In its judgment of 27/11/2024 (case I R 23/21), the Federal Fiscal Court (Bundesfinanzhof – BFH) held that holding partnerships engaged purely with management may act as the controlling company within a consolidated corporation tax group, even if they do not provide any intra-group services for compensation. This decision constitutes a significant expansion of the understanding of commercial activity as defined by the Corporation Tax Act (KStG) (sections 14(1) no. 2 sentence 2) and the Income Tax Act (EStG) (section 15(1) sentence 1 no. 2).
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The case – no paid services but still a controlling company

In the case at hand, a GmbH had transferred its subsidiaries to a newly founded German limited partnership (Kommanditgesellschaft – KG) as part of restructuring. This partnership also assumed the profit transfer agreement with a controlled company.  Although the partnership did not have any employees and did not provide any of the standard intra-group services, the corporation tax return was submitted on the assumption that the tax group continued to exist.

The tax office refused to recognise the tax group. In that authority’s view, if an entity doesn’t provide any paid services, it does not participate in general business, and referred to the Federal Ministry of Finance Circular of 10/11/2005.

The Federal Fiscal Court – active management is sufficient to count as commercial activity

Both Nuremburg Financial Court and the Federal Fiscal Court disagreed with this restrictive view, stating that the decisive point was that entrepreneurial management is actually exercised. As planned, the partnership exercised control over the management of the subsidiary. This was proved with minutes of regular management meetings, among other things, in which specific business activities had been discussed.

The Federal Fiscal Court clarified that it is not necessary to provide paid services to subsidiaries as long as the holding entity actively intervenes in managing the business. But holding interests alone is not sufficient.

Practical significance of the judgement

The judgement strengthens the recognition for tax purposes of holding partnerships that exercise management as the controlling company. For existing tax group structures this means that whoever actively exercises influence in a documented way fulfils the requirements for commercial activity even without a service agreement.

It remains to be seen whether at least two shareholdings are required to qualify as a tax group parent or whether one shareholding is sufficient.  In any case, written documentation of management activities remains essential.

Classification in the international context

The judgement relates to the year 2008. Since 2012 it has also been required for tax group shareholdings to be allocated to a domestic permanent establishment (section 14(1) sentence 1 no. 2 sentences 4-6 KStG). The Federal Fiscal Court has not decided whether the activity described in the judgement is sufficient to be allocated in this way.

Relevance to leaving the country

Contributing shares in a corporation to a commercial limited partnership is a common way of avoiding the disclosure of hidden reserves on leaving the country. Whether the partnership’s activities described here are sufficient to constitute a domestic permanent establishment remains unclear. Taxpayers should continue to comply with the requirements made by the tax authorities.

Current advisory news in brief

Cologne Fiscal Court judgement of 30/01/2025 – 10 K 101/21: Expenses for incentive trips and shopping vouchers for insurance brokers are deductible business expenses

The operating expenses for incentive trips and shopping vouchers incurred as part of a marketing competition are fully deductible as non-cash commission under section 8(1) sentence 1 KStG in conjunction with section 4(4) EStG.  In the case at hand, these services were agreed in advance between the parties as additional remuneration in the form of prizes in a marketing competition. The prohibitions on deduction in section 4(5) sentence 1 nos. 1, 2 and 4 EStG given by the tax authorities do not apply because the services received are directly connected economically and in time with brokering sales revenue. They therefore equate to an exchange of services.  The decision is final and binding. However, it must be expected that the tax authorities will classify the benefits received by the insurance brokers as taxable income.

News in brief

Deduction of foreign taxes in consolidated trade tax groups (BFH of 16/10/2024, case I R 16/20)

An isolated trade tax deduction of foreign withholding taxes is not possible if free float dividends are exempt from corporation tax. 

New BMF circular on relief for profits not withdrawn under section 34a EStG

On 12 March 2025, the Federal Ministry of Finance, in agreement with the tax authorities of the federal states, published a letter of application on income tax relief for profits not withdrawn from partnerships and specified key points. This replaces the previous Federal Ministry of Finance Circular of 11 August 2008 and applies from the tax year 2024.

Bonus payments to minority shareholder as hidden profit distributions? (BFH on 24 October 2024, case I R 36/22)

A remuneration agreement between a stock corporation and a board member who is also a minority shareholder of the stock corporation only leads to a hidden profit distribution if the circumstances of the individual case clearly indicate that the supervisory board has unilaterally aligned itself with the interests of the executive board member in the remuneration agreement.

Federal Fiscal Court judgement of 27/11/2024 (I 19/21): Tax treatment of a shareholder loan to an asset-management partnership 

A loan granted by a partner to an asset-managing partnership is not to be recognised for tax purposes. This applies if:

  • the partnership’s loan liability is attributable to its partner for tax purposes under section 39(2) no. 2 of the Fiscal Code (AO), and
  • there is no difference in the person of the creditor and the debtor necessary for recognition under tax law (BFH judgements of 18/05/2004 - IX R 42/01, BFH of 07/06/2006 - IX R 14/04).  

To this extent, the loan does not result in deductible income-related expenses for the borrower or income from capital assets for the lender. It is to be treated as a tax-neutral contribution.

This article was written by our experts Karin Deuringer, Michael Faulhaber and Daniel Reichert.