Das Schleswig-Holsteinische Finanzgericht (Schleswig-Holstein Tax Court) considered the requirements for the extended reduction available to real estate companies (FG Schleswig-Holstein, decision of 11 December 2024 – 1 K 80/23). In the court’s view, merely holding an interest in a property-managing Kommanditgesellschaft (KG, limited partnership) precludes the extended reduction under § 9 no. 1 sentence 2 GewStG (German Trade Tax Act). This also applies where the company exclusively manages its assets and is deemed to conduct a trade solely due to its commercial structure.
Co-entrepreneurial interest precludes extended reduction
Subject to the statutory requirements, real estate companies may claim the extended trade tax reduction. However, FG Schleswig-Holstein classified the holding of an interest in a co-entrepreneurial partnership as an activity exceeding the scope of the tax privilege.
According to the decision, neither the size of the interest nor the nature or amount of the income generated from it is relevant. Accordingly, an interest in a co-entrepreneurial partnership always precludes the extended reduction.
General partner status without an interest in the assets is also detrimental
The court’s assessment also covers a managing interest held as a general partner. An interest in the company’s assets is not required.
In the view of FG Schleswig-Holstein, the following factors in particular are therefore irrelevant to the denial of the extended reduction:
- The percentage interest does not affect the tax classification.
- The amount of income generated from the interest is irrelevant.
- General partner status without an interest in the company’s assets may also be detrimental.
Commercial structure of the KG is sufficient
The decision is not limited to interests in partnerships engaged in an active commercial business. In the view of FG Schleswig-Holstein, the restriction also applies to a KG that merely manages assets but is deemed commercial due to its structure.
This is intended to apply even if the investee itself meets the requirements for the extended reduction for real estate companies. According to this assessment, the tax privilege at KG level does not mean that the upper-tier company’s holding of the interest can also be classified as falling within the scope of privileged activities.
Interest treated as a commercial business of the upper-tier company
FG Schleswig-Holstein considers a co-entrepreneurial interest in a commercially structured partnership to constitute a commercial business of the upper-tier company. On this basis, it denied the extended reduction.
At the same time, the court classified the holding of such an interest neither as the use or management of capital assets nor as part of the privileged management of real estate. In its assessment, the interest therefore does not fall within the activities compatible with the extended reduction.
Comparable legal issue in separate proceedings
The same legal issue was also the subject of separate proceedings before the Bundesfinanzhof (BFH, Federal Fiscal Court). The claimant in those proceedings was a commercially structured GmbH & Co. KG that managed and used its own real estate in the tax years at issue from 1999 to 2003.
The treatment of interests within property-managing corporate structures can have significant trade tax implications. MTR Legal advises companies, investors and high-net-worth individuals on related matters as part of its tax law advisory services.
