged. [51] Liquid funds qualify as such individual assets. Similarly, a real division in which individual co-entrepreneurs are allocated only cash, book money or stable securities must not be denied the book value privilege.

With regard to possible arrangements, however, caution is advised for cash severance payments in accordance with § 42 AO, in particular if deposits or loans are made shortly before the departure of a shareholder. [52] If a design in this direction is chosen, care should be taken that the deposits or the borrowing is economically underpinned. [] 53

5.4 Real division beneficial?

Finally, it should be mentioned that the continuation of the necessarily later taxable hidden reserves is not always the most favorable form of arrangement; in many cases, a waiver of the eligible allowances and tariff reductions and the higher depreciation to be gained proves to be a disadvantage.[54] From the point of view of loss carry forwards, a discovery of hidden reserves appears to be mandatory if a shareholder e.g. a high loss carry forward which cannot be used in any other way.

A more advantageous solution is also likely to exist if, as a result of early design considerations, co-entrepreneurs partly distribute their shares among one or more relatives, free of charge in case of doubt. For the shared co-entrepreneur shares, the hidden reserves would be distributed among several heads. In addition, the tariff reduction of the fifth rule or the reduced rate could be considered several times, resulting in higher savings.

According to the wording of § 16 para. 2 sentence 3 EStG, however, there is no profit realization option right in the case of a completed real division, a mandatory book value continuation is inevitable.[55] Notwithstanding this, co-entrepreneurs have the possibility at any time to acquire the assets from the co-entrepreneurship in full or in part for payment. Thus they have the right to choose between book value and common value approach.

6th overall result

The BFH’s recent jurisprudence on the concept of real division has provided convincing clarity. [56] The severance payment in kind shall be treated in accordance with the principles of division of real estate, irrespective of whether it is granted to the outgoing shareholder as a branch, a share of the company or as an individual asset. The real division thus now receives the further scope of application that the legislature had intended for them from the beginning.[57] The BFH has taken into account the objective of the legislature not to impede taxation of restructuring operations desired by the company. [] 58]

As a result of the two most recent BFH judgments of 16.03.2017 and 30.03.2017, the financial administration should have no choice but to follow the case-law and adapt the realteilungsree. A further hesitation is already incomprehensible, since the tax liability of the Treasury is secured due to existing abuse clauses. [60]

A retreat of the BMF, following the convincing supreme court case law, would greatly facilitate design practice.

The taxpayer still has to fear that he will be denied the continuation of the book value – even if he is open to legal action. [61] A reliable tax planning security, which also allows for short-term implementation, can only be achieved if the financial administration follows BFH’s case law in the future.

The publication of the BFH judgments of 16.03.2017 and 30.03.2017 in the Federal Tax Gazette would be a first “milestone” towards a more consistent interpretation of the real distribution standards in the application intended by the legislature.