In its judgement of 8 May 2025, the Federal Fiscal Court clarifies that the disposal of shares in partnerships with subsidiary partnerships, both in Germany and abroad, is to be regarded as a single transaction, and that it is not permissible to allocate the total hidden reserves within the group of companies being disposed of to individual companies. These must be subject to trade tax as a single aggregate at the highest level; or, alternatively, they are not subject to trade tax if natural persons sell these shares.
Case law
On 8 May 2025 (Case No. IV R 40/22), the Federal Fiscal Court had to rule on an important issue relating to the sale of shares in a partnership. Specifically, the case concerned a situation in which, within a so-called multi-tier partnership structure – that is, a holding structure with several levels of shareholding – shares in an upper-tier partnership were sold. The point of contention was whether the profit from such a sale should be apportioned between hidden reserves at the level of the selling partnership and those relating to shareholdings in lower-tier partnerships.
The judgement was based on a real-life business case: a foundation contributed shares in an investment company to a holding limited partnership. This holding company, in turn, held shareholdings in several operating companies. The competent tax court regarded the entire contribution gain arising from this – on the basis of the Transformation Tax Act – as taxable at the level of the holding limited partnership. The foundation took the view that at least the portion of the hidden reserves attributable to tax-privileged shareholdings should remain tax-exempt.
The Federal Fiscal Court dismissed the foundation’s appeal. It confirmed that the full capital gain on the contribution is subject to trade tax at the level of the holding company – regardless of which portfolio companies had contributed to the increase in value.
Headnotes of the judgement
1. The gain arising from the sale of a share in a partnership within a multi-tiered structure is uniformly attributed to the selling company, which is usually the top-tier holding company. There is no apportionment to individual components – such as the hidden reserves of the underlying investee companies.
2. Even if hidden reserves of the lower-tier associated companies are also disposed of, the total profit must be recognised in full as trade income by the disposing company. A reduction under the Trade Tax Act is not permitted.
3. If the seller is a company or a legal entity within the meaning of the Corporation Tax Act (KStG), trade tax is payable on the entire capital gain; this also includes hidden reserves from subsidiaries or sub-subsidiaries both in Germany and abroad.
Implications for practice
The ruling has significant implications for the tax treatment of share disposals within complex shareholding structures. The Federal Fiscal Court states with remarkable clarity that, where a partnership disposes of a shareholding, the resulting gain is to be attributed in full to that partnership – even if the increase in value derives partly or predominantly from shareholdings in other companies.
In practice, this means that the full capital gain is subject to trade tax at the level of the selling company if its shareholders – and thus the sellers – are a corporation or a legal entity. Tax reliefs, such as those provided for certain investment income, do not apply in this case. Companies with multi-tiered corporate structures must therefore be prepared for the fact that, when shares are sold, the entire profit will be subject to trade tax – without any relief through the allocation or pass-through of tax benefits, which was previously sometimes assumed. Hidden reserves in foreign subsidiary or sub-subsidiary partnerships, which are normally attributable to the foreign state under double taxation agreements, are also assigned to the German trade tax jurisdiction.
Conclusion
The Federal Fiscal Court’s ruling underlines the importance of early and detailed tax planning when structuring company disposals within investment chains, particularly where partnerships are involved. When partnership interests are sold by partnerships, it is to be assumed that the tax consequences arise exclusively at the level of the selling partnership – regardless of the level of the holding structure at which the hidden reserves were accumulated.
For holding companies or special-purpose entities in particular, this can result in a significant additional tax burden. Even arrangements designed to specifically target hidden reserves at various levels must now be reconsidered in light of these new circumstances. In any case, the tax implications of such transactions should be analysed in detail in advance. The tax clauses in the SPA (Share Purchase Agreement) for the sale of shares in partnerships therefore remain – as before – of great importance.
