24.02.2015BFH rules on business activities that could trigger trade tax for professional services partnerships
The BFH has provided guidance on the extent of business activities that could trigger trade tax for professional services partnerships
In a series of decisions issued on 27 August 2014, the federal tax court (BFH) provided guidance on the extent of business activities that would trigger trade tax consequences for a partnership that otherwise renders professional services that are not subject to trade tax. The BFH concluded that as long as the net revenue generated from business activities does not exceed EUR 24,500 per year and 3% of the overall net revenue, the business activities should not “taint” the income from professional services and should not result in all of the income of the partnership being considered business income.
Under German tax law, income from professional services activities or independent services (such as the activities of lawyers, tax advisers, architects, medical doctors, journalists, etc.) is treated as income items that are separate from business income. Only business activities are subject to trade tax; professional services are not.
If the activities of a sole proprietor result in income from both business activities and professional services, the income must be allocated between the two types of activities. In the case of a partnership whose activities consist mainly of professional services (e.g. a partnership of lawyers) and the partnership also earns business income, the business income can taint the income from professional services activities and to lead to a business income qualification for 100% of the income. An allocation as for a sole proprietor is not possible in the case of a partnership.
An exception from the general rule is possible only if the business income is “insignificant” as compared to the overall income of the partnership. In its decisions, the BFH has clarified how to interpret the term “insignificant.” In their statement to the court, the German tax authorities referred to a 2000 BFH decision in which the court stated that a percentage of 1.25% of the net revenue from business income as compared to the overall net revenue qualifies as insignificant. The BFH stated that its 2000 decision did not refer to a maximum amount and now has explicitly defined the maximum threshold for income from business activities that will not taint the income from professional services activities.
The BFH introduced two separate thresholds that must be met simultaneously to avoid trade tax consequences: (1) a flat amount of EUR 24,500; and (2) net revenue of 3% as compared to the overall net revenue.
The BFH decision could have an impact in other situations as well: the 1.25% threshold has been used in the past to determine whether the trade or business activities of a partnership that is the head of a German tax consolidated group are not an insignificant amount (which is a requirement for a partnership to act as the head of a tax consolidated group). Based on the recent decision, however, it may no longer be possible to rely on this (lower) threshold; instead, the new 3% threshold may be of relevance in these cases.
Contact
Andreas Maywald
Client Service Executive | ICE – German Tax Desk
