Germany: Cross-border company “split-up” (court decision of first impression)

Principles of “company split-up” also apply when a domestic holding company leased a property located abroad to a foreign operating corporation.

Principles of “company split-up”

The German Federal Tax Court (BFH) in a November 2020 decision held that the principles of “company split-up” for tax purposes also apply when a domestic (German) holding company leased a property located abroad to a foreign operating corporation.


A company split-up for tax purposes occurs when a company (holding company) makes a material business asset (operating basis) available to a commercially operating partnership or corporation (operating company) for use (material interdependence) and one person or several persons jointly (group of persons) control both the holding company and the operating company such that they are able to implement uniform commercial operating activities in both companies (personal interdependence).

If the conditions for personal and material interdependence are fulfilled, rental or lease no longer qualifies as property management but as commercial rental or lease. The holding company thus is treated as a commercial operation in that case.


The taxpayer was a tax-exempt charitable incorporated foundation based in Germany. The taxpayer was also the ultimate parent company of B Group and also the sole shareholder of the Dutch company B B.V.

After restructuring, the taxpayer held a property in the Netherlands, which it leased to and was used by B B.V. as commercial premises for its operating activities. Dividend distributions by B B.V. to the taxpayer were subsequently agreed.

At issue was whether the dividends paid to the foundation were to be attributed to its fully tax-exempt asset management or to its taxable commercial business operations (only 95% of the dividend is tax-exempt overall).

The BFH held that lease of the property by the taxpayer to B B.V. fulfilled the requirements for company split-up for tax purposes, resulting in primary commercial activities by the taxpayer and also representing commercial business operations.

The court found that there was personal and material interdependence because the taxpayer held all the shares in B B.V. and leased the property used by B B.V. as business premises to B B.V. The situation would not change if the constellation were a "domestic holding company" and a "foreign operating company.” The court observed that in the constellation presented a cross-border company split-up for tax purposes—one that is generally rejected because it would be contrary to the provisions of the treaties to avoid double taxation if foreign rental income were reclassified as commercial income. Another view is that the principles of company split-up for tax purposes must also be applied without restriction in the present constellation to avoid tax structuring options. In its conclusion, the court agreed with the latter view.

KPMG observation

This is the first BFH judgment confirming a cross-border company split-up for tax purposes. A response from the tax authorities is still pending; however, the Federal Ministry of Finance joined the proceedings and supported the arguments of the defendant tax office.

Read a June 2021 report [PDF 330 KB] prepared by the KPMG member firm in Germany



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