The Federal Government is planning a new option model for corporate tax for commercial companies. This applies in particular to open commercial companies (OHG) and limited partnerships (KG), which also include GmbH & Co. KG. But partnership companies (PartG) also benefit from the innovation. This is already the second attempt by the Federal Government to reform the existing regulation on the optional corporate tax for partnerships. Because already in 2020 there was a first draft for this. After all, the current legislation has only rarely been applied in practice. The new option model for corporation tax for commercial partnerships is now intended to bring about a significantly easier use of this option via a fiction of a change of legal form.

In fact, this new option model for corporate tax for commercial companies also has another advantage. Because via this way you can transfer real estate as a shareholder to a personal trading company, without a real estate acquisition tax. At the same time, however, you can also benefit from the same tax advantages that a real estate GmbH can claim for itself. This thus also makes it possible to avoid trade tax when renting real estate by commercial companies.

partnership with 15% KSt: better than VV-GmbH?

We explain how the changes to corporate tax for commercial companies lead to the saving of a real estate transfer tax.

1. The history of the corporate tax option model

At the end of March 2021, the German government introduced a bill to allow partnerships to tax their profits via corporate tax. This is by no means something new, because the possibility of saving profits in a partnership has existed for quite some time. In fact, the option model for corporation tax has been possible since 2008 by § 34a EStG as a so-called tax benefit by law.

So why is the Federal Government undertaking a reform to tax partnerships if such an alternative already exists? The answer is very simple. Because until now, the law basically served only itself. Thus, the application of § 34a EStG in practice is a rare event. Many tax consultancy firms have also so far advised against using the thesaurierungsbegünstigung. And if even tax consultants consider this option model for corporate tax to be too complicated for partnerships, then this certainly has good reasons.

2. changes to the option model for corporate tax

SEGMENT008 2.1. New approach: fiction of a transformation of the partnership into a capital company

The main difference both to the existing regulation and to the reform of the option model for corporate tax developed last year lies in the implementation. For a partnership wishing to be taxed by corporation tax is now to be considered a corporation for purposes of taxation. For this purpose, the legislature proposed the fiction of a transformation of the partnership in the draft law. So you just pretend that a partnership has changed form into a corporation. And this now pays, like any corporation, corporate tax. However, for all other purposes, in particular civil law, the partnership is still considered as such.

2.2. Only commercial companies benefit from the option model for corporate tax

However, there are also some restrictions in the new draft law on the option model for corporate tax. Because the option model for corporate tax is only reserved for commercial companies. Individual enterprises or companies under civil law (GbR) are therefore excluded. Thus, only OHGs and KGs benefit, including GmbH & Co. KGs. In addition, partnership companies (PartG) may also use the new option model for corporate tax.

2.3 Requirement to apply for the corporate tax option model

In addition, the use of the option model for corporate tax is only foreseen through an application to the tax administration. According to the legal text, the request to apply the option model to corporate tax is irrevocable. But of course there is also a return option. Thus, the possibility is open to fictitious a new conversion by application at the financial administration. This is because the approach is as if the fictitious capital company had been converted back into a person trading company.

In order to submit an application to use the corporate tax option model for a commercial partnership, a shareholder resolution is required. Because the option model for corporate tax only applies to the entire company. Thus, an individually regulated claim by the shareholders is excluded.

The redesign of the option model for corporate tax allows for an interesting design in connection with the rental of real estate.

3.1. Taxation of rental income – partnership vs. Capital company

As most regular readers of our articles probably already know (everyone else now also learns), the private rental and lease of real estate incurs income tax at the level of the personal tax rate. So this can be up to 45%. However, shareholders of partnerships are also subject to this taxation of profits at the private level. Finally, partnerships are tax transparent.

On the other hand, it is different when renting real estate by a corporation. For example, corporations pay only 15% corporation tax in income taxes. And if the rental of real estate is the exclusive business purpose of a corporation, then there is even the possibility of applying for extended land reduction. Because this even eliminates the trade tax, which usually also arises with a partnership. However, as a shareholder of a corporation, you have to expect another tax in the event of a profit distribution, namely the capital gains tax. Fortunately, this tax should be set at a flat rate of 25%. Therefore, it is usually worth renting or leasing real estate through a corporation.

3.2 Taxation in the transfer of real estate – partnership vs. Capital company

However, the partnership can post a different advantage for itself compared to the corporation. Because in order to transfer a property in private assets to a partnership, you also have to pay attention to the real estate transfer tax. Thus, in the case of a partnership, the real estate transfer tax only applies to the amount at which the transferring person participates in the receiving partnership. For example, a 100 % shareholding in a GmbH & Co. KG could lead to a complete exemption of the property transfer tax for the natural person as a limited partner of the KG.

On the other hand, it is different when transferring private real estate to a corporation. Because in such a case, the real estate transfer tax is always incurred in full. At most, via a special arrangement, the real estate transfer tax can be avoided in this situation.

3.3. Optional model for corporate tax: Combination of advantages

With our design model via the new option model for corporate tax, you can now combine both advantages. So you first set up a partnership and then opt for taxation according to § 1a KStG. Upon expiry of a period specified in § 5 Abs. 3 GrEStG, shareholders can then transfer to it a property held in private assets without incurring real estate transfer tax. At the same time, the condition must also be fulfilled that the persons who transfer the property to the partnership are also involved in the company for at least ten years. Subsequently, the option model for corporation tax for the commercial company can be used to optimise the taxation of profits by only 15%. At the same time, an application is being made for an extended land cut. This saves a further taxation of usually more than 15% trade tax completely.

In principle, the saving of the real estate transfer tax is possible in this case because the real estate transfer tax is linked to civil law. The introduction of the ten-year period is certainly an adjustment to avoid abuse of the new regime relating to the transfer of real estate to partnerships in order to circumvent the real estate transfer tax.

New law: option model for partnerships (15 % KSt)

Our conclusion on the option model for corporate tax

Although the new option model for corporate tax for persons trading companies is a very successful approach, with which it is now actually possible to redeem for persons trading companies. Furthermore, it can be assumed that the regulation can actually be implemented in everyday practice. However, a comparison to the taxation of US LLCs and similar hybrid companies elsewhere in the world still misses a certain simplicity. Because the application for the use of the option model for corporate tax appears at least more complex than a simple checking in the check-the-box procedure. However, those who would prefer to remain permanent with a certain form of taxation of the commercial company should prefer the new option model for corporate tax for commercial companies.