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BFH – Withdrawal of a partner with neutral impact on profits

September 2018

In its rulings from May 16 and 30, 2017, the Bundesfinanzhof (BFH), Germany’s Federal Fiscal Court, has made it easier for a partner to withdraw from a partnership (Az.: IV R 31/14 and IV R 11/15).

In the view of the Bundesfinanzministerium, Germany’s Federal Ministry of Finance, the withdrawal of a partner need only have a neutral impact on profits if the withdrawing partner receives an operational unit or a partnership interest. In its rulings, the Bundesfinanzhof has taken a position contrary to this view. We at the commercial law firm GRP Rainer Rechtsanwälte note that pursuant to these rulings, partners now have more scope than was previously the case when withdrawing from partnerships while maintaining a neutral impact on profits and thus without disclosing hidden reserves.

In one of the cases, the partner had initially incorporated his share in a Kommanditgesellschaft (KG), a type of limited partnership under German law, into a newly established “Ein-Mann-GmbH & Co. KG”, i.e. a one-man limited partnership with a limited liability company (GmbH) as general partner. This withdrew from the KG on the same date and received in consideration all of the assets from a business division of the KG that was not organized as an operational unit. This business division was then continued by the newly established GmbH & Co. KG. While the tax authorities deemed this to be a profitable swap, the BFH took a different view in categorizing the transaction as an artificial division of partnership assets with a neutral impact on profits (Az.: IV R 11/15).

In the other case, a GmbH & Co. KG run by a father and son had been dissolved. The father received only a small proportion of the company’s assets; the lion’s share went to the son, who carried on the business alone. The competent tax office rejected the classification as a division of partnership assets with a neutral impact on profits, stating in its reasoning that the son had continued the business. The BFH took a different view here as well. It held that the company had ceased its activities as a consequence of its dissolution and complete termination, and there could therefore be said to have been a real division of partnership assets with a neutral impact on profits (Az.: IV R 31/14).

It follows from these two rulings of the BFH that the dissolution of a company and subsequent distribution of its assets among the partners is equivalent to a partner withdrawing from a continuing company.

Lawyers who are experienced in the field of company law can advise on matters ranging from the establishment to the dissolution of a company, with due consideration also being given to aspects relating to tax law.

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