BFH rules on forfeiture of trade tax loss carryforwards in multiple tier partnerships

The Federal Tax Court (BFH) recently published a decision on two tier partnerships (case reference IV R 59/07). The case involved the availability of trade tax loss carryforwards of a German lower tier partnership (Sub KG) in case of a collapse of its partner (another German partnership, upper tier partnership/Top KG) due to the merger of the partners in the upper tier partnership. According to German trade tax principles, the use of trade tax loss carryforwards at the level of a partnership requires the partners who incur the losses to be identical to the partners who derive the future profits. As a result, trade tax loss carryforwards of a German partnership are forfeited on a pro rata basis when there is a transfer of the partnership interest.

The BFH rejected the decision of the tax court of Lower Saxony, which had ruled that the trade tax loss carryforwards of the lower tier partnership should survive the restructuring. The BFH held that, from a trade tax perspective, a collapsed partnership (i.e. the upper tier partnership) and its partners cannot be considered as being identical so that the collapse of the upper tier partnership constitutes a change in the partners of the lower tier partnership and, therefore, is harmful for the trade tax loss carryforwards of the lower tier partnership. The BFH referred the case back to the lower tax court to determine the portion of the trade tax loss carryforwards of the lower tier partnership that is forfeited in the case.

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