Consequential issues arising from the upward tainting of an originally asset-managing partnership – even in the absence of trade tax liability

If an asset-managing partnership participates (vermögensverwaltende Personengesellschaft) in a commercial partnership (gewerbliche Personengesellschaft), this leads to the so-called "upward tainting" (Aufwärtsabfärbung) pursuant to Sec. 15 (3) No. 1 of the German Income Tax Code.

The upward tainting has the effect that the originally asset-managing partnership is considered a commercial enterprise for tax purposes from the time it earns commercial income. All income is then treated as commercial. However, this applies exclusively for income tax purposes, not for trade tax. The parent company remains exempt from trade tax liability if it does not carry out any original commercial activities itself. This interpretation was confirmed by the case law of the Federal Fiscal Court and adopted by the tax authorities in an identical state decree of 5 November 2025.

Even if the main tax risk of an additional trade tax liability is eliminated, the upward tainting entails numerous tax changes. In the following, some follow-up topics of an upward tainting are presented:

a) Contribution to the newly created commercial enterprise

With the tainting, a commercial enterprise is created. All assets of the partnership (including real estate, shareholdings, etc.) become business assets for tax purposes and must generally be deposited at the partial value (Teilwert) (Sec. 6 (1) No.. 5 German Income Tax Code).

Exceptions for the partial value contribution:

• Assets that were acquired or produced from private assets within the last three years prior to the date of the transfer (Sec. 6 (1) No. 5 a) German Income Tax Code), or
• Participations in corporations are always to be assessed at the acquisition cost (Sec. 6 (1) No. 5 b) and c) German Income Tax Code)

These assets are to be assessed at the amortised acquisition or production costs. As a result, the hidden reserves become taxable at the time of contribution and are subject to income tax or corporation tax at the latest when the respective assets are sold.

Exceptions also apply for commercial partners of the upper-tier partnership, as the proportionate assets are transferred from the commercial assets of the commercial partner at partner level to the commercial assets of the upper-tier partnership. In principle, the transfer is made at book value (Sec. 6 (5) German Income Tax Code).

Special features of real estate

• Real estate that was acquired in private assets more than three but less than ten years ago at the time of contribution is invested at partial value. If the property is later sold from the business assets and less than 10 years have passed since the original acquisition in private assets, the difference between book value and partial value is taxable (Sec. 23 (1) sentence 5 No. 1 German Income Tax Code).

b) Changes in depreciation rates for real estate

The reclassification as business assets may lead to an adjustment of the depreciation rates. Real estate that was previously depreciated according to Sec. 21 German Income Tax Code (rental and leasing) is now subject to the regulations for business assets (Sec. 7 German Income Tax Code). 

Important changes:

• The depreciation (Absetzung für Abnutzung, AfA) is calculated from the time of tainting in accordance with the tax rules for commercial businesses.
• If necessary, a new depreciation assessment basis (partial value) must be determined.

c) Special operating income and expenditure

The asset-managing partnership previously had no special business sphere (Sonderbetriebssphäre). The upward tainting must be used to check the existence of special business assets (Sonderbetriebsvermögen).

Changes in detail:

• Loans from the shareholders to the company, which were previously not recognised due to the fractional consideration (Bruchteilsebetrachtung), are now considered special business assets. The interest on this is special operating income and thus neutralises the interest expenses in the partnership’s undivided assets (Gesamthandsvermögen).
• The interest income of the shareholder does not constitute capital income, as before, but income from co-entrepreneurship (Mitunternehmerschaft) according to Sec. 15 German Income Tax Code.
• Special operating income and expenses of the general partner (e.g. liability compensation, expense allowances) must now be recognised as part of commercial income. It remains to be clarified whether a reduction in trade tax at the level of the general partner GmbH is required, even though no trade tax arises at the level of the partnership..

These changes also affect the preparation of e-balance sheets (see point e).

d) Over-withdrawals pursuant to Sec. 4 (4a) German Income Tax Code

With the tainting, the provisions of Sec. 4 (4a) of the German Income Tax Code apply to the upper-tier partnership. Withdrawals exceeding profits and contributions are treated as excessive withdrawals, which may result in a limitation of the deduction of interst expenses.

e) Preparation of amended assessments of results and e-balance sheets

The upward tainting requires the preparation of uniform and separate profit assessments (einheitliche und gesonderte Gewinnfeststellung) in accordance with Sec. 15 German Income Tax Code. Other types of income, e.g. income from capital assets or renting and leasing, can no longer be determined.

Major changes:

• Previous surplus income from renting and leasing (Sec. 21 German Income Tax Code) or capital assets (Sec. 20 German Income Tax Code) must now be reported as commercial income. The surplus of income over the income-related expenses no longer applies, but the profit is determined in accordance with Secs. 4 to 6 German Income Tax Code.
• The company must submit e-balance sheets in accordance with the requirements for commercial operations, including special and supplementary balance sheets.
• The declaration of assessment must reflect the amended impact on capital accounts and the offsetting of losses pursuant to Sec. 15a German Income Tax Code.

Special features in the event of liquidation or withdrawal of a shareholder:

• Negative capital accounts are subject to retrospective taxation pursuant to Sec. 52 (24) sentence 3 German Income Tax Code.

Conclusion

The upward tainting of an asset-managing partnership has far-reaching tax consequences. Even if trade tax is not liable, numerous changes in tax treatment must be observed. In particular, the contribution of assets, the adjustment of depreciation rates, the consideration of special operating income and expenses as well as the preparation of amended profit assessments and e-balance sheets require careful tax planning and implementation.

Final note

Caution is advised if the tainting is terminated by the commercial partnership, e.g. if it is sold or ends its commercial activity. Then tax implications arise again. A cessation of business occurs (Sec. 16 German Income Tax Code), and the business assets are transferred back into private assets.

Jens Müller