Typical silent partnership or atypical silent partnership? Co-entrepreneur yes or no?

Co-entrepreneur or not?

The distinction between a typical silent partnership and an atypical silent partnership has far-reaching implications, both in procedural law and in substantive law. From a procedural point of view, the income and other tax bases associated with it are to be determined separately and uniformly in accordance with sect. 180(1) sent. 1 no. 2 lit. a of the German Fiscal Code if several persons participate in the income and the income is attributable to these persons for tax purposes (most recently Federal Tax Court, Judgement of November 19, 2024, file number VIII R 10/22, margin no. 40). In a typical silent partnership, on the other hand, there is only a "financing relationship" that does not require a separate and uniform assessment.

In substantive law, the typical silent partnership has income from capital assets pursuant to sect. 20(1) no. 4 of the Income Tax Act, for which withholding tax is to be withheld (sect. 43(1) sent. 1 no. 3 of the Income Tax Act). In the case of a typical silent partner, the final and binding effect of sect. 43(5) sent. 1 of the Income Tax Act typically arises, which is mandatorily denied, inter alia, in cases of sect. 32d(2) no. 1 of the Income Tax Act – in the case of related parties or in the case of a typical silent partnership in a corporation in which the silent partner holds at least 10%. For the business in which the typical silent partnership exists, operating expenses are incurred (Sect. 4(4) of the Income Tax Act; limited, inter alia, by the addition pursuant to sect. 8 no. 1 lit. c of the Trade Tax Act). 

However, sect. 20(1) no. 4 sent. 1 of the Income Tax Act also has its exact opposite in mind, since its wording alone requires that the silent partner is not to be regarded as a co-entrepreneur (“Mitunternehmer”). However, if this is the case, co-entrepreneurship results in the form of an atypical silent partnership, in which the position of the individual partners as co-entrepreneurs must be examined in detail (e.g. Federal Tax Court of April 12, 2021, file number VIII R 46/18, Federal Tax Gazette II 2021, p. 614, margin no. 16 et seqq.). In this case, if there is a commercial operation pursuant to sect. 15 of the Income Tax Act, the parties involved generate income from commercial operations, which must accordingly also be taken into account for trade tax purposes (sect. 2(1) of the Trade Tax Act; Federal Tax Court of July 15, 2020, file number III R 68/18, Federal Tax Gazette II 2021, p. 869, margin no. 20). The atypical silent partnership is then an "independent subject of the determination of profits and the qualification of income" (Federal Tax Court of June 25, 2014, file number I R 24/13, Federal Tax Gazette II 2015, p. 141, margin no. 15).

In many cases, the assumption of co-entrepreneurship can result in advantages, particularly in the case of cross-border relationships: The "withdrawals" from a co-entrepreneurship are not taxable income (sect. 2(1) sent. 1 of the Income Tax Act), so that problems of withholding tax (especially with regard to sect. 50d(3) of the Income Tax Act) do not arise.

Balancing co-entrepreneurial initiative and co-entrepreneur risk

In order to distinguish between the typical and atypical silent partnership, it is necessary to weigh up the position as a co-entrepreneur and a mere partner. The two elements of "co-entrepreneur initiative" and "co-entrepreneur risk" must be weighed against each other, whereby neither is decisive on its own: "The characteristics of the co-entrepreneur initiative and the co-entrepreneur risk may be more or less pronounced in individual cases (e.g. Federal Tax Court decision of October 10, 2012, file number VIII R 42/10, Federal Tax Gazette II 2013, p. 79). However, both characteristics must be present. In the case of deviations from the rule, a strong right of initiative can compensate for a weak co-entrepreneur risk. Whether both characteristics are present and, if so, whether there is such compensation for a weaker characteristic must be assessed taking into account all circumstances that determine the legal and economic position of a person as a whole" (Federal Tax Court, Judgement of September 5, 2023, file number VIII R 31/20, Federal Tax Gazette II 2024, p. 184, margin no. 29). 

In its judgment of November 13, 2025 (file number IV R 24/23), the Federal Tax Court once again clarified this balancing: In the case at hand, the tax authority had assumed co-entrepreneurship in the form of an atypical silent partnership, although e.g. losses of the partners were not provided for in the articles of association and a participation in the hidden reserves (goodwill) was not granted. Nevertheless, the tax authorities saw a "weak" co-entrepreneur risk.

This was enough for the lower court (Tax Court of Baden-Württemberg, Judgement of February 23, 2023, file number 3 K 2942/20), but not for the Federal Tax Court: The promise of the future provision of services ("benefit contribution") alone is not accompanied by the use of personal assets as a minimum prerequisite for the assumption of co-entrepreneurial risk (margin no. 48). In addition, the participation in the (current) profit from the sale of current assets does not constitute a participation in the hidden reserves and goodwill that creates co-entrepreneurial risk, but merely a profit participation (margin no. 52). Without at least a weak co-entrepreneur risk, there can be no co-entrepreneur status (with regard to the balancing also Federal Tax Court of November 19, 2024, file number VIII R 10/22), so that the Federal Fiscal Tax could directly "decide" (and uphold the action). 

Special features of the atypical silent partnership

The atypical silent partnership is not only significant in terms of its procedural and substantive effects (on special features of the income tax group, e.g. Federal Finance Ministry, Circular dated November 13, 2025, Federal Tax Gazette I 2025, p. 2077). 

Even when it is established for the first time (or even when participation quotas are changed in it), there are striking differences from the establishment of a typical silent partnership: "For the duration of the existence of the atypical silent partnership, the company of the owner of the commercial business is assigned to this co-entrepreneurship for income tax purposes. The emergence of an atypical silent partnership is therefore to be assessed for income tax purposes in the same way as a contribution of the business of the owner of the commercial business to the silent partnership within the meaning of sect. 24 of the Reorg Tax Act. If the owner of the commercial business in which another person has an atypical silent participation is a partnership, the establishment of the silent partnership therefore creates a two-tier partnership structure with the partnership as the parent company and the atypical silent partnership as the subsidiary " (Federal Tax Court of December 8, 2016, file number IV R 8/14, Federal Tax Gazette II 2017, p. 538, margin no. 16; for the termination of the atypical silent partnership, see e.g. Federal Tax Court of March 23, 2023, file number IV R 8/20 (IV R 7/17), margin no. 41 et seqq.). 

When applying sect. 24 of the Reorg Tax Act, a full taxation of hidden reserves in the contributed business assets is mandatory (sect. 24(2) sent. 1 of the Reorg Tax Act). This can only be partially or completely suppressed by the receiving entity filing an application pursuant to sect. 24(2) sent. 2 of the Reorg Tax Act. However, the application must be submitted within the time limit of sect. 20(2) sent. 3 of the Reorg Tax Act (sect. 24(2) sent. 3 of the Reorg Tax Act in conjunction with) sect. 20(2) sent. 3 of the Reorg Tax Act.