Green light for utilization of tax losses of a KG by limited partners after accrual

Legal background - ongoing loss utilization in the case of a commercial limited partnership & accrual

A commercial limited partnership (regularly referred to as a "co-entrepreneurship" for tax purposes) is generally not subject to income tax or corporation tax itself. Accordingly, the pro rata losses incurred as a co-entrepreneur are determined separately and uniformly for the partners and, if applicable, offset against positive income from other sources at their level (tax loss compensation). An interperiod loss deduction is also possible. 

For limited partners, however, the use of losses from the KG for tax purposes is only possible to a limited extent. In accordance with Section 171 (1) HGB, the limited partner's liability is limited to the amount of liability entered in the commercial register. Therefore, in the year in which the loss arises, the limited partner is not economically burdened by any losses of the company in excess of this amount - even if they are to be allocated to him arithmetically. Section 15a EStG takes this into account. According to this, the following applies in principle: the KG losses attributable to the limited partner may neither be offset against other income nor deducted across periods if a negative capital account arises or increases for the limited partner. These non-offsettable and non-deductible losses are determined and updated annually as "offsettable" losses. The effect: they can only be offset against profits from the KG in subsequent years. 

In contrast to income tax and corporation tax, trade tax is linked to the business itself as the taxable entity, which is why the commercial limited partnership is itself liable for tax. Trade losses of the company reduce its trade income in subsequent years in accordance with Section 10a GewStG. According to established case law, such a loss deduction requires not only the identity of the company but also the identity of the entrepreneur. Therefore, in the case of co-entrepreneurships, it is also necessary to consider the shareholder level for the purposes of trade tax loss deduction. In accordance with § 10a sentences 4 and 5 GewStG, the trade loss of the company is allocated proportionately to the individual co-entrepreneurs and deducted from their calculated share of the trade income in subsequent years. Trade losses of a KG are thus divided up and linked to the identity of the respective co-entrepreneur, which is why changes in the shareholder structure generally entail the risk of the loss of parts of the trade loss. 

An essential characteristic of a partnership - and therefore also of a KG - is the participation of at least two persons. If all but one partner leaves the company, it cannot continue to exist as such. In accordance with §§ 161 Para. 2, 105 Para. 3 HGB, §§ 712, 712a BGB, the company assets accrue to the remaining partner ("accrual"). 

Facts of the BFH ruling (XI R 2/23)

The plaintiff was a GmbH which, as the sole limited partner, held 100% of the assets of a two-tier GmbH & Co KG. On the reporting date of December 30,  .2011, the general partner, who did not hold a stake in the capital, withdrew from the KG without compensation, whereupon the company assets were transferred to the plaintiff by way of accrual. Prior to the accrual, the KG had already shut down a plant and sold part of the business premises. The activities of the KG had not been completely discontinued at the time of the accrual.

In its corporation tax return for 2011, the plaintiff claimed a loss in the identical amount of the unused, offsettable loss pursuant to Section 15a EStG at the time of the accrual. In its 2011 trade tax return, it declared the trade loss of the former KG that had been fully absorbed by the merger. 

With regard to the corporation tax loss, the tax office did not follow the declaration. It assessed the corporation tax for 2011 without taking the losses into account and subject to review. In the subsequent court proceedings, it stated that following the merger with the GmbH, the original business identity of the KG had been dissolved and was subsumed into the uniform business operations of the acquiring GmbH in accordance with Section 8 (2) KStG. The future offsetting of losses against any profits of the GmbH would contradict the legal concept of § 15a EStG. 

The trade tax, on the other hand, was initially assessed in accordance with the declaration, taking into account the assumed trade losses - also subject to review. As part of a subsequent external audit for the years 2009 to 2012, the trade losses were disallowed again as the necessary corporate identity was lacking.

The tax office responsible for the former KG later issued amending notices in 2021 determining an offsettable loss attributable to the plaintiff in accordance with Section 15a (4) EStG and a trade loss - both as at December 31, 2011. Both assessments became final and binding.  

Appeals by the plaintiff against the assessment of corporation tax and trade tax for 2011 without taking the losses into account were unsuccessful, so an action was filed with the tax court (Finanzgericht, FG). 

The FG upheld the action. The losses under Section 15a EStG and Section 10a GewStG, which were last assessed with notices from 2021 as at December 31, 2011, were not to be taken into account for the 2011 tax year, but in 2012 (which the plaintiff had applied for as a substitute) in the assessment for corporation and trade tax. 

BFH ruling and classification in previous case law

After the tax office appealed, the BFH also ruled in favor of the plaintiff and agreed with the assessments of the tax court. In particular, it clarified the following:

• If the company assets of a two-tier limited partnership, whose business operations had not yet been completely discontinued, accrue to the limited partner GmbH, the offsettable losses attributable to it to date and determined in accordance with Section 15a EStG are also transferred to it. This must apply simply because the BFH has ruled in the past that the share of the offsettable loss of the withdrawing partner from a two-tier KG is transferred to the last remaining partner (see BFH ruling of 11.05.1995, IV R 44/93).
• However, a reclassification of the losses taken over from offsettable to compensable - i.e. a change to the more favorable category - does not take place. Here, the XI Senate of the BFH refers to earlier BFH rulings according to which offsettable losses are not reclassified even when changing from the legal status of a limited partner to that of a general partner (see BFH ruling of 14.10.2003, VIII R 38/02).
• However, as a GmbH with unlimited tax liability only has a single source of income in accordance with Section 8 (2) KStG, the offsettable losses assumed can in fact also be offset against other company profits in subsequent years. It is not necessary to continue the loss-making business of the KG.
• In the event of a disputed accrual, trade losses can also continue to be used by the limited partner. The corporate identity required by case law is in any case given if the activity of the KG was not completely discontinued at the time of the accrual. The continuation of the KG's activities while preserving its identity is also not required from a trade tax perspective in the event of accrual to a corporation, as the activities of a corporation are always and fully deemed to be a trade in accordance with Section 2 (2) GewStG. This confirms the existing case law of the BFH (see BFH ruling of 25.04.2024, III R 30/21). 

Take-aways from a practical perspective

The BFH's ruling is in favor of taxpayers and is very welcome. In the case of restructurings of GmbH & Co. KG, it creates a little more legal certainty with regard to existing losses.

With regard to the use of offsettable losses under Section 15a EStG by the limited partner as a result of an accrual, the ruling follows on from various previous decisions on the topic. The "highlight": If the last partner is a corporation, it can also offset the losses against other company profits in future, even without the business of the former KG being continued in future.

With regard to trade losses, the BFH confirms its existing view: if the acquiring partner is a corporation, the criterion of corporate identity takes a back seat. Here too, the activity of the KG does not have to be continued. Advice: However, the BFH left open the question of whether the losses are still retained even if the entrepreneurial activity of the partnership is completely terminated before the accrual. Caution is required here and, in case of doubt, a certain "period of shame" should be observed. In addition, the Senate indicated that the discontinuation of a part of the business prior to the accrual in the case in dispute could have led to a pro rata reduction of the trade losses. In this case, the plaintiff benefited from the fact that the KG tax office had - albeit procedurally incorrectly - determined unreduced trade losses as at December 31, 2011 and the assessments were already final.

Do you have questions about the use of tax losses in your partnership structure? We can provide you with comprehensive advice on this topic. Get in touch with us!

Current advice - in brief

En bloc sale of five real estate properties in the third year after acquisition detrimental to the extended reduction of a GmbH's real estate holdings

The extended reduction of trade income pursuant to § 9 no. 1 sentence 2 GewStG represents a significant tax privilege for real estate companies. If it is applied, no trade tax is regularly payable. Accordingly, the regulation is interpreted restrictively by case law. If the activities of a real estate company go beyond mere asset management and instead constitute commercial real estate trading, the reduction cannot be claimed. An important distinguishing criterion here is the three-property threshold: if at least four properties are sold within five years of acquisition or construction, an initial intention to sell and thus commerciality (refutable) is assumed. In its ruling of June 3, 2025 (III R 12/22), the BFH decided that the sale of five multi-family house properties by a GmbH in one act of sale to one purchaser ("en bloc") in the third year after acquisition indicates a commercial nature and therefore generally excludes the extended reduction. The sustainability of the sales activities within the meaning of Section 15 (2) EStG is not relevant for a corporation. The fact that the sale took place  within the same group and only for the purpose of combining several properties into one property company does not refute the intention to sell.  

Assessment of fees in the case of binding information for several applicants

In the case of complicated projects, taxpayers can apply to the tax office for binding information in order to obtain tax certainty. In accordance with Section 89 (3) AO, a fee is charged for the provision of such information. If the information is provided to several applicants at the same time, only one fee is to be set, for which all applicants are jointly and severally liable. § Section 1 (2) of the Tax Information Ordinance (StAuskV) contains a list of circumstances in which an application can only be made jointly. In its ruling of July 3, 2025 (IV R 6/23), the BFH decided that, in order to determine a uniform fee, it is not important whether the specific facts are covered by Section 1 (2) StAuskV, but whether the binding information was actually provided uniformly. In the specific case in dispute, the (altogether eight) shareholders of a holding company had jointly applied for the issue of binding information regarding a restructuring measure. The tax office provided them with eight identical binding information notices. However, according to BFH, the fee could only be set once. 

Listed building does not render the land worthless when allocating the purchase price for depreciation purposes

If a property is used for business purposes, the acquisition costs can be depreciated for tax purposes over its useful life (depreciation for wear and tear - AfA for short). However, this only applies to the portion of costs attributable to the building, as the land is not subject to wear and tear. A purchase price allocation is therefore regularly necessary. In a ruling dated November 13, 2024, the Cologne Tax Court (Finanzgericht, FG) decided that the land value of a property is not irrelevant when allocating the purchase price for AfA purposes simply because it has a listed building on it. The plaintiffs argued that the maintenance obligation arising from the listed building would lead to an "infinite" useful life. The land was therefore effectively withdrawn from circulation and discounted to zero for the purposes of the purchase price allocation. Ultimately, the entire purchase price was to be allocated to the building and therefore depreciable. The tax court rejected this. For the purposes of determining depreciation, the share of the building determined by the expert opinion (in this case approx. 40 percent ) was to be assumed. The appeal was allowed due to its fundamental importance and is currently pending before the BFH under the case number IX R 26/24. Note: It is true that the tax court rejects the plaintiffs. However, in its reasoning, it also follows the expert opinion with regard to the assumption of a shorter useful life of 30 years (instead of the statutory flat rate of 40 years), which results from the increased need for maintenance due to monument protection.

No consideration of the pre-group interest carryforward of the controlled company at the controlling company

The consolidated tax group for corporation tax purposes allows several companies to be combined for tax purposes and taxed as a single company. The income of the controlled company (OG) is initially determined independently and then allocated to the controlling company (OT). The regulations for determining the income of the controlled company are basically the same as for stand-alone companies, but are modified by a number of special regulations in Section 15 KStG. One important regulation for determining income is the interest barrier, which limits the deduction of interest expenses under certain conditions. However, non-deductible interest can be taken into account in later years to reduce income ("interest carryforward"). In its ruling dated November 14, 2024 (13 K 1081/22), the Cologne tax court decided that a pre-organizational interest carryforward of the OG is not to be included in the determination of the income of the OT. The plaintiff was an SE that, as an OT, wanted to deduct an interest carryforward of its OG from the time before it became a tax group when determining its income. The tax court denied this and agreed with the prevailing opinion in the literature: For the duration of the tax group, interest is to be carried forward in accordance with. § 15 sentence 1 no. 3 KStG, the rules of the interest barrier do not apply to the OG. This means that current interest expenses of the OG can initially be deducted without restriction. On the other hand, interest carried forward by the OG from years prior to the formation of the tax group cannot be used. The interest carried forward is also not transferred to the OT. The old interest is therefore effectively "frozen" and can only be used again after the termination of the tax group. The ruling has been admitted for appeal and is pending before the BFH under the case number I R 1/25.