Germany: Restrictive application of the German trust model

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2026

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Germany: Restrictive application of the German trust model

schnitger.jpg

weiss.jpg

Arne Schnitger


Martin Weiss

Over the past few years, partnerships have grown in popularity as investment vehicles into Germany. Profit shares are repatriated free of withholding tax as partnerships are treated as transparent for income (corporation) tax purposes, that is the income is taxed at the level of its partners. However, German trade tax levied on business income is owed by the partnership itself, that is the partnership is not transparent for trade tax. Consequently, trade tax losses can only be carried forward by the partnership and cannot be offset against income from other German operations of associated enterprises. To enable offset of the trade tax losses of the German partnership against other trade tax income of the partner, the trust model is frequently used by German and foreign investors. The second partner holds a minor limited partnership share as the nominee of the general partner. In consequence, the partnership ceases to exist for tax purposes (that is, the general partner is subject to tax on the trade tax income) while continuing to exist under corporate law. Accordingly, the partnership's results are mingled with those of the general partner for both trade and income (corporation) tax.

Such partnerships being set up according to the trust model trigger various questions, for example regarding their entitlement to a tax-free reorganisation under German tax law. A provincial tax directorate has issued a new directive according to which a merger of a company into a partnership deemed as being held by a single partner cannot be conducted tax-free for failure to meet the condition in the Reconstructions Tax Act that the merged assets be taken up by the surviving entity. Even though this interpretation of the law is questionable, it may make a trust partnership somewhat inflexible as a vehicle for further operations.

Arne Schnitger (arne.schnitger@de.pwc.com)

Tel: +49 30 2636-5466

Martin Weiss (martin.weiss@de.pwc.com)

Tel: +49 30 2636-2588

PwC

Website: www.pwc.de

more across site & shared bottom lb ros

More from across our site

Taxpayers should support the MAP process by sharing accurate information early on and maintaining open communication with the competent authorities, the OECD also said
The Fortune 150 energy multinational is among more than 12 companies participating in the initiative, which ‘helps tax teams put generative AI to work’
The ruling excludes vacation and business development days from service PE calculations and confirms virtual services from abroad don’t count, potentially reshaping compliance for multinationals
User-friendly digital tax filing systems, transformative AI deployment, and the continued proliferation of DSTs will define 2026, writes Ascoria’s Neil Kelley
Case workers are ‘still not great’ but are making fewer enquiries, making the right decision more often and are more open to calls, ITR has heard
There is a shocking discrepancy between professional services firms’ parental leave packages. Those that fail to get with the times risk losing out in the war for talent
Winston Taylor is expected to launch in May 2026 with more than 1,400 lawyers across the US, UK, Europe, Latin America and the Middle East
They are alleging that leaked tax information ‘unfairly tarnished’ their business operations; in other news, Davis Polk and Eversheds Sutherland made key tax hires
Overall revenues for the combined UK and Swiss firm inched up 2% to £3.6 billion despite a ‘challenging market’
In the first of a two-part series, experts from Khaitan & Co dissect a highly anticipated Indian Supreme Court ruling that marks a decisive shift in India’s international tax jurisprudence
Gift this article