Federal Fiscal Court ruling: Extended trade tax reduction - forming a GmbH for shareholders is harmful

Extended trade tax reduction and the management of own capital assets

By virtue of their legal form, corporations are subject to trade tax “always and in full” (section 2(2) sentence 1 of the Trade Tax Act), even if they merely manage real property. The simple reduction [einfache Kürzung] under section 9 no. 1 sentence 1 of the Trade Tax Act – in the year in dispute 1.2% of the standard value [Einheitswert], since the 2025 tax period [Erhebungszeitraum] the real property tax recognised as a business expense (Annual Tax Act 2024 [Jahressteuergesetz 2024–JStG 2024] of 2 Dec 2024, Federal Law Gazette [Bundesgesetzblatt–BGBl.] 2024 I no. 387) – provides them with only minor relief. Upon application, it is replaced by the extended trade tax reduction, under which the income subject to trade tax is reduced by the portion attributable to the management and use of the company’s own real property (section 9 no. 1 sentence 2 of the Trade Tax Act). The extended deduction is intended to place property companies on an equal footing with sole proprietorships and partnerships [Einzel- und Personenunternehmen] engaged in private asset management (Federal Fiscal Court order of 25 Sep 2018, file ref. GrS 2/16, Federal Tax Gazette [Bundessteuerblatt–BStBl.] II 2019, p. 262, para. 96).

The prerequisite is that the company exclusively manages and uses its own real property or, in addition, its own capital assets. The exclusivity requirement [Ausschließlichkeitsgebot] applies qualitatively, quantitatively and temporally. Any breach results in the extended deduction being denied in full (Federal Fiscal Court judgement of 24 Jul 2025, file ref. III R 23/23, Federal Tax Gazette II 2026, p. 236, para. 12). The activities permitted in addition are exhaustively listed in section 9 no. 1 sentences 2 and 3 of the Trade Tax Act (R 9.2(2) sentence 1 of the Trade Tax Guidelines [Gewerbesteuer-Richtlinien–GewStR]). Beyond that, only ancillary activities that are an indispensable part of an economically reasonable management of the company’s own real property are harmless (Federal Fiscal Court judgement of 23 Mar 2023, file ref. III R 49/20, Federal Tax Gazette II 2024, p. 126, para. 12). There is no general de minimis threshold (Federal Fiscal Court judgement of 23 Mar 2023, file ref. III R 49/20, Federal Tax Gazette II 2024, p. 126, paras. 25 and 26). The thresholds up to which certain activities remain harmless under section 9 no. 1 sentence 3 (b) and (c) of the Trade Tax Act relate only to supplies of electricity and certain services to tenants.

Capital assets are only those assets whose use can give rise to income under section 20 of the Income Tax Act [Einkommensteuergesetz–EStG] (Federal Fiscal Court judgement of 24 Jul 2025, file ref. III R 23/23, Federal Tax Gazette II 2026, p. 236, para. 25). These include shareholdings in a GmbH. Whether the investee company itself engages solely in asset management is irrelevant owing to the separation principle [Trennungsprinzip] between shareholder and company. “Management and use” means harvesting the fruits of assets that are to be preserved [Fruchtziehung aus zu erhaltenden Substanzwerten] (Federal Fiscal Court order of 10 Dec 2001, file ref. GrS 1/98, Federal Tax Gazette II 2002, p. 291, under C.III.1.). The Federal Fiscal Court draws the boundary negatively by reference to the typical image of a commercial business, based on the occupational profiles of the producer, the service provider and the trader. Accordingly, the ninth chamber did not regard the repeated formation and sale of shelf companies [Vorratsgesellschaften] as private asset management (Federal Fiscal Court judgement of 27 Jun 2017, file ref. IX R 3/17).

The claimant, a GmbH formed in 2014 without any staff of its own, was held 50% each by two GmbHs. By 2018 it had formed some 40 corporations and endowed them with equity. It sold shares in 13 of these companies after a short holding period, in seven cases within one year of formation. Nine of these shareholdings were acquired by its shareholders, in some cases together with a related company that shared a managing director with the claimant. Four went to unrelated third parties. The tax office assumed that each of the companies had concluded a property purchase agreement after its formation and that the shares had been transferred before or upon the transfer of benefits and burdens. In 2016, the year in dispute, the claimant sold a property acquired in 2014 and applied for the extended deduction in respect of the gain.

The tax office granted only the simple reduction on the grounds that the activity was directed at reallocating assets rather than at harvesting fruits. The Fiscal Court allowed the action (Fiscal Court of Berlin-Brandenburg judgement of 19 Sep 2023, file ref. 8 K 8162/21): in its view, the claimant was neither a founder of companies akin to a producer nor a securities dealer acting in a manner typical of a trader. With the bulk of its formations, it had addressed not the market but its shareholders and persons related to them, who could not be regarded as representing the market.

Forming a GmbH for the benefit of others breaches the exclusivity requirement

The third chamber set aside the judgement and dismissed the action (section 126(3) sentence 1 no. 1 of the Code of Procedure for Fiscal Courts [Finanzgerichtsordnung–FGO]). The decision contains five key holdings:

• Formation for others is not management of capital assets: forming a GmbH and holding its shares can form part of the management of the company’s own capital assets; occasional reallocations are harmless (para. 28). If, however, the formation is carried out for others, that is, with the aim of transferring the shares onwards shortly afterwards so that third parties derive the income, it serves to create an asset intended for transfer (para. 29). To that extent, the claimant acted like a “producer” (para. 34).
• No market participation required: activities that do not fulfil all the criteria of section 15(2) of the Income Tax Act are also harmful. Neither an intention to make a profit nor sustained activity (Federal Fiscal Court judgement of 3 Jun 2025, file ref. III R 12/22, Federal Tax Gazette II 2025, p. 749, paras. 24 and following) nor market participation recognisable to third parties is required (paras. 20 and 30).
• Shareholders are third parties: owing to the separation principle, an exchange transaction is not harmless merely because the contracting party is a shareholder or a related party (paras. 21 and 31).
• Individual transactions suffice: the sale, in the year in dispute, of a GmbH formed in 2015, and the formation, in the year in dispute, of another GmbH, whose shares were not transferred until 2017, already breached the exclusivity requirement (para. 34). An overall view of all formations and transfers confirmed that the onward transfer had been planned from the outset in these cases (para. 35).
• No modified three-object limit: the chamber leaves open the point at which reallocations of GmbH shares become typical of a trader. In an obiter remark, it rejects the modified application of the three-object limit [Drei-Objekt-Grenze] advocated by the tax office, because section 39(2) no. 2 of the Fiscal Code [Abgabenordnung–AO] does not apply to GmbHs and transfers of shares are not comparable with transfers of real property (para. 37).

The decision continues the strict line of the third chamber, which is gradually detaching the exclusivity requirement from the criteria of section 15(2) of the Income Tax Act: sustained activity (III R 12/22), receipts (III R 23/23) and now market participation are all irrelevant. The wording of section 9 no. 1 sentence 2 of the Trade Tax Act, which does not refer to section 15(2) of the Income Tax Act, supports the chamber’s view. This is not free of tension: the chamber draws the boundary of asset management by reference to the typical image of a commercial business (para. 26), yet disregards one of its statutory criteria. As a result, asset management by a property company is likely to be defined more narrowly than for the sole proprietorships and partnerships with which the provision is intended to establish equal treatment (para. 15).

The formula is reminiscent of the case law of the Grand Chamber, according to which commercial real estate dealing [gewerblicher Grundstückshandel] exists irrespective of the number of objects where the intention to sell is established from the outset, for instance where a building is constructed according to the purchaser’s wishes or for the purchaser’s account (Federal Fiscal Court order of 10 Dec 2001, file ref. GrS 1/98, Federal Tax Gazette II 2002, p. 291, under C.III.5.). Unlike shelf companies, this case concerned special-purpose property companies [Objektgesellschaften] endowed with equity, from which fruits could certainly be harvested. What is decisive, therefore, is not the asset but the purpose for which it was intended at the time of its formation. This inner fact can be established only through circumstantial evidence. In the case in dispute, it was established by the findings of the Fiscal Court and by the claimant’s own submission that it had formed the companies “overwhelmingly” for its own requirements (para. 33). Since the overall assessment takes into account the entire activity over a manageable period (para. 27), later transfers may, moreover, call into question the reduction for the year of formation.

Extended trade tax reduction: implications for group and project structures

Typical platform and project structures are affected, in which a company entitled to the deduction forms special-purpose property companies, has them acquire real property and passes the shares on to shareholders, group companies or investors. The following is recommended in practice:

• Separate functions: companies intended for onward transfer should be formed by the future shareholders themselves or by a company that does not depend on the extended deduction. The disadvantage generally lies not in the capital gain, which under section 8b(2) and (3) of the Corporation Tax Act [Körperschaftsteuergesetz–KStG] – without restriction by section 8b(4) of the Corporation Tax Act – is ultimately 95% tax-exempt, but in the loss of the extended deduction for all income from real property in the levy period.
• Document the intention to hold: for formations intended for the company’s own portfolio, investment and financing decisions and decisions by corporate bodies should evidence the intention to hold. Sweeping statements such as those in the case in dispute (para. 33) should be avoided. Later sales due to changed circumstances are likely to remain harmless as occasional reallocations (para. 28). However, there is no standardised object limit serving as a safe harbour (para. 37).
• Include gratuitous transfers: the Federal Fiscal Court has not decided whether gratuitous onward transfers, such as distributions in kind to shareholders, are also covered. The wording “transfer onwards” [weiter zu übertragen] (para. 29) suggests that they are.
• Hold real property throughout: irrespective of the above, the company must hold real property of its own throughout the entire levy period (section 14 sentences 2 and 3 of the Trade Tax Act; paras. 16 and 38). If all of the real property is sold before the end of that period, the extended deduction is lost for that reason alone (Federal Fiscal Court judgement of 17 Oct 2024, file ref. III R 1/23, Federal Tax Gazette II 2025, p. 158). A shortened levy period (section 14 sentence 3 of the Trade Tax Act) is also relevant in this respect (Federal Fiscal Court judgement of 18 May 2017, file ref. IV R 30/15).

The judgement is not designated for official publication, but consistently continues the line taken by the third chamber. Tax auditors are likely to take it up. It remains open how long a GmbH must be held so that its shares are no longer regarded as having been transferred onwards “shortly afterwards”.