Self-employed, especially freelancers such as doctors, lawyers, tax consultants, patent attorneys, management consultants, regularly join with others to practice their profession together. BGB companies or partnerships, are very often established for this purpose.
Just as such companies are founded, separations also take place were either individual partners leave the existing partnership, or these are dissolved as a whole and the previous partners split up.
As a Munich tax consultancy firm, Alexia Huber & Partner Steuerberatungsgesellschaft mbB advises its clients on all issues relating to the establishment of partnerships, the admission of new partners and the exit of individual partners or the complete liquidation of partnerships.
In all of these cases, the question arises as to what extent this will have tax consequences. A dispute involving a partnership harbors the risk that existing hidden reserves in the business assets of the partnership will have to be uncovered and taxed. Especially with freelancers, an existing customer, patient or client base can have a high, unrecognized value as an essential intangible asset of the partnership. As a rule, taxation should be avoided in the event of a separation when individual partners continue to work professionally.
The same considerations of course also apply to the extent that individual professional groups require a high level of fixed assets in terms of value, such as oral surgeons, dentists, radiological practices and the like.
In these cases legislature has created the possibility of so-called “Realteilung” in § 16 (2), (3) of the Income Tax Act. If certain rules are observed, the parting partners can divide the previous joint taxable business assets among themselves without creating a taxation consequence (book value continuation).
The most important requirement for this book value continuation is that the individual partners hold and continue the transferred assets for the duration of a statutory blocking period as their own taxable business assets. This blocking period ends 3 years after submitting the tax return of the previous co-entrepreneurship for the assessment period of the separation.
It should be noted that within this blocking period, particularly a transfer of the assets taken over from individual partners to another partnership or a corporation is detrimental to the continuation of the book value.
Insofar as leaving shareholders / partners do not wish to pursue their future professional activity on their own, but again plan to collaborate with others, it must be ensured that the transferred assets remain individual taxable business assets and are also directly attributable to this partner.
If the resigned partner joins a new partnership, it is therefore advisable that he does not add these assets to the collective property, but rather assigns it to his so-called “Sonderbetriebsvermögen” at the new partnership, only allowing the partnership to use his personal assets.
By agreeing on a corresponding sales tax-based usage fee with the partnership for the special business assets, it can also be ensured that entrepreneurs who are entitled to input tax deduction do not have to make sales tax corrections from past acquisition costs of expensive technical equipment.
A resigned partner continuing his professional activity not in a partnership but through a corporation in which he has a majority stake, has the possibility to maintain the status of personal business assets through a so-called business split (“Betriebsaufspaltung”). Here, too, the personal business assets are not handed over but only used by the corporation.
To avoid existing pitfalls, it is absolutely advisable to obtain advance tax advice before establishing a partnership, the acceptance of new partners and in the event of the departure of partners or the dispute with a previous partnership. The aim here is to minimize the consequences of taxation or to avoid them altogether and to exhaust the scope for creativity. Arrangements for partnerships prior to a dispute can be used to set the course for taxation and minimize any tax consequences in case of a separation.