In its decision dated 28 November 2023 (2 BvL 8/13), the German Federal Constitutional Court (BVerfG) ruled that Sec. 6 Para. 5 Sent. 3 German Income Tax Act (Einkommensteuergesetz, EStG) violates the principle of equality before the law if a book value transfer of assets between sister partnerships with identical shareholdings is excluded.
A commercially active limited partnership (F1 – KG) sold two developed properties to its sister limited partnership (F2 – KG) with the identical shareholding with an agreed purchase price corresponding to the book value and therefore, in the opinion of the tax authorities, below the fair market value (transfer for partial consideration).
F1 – KG treated the transfer as a tax-neutral transfer. The tax authorities, on the other hand, took the view that the hidden reserves should be recognized in profit or loss in the amount of the difference between the book value and the fair market value.
The BVerfG had to decide, following a referral from the German Federal Fiscal Court, whether Section 6 Para. 5 EstG violates the principle of equality before law pursuant to Art. 3 Para. 1 of the German constitution (Grundgesetz, GG) insofar as it does not permit the direct transfer of assets between sister partnerships with identical shareholdings at book values.
The BVerfG comes to the conclusion that Sec. 6 Para .5 Sent. 3 EStG is incompatible with the principle of equality before law insofar as it excludes a book value transfer between partnerships with identical shareholdings.
In the opinion of the BVerfG, the decisive factor for the constitutionally relevant unequal treatment is that Sec. 6 Para. 5 Sent. 3 EStG provides for tax-neutral transfers between different assets of a taxpayer and enables a redistribution of hidden reserves within a partnership or, in the event of a transfer, from a previous sole owner to a partnership (Sec. 6 Para. 5 Sent. 3 No. 3 or No. 1 and 2 EStG). In addition, a tax-neutral transfer of assets between partnerships with identical participations is possible through a combination of withdrawal and reinvestment. Against this background, the lack of a tax-neutral direct transfer is arbitrary and violates the principle of equality before law pursuant to Art. 3 Para. 1 GG.
The legislator is required to create a corresponding new regulation and to apply the ruling in all outstanding cases since December 31, 2000.
The decision now provides legal certainty with regard to direct transfers between partnerships and should contribute to a significant simplification in this respect; to the extent that transfers since December 31, 2000 are still accessible under German law, they can still be treated as tax-neutral.
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