At the heart of German partnership taxation lies the Transparenzprinzip, which translates to the „transparency principle.“ Under this principle, partnerships are not considered separate tax entities; instead, the income and losses of the partnership flow through to the individual partners. This means that the partnership itself is not subject to income tax; rather, the partners are taxed individually on their share of partnership income.

However, since recently, partnerships can opt to be taxed as corporations under German tax law. In this case, the Trennungsprinzip or separation principle applies.

The German rule is similar to the check the box rule of the US. Nevertheless, the option is not very popular since the rule does not allow as much flexibility as the US option. The option can lead to certain disadvantages for partnerships and its partners.

In Germany, partnerships can be classified into different categories, one of which is the vermögensverwaltende Personengesellschaft, or asset-management partnership. These partnerships primarily engage in asset management and do not carry out any commercial activities. For such partnerships, the income is subject to a special tax regime, and it is taxed as investment income or rental income.

Such a partnership is not subject to trade tax. Moreover, the partnership does not have a PE.

Partnerships often involve special categories of assets, expenses, and revenues that are attributed to individual partners. Sonderbetriebsvermögen, Sonderbetriebsausgaben, and Sonderbetriebseinnahmen are terms used to describe these special allocations.

Sonderbetriebsvermögen: Special business assets are assets that are exclusively allocated to a particular partner within the partnership. These assets are treated as if they were owned by that partner alone for tax purposes.

Sonderbetriebsausgaben: Special business expenses refer to expenses that are exclusively borne by a specific partner within the partnership. These expenses are deducted from the partner’s share of partnership income.

Sonderbetriebseinnahmen: Special business revenues are revenues that are earned by a particular partner individually and are not part of the partnership’s overall income.

Due to the special allocation of assets expenses and revenues to the taxable sphere of partners, the tax sphere of a partnerships exceeds its sphere under civil or trade law. Therefore, a tax balance sheet of a partnership most of the time differs from its balance sheet under German GAAP.

Subject to income tax or corporate income tax of the profits of a partnership are its partners. However, partnerships in Germany may also be subject to Gewerbesteuer, or trade tax. This tax is levied at the local level and is based on the partnership’s business activities. The calculation of Gewerbesteuer can be complex and varies depending on factors such as location and the type of business conducted.

Whereas partnerships involved in commercial acitvities are subject to trade tax, pure Asset-Management Partnerships are excluded. To avoid double taxation at the level of partners, trade tax of a partnership is either credited (individuals) or the income is exempt (corporations).

German partnerships can have foreign individuals or entities as partners. When foreign partners are involved, it adds another layer of complexity to the tax landscape. Depending on the specific circumstances and tax treaties between Germany and the partner’s home country, different rules may apply. It’s essential to understand the tax implications of having foreign partners and ensure compliance with reporting requirements.

To mitigate the potential double taxation of income that can arise when foreign individuals or entities are involved in a German partnership, treaty law comes into play. Germany has tax treaties with numerous countries that provide guidelines for the taxation of income in cross-border situations. Understanding the provisions of these treaties is crucial to optimizing the tax position of the partnership and its partners.

One particular feature is not uncommon in cross-border cases involving partnerships. Since other countries treat partnerships as opaque rather than transparent, partnerships often qualify as hybrid companies. In such cases, the tax consequences must be examined particularly closely. Problems of hybrid entities might also arise when German partnerhips opt to be taxed as corporations.

In conclusion, the taxation of partnerships in Germany is a multifaceted and intricate subject. The Transparenzprinzip, Mitunternehmerschaft, Sonderbetriebsvermögen, Gewerbesteuersubjekt, and the involvement of foreign partners all contribute to the complexity. To navigate this landscape successfully, it’s essential to have a comprehensive understanding of the principles and regulations governing partnership taxation in Germany.

Additionally, seeking professional advice from tax experts with expertise in international taxation can be invaluable when dealing with partnerships involving foreign partners. With the right knowledge and guidance, you can optimize the tax position of your German partnership and ensure compliance with all relevant tax laws and regulations.

The experts of GHS have a lot of experience when it comes to the taxation of partnerships. A speciality are in particular cross-border cases where partnerships are involved. Feel free to contact us!