Federal Fiscal Court ruling: Gift tax on limited partnership interests with a negative value

Gift tax follows the statutory valuation scheme

The value of an interest in the business assets of a partnership is separately determined under section 151(1) sentence 1 no. 2 where it is relevant for gift tax purposes. Section 97(1a) determines how this value is to be calculated and allocated to the partners. The Federal Tax Court confirms that this scheme also applies to a limited partner who has paid his contribution in full and is under no obligation to make additional contributions. Limited personal liability does not justify a floor of EUR 0 for the calculated value of the share in the jointly held assets.

The starting point is the fair market value (“gemeiner Wert”) of the partnership’s jointly held assets, determined in accordance with section 109(2). When allocating this value, the capital accounts shown in the partnership’s balance sheet („Gesamthandsbilanz”) must first be allocated in advance to the respective partners (section 97(1a) no. 1 (a)). The remaining difference between the overall value and the sum of the capital accounts is then distributed in accordance with the applicable profit-sharing ratio. Preferential profit shares are disregarded in this process (section 97(1a) no. 1 (b)).

Subsequently, the assets and liabilities constituting special business assets (“Sonderbetriebsvermögen”) are valued separately at their fair market value and allocated to the respective partner (section 97(1a) no. 2). These may include, for example, a partner’s receivables from the partnership. Finally, the value of the interest to be valued is the sum of the allocated share in the jointly held assets and the special business assets attributable to the partner (section 97(1a) no. 3). Accordingly, a negative first value component can reduce a positive second value component.

However, a negative capital account alone does not necessarily result in a negative value of the share in the jointly held assets. The proportionate remaining value must also be included. For advisory practice, this means that the full calculation must be carried out. The book value of a negative capital account cannot be deducted from the special business assets without further examination.

The statutory procedure is deliberately designed to be a standard and generalization. It is intended to simplify valuation without the need to establish a concretely achievable sale price for each individual partnership interest. Discrepancies between the schematically determined value of the interest and the actual fair market value must therefore be accepted in individual cases. An additional lower bound of EUR 0 applying only to certain limited partnership interests would breach the method laid down by statute. This is consistent with the binding nature of the statutory allocation method already confirmed in 2020 (Federal Tax Court judgement of 17 Jun 2020, file ref. II R 43/17, Federal Tax Gazette [Bundessteuerblatt–BStBl.] II 2022, p. 13).

Recognizing negative interest values for gift tax purposes

The plaintiff was the sole limited partner of a GmbH & Co. KG (German limited partnership) with a fixed capital interest of EUR 100,000. The general partner, a GmbH (German corporation), held no interest in either the capital or the assets of the partnership. The plaintiff had paid his contribution in full and was under no obligation to make additional contributions. The partnership agreement stipulated that future profits were first to be offset against the loss adjustment account.

By way of a transfer inter vivos (“vorweggenommene Erbfolge”), the plaintiff transferred to his nephew a fixed capital share of EUR 90,000, and thus 90 per cent of his interest in the partnership, together with part of his loan receivable from the limited partnership in the amount of EUR 1,500,000. The transfer took effect upon entry in the commercial register on 13 January 2016.

For the jointly held assets of the limited partnership, the tax office applied the negative net asset value (“Substanzwert”) of EUR -629,929, which was undisputed between the parties. This amount was higher than the value determined using the simplified capitalised earnings method (“vereinfachtes Ertragswertverfahren”). Arithmetically, the transferred 90 per cent interest therefore accounted for EUR -566,937. Nevertheless, the tax office recognised the negative share in the jointly held assets at EUR 0. The Munich Fiscal Court (“Finanzgericht München–FG München”) upheld this view, having regard to the fully paid-in contribution and the absence of an obligation to make additional contributions. Taking into account the loan receivable transferred at the same time, this resulted in a determined value of the interest of EUR 1,500,000.

The difference becomes clear when the two approaches are compared: The tax office took into account EUR 0 for the jointly held assets plus EUR 1,500,000 in special business assets. According to the Federal Tax Court, by contrast, EUR -566,937 for the jointly held assets is to be offset against EUR 1,500,000 in special business assets. The value to be determined is therefore EUR 933,063, which is significantly lower than the figure applied by the tax office (based on R B 97.5 of the Inheritance Tax Guidelines 2019).

The Federal Tax Court rejects a possible restrictive interpretation of section 97(1a) of the Valuation Act. The provision distinguishes neither between positive and negative values of interests nor according to whether the partner is obliged under civil law to cover losses. A blanket zero valuation for negative interest values would also distort the overall valuation: the sum of the interest values to be determined could exceed the value of the partnership itself. It is precisely the full recognition of both positive and negative value components that ensures an internally consistent valuation.

The enrichment principle (“Bereicherungsprinzip”) also does not require a value of zero to be applied. Admittedly, the limited partner is not required to make good his negative capital account by means of additional payments as at the valuation date. Under the partnership agreement, however, future profits must first be used to balance the accounts. The resulting reduced earning power constitutes an economic burden on the interest which a hypothetical acquirer would also take into account. Whether a negative purchase price could actually be agreed for such an interest is not decisive in the standardised valuation procedure. Nor does the differing personal liability of the general partner and the limited partner justify a different allocation key. Earlier decisions on the apportionment of standard values (“Einheitswerte”) concerned a different legal framework.

Section 15a of the Income Tax Act [Einkommensteuergesetz–EStG] does not lead to a different valuation either: this provision concerns the offsetting of losses across periods in the case of limited liability and takes economic disadvantages into account, where applicable, in later financial years, at the latest upon disposal of the interest (section 15a(2)). Gift tax, by contrast, is based on the value of the enrichment at the specific valuation date (Section 9(1) no. 2 of the Inheritance and Gift Tax Act [Erbschaftsteuer- und Schenkungsteuergesetz–ErbStG]). Nor can the statutory calculation rule be restricted by reference to the abstract risk of tax planning arrangements. The Federal Tax Court found no indications of abusive tax planning in the case at hand.

The judgment is particularly relevant in practice because it conflicts with the long-standing position of the tax authorities. The Inheritance Tax Guidelines 2011 already contained a corresponding limitation. R B 97.5(2) sentence 1 of the Inheritance Tax Guidelines 2019 expressly states that, as a rule, no negative value of the jointly held assets is to be allocated to a limited partner whose contribution has been paid in full and who is under no obligation to make additional contributions. The Federal Tax Court considers this blanket lower value limit to be incompatible with the statutory valuation scheme. The absence of personal liability may therefore not be used as a substitute for the calculation under section 97(1a) of the Valuation Act.

Determining gift tax correctly in business succession

When planning the succession of partnerships, the values of the jointly held assets, the capital accounts and the special business assets should be examined together. In the calculation under section 97(1a) of the Valuation Act, a negative interest value may not be capped at EUR 0 merely because the contribution has been paid in full and there is no obligation to make additional contributions. Particularly where partner loans are transferred at the same time, this examination can have a considerable influence on the value to be determined.

To ensure a robust valuation of the transfer, the entire calculation should be documented in a traceable manner: The determination of the fair market value of the jointly held assets as at the relevant valuation date, its apportionment on the basis of the capital accounts and the profit-sharing ratio, and the separate valuation of the special business assets actually transferred along with the interest. In the case of partner loans, the scope and fair market value of the transferred receivable should be recorded. The key documents also include partnership agreements and account statements, in particular provisions governing how losses and subsequent profits are offset against each other.

For transfers already completed, it is advisable to review assessment notices that are still open or can still be amended under procedural law. Where the tax authorities excluded a negative value component solely on the basis of the liability-based approach rejected by the Federal Tax Court, the judgement offers a concrete basis for a correction. In this context, the separate determination of value and the actual gift tax assessment must be distinguished: the Federal Tax Court ruled on the value of the transferred business assets. The final tax liability additionally depends on, among other things, further components of the acquisition, personal allowances and any applicable relief provisions for business assets (“Verschonungsregelungen”).

Where negative value components have so far been recognised at EUR 0, it is advisable to review the reasoning and procedural status of the notice of determination. In proceedings that are still open, the judgement can be relied upon to obtain a value determination that complies with the law. If the notice has already become final and non-appealable, the relevant amendment provisions must be examined separately. The decision does not create a general possibility of amendment merely by virtue of its publication.

Moreover, the decision does not confirm any particular planning model as generally permissible: the Federal Tax Court expressly denies an abuse of legal arrangements only for the case decided. For future transfers, the provisions of the partnership agreement, the accounts relevant as at the valuation date and the individual assets transferred should therefore be documented in a traceable manner.