According to a recent BFH ruling of 2 December 2015, currency losses from the liquidation of a foreign lower-tier partnership may not reduce the domestic taxable trade income of the German partnership where the latter (as upper-tier partnership) holds an interest in the foreign partnership.
Facts of the case:
A domestic Kommanditgesellschaft (KG) held approximately 25 percent of the shares in a US limited partnership that was being liquidated. Due to exchange rate movements upon repayment of its capital contribution, the KG incurred a currency loss of approximately EUR 1 million. The domestic KG sought to claim this loss in its trade tax return and thereby reduce its trade income (i.e., with tax effect).
Decision:
The BFH concurs with the view of the tax office and the subsequent decision of the Finanzgericht. In its view, the decisive point is that trade tax applies only to the income of domestic permanent establishments. The fact remains that each partnership is itself an independent taxable entity. The Trade Tax Act therefore provides, in the case of two-tier partnerships, that both profits and losses from interests (in domestic and foreign) partnerships must be eliminated from the trade income of a domestic company. These rules apply not only to ongoing participation income but also to cases in which a foreign lower-tier partnership is liquidated and a currency loss arises in this context.
The BFH also considers this approach to be compatible with Union law, taking into account the case law of the Court of Justice of the European Union (judgment X, C-686/13). There is no obligation to deduct currency losses when determining the domestic trade income of the KG in order to safeguard the free movement of capital, which also applies vis-à-vis third countries (here: the USA).
See also the press release of the BFH dated 13 April 2016.
Frequently asked questions
Frequently asked questions
Are currency losses from the liquidation of a foreign subordinate partnership deductible for trade tax purposes?
No. According to the BFH ruling of 02 December 2015, currency losses from the liquidation of a foreign subordinate partnership do not reduce the domestic trade earnings of the German parent partnership. Only income from domestic permanent establishments is subject to trade tax.
How are profits and losses from interests in multi-tier partnerships treated for trade tax purposes?
In multi-tier partnerships, both profits and losses from interests in domestic and foreign partnerships must be excluded from the trade income of the domestic upper-tier partnership. The reason is that each partnership is an independent taxable entity for trade tax purposes.
Does the reduction also apply to liquidation losses of a foreign subsidiary partnership?
Yes. The exclusion from the trade income covers not only current income from the participation but also losses arising from the liquidation of a foreign subsidiary partnership, including any related currency losses.
Does the non-recognition of currency losses from third countries violate the free movement of capital?
No. Referring to the ECJ ruling X (C-686/13), the BFH held that there is no obligation under EU law to deduct currency losses from shareholdings in third countries such as the USA when determining domestic trade income. The free movement of capital is not infringed thereby.
What is the practical consequence of the ruling for German KGs with U.S. investments?
German limited partnerships (KG) cannot claim losses – including currency losses – from investments in U.S. partnerships as a reduction of trade tax. Such losses are disregarded for domestic trade tax purposes, even if they economically affect the German entity.