Federal Fiscal Court ruling: No separate and uniform determination of tax bases on sub-participation in a shareholding in a corporation

The separate and uniform determination of tax bases

Under section 179(1) of the Fiscal Code, tax bases are determined separately in derogation from section 157(2) where this is provided for in the Fiscal Code or in other tax laws. This provision clarifies the principle of the legality of administrative action laid down in Art. 20(3) of the Basic Law [Grundgesetz–GG] (e.g. Federal Fiscal Court judgement of 13 May 2013, I R 39/11, para. 30). A multi-stage tax procedure therefore requires an explicit legal basis. Where there isn’t one, it cannot be substituted by general considerations of expediency. If the separate determination of particular computational factors that are decisive under substantive law is not provided for by statute, these factors must be decided on directly in assessing the taxpayer (e.g. Federal Fiscal Court judgement of 17 May 2023, I R 46/21, para. 11).

According to section 179(2) sentence 2 of the Fiscal Code, the condition for separate and uniform determination of tax bases is either that it is provided for by statute or that the object of the determination is attributable to several persons. For cases in which one of the persons referred to in sentence 2 only holds a share in the object being determined through another person, section 179(2) sentence 3 of the Fiscal Code prescribes a special separate determination. This rule thus covers the case of a multi-tiered separate determination. It does not, however, extend to the sub-participation in a share in a corporation, since no separate and uniform determination is made to the corporation itself. Extending the provision to sub-participations by way of analogy is not an option because there is no unintended legislative gap that this would require.

Section 180(1) sentence 1 no. 2 (a) of the Fiscal Code provides that income subject to income tax and corporate income tax are to be determined separately where several persons share in the income and the income is attributable to these persons for tax purposes. According to Federal Fiscal Court case law, the condition requiring several persons to share in the income is satisfied where several persons jointly fulfil the condition of generating income (Federal Fiscal Court judgement of 20 Nov 2018, VIII R 39/15, Federal Tax Gazette II [Bundessteuerblatt-BStBl.] 2019, p. 239, para. 30). In a recent judgement (VIII R 33/24), the eighth chamber concluded that these requirements are not met in the case of a sub-participation in a share in a corporation. In the absence of any other applicable legal basis in more specific tax statutes, such a determination is therefore ruled out for sub-participation partnerships [Unterbeteiligungsgesellschaften].

In addition, in terms of time, it must be borne in mind that tax bases the separate and uniform determination of which is not provided for under general or special tax law must be decided on directly in the assessment of the persons potentially involved in the determination.

Typical and atypical sub-participation

According to the judgement of the eighth chamber, the distinction between a typical and an atypical sub-participation is immaterial in deciding whether the requirements for a separate and uniform determination of tax bases have been met.  The requirement laid down in section 180(1) sentence 1 no. 2 (a) of the Fiscal Code, which states that several persons must jointly fulfil the condition of generating income, is not satisfied either in the case of typical or atypical sub-participation.

Typical sub-participation is characterised by assignment under the law of obligations of a fixed amount of the main participant’s claim to profit to the sub-participant. The sub-participant's profit participation is thereby confined exclusively to the share of profit which the main participant is entitled to based on interest in the business. To this extent, the main participant and the sub-participant do not generate joint income to be apportioned as defined by sections 179(2) sentence 2 and 180(1) sentence 1 no. 2 (a) of the Fiscal Code, since they do not share the same income.  While the main participant generates dividend income under section 20(1) no. 1 in conjunction with section 20(5) sentence 1 of the Income Tax Act [Einkommensteuergesetz–EStG], the sub-participant receives capital assets under section 20(1) no. 4.

In contrast to typical sub-participation, atypical sub-participation is not confined to shares of profit. Rather, the sub-participant’s share also extends to the substance of the shareholding, including the hidden reserves. In addition, the sub-participant may be granted rights of co-determination between the participants. The condition requiring several persons to hold an interest in joint income as defined by sections 179(2) sentence 2 and 180(1) sentence 1 no. 2 (a) of the Fiscal Code is not fulfilled in the case of atypical sub-participation either. By virtue of his legal position, the sub-participant is the beneficial (co-)owner of the shares in the corporation (Federal Fiscal Court judgement of 18 May 2005, VIII R 34/01, Federal Tax Gazette II 2005, 857; Federal Fiscal Court judgement of 23 Nov 2022, I R 36/19). In accordance with its sub-participation quota, a portion of the main participant's share is attributable to it under section 39(2) no. 1 of the Fiscal Code. From that share attributed to it, it generates under section 20(5) sentence 2 of the Income Tax Act its own capital assets as defined by section 20(1) no. 1. The main participant and the sub-participant therefore do not generate joint income.

The Order on the Separate Determination of Tax Bases under Section 180(2) of the Fiscal Code (see section 180(2) Fiscal Code)

A separate (and uniform) determination of the amounts of distributions and withholding tax is also not an option based on section 180(2) of the Fiscal Code in conjunction with the Order issued on this, the Ordinance on the Separate Determination of Tax Bases under section 180(2) of the Fiscal Code [Verordnung über die gesonderte Feststellung von Besteuerungsgrundlagen nach § 180 Abs. 2 der Abgabenordnung–V zu § 180 Abs. 2 AO] (Federal Law Gazette [Bundesgesetzblatt–BGBl.] I 1986, p. 2663; Federal Tax Gazette I 1987, p. 2).  

The requirements of section 1(1) no. 1 and (3) of the Ordinance on section 180(2) of the Fiscal Code are not met. Under those provisions, tax bases, particularly income subject to income tax or corporate income tax, may be determined separately and uniformly, in whole or in part, where the plant, facilities or assets serving to generate income are operated, used or held by several persons. Here, too, the distinction between typical and atypical sub-participation does not lead to a different result. In both cases, there is no joint use or holding by several persons of an asset serving the generation of income.

The requirements of section 1(1) no. 1 and (3) of the Ordinance on section 180(2) of the Fiscal Code are not met either. Under those provisions, the condition for the separate determination of tax bases is that the assets, plant or facilities to generate income are attributable separately to several persons who, in planning, producing, maintaining or acquiring those assets, plant or facilities, have established or maintained legal relationships of the same kind with third parties. The required legal relationship of the same kind between the main participant and the sub-participant and third parties is not present, however.