Usufruct over gifted limited partnership interests – Avoiding co-partnership
In the practice of tax planning, the transfer of limited partnership interests free of charge, subject to a right of usufruct – particularly in the context of family-run businesses – a common tool for Asset succession. This allows the donor to retain partial use of the share in the company – for example, by receiving ongoing profits – whilst transferring the share to their descendants at a reduced value. In such cases, however, it is often unclear whether the usufructuary or the Shareholder as a co-entrepreneur within the meaning of the Section 15(1), first sentence, point 2 of the Income Tax Act (EStG) This issue is of central importance for tax purposes, particularly with regard to the allocation of losses or capital gains.
A co-entrepreneur is someone who, under civil law, is a partner in a partnership and is able to demonstrate a certain degree of entrepreneurial initiative, as well as bearing entrepreneurial risk. The co-entrepreneurial risk is one of two criteria for qualifying as a co-entrepreneur, alongside what is known as ‘co-entrepreneurial initiative’. It describes the partner’s financial stake in the success and failure of the business. This includes, in particular, a share in the current profits and losses, as well as in the hidden reserves of the partnership’s assets, including any goodwill. Co-entrepreneurial initiative, on the other hand, involves participation in business decisions, i.e. the ability to exercise rights that go beyond those of a mere investor.
The question of whether a person qualifies as a co-entrepreneur, or whether the risk and initiative associated with co-entrepreneurship are present, may be assessed differently simply on the basis of minor linguistic variations in the provisions of the relevant gift and transfer agreement. For example, the Federal Fiscal Court (BFH) ruled in its judgement of 20 March 2025 that a limited partner is to be regarded as a co-partner despite the creation of a usufruct over their limited partnership share, provided that, in accordance with the contractual arrangements, they exercise co-partner initiative and are economically liable for any loss of capital.
In the case of the judgement in question, the donors (usufructuaries) had indeed included a provision in the contract stipulating that the grantors of the usufruct (shareholders) were to bear profits and losses, which in turn was intended to ensure that the latter bore the risk of being co-entrepreneurs. An attempt was made to achieve this by imposing a withdrawal restriction on the usufructuaries, which was to take effect if the limited partnership share fell below the amount of the capital contribution made as a result of a loss. At the same time, the agreement provided for a revocable authorisation for the usufructuaries to exercise the shareholders’ voting and management rights.
In the judges’ view, in the case in question, the risk and initiative associated with being a co-entrepreneur remained with the shareholders. The restriction on withdrawals imposed on the usufructuaries did not give rise to an obligation to bear losses directly. Otherwise, the usufructuaries would actually have had to make good the losses, which was not, however, the intention. Contrary to its wording, the chosen structure was not sufficient to establish adequate joint venture risk and merely constituted an indirect assumption of losses.
The Federal Fiscal Court (BFH) also continued to regard the joint venture initiative as originating with the shareholders, justifying this on the grounds that the power of attorney was revocable and that the granting of a power of attorney did not prevent the shareholders from continuing to exercise their voting rights themselves.
Consequently, a capital loss incurred by the company had to be allocated to the shareholders by virtue of their status as co-owners.
As regards the drafting of contracts in the context of tax succession planning, this means that the mere allocation of profits or formal voting rights to the usufructuary is not sufficient to establish a tax-effective partnership. Rather, a careful analysis is required to determine who actually bears the economic risk and who holds the key rights to influence the company. In this respect, a transfer of partnership risk can only be assumed if substantial risks of loss, which have genuine economic implications, are actually transferred to the usufructuary. The same applies to the right to take the initiative as a partner.
The above remarks highlight the importance of exercising the utmost care and precision when designing such Successor models. Our Tax advisers and specialist solicitors in tax law We would be happy to advise you on such an arrangement.