German High Fiscal Court: Treatment of depreciable assets when purchasing shares in partnerships
If a shareholder acquires an equity interest in a partnership for a price which exceeds the capital account in the partnership balance sheet, the additional value (selling price with respect to capital account) is to be stated in a positive supplementary balance sheet. Since, from an income tax perspective, the purchaser of a partnership share acquires a proportional share of the assets, the same rules are to be applied to such purchaser as apply to a sole proprietor. This was ruled by the German High Fiscal Court in a recently published judgement dated 20 November 2014 (IV R 1/11).
This means, on the one hand, that the purchaser has to write off the depreciable items of the partnership’s assets over the remaining useful life applicable at the time of the purchase. On the other hand, the purchaser has the same depreciation options which a sole proprietor could use if he had bought a corresponding asset at the time of such purchase.
In its judgement the German High Fiscal Court rejected the plaintiff taxpayer’s request to depreciate the additional value of the depreciable assets capitalised in the supplementary balance sheet over the residual useful life still applicable for the assets capitalised in the partnership balance sheet. The German High Fiscal Court held that the remaining useful life of the depreciable assets has to be newly assessed at the time of the share purchase and the assets thus have to be depreciated over this period of time.
If such a reassessment results, for example, in a residual useful life of five years for an asset purchased in the context of the share purchase, the purchaser has to depreciate the costs of purchasing these assets which are capitalised proportionally both in the partnership balance sheet and the supplementary balance sheet over five years, even if the asset is depreciated in the partnership balance sheet within a residual useful life of only four years.
Where equity interests in partnerships are acquired, this ruling will tend to result in depreciation over a longer period of time, which in turn may have an impact on the selling price and therefore should be taken into account in contractual negotiations.