In connection with corporate transactions, parts of the fixed assets that are not intended to be part of the transaction are often transferred from the target company to a sister partnership of the same shareholder (so-called "carve-out"). These are sometimes assets with significant hidden reserves, such as the business premises. As the disclosure of hidden reserves can lead to a considerable tax burden, there is a great need in practice for a tax-neutral transfer from the business assets of the transferring company to the business assets of the receiving company.
Until now, it was unclear and disputed between the tax authorities and the First and Fourth Senate of the Federal Fiscal Court (BFH) whether the book value privilege of Section 6 para. 5 sentence 3 of the German Income Tax Act (EStG) applies to the direct transfer of assets between sister partnerships with identical shareholdings. This long-standing dispute has now been finally decided by the Federal Constitutional Court (decision of 28.11.2023 - v BvL 8/13): Accordingly, Section 6 para. 5 sentence 3 EStG is incompatible with Article 3 para. 1 GG insofar as it excludes the transfer of assets between partnerships with identical participations at book value. The Federal Constitutional Court (BVerfG) has instructed the legislator to make a new regulation retroactively for transfer transactions after December 31, 2000. According to the decision of the Federal Constitutional Court, § 6 para. 5 sentence 3 EStG remains applicable until a new regulation comes into force with the proviso that the so-called "book value privilege" regulated therein also applies with effect for transfer transactions after December 31, 2000, insofar as 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.
I. Background to the decision and outline of the problem
If the legal responsibility for an asset changes, for example as a result of a transfer, or if an asset is otherwise removed from the business assets (e.g. by withdrawal or cessation of business), it must be recognized and valued anew in the balance sheets of the transferee and the transferor. If a partnership transfers assets to another partnership in which the same partners have the same shareholding (partnerships with identical shareholdings), the question arises as to whether this transfer can take place at book value or at market value.
The book value is the value shown in the balance sheet of the transferring partnership. The market value is the value that could be achieved for the asset on the market. If the market value is higher than the book value, hidden reserves arise which must be disclosed and taxed in the event of a transfer at market value. A transfer at book value is therefore more advantageous for tax purposes, as it allows the hidden reserves to continue to exist and avoids taxation.
Whether the transfer of an asset from the joint assets of a partnership to the joint assets of a sister partnership (with the same shareholding) was possible under the current legal situation while retaining the book values was a bone of contention between the First and Fourth Senate of the BFH. The answer to this question determines whether and, if so, to what extent the transfer results in balance sheet profits for the companies involved.
If an asset is transferred free of charge, it leaves the business assets for non-business purposes and, in principle, there is a withdrawal from the transferor in accordance with Section 4 para. 1 sentence 2 EStG. The withdrawal leads to the asset being recognized at going concern value and derecognized in the balance sheet of the transferor in accordance with Section 6 para. 1 no. 4 sentence 1 HS 1 EStG. This equates the withdrawal to a sale for consideration at partial value. This results in an increase in the value of the business assets and the disclosure of any hidden reserves in the asset. In this respect, the transfer of the asset leads to a profit-effective transaction in the balance sheet of the seller. Mirroring this, the transfer process is a contribution for the transferee in accordance with Section 4 para. 1 sentence 8 EStG. The asset contributed must also be recognized at going-concern value in the balance sheet of the transferee pursuant to Section 6 para. 1 no. 5 sentence 1 HS 1 EStG. Operating expenses are not incurred for the acquisition of the asset due to the fact that the sale is free of charge.
The situation is different if, exceptionally, the asset can be transferred at book value. In the case of so-called book value continuation, an asset is not recognized at its partial value upon acquisition, but at the book value of the legal predecessor. In this case, the hidden reserves in the asset are not disclosed by the transfer. Consequently, the transfer at book value does not result in a taxable gain in the amount of the difference between the fair market value and the book value of the asset. Instead, the hidden reserves in the asset are "conserved" and transferred to the absorbing legal entity. However, the right to tax the hidden reserves is not completely lost with the continuation of the book value. Instead, the hidden reserves are finally taxed when the recipient of the asset in turn transfers it on with an effect on profits. The applicability of the book value privilege is not tied to an asset, but must be reviewed anew for each transfer.
Section 6 para. 5 of the Income Tax Act contains a provision that allows the transfer of assets at book value in certain cases (so-called "book value privilege"). Section 6 para. 5 EStG standardizes various transfer circumstances which, in exceptional cases and in deviation from the principle of section 6 para. 1 no. 4 EStG, require the accounting treatment of the transfer to be carried out while retaining the book values. § Section 6 para. 5 EStG is lex specialis compared to the general basic rule of Section 6 para. 1 no. 4 EStG, insofar as the exceptions standardized there are fulfilled.
§ Section 6 para. 5 sentences 1-3 EStG regulate the book value approach for certain transfers of assets. Accordingly, the book value approach is mandatory for the transfer of an asset to another business asset of the same taxpayer (sentences 1 and 2). On the other hand, Section 6 para. 5 sentence 3 EStG prescribes the book value approach for certain cases of asset transfers between the special business assets of the partners and the joint assets of the co-entrepreneurship. According to the prevailing view, the catalog of § 6 para. 5 sentences 1-3 EStG is exhaustive.
II Differing views of the tax authorities, the First and the Fourth Senate of the BFH
The transfer of an asset from the joint assets of a partnership to the joint assets of a sister partnership is not expressly regulated in Section 6 para. 5 EStG. The tax authorities (BMF letter dated 29.10.2010 - IV C 6 - S2241/10/10002:001, BStBl. I 2010, 1206) and the I. Senate of the BFH (judgment dated 25.11.2009 - I R 72/08, DStR 2010, 269) were therefore of the opinion that a transfer of assets between sister companies at book value was not possible.
However, the Fourth Senate of the BFH was of the opposite opinion and therefore initially expressed serious doubts about the correctness of the opinion of the First Senate (decision of 15.04.2010 - IV B 105/09, NJW-RR 2010, 1126) and, in a case to be decided shortly afterwards, submitted this legal matter to the Federal Constitutional Court for a decision (decision of 10.04.2013 - I R 80/12. DStR 2013, 2158).
III The decision of the Federal Constitutional Court of 28.11.2023
After more than ten years since the referral decision of the IV Senate of the Federal Fiscal Court, the Federal Constitutional Court has now decided the issue in its decision of 28.11.2023 (Ref. 2 BvL 8/13).
1. non-application of the book value privilege to transfers of assets between sister partnerships with identical shareholdings violates the general principle of equal treatment (Art. 3 para. 1 GG)
In the opinion of the Federal Constitutional Court, it constitutes unconstitutional unequal treatment if sole traders are able to transfer individual assets to the business assets of another business they maintain without incurring tax (Section 6 para. 5 sentence 3 nos. 1 and 2 EStG), while a transfer of assets between sister partnerships with identical shareholdings leads to the disclosure of hidden reserves. This is because in both cases it is not a "market transaction". Furthermore, there is no need for immediate tax access in either case, as the hidden reserves remain subject to tax and in particular remain allocated to the same taxpayers, namely in one case to the respective sole proprietor and in the other case to the partners behind the sister partnerships. In this respect, there is an exclusion of preferential treatment that requires justification.
2. interpretation of Section 6 para. 5 sentence 3 EStG in conformity with the constitution not possible
In the opinion of the BVerfG, this unequal treatment expressed in the wording of the law cannot be eliminated by an interpretation in conformity with the constitution. The decisive factor for the interpretation of laws is the objective intention of the legislator expressed in the provision, as it results from the wording of the provision and the context in which it is placed. According to the wording, however, it is not a "transfer" within the meaning of § 6 para. 5 sentence 1 EStG, because the term "transfer" - unlike the term "transfer" - describes a process that is not accompanied by a change of legal entity, which is evident from an overall consideration of § 6 para. 5 EStG. An analogy is also ruled out due to the lack of an unintended loophole, as the legislator - which is clearly evident from the legislative materials - has repeatedly dealt with the question of whether the transfer of assets between sister partnerships with identical shareholdings should be privileged during the legislative process. It must therefore be assumed that the legislator deliberately decided against a privileged treatment, even though the legislative materials do not provide any justification for this decision.
3. objective reasons to justify the unequal treatment do not exist in the opinion of the BVerfG
However, not every unequal treatment of comparable life circumstances leads to a violation of the principle of equal treatment under Art. 3 para. 1 GG. Unequal treatment can be constitutionally permissible if there are at least objectively plausible reasons that justify the unequal treatment. In the opinion of the BVerfG, however, no objectively plausible reason for the unequal treatment is apparent. The discrimination of transfers of assets between sister partnerships with identical shareholdings is not justified either in relation to transfers of assets between different business assets of the same taxpayer or in relation to the transfers of assets within the group of co-entrepreneurs privileged by Section 6 para. 5 sentence 3 EStG.
4. the book value privilege applies to transfers after 31.12.2000; legislator obliged to create a new regulation
The BVerfG has therefore instructed the legislator to create a new regulation retroactively for transfer transactions after December 31, 2000, which also permits transfers between partnerships with identical participations at book value. Until such a new regulation comes into force, Section 6 para. 5 EStG applies with the proviso that the provision also applies to transfers of assets between partnerships with identical shareholdings after December 31, 2000. This means that the gratuitous transfer of assets between sister partnerships with identical shareholdings carried out after December 31, 2000 is carried out at book value and therefore the hidden reserves for such transfers are not disclosed and taxed.
IV. Conclusion
The decision of the BVerfG has considerable significance for legal practice and puts an end to years of legal uncertainty. Particularly in small and medium-sized companies, especially in connection with business splits or in the run-up to corporate transactions, business assets with significant hidden reserves (such as the business property) are often transferred from the operating target company to a sister partnership of the same shareholder. The fact that this process does not lead to the disclosure of hidden reserves considerably facilitates corporate restructuring or measures in the run-up to corporate transactions.
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