Federal Fiscal Court ruling: procedural law for tiered partnerships

Tiered partnerships and income taxes

From an income tax perspective, the tiered partnership is an important tool. Advantages arise in particular from the fact that the Federal Fiscal Court’s landmark decision from 1991 regarding trade tax losses is applied (section 10a of the Trade Tax Act [Gewerbesteuergesetz–GewStG]). This means that a change in the partners in the upper-tier partnership only constitutes a detrimental “change of partner” with respect to that partnership so the losses attributed to the departing partner cannot be offset by the upper-tier partnership without exception (even transfers without consideration are detrimental in this respect; Explanatory Notes to the Trade Tax Act [Gewerbesteuer-Hinweise–GewStH] 10a.3(1), “change of business operator”; e.g., Federal Fiscal Court judgement of 12 Nov 2020, file ref. IV R 29/18, Federal Tax Gazette II 2021, p. 722). 

In the case of the lower-tier partnership, however, the case law of the Grand Chamber of the Federal Fiscal Court states that the partners in the upper-tier partnership are not partners in the lower-tier partnership. Instead, only the upper-tier partnership is itself a partner and thus a taxable person within the meaning of section 5(1) of the Trade Tax Act. The losses to which the upper-tier partnership is entitled in the lower-tier partnership as defined by section 10a of the Trade Tax Act are therefore retained (Federal Fiscal Court judgement of 11 Oct 2012, file ref. IV R 3/09, Federal Tax Gazette II 2013, p. 176; Guidelines to the Trade Tax Act [Gewerbesteuer-Richtlinien–GewStR] 10a.3(3) sentence 9 no. 8 sentence 2). Loss-generating business should therefore be concentrated in the lower-tier partnership so, for trade tax purposes, losses “survive” a transaction at the upper-tier partnership.

Furthermore, in a landmark decision dated 8 May 2025 (judgement of 8 May 2025, file ref. IV R 40/22, Federal Tax Gazette II 2025, p. 603) the Federal Fiscal Court decreed that a gain from the sale of a share in the upper-tier partnership falling under section 7 sentence 2 no. 2 of the Trade Tax Act is not to be allocated between the hidden reserves of the upper-tier partnership and those of the lower-tier partnership. “Rather, this constitutes a single sale transaction at the level of the upper-tier partnership”. In this respect, depending on the specific circumstances, this may result in advantages or disadvantages with regard to trade tax.

Another development worth noting is the Federal Fiscal Court case law, according to which, in the case of “upward tainting” under section 15(3) no. 1 first sentence second alternative of the German Income Tax Act [Einkommensteuergesetz–EStG] of a non-commercial upper-tier partnership by a commercial lower-tier partnership there is no de minimis threshold (Federal Fiscal Court judgement of 6 Jun 2019, file ref. IV R 30/16, Federal Tax Gazette II 2020, p. 649). Even minor interests held in a commercial lower-tier partnership are thus detrimental, at least as soon as a “relation” is created through business income (Federal Fiscal Court judgement of 26 Jun 2014, file ref. IV R 5/11, Federal Tax Gazette II 2014, p. 972). 

For trade tax purposes, however, where the upper-tier partnership is “upwardly infected”, no commercial enterprise should exist (explained in great detail in Federal Fiscal Court judgement of 5 Sep 2023, file ref. IV R 24/20), despite section 2(1) sentence 2 of the Trade Tax Act. After initially rejecting this view, the tax authorities have now adopted it (Supreme Tax Authorities of the Federal States Circular of 5 Nov 2025, Federal Tax Gazette I 2025, p. 1838).

Procedural handling of tiered partnerships

Alongside the developments in substantive law, however, procedural requirements must also be observed in the case of separate and uniform assessments for tiered partnerships. Under section 180(1) sentence 1 no. 2 (a) in conjunction with section 179(1) of the Fiscal Code [Abgabenordnung–AO], income subject to personal income tax and corporate income tax is assessed separately if multiple persons have a share in the income and the income is attributable to them. 

Established Federal Fiscal Court case law lays down that in the case of a tiered partnership a two-stage assessment must be carried out. In this process, the income generated by the lower-tier partnership is assessed separately and uniformly in a notice for that partnership and allocated to the upper-tier partnership. The assessments made for this purpose with respect to the lower-tier partnership then form the basis for a further assessment notice to be issued to the upper-tier partnership, in which the income attributed to the upper-tier partnership is assessed with respect to it and attributed to those holding an interest in the upper-tier partnership (Federal Fiscal Court judgement of 18 Sep 2007, file ref. I R 79/06, with further references).

According to established case law (Federal Fiscal Court judgement of 2 Dec 2015, file ref. I R 13/14), this also applies to foreign sub-partnerships. In such cases, however, the exemption method will often apply to taxpayers resident in Germany if a double taxation treaty (DTT) is applicable. In this case, the progression clause applies (section 32b(1) sentence 1 no. 3 of the Income Tax Act). For this purpose, section 180(5) no. 1 of the Fiscal Code provides for a special assessment procedure, to which the provisions of section 180(1) sentence 1 no. 2 (a) apply with the corresponding changes. 

In “Goldfinger models”, which utilised the progression clause of section 32b(1) sentence 1 no. 3 of the Income Tax Act in trading in precious metals within a foreign partnership (see section 15b(3a) of the Income Tax Act, section 32b(2) no. 2 (c) of the Income Tax Act), this question naturally plays a major role. In assessing these cases (e.g., Federal Fiscal Court judgement of 14 Dec 2018, file ref. I R 81/16, Federal Tax Gazette II 2019, p. 390; Federal Fiscal Court judgement of 18 Dec 2024, file ref. I R 39/21), the provisions regarding the mandatory joinder of third parties before the fiscal court (section 60(3) of the Fiscal Tax Court Code [Finanzgerichtsordnung–FGO]) must be observed (file ref. I B 38/24). Under section 60(3) sentence 1 of the Code, third parties must necessarily be joined if they are involved in the disputed legal relationship in such a way that the decision can only be rendered uniformly with respect to them as well. In the case of a “negative assessment notice”, in which the tax office denies the foreign partnership’s intent to generate income, the partners themselves are also entitled to bring an action under section 48(1) no. 4 or 5 (Federal Fiscal Court judgement of 19 Jan 2017, file ref. IV R 50/13) and must be joined as parties to the proceedings. 

Special features of trade tax for tiered partnerships

Although the partners of a commercial partnership are taxed transparently for income and corporate tax purposes (section 15(1) sentence 1 no. 2 of the Income Tax Act), for trade tax purposes, the “transparency principle governing the taxation of partners” is specifically breached (Federal Fiscal Court judgement of 8 May 2025, file ref. IV R 40/22, Federal Tax Gazette II 2025, p. 603, para. 37). At the partner’s level, sections 8 no. 8 and 9 no. 2 of the Trade Tax Act require the individual levels of a chain of partnerships to be isolated for trade tax purposes (Federal Fiscal Court judgement of 12 Nov 2020, file ref. IV R 29/18, Federal Tax Gazette II 2021, p. 722, para. 20). 

A strict “isolation” of partnerships from one another is even assumed if the lower-tier partnership is resident abroad, since the wording of section 8 no. 8 and section 9 no. 2 specifically concerns “shares in the profit or loss of a domestic or foreign” partnership. A prior assessment of trade tax is specifically not required (Federal Fiscal Court judgement of 2 Dec 2015, file ref. I R 13/14, Federal Tax Gazette II 2016, p. 927, para. 21), and alignment with the tax situation of the lower-tier partnership is specifically not mandated.