If the option is exercised, a commercial partnership or partnership company is treated as a corporation in terms of income tax (opting company; Section 1a [1][1] Corporate Income Tax Act (KStG), Section 2 [8] of the German Trade Tax Act (GewStG)), and its shareholders are treated as the non-personally liable shareholders of a corporation.

Commercial partnerships (general partnerships and limited partnerships as per Sections 105 and 161 of the German Commercial Code (HGB) including the European economic interest grouping, cf. Section 1 of the Act Concerning the Implementation of the EU Regulation on the European Eco-nomic Interest Grouping (EWIVAG)), and partnership companies as per the Partnership Companies Act (PartGG) are entitled to apply.

The option is also open to companies with a foreign legal form that are comparable to the corporate forms mentioned in Section 1a [1][1] Corporate Income Tax Act (KStG) and are subject to a tax comparable to the German unlimited corporation tax liability.

According to Section 1a [1][6] Corporate Income Tax Act (KStG), the option is not available to investment funds as per the German Investment Tax Act (InvStG). It is also unavailable to sole proprietorships, companies constituted under civil law, communities of heirs, and entirely undisclosed partnerships (such as the atypical silent partnership).

As the application must be made by the commercial partnership or partnership company, it cannot be made before the partnership or company is established. Consequently, the option for corporate taxation is ruled out for the first (short) fiscal year.

In the case of companies headquartered outside Germany that solely generate income that is subject to the deduction of tax from investment income or the deduction of tax on the basis of Section 50a of the German Income Tax Act (EStG) and the income tax or the corporation tax is consequently regarded as paid as according to Section 50 [2][1] German Income Tax Act (EStG) or Section 32 [1] Corporate Income Tax Act (KStG) respectively, the application must be submitted to the German Federal Central Tax Office (BZSt) according to Section 1a [1][4] Corporate Income Tax Act (KStG).

The domestic income actually generated is relevant to the question of whether the applying company solely generates income that is subject to the deduction of tax. The existence of other income with which the company is not subject to German taxation (e.g. foreign income) is irrelevant here. In the application, the declaration must be made on the basis of the income expected for the current fiscal year. The abstract possibility under the articles of incorporation of also generating other income is irrelevant in this respect.

If income that is not solely subject to the deduction of tax from investment income or the deduction of tax on the basis of Section 50a German Income Tax Act (EStG) is generated within the period of validity of the option, in contrast with the declaration in the application, and the income tax or corporation tax are consequently not regarded as paid as according to Section 50 [2][1] German Income Tax Act (EStG) or Section 32 [1] Corporate Income Tax Act (KStG) respectively, a change of responsibility occurs. The taxpayer must inform the previously responsible tax authority of the change in its circumstances. However, the change of responsibility does not affect the validity of the option.

The option can be exercised for the first time for fiscal years that start after December 31, 2021 (Section 34 [1a] Corporate Income Tax Act (KStG)). An option application can be submitted at any time. However, the application must be received by the responsible tax authority no later than one month before the start of the fiscal year in which the option is to take effect. In the event of a fiscal year that is the same as a calendar year, therefore, the application must be submitted no later than November 30 of the preceding year, subject to Section 108 [3] of the German Fiscal Code (AO).

A late application is ineffective and not automatically regarded as an application for the next fiscal year. Rather, a new application must be submitted for effective exercising of the option for a fiscal year that starts on a different date from that designated in the application that was ineffective due to lateness.

If no refusal is issued, the option becomes effective upon receipt by the responsible tax authority and is valid from the fiscal year for which it was requested for the first time. There is no need for a further application for the subsequent fiscal years if the essential conditions for the option are continuously in place.

The option is valid for as long as the essential conditions for the option are in place: in particular, the essential conditions must remain in place throughout. Under the essential conditions of Section 1a [4][4] to [7] Corporate Income Tax Act (KStG), the option is terminated by law. A return option can be issued on request (cf. Section 1a [4][1] to [3] Corporate Income Tax Act (KStG)).

A return to transparent taxation is issued either on request (cf. Section 1a [4][1] to [3] Corporate Income Tax Act (KStG)) or if the essential conditions for the option are no longer in place, i.e. if:

• the opting partnership continues to exist, but the essential personal conditions for the option for corporate taxation are no longer fulfilled (Section 1a [4][4] Corporate Income Tax Act (KStG); e.g. if the corporation tax obligation ceases to apply in the country of domicile or in the event of a change of form of the commercial partnership or partnership company to a company constituted under civil law);
• the opting partnership is converted to a corporation (Section 1a [4][7] Corporate Income Tax Act (KStG)), or;
• the penultimate shareholder leaves the opting partnership (Section 1a [4][5] and [6] Corporate Income Tax Act (KStG)).

A return to transparent taxation is possible on request. This requires an application no later than one month before the start of the first fiscal year in which the opting company is no longer to be taxed as a corporation. In the event of a fiscal year that is the same as a calendar year, therefore, the application must be submitted no later than November 30 of the preceding year, subject to Section 108 [3] of the German Fiscal Code (AO).

The option period ends immediately once the essential conditions are no longer in place, i.e. it may be that a return to transparent taxation becomes necessary during the year. The responsible tax authority must be informed immediately if the essential conditions are no longer in place.

In tax terms, a name change has no effect on the validity of the option, as the legal entity and the entity subject to taxation remain unchanged. If a change to the shareholder structure is associated with this, the essential conditions for the option must be verified again. The responsible tax authority must be notified of any name change.

The application for an option for corporate income taxation must be submitted by the commercial partnership or partnership company in accordance with the officially prescribed data record by remote data transmission (Section 1a [1][2] German Corporate Income Tax Act), i.e. electronically via the Online Portal of the Federal Central Tax Office (BZSt Online Portal; BOP) for the area of responsibility of the Federal Central Tax Office (BZSt).

The BZSt Online Portal is available at www.elsteronline.de/bportal. The application via the Online Portal of the German tax authorities‘ „My ELSTER“ is not possible for cases in which the BZSt is responsible.

To access the BZSt Online Portal, you can use your existing BOP-certificate or alternatively an existing "ELSTER certificate". If you do not have either a BOP-certificate or an ELSTER certificate, you must register for electronic data communication and apply for a BOP-certificate in order to use the BZSt Online Portal. Please note that the registration process can take up to six weeks.

To begin the registration process, you will be asked for your BZSt number and a secret code. You can receive this information by sending an informal letter with the subject "Application for approval/registration for electronic transmission of the application for an option under Section 1a Corporate Income Tax Act via the BZSt Online Portal" to the following address:

Bundeszentralamt für Steuern
Referat St I B 1 - Option § 1a KStG
An der Küppe 1
53225 Bonn

For identification purposes, this letter must contain details of the applicant (surname, first name, company, street, house number or P.O. Box, post code, city) and an e-mail address for transmission of the authorization certificate.
In response to this letter, you will receive the access data required for actual registration in the BZSt Online Portal (BZSt number and a secret code). For the rest of the registration process and the required information on electronic data communication, please refer to "Electronic Data Communication".

The application form for an option for corporate income taxation pursuant to Section 1a [1] Corporate Income Tax Act or the application for a re-option pursuant to Section 1a [4] Corporate Income Tax Act is not stored in the BZSt Online Portal, but can be accessed via the link under the heading "Forms", completed electronically and saved as a pdf file. The pdf file (including required supporting documents) can then be uploaded and sent via the BZSt Online Portal using the "Submission of supporting documents" form. It is not permissible to submit applications on forms that you have created yourself. This also applies to forms with identical content.

To verify the essential conditions, further documents must be enclosed with the application:

• a copy of the resolution regarding the application (approval from all shareholders or approval from the majority of shareholders required according to the articles of incorporation, subject to a minimum of three quarters of the votes cast. In the case of foreign companies, if company law stipulates a higher formal requirement or approval requirement, this shall apply);

• if the management of the company is based abroad:

  • documentary evidence that the company is subject to a tax obligation comparable to German unlimited corporation tax liability in the country in which the management is based (e.g. current corporation tax assessment or confirmation of the foreign state) and
  • a tax residence certificate must be submitted to the responsible tax authority as well as
• articles of incorporation.

The supporting documents to be submitted must be attached to the electronic application - via the "Submission of supporting documents" form - and sent.

If the full name of the company is too long for the field provided for this purpose in the application form, an abbreviated version must be entered in the form. It must be possible for the application to be clearly identified. At the same time, the full name of the company must be written on a supplementary sheet and attached to the electronic application - via the "Submission of supporting documents" form - and sent.

Addresses outside Germany must be entered in full in lines 8 and 11 of the form, taking the country-specific features into account.

Sample:

• Line 8 Street: rue de fiscal
• Line 8 Street number: 3
• Line 8 House number suffix: appartement 549
• Line 11 Postal code and town/city (outside Germany): 75006 Paris
• Line 11 Country (only state if outside Germany): France

or

• Line 8 Street: Financial Street
• Line 8 Street number: 11
• Line 8 House number suffix: Suite 1157
• Line 11 Postal code and town/city (outside Germany): New York, NY 10005
• Line 11 Country (only state if outside Germany): USA

When the essential conditions as per Section 1a Corporate Income Tax Act are in place, the application is effective on receipt by the BZSt. The file number under which the application is registered will be communicated via the BZSt Online Portal at www.elsteronline.de/bportal.

In the event of questions and in the context of the procedure for relief from German withholding tax (refunds and exemptions) on the basis of agreements to eliminate double taxation, the corresponding reference number must be stated.

The status of the opting company is taken into account in the procedure for relief from German withholding tax. To this end, a check is performed as to whether the essential conditions for the option are and have continuously been in place.