The Bundesfinanzhof (BFH, Federal Fiscal Court) has clarified the tax treatment of positive equity following the conversion of a corporation into a partnership by way of a change of legal form. According to the judgment, the positive tax-balance-sheet equity assumed by the partnership must be treated as a capital contribution for the purposes of § 4 Abs. 4a Satz 2 EStG (German Income Tax Act) (BFH, judgment of 2 September 2026 – IV R 10/24, ECLI:DE:BFH:2026:U.020926.IVR10.24.0).
Deduction of interest expense following a change of legal form
The proceedings concerned the question of whether positive equity assumed by a partnership as a result of a corporation’s change of legal form must be included when determining excess withdrawals under § 4 Abs. 4a EStG.
The claimant, a GmbH & Co. KG, had been created with effect from 1 January 2010 through the change of legal form of a GmbH pursuant to § 9 UmwStG (German Reorganisation Tax Act). A further GmbH & Co. KG held an interest in the claimant as a limited partner, while a GmbH participated as its general partner. No natural persons held a direct equity interest in the claimant.
As at 31 December 2009, the GmbH changing its legal form had positive tax-balance-sheet equity. In the course of a tax audit, the Finanzamt (tax office) determined that excess withdrawals had been made in 2012 and added non-deductible interest expense of EUR 52,082.20 to the claimant’s profit pursuant to § 4 Abs. 4a EStG. Subject to the claimant’s differing legal position, the calculation and the figures on which it was based were undisputed between the parties.
It was likewise agreed that the interest expense had not arisen in connection with the financing of a withdrawal.
Finanzamt does not treat positive equity as a contribution
The claimant challenged the add-back of the interest expense. It took the view that the positive equity assumed upon the change of legal form had to be taken into account in the calculation under § 4 Abs. 4a EStG. In the alternative, it applied for a different determination of income on grounds of equity.
The Finanzamt rejected this view and dismissed the objections. The claimant subsequently brought an action seeking to have the interest expense that had been added back deducted from its profit again.
Finanzgericht upholds the action
The Finanzgericht Münster (Münster Fiscal Court) upheld the action in full. It reversed the add-back of the non-deductible interest expense both in the determination of profit and in the assessment of the trade tax base amount.
In the Finanzgericht’s view, § 4 Abs. 4a EStG also applied to the multi-tier partnership structure at issue. This applied irrespective of the fact that no natural person held an equity interest in the lower-tier partnership.
However, the positive equity assumed by the claimant as a result of the change of legal form had to be included as a deemed contribution when calculating the excess withdrawals. Taking this amount into account, the calculation did not produce any excess withdrawals. There was therefore no basis for adding back interest expense.
The Finanzamt appealed against the decision on points of law, alleging an infringement of § 4 Abs. 4a EStG.
BFH dismisses the Finanzamt’s appeal
The BFH upheld the Finanzgericht’s decision and dismissed the appeal on points of law as unfounded. The costs of the appeal proceedings were imposed on the Finanzamt.
The appeal proceedings concerned the amount of the claimant’s current jointly earned partnership profit determined for 2012 and the trade tax base amount assessed for that year.
Action admissible as an action for failure to act
The BFH first confirmed the Finanzgericht’s assessment of the procedural issues. An amended assessment notice issued during the objection proceedings had become the subject matter of those proceedings pursuant to § 365 Abs. 3 Satz 1 AO (German Fiscal Code). However, the Finanzamt had not ruled on that amended assessment notice in its decision on the objection.
The Finanzgericht was therefore entitled to treat the action for annulment directed against the relevant profit determination notice as an action for failure to act under § 46 FGO (German Code of Procedure for Fiscal Courts). Insofar as the decision on the objection related to a notice that was no longer effective, it had no legal effect and had to be set aside on formal grounds.
Requirements of § 4 Abs. 4a EStG
Under § 4 Abs. 4a Satz 1 EStG, interest expense is non-deductible in accordance with the further provisions of that section if excess withdrawals have been made. Under sentence 2, an excess withdrawal exists to the extent that withdrawals exceed the sum of the profit and contributions for the relevant financial year.
Non-deductible interest expense is calculated using a standardised method. The following figures are particularly relevant:
- Six per cent of the excess withdrawal for the current financial year is taken into account.
- Excess withdrawals from previous financial years must be added.
- Previous shortfalls in withdrawals, where profit and contributions exceeded withdrawals, must be deducted.
- The amount to be added back is limited to the interest expense incurred during the financial year, less an amount of EUR 2,050.
According to BFH case law, the assessment is conducted in two stages. First, it must be determined whether the interest expense was incurred for business purposes. It must then be examined whether § 4 Abs. 4a EStG restricts its deduction as a business expense.
In the case at issue, it was undisputed between the parties that the interest expense had been incurred for business purposes. The remaining question was therefore whether the rule on non-deductible interest expense due to excess withdrawals applied.
§ 4 Abs. 4a EStG must also be taken into account when determining trade income under § 7 GewStG (German Trade Tax Act). The classification of the assumed equity therefore affected both the determined profit and the trade tax base amount.
Application to multi-tier partnerships
The BFH reaffirmed its case law according to which § 4 Abs. 4a EStG also applies at the level of a lower-tier partnership within multi-tier partnership structures. This is also the case if no natural person holds an equity interest in that partnership.
Business-specific assessment is decisive
According to the BFH, the provision is linked to the respective business and not to the legal form of its partners. The relevant unit is the individual business for which a separate determination of profit is carried out.
In this context, withdrawals are not limited to transactions serving private purposes. Rather, they include reductions in equity that, from the perspective of the respective business, are prompted by non-business considerations. It is therefore irrelevant whether the partners themselves have a private sphere.
As the owner of the business and the entity whose profit is determined, the partnership is the entity to which excess withdrawals and shortfalls in withdrawals are attributed. The BFH rejected an assessment spanning multiple businesses or based on the group as a whole. Such an approach would make the application of the provision considerably more difficult, particularly where several tiers of ownership are involved.
Objective net principle does not preclude application
The claimant had argued that, in the case of partners without a private sphere, there could be no abusive transfer of interest expense from the private to the business sphere. The BFH did not consider this sufficient to disapply § 4 Abs. 4a EStG.
The rationale for the statutory rule had not been directly reflected in the legislation in the form of a provision limited to specific cases of abuse. Instead, § 4 Abs. 4a EStG contained a generalised and standardised rule linked to the development of equity within the relevant business.
The objective net principle did not lead to a different conclusion either. According to the BFH, the legislature may restrict the general deduction of expenses incurred for business purposes on objective grounds by means of standardised and simplifying rules. In the case of multi-tier partnerships, the business-specific application was justified by such requirements of simplification.
Positive equity is treated as a contribution for the specific purposes of the provision
The decisive factor in the outcome of the proceedings was the BFH’s view that the positive tax-balance-sheet equity assumed upon the change of legal form must be treated as a contribution within the meaning of § 4 Abs. 4a Satz 2 EStG.
No contribution under the provision’s literal wording
A contribution within the meaning of § 4 Abs. 1 Satz 8 EStG generally requires the taxpayer to transfer assets to the business during the financial year. This includes cash payments and other assets.
Under civil law, however, a change of legal form does not involve any transfer of assets. The legal entity remains the same; only its legal form changes. There is therefore no act of contribution by which assets are transferred from the partners’ sphere to the partnership’s business.
The BFH expressly held that the positive equity was therefore not contributed within the literal meaning of § 4 Abs. 1 Satz 8 EStG.
Purpose of § 4 Abs. 4a EStG requires equivalent treatment
Despite the absence of an act of contribution, the assumed equity must be treated as a contribution in accordance with the spirit and purpose of § 4 Abs. 4a EStG. The provision is based on an equity model: profits and contributions increase equity, while withdrawals and losses reduce it.
Equity therefore generally determines the extent to which funds may be withdrawn from the business without triggering the legal consequences of § 4 Abs. 4a EStG. The restriction on the deduction of interest expense is linked to the withdrawal of equity from the relevant business unit.
Reorganisation tax law treats a change of legal form differently from civil law. As a result of the reference in § 9 Satz 1 UmwStG to §§ 3 bis 8 und 10 UmwStG, a transfer of assets from the corporation to the partnership is deemed to take place for tax purposes. This is due to the different taxation systems applicable to corporations and partnerships.
For the business-specific application of § 4 Abs. 4a EStG, the corporation’s business and the partnership’s business must be regarded as separate businesses. The assets representing the corporation’s positive equity are attributed to the partnership on the basis of the deemed transfer of assets. This justifies treating them as a contribution.
Comparison with the commencement of a business
The BFH also drew a parallel with the commencement of a business. When a business commences, the initial provision of funds must be recognised as a contribution for the purposes of § 4 Abs. 4a Satz 2 EStG, even though that transaction may likewise merely have a contribution-like character.
The change of legal form is comparable in this respect. Under § 9 Satz 2 UmwStG, the acquiring partnership must prepare an opening tax balance sheet as at the date on which the change of legal form takes effect. The equity assumed upon the change of legal form therefore constitutes the starting point for the subsequent application of the equity model.
According to the decision, treating the commencement of a business differently from a change of legal form would be incompatible with the purpose of § 4 Abs. 4a EStG.
No carry-forward of previous excess withdrawals or shortfalls in withdrawals
The Finanzamt relied on tax-law succession. In the case of a gratuitous transfer of a business or partnership interest under § 6 Abs. 3 EStG, excess withdrawals or shortfalls in withdrawals that have already arisen are carried forward by the successor. Subject to the statutory requirements, the same applies where a sole proprietorship is contributed to a partnership at book value.
However, the BFH distinguished these situations from a corporation’s change of legal form:
- In cases involving the transfer or contribution of a business, the business concerned already fell within the scope of § 4 Abs. 4a EStG before the transfer.
- Existing excess withdrawals or shortfalls in withdrawals could therefore be carried forward by way of the statutorily prescribed tax-law succession.
- By contrast, § 4 Abs. 4a EStG does not apply to corporations because they have no non-business sphere and therefore cannot have withdrawals or contributions.
- Consequently, the corporation changing its legal form could not have had any excess withdrawals or shortfalls in withdrawals to which the partnership could have succeeded.
According to the decision, no excess withdrawals or shortfalls in withdrawals therefore had to be carried forward as at the date of the change of legal form. Instead, the assumed positive tax-balance-sheet equity had to be taken into account as a contribution, as in the case of the commencement of a business.
No excess withdrawal in the year in dispute
Once the positive equity assumed upon the change of legal form was included, there were no excess withdrawals in the year in dispute. This mathematical consequence was undisputed between the parties.
The BFH therefore upheld the reversal of the interest expense add-back. The current jointly earned partnership profit and the trade tax base amount had to be determined and assessed at correspondingly lower levels.
Significance of the decision for reorganisations
The judgment combines the business-specific application of § 4 Abs. 4a EStG with the tax-specific features of a change of legal form. On the one hand, the provision remains applicable to lower-tier partnerships in which no natural person directly holds an equity interest. On the other hand, the positive tax-balance-sheet equity of the corporation changing its legal form must not be disregarded in the calculation.
The classification does not depend on a transfer of assets under civil law. Instead, the decisive factors are the transfer of assets deemed to occur under reorganisation tax law and the equity model underlying § 4 Abs. 4a EStG.
In addition to the consequences under reorganisation tax law, the tax effects of a change of legal form may therefore also affect the subsequent deductibility of business interest expense. MTR Legal advises companies, investors and high-net-worth individuals on matters at the intersection of reorganisation and income tax law. Further information is available under tax law advice.
