Overview

For some time now, various sides have been calling for the accumulation and reinvestment within a partnership to be made more attractive for tax purposes. According to unanimous opinion, the existing regulations on the preferential treatment of the retention are not sufficient for this.

The legislator is now obviously ready for a far-reaching change by introducing a so-called option model, which allows partnerships to switch to the corporate tax regime. After a long negotiation phase, the draft of the Act on the Modernisation of Corporation Tax Law (KöMoG) is now available.

The core of the draft law is the option right of partnerships to corporation tax. The application can be irrevocably submitted by all commercial partnerships. Only sole proprietorships, GbR’s but also investment funds within the meaning of the InvStG are excluded from the option right.

The corporate tax rules will then apply for the first time to the financial year following the marketing year in which the application is submitted.

Contrary to initial considerations, no minimum length of stay as an opted company is provided for a return option, so that a change back is possible after just one year. The application may be submitted for the first time for marketing years starting from 1 January 2022.

Ongoing taxation of the company

Subsequently, the profits of the partnership are taxed at the level of the company with corporation and trade tax.

Only facts that expressly require a corporation do not apply. Also, constituent elements that can only be fulfilled by a genuine corporation, such as .§ 28 KStG (reduction of the nominal capital), do not apply to an opting company.

Ongoing taxation of shareholders

Insofar as the company distributes profits to the shareholders, they generate income from capital assets that are subject to withholding tax. If a shareholder of the partnership is a corporation, the distributions are 95% exempt from corporation tax in accordance with § 8b KStG.

If a natural person as a partner of a partnership receives an activity remuneration or interest from a shareholder loan, these are not taxable as income from business operations. Depending on the type of remuneration, the income is taxed as wages (§ 19 EStG) or as income from capital assets (§ 20 para. 1 no. 7 EStG).

Transition to corporation tax

From a legal point of view, the transition to corporation taxation is regarded as a change of legal form within the meaning of § 1 sec. 3 no. 3 UmwStG. Therefore, the provisions in §§ 20 et seq. UmwStG apply to the option-related change of legal form of a partnership to a corporation. In principle, this constitutes a sale process, but this can take place without covering hidden reserves. Care must be taken to ensure that the tax-neutral contribution is transferred if all functionally essential operating bases of a business, partial operation or co-entrepreneur share are transferred.

Any already “taxed” capital accounts of the shareholders are transferred to the tax contribution account in the absence of share capital at a partnership.

Summary

It remains to be seen how the project will ultimately be implemented. At present, there are still many open questions to be answered. It will certainly also be exciting to see what effects the reform has on the qualification of a partnership in international tax law.

Contact

Timo Turek, LL.M.

Email: timo.turek@ypsilon.group

phone: +49 221 292796 15

www.ypsilon.international