Crediting of trade tax - Who is entitled to the credit in the event of death?

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In the event of a death, the question that arises for partnerships with a financial year that diverges from the calendar year is: who is entitled to the trade tax credit pursuant to Section 35 of the Income Tax Act (Einkommenssteuergesetz, EStG), is it the deceased partner, or their heirs? The crucial factor is determining the date that must be used for allocating the amount to be credited.

Allocation of the tax reduction pursuant to Section 35 EStG

Under Section 35 EStG, certain members of a partnership are granted a tax reduction for income from trade or business. The case law of the Federal Fiscal Court (Bundesfinanzhof, BFH) as well as the fiscal administration have hitherto allocated the tax reduction on the basis of the situation at the end of the trade tax assessment period. This normally corresponds to the calendar year. For businesses with a diverging financial year, it was not clear whether the tax reduction had to be allocated as per the situation at the end of the tax assessment period, or the (diverging) financial year.

A recent BFH decision on the application in cases of death

In its ruling of 10.4.2025 (case reference: IV R 21/22), the BFH provided a key clarification on the allocation of a tax reduction pursuant to Section 35 EStG in the case of income from trade or business. The ruling applies especially to business partnerships with a financial year that diverges from the calendar year and concerns situations where someone has died, or where the interests have been transferred after the end of the financial year. For financial years that are the same as the calendar year the legal issue that was decided had already been clarified.

In the case in question, the claimant was a German limited partnership (Kommanditgesellschaft, KG) with a diverging financial year that ran from 1.7. to 30.6 of the subsequent year. The company’s sole limited partner (Kommanditist) passed away after the end of the 2017/2018 financial year. In the assessment notice of separate and uniform determination, pursuant to Section 35(2) EStG, the local tax office had listed the limited partner’s two heirs as fellow partners because they had been entered into the Commercial Register in accordance with the succession to specific rights and obligations. From the perspective of the KG, the tax reduction should have been allocated to the deceased limited partner, since he had generated the profits in the financial year that had already ended.

The BFH has now clearly decided that for the allocation of the tax reduction the determining criterion is not the end of the trade tax assessment period, but instead the end of the respective financial year of a commercial undertaking that forms the basis for the calculation of the commercial income. This ruling takes into account the particularity of a diverging financial year and ensures that the tax reduction is granted to the fellow partners who actually held interests during the financial year. For companies with financial years that are the same as the calendar year there will be no change because the financial year-end and the end of the assessment period will coincide.

Generally of great importance in the case of a diverging financial year

In practical terms this means that, in the case of a diverging financial year, the allocation of the tax reduction will happen in accordance with the actual ownership stakes at the financial year-end. If a death occurs or interests are transferred after the end of the financial year, then this would not affect the tax reduction for that financial year. Solely the partners that hold interests on the date of the financial year-end would be allocated the respective amounts.

This ruling is of great importance for partnerships with diverging financial years. To ensure an appropriate allocation of the tax reduction pursuant to Section 35 EStG it would be advisable to document the lists of partners and the entries in the Commercial Register. When planning the transfer of interests or business succession, it would be necessary to bear in mind that the financial year-end is the relevant date for the tax reduction.

Please note

The ruling differs from the administrative opinion hitherto (Federal Ministry of Finance [Bundesministerium der Finanzen, BMF] circular of 3.11.2016), according to which the trade tax base amount has to be divided between the partners at the end of the trade tax assessment period. The BMF circular will thus have to be adapted. In practice, the BFH ruling could have a significant impact on succession cases at partnerships, especially if the heirs generate lower incomes and the offsetting comes to nothing. A right to choose who should be entitled to the credit does not exist.