Allocation of Earnings in the Merger of Two Partnerships – No Consolidation as of the Tax Transfer Date
In rulings issued by the Federal Fiscal Court (BFH) on March 14, 2024 (IV R 6/21 and IV R 1/24), it was decided that, in the case of a merger of two partnerships with retroactive tax effect as of December 31 of the previous year, there is no consolidation of the net income and business income for the merger year, and thus no offsetting of profits and (current) losses of both partnerships is possible at that time.
The issue in the proceedings was whether, in the merger of two partnerships, the business loss of the transferring partnership can be offset against the profit of the acquiring partnership as early as the tax assessment period in which the tax effective date of the transfer falls. In principle, the merger of two partnerships is to be classified as a contribution of business assets by way of universal succession (Section 24(4) of the German Merger Tax Act (UmwStG)).
The provision for retroactive effect under § 20(5), sentence 1, of the German Corporate Tax Act (UmwStG) has the effect of deeming the transfer of business assets from the transferring company to the acquiring legal entity to have taken place as of the end of the tax transfer effective date.
According to the case law of the Federal Fiscal Court (BFH), the legal consequence of this is that the allocation of earnings among the companies does not change until the end of the tax transfer date and thus takes effect on the day following the transfer date under commercial law (typically January 1 of the following year). Only then does the acquired business assets become taxable for the acquiring company.
However, since all other tax consequences of the conversion are retroactive to the tax transfer date, the respective acquisition result must also be determined as of that date. From a tax perspective, however, the consolidation of results for the retroactive period does not begin until the transfer date under commercial law.
With regard to loss carryforwards for trade tax purposes, it should also be noted that, according to the established case law of the Federal Fiscal Court (BFH), offsetting such losses against the profits of another legal entity is possible only if, as an additional requirement, the business and the entrepreneur are the same.
Particular attention must be paid to such aspects, especially following corporate acquisitions (“add-ons”) within corporate group structures, as these cases often involve reorganizations as part of the integration process under corporate law.
