Classification of the OFD Frankfurt am Main Ruling
In the case of multi-tier partnerships, tax law raises the question of how the gain is to be recorded when an interest in the upper-tier partnership is sold. The Oberfinanzdirektion Frankfurt am Main (OFD Frankfurt am Main, Regional Tax Office Frankfurt am Main) treats this transaction in its ruling of 6 August 2026 under file reference S 2241 A-00067-0357-St 517 as a single disposal.
The ruling concerns cases in which a partnership holds an interest in another partnership and a partner transfers its interest in the upper-tier partnership. According to the administrative view, the capital gain is to be determined in accordance with the general principles of § 16 EStG (German Income Tax Act).
The ruling of 6 August 2026 follows an earlier file instruction issued by the OFD Frankfurt am Main with the identical heading. It had previously been maintained under file reference S 2241 A – 99 – St 213 and was most recently available in the version dated 16 September 2014. The current ruling therefore constitutes a revised version under a new file reference.
Determination of the Capital Gain at the Upper-Tier Partnership
Single Disposal Transaction in the Case of a Sale of an Interest
If the interest in the upper-tier partnership is sold, the ruling of the OFD Frankfurt am Main states that there is a disposal transaction to be assessed as a single transaction. Accordingly, the transaction is not split between the level of the upper-tier partnership and the level of the lower-tier partnership.
The capital gain is determined by comparing the sale price with the capital account at the upper-tier partnership. This capital account also includes the capital account of the lower-tier partnership. The indirect interest in the lower-tier partnership is thus taken into account within the calculation at the level of the upper-tier partnership.
Tax Basis of the Mirror-Image Method
As a matter of legal doctrine, the view is based on the fact that the upper-tier partnership’s interest in the lower-tier partnership is not treated as an independent asset for income tax purposes. Rather, it embodies the share in the individual assets of the partnership assets of the lower-tier partnership.
In the tax balance sheet of the upper-tier partnership, the interest in the lower-tier partnership is reported in accordance with the so-called mirror-image method. The decisive factor is therefore the amount of the capital account held by the upper-tier partnership at the lower-tier partnership.
The judgment of the Bundesfinanzhof (BFH, Federal Fiscal Court) of 25 April 1985 – V R 83/83, published in BStBl II 1986, 350, is cited as the basis for this tax treatment.
Allowance and Reduced Tax Rate under the EStG
Application of § 16 para. 4 EStG and § 34 para. 3 EStG
For the single disposal transaction, the ruling states that the allowance under § 16 para. 4 EStG and the reduced tax rate under § 34 para. 3 EStG may be granted. However, this applies only insofar as the other statutory requirements are also met.
The administrative view therefore does not apply to every sale of an interest in isolation from the further statutory elements of the respective provisions. Rather, the examination of the additional requirements remains necessary, particularly insofar as the relevant provisions contain their own personal or substantive requirements.
No Separate Assessment of the Participation Levels
The ruling does not classify the sale of the interest in the upper-tier partnership as several independent disposals. According to this view, the relevant transaction for tax purposes remains a single transaction, even if the upper-tier partnership itself holds an interest in a lower-tier partnership.
This view is consistent with the more recent case law of the Bundesfinanzhof. In its judgment of 8 May 2025 – IV R 40/22, published on 10 July 2025, the Bundesfinanzhof held that, in the case of the sale of an interest in the upper-tier partnership, there is a single disposal transaction at the level of the upper-tier partnership and no split by participation levels.
The parallel judgment of the Bundesfinanzhof of 8 May 2025 – IV R 9/23 is partially identical in content to the decision IV R 40/22. It additionally concerns the assessment of the trade tax base amount upon termination of an atypical silent partnership.
Distinction from Co-Entrepreneur Interests Held as Business Assets
Two Legal Acts to Be Assessed Separately
The ruling takes a different view where a co-entrepreneur interest forms part of the business assets of a sole proprietor. If such a co-entrepreneur interest is sold, the administrative view is that there are two legal acts that must be examined separately from one another.
For these transactions to be assessed separately, the applicability of the allowance under § 16 para. 4 EStG and the reduced tax rate under § 34 para. 3 EStG must be examined separately in each case. In this respect, the ruling refers to R 16 para. 13 sentences 6 and 7 EStR (German Income Tax Guidelines) and to R 34.5 para. 2 sentence 3 EStR.
Special Business Assets of Another Co-Entrepreneurship
According to the previous version of the instruction, treatment as two legal acts to be assessed separately also applies accordingly if the co-entrepreneur interest forms part of the special business assets of another co-entrepreneurship. This classification does not concern the sale of an interest in an upper-tier partnership as such, but rather the specific allocation of the co-entrepreneur interest to other business assets for tax purposes.
The distinction between a single disposal transaction and two legal acts to be assessed separately is of considerable importance for the application of preferential tax provisions. In particular, it affects whether § 16 para. 4 EStG and § 34 para. 3 EStG are to be examined uniformly or separately.
Case Law on the Simultaneous Sale of Direct and Indirect Interests
Judgment of the FG Köln of 23 September 2025
The Finanzgericht Köln (FG Köln, Cologne Fiscal Court) assessed, in its judgment of 23 September 2025 – 15 K 758/23, a situation in which a direct interest in the lower-tier partnership and an interest via the upper-tier partnership were sold at the same time. The court decided that, in this case, there is no single transaction.
According to this decision, the reduced tax rate under § 34 para. 3 EStG is to be granted only once. The decision therefore does not merely concern the sale of an interest in the upper-tier partnership, but rather a special case involving the simultaneous sale of a direct and an indirect interest.
Pending Appeal on Points of Law before the Bundesfinanzhof
An appeal on points of law against the judgment of the Finanzgericht Köln of 23 September 2025 – 15 K 758/23 is pending before the Bundesfinanzhof. The further outcome of the proceedings therefore remains to be seen.
In the specialist literature on the decision of the Finanzgericht Köln, the view is taken that the reduced tax rate under § 34 para. 3 EStG is applicable in such cases only to one capital gain. In case of doubt, this should be the higher capital gain.
Significance for Corporate Structures with Partnerships
Multi-tier partnerships are found in particular in investment, family and corporate structures. The tax treatment of a sale of an interest depends to a large extent on whether the transaction is classified as a single disposal or as several separate legal acts.
The ruling and the case law presented give rise in particular to the following lines of distinction:
- In the case of the sale of the interest in the upper-tier partnership, the ruling of the OFD Frankfurt am Main states that there is a single transaction.
- The capital gain is determined by comparing the sale price with the capital account of the upper-tier partnership, with the capital account of the lower-tier partnership being included.
- § 16 para. 4 EStG and § 34 para. 3 EStG may apply to this single transaction, provided that their further requirements are met.
- If a co-entrepreneur interest forms part of the business assets of a sole proprietor, the ruling states that two legal acts to be assessed separately are to be assumed.
- In the case of the simultaneous sale of a direct and an indirect interest, the Finanzgericht Köln did not assume a single transaction; an appeal on points of law is pending in this regard.
Frequently Asked Questions
OFD Frankfurt sale of an interest in an upper-tier partnership in a multi-tier partnership: a single transaction?
According to the ruling of the OFD Frankfurt am Main of 6 August 2026, the sale of the interest in the upper-tier partnership is treated as a single disposal transaction. The gain is determined under § 16 EStG by comparing the sale price with the capital account of the upper-tier partnership, including the capital account of the lower-tier partnership.
BFH IV R 40/22 multi-tier partnership: no splitting of the disposal?
In its judgment of 8 May 2025 – IV R 40/22, the Bundesfinanzhof held that, in the case of the sale of an interest in the upper-tier partnership, there is a single disposal transaction at the level of the upper-tier partnership. Accordingly, there is no splitting by participation levels.
Practical consequences for companies regarding § 34 para. 3 EStG and multi-tier partnerships?
For companies, classification as a single transaction or as transactions to be assessed separately may be relevant for the allowance and the reduced tax rate. In the case of the simultaneous sale of a direct and an indirect interest, the Finanzgericht Köln granted the reduced tax rate under § 34 para. 3 EStG only once; an appeal on points of law is pending before the Bundesfinanzhof in this regard.
Have the Tax Classification Carefully Reviewed
The sale of interests within multi-tier partnerships touches on key issues relating to the determination of profit, preferential tax treatment and the distinction between different participation levels. MTR Legal Rechtsanwälte advises companies, investors and high-net-worth private individuals on tax law issues in connection with partnerships, corporate shareholdings and disposal transactions. Further information can be found at Legal advice in tax law.
