Federal Fiscal Court ruling: Section 6b of the Income Tax Act - transfer of hidden reserves to the assets of a partnership limited by shares (“KGaA”)

The partner-related transfer of hidden reserves under section 6b of the Income Tax Act

Section 6b of the Income Tax Act makes it possible to transfer certain gains on disposal to the acquisition or production costs of qualifying replacement assets [Reinvestitionswirtschaftsgüter]. If no deduction is made initially, a reserve reducing profit may be formed under section 6b(3) of the Income Tax Act, subject to the statutory conditions. The provision is intended to prevent the immediate taxation of the disclosed hidden reserves from impeding economically sensible adjustments to the structure of business assets. The liquidity available for reinvestment is initially to be preserved. The provision thus constitutes a deferral of taxation. A transfer of hidden reserves specifically does not entail a definitive tax exemption (e.g. Federal Fiscal Court judgement of 14 Mar 2012, file ref. IV R 6/09, para. 18).

The relief is linked to the “taxpayer”. Since 1 January 2002, a “partner-related approach” has (once again) applied (Federal Fiscal Court judgement of 9 Sep 2010, file ref. IV R 22/07, para. 17): hidden reserves can be transferred not only within the selling business, but also to assets forming part of the partner’s individual business assets or special business assets [Sonderbetriebsvermögen], and proportionately to assets of another partnership [Mitunternehmerschaft] (regarding the transfers endorsed by the tax authorities, see R 6b.2(6) and (7) of the Income Tax Guidelines [Einkommensteuer-Richtlinien–EStR]). In the case of a further partnership, the transfer is limited to the share notionally attributable to the partner. The economic allocation of the hidden reserves to the same person is thus preserved (Federal Fiscal Court judgement of 12 Dec 2024, file ref. IV R 24/22, Federal Tax Gazette [Bundessteuerblatt–BStBl.] II 2025, p. 188, para. 33).

In the case of the partnership limited by shares, this person-related relief encounters a hybrid legal form. The company is – “notwithstanding its shareholding structure, which also has co-entrepreneurial features” – a corporation (Federal Fiscal Court judgement of 1 Jun 2022, file ref. I R 44/18, para. 28) and has assets of its own. However, its general partners derive business income under section 15(1) sentence 1 no. 3 of the Income Tax Act from their profit shares not attributable to the share capital. These profit shares are split off from the corporate taxation of the partnership limited by shares (section 9(1) no. 1 of the Corporate Income Tax Act [Körperschaftsteuergesetz–KStG]; section 8 no. 4 and section 9 no. 2b of the Trade Tax Act [Gewerbesteuergesetz–GewStG]). To that extent, the transparency principle applies to the general partners. For income tax purposes, they are largely treated like partners.

This dovetails with the possibility, already recognised in the case law of the Federal Fiscal Court, of reflecting a general partner’s individual acquisition costs in a supplementary balance sheet [Ergänzungsbilanz] at the level of the partnership limited by shares (Federal Fiscal Court judgement of 15 Mar 2017, file ref. I R 41/16, paras. 25 and following). Whether these principles also support the transfer of hidden reserves under section 6b of the Income Tax Act across different legal entities was the subject of a new judgement of the Federal Fiscal Court (file ref. IV R 21/23). What is decisive here is the position as general partner. Mere participation as a limited shareholder [Kommanditaktionär] is not covered by the judgement.

Section 6b of the Income Tax Act applicable to the partnership limited by shares despite its separate legal personality

In the case at issue, three limited partners sold their interests in a partnership (“GmbH & Co. KG”) in 2011. For the hidden reserves in real property included in the purchase price, reserves under section 6b(3) of the Income Tax Act totalling EUR 1.264 million were formed. The claimants then established a partnership limited by shares in which they participated both as limited shareholders and as general partners. The partnership limited by shares acquired two developed plots of land. Hidden reserves of approximately EUR 1.145 million were to be transferred to their acquisition costs. The remainder of the reserves was carried forward. The tax office refused the transfer on account of the partnership limited by shares’s separate legal personality and increased the gains on disposal. The Cologne Fiscal Court upheld the action (judgement of 13 Jul 2023, file ref. 1 K 1783/18).

The fourth chamber of the Federal Fiscal Court confirms that a transfer is possible in principle. Neither the absence of jointly owned partnership property [Gesamthandsvermögen] at the partnership limited by shares nor the wording of section 6b of the Income Tax Act precludes it. The extensive equal treatment of the general partner with a partner for income tax purposes justifies recording reduced acquisition costs resulting from a transfer of hidden reserves in a supplementary balance sheet as well. Co-ownership in rem of the partnership limited by shares’s assets is not required for this purpose. The Federal Fiscal Court refers to the atypical silent partner, for whom supplementary balance sheets must likewise be prepared despite the absence of any entitlement in rem (paras. 34–40).

The transfer is effected by reducing the proportionate acquisition costs in a supplementary balance sheet of the general partner at the level of the partnership limited by shares. It therefore does not shift the hidden reserves to another person. At the same time, it achieves the purpose of section 6b of the Income Tax Act, namely to enable reinvestment initially without taxation of the qualifying gain on disposal. The fact that section 6b(10) sentence 10 mentions only partnerships and joint ownership communities [Gemeinschaften] does not imply that the partially transparently taxed partnership limited by shares is excluded. The chamber was able to leave open the question whether constitutional considerations also require this result (paras. 37 and 41–45). The whole matter carries through to trade tax via section 7 sentence 1 of the Trade Tax Act – there, too, the partnership limited by shares, as a corporation under section 2(2) sentence 1 of the Trade Tax Act, is “always and in its entirety” deemed a trade business (e.g. Federal Fiscal Court judgement of 28 Nov 2007, file ref. X R 6/05, Federal Tax Gazette II 2008, p. 363, under II.2.a.).

Nevertheless, the tax office’s appeal on points of law [Revision] succeeded. The Fiscal Court had not established whether, and to what extent, the deduction sought had actually been taken into account in the taxation of the claimants as general partners. The abstract admissibility of the transfer was not sufficient for the decision on the gains on disposal. After the referral back, the Fiscal Court must therefore clarify whether correspondingly reduced acquisition costs of the assets acquired by the partnership limited by shares were used as the basis (paras. 46–52). For advisory practice, this is the second key message of the decision: the admissibility of the transfer under substantive law and its corresponding implementation in the balance sheets and in the procedural sphere must go hand in hand.

Securing the transfer under section 6b of the Income Tax Act in the taxation procedures 

In the case of a planned reinvestment via a partnership limited by shares, the taxpayer’s position as general partner, the share of the replacement assets attributable to him and the general conditions of section 6b must first be examined. The formation and release of the reserve are reflected in the balance sheet of the selling business; the deduction from the acquisition or production costs is decided upon in the reinvesting business. The Federal Fiscal Court considers a corresponding division of tasks between the competent tax offices to be appropriate. The tax office of the selling business is to adopt the audit result of the tax office responsible for the reinvesting business. However, this does not give rise to a relationship of base assessment and follow-up assessment [Grundlagen-/Folgebescheid] between these decisions (paras. 47–49). The corresponding treatment should therefore be documented in a traceable manner by means of the balance sheets, calculations and tax assessment notices.

The procedural level of the partnership limited by shares deserves particular attention. According to what is now settled case law, its business income and the allocation of that income between the partnership limited by shares and the general partners must in principle be subject to a separate and uniform determination (Federal Fiscal Court judgement of 15 Oct 2025, file ref. I R 27/22, para. 13; in the judgement under discussion, para. 29). In the case at issue, however, such proceedings had been refused with final and binding effect. According to its specific content, this negative determination notice did not preclude the transfer from being taken into account in the claimants’ income tax assessments. It is precisely there that the Fiscal Court must now examine the actual treatment (paras. 30 and following, and para. 52).

Finally, declarations regarding the release or continuation of the reserve should be worded carefully. The claimants had expressly ruled out continuing, in the alternative, the portion earmarked for transfer. The Federal Fiscal Court treated this as a declaration of a voluntary release of the reserve with effect on profit in the event that the transfer failed (para. 27). Such a commitment can bar a continuation of the reserve that would otherwise still be possible. By contrast, the remainder actually carried forward did not have to be released with effect on profit in the year in dispute. Nor did the sale of the co-entrepreneurial interests justify such a release (para. 24). The judgement thus opens up reinvestments via a general partner’s interest in a partnership limited by shares, but requires consistently person-related accounting and coordinated procedural implementation.