Federal Fiscal Court decision: Time limits in the taxation of private disposal transactions (section 23 of the Income Tax Act)

The significance of points in time and time limits for taxability concerning income taxes

Periods and points in time play a role in many areas of income tax law. Most recently, the Federal Fiscal Court's judgement of 17 Dec 2025 (I R 9/23, Federal Tax Gazette [Bundessteuerblatt–BStBl.] II 2026, p. 468) once again illustrated the distinction between the two concepts in the context of succession on reorganisations (section 4(2) of the Reorganisation Tax Act [Umwandlungssteuergesetz–UmwStG] and similar provisions). One way in which holding periods arise is in the application of the German transposition of the EU Parent-Subsidiary Directive (section 43b of the Income Tax Act). This permits a reduction of withholding tax to 0% only where the related minimum shareholding threshold of 10% (section 43b(2) sentence 1 no. 2) has been maintained for at least 12 months (section 43b(2) sentence 4). As an absolute peculiarity among the time limits under the Income Tax Act, “this holding period” may also still be “completed after the point in time at which the capital gains tax arises under section 44(1) sentence 2” (section 43b(2) sentence 5).

Other periods of time are found, for example, in section 6(2) sentence 1 of the Foreign Transactions Tax Act [Außensteuergesetz–AStG], which requires, for the exit taxation rules to apply, that resident tax liability as defined by section 1(1) of the Income Tax Act has existed for at least a total of seven years within the twelve years preceding the events referred to in section 6(1) sentence 1 nos. 1 to 3 (referenced in section 19(3) sentence 3 and section 49(5) sentence 3 of the Investment Tax Act [Investmentsteuergesetz–InvStG]).

By contrast, the provisions of the Corporate Income Tax Act [Körperschaftsteuergesetz–KStG] focus on specific points in time in relation to distributions, for example (section 8b(4) sentence 1, the start of the calendar year), as does trade tax (section 9 nos. 2a and 7 of the Trade Tax Act [Gewerbesteuergesetz–GewStG], the start of the assessment period [Erhebungszeitraum]). In both cases, full tax liability for these types of tax arises if these points in time are not observed, which the Federal Fiscal Court regards as constitutionally unobjectionable (Federal Fiscal Court judgement of 18 Dec 2019, I R 29/17, Federal Tax Gazette II 2020, p. 690). For corporate income tax, the strict reference to the calendar year is at least somewhat softened by the retroactive effect of section 8b(4) sentence 6 of the Act, although the “contours” of that provision have still not been fully clarified (e.g. Federal Fiscal Court of 6 Sep 2023, I R 16/21, Federal Tax Gazette II 2024, p. 778). Likewise, the simple deduction under section 9 no. 1 sentence 1 of the Trade Tax Act, intended to avoid a cumulation of the two real property taxes (section 3(2) of the Fiscal Code) – trade tax and real property tax [Grundsteuer] – is only granted for property that formed part of the business’s business assets at the start of the calendar year (section 20 of the Trade Tax Implementation Regulation [Gewerbesteuer-Durchführungsverordnung–GewStDV]).

The time limitation of private disposal transactions under section 23 of the Income Tax Act

Similar questions arise as to the taxability of other income under section 22 no. 2 of the Income Tax Act in conjunction with section 23 for “private disposal transactions” involving assets held as private property for tax purposes. Under section 23(2), such income is subsidiary (e.g. Federal Ministry of Finance Circular of 14 May 2025, Federal Tax Gazette I 2025, p. 1330, para. 131) to the other categories of income under section 2(1) sentence 1, “insofar as it falls within those categories”.

One condition for taxability under section 23(1) is the “period between acquisition and disposal”. For “real property and rights subject to the provisions of civil law relating to real property”, this period is “no more than ten years” (section 23(1) sentence 1 no. 1 sentence 1); for other assets, it is “no more than one year” (section 23(1) sentence 2 no. 1 sentence 1). Where such assets generate income from their use as a source of income in at least one calendar year, the period is extended to ten years (sentence 4). Finally, section 23(1) sentence 1 no. 3 contains a rule for assets where the disposal actually occurs earlier than the acquisition (a “short sale”).

The question of how these time limits are to be calculated turns on several issues. First, there is the question of how the terms “disposal” and “acquisition” are to be understood. In both cases, the Act also provides legal fictions for transactions of these kinds. For example, the transfer of an asset into the taxpayer’s private property by way of withdrawal or cessation of business is treated as equivalent to an acquisition (section 23(1) sentence 2). This legal fiction also raises the question of the acquisition cost to be applied, which must likewise be set notionally (section 23(3) sentence 3; on doubtful cases, see Federal Fiscal Court judgement of 6 Dec 2021, IX R 3/21, Federal Tax Gazette II 2022, p. 406). On the disposals side, section 23(1) sentence 5 provides for no fewer than two legal fictions, which are also given notional disposal prices (section 23(3) sentence 2). Finally, section 23(1) sentence 4 provides for “both sides” that “the acquisition or disposal of a direct or indirect interest in a partnership of property...is treated as the acquisition or disposal of the underlying proportionate assets”.

Calculating time limits under section 23(1) of the Income Tax Act

The calculation of the “no more than ten years” or “no more than one year” time limit is, moreover, contentious in view of the distinction between the underlying obligation and the transfer of title. In its settled case law, the Federal Fiscal Court holds that “for the purpose of calculating the period between acquisition and disposal...the points in time at which the underlying contracts were concluded are basically determinative” (Federal Fiscal Court judgement of 26 Oct 2021, IX R 12/20, Federal Tax Gazette II 2022, p. 400, para. 14, with further references), while the transfers of title are generally irrelevant for this purpose. A legal transaction subject to a condition precedent under section 158(1) of the Civil Code is likewise binding on the parties in this sense. If the point in time at which the condition precedent is satisfied falls outside the disposal period, it is therefore irrelevant to taxation under section 23(1) sentence 1 no. 1 (Federal Fiscal Court judgement of 10 Feb 2015, IX R 23/13, Federal Tax Gazette II 2015, p. 487).

The Income Tax Act also resolves certain individual questions concerning these points in time: under section 23(1) sentence 3, if the acquisition is without consideration, the individual successor in title is attributed the predecessor's acquisition of the asset or its transfer into private property for the purposes of section 23. This rule is also extended beyond the statutory provision to cover universal succession as well (Explanatory Notes to the Income Tax Act [Einkommensteuer-Hinweise–EStH] 23, “disposal period”, second indent).

In the context of a complaint against denial of leave to appeal, the Federal Fiscal Court has now once again confirmed its settled case law on the relevance of the underlying contractual transaction. In the view of the ninth chamber ( IX B 24/26), this reflects “the underlying principle on which the taxation of private disposal transactions is based, namely, that the taxpayer has economically appropriated increases in the value of assets within a certain period; this already occurs when the obligatory transaction is concluded”. At the same time (para. 6), the ninth chamber indicated that calculation by reference to the obligatory transaction is only determinative “in principle”. If at the time of the obligatory transaction “not all contracting parties are bound yet by their declaration in this way, the determining event is that by which the binding effect, or the full validity of the contract, is brought about”.