German Tax Authorities Follow Federal Fiscal Court: No Trade Tax on Other Income in Case of Mere Commercial Infection
Legal Insights Germany
December 05, 2025The German Federal Fiscal Court (BFH) had once again confirmed its ruling that commercial infection pursuant to Section 15 (3) No. 1 Sentence 1 Alt. 2 German Income Tax Code (Einkommensteuergesetz – EStG) shall be interpreted in accordance with the constitution to mean that the upper-tier partnership is not considered a commercial enterprise subject to trade tax (see decision of February 4, 2025 – VIII R 1/22). The German tax authorities initially responded with a non-application decree; however, the supreme tax authorities have now concurred with the BFH's opinion and repealed the non-application decree.
Background
The BFH had already ruled in 2019 (see judgment of June 6, 2019 – IV R 30/16) that, regardless of a commercial infection within the meaning of Section 15 (3) No. 1 Sentence 1 Alt. 2 EStG, an upper-tier partnership is not considered a commercial enterprise within the meaning of Section 2 (1) Sentence 1 German Trade Tax Code (Gewerbesteuergesetz – GewStG) and therefore its income is not subject to trade tax.
The provision on so-called commercial infection shall be interpreted in accordance with the constitution to mean that, for income tax purposes, all income of the upper partnership is to be classified as commercial income. However, this rule of commercial infection does not imply that the upper-tier partnership qualifies as a deemed commercial enterprise within the meaning of Section 2 (1) sentence 2 GewStG. Consequently, although income realized at the level of upper-tier partnership is considered to be commercial income, this income is not subject to trade tax in the case of mere commercial infection. The tax authorities initially responded to this with a non-application decree (see identical decrees of the highest tax authorities of the federal states dated October 1, 2020, BStBl I p. 1032).
LATEST DEVELOPMENT
The VIII Senate of the Federal Fiscal Court (see decision of February 4, 2025 – VIII R 1/22) has confirmed the ruling of the IVth Senate, according to which mere commercial infection pursuant to Section 15 (3) No. 1 sentence 1 Alt. 2 EStG does not lead to the assumption of a permanent business operation in the upper partnership (see Legal Insights Germany of May 13, 2025).
As a result, the tax authorities decided to no longer adhere to their original opinion and repealed the non-application decree (see identical decrees of the supreme tax authorities of the federal states dated November 5, 2025 - G 1400).
Impact on practice
Now that the tax authorities have also accepted the tax court ruling, there is now planning security for national and, in particular, international investment structures—for example, in the area of private equity, real estate, and infrastructure funds in the legal form of a partnership. Taxpayers can now rest assured that even if they invest in potentially commercial foreign partnerships, other domestic income will not be subject to additional trade tax.
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