Business split-up (“Betriebsaufspaltung”) and trade tax

Business split-up (“Betriebsaufspaltung”) and extended deduction (“erweiterte Kürzung”) for trade tax purposes

The business split-up as a "legal institution" originally had a trade tax background: The Reich Tax Court (“Reichsfinanzhof”) originally developed it before the Second World War for reasons of "abuse prevention," since the formation of leasing companies, among other things, would "reduce trade tax" (Judgement of the Federal Tax Court dated November 17, 2020, file number I R 72/16, Federal Tax Gazette II 2021, p. 484, margin no. 26 with further references). Case law has now moved beyond this context of the business split-up. Under the current legal situation, in which the business split-up has not been codified even after many decades (description in Sect. 50i(1) sent. 4 of the Income Tax Act, for example), it has "moved away from the original intention of preventing abuse and has become dogmatically independent" (Judgement of the Federal Tax Court dated November 17, 2020, file number I R 72/16, Federal Tax Gazette II 2021, p. 484, margin no. 27).

The trade tax background may thus have been lost – nevertheless, the business split-up continues to pose a risk, particularly with regard to trade tax, which in turn will become by far the most important German income tax due to the reduction of the corporation tax rate to 10% by 2032 (Sect. 23(1) of the Corporate Income Tax Act). As a result of the business split-up, the holding company with an original asset management activity becomes a commercial enterprise and generates "(original) income from commercial enterprises within the meaning of Sect. 15(1) sent. 1 no. 1, (2) of the Income Tax Act" (most recently judgement of the Federal Tax Court dated July 16, 2025, file number I R 13/22, margin no. 21). This also makes it a commercial enterprise for trade tax purposes (Sect. 2(1) sent. 2 of the Trade Tax Act; judgement of the Federal Tax Court dated July 14, 2016, file number IV R 34/13, margin no. 49), which has not been challenged on constitutional grounds (Judgement of the Federal Constitutional Court dated January 14, 1969, file number 1 BvR 136/62).

At the same time, due to the original commercial activity resulting from the business split-up, the extended deduction for trade tax purposes (“erweiterte Kürzung”; Sect. 9 No. 1 sent. 2 et seqq. of the Trade Tax Act) is disallowed (e.g., judgement of the Federal Tax Court dated February 22, 2024, file number III R 13/23, margin no. 12). The extended deduction has many "pitfalls" anyway, such as problems of "interim periods" (Judgement of the Federal Tax Court dated October 27, 2021, file number III R 7/19, margin no. 12), the holding of vintage cars among the fixed assets of the business (Judgement of the Federal Tax Court dated July 24, 2025, file number III R 23/23) or the participation of the business in a Christmas market (Judgement of the Federal Tax Court dated June 15, 2023, file number IV R 6/20). In addition, there are the statutory exclusions for the extended deduction contained in sent. 5 of Sect. 9 no. 1 of the Trade Tax Act (e.g. judgement of the Federal Tax Court dated October 27, 2021, file number I R 39/19). However, the business split-up is often an "undiscovered risk" ("unknown unknown"). 

Special forms of the business split-up

In (almost) all its forms, the business split-up itself is detrimental to the extended deduction under Sect. 9 no. 1 sent. 2 et seqq. of the Trade Tax Act (Judgement of the Federal Tax Court dated June 22, 2016, file number X R 54/14, Federal Tax Gazette II 2017, p. 529, margin no. 21 et seqq.). This issue has recently come back into focus as a result of the change in the Federal Tax Court's case law in its ruling of September 16, 2021 (file number IV R 7/18) on the subject of business split-ups: Two partnerships, one of which leases the essential operating asset to the other "deep down in the group", can formally establish a business split-up. The trade tax liability, which is undisputed within the group anyway (Sect. 8(2) of the Corporate Income Tax Act, Sect. 2(2) sent. 1 of the Trade Tax Act), can then no longer be avoided by applying for the extended deduction under Sect. 9 no. 1 sent. 2 et seqq. of the Trade Tax Act. 

However, the extended deduction in cases of business split-ups can be claimed if the holding company itself has the legal form of a corporation ("capitalistic business split-up") and the shares in the operating corporation are not attributable to the holding corporation as such, but to its shareholders (Judgement of the Federal Tax Court dated August 1, 1979, file number I R 111/78, Federal Tax Gazette II 1980, p. 77), because piercing the corporate veil is generally not permitted (Judgement of the Federal Tax Court dated June 22, 2016, file number X R 54/14, Federal Tax Gazette II 2017, p. 529, margin no. 25). However, if the holding corporation itself is the owner of the shares in the operating corporation and, as such, exercises the control that characterizes the business split-up, the extended deduction is again disallowed (Judgement of the Federal Tax Court dated January 28, 2015, file number I R 20/14). These principles continue to apply even after the most recent volatility surrounding the question (Circular by the highest tax authorities of the German federal states dated November 22, 2022; judgement of the Federal Tax Court dated February 22, 2024, file number III R 13/23).

Leasing back does not prevent a business split-up detrimental to the extended deduction

The Federal Tax Court has now reaffirmed its established case law on the issue of business split-ups and the extended deduction for trade tax purposes in the context of proceedings against denial of leave to appeal (“Nichtzulassungsbeschwerde“; Sect. 116 of the Tax Court Act (“Finanzgerichtsordnung”); file number IV B 31/25). The appellant argued that a business split-up that disallows the extended deduction could not exist if the holding company transfers an essential asset to the operating company for use and the operating company uses this exclusively for services to the holding company. 

The Federal Tax Court rejected this argument under the requirements of Sect. 115(2) of the Tax Court Act as a ground for admission: The "direction of the service" provided by the operating company is irrelevant (margin no. 9). Even if the holding company transfers an essential asset to the operating company for use and the operating company uses it exclusively for services to the holding company, the transfer of use is aimed at participation in general economic transactions and participation in the value added realized by the operating company. This applies in any case if the operating company also provides extensive additional services on the market – this was the case with the appellant.