Extended property deduction also in the case of reverse business splits

May 29, 2024

The exclusive rental of real estate can generally be carried out without trade tax. This enables the so-called extended property reduction (Section 9 no. 1 sentence 2 GewStG).

However, care must be taken if the shareholder of a renting GmbH uses the property in his business operations. In this case, the extended reduction is denied (Section 9 no. 1 sentence 5 no. 1 GewStG). “His” business is also a small participation in a commercial partnership.

The transfer from a GmbH to the sister GmbH, on the other hand, is not harmful. As corporations are not transparent for tax purposes, the so-called “prohibition of pass-through” ensures that the participation of the same shareholder is not harmful. This has been common taxation practice for years.

In the meantime, however, the Federal Fiscal Court caused some unrest in 2022 with its ruling of September 16, 2021 (IV R 7/18):

On 03.02.2022, it published its change in case law on the reverse business split. In this case, however, the BFH ruled on the “identity of control” in the case of an owner partnership if this control is exercised via a corporation. While the BFH had previously been of the opinion that no “penetration” by the GmbH was possible in order to assume control, the BFH has moved away from this with this ruling and assumes a business split. As a result, the BFH denied extended property relief for these cases.

However, the First Senate was already of the opinion at the time that this view did not change the “prohibition of pass-through” of Section 9 GewStG. This view was even expressed by the Federal Ministry of Finance in its letter dated 21.11.2022. However, some speculated that, based on this decision, the use of the property by a PersG, even if a GmbH is interposed above it, could lead to the extended reduction not being applied.

This discussion has now been ended by the Third Senate of the BFH in its recent ruling of 22.02.2024 (III R 13/23). It once again confirmed the prohibition of pass-through. In this case, the user PerG was itself an indirect shareholder of the owner GmbH - albeit through the intermediary of another GmbH. In this case, pass-through remains prohibited.