Trade tax liability on capital gains from a participation in a partnership

Commencement of Trade Tax Liability for Partnerships and Corporations

In the opinion of the Federal Tax Court, trade tax is a “tax related to the active business” (Federal Tax Court, Judgement dated August 30, 2022, file number X R 17/21, Federal Tax Gazette II 2023, p. 396, margin no. 17). Based on its nature, the Federal Tax Court concludes, among other things, that “the intentions of the partners involved in the partnership may not be taken into account when determining the commencement of its objective trade tax liability. The activity actually carried out by the partnership remains decisive” (Federal Tax Court, Judgement dated February 20, 2025, file number IV R 23/22, margin no. 43). Accordingly, the substantive trade tax liability of partnerships (Sect. 2(1) of the Trade Tax Act) commences only when all factual requirements for a business operation are met (Federal Tax Court, Judgement dated June 12, 2019, file number X R 20/17, Federal Tax Gazette II 2020, p. 3, margin no. 17 et seqq.) and the business operation has been launched (Federal Tax Court, Judgement dated September 1, 2022, file number IV R 13/20, margin no. 33). Prior to this date, no trade tax losses (Sect. 10a of the Trade Tax Act) are accumulated; similarly, the creation of an investment deduction (Sect. 7g of the Income Tax Act) is, for example, “effectively meaningless for trade tax purposes” (Circular of the Lower Saxony State Tax Office dated October 17, 2023, section IV.3 therein, specifically regarding photovoltaic systems).

The situation is quite different for corporations: According to Sect. 2(2) sent. 1 of the Trade Tax Act, their activities are always and in their entirety considered a business operation (“tax liability based solely on legal form,” Federal Fiscal Court, Judgement dated June 3, 2025, file number III R 12/22, Federal Tax Gazette II 2025, p. 749, margin no. 21). Consequently, the factual trade tax liability for a corporation commences earlier and ceases later than for natural persons and partnerships (Directives covering the Trade Tax Act, sect. 2.5(2); sect. 2.6(2); regarding the end of the trade tax liability, see e.g. Federal Tax Court, Judgement dated October 17, 2024, file number III R 1/23, margin no. 19).

What happens when both “regimes” collide with each other? In a new ruling (file number III R 38/22), the third chamber of the Federal Tax Court addresses the case where a corporation sells participations in partnerships at whose level the trade tax liability had not yet commenced. It was thus clear that no trade tax could be levied on the partnerships themselves. But what is the situation “one level up” at the selling corporation?

Can a capital gain be recognized for trade tax purposes at the level of the seller?

The third chamber of the Federal Tax Court rejected the tax authority’s inclusion of the gain for trade tax purposes at the seller’s level. The transparency principle of Sect. 15(1) sent. 1 no. 2 of the Income Tax Act applies in this regard only for the purposes of income and corporation tax. Under trade tax law, however, the taxation of a group of business enterprises works exactly the opposite way: The next higher level in each case deducts a corresponding profit pursuant to Sect. 9 no. 2 sent. 1 of the Trade Tax Act. Corresponding losses are added back to the trade income of the parent company pursuant to Sect. 8 no. 8 of the Trade Tax Act. Thus, contrary to the transparency principle applicable to income and corporation tax, trade tax is levied “definitively” at the individual level. According to established case law of the Federal Tax Court, this rule applies not only to current income but also specifically to capital gains (e.g., Federal Tax Court, Judgement dated December 2, 2015, file number I R 13/14, Federal Tax Gazette II 2016, p. 927, margin no. 21).

This principle also applies if no trade tax is due at the level of the partnership whose partnership interest was sold because its trade tax liability has not yet arisen. The facts of the case in question concerned a real estate project company whose shares were sold even before the acquisition of ownership of the relevant property.

The third chamber of the Federal Tax Court expressly opposes the attempt to replace this lack of trade tax liability at the level of the partnership with an “alternative” assessment at the level of the parent corporation. The third chamber deliberately leaves open the question whether Sect. 7 sent. 1 and 2 of the Trade Tax Act should be reduced beyond its wording to reflect its purpose so that the capital gain does not appear in the base amount for trade tax, or whether a deduction pursuant to Sect. 9 no. 2 of the Trade Tax Act applies (margin no. 48 et seqq.). In any case, the “isolation” of individual layers of companies for trade tax purposes provided by Sect. 8 no. 8 of the Trade Tax Act and Sect. 9 no. 2 of the Trade Tax Act is also applicable if the subsidiary partnership’s trade tax liability has not yet commenced (margin no. 60).

Further trade tax-related follow-up questions

The ruling of the third chamber of the Federal Tax Court concerns partnerships as subsidiaries. Capital gains from these are, in principle, not subject to trade tax, but are partially included in trade income under Sect. 7 sent. 2 of the Trade Tax Act (“Trade income also includes…”). This constitutes a “special trade tax provision for partnerships regarding the (exceptional) inclusion of capital gains from sales or liquidation in trade income” (see Federal Tax Court, Judgement dated September 5, 2023, file number IV R 24/20, margin no. 126).

The situation is different, however, for capital gains from shares in corporations as subsidiaries: These are included in business income only to the extent (Sect. 7 sent. 1 of the Trade Tax Act) that the partial income method (Sect. 3 no. 40 sent. 1 lit. a, b of the Income Tax Act) or the corporate income tax participation exemption (Sect. 8b(2, 3) of the Corporate Income Tax Act) “allow”. To this extent, they also remain in business income for trade tax purposes: The additions and deductions under Sect. 8, 9 of the Trade Tax Act are not applied to capital gains from shares in corporations, regardless of the participation quota (Annotations to the Trade Tax Directives (“GewStH”) 9.3 “Capital Gains”; Federal Tax Court, Judgement dated September 7, 2016, file number I R 9/15, margin no. 19).

The differences between the commencement of the trade tax liability for partnerships and corporations can also be utilized for tax planning purposes. The Federal Tax Court itself points this out in its ruling of February 1, 2024 (file number IV R 26/21, at margin no. 47): Start-up losses can be accumulated in a corporation due to the earlier onset of the trade tax liability under Sect. 10a of the Trade Tax Act. A subsequent “hive-down” (“Ausgliederung”; income tax treatment pursuant to Sect. 24 of the Reorg Tax Act) to a partnership then allows the “carryover” of the losses for trade tax purposes accumulated in this manner.