I. Basics

Since the abolition of the so-called co-entrepreneur decree (Mitunternehmererlass) as of 1 January 2001, § 6 para. 5 EStG regulates the conversion (Überführung) (sentence 1 f.) or transfer (Übertragung) (sentence 3) of business assets at book value. § 6 para. 5 sentence 3 EStG allows the conversion of an individual asset between different business assets of the same taxpayer without affecting income tax, i.e. without a change of legal entity. In contrast, the provision in § 6 para. 5 sentence 3 EStG allows the transfer of assets at book value with a change of legal entity with no effect on income tax, provided that these assets are

No. 1:

free of charge or in return for the granting or reduction of company rights from the business assets of a co-entrepreneur to the joint assets of a co-entrepreneurship and vice versa;

No. 2:

free of charge or in return for the granting or reduction of company rights from the special business assets of a co-entrepreneur to the joint assets of the same co-entrepreneurship or another co-entrepreneurship in which he holds an interest, and vice versa, or

No. 3:

free of charge between the respective special business assets of different co-entrepreneurs of the same co-entrepreneurship.

II. Initial problem

According to the wording, book value transfers between sister partnerships with identical shareholdings are therefore not covered by § 6 para. 5 sentence 3 EStG. While the tax authorities have so far not considered § 6 para. 5 sentence 3 EStG to apply to such transfers (BMF (Federal Ministry of Finance) letter dated 8 December 2011, para. 18), the Fourth Senate (affirmative; BFH ruling dated 15 April 2010, case no. IV B 105/09) and the First Senate (negative; BFH ruling dated 25 November 2009, case no. I R 72/08) of the BFH (Federal Fiscal Court) have so far disagreed in this regard.
In the past, the negative attitude of the tax authorities and the inconsistent case law on the subject have meant that alternative arrangements have often been used in practice, such as

• By means of a “two-step” process in which (1) the asset is first transferred in accordance with § 6 para. 5 sentence 3 no. 2 alternative 1 EStG from the joint assets of co-entrepreneurship I to the special business assets of one (or more) of the co-entrepreneurs there, (2) before it is transferred in accordance with § 6 para. 5 sentence 3 no. 2 alternative 2 EStG from the special business assets of co-entrepreneurship I to the joint business assets of co-entrepreneurship II, or
• using the real division principles (Realteilungsgrundsätze).

In the pursuit of legal certainty, it was also not uncommon for binding information to be requested from the tax authorities in order to secure the chosen structure. In addition to the consulting costs, fees were also incurred for the provision of information. In addition, there was a risk that information would not even be provided with reference to § 42 AO (German Fiscal Code) and the abuse of tax planning regulated therein.
With its decision of 28 November 2023, the BVerfG now lays the foundation for a legally secure and cost-effective book value transfer between sister partnerships with identical shareholdings.

III. Facts of the BVerfG decision

In the underlying case, a commercially active GmbH & Co. KG sold two developed plots of land from its joint assets to a sister partnership with the same shareholding at book value and treated these transfers as income tax-neutral.
The tax office took the view that the disposals had led to the full disclosure of the hidden reserves contained in the transferred properties.
The Baden-Württemberg tax court again upheld the action brought against this (judgment of 19 July 2012, case no. 13 K 1988/09) and ruled that the transfer of an asset from the joint assets of a partnership to a sister partnership with the same shareholding was possible at book value in accordance with § 6 para. 5 EStG.
Due to the divergent case law of the First and Fourth Senate of the BFH described above, the First Senate referred the question to the BVerfG for a decision (order of reference dated 10 April 2013, ref. I R 80/12).

IV. Decision of the BVerfG

First, the BVerfG ruled that

• § 6 para. 5 sentence 1 EStG cannot be applied, as the transfer of an individual asset between the joint assets of sister partnerships is always accompanied by a change of legal entity under civil law and therefore does not constitute a conversion (Überführung) within the meaning of the provision (see Section I);
• § 6 para. 5 sentence 3 EStG cannot be applied, as the wording of the standard cannot be interpreted to mean that the transfer of individual assets between the joint assets of sister partnerships with identical shareholdings can be subsumed under it due to the lack of an unintended loophole.

As a result, the BVerfG considers the provision of § 6 para. 5 sentence 3 EStG to be an unjustified violation of the general principle of equality of Art. 3 para. 1 GG, which requires that essentially equal things be treated equally and essentially unequal things be treated unequally. As the BVerfG states above, § 6 para. 5 EStG cannot be applied by analogy to the transfer of assets between the joint assets of partnerships with identical shareholdings. In this respect, such transfers are disadvantaged in a manner contrary to the principle of equality compared to transfers of assets that are favored under § 6 para. 5 EStG. For example, sole traders can transfer assets free of charge at book value between different business assets, but this is not possible between sister partnerships with identical persons.
As a result of this decision, the legislator was obliged to immediately create a new regulation for all transfers made after 31 December 2000.

V. Consequences for the practice

§ 6 para. 5 sentence 3 EStG remains applicable until a new regulation comes into force with the proviso that the provision also applies with effect for transfer transactions after 31 December 2000 if an asset is transferred free of charge from the joint assets of a co-entrepreneurship to the joint assets of a sister partnership with the same shareholding. The BVerfG decision thus creates the long-awaited legal certainty for the book value transfer of assets between sister partnerships with identical shareholdings.
A retroactive new regulation from 1 January 2001 only helps in cases in which the assessment was provisional or was kept open by an objection or legal action and has therefore not yet become final. It remains to be seen whether an easement regulation will be granted for cases that are already final and absolute.
For future arrangements, it should be noted that the case decided by the BVerfG was a special case of the gratuitous transfer of assets between sister partnerships with identical shareholdings. Thus, it remains unclear whether only transfers free of charge or also transfers against the granting or reduction of company rights are favored. It is also questionable to what extent the tax authorities will classify necessary preparatory acts to create the conditions for tax neutrality imposed by the BVerfG as an abuse of structuring under § 42 AO.
In view of the continuing legal uncertainties in the context of the transfer of assets between sister partnerships with identical shareholdings, the new statutory regulation and any easement measures are eagerly awaited.