The procedural approach to atypical silent partnerships

The atypical silent partnership under tax law

If the owner of a commercial enterprise establishes a silent partnership covering his entire business and the partnership is to be regarded as a trading partnership for income tax purposes (Circular of the Frankfurt am Main Regional Tax Office of 12 Dec 2024) because the silent partner can take initiative and bears risk (e.g., Federal Fiscal Court judgement of 13 Nov 2025, file ref. IV R 24/23) an atypical silent partnership arises as an independent partnership. In this context, the partners are, on the one hand, the owner of the commercial enterprise and, on the other hand, the (atypical) silent partner. The atypical silent partnership may also be restricted to participation in the profits of individual parts of the business (e.g., areas of business; Federal Fiscal Court judgement of 23 Apr 2009, file ref. IV R 73/06, Federal Tax Gazette [Bundessteuerblatt–BStBl.] II 2010, p. 40). For example, regarding the capacity to be a controlling entity in a fiscal unity under section 14(1) sentence 1 of the Corporate Income Tax Act, the tax authorities base their assessment precisely on this circumstance (Federal Finance Ministry Circular of 13 Nov 2025, Federal Tax Gazette I 2025, p. 2077).

For the duration of the atypical silent partnership, the business of the owner of the commercial enterprise is allocated to this partnership for income tax purposes (Federal Fiscal Court judgement of 8 May 2025, file ref. IV R 9/23, Federal Tax Gazette II 2025, p. 610, para. 64). The formation of an atypical silent partnership in a commercial enterprise is therefore classified by the Federal Fiscal Court as a reorganisation under section 24 of the Reorganisation Tax Act (Federal Fiscal Court judgement of 15 Jul 2020, file ref. III R 68/18, Federal Tax Gazette II 2021, p. 869, para. 20). For a valuation below fair market value (section 24(2) first sentence of the Reorganisation Tax Act), the acquiring company must therefore submit applications pursuant to section 24(2) second sentence of the Reorganisation Tax Act for a lower valuation for the contributing party. 

In addition, for a person to be considered a partner, the two conditions of the partner’s taking initiative and the partner’s risk must be present to a greater or lesser extent. A lesser degree of initiative may be offset by a particularly high degree of risk, and vice versa (Federal Fiscal Court judgement of 19 Nov 19, 2024, file ref. VIII R 10/22, para. 31). However, neither of these two elements may be entirely absent (see most recently Federal Fiscal Court judgement of 13 Nov 2025, file ref. IV R 24/23).

The atypical silent partnership interest in a partnership

From a procedural law perspective, a separate and uniform determination must be made for the partners defined in this way, even in the case of the atypical silent partnership as an independent entity for the determination of profits and the classification of income (Federal Fiscal Court judgement of 25 Jun 2014, file ref. I R 24/13, Federal Tax Gazette II 2015, p. 141, para. 15; under section 180(1) sentence 1 no. 2(a) of the Fiscal Code [Abgabenordnung–AO]; e.g., Federal Fiscal Court judgement of 4 Apr 2023, file ref. IV R 19/20). Since the atypical silent partnership, as a purely internal partnership, is not required to prepare financial statements, its total taxable profit consists of the taxable profit derived from the principal’s financial statements under commercial law and the profits from any special and/or supplementary balance sheets that may need to be prepared for the partners. The atypical silent partnership is therefore treated for tax purposes as a (notional) limited partnership [Kommanditgesellschaft–KG] (e.g., Federal Fiscal Court judgement of 23 Mar 2023, file ref. IV R 8/20 (IV R 7/17), para. 39).

The Federal Fiscal Court recently had to rule on this procedural law in a case where an atypical silent partnership interest in a partnership had been established. The formation of such a silent partnership creates a two-tier partnership structure with the partnership as the parent company and the atypical silent partnership as the subsidiary (e.g., Federal Fiscal Court judgement of 8 Dec 2016, file ref. IV R 8/14, Federal Tax Gazette II 2017, p. 538, para. 16). For the separate and uniform determination under section 180(1) sentence 1 no. 2(a) of the Fiscal Code, it follows that a determination procedure must first be conducted at the level of the atypical silent partnership (para. 17). 

This assessment notice is then binding on the subsequent notices issued to the partners (section 182(1) first sentence AO). The Federal Fiscal Court rejects a consolidation of the lower and upper partnerships into a single assessment notice – for each company in which multiple persons meet the criteria for generating income, an independent, separate and uniform assessment procedure must be conducted, and an independent profit assessment notice must be issued (para. 19; e.g., Federal Fiscal Court judgement of 21 Oct 2015, file ref. IV R 43/12, Federal Tax Gazette II 2016, p. 517).

No consideration of substantive law (section 50d(10) of the Income Tax Act)

Due to the cancellation of the assessment notice on procedural grounds, the Federal Fiscal Court could no longer render a decision regarding the original matter in dispute (para. 14, “irrespective of the assessment of the substantive legal issues”). In the case in question, the atypical silent partner, who was summoned to the proceedings, was a person subject to non-resident income tax liability residing in Italy (section 1(4) of the Income Tax Act). From his participation as an atypical silent partner, he received profit shares amounting to DM 15,000 and interest of DM 718,952, of which DM 669,544 resulted from a loan granted to the partnership and DM 49,408 from interest on his account. Italy also taxed this interest.

The actual point of contention – namely, how the interest should be treated under the double tax treaty with Italy (Art. 7 or Art. 11 DTT ITA 1989) and what role the treaty override of section 50d(10) of the Income Tax Act plays in this regard – no longer needed to be decided. The Federal Fiscal Court had originally stayed the proceedings and referred questions regarding section 50d(10) of the Income Tax Act to the Federal Constitutional Court (Federal Fiscal Court judgement of 11 Dec 2013, file ref. I R 4/13, Federal Tax Gazette II 2014, p. 791). However, the Federal Constitutional Court had objected to the now decided procedural issues in its order to dismiss the case in a judgement dated 4 July 2025 (file ref. 2 BvL 15/14).