BFH confirms pass-through prohibition for corporations

Accordingly, an original commercial activity of the holding corporation cannot be deduced even if the operating partnership holds an indirect interest in the holding corporation through a corporation. In such a case, the holding corporation can continue to apply the extended property deduction pursuant to Art. 9 no. 1 sentence 2 et seq. GewStG (German Trade Tax Act).

With this decision, the BFH has confirmed and consolidated its previous case law. This was largely in line with the literature and provides the necessary certainty for advisory practice.

The decision was based on the following facts (simplified): The plaintiff and defendant in the appeal, a real estate management GmbH, leased sub-areas of a property to F GmbH & Co. KG (F-KG) by way of an intermediate lease through its wholly-owned subsidiary A-GmbH. F-KG used these sub-areas afor its management and its central administrative units.

Until November 4, 2015, the plaintiff’s shareholders comprised the individual F with a 47.62 % shareholding and F-Beteiligungsgesellschaft mbH, a wholly-owned subsidiary of F-KG, with a 52.38 % shareholding. The limited partner share of F-KG was held in full by F-Holding GmbH, whose sole shareholder was F until November 4, 2015.

For the 2015 assessment period, the plaintiff claimed the extended reduction for real estate companies in accordance with Art. 9 no. 1 sentence 2 et seq. GewStG. The competent tax office took the view that there was a split-up between the plaintiff and F-KG and did not grant the extended reduction. The plaintiff appealed against this with a leap-frog action.

The Munich Tax Court considered the requirements for the extended reduction to be fulfilled and upheld the claim.

The BFH agreed with the Munich Tax Court and found there was no split-up, as the plaintiff lacked the necessary integration of personnel. The plaintiff was therefore justified in claiming the extended reduction in accordance with Art. 9 no. 1 sentence 2 GewStG.

An integration of personnel can only be assumed if the persons controlling the holding company also have a dominant position in the operating company’s decision-making process. In the case of holding corporations, only their own economic will to operate and such will’s enforceability in the operating company must be taken into account. Recourse to the shareholders “behind” the holding corporation and their actual ability to influence the formation of its will is denied under the pass-through prohibition. Likewise, the pass-through prohibition prevents an attribution of the shares in the operating company held by the holding corporation’s shareholders. Consequently, a split-up can only be assumed if the holding corporation holds a direct or indirect share of more than 50% in the operating company. However, the plaintiff does not have such a shareholding in the operating company F-KG. 

The same applied in cases of a reverse split-up, i.e., if the holding corporation is controlled by the operating company. The present structure in the form of an operating partnership’s indirect participation in a holding corporation through a corporation still did not allow the assumption of an integration of personnel.

The principles from the BFH decision dated September 16, 2021 (IV R 7/18) were therefore not applicable. In this decision, the Fourth Senate departed from its previous case law and decided that the pass-through prohibition no longer applied to the indirect participation in a holding partnership through a corporation.

In practice, this means that, in the case of a holding company in the legal form of a partnership, the integration of personnel required for a split-up may also exist (from the 2024 assessment period) if the participation is held indirectly through a corporation.

If, on the other hand, the holding company is a corporation, there is no integration of personnel if the corporation itself does not hold a direct or indirect share of at least 50% in the operating company. In this case, the pass-through prohibition remains in effect and generally allows further scope for structuring.