The German Federal Fiscal Court (BFH) confirmed its case law according to which the commercial infection of an upper-tier partnership pursuant to Section 15 para. 3 no. 1 sentence 1 alt. 2 German Income Tax Code (Einkommensteuergesetz – EStG) does not lead to the entire activity of a partnership being reclassified as a commercial enterprise pursuant to Section 2 para. 1 sentence 1 German Trade Tax Code (Gewerbesteuergesetz – GewStG) (see resolution dated 4 February 2025 - VIII R 1/22).
In the case, a tax consultancy company in the form of a German LLP (Partnerschaftsgesellschaft mit beschränkter Berufshaftung – PartGmbB) generated income from independent work activity (selbständige Tätigkeit). In addition, one of the partners realized capital gains from the partial sale of his participation in the company, which the company declared as commercial income. The tax office, on the other hand, wanted to classify the entire activity of the company in the year in dispute on the basis of the so-called commercial infection pursuant to Section 15 para. 3 no. 1 sentence 1 Alt. 2 EStG as a commercial enterprise (Gewerbebetrieb) pursuant to Section 2 para. 1 sentence 1 GewStG and thus make the entire income subject to German trade tax (Gewerbesteuer).
According to the BFH, in this case, Section 2 para. 1 sentence 1 GewStG must be interpreted in accordance with the German constitution to the effect that the commercial infection for income tax purposes pursuant to Section 15 para. 3 no. 1 sentence 1 alt. 2 EStG does not lead to the entire reclassification of the upper-tier partnership as a commercial enterprise for trade tax purposes. Rather, only the capital gains realized are subject to trade tax, but not the other income generated from independent work activity. Although this income constitutes commercial income (gewerbliche Einkünfte), it is not subject to trade tax due to the lack of a commercial enterprise (kein Gewerbebetrieb).
The BFH thus confirms its case law, which had previously been issued in a similar form in relation to partnerships with asset management activities (vermögensverwaltende Tätigkeit) (see, for example, BFH judgment dated June 6, 2019 - IV R 30/16 and June 15, 2023 - IV R 6/23).
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