Federal Fiscal Court ruling: Forfeiture of a partnership’s trade tax losses on succession

Trade tax loss deduction under section 10a of the Trade Tax Act 

As a rule, trade tax is assessed and levied by the assessment period laid down by section 14 sentence 2 and following of the Trade Tax Act (section 14 sentence 1) (“annual tax”, Federal Fiscal Court judgement of 26 Feb 2014, I R 47/13, para. 18; “principle of periodic taxation” Federal Fiscal Court judgement of 11 Jul 2024, III R 41/22, para. 40). This levying by period matches the levying of income and corporate income tax by year (section 2(7) sentence 1 Income Tax Act; section 7(3) sentence 1 Corporate Income tax Act). Owing to this period-based taxation, taking account of losses from earlier tax periods intertemporally is in principle not possible. 

But the way to take account of losses in future assessment periods was already opened in principle by the provision contained in section 10a since its introduction in the Act to Amend Trade Tax Legislation [Gesetz zur Änderung des Gewerbesteuerrechts] of 27 December 1951 (Federal Fiscal Court judgement of 20 Sep 2012, IV R 36/10, Federal Tax Gazette [BStBl.] II 2013, p. 498, paras. 34 and following). In contrast with section 10d of the Income Tax Act, which, for income tax and corporate income tax, firstly and in precedence orders a loss carry-back (section 10d(1) Income Tax Act), section 10a of the Trade Tax Act allows trade tax losses to be only carried forward as a form of loss deduction. This must be taken account of ex officio (Federal Fiscal Court judgement of 31 Jul 1990, I R 62/ 86, Federal Tax Gazette II 1990, p. 1083), thereby creating in trade tax a precisely defined breach of the principle of taxation by period.

Utilising trade tax losses is not possible without restrictions. Rather, it is both stretched out over time (“minimum taxation”, sentence 2; most recently, Federal Fiscal Court judgement of 15 Apr 2026, I R 20/25 (I R 59/12)) and denied proportionately or even in full if the partners change after the losses have arisen, with the denial of loss deduction differing depending on the legal form of the trade or business (Federal Fiscal Court judgement of 26 Feb 2014, I R 59/12, Federal Tax Gazette II 2014, p. 1016, para. 35).

On the one hand, in the case of sole proprietorships and partnerships, the owner or partners are entitled to use losses (Federal Fiscal Court judgement of 12 Nov 2020, IV R 19/18, Federal Tax Gazette II, 2021, p. 722, para. 14; also see the formulation of section 7b(2) sentence 4 of the Trade Tax Act: “the losses attributed to the partners as of the end of the previous assessment period”). It is therefore critical that the owner is or the partners remain the same if loss deduction is to be continued (Federal Fiscal Court of 22 Jan 2009, IV R 90/05). Their interests do not have to be identical in terms of size, but they do have to be identical in principle (Federal Fiscal Court judgement of 17/1/2006, VIII R 96/04). Furthermore, the continuity of the enterprise’s activities is observed with regard to the use of losses (“identicalness of enterprises”, Federal Fiscal Court judgement of 19 Dec 2019, IV R 8/17, Federal Tax Gazette II 2020, p. 401, paras. 25 and following). Potential forfeiture during the assessment period should already be taken account of when the losses are determined under section 10a sentence 6 of the Trade Tax Act (Federal Fiscal Court judgement of 4 May 2017, IV R 2/14, Federal Tax Gazette II 2017, p. 1138, para. 28).

On the other hand are corporations, which follow the rule of section 8c of the Corporate Income Tax Act to govern the forfeiture of losses, including for trade tax purposes (Trade Tax Guidelines [Gewerbesteuer-Richtlinien–GewStR] 10a.1(3) sentence 4). The taxpayer of a corporation, and thereby the party bearing trade tax losses, is the corporation itself (section 5(1) sentence 2 Trade Tax Act). A change in ownership therefore has no effect on the identical nature of the taxpayer. Nevertheless, under the conditions of section 8c(1) sentence 1 of the Corporate Income Tax Act, forfeiture of the corporation’s trade tax losses is triggered, with all exemptions (such as the “corporate group clause” of section 8c(1) sentence 4) also applying to trade tax. However, in the case of corporations the identicalness of the enterprises involved is “in principle” of no importance to a loss carryforward continuing under section 10a of the Trade Tax Act [Federal Fiscal Court of 25 April 2024, III R 30/21, Federal Tax Gazette II 2025, p. 56, para. 24).

Denial of loss deduction to partnerships 

Friction between the different legal forms of businesses is therefore “built in” and has appeared in Federal Fiscal Court case law again and again. In hiving down (section 123(3) Reorganisation Act [Umwandlungsgesetz–UmwG]) a business operation from a corporation into a partnership under section 24 of the Reorganisation Tax Act [Umwandlungssteuergesetz–UmwStG], questions arise such as this one: the Federal Fiscal Court affirmed the transfer of trade tax losses to the receiving partnership in the case of a “total hive-down” by the transfer of all assets (including functionally immaterial ones) (judgement of 1 Feb 2024, IV R 26/21, Federal Tax Gazette 2025, p. 51). Otherwise the losses will not be forfeited but will remain with the corporation, where they are at least partly not usable (section 9 no. 2 sentence 1 Trade Tax Act) (Federal Fiscal Court of 17 Jan 2019, III R 35/17, Federal Tax Gazette 2019, p. 407).

When a partner’s share is spun off between corporations (section 123(2) Reorganisation Act, section 15 Reorganisation Tax Act) the issue again shows itself of drawing the line between the forfeiture of losses at corporations and at partnerships: the spin-off [Abspaltung] (of the notional business unit under section 15(1) sentence 3 of the Reorganisation Tax Act) therefore results in the forfeiture of the partner’s trade losses that can be carried forward when they are attributed to the corporation (Trade Tax Guidelines 10a.3(3) “Departure of partners in a partnership”, Federal Fiscal Court of 12 Nov 2020, IV R 29/18, Federal Tax Gazette II 2021, p. 722.) There is no way to retain trading losses that can be carried forward, such as by applying the logic of section 8c(1) sentence 4 of the Corporate Income Tax Act (the “corporate group clause”) (Federal Fiscal Court of 12 Oct 2020, IV R 29/18, Federal Tax Gazette II 2021, p. 722, para. 22 f.)

Leaving the partnership, which disrupts the identicalness of the enterprises, can be with or without compensation (Federal Fiscal Court of 5 May 2024, III R 7/22, Federal Tax Gazette II, p. 740, para. 21 and following). Contrary to the authorities’ practice regarding 8c of the Corporate Income Tax Act (Federal Ministry of Finance Circular [Bundesministerium der Finanzen–BMF] of 28 Nov 2017, Federal Tax Gazette I 2021, p. 363, para. 5; following the letter of the Supreme Tax Authorities of the German Federal States of 19 Mar 2021 (Federal Tax Gazette I 2021, p. 359) also applicable to trade tax), precisely no differentiation is made between the various forms of transfer (Trade Tax Guidelines 10a.3(1) “change in partners”). 

Forfeiture of trade tax losses on succession

The Federal Fiscal Court has now again confirmed this case law for the purposes of succession (IV R 14/24; section 1922(1) German Civil Code [Bürgerliches Gesetzbuch–BGB]): on the death of the partner, his heirs succeeded to his position in the partnership, so the testator, with a holding of 30% in the partnership, forfeited losses still attributable to him under section 10a of the Trade Tax Act amounting to approx. EUR 85,000. The heirs could no longer claim the loss since “it is immaterial...whether the departure is based on the shareholder’s withdrawal, with the consequence of automatic transfer (accretion),...or on a transfer of the interest, whether the previous partner leaves on the basis of a transaction for consideration or whether the interest is transferred for no consideration (for instance, in the case of anticipated succession or on succession)” (para. 21).

The advantage of the corporation, concerning which a transfer (whether for consideration or not) of 30% of the shares cannot by itself fulfil the condition of section 8c(1) sentence 1 of the Corporate Income Tax Act (and 10a sentence 10 of the Trade Tax Act in conjunction with it), becomes obvious: the Federal Fiscal Court considers the clear difference (in the corporation’s favour) to be “owing to the circumstance that a corporation (unlike a partnership) is itself the party bearing the business and the right to deduct losses. This shows that corporations and partnerships are treated differently in tax law related to the use of losses under section 10a of the Trade Tax Act due to the differences in legal form, without this being seen as unequal treatment in violation of Art. 3(1) of the Basic Law [Grundgesetz–GG]” (para. 30).