Tax group also possible with atypical silent partnership

Whether a subsidiary corporation, in which an atypical silent partnership exists, can be a suitable controlled company within the framework of a consolidated tax group for corporation tax purposes, has so far been judged differently in case law, tax authorities and literature and has not yet been decided by the highest court. Fiscal court rulings and parts of the literature have assumed that a tax group is ruled out in the case of an atypical silent partnership in the controlled company. This is because such a participation is to be classified as a partial profit transfer agreement, which precludes the conclusion of an agreement aimed at full profit transfer. The tax authorities agreed with this in the German Federal Finance Ministry circular dated August 20, 2015: Due to the profit participation of the atypical silent partners, the (alleged) controlled company cannot transfer its “entire profit” within the meaning of Section 14 (1) of the German Corporate Tax Act (Körperschaftsteuergesetz, KStG) to the controlling company. In contrast, the majority of the literature assumes that the “entire profit” is transferred even if there is an atypical silent partnership in the controlled company. This is because the profit transfer provided for in Section 14 (1) KStG is to be determined in accordance with civil law standards. As the profit participation of the (atypical) silent partner is recognized as an expense in the annual financial statements of the controlled company under commercial law, the profit reported accordingly represents the “entire profit” that is subject to the transfer obligation. The German Federal Fiscal Court (Bundesfinanzhof, BFH) has now confirmed this view in two rulings from December 11, 2024 (file no. I R 33/22 and I R 17/21).

In one case (no. I R 33/22), a limited partnership (Kommanditgesellschaft, KG) had concluded a profit transfer agreement with a limited liability company (GmbH) in order to establish a tax group. According to this agreement, the “dependent” GmbH as the controlled company was obliged to transfer the entire profit it generated to the KG as the controlling company. In the following year, the KG also acquired an atypical silent partnership interest in the GmbH, i.e. the controlled company. As the atypical silent partner (the KG) was entitled to a 10% share of the GmbH's profit, the tax office and the tax court took the view that only 90% of the profit had been transferred to the KG as the parent company, but that the law required the transfer of the entire profit. The tax group was therefore not to be recognized as a whole and the profit transfer was to be treated as a hidden profit distribution.

The BFH decided otherwise: an atypical silent partnership in the controlled company does not, in principle, prevent the recognition of a consolidated tax group under income tax law.

Section 14 (1) KStG does require a contract aimed at the complete transfer of profits within the meaning of Section 291 of the German Companies Act (Aktiengesetz, AktG) and the strict fulfillment of contractual obligations under civil law. However, what is to be transferred as full profit is determined by civil law. The object of the transfer obligation - also for tax law purposes - is therefore the net profit for the year within the meaning of Section 301 (1) AktG and not the profit determined under tax law. It follows from the authoritative nature of the net profit for the year under commercial law that the determination of profit in detail must also follow the requirements of commercial law. Otherwise, the annual result would deviate from commercial law and the obligations arising from the profit and loss transfer agreement would not be fulfilled.

However, profit participations to which a silent partner is entitled (both in the case of a typical and atypical silent partnership) are an expense under civil law and as such must be deducted from the GmbH's profit. This (reduced) annual result - i.e. “the 90%” in the case in dispute - therefore represents the “entire profit” within the meaning of Section 291 (1) sentence 1 AktG, which must be transferred to the controlling company under commercial law and subsequently also under tax law.

The BFH confirms that a (typical or atypical) silent partnership is to be qualified as a partial profit transfer agreement under civil law. However, this does not preclude the possibility of a tax group. On the one hand, it cannot be deduced from section 14 KStG that a partial profit transfer agreement within the meaning of Section 292 AktG cannot also exist in addition to a profit transfer agreement within the meaning of Section 291 AktG. On the other hand, the latter primarily establishes claims under the law of obligations of the beneficiary to profit- and earnings-related payments. These in turn - like other liabilities - reduce the distributable (net) profit of the company and therefore affect the upstream level of profit determination. The profit remaining after deduction of these “business expenses” can be regarded as “total profit”, which is made the subject of an intercompany agreement aimed at the transfer of total profit.

In the other case (no. I R 17/21), in addition to the fundamental question of the admissibility of a consolidated tax group in the case of existing atypical silent partnerships in the controlled company a special corporate structure of the plaintiff company also had to be taken into account: in some cases, atypical silent partnerships existed both in the plaintiff's own branches and in the branches of subsidiaries. The BFH compared these structures with so-called tracking stocks, the existence and effects of which - also in terms of trade tax - require further clarification and therefore referred the case back to the tax court. However, the latter must take into account the following principles expressed in the further guiding principles:

• If several atypical silent partnerships exist independently of one another, each (only) in different branches of a corporation, then this corporation can in principle be the parent company of a consolidated tax group under corporation tax law.
• The legal consequences of a consolidated tax group under trade tax law generally do not apply if an atypical silent partner is involved in the business operations of a controlled company. This does not apply if the atypical silent partner only participates in one of these business areas if there are several sufficiently separate business areas of the controlled company.