When a partnership is dissolved, the assets are usually divided among the partners. It can happen that an overhang arises in favor of one or more shareholders, which is monetaryly compensated for other shareholders. The taxation of this peak compensation in the real division is a complex topic from the point of view of the financial administration, the prevailing opinion of the literature and the judges at the Federal Finance Court (BFH). We now offer you an overview of the current legal situation for peak compensation in a real division.

1st Peak Balance in Real Division – Introduction

If a shareholder leaves a partnership and individual assets, subsidiaries or co-entrepreneur shares are transferred in the course of the course into the operating assets of the retiring party, the transaction is subject to the tax advantage of § 16 (3) sentence 2 EStG. This applies on the one hand to the withdrawal of shareholders and on the other hand to the distribution of assets in the context of a complete liquidation. The provision allows a transfer to taxable book values. It prevents the discovery of the hidden reserves contained, provided that the taxation of the hidden reserves is still guaranteed.

However, in the dispute there may be differences between the severance rights which the shareholders are entitled to by law or on the basis of company law regulations and the actual value of the assets received. If the former partnership does not have sufficient cash or freely redistributable funds to settle the differences, an agreement is usually concluded which provides for compensation payments between the individual shareholders. This value compensation is referred to as peak compensation and also enables a real sharing which is neutral in terms of performance (see BFH, judgment of 10.12.1991).

2. The peak equilibrium in real sharing

It is undisputed that the peak compensation must be taxed and that the profit to be taxed is neither favoured by the allowance of § 16 (4) EStG nor by the tariff reduction of § 34 EStG. It is questionable, however, to what extent the payee has to tax the peak compensation in the real share.

2.1. Real Division: Taxation of the peak compensation at the recipient

2.1.1 Views of financial management and dominant opinion in literature

The tax administration and the prevailing opinion of the literature are of the opinion that the common value of the assets taken over should be divided first into a part for remuneration and a part for free. Consequently, only the part for which payment is made by the beneficiary of the peak compensation would result in the discovery of hidden reserves, while the part free of charge would remain untaxed by way of real sharing. The division had to take place according to the ratio of the marginal compensation to the common value of the assets received. The so-called “payment rate” calculated from this would then be applied to the book value. The peak compensation paid, reduced by the pro rata book value, subsequently led to a taxable capital gain for the receiving shareholder.

This view is justified by the fact that the compensation does not relate to the assignment of the pro rata claim for dispute, but only that the assets distributed in the course of the liquidation are partly taken over for remuneration. The peak compensation should therefore be distinguished from the rest of the real division and considered separately. In addition, it also taxed only that part of the marginal compensation which relates to the hidden reserves of the pro rata WG.

2.1.2 Peak compensation at real share: view of the BFH

However, the BFH already ruled, among other things, with the judgment of 01.12.1992, that instead of a proportional disclosure of the hidden reserves, the peak compensation itself in full amount should always be recognized as profit. Deviating from the described view of the financial administration and prevailing opinion of the literature, the 8th argued here. Senate that it comes to a cession of part of the claim to dispute. The transfer of receivables was already included in the agreement on real sharing and the peak settlement was therefore a purchase of receivables. This resulted from the difference between the common values of all assets received and the actual severance payment entitlement. In the judgment of 17 September 2015, however, BFH initially left open the calculation method for determining the taxable profit.

2.2 Effects of the marginal settlement in the event of a real shareholding for the managing partner

So compensation payments to the recipient lead to a taxable profit. Conversely, they represent acquisition costs within the meaning of § 255 (1) of the German Civil Code for the contributing partner. They therefore increase the AfA tax base if further income is subsequently generated with the assets.

3rd peak compensation in the real division – Conclusion

The taxation of a peak compensation in the course of the real division is still incompletely clarified at the current stage. It remains to be seen whether the jurisprudence will follow the view of the financial administration in the future.