Usufruct is a popular means of structuring the transfer of shares in commercial partnerships in succession planning in Germany.
A long-standing and popular model was for the limited partner of a GmbH & Co. KG of the parent generation to transfer his limited partnership share to his descendants during his lifetime by way of anticipated succession, while reserving the usufruct for himself. Two new rulings by the Federal Fiscal Court (BFH) are now reshuffling the cards.
Tax advantages and framework conditions for usufruct in Germany
On the one hand, usufruct arrangements made it possible to reduce the value of the transferred shareholding if, from an inheritance tax perspective, only the standard exemption (exemption of business assets pursuant to Sections 13a and 13b of the German Inheritance Tax Act (Erbschaftsteuergesetz, ErbStG) in the amount of 85 percent) was possible, and on the other hand, the donor’s livelihood was guaranteed.
From an income tax perspective, the transfer of a share in a commercial partnership by way of gift subject to usufruct constituted a gratuitous transfer of assets. This can generally be done in a tax-neutral manner (Section 6 (3) EStG) if the taxation of hidden reserves is ensured. From an inheritance tax perspective, the transfer is favored if the requirements for the favorable treatment of business assets pursuant to Sections 13a and 13b ErbStG are met. However, a prerequisite for inheritance and gift tax relief is that the recipient becomes a co-partner in the shareholding from an income tax perspective.
Taxation of income and the role of dual co-ownership in usufruct
Who has to pay tax on income from participation in a commercial partnership within the meaning of Section 15 of the German Income Tax Act (Einkommensteuergesetz, EStG) depends on the co-ownership of the parties involved. The aim of transferring limited partnership shares with reserved usufruct has always been for the donor, as the usufructuary, to pay tax on the income in accordance with Section 15 EStG.
Would you like to receive such news directly to your mailbox every two months? Subscribe to our newsletter Private Clients Update – Assets | Foundations | Succession.
In previous structuring practice, despite the transfer of the company shares, the donor retained his position as a co-entrepreneur in the opinion of the tax authorities and old case law, in that he was granted management authority and voting rights in current affairs (so-called double co-entrepreneur status). This was often secured by a voting proxy. However, as the new shareholder, the recipient of the gift always retained the right to exercise significant shareholder and voting rights. In addition, the usufructuary did not participate in the company’s hidden reserves.
BFH: no dual co-entrepreneurship possible
The previous arrangement is being challenged on the basis of BFH case law. Dual co-entrepreneurship is being called into question by the Senate IV of the BFH. Two co-entrepreneurships cannot be established on the basis of a single co-entrepreneurship share. The tax authorities still consider dual co-entrepreneurship to be possible.
Who is a co-entrepreneur after a gift?
The task of a dual co-entrepreneurship would have far-reaching consequences for business succession:
- If only the recipient of the gift became a co-partner, the donor, as the usufructuary, would no longer have any co-partner income under Section 15 of the German Income Tax Act. This would create the risk that the recipient of the gift would have to pay tax on the income at their personal tax rate due to a lack of deduction options, even though the usufructuary receives the income under civil law.
- If only the usufructuary remained a co-partner, the assets transferred to the usufructuary (donee) for tax purposes would be withdrawn from his private assets at the moment of transfer. The hidden reserves would have to be taxed as current profit. In addition, the inheritance and gift tax benefits under Sections 13a and 13b of the German Inheritance Tax Act would no longer apply.
Losses incurred by the usufructuary do not constitute a co-entrepreneurial risk
Two recent rulings (dated July 2, 2025 – IV R 36/22 and IV R 37/22) once again clarified that the usufructuary only becomes a co-entrepreneur within the meaning of Section 15 (1) sentence 1 no. 2 EStG in a limited partnership if he can exercise co-entrepreneurial initiative and bears co-entrepreneurial risk.
If the usufruct is structured in such a way that the usufructuary is not involved in the hidden reserves in the company’s assets or directly in the company’s losses, the usufructuary does not bear any co-entrepreneurial risk.
In the opinion of the Federal Fiscal Court, the fact that the usufructuary indirectly bears losses is not sufficient to assume a co-entrepreneurial risk. Only if the usufructuary, deviating from the legal model, bears an entrepreneurial risk of loss in another way, which can burden his assets, does he bear a co-entrepreneurial risk. This means that, in the opinion of the courts, the usufructuary would also have to be obliged to compensate for losses (on a pro rata basis) and that a normal arrangement of usufruct, in which the usufructuary has a right of use to the withdrawable profits, does not lead to the assumption of co-entrepreneurial risk for income tax purposes. However, the Federal Fiscal Court does not comment on the question of whether it is possible to have dual co-entrepreneurial status for one and the same limited partnership share.
Diligence required when structuring co-entrepreneurship
Although the tax authorities still assume that dual co-entrepreneurship is possible in Germany in principle, in light of this ruling, increased caution should be exercised when transferring limited partnership interests with reserved usufruct, as the direct assumption of losses does not correspond to the civil law model of usufruct. One consideration would be for the donor to retain a mini limited partnership interest in order to secure their co-entrepreneurship status.
However, here too, great care must be taken in structuring the usufruct and the partnership agreement, as the decision on co-entrepreneurship status is always a case-by-case decision that takes all relevant circumstances into account. The provisions in the partnership agreement and the structuring of the usufructuary’s rights in particular can lead to a different assessment of the co-entrepreneurial status of the donor and the donee and thus to undesirable tax results. In such cases, absolute legal certainty can only be obtained by applying to the tax authorities for binding information.
Against this background, business succession involving usufruct arrangements requires in-depth advice – which we are happy to provide. Please contact us!
