Germany Tax: Municipal trade tax consequences

In a decision published 14 April 2010, the German Supreme Tax Court (BFH) clarified the municipal trade tax consequences for a limited partnership (KG) with two partners where the limited partner held its interest in the KG on trust for the general partner. The BFH concluded that the KG is to be viewed as a fully transparent entity for both (corporate) income tax and trade tax purposes.

According to the court, the trade tax liability for income originating from such a "virtual" KG is on the trustor (i.e. the general partner) instead of the KG. This decision has consequences for domestic and cross-border tax planning involving German partnerships: (1) loss utilization among domestic entities might be simplified; (2) in cross-border structures where the investor's home country applies a tax credit system, the use of such "virtual" KGs could potentially open up (trade) tax credit planning opportunities; and (3) planning structures with regard to the German interest deduction limitation rules could exist. The official reaction to this decision will have to be monitored.