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For income tax purposes, a look-through approach applies to partnerships under German law. Income tax (individual or corporate) is thus paid by the partners, not by the partnership. For trade tax purposes, however, partnerships engaged in commercial activities are a taxpaying entity.

In a recent case (DB 1995, 123 - 22/11/1994) the Federal Tax Court had to decide when trade tax liability begins for a commercial general partnership (OHG) both of the partners of which were corporations. The Trade Tax Act does not state expressly when trade tax liability starts and ends. The courts have consistently held that trade tax liability begins only after a business has commenced trading and entered the marketplace. Preparatory activities such as constructing a factory or building a ship are not part of trading activity and do not create trade tax liability. This instead begins when goods are manufactured or the ship is put into service. Marketing activities and initiating client contacts also constitute trading activities.

The Federal Tax Court held that the same approach applies even when all of the partners are corporations. The decision is interesting because corporations are themselves liable to trade tax from the start of their legal existence by virtue of their corporate form alone irrespective of when trading activity is commenced. The decision is logical when one recalls that, for trade tax purposes, the partnership is the taxable entity, not the partners.

The practical consequences of the decision are probably negative for the taxpayer since expense is likely to exceed revenue in the pre-trading phase. Such expense will not be carried forward for trade tax purposes and hence be lost.

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