Partnerships (GbR, OHG, KG, GmbH & Co. KG, PartG, etc.) are generally taxed under the transparency principle. This means that each partner's share of the profits is taxed at their personal income tax rate. To strengthen the international competitiveness of partnerships, the German Bundestag adopted the new KöMoG on 21 May 2021. It gives partnerships and professional partnerships the option to be taxed in the same way as a corporation. As a result, the profits of the electing entity are taxed in full at the 15% corporate income tax rate rather than at the individual partners' income tax rates.
Application for a Change of Legal Form of the Partnership
In principle, partnerships within the meaning of § 25 UmwStG (German Reorganisation Tax Act) are eligible to apply. This includes the OHG, KG, GmbH & Co. KG and professional partnerships. The GbR legal form is excluded. Before an option application is filed, at least 75% of the partners must approve the change of legal form by way of a partner resolution (§ 217 Abs. 1 UmwG). It is important to note that the electing entity is treated as a corporation not only for tax purposes but also under procedural law. Once the partner resolution has been passed, the option application can be filed with the competent tax office. It is essential that the application is submitted at least one month before the start of the new fiscal year.
Tax Law Basis for an Electing Entity
Because the electing entity is treated as a corporation for tax purposes, all statutory provisions applicable to a corporation now also apply to the new entity (e.g. KStG, InvStG, AStG, etc.). Exceptions apply to provisions that apply exclusively to stock corporations (e.g. § 9 Abs. 1 Nr. 1 KStG).
Procedure for Changing the Legal Form of a Partnership
As a rule, the change in the taxation of a partnership takes the form of a disposal transaction. In this transaction, the partnership is disposed of and the new corporation offers shares in consideration. The legal basis for the change of legal form of a partnership is set out in §§ 20 ff. UmwStG. In practice, a tax-neutral contribution may only be carried out if a business, a part of a business or a co-entrepreneur's interest (functionally essential operating assets) is contributed to the corporation (§ 20 Abs. 1 und 2 UmwStG). It is important to bear in mind that the contribution of special business assets has no basis under civil law. A separate procedural arrangement must therefore be agreed for such contributions. The contribution of the partners' equity can be recorded in the accounts in the contribution account. In addition, it must be noted in the accounts that the partnership's profit determination can no longer be carried out as a cash-basis accounting statement (§ 4 Abs. 3 EStG) but must instead be recorded on the basis of a balance sheet.
Changes to the Income of the Partners
In principle, all co-entrepreneurs of a partnership become shareholders of the electing entity as a result of the change of legal form. Special remuneration paid to individual co-entrepreneurs is therefore now to be treated as employment income subject to wage tax. In addition, loans granted by co-entrepreneurs and profit distributions to them are in future treated as investment income (§ 20 Abs. 1 und 2 EStG) and must therefore be taxed at the capital gains tax rate. The provision of assets by individual co-entrepreneurs to the electing partnership (e.g. office space, car, etc.) may, following the change of legal form, be classified as income from letting and leasing (§ 21 EStG).
Application to Revoke Corporate Income Tax Treatment
In addition to the option to elect partnership treatment, the KöMoG also provides the legal basis for an application to revoke this election. As a result, the electing partnership is no longer taxed as a corporation but can return to its original legal form. This option was provided because there is no statutory minimum holding period for the electing entity. The revocation application must likewise be submitted to the competent tax office at least one month before the start of the fiscal year.
Frequently asked questions
Frequently asked questions
What does the KöMoG enable partnerships to do?
Under the Act to Modernize Corporate Income Tax Law (KöMoG) of 21 May 2021, partnerships and professional partnerships can elect to be taxed as a corporation. Instead of the partners' individual income tax (transparency principle), the total profit is then subject to 15% corporate income tax. The aim is to improve international competitiveness.
Which legal forms may opt for corporate taxation?
Eligible to apply are partnerships under § 25 UmwStG, i.e. OHG, KG, GmbH & Co. KG and Partnerschaftsgesellschaften. The GbR is excluded from the option. In addition, at least 75% of the partners must approve the change of legal form by shareholder resolution pursuant to § 217 Abs. 1 UmwG.
What deadline applies to the option application under the KöMoG?
The option application must be submitted to the competent Finanzamt at least one month before the start of the new fiscal year. A prior shareholder resolution with at least 75% approval is required. The same one-month deadline also applies to a later withdrawal application.
How do shareholders' income types change after exercising the option?
Co-entrepreneurs become shareholders of the opting corporation. Special remuneration is then treated as wage-tax liable employment income, loan interest and profit distributions are subject to capital gains tax as investment income (§ 20 EStG), and the provision of assets to the company may result in rental and leasing income (§ 21 EStG).
How is a change of legal form treated for tax purposes?
The conversion qualifies as a disposal under §§ 20 ff. UmwStG: the partnership is contributed, and in return the partners receive shares in the corporation. A tax-neutral contribution is only possible if an entire business, a business unit, or a co-entrepreneur interest is transferred together with all functionally essential operating assets. Going forward, profits must also be determined via a balance sheet rather than by cash-basis accounting (Einnahmenüberschussrechnung).
Can an opting company revert to partnership taxation?
Yes, the KöMoG does not stipulate a minimum holding period. By filing a reversion application, the company can return to the original transparent taxation regime. The application must likewise be submitted to the tax office at least one month before the start of the fiscal year.