BFH decision of 21 July 2016 – IV R 26/14, published on 26 October 2016
The IV. Senate of the Bundesfinanzhof (BFH) has referred the following legal question to the Grand Senate for clarification:
Is a property-managing entity that generates commercial income solely by virtue of its legal form likewise to be denied the so-called "extended property reduction" under § 9 No. 1 sentence 2 GewStG if it holds an interest in a property-managing partnership that is not deemed commercial by virtue of its legal form?
Background:
For enterprises that exclusively manage their own real property, the profit is generally to be reduced by the portion of the trade earnings attributable to the management and use of the own real property; see § 9 No. 1 sentence 2 GewStG.
Facts of the case:
The plaintiff is a commercially structured GmbH & Co. KG that held an interest in an asset-managing GbR. The GbR owned a property and claimed the extended property reduction within the meaning of § 9 No. 1 sentence 2 et seq.
The tax office took the view that the interest in the GbR, i.e. in a partnership, could not be treated as equivalent to own real property and denied the extended property reduction.
The judges of the IV. Senate of the BFH further stated on this matter:
The term "own real property" is to be interpreted under tax law.
The property of an asset-managing partnership is, for tax purposes, attributed proportionately to the partners standing behind it. A property held under civil law by the partnership is therefore not its "own real property", but rather (proportional) real property of each partner.
However, the I. Senate of the BFH (see BFH of 19 October 2010, I R 67/09) takes the view that, when relying solely on civil law, the real property is to be attributed to the partnership.
If one proceeds, as another senate of the BFH holds (most recently: BFH, judgment of 19 October 2010 – I R 67/09), solely from civil law, the real property is to be attributed to the partnership.
General significance of the decision to be rendered by the Grand Senate:
In principle, the management of real estate is not subject to trade tax. Trade tax can only arise if the management is carried out by a partnership or corporation that is subject to trade tax solely by virtue of its legal form.
However, if the entity confines itself to real estate management, the profit generated from this activity is, as a result, fully exempted from trade tax through the extended reduction under § 9 No. 1 sentence 2 GewStG. In the case of large asset portfolios, there may be an interest in spinning off real estate into subsidiary entities. The dispute concerns the question of whether this is possible without jeopardising the exemption from trade tax.
Source: Press release of the BFH of 26 October 2016
Frequently asked questions
Frequently asked questions
What is the extended trade tax deduction for real estate under Section 9 No. 1 Sentence 2 GewStG?
The extended trade tax deduction for real estate (erweiterte Grundstückskürzung) is a trade tax benefit for companies that exclusively manage and use their own real estate. The trade income attributable to the management and use of the company's own real estate is fully deducted, meaning no trade tax is ultimately levied on this income. It is particularly relevant for purely asset-managing corporations and commercially characterized partnerships that generate commercial income solely by virtue of their legal form.
What legal question did the IV. Senate of the BFH refer to the Grand Senate?
The IV. Senate referred the question of whether the extended trade tax deduction for real estate (erweiterte Grundstückskürzung) must also be denied to a property-managing entity that qualifies as commercial solely due to its legal form, if it holds an interest in a purely asset-managing partnership that is not deemed commercial. The key issue is whether real estate held via the lower-tier partnership qualifies as "own real estate" of the upper-tier entity.
How should the term "own real estate" be interpreted when there is a participation in an asset-managing partnership?
In the view of the Fourth Senate, the term is to be interpreted under tax law. The civil-law ownership of an asset-managing partnership is attributed pro rata to its partners for tax purposes, so that the property qualifies on a pro rata basis as own real estate of the participating company. The First Senate of the BFH (judgment of 19 October 2010, I R 67/09), by contrast, takes a purely civil-law view and attributes the real estate solely to the partnership.
What is the practical relevance of this decision for real estate structures?
In the case of large real estate portfolios, there is often an interest in transferring individual properties into asset-managing subsidiaries (e.g. GbR). The decision of the Grand Senate clarifies whether such structures jeopardize the extended trade tax deduction for real estate (erweiterte Grundstückskürzung) at the parent entity level. A negative ruling would result in full trade tax liability on the real estate income of the holding structure.
What were the facts underlying the BFH decision of 21 July 2016 (IV R 26/14)?
A commercially characterized GmbH & Co. KG held an interest in a purely asset-managing GbR that owned a property. The KG claimed the extended trade tax deduction for real estate under § 9 Nr. 1 S. 2 GewStG. The tax office denied the deduction, arguing that an interest in a partnership is not equivalent to owning real property directly.