The struggle regarding partially remunerated transfers under Sect. 6(5) sent. 3 of the Income Tax Act

The transfer of individual business assets 

With regard to taxable business assets, the transfer of individual assets free of charge is generally assumed to be a withdrawal (Sect. 4(1) sent. 2 of the Income Tax Act) and a contribution (Sect. 4(1) sent. 8 of the Income Tax Act). The withdrawal is to be valued at its market value (Sect. 6(1) No. 4 of the Income Tax Act), resulting in a taxable gain. In the absence of a "sale", this cannot, for example, be taxed preferentially under Sect. 6b of the Income Tax Act (“rollover relief”). If the transfer is made in exchange for newly issued equity rights, this constitutes an exchange, which would have to be valued at fair market value (Sect. 6(6) sent. 1 of the Income Tax Act).

However, Sect. 6(5) sent. 3 of the Income Tax Act stipulates that the transfer – in deviation from these principles (Sect. 6(6) sent. 4 of the Income Tax Act; Circular of the Federal Ministry of Finance dated December 8, 2011, Federal Tax Gazette 2011, p. 1279, margin no. 8 et seqq.) – is mandatorily valued at book value if the conditions specified in numbers 1 to 4 are met. In contrast to provisions in the Reorg Tax Act (e.g., Sect. 3(2) sent. 1 of the Reorg Tax Act), there is therefore no possibility in such cases of partially or completely realizing hidden reserves, for example in order to utilize existing losses. In response to constitutional pressure, the list of circumstances was recently expanded to include a fourth item, which regulates the transfer free of charge between two jointly owned assets (“Gesamthandsvermögen”) with identical partners (Sect. 39(2) no. 2 sent. 2 of the General Tax Act).

According to the wording of the law, it remains unclear how to deal with a "partially remunerated transfer" – i.e., a transfer for a consideration below market value. Consideration can be provided both by transferring assets and by assuming liabilities (e.g., debts). The tax authorities take the view that the gratuitous portion should be transferred at book value in accordance with Sect. 6(5) sent. 3 of the Income Tax Act. With regard to the consideration portion of the transfer, this constitutes a sale of the asset and, in this respect, the hidden reserves of the asset are realized and taxed ("strict separation theory"; Circular of the Federal Ministry of Finance dated December 8, 2011, Federal Tax Gazette 2011, p. 1279, margin no. 15). This differs from the "modified separation theory" advocated by some authors, according to which the book value is only to be allocated to the part for which consideration is paid up to the amount of the partial consideration. 

Attempts to clarify the question of partial remuneration 

This highly practical question was referred to the full assembly (“Großer Senat) of the Federal Fiscal Court for clarification by the tenth chamber in a referral order of October 27, 2015 (file number X R 28/12, Federal Tax Gazette II 2016, p. 81), advocating the "strict separation theory." However, after the tax office had granted the plaintiff's request in the underlying appeal proceedings, these proceedings were terminated without a decision on the merits (Judgment of the Federal Fiscal Court October 10, 2018, file number X R 28/12).

However, a different chamber of the Federal Fiscal Court (judgment of December 11, 2025, file number IV R 17/23) has now – contrary to the decision of the respective lower tax court (Fiscal Court of Rhineland-Palatinate, judgment dated June 14, 2023, file number 2 K 1826/20) – adopted the "modified separation theory." The dispute concerned the transfer of individual assets "from the special business assets of a partner in a partnership to the joint assets ... of another partnership in which he holds a stake," which corresponds precisely to the second alternative in Sect. 6(5) sent. 3 no. 2 of the Income Tax Act. The two assets, "land" and "buildings," had been sold from the special business assets (“Sonderbetriebsvermögen”) at their book value. In its separate and uniform assessment, the tax office applied the strict separation theory to the transferring partnership and assessed proportional capital gains based on the ratio of the consideration to the market value of the two assets.

However, the fourth chamber of the Federal Fiscal Court advocates the application of the modified separation theory. It had already taken this view on several occasions for "other cases" under Sect. 6(5) sent. 3 of the Income Tax Act – namely those that take place within the "same" partnership (e.g., for transfers between the respective special business assets of different partners in the same partnership, Sect. 6(5) sent. 3 no. 3 of the Income Tax Act, Judgment of the Federal Fiscal Court August 3, 2022, file number IV R 16/19). For cases of withdrawal in which the individual asset leaves the business assets to which it belonged prior to the transfer (Judgment of the Federal Fiscal Court August 3, 2022, file number IV R 16/19. margin no. 45), it has now also ruled in this way in its judgment IV R 17/23, giving very detailed reasons.

This means that in the fourth chamber, which sees the main area of application of Sect. 6(5) sent. 3 of the Income Tax Act in the area of (commercial) partnerships, for which it is specifically responsible as the adjudicating chamber (margin number 76 of the judgment), a more favorable treatment for taxpayers in the case of partial-consideration transfers is now "standard".  

Link between partial-consideration transfers and other taxes

Questions regarding the treatment of partial-consideration transfers under Sect. 6(5) sent. 3 of the Income Tax Act may arise in all partnerships. If, as in the case featuring file number IV R 17/23, the partnership is a commercial partnership, trade tax also comes into play (Sect. 2(1) sent. 2 of the Trade Tax Act). The special business assets referred to in the case in dispute are also included in the calculation of income for trade tax purposes (e.g., Judgment of the Federal Tax Court dated February 13, 2008, file number I R 63/06, Federal Tax Gazette II 2009, p. 414). In this respect, all partners in the partnership – not only the specific transferor within the meaning of Sect. 6(5) sent. 3 of the Income Tax Act – are dependent on the handling of partially remunerated transfers under Sect. 6(5) sent. 3 of the Income Tax Act via the partnership's liability for the resulting trade tax (Sect. 5(1) sent. 3 of the Trade Tax Act).

In addition, Sect. 6(5) sent. 3 of the Income Tax Act involves a whole "regime" of lock-up periods. According to sent. 4 of Sect. 6(5) of the Income Tax Act, there is a lock-up period with regard to the sale or withdrawal of the transferred asset, and according to sentences 6 and 7, there is a lock-up period with regard to a corporation's participation in the transferred asset.

Other types of tax – such as VAT – are also essential for a comprehensive assessment under Sect. 6(5) of the Income Tax Act. Similarly, in the case of a transfer of domestic real estate – as in the case of the fourth chamber of the Federal Fiscal Court – questions arise regarding real estate transfer tax (in particular Sect. 6 of the Real Estate Transfer Tax Act).