Conversion of a partnership into a company: a breach of the holding period rules for a preceding contribution of special business assets?

Special business assets: the interaction between section 6(5) of the German Income Tax Act (EStG) and sections 25 and 20 of the German Reorganisation Tax Act (UmwStG)

Where individual assets are transferred from a partner’s special business assets (Sonderbetriebsvermögen) to the jointly held assets of the same partnership, either without consideration or in exchange for the granting or reduction of partnership rights, the transfer must be recognised at tax book value under section 6(5), sentence 3, no. 2 EStG. If a corporate entity’s interest in the transferred asset is subsequently created or increased within seven years, the so-called corporate entity clause applies. This provision imposes a tax charge on the change in status by requiring the asset to be recognised retrospectively at its tax fair value within the meaning of Section 6 EStG (Teilwert) at the date of the original transfer. The previously unrealised hidden reserves are therefore retrospectively brought into charge to tax.

The tax treatment of a conversion of a partnership into a company is generally governed by section 25, sentence 1, in conjunction with section 20 UmwStG. Tax neutrality, i.e. recognition of the contributed business assets at tax book value under section 20(2) et seq. UmwStG, requires, in particular, that all functionally essential business assets pass to the company. This also includes functionally essential special business assets which, under civil law, belong to the respective partner rather than to the partnership itself, because the assets contributed in such a conversion are the individual partnership interests (see, for example, BFH judgment of 21 February 2022 – I R 13/19, BFH/NV 2022, 1157, paragraph 21). 

In the case decided by the Saxony-Anhalt Fiscal Court, the claimant was the sole limited partner of a German limited partnership (KG) and the sole shareholder and managing director of its general partner, a German limited liability company (GmbH). He also held shares in two other GmbHs to which the KG leased business premises, among other assets. These shareholdings formed part of the claimant’s special business assets in relation to the KG.

By notarised deed dated 21 October 2014, the claimant transferred these GmbH shareholdings from his special business assets to the jointly held assets of the KG in exchange for partnership rights. The transfer was intended to take place at tax book value, and legal title passed immediately. A further notarised deed executed on the same day resolved to convert the KG into a GmbH. However, the conversion was not to take effect until 1 November 2014. There was therefore a ten-day gap between the transfer of the shareholdings and the effective tax date of the conversion. Furthermore, the two notarised deeds did not expressly cross-refer to each other.

The tax authorities considered the preliminary transfer to be a separate transaction under section 6(5), sentence 3 EStG. Accordingly, the subsequent conversion of the KG into a GmbH constituted a breach of the holding period rules under section 6(5), sentence 6 EStG, resulting in retrospective recognition of the two shareholdings at tax fair value within the meaning of Section 6 EStG and the realisation of a taxable gain. 

The claimant, by contrast, argued that the transfer of the shareholdings and the conversion should be treated as a single restructuring transaction. The sole purpose of the preliminary transfer had been to include the special business assets in the subsequent conversion. Consequently, only sections 25 and 20 UmwStG and the holding period rules contained therein should apply to the transaction as a whole. There was no scope for the additional application of section 6(5), sentence 6 EStG.

The court rejected the claimant’s argument. A single transaction would exist only if the transfer of the special business assets and the conversion were demonstrably linked and took effect on the same date. In the court’s view, these requirements were not met because legal title to the shareholdings had already passed on 21 October 2014, whereas the conversion did not take effect until 1 November 2014.

Breach of the holding period rules: the Fiscal Court’s reasoning 

In its judgment of 27 November 2025 (1 K 343/23), the Saxony-Anhalt Fiscal Court upheld the retrospective recognition at tax fair value within the meaning of Section 6 EStG and dismissed the claim. Its reasoning relied in particular on the BFH judgment of 15 July 2021 (IV R 36/18). That judgment was published in the Federal Tax Gazette only after the Reorganisation Tax Decree of 2 January 2025 had been issued. Paragraph 34 of the Federal Ministry of Finance (BMF) circular of 10 November 2021 on the option for corporate income taxation under section 1a of the German Corporation Tax Act (KStG) also contains a provision comparable to that in the Reorganisation Tax Decree. 

According to the BFH, there is no scope for a purposive restriction of section 6(5), sentence 6 EStG where a conversion at tax book value transfers hidden reserves from the personal income tax regime to the corporate income tax regime on a tax-neutral basis. It is precisely this change in tax attribution that the corporate entity clause is intended to address. In the BFH’s view, the broad wording of the provision reflects a deliberate legislative policy choice.

The BFH judgment of 18 August 2021 (XI R 43/20), which was likewise not published in the Federal Tax Gazette until 2025, does not contradict this conclusion. In that case, the hidden reserves were actually realised as a result of a disposal of shares for full consideration. By contrast, in a conversion at tax book value, they remain untaxed and merely pass into the corporate income tax regime. This gives rise to precisely the risk addressed by section 6(5), sentence 6 EStG: a tax-neutral transfer of hidden reserves.

In the Fiscal Court’s view, the case law on the overall plan doctrine invoked by the claimant did not lead to a different outcome either. That doctrine was developed through a purposive interpretation of section 34 EStG, whereas, as explained above, such an interpretation was not available in this case. Instead, the requirements of each applicable provision were decisive. The overall plan principles developed in relation to the preferential tax treatment under section 34 EStG could not simply be applied to section 6(5), sentence 6 EStG.

The court also considered the interaction with section 22(2) UmwStG. That provision covers, in particular, the disposal by the receiving company, within seven years, of shares in a company that were contributed at less than fair market value. Section 6(5), sentence 6 EStG, by contrast, applies at an earlier stage: it imposes a tax charge not only on a subsequent disposal, but already on the preceding change in the tax status of hidden reserves resulting from their transfer from the personal income tax regime to the corporate income tax regime. The court therefore did not regard section 22(2) UmwStG as a more specific provision that takes precedence over section 6(5), sentence 6 EStG.

The court’s consideration of paragraph 20.05 of the Reorganisation Tax Decree of 2 January 2025 also merits particular attention. Under that paragraph, the tax authorities consider there to be a single transaction potentially falling entirely within section 20 UmwStG where the jointly held partnership assets and the special business assets are transferred in a temporal and economic connection. On that interpretation, the transaction does not trigger the application of section 6(5), sentence 3 EStG. 

However, the Fiscal Court interpreted this administrative position restrictively. Like the tax authorities, whose administrative guidance is not binding on the court, it required a sufficiently clear temporal and economic link. In the court’s view, execution of the deeds on the same day and a common economic objective were insufficient in the case at hand, because the transactions had different effective dates and the deeds did not expressly link them to each other.

The judgment therefore raises the requirements for the legal and temporal coordination of multi-step reorganisations and their documentation. A coherent overall commercial plan alone does not provide sufficient certainty. Rather, the individual implementation steps must also be legally structured as components of a single transaction. 

Changes of legal form in practice: implications and action points

The judgment is not yet final. An appeal on points of law is pending before the BFH under case reference IV R 1/26. The BFH must determine whether the conversion of a KG into a GmbH actually constitutes a breach of the holding period rules in respect of assets previously transferred from special business assets to jointly held partnership assets, or whether the transfer and subsequent conversion fall entirely within sections 20 and 25 UmwStG.

Pending a final ruling by the BFH, planned conversions should be structured with particular care. All existing functionally essential special business assets should be identified at an early stage. Where assets are transferred to the partnership in advance, the transfer and conversion should, wherever possible, have the same effective tax date and be expressly linked in the contractual documentation. Matters such as conditions precedent, the dates on which legal title passes and the accounting treatment should also be coordinated.

In addition, the temporal and, above all, economic connection between the individual implementation steps, and their resulting treatment as a single transaction, should be thoroughly documented to demonstrate that the requirements of paragraph 20.05 of the Reorganisation Tax Decree are met.

Please contact us if you would like support in structuring your reorganisations on a tax-neutral basis with legal certainty. 

Latest tax advisory updates – in brief

Transfers for partial consideration: BMF adopts the modified separation approach
In its circular of 20 October 2026, the BMF responds to the BFH judgment of 11 December 2025 (IV R 17/23) and revises its position on transfers of individual assets for partial consideration under section 6(5), sentence 3 EStG. It will now follow the modified separation approach developed by the BFH – which is generally more favourable to taxpayers – when assessing such transfers. 

Under this approach, hidden reserves are realised only to the extent that the consideration exceeds the tax book value of the transferred asset. Consideration up to the tax book value generally does not give rise to a gain on transfer. This applies in particular to cash payments and assumed liabilities. However, where the market value is below the tax book value, a transfer for partial consideration cannot give rise to a realised loss either.

The circular applies to all open cases. For transfers made before 19 February 2026, the transferor and transferee may jointly and irrevocably elect to apply the previous strict separation approach. The election must be submitted to the tax office with local jurisdiction over the transferor.

Practice point: Open cases involving past transfers should be reviewed, and the results under both calculation methods should be compared.

Acquisition of own shares: BMF introduces simplification for short-term trading in own shares
In its circular of 16 October 2026, the BMF supplements its administrative guidance on the tax treatment of the acquisition of own shares. The new paragraph 19a addresses short-term trading by a company in its own shares.

For such short-term trading transactions, the rules on adjustments to the tax capital contribution account (steuerliches Einlagekonto) will now apply only to the net change in holdings of own shares between the respective balance sheet dates. Purchases and sales during the year therefore no longer need to be considered individually for this purpose. Instead, the determining factor is whether, and to what extent, holdings of own shares have changed between the balance sheet dates.

The new rules reduce the administrative burden, particularly where companies undertake extensive share buybacks and subsequent resales. However, companies should assess and document whether the activities genuinely constitute short-term trading in own shares. Outside such trading transactions, the existing principles set out in the BMF circular of 27 November 2013 continue to apply.

This article was written in collaboration with Lisa Rittel.