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In article no. 172, we reported on a decision by the Münster Tax Court holding that, under the Tax Reorganisation Act as in force from 1995 to 1998 (the 1995 law), a step-up in asset basis resulting from reorganisation of a corporation as a partnership is effective for trade tax purposes. The tax authorities had taken the position that such step-ups were effective only for income tax purposes (personal or corporate income tax).
On appeal, the Federal Tax Court has upheld the Münster Tax Court in a decision made public in the summer of 2000 (judgement of 20 June 2000 - VIII R 5/99 - DB 2000, 1795).
2. Issues Posed And Court's Reasoning
At issue was the proper interpretation of § 18 (2) UmwStG under the 1995 law. The 1995 statute stated that any "takeover gain" realised by the receiving partnership on reorganisation of a corporation as a partnership was to be ignored for trade tax purposes. In section 18.02 of the 1998 tax reorganisation directive (see sec. 2.1 of article no. 134), the tax authorities took the position that the term "takeover gain" in § 18 (2) UmwStG included a takeover loss as well. A takeover loss results when the book value of the shares in the disappearing corporation exceed the transfer values of the corporation's assets. Takeover loss is equalised for corporate and personal income tax purposes by stepping-up the values of the transferred assets to fair market value. Non-recognition of takeover loss for trade tax purposes would therefore have meant that no step-up in basis would occur for trade tax purposes on reorganisation of a corporation as a partnership.
The March 1999 Tax Relief Act for the Years 1999, 2000, and 2002 amended § 18 (2) effective 1 January 1999 to provide for non-recognition for trade tax purposes of both takeover gains and takeover losses on reorganisation of corporations as partnerships. A second sentence specifically prohibited stepped-up asset bases for trade tax purposes, thus ending such step-ups for reorganisations subject to the new law (the 1999 law).
However, the issue of step-ups for trade tax purposes under the old law remained open until the judgement of the Federal Tax Court here reported on. The court's decision is based essentially on the wording of the statute in force prior to the 1999 amendment. However, the court also gave weight to arguments that the position advocated by the tax authorities would lead to double imposition of trade tax, hence that, absent a clear expression of legislative intent, which is beyond doubt not present until the 1999 amendment, the statute should not be construed as the tax authorities desire.
3. Dividing Line Between 1995 And 1999 Law
Since the tax authorities maintained that the 1999 amendment to § 18 (2) UmwStG merely clarified what the statute meant all along, they refrained from including any specific transition provisions in the 1999 tax legislation. The general provision on entry into force states merely that the law is effective from 1 January 1999 onwards. This raises the question of where to draw the line between reorganisations falling under the 1995 law, for which the step-up on reorganisation in partnership form is recognised for trade tax purposes, and reorganisations falling under the 1999 law, for which such recognition is denied.
Since reorganisations are transactions taking place over time, any number of events are conceivable as demarcation points, such as the date of entry of the reorganisation in the Commercial Register, the date as of which the reorganisation is retroactively effective, or the time as of which the legal groundwork for the reorganisation is laid. Cf. the case reported on in article no. 159.
The June 2000 decision by the Federal Tax Court casts no light on these issues because it involves a reorganisation which was subject to the 1995 reorganisation law no matter what demarcation point one applied.
4. 2000 Tax Reforms
The landmark tax reforms legislated in 2000 for years 2001 ff. eliminated the step-up in basis on reorganisation of a corporation as a partnership for purposes of the personal and corporate income tax as well, thus ending the short but glorious era of reorganisation step-ups, which, broadly speaking, stretched from 1995 to 2000. For a discussion of the complicated transition provisions from 1999 law to 2001 law, see Last Chance for Reorganisation Step-Up (article no. 218) and article no. 210 (Buying Businesses in Germany after Tax Reform 2000).
Editorial Cut-Off Date: 20 June 2001
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