Federal Constitutional Court Overturns Rule on Book Value Transfer Between Sister Partnerships

In a landmark ruling on November 28, 2023, the Federal Constitutional Court (BVerfG) put an end to a long-standing debate regarding the transfer of assets between partnerships with identical ownership structures.

Background: A Decades-Long Dispute

For more than ten years, tax authorities and courts have debated whether the transfer of assets between sister partnerships with identical shareholders is permissible at book value. The tax authorities denied this, while the Fourth Senate of the Federal Fiscal Court (BFH) considered it possible by analogy to another regulation. The disagreement ultimately led to a referral to the Federal Constitutional Court.

The BVerfG’s Decision

The Federal Constitutional Court ruled that the relevant provision in the Income Tax Act (Section 6(5), sentence 3, EstG) violates the principle of equal treatment under the Basic Law. Accordingly, the transfer of assets between partnerships with identical ownership structures at book value should be permitted. The legislature is called upon to enact a new provision retroactively effective as of December 31, 2000.

Background of the Decision: Arrangement Made 22 Years Ago

The specific case that led to the decision occurred 22 years ago. A partnership transferred real estate at book value to a sister partnership with identical ownership. The tax office refused to allow the book value to be carried forward, which led to a protracted legal dispute.

BverfG vs. Tax Administration and Parts of the BFH

The Federal Constitutional Court did not follow the opinion of the Fourth Senate of the Federal Fiscal Court. It argued that the transfer of book value entailed a change in legal entity and thus did not fall under the previous regulation. An analogous application was not possible, as there was no gap in the law. The constitutionality of the regulation was reviewed and deemed unconstitutional.

Implications and Recommendations

The decision of the Federal Constitutional Court has far-reaching consequences and may affect all book value transfers between partnerships with identical shareholders since the year 2000. We recommend structuring transfers for the time being in accordance with the BVerfG’s decision and awaiting the new statutory regulation.

Conclusion

The Federal Constitutional Court’s decision marks a milestone in the long-standing debate over book value transfers between sister partnerships. The decision reinforces the principle of equal treatment and could lead to a fundamental overhaul of income tax legislation.

We are closely monitoring developments in this area. We have direct points of contact in Düsseldorf and Oberhausen. Please contact us to schedule a consultation. We look forward to meeting you.