German Federal Fiscal Court: Loan interest for asset-managing partnerships not deductible

Germany's Federal Fiscal Court (Bundesfinanzhof, BFH) has reaffirmed its established case law regarding loan arrangements between asset-managing partnerships and their partners. In a ruling on November 27, 2024 (Case No. I R 19/21), the court clarified the tax implications of such transactions.

The BFH determined that interest payments on loans are not tax-deductible expenses when the lender is a partner of an asset-managing partnership and the partnership itself is the borrower. This decision hinges on tax regulations that treat such entities and their partners as a unified whole under specific conditions.

The case involved an asset-managing partnership, a GmbH & Co. KG (KG), which had incurred interest expenses on a loan used to acquire property. The tax authorities disallowed these interest expenses as deductions, asserting that the loan relationship was not tax-recognizable between the partner and the company.

The court's reasoning is based on the principle of treating asset-managing partnerships as fractional co-ownerships for tax purposes. According to this 'fractional consideration' approach, when the creditor and debtor in a loan agreement are effectively the same party due to tax law's attribution rules, the debt is considered extinguished for tax purposes, preventing the deductibility of interest.

This ruling confirms that the same principles apply regardless of whether the loan is granted by the partner to the partnership or vice-versa. The court also indicated that similar tax non-recognition would apply to lease agreements between such partnerships and their partners.