BMF limits BFH case law on businesses of commercial nature until 2008

In its letter dated May 5, 2025, the German Federal Ministry of Finance (BMF) revised the letter dated February 8, 2016 and clarified: The principles from the German Federal Court of Finance’s (BFH) rulings I R 52/13 and I R 16/19 on the participation of legal entities under public law in co-entrepreneurships apply beyond the cases decided – but only for assessment periods up to and including 2008. For assessment periods from 2009 onwards, the BMF letter dated June 21, 2017 remains authoritative.

Background: BFH case law on the establishment of a business of commercial nature through participation

In its decision of March 25, 2015 (I R 52/13, Federal Tax Gazette 2016 II p. 172), the BFH decided that the mere existence of a legal entity under public law’s participation in a co-entrepreneurship (Art. 15 (1) sentence 1 no. 2 EStG (German Income Tax Act)) leads to the establishment of a business of a commercial nature – irrespective of whether the activity would establish a business of a commercial nature if performed directly by the legal entity under public law.

This view was confirmed and supplemented by the ruling of January 18, 2023 (I R 16/19, Federal Tax Gazette II p. 1096): Activities of subsidiary corporations of a partnership holding company acting as a controlling company, in which the legal entity under public law holds an interest, cannot establish any further business of commercial nature at the level of the legal entity under public law. The rulings relate to the years in dispute 2002 to 2007 and 2008, respectively. 

The BMF letter dated May 5, 2025, as revised, on the time limit

In its letter dated May 5, 2025 (IV C 2 - S 2706/00056/014/035), the BMF revised the letter dated February 8, 2016 (Federal Tax Gazette I p. 237), thereby emphasizing in particular the temporal differentiation:

• The principles of the aforementioned BFH rulings only apply beyond the individual case for assessment periods up to and including 2008.
• For assessment periods from 2009 onwards, the BMF letter dated June 21, 2017 (ibid.) continues to apply, in which the current administrative opinion is regulated in detail.

At the same time, this new version removes the transitional regulation that was previously in force, according to which relevant cases in assessment periods from 2009 onwards were to be kept open.

Why a new letter now?

In its letter dated February 8, 2016 (ibid.), the BMF had announced to issue a separate letter on the application of the BFH principles from the 2009 assessment period. This announcement was already implemented with the BMF letter dated June 21, 2017 (ibid.) – albeit without an explicit reference to the previous announcement.
The current letter dated May 5, 2025 (ibid.) fulfills less the function of a new substantive regulation, but rather:

• cancels the BMF circular from 2016 and formally replaces it,
• ends the transitional regulation on keeping cases open from the 2009 assessment period,
• clarifies that the BFH case law is to be applied for a limited period of time (until 2008), and
• thus avoids any uncertainties in the context of tax audits and in the application of the law.

It is therefore more of a systematic and formal clarification than a new substantive regulation.

What applies from the 2009 assessment period – and what is the difference to the view up to the 2008 assessment period?

The BMF letter dated June 21, 2017 (ibid.) applies unchanged for assessment periods from 2009 onwards. The letter contains a differentiated consideration of the justification for the establishment of a business of commercial nature if a legal entity under public law holds an interest in a partnership and clarifies, among other things:

• The participation of a legal entity under public law in a co-entrepreneurship leads to one or more businesses of commercial nature for the legal entity under public law. This applies regardless of whether the activity of the co-entrepreneurship (e.g., household waste disposal) would not establish a business of commercial nature if it were performed directly by the legal entity under public law itself.
  • Mandatory application of this principle only from the 2018 assessment period: If a legal entity under public law has previously taken the view that the participation in a co-entrepreneurship did not establish a business of commercial nature if the legal entity under public law would not establish a business of commercial nature if it directly performed the co-entrepreneurship’s activities itself, this legal opinion can be maintained up to and including the 2017 assessment period. 
• Asset management activities must be differentiated according to whether they are to be allocated to a self-employed activity (no business of commercial nature) or as an auxiliary or ancillary service of an activity relevant to a business of commercial nature (establishment of or allocation to an existing business of commercial nature). 
• The commercial nature of a partnership (Art. 5 (3) No. 2 EStG) alone is not sufficient in order to establish a business of commercial nature.
• Special circumstances may also arise if individual activities within the co-entrepreneurship are not performed with the intention of making a profit or if the partnership as a whole is not to be regarded as a co-entrepreneurship; in such cases, it must be examined independently whether and to what extent a business of commercial nature arises at the legal entity under public law.
• Activities of the co-entrepreneurship must be examined individually; in particular, in cases in which the partnership acts as a holding company and establishes income tax groups with subsidiary corporations, the activities of the subsidiaries may result in additional businesses of commercial nature at the level of the legal entity under public law.

In contrast, for periods up to and including 2008 (based on the aforementioned BFH rulings, which the BMF follows in its letter dated May 5, 2025 (ibid.), at least in this respect for assessment periods up to 2008), no additional business of commercial nature can be created by commercial activities of the subsidiaries of a controlling partnership (in which the legal entity under public law holds an interest).

A decisive difference therefore lies in the relevance of the (possibly brokered) activities of the co-entrepreneurship:

• For assessment periods up to 2008: participation in co-entrepreneurship = always exactly one business of commercial nature (participation), irrespective of the type and purpose of the activity (uniform consideration of several activities might only be possible in accordance with the so-called aggregation principles, which were only regulated by law in the context of the 2009 Annual Tax Act by Art. 4 (6) KStG).
• For assessment periods from 2009 onwards: The participation of a legal entity under public law in a co-entrepreneurship leads to one or more businesses of commercial nature (possible in particular if the partnership acts as the controlling company and brokers various activities of the controlled companies to the legal entity under public law).

The tax evaluation of a legal entity under public law’s participations in a partnership is complex and error-prone. We are happy to support you in analyzing existing structures, the correct classification of past assessment periods and forward-looking tax planning.