Partnerships are eligible to apply to be taxed like a corporation for the first time for the assessment/reporting period 2022. The option is only effective if the application has been filed at least one month before the beginning of the first financial year for which the taxation as a corporation shall apply. Consequently, for first-time applicability as of the assessment/relevant period 2022, the application will have to be filed by 30 November 2021.
The application is usually to be filed electronically via the officially designated interface at the tax office responsible for the partnership’s separate and uniform determination of the tax base, and it is irrevocable (although the option can be reversed, as explained below). If there is no separate and uniform determination of the tax base, the application is to be filed with the tax office of the district in which the partnership has its registered office (in Germany), and otherwise with the tax office responsible for the partners’ income or corporate tax. Applications for partnerships that only have earnings that are subject to withholding tax and whose members are only subject to limited taxation in Germany (in particular capital gains tax on investment income in Germany) are to be filed with the German Federal Central Tax Office (Bundeszentralamt für Steuern – BZSt).
The application is to be filed by the managing partner with power of representation. Furthermore, an unanimous resolution by the members is generally required. However, the partnership agreement can also provide for a majority decision of the partners. In such a case, the majority must constitute at least three quarters (75%) of the votes cast (section 1a(1) sentence 1, second clause German Corporate Tax Act (Körperschaftssteuergesetz – KStG), section 217(1) German Reorganisation Act (Umwandlungsgesetz – UmwG)). Existing partnership agreements of family-owned companies often stipulate that reorganisation measures can be resolved with the corresponding majority. However, due to the fact that an application to be taxed as a corporation has wide-ranging legal and economic implications, and – in contrast to a genuine change in legal form – the majority is not required to offer any opposing minority a settlement under section 207 German Reorganisation Act, exercising the option is not to be considered equal as a whole to a reorganisation measure. Instead, the permissibility of the majority decision is to be determined in light of the actual partnership circumstances, including what can reasonably be expected from the minority. This applies all the more if the partnership agreement only allows majority decisions in a broadly generalised manner. Thus, in anticipation of the revision of partnership agreements that is already impending for many partnerships due to the German partnership law reform, it is advisable to include a specific provision stating that a resolution on the option application is permissible with a majority of three quarters of the votes cast.
The Circular of the German Federal Ministry of Finance (Bundesfinanzministerium – BMF) on the application of the corporation tax option that has been published on 10 November 2021 stipulates in this context that “documentation that the necessary number of partners have consented to exercising the option is to be included with the application for the corporation tax option”. In our opinion, the reference here can at most be to a high level examination. Otherwise, the responsible tax authorities would be obliged to conduct a deeper examination of the partnerships’ circumstances, which can hardly be deemed a reasonable expectation.