para. | paragraph

AO | Tax Code

Art. | Article

Founder

BFH | Bundesfinanzhof

BGB | Civil Code

for example | for example

BStBl. | Bundessteuerblatt

DStR | German Tax Law (Zeitschrift)

EStG | Income Tax Act

GewStG | Business Tax Act

GrS | Grand Senate

HGB | Commercial Code

Hresg. | Publisher

HS | half sentence

i.S.d. | in the sense of

i.V.m. | in conjunction with

KStG | Corporate Tax Act

No | Number

NWB | New economic letters

OFD | Chief Financial Directorate

paragraph | recital

Rz | Margin

S. | sentence/page

Tz | subtotal

Cit. | Cited

Brandis, Peter/

Heuermann, Bernd

(ed.) | income tax law commentary on the income tax law,

Supplementary delivery, Munich, 2023

(quote: processor, in: Brandis/Heuermann, §, paragraph)

Dorn, Katrin/

Chamber, Pauline/

Alptekin, Sepha | Clarified and unclear application questions of commercial coloring according to § 15 para. 3 No. 1 EStG,

in: DStR – German Tax Law, 2023, 2545

(quote: Dorn / Kammer / Alptekin, DStR, 2023, p.)

Hey, Johanna

Small, Martin/

Wendt, Michael/

Anzinger/Heribert M./

Bergkemper, Winfried/

Clausen, Uwe/

Link, Mathias/

Musil, Andreas/

Reddig, Jens/

Schober, Tibor/

Schapperfend, Thomas/

Tiedchen, Susanne/

Witt, Sven-Christian

(ed.)

Mrozek, Alfons/

Kennerknecht, Albert/

Hermann, Carl/

Heuer, Gerhard /

Raupach/Arndt

(gr.) | Herrmann/Heuer/Raupach,

Commentary on the Income and Corporate Tax Act,

(quote: Edited in: Herrmann/Heuer/Raupach, §, paragraph)

Kirchhof, Paul/

Mellinghoff, Rudolf/

Kube, Hanno/

Son, Hartmut

(ed.) | Commentary on the Income Tax Act,

Delivery, Heidelberg, 2023

(quote: Editor, in: Kirchhof/Söhn/Mellinghoff, EStG, paragraph)

Ley, Ursula | The application of § 15a EStG to double-storey partnerships,

in: DStR – German Tax Law, 2004, 1498

(quote: Ley, DStR, 2004, p.)

Meyer-Scharenberg, Dirk | The double-storey partnership as a legal form alternative,

in: DStR – German Tax Law, 1991, 919

(quote: Meyer-Scharenberg, DStR, 1991, p.)

Meyer-Sparenberg, Wolfgang /

Jäckle, Christof

(ed.) | Beck’sches M & A Handbook,

Edition, Munich, 2022

(quote: Editor, in: Meyer-Sparenberg/Jäckle, §, paragraph)

Prince Ulrich/

Bald, Holger

(ed.) | Beck's Handbook of partnerships,

Company Law – Tax Law

Edition, Munich, 2020

(quote: Edited in: Prinz/Kahle, §, paragraph)

Reichert, Jochem

(ed.) | GmbH & Co. KG,

Edition, Munich, 2021

(quote: Editor, in: Reichelt, §, paragraph)

Judge, David/

Chuchra, Matthias/

Dorn, Katrin | Open questions and problems when applying the so-called “Upside infection” of § 15 Abs. 3 No. 1 Alt. 2 EStG,

in: DStR – German Tax Law, 2016, 2944

(quote: Richter / Chuchra / Dorn, DStR, 2016, p.)

Semler, Johannes /

(reference)

Stengel, Arndt/

Leonard, Nina

(ed.) | conversion law,

Edition, Munich, 2021

(quote: Editor, in: Semler/Stengel/Leonard, §, paragraph)

Schmid, Reinhold | Tax Accounting Issues in Special Business Assets

ratio of parent company to sub-company in the case of double-floor partnerships,

in: DStR – German Tax Law, 1997, 941

(quote: Schmid, DStR 1997, p.)

Vögele, Alexander /

Borstell, Thomas/

van der Ham, Susann | Transfer Pricing,

Edition, Munich, 2024

(Quote: Edited in: Vögele/Borstell/van der Ham, Chapter, paragraph 1)

Weber-Grellet, Heinrich

(ed.)

Schmidt, Ludwig

(gr.) | Income Tax Act,

Edition, Munich, 2023

(quote: Editor, in: Weber-Grellet/ Schmidt, §, paragraph)

Wehrheim, Michael/

Brodthage, Sven | The Dyeing Theory at Partially Commercial Partnerships,

in: DStR – German Tax Law, 2003, 485

(quote:Wehrheim/Brodthage, DStR, 2003, p.)

Double-storey partnerships are subject to a number of different taxation regulations. Be it in the area of income taxes, accounting or company sales, who operates with double-storey partnerships should know in advance what regulations apply to them. On the one hand, a double-storey partnership can lure great tax advantages, but on the other hand, there are also certain risks. In addition, with these usually quite complex structures, the constant jurisprudence can also be observed on an ongoing basis.

List of abbreviations

Introduction

Taxation of partnerships is a complex and multi-layered topic that is

is of great importance in terms of tax design. In particular, double-storey partnerships are an interesting way of designing tax consultants, as they represent a special legal form that entails various tax challenges. This housework focuses in particular on the taxation issues of double-storey partnerships, with a focus on the income tax aspects. Sales tax is not discussed due to a content limitation.

In the first section of the housework, the historical background and the facts of the double-storey partnership are first worked out.

In the second section of the housework, the creation of the double-storey partnership is briefly explained, in particular the conversion variants into a double-storey partnership are briefly discussed.

In the third section, the dyeing theory with regard to a possible commercial infection, as well as commercial characterization with regard to the double-storey partnership is elaborated in order to be able to carry out a classification in an income type and to clarify the further taxation questions.

The fourth section sets out the general and specific accounting principles with regard to the commercial and tax law principles of the double-storey partnership at the level of the upper and lower company and the associated relevant corporate transactions.

In the fifth section, the additional balance sheet in connection with the upper and lower company and the preparation principles is explained in more detail and worked out which presentation is necessary in the additional balance sheet.

The sixth section deals with the general determination of income and profit in partnerships with the division into the determination of profit in the subsidiaries and upper companies, as well as the determination of income in the co-entrepreneurs. In particular, the special remuneration, the special operating assets, as well as the special operating income and special operating expenses of the individual co-entrepreneurs are defined and explained in more detail. Subsequently, a possible application of the loss deduction in the sense of § 15a EStG will be examined.

In the seventh section, the determination procedure of the double-storey partnership is briefly set out.

The eighth section covers the tax aspects in the case of the sale of shares and the associated tax specificities, in particular with regard to business tax.

In the last section of housework, the tax treatment of profits in connection with business tax is elaborated in detail and special features in the case of

Divestiture of shares. The loss of trade tax within the meaning of § 10a GewStG is not discussed due to content limitation.

This housework aims to provide a general understanding of the tax aspects of double-storey partnerships and to clarify possible questions regarding taxation. Overall, this housework provides a general overview of the taxation issues of double-storey partnerships with regard to income and business tax, as well as taxation at the level of shareholders and the company itself.

A. Historical background and facts of the double-storey partnership

The term “double-storey partnership” refers to a special legal form, which was first adopted by resolution of the Grand Senate of the Bundesfinanzhof in 1991 and recognized as an independent legal form. The guiding principle on which the decision in principle of the judgment is based is: “partnerships and joint entrepreneurial companies under civil law” (§ 15 para.). 1 sentence 1 no. 2 EStG be shareholders and co-entrepreneurs of a partnership with the consequence that the shareholders of the parent company are not also co-entrepreneurs of the sub-company. Accordingly, a double-storey partnership exists if a partnership (upper company) is a shareholder of another partnership (sub-company) operating in business. The legal form is characterised by the fact that a partnership (upper company) is directly involved in another partnership (sub-company).2 In principle, any legal form of partnerships is suitable as a parent company, such as a limited partnership, an open commercial company or a civil company.3

B. Creation of a double-storey partnership

Furthermore, in particular the creation of a double-storey partnership will be worked out. In particular, the participants and the conversion into a double-storey partnership are discussed.

I. Participants in a double-storey partnership

If another partnership (upper company) is involved in a partnership (sub-company), the co-entrepreneurs are in accordance with § 15 para. 1 S. 1 No 2

S. 2 EStG, on the one hand, about the overholders and, on the other hand, about the overholders themselves.4

II. Conversion into a double-storey partnership

For a success-neutral conversion into a double-storey partnership, there are two different possibilities. In practice, two variants are distinguished here, namely between the separation variant and the operating lease variant, which are briefly summarized below.

1st separation variant

The spin-off option is the transfer of a company to an existing or newly formed company.5 In this variant, three phases are run through to effect the splitting or conversion. The three phases consist of the preparatory phase, the decision phase and the implementation phase.6 The spin-off option makes sense in practice in particular if a company can be limited to individual areas of activity.7

2nd operating lease option

In the case of the operating lease variant, the entire operation of the old company is leased to the newly founded sub-company. Consequently, this refers to a dormant business, in which income continues to be generated from business, but is not subject to business tax. However, since this process can lead to tax consequences in practice, the spin-off option is used as a safer solution.8

C. The Coloring Theory

I. Commercial Infection § 15 para. 3 No 1 EStG

According to the dyeing theory, even minimal entrepreneurial activities of a partnership, which take place in parallel with another activity, lead to uniform commercial income.9 If the partnership carries out an activity in accordance with § 15 para. 1 S. 1 No. 1 EStG, the income as a commercial activity according to § 15 para. 3 No. 1 EStG to be requalified.10 Accordingly, § 15 para. 3 No. 1 EStG for use even in the case of a small commercial activity, even if it has only a minor relevance.11 In particular with regard to trade tax, the classification of the type of income is of great importance (see Chapter I. Trade tax in the case of double-storey partnerships).12 In the past, a partnership managing assets (superior company) that does not generate commercial income could participate in a partnership (sub-company) that operates on a commercial basis without its entire income being reclassified into commercial income.13 However, the limitation of the degradation effect in the case of double-storey partnerships according to the BFH judgment of 2004 was amended by the addition of § 15 para. Consequently, the discoloration of income occurs as soon as the non-commercially active or characterised partnership participates in a partnership which is commercially active, commercially infected or commercially characterised and thereby generates commercial income in accordance with § 15 para. 15 However, the dyeing theory and the associated legal norms only occur at the time of receipt of the income.16 The consequence of this is the commercial dyeing of the upper company, based on the commercially received income from the lower company, which is referred to as upward dyeing.17 The trivial limit for the non-application of the dyeing theory according to § 15 para. 3 No. 1 EStG18 does not apply in the case of upward colouring.19 At income tax level, therefore, any participation which leads to commercial income leads to the reclassification of all income into income from business.20

II. Commercial character – application of § 15 para 3 no. 2 EStG to the double-storey partnership

According to § 15 Abs. 3 No. 2 EStG, the activity of a partnership in which only one or more commercial partnerships (double-storey partnerships) are involved as personally liable partners is classified as a business enterprise if only these or persons who are not shareholders of the partnership have the management authority.21 In practice, this is also referred to as a GmbH & Co. KG as the most common legal form, where the sole personally liable and managing partner is a legal person. In this context, it is not relevant whether the GmbH & Co. KG, which is involved as a personally liable partner, operates commercially.22 If these prerequisites exist, the activity of the partnership is classified as a commercial enterprise to the full extent.23 The legal norm of § 15 para. 3 No. 2 EStG therefore assumes a commercial activity, which consequently entails the receipt of income from commercial operations according to § 15 para. 1 S.1 No. 2 EStG vis-à-vis the shareholders as co-entrepreneur.24

D. Accounting

Under commercial law, the participation in a partnership constitutes an asset of the fixed assets (§§ 246 (1) S. 1 HGB, 247 (2) HGB). The access assessment is made with the acquisition costs (§ 255 para 1 HGB). The subsequent valuation is carried out with the acquisition costs or an expected permanently lower partial value (§§ 253 para 1 s. 1 HGB, 253 para 3 s. 5 HGB). In the case of a temporary impairment, commercial law gives the right to choose to recognise the lower partial value (§ 253 (3) S. 6 HGB).

The commercial income of the shareholder according to § 15 para. 1 S. 1 No. 2 EStG consists on the one hand of the profit share, the possible supplementary balance sheet result and on the other hand of the special remuneration (see Chapter F, IV. Determination of the income of the co-entrepreneurs). According to § 5 Abs. 1 S. 1 EStG is to recognise at tax level the operating assets at the upper company, which results according to commercial law principles on the basis of proper accounting. The same applies to the sub-company.25 At tax level, a participation in a partnership does not qualify as an accounting asset. The shareholding is rather seen as a partial recognition of assets and liabilities of the sub-company.26 In the case of the parent company, the shareholding in tax equity is shown in mirror image. This is referred to as the “mirror image method”.27 The value of the co-entrepreneur’s capital account, resulting from the tax law balance sheet, supplementary balance sheet and special balance sheet, is therefore to be assumed mirror-image at the co-entrepreneur level. In other words, this refers to the allocation of the balance sheet result of the co-entrepreneurship to the respective co-entrepreneur.28 In practice, this leads to the fact that the participation approach under commercial law can deviate, in particular in the case of tax-related losses at the level of the sub-company, and the participation was not assessed as a loss in value under commercial law, at the level of the co-entrepreneur.29 In tax law, no valuation of the co-entrepreneur's share is carried out, but rather the balance sheet loss is attributed to the respective co-entrepreneur.30

E. Supplementary balance

The preparation of a supplementary balance sheet is unavoidable if a shareholder joins a company and the expenses do not correspond to his capital account.31 The supplementary balance sheet is therefore to be drawn up if the acquisition of shares in a sub-company by the upper company results in different valuations under commercial and tax law.32 A further reason for drawing up results from assets which are indirectly attributable to the lower company and justify the acquisition costs for the acquisition of a share in the upper company.33 In this case, a supplementary balance sheet is drawn up at the level of the lower company for the upper company, in which the deviations already mentioned are shown in the form of hidden reserves which are attributable to the assets of the lower company.34 In order to avoid a double consideration of the loss share according to § 15a EStG for the limited company (see application of § 15a EStG – losses in the case of limited liability), the main balance sheet of the upper company must be corrected so that the already available loss compensation potential is not offset several times.35

If a share in a parent company is acquired, a supplementary balance sheet must be drawn up with the parent company for the new shareholder if the additional expenses are incurred on the hidden reserves in connection with the participation in the parent company.36 If the share of the participation in a sub-company is held by the parent company itself, it is unclear at which level and for whom a supplementary balance sheet must be drawn up with regard to the additional expenses of the hidden reserves.37

F. Determination of income and profit

In the case of partnerships, profit is generally not recorded and taxed at the level of the partnership, but allocated proportionally to the co-entrepreneurs for income tax purposes (transparency principle). As a rule, this is income from business operations within the meaning of § 15 EStG.38 The profit is determined in two stages.

At the first stage, profit is determined as if the partnership were an independent tax entity. For this purpose, according to the business assets comparison, the total hand assets, the tax balance profit – or Losses are determined and assigned to the individual shareholders. This is usually done on the basis of the shareholder contract and the distribution key regulated therein.39 At this level, the deviations due to supplementary balance sheets are also taken into account.40

At the second stage, special remuneration, special operating income and expenses are determined (see chapter F, IV. Determination of the income of the co-entrepreneurs). At the level of the second profit level, the special assets also belong to the profit of the individual co-entrepreneurs.41

I. Determination of the profit of the subsidiaries

In the case of the sub-company, the total profit is determined on the basis of the tax result of the sub-company and proportionally attributed to the individual shareholders as well as to the parent company.42 The share of profit under tax law, which is attributable to the parent company, is regarded as part of the tax profit.43 The total profit of the sub-company is composed of the following parts:44