Modified separation theory for transfers under section 6(5) sentence 3 EStG: BMF changes course – with a catch

Modified separation theory: from the BFH judgment to the BMF letter

The transfer of an individual asset to another business without consideration generally constitutes a withdrawal (section 4(1) sentence 2 EStG), to be measured at going-concern value (Teilwert) (section 6(1) no. 4 EStG), and a contribution (section 4(1) sentence 8 EStG). A transfer in exchange for the grant of partnership rights would be treated as an exchange and measured at fair market value (gemeiner Wert) (section 6(6) sentence 1 EStG). 

By way of derogation (section 6(6) sentence 4 EStG), section 6(5) sentence 3 EStG mandatorily requires the book value to be carried forward where an asset is transferred without consideration or in exchange for the grant or reduction of partnership rights between the business assets or special business assets (Sonderbetriebsvermögen) of a partner (Mitunternehmer) and the jointly held assets (Gesamthandsvermögen) of a partnership (Mitunternehmerschaft) in which that partner holds an interest (nos. 1 and 2). The same applies to transfers without consideration between the special business assets of different partners in the same partnership (no. 3) and – since the Annual Tax Act 2024 – between sister partnerships with identical ownership (no. 4). There is no requirement to realise hidden reserves combined with an option to avoid this effect, as provided for, for example, in section 3(2) sentence 1 of the Reorganisation Tax Act (UmwStG).

If the consideration – typically a purchase price or the assumption of liabilities – falls short of the market value, the transfer is made for partial consideration. It has never been disputed that the transfer must then be split into a part made for consideration (disposal) and a part made without consideration (book value carried forward). The dispute concerned which portion of the book value is to be set against the consideration:

• Strict separation theory: the book value is apportioned in the ratio of consideration to market value. Every part-consideration transfer therefore gives rise to a proportionate gain, even if the consideration does not reach the book value. This was the position of the tax authorities (BMF of 8 December 2011, BStBl. I 2011, 1279, para. 15).
• Modified separation theory: the book value is allocated primarily to the part made for consideration, up to the amount of the partial consideration. A gain arises only to the extent that the consideration exceeds the entire book value.

In 2015, the X Senate of the BFH referred the legal question to the Grand Senate, favouring the strict separation theory (BFH of 27 October 2015 – X R 28/12, BStBl. II 2016, 81). After the tax office had granted the taxpayer’s request, the proceedings ended in 2018 without a decision on the merits (BFH of 30 October 2018 – X R 28/12, BFH/NV 2019, 39; BFH of 30 October 2018 – GrS 1/16, BStBl. II 2019, 70). 

The IV Senate, by contrast, had already applied the modified separation theory on several occasions to transfers within the same partnership (BFH of 19 September 2012 – IV R 11/12, BFH/NV 2012, 1880; on no. 3, BFH of 3 August 2022 – IV R 16/19, BFH/NV 2023, 120). In its judgment of 11 December 2025 (IV R 17/23, DStR 2026, 395, published on 19 February 2026), it has now also applied it to a transfer in which the asset left its previous business sphere: a partner sold land and buildings from his special business assets in one partnership at book value to another partnership in which he also held an interest. The transaction fell under section 6(5) sentence 3 no. 2 alt. 2 EStG. Instead of the gain of around EUR 96,500 assessed by the tax office under the strict separation theory, the gain was nil (paras. 58 f.).

The decisive factor was the purpose of the provision: section 6(5) sentence 3 EStG is intended to facilitate restructurings of partnerships. Book value continuity ends ‘only where hidden reserves would escape taxation’ (paras. 48, 50). The IV Senate did not consider a referral to the Grand Senate necessary (paras. 68 et seq.), particularly as the main scope of application of section 6(5) sentence 3 EStG lies with (commercial) partnerships, for which it has jurisdiction (para. 76).

Eight months after the decision was published, the tax authorities have followed suit. In its letter of 20 October 2026 (IV C 6 - S 2241/00066/022/040), the BMF, in agreement with the federal states (Länder), amends the letter of 8 December 2011 and revokes the letter of 12 September 2013 (BStBl. I 2013, 1164), in which it had provisionally declined to apply the IV Senate’s case law. 

In detail:

• Para. 15 of the letter of 8 December 2011 is redrafted: consideration may take the form of the transfer of assets (e.g. cash), the assumption of liabilities (e.g. loans) or the grant or reduction of partnership rights. The part made for consideration constitutes a disposal; for the part made without consideration, the book value must be carried forward – in cases under nos. 1 and 2 also to the extent that the consideration consists of partnership rights. Hidden reserves are realised only to the extent that the consideration not consisting of partnership rights exceeds the book value. The previous example 2 is resolved differently and supplemented by three variants.
• Para. 38 is amended as a consequential change: to the extent that hidden reserves are realised ‘in accordance with para. 15’, section 6(5) EStG does not apply.
• The letter applies in all open cases. For transfers made before 19 February 2026, the strict separation theory may continue to be applied upon a joint, irrevocable application by the parties involved.

Part-consideration transfers in practice: figures and pitfalls

The BMF’s examples illustrate what this means. Basic case: A and B each hold 50% of AB-OHG (a general partnership); A transfers a car with a book value of EUR 1,000 from his sole proprietorship to the jointly held assets of the OHG without the grant of partnership rights:

• Assumption of debt above book value (example 2: market value EUR 10,000; the OHG assumes a loan of EUR 3,000): previously, 30% of the book value had to be set against the consideration; A was taxed on EUR 2,700 and the OHG capitalised EUR 3,700. Now the gain is EUR 2,000 and the OHG capitalises EUR 3,000.
• Consideration below book value (example 2a: market value EUR 10,000, purchase price EUR 900): under the strict separation theory, a gain of EUR 810 arose. Under the tax authorities’ new view, the transfer is tax-neutral. Of the book value of EUR 1,000, EUR 900 is allocated to the part made for consideration and EUR 100 to the part made without consideration. The OHG recognises the car at a total of EUR 1,000.
• Market value below book value (example 2b: market value EUR 500, purchase price EUR 400): under the strict separation theory, A would have realised a loss of EUR 400. Under the modified separation theory, by contrast, no loss arises. Of the book value of EUR 1,000, EUR 400 is allocated to the part made for consideration and EUR 600 to the part made without consideration. The OHG takes over the total book value of EUR 1,000 and, with it, the hidden loss of EUR 500 inherent in the asset.
• Consideration equal to market value (example 2c: market value and purchase price EUR 500 each): the transfer is made for full consideration and section 6(5) EStG does not apply. A realises a loss on disposal of EUR 500; the OHG capitalises EUR 500.

For part-consideration transfers within the scope of section 6(5) sentence 3 EStG, the general rule is therefore: a gain arises to the extent that the consideration not consisting of partnership rights exceeds the book value. For the transferee, the carrying amount is the sum of the portion acquired for consideration and the book value carried forward for the part made without consideration. As a result, it is at least equal to the previous book value. 

Calculating a gain no longer requires the book value to be apportioned in the ratio of consideration to market value. The contentious determination of a consideration ratio falls away. However, the market value remains central to distinguishing between partial and full consideration and, in particular, for loss cases. At the same time, the partial consideration becomes an adjustable lever: every euro above the book value – up to the market value – is realised as a gain. To a limited extent, this can compensate for the lack of an option, for example in order to utilise existing losses. 

The scope of the letter is noteworthy. Headnote 1 of the IV Senate’s judgment (IV R 17/23) concerns only no. 2 of section 6(5) sentence 3 EStG; the new para. 15, by contrast, is worded in general terms, and the new examples concern transfers from a sole proprietorship under no. 1 – precisely the constellation that the X Senate had referred to the Grand Senate. This is consistent, as the BFH bases its reasoning on the purpose of section 6(5) sentence 3 EStG as a whole (headnote 2) and had already applied the modified separation theory to no. 3. At the same time, it takes the practical sting out of a possible divergence between the IV and X Senates. The clarification on mixed consideration is also welcome: where an asset is transferred partly in exchange for partnership rights and partly against payment or the assumption of debt, only the portion of the consideration not consisting of partnership rights is to be set against the book value. 

Three points remain open:

• Sister partnerships (no. 4): the letter does not expressly mention no. 4, which was inserted by the Annual Tax Act 2024 (BGBl. I 2024 No. 387) following the order of the Federal Constitutional Court of 28 November 2023 (2 BvL 8/13). Section II of the updated letter of 8 December 2011 has so far dealt only with nos. 1 to 3. The generally worded rule on determining the gain and the purpose of the provision relied on by the BFH support applying it correspondingly to no. 4. However, express confirmation from the tax authorities is still lacking.
• Lock-up periods: the fewer hidden reserves are realised on the transfer, the more remain in the part made without consideration – and are subject to the lock-up period for disposals or withdrawals (section 6(5) sentence 4 EStG) and to the rules on the participation of a corporation (section 6(5) sentences 5 to 7 EStG). In example 2, the hidden reserves tied up there increase from EUR 6,300 to EUR 7,000. If the lock-up period is breached, the going-concern value must be applied retroactively. The advantage of the modified separation theory is then entirely eliminated. Retroactive taxation at going-concern value under section 6(5) sentence 4 EStG can be avoided to the extent that the hidden reserves accrued up to the transfer have been allocated to the transferring partner by means of a supplementary balance sheet (Ergänzungsbilanz). Where the interest is 100%, this lock-up period does not apply at all (BFH of 31 July 2013 – I R 44/12, BStBl. II 2015, 450; BFH of 26 June 2014 – IV R 31/12, BStBl. II 2015, 463).
• Three methods side by side: the method to be applied depends on what is transferred. For individual business assets within the scope of section 6(5) sentence 3 EStG, the modified separation theory applies; for private assets, the strict separation theory generally applies (BFH of 11 March 2025 – IX R 17/24, BStBl. II 2025, 550); and for business units under section 6(3) EStG and section 24 UmwStG, the unity theory (Einheitstheorie) applies. Before any calculation, it must therefore be established which regime is relevant.

Key change for loss cases 

The real innovation in the letter lies in the loss cases (examples 2b and 2c). If the market value is below the book value, the transferor does not realise a loss on a part-consideration transfer. The hidden losses pass to the transferee. On this point, the BMF adopts the BFH’s reasoning almost verbatim: if all hidden reserves attributable to the partial consideration pass to the transferee, the same must apply to the hidden losses attributable to the partial consideration (IV R 17/23, para. 55). The BFH consciously accepted this disadvantage and pointed out that it generally works in the transferee’s favour.

Option for legacy cases 

For legacy cases, the letter provides an option: for part-consideration transfers made before 19 February 2026 – the date on which the judgment was published – the strict separation theory may continue to be applied upon a joint, irrevocable application by the transferor and the transferee to the tax office with local jurisdiction over the transferor. This exceptionally creates a choice that section 6(5) sentence 3 EStG does not otherwise provide. It is of particular interest in two constellations:

• Loss cases: only the strict separation theory results in a – proportionate – loss for the transferor where the market value is below the book value.
• Asymmetric tax burden: the strict separation theory increases the transferor’s gain, but also the carrying amount for the transferee and thus – for depreciable assets – its depreciation base. This may be worthwhile if the transferor can utilise losses or, for example as a self-employed professional or farmer or forester, is not subject to trade tax, while the transferee partnership is liable to trade tax.

The application has its pitfalls:

• It must be filed jointly. As the transferor and the transferee may have conflicting interests, agreement is required. Where the transferee is a partnership, the choice affects all partners via the carrying amount in the jointly held assets – and, for trade tax purposes, additionally via the partnership as the taxpayer liable (section 5(1) sentence 3 of the Trade Tax Act, GewStG). The decision should be formally resolved and documented within the partnership.
• It is irrevocable. Before the application is filed, a comparative calculation covering the entire remaining useful life should be prepared, taking into account trade tax and lock-up period risks.
• It must be addressed to the tax office with local jurisdiction over the transferor. Where the transfer is made from special business assets, however, the gain must be included in the separate and uniform determination of income (gesonderte und einheitliche Feststellung) for the partnership. As a precaution, the application should therefore also be filed with the tax office responsible for the partnership and notified to the tax office responsible for the transferee.
• The letter does not specify a deadline. The application should be possible as long as the relevant assessments can still be amended.

Conclusion: review part-consideration transfers now

The letter of 20 October 2026 ends a dispute that has accompanied practitioners since the BMF letter of 8 December 2011 – in gain cases, generally in favour of taxpayers. The fact that the tax authorities are swiftly following the judgment, beyond the case decided and in agreement with the federal states, deserves recognition. As recently as November 2025, the Bundesrat had proposed in the legislative process for the Location Promotion Act (Standortfördergesetz) that the strict separation theory be enshrined in statute (statement of 21 November 2025, BR-Drs. 550/25 (B)). This proposal was not implemented in the Location Promotion Act as subsequently promulgated. Now that the BMF letter has been issued in agreement with the federal states, a renewed legislative initiative appears less likely, although it remains possible in principle.

The consequences extend beyond income tax. For commercial partnerships, the determination of the gain also affects trade tax (section 2(1) sentence 2 GewStG). Special business assets must be included in the trade income (e.g. BFH of 13 February 2008 – I R 63/06, BStBl. II 2009, 414). As the partnership is the debtor of trade tax (section 5(1) sentence 3 GewStG), the treatment of part-consideration transfers affects all partners – not just the transferor. In addition, VAT and, for German real estate, real estate transfer tax (in particular sections 5 and 6 of the Real Estate Transfer Tax Act, GrEStG, with their post-transfer holding periods) must be examined separately. 

We recommend the following:

• Reopen open gain cases: review tax assessments, determination notices and trade tax base assessments in which a gain was recognised under the strict separation theory to establish whether they can still be amended – in particular assessments made subject to review (application under section 164(2) sentence 2 of the Fiscal Code, AO) and objection proceedings kept open in view of the legal question.
• Calculate before applying: for transfers made before 19 February 2026, run the numbers under both theories for all parties involved, align interests and only then file a joint application.
• Monitor lock-up periods: the higher proportion of unrealised hidden reserves increases the risk of retroactive taxation at going-concern value under section 6(5) sentences 4 and 6 EStG.
• Safeguard borderline cases: for part-consideration transfers between sister partnerships with identical ownership (no. 4) with significant tax implications, consider applying for a binding ruling under section 89(2) AO.

Have you transferred individual assets to or from partnerships for partial consideration, or are you planning a restructuring? We will review your open cases, calculate the variants under the transitional rule for all parties involved and support you with the application. Please do not hesitate to contact us.