Cooperative partnerships

Civil Law partnerships and other forms of cooperative partnerships

Scenario: Two theatres collaborate

For a performance, Theatre A collaborates with Theatre Group B. Theatre Group B provides artistic services. Theatre A provides staff and spaces and/or handles administrative work.

Variant 1: Cooperative partnership as an exchange of services

An agreement specifies the tasks for the joint project without either party paying the other.

  • The tax office considers this an ‘exchange of services’ and, therefore, economic activity. This is a fee-based cooperative partnership, if even there is no payment.
  • Except in case of exemption, the services will be subject to VAT. However, input taxes may be deducted.
  • If Theatre A or Theatre B are non-profit organisations, the exchange of services may establish economic activity (Section 14 of the German Fiscal Code).

If not specified, the tax office will assume a customary fee as the net value of the services. It is better to invoice services at clear amounts.

Variant 2: Cooperative partnership with reimbursement

No exchange of services is agreed, but reimbursement of one theatre for services, such as marketing and administrative work, from the partner is agreed. An allowance is also possible.

Publicly, only one partner will be responsible for the project. This must be specified and implemented clearly. For example, although Theatre A provides space and certain staff, only Theatre B will act as the organiser and sign contracts.

Important: Original receipts for project sponsors

Under this model, original receipts as must be posted as transitory items and submitted by Theatre A and addressed to Theatre B. If an original receipt is addressed to Theatre A and only a copy is submitted, this will represent an exchange of services subject to VAT.

Variant 3: Cooperative partnership in form of a publicly-recognisable civil law partnership

If Theatre A and Theatre B both act as representatives, a publicly-recognisable civil law partnership is normally established as the project sponsor.

  • The civil law partnership is the tax subject for VAT and trade tax purposes.
  • For taxation, project revenue (profit or losses) is divided between the partners of the civil law partnership. Profit is subject to income and corporate tax.
  • The civil law partnership must keep its own accounting records, register with the tax office, and file advance VAT returns if liable for VAT.
  • Management and accounting may be delegated to a partner.
  • A partnership agreement is strongly recommended.

Important: A civil law partnership may be formed spontaneously and unintentionally—without agreeing on it! This is not only possible for joint theatre projects, but also, e.g., if theatres jointly apply for funding together.

Trade income:

If the civil law partnership organises a theatre performance which includes F&B services, the trade income from F&B may rub off onto the non-trade ticket income. The civil law partnership will then generate trade income and may have to pay trade tax.

Non-profit purposes:

If a civil law partnership formed by non-profit organisations only generates income by selling tickets, this income may be assigned to dedicated activity. If, for example, income from F&B is trade income, economic activity will be established.

Working groups

In case of a working group (Section 2a of the German Trade Tax Act [Gewerbesteuergesetz (GewStG)], only formed for a works contract), the partners are the tax subject for trade tax purposes.

Cooperative partnership checklist

  • What are the tax consequences (VAT, corporate tax, income/corporate tax)?
  • When is economic activity established?
  • Are tax allowances exceeded (small business entrepreneurs)?
  • Was liability considered (civil law partnership: all partners liable)
  • Who will prepare and keep accounting records?
  • What will you do if additional funds are needed?
  • Is the partnership publicly represented by only one or all partners?

Summary

Financial risk? Form a limited liability company or entrepreneurial company!

In case of a longer collaboration with greater financial risk, a company with limited liability, i.e., a limited liability company or an entrepreneurial company with limited liability, may be better than a civil law partnership.

Joint theatre project? Three possibilities:
  1. Exchange of services (for a fee)
  2. Reimbursement
  3. Civil law partnership as the sponsor
Important questions:
  • Exchange of services/hidden compensation?
  • Who is the public representative?
  • Is a civil law partnership formed?
  • Tax consequences?

Questions and answers:

  • Non-profit organisations may provide resources to other non-profit organisations for non-profit purposes without forming a civil law partnership. However, exchanges of services, such as something in return for use of the spaces, may not be provided.

    Non-profit organisations may provide resources to other non-profit organisations for non-profit purposes without forming a civil law partnership. However, exchanges of services, such as something in return for use of the spaces, may not be provided.

  • Yes, for example, by forming an entrepreneurial company with limited liability for 1 year. But current liability risk should be determined first. When not acting as, e.g., the organiser, the director won’t be liable for public safety. In certain cases, the director may be liable for, e.g., breaches of duty, as the managing director of an entrepreneurial company with limited liability.

    Yes, for example, by forming an entrepreneurial company with limited liability for 1 year. But current liability risk should be determined first. When not acting as, e.g., the organiser, the director won’t be liable for public safety. In certain cases, the director may be liable for, e.g., breaches of duty, as the managing director of an entrepreneurial company with limited liability.

  • No, a civil law partnership will only be formed if they both have own events and/or appear in public. Forming a civil law partnership would probably not be beneficial.

    No, a civil law partnership will only be formed if they both have own events and/or appear in public. Forming a civil law partnership would probably not be beneficial.

Tax consultation makes sense!

Partners of a civil law partnership, like board members of an association, are jointly and severally liable—including for taxes.

This is why tax matters of cooperative partnerships should be discussed with a tax advisor. Otherwise, audits may result in back payments even years later. The German Federal Court of Justice confirms: Not getting tax advice despite lacking the necessary expertise is an act of negligence and leaves you liable for any unpaid taxes!