Federal Tax Court judgement: Treatment under treaty law of trade tax for partnerships

Differences between income taxes for partnerships

The substantive scope of German DTTs covers, on the German side, income tax, corporate income tax and trade tax (Art. 2(3) of the OECD Model Convention 2025; Art. 2(3) no. 1 of the German Negotiating Basis [Deutsche Verhandlungsgrundlage] 2026). It also includes surtaxes. Income tax DTTs do not apply to other types of taxes, leaving aside the non-discrimination provisions (Art. 24 OECD Model Convention 2025; Art. 23 German Negotiating Basis 2026) (on section 6a of the Real Estate Transfer Tax Act [Grunderwerbsteuergesetz–GrEStG] see Saxony Fiscal Court judgement of 9 Nov 2023, file ref. 2 K 939/20, para. 48; left open on appeal on points of law in Federal Fiscal Court judgement of 8 Oct 2025, file ref. II R 33/23, para. 34).

Even when income is generated through partnerships, the DTTs must still fulfil their function. In this respect, for income tax and corporate income tax purposes under national law, transparency follows from section 15(1) sentence 1 no. 2 of the Income Tax Act (Federal Constitutional Court [Bundesverfassungsgericht–BVerfG] order of 29 Mar 2017, file ref. 2 BvL 6/11, Federal Tax Gazette [Bundessteuerblatt–BStBl.] II 2017, p. 1082, para. 111): the income is attributed to the partners and taxed with them. The partnership itself is a “tax subject for the purposes of classification and determination of income”. The entity generating the income is, however, the partner, which leads to a tension between the “unity of the partnership” and the “plurality of the partners” (Federal Fiscal Court judgement of 20 Nov 2014, file ref. IV R 1/11, Federal Tax Gazette II 2017, p. 34, para. 16). Under treaty law the partnership confers a permanent establishment on each of the partners (see Federal Fiscal Court judgement of 29 Nov 2017, file ref. I R 58/15, Federal Tax Gazette II 2025, p. 660, paras. 19 and following).

For trade tax purposes, section 2(1) sentence 2 of the Trade Tax Act adopts the income tax classification as a trade or business (section 15(2) of the Income Tax Act; including notionally under section 15(3) Income Tax Act). Objective liability to trade tax begins from the commencement of the trading activity (i.e. later than for income tax purposes, 2.5(1) of the Trade Tax Guidelines [Gewerbesteuer-Richtlinien–GewStR]). Liability to tax (“personal liability to trade tax”, section 43 sentence 1 of the Fiscal Code [Abgabenordnung–AO]), on which a binding decision is to be taken in the assessment notice for the trade tax base amount (section 184(1) sentence 2 Fiscal Code), lies “by way of derogation from the principle of transparency otherwise applicable in income tax law” (Federal Fiscal Court judgement of 8 May 2025, file ref. IV R 9/23, Federal Tax Gazette II 2025, p. 610, para. 41) with the partnership itself (section 5(1) sentence 3 Trade Tax Act; Federal Fiscal Court judgement of 27 Jun 2019, file ref. IV R 45/16, para. 31). The equalisation of trade tax burdens among the partners is only inadequately achieved by section 35 of the Income Tax Act and is therefore frequently shifted to agreements between the partners themselves (e.g. Federal Fiscal Court judgement of 19 Jul 2018, file ref. IV R 14/16, Federal Tax Gazette II 2022, p. 513).

Application of income tax DTTs to partnerships

For DTT purposes, by contrast, the overall problem arises that entitlement to benefit from a treaty is available only to persons “who are residents of one or both of the Contracting States” (Art. 1(1) OECD Model Convention 2025).  While a partnership may constitute a “person” as defined by a DTT (Art. 3(1)(a) OECD Model Convention 2025) (on the divergent view taken in older treaties see e.g. Federal Fiscal Court judgement of 5 Jun 2024, file ref. I R 32/20, Federal Tax Gazette II 2024, p. 875, paras. 22 and 23), it lacks in any event the capacity to be “resident” as defined by the DTT (Art. 4(1) sentence 1 OECD Model Convention 2025; Federal Ministry of Finance [Bundesministerium der Finanzen–BMF] Circular of 26 Sep 2014, Federal Tax Gazette I 2014, p. 1258, no. 2.1.1). This may differ where the partnership opts to be taxed as a corporation under section 1a of the Corporate Income Tax Act [Körperschaftsteuergesetz–KStG] (Federal Ministry of Finance Circular of 10 Nov 2021, Federal Tax Gazette I 2021, p. 2212, para. 54).  

This therefore gives rise to the problem that, although under national law trade tax is owed by the partnership itself (section 5(1) sentence 3 Trade Tax Act), it is precisely this taxpayer that is not personally entitled to treaty benefits when German DTTs are applied (Art. 1 OECD Model Convention 2025).  German trade tax does, however, fall within the substantive scope of all German income tax DTTs (Art. 2 OECD Model Convention 2025). In settled case law, the Federal Fiscal Court has resolved this conflict by holding that the partners of the partnership are each entitled to treaty benefits (e.g. Federal Fiscal Court judgement of 5 Jun 2024, file ref. I R 32/20, Federal Tax Gazette II 2024, p. 875, para. 25, on the Germany–Netherlands DTT of 1959), and that the partnership may invoke their treaty entitlement for the purposes of trade tax (Federal Fiscal Court judgement of 5 Jun 2024, file ref. I R 32/20, Federal Tax Gazette II 2024, p. 875, para. 21). The “enterprise” of a partnership as defined for DTTs is ultimately carried on by “the respective partners” (Federal Fiscal Court judgement of 18 Dec 2002, file ref. I R 92/01), so treaty entitlement can only be derived from them.

The Federal Fiscal Court has now again confirmed this case law in the context of the Germany–Switzerland DTT of 1971 for a group of companies operating in the shipping sector (file ref. IV R 32/23): the claimant partnership had as its sole limited partner a corporation with its registered office and place of management in Switzerland. It was in dispute with the tax office whether Art. 7(1) of the Germany-Switzerland DTT applied (taxing right for permanent establishment income in Germany) or the special rule for shipping in Art. 8(1) of that Treaty (taxing right only in the Contracting State in which the place of effective management of the enterprise is situated, i.e. Switzerland).

The fourth chamber of the Federal Fiscal Court decided, with detailed reasoning, in favour of the application of Art. 8 of the Germany-Switzerland DTT. This result was then also retained for trade tax purposes. The claimant partnership may invoke the treaty entitlement of its sole limited partner, with the result that Art. 8 of the Germany-Switzerland DTT also prevents the claimant from incurring trade tax. Income exempt under a DTT is already not included in the starting figure of section 7 of the Trade Tax Act (e.g. Federal Fiscal Court judgement of 22 Feb 2023, file ref. I R 35/22 (I R 32/18), Federal Tax Gazette II 2023, p. 761, para. 17). Nor can national law governing trade tax “override” the exemption (section 2(1) Fiscal Code; Federal Fiscal Court judgement of 23 Jun 2010, file ref. I R 71/09).