Cessation of business only upon the disposal of the essential assets of the business

When is a busi­ness dee­med to have been wound up for tax pur­po­ses? This ques­ti­on has signi­fi­cant impli­ca­ti­ons, as it is only at the time of win­ding up that a so-cal­led ‘wind-up gain’ ari­ses, which is sub­ject to tax. The Nurem­berg Finan­ce Court has dealt with a com­plex inhe­ri­tance case and cla­ri­fied that, as long as the essen­ti­al assets of the busi­ness have not yet been sold, the busi­ness is regard­ed as dor­mant, not as having been wound up.

The facts of the case

During his life­time, a father had run an acti­ve busi­ness, which included, among­st other things, two pro­per­ties. When he died, the busi­ness had alre­a­dy cea­sed tra­ding. The mother was appoin­ted as the preli­mi­na­ry heir, and their child­ren as the sub­se­quent heirs. In 1988, the mother set up a GmbH & Co. KG and trans­fer­red her sole trader busi­ness, tog­e­ther with the pro­per­ties, into this company.

Fol­lo­wing their mother’s death, a dis­pu­te over the inhe­ri­tance raged bet­ween the siblings for years. Under their mother’s will, the son was bequea­thed all the shares in the GmbH and, con­se­quent­ly, sole manage­ment of the com­pa­ny. As both daugh­ters took legal action against this, the son ulti­m­ate­ly beca­me the sole heir, whilst the daugh­ters were award­ed only their sta­tu­to­ry share of the estate. In the cour­se of the legal pro­cee­dings, it also emer­ged that the limi­t­ed lia­bi­li­ty com­pa­ny (GmbH) had been incor­po­ra­ted inva­lid­ly, which led to the limi­t­ed part­ner­ship (KG) being wound up.

The plots of land were final­ly sold in 2016. The trans­fer of rights and obli­ga­ti­ons took place in 2017. In their tax returns for that year, the par­ties invol­ved declared inco­me from let­ting and lea­sing, but no capi­tal gain on dis­po­sal. The tax office took a dif­fe­rent view and asses­sed inco­me from busi­ness ope­ra­ti­ons as well as a capi­tal gain on disposal.

Decision of the Nuremberg Finance Court

The legal action brought by one of the daugh­ters was unsuc­cessful. The court made it clear that the pro­per­ties had been valid­ly con­tri­bu­ted to the limi­t­ed part­ner­ship becau­se all the sub­se­quent heirs had con­sen­ted to the con­tri­bu­ti­on. As evi­dence of this, the court cited, among­st other things, the limi­t­ed partnership’s decla­ra­ti­on of assess­ment for the year 2011, which had been signed by all the sub­se­quent heirs.

The decisi­ve fac­tor for the court was that at no point had it been made appa­rent to the out­side world that the busi­ness was to be wound up. Accor­ding to estab­lished case law, the ces­sa­ti­on of busi­ness requi­res an expli­cit decla­ra­ti­on of intent that is appa­rent to out­si­ders. This was not the case here. The con­di­ti­ons for a dor­mant busi­ness had been met throug­hout all tho­se years.

It was only with the trans­fer of bene­fits and lia­bi­li­ties to the purcha­ser in 2017 that the sus­pen­si­on of ope­ra­ti­ons came to an end. From that point onwards, the­re were no lon­ger any sub­stan­ti­al ope­ra­tio­nal foun­da­ti­ons. The capi­tal gain on dis­po­sal was the­r­e­fo­re to be cal­cu­la­ted for the year 2017.

What does this mean in practice?

The jud­ge­ment high­lights the far-rea­ching tax con­se­quen­ces that can ari­se when inhe­ri­tance dis­pu­tes remain unre­sol­ved for years and assets remain within the busi­ness assets for tax pur­po­ses. Anyo­ne dra­wing up a will that includes pro­vi­si­ons for rever­sio­na­ry heirs and sub­se­quent heirs, whe­re busi­ness assets are invol­ved, should inform all par­ties con­cer­ned at an ear­ly stage of the future tax implications.

• For tax pur­po­ses, a dor­mant busi­ness remains a busi­ness as long as its essen­ti­al ope­ra­tio­nal foun­da­ti­ons are still in place.
• The ces­sa­ti­on of busi­ness must be declared expli­cit­ly and in a man­ner that is cle­ar­ly visi­ble to the out­side world.
• It is only upon the dis­po­sal of the last signi­fi­cant asset forming the basis of the busi­ness that the taxa­ble capi­tal gain on ces­sa­ti­on arises.

The jud­ge­ment is final; no appeal has been lodged. In indi­vi­du­al cases, it is advi­sa­ble to seek tax advice in order to avo­id simi­lar surprises.

Nurem­berg Regio­nal Court, jud­ge­ment of 10 April 2025, Case No. 4 K 1176/23