Grman federal fiscal court: De minimis threshold for the commercial income of partnerships

De minimis threshold triggering “tainting effect” on the limited commercial income of partnerships

If an asset-management or freelance partnership also engages in commercial activities to a limited extent, this leads to the overall income of the partnership being qualified as commercial income pursuant to Section 15(3) No. 1 of the German Income Tax Act (Einkommensteuergesetz – EStG) if the commercial revenue generated exceeds a de minimis threshold (referred to as “tainting effect” (Abfärbewirkung)).

The amount of this de minimis threshold had not in the past been specifically defined. The German Federal Fiscal Court had merely ruled that the “tainting effect” is not triggered if commercial revenues account for 1.25 % of overall revenues. The German Federal Fiscal Court had therefore not to date ruled on the issue of what threshold triggers the “tainting effect”. The German Federal Fiscal Court is now providing more legal certainty on this issue with three rulings handed down on 27 August 2013 (VIII R 41/11, VIII R 16/11, VIII R 6/12).

According to these rulings, all income is only then to be qualified as commercial income if the original commercial net revenues do not exceed 3 % of the total net revenues of the partnership and the amount of EUR 24,500 during the assessment period.
Conversely, all income is then qualified as commercial income if either the net commercial revenues of the partnership exceed 3 % of total net revenues or the amount of EUR 24,500.

A “tainting effect” is, for example, triggered when a freelance partnership generates net commercial revenues of EUR 30,000, even if these only account for 2 % of the partnership’s total net revenues. The same applies if this partnership generates net commercial revenues of EUR 10,000, but these account for 5 % of the partnership’s total net revenues.

Important in this case is the fact that the German Federal Fiscal Court, for reasons of simplification, has linked the de minimis threshold to net revenues. This is intended to prevent a complicated parallel determination of income, which would also in some cases only have to be carried out for the issue of whether a “tainting effect” is triggered.

Compliance with these thresholds is decisive for asset-management or freelance partnerships if their partners still wish to tax freelance or asset-management income from the letting or leasing of real estate or from capital assets.