Federal Fiscal Court ruling: distinction between sale under section 17 of the Income Tax Act and wages under section 19 of the Income Tax Act

Distinguishing between the seven types of income under section 2(1) of the Income Tax Act

Section 2(1) sentence 1 of the Income Tax Act gives a conclusive list of the seven types of income that apply to natural persons (for the differing treatment of corporations subject to resident tax liability, see Federal Fiscal Court judgement of 6 Dec 2016, file ref. I R 50/16, Federal Tax Gazette [Bundessteuerblatt–BStBl.] II 2017, p. 324, para. 6). Even the “other” income under section 2(1) sentence 1 no. 7 and section 22 is, despite its name, not a “catch-all” category for taxing all earnings under income tax law but must meet specific criteria to be subject to taxation. For example, the situation is different when applying double taxation treaties, in which Art. 21 of the 2025 OECD Model Tax Convention (“other income”) does conclusively capture all income that cannot otherwise be classified (e.g., Federal Fiscal Court judgement of 11 Oct 2017, file ref. I R 42/15, para. 21; Federal Fiscal Court judgement of 16 Jul 2025, file ref. I R 13/22, para. 22).

In the case of resident income tax liability, the income under section 2(1) sentence 1 of the Income Tax Act is taxable without any further inquiry. In the case of non-resident tax liability (section 1(4); section 2 of the Corporate Income Tax Act [Körperschaftsteuergesetz–KStG]), the income must also qualify as domestic income (section 49 of the Income Tax Act; e.g., Federal Fiscal Court judgement of 7 Dec 2016, file ref. I R 76/14, Federal Tax Gazette II 2017, p. 704, para. 27; modified and expanded under section 2 of the Foreign Transactions Tax Act [Außensteuergesetz–AStG]).

Disputes have therefore frequently arisen regarding income from other benefits (section 22(3) of the Income Tax Act), as this represents the “last resort” for the tax authorities to charge income tax (list of taxable and non-taxable benefits in Explanatory Notes to the Income Tax Act [Einkommensteuer-Hinweise–EStH] 22.8, “is income from services as defined by section 22 no. 3 of the Income Tax Act” or “is not income from benefits as defined by section 22 no. 3 of the Income Tax Act”). As a further example, sales transactions involving real estate in private assets are not taxable if they are carried out after the ten-year period in section 23(1) sentence 1 no. 1 has expired (for calculation of the period based on the underlying transactions, see Explanatory Notes to the Income Tax Act 23, “Sale Period”).

Distinguishing between the types of income is important for several reasons. Income under section 2(2) sentence 1 no. 1 requires the profit to be determined as the tax base, whereas income under section 2(2) sentence 1 no. 2 requires the excess of income minus income-related expenses. Furthermore, certain allowances (section 23(3) sentence 5) or tax-exempt amounts (sections 17(3) and 16(4)) only apply to certain types of income. 

The applicable tax rate may also differ, as income from capital assets is subject to the “final withholding tax” [Abgeltungsteuer] under section 32d, and the deduction of withholding tax also has a final effect (sections 25(1) and 43(5) sentence 1). Furthermore, for income from capital assets, only saver’s tax-exempt amounts (section 20(9)) are generally deductible, but not actual income-related expenses (section 9). Far-reaching effects may also arise under section 2(1) sentence 2 of the Trade Tax Act [Gewerbesteuergesetz–GewStG] if income is classified as such from a business operation (section 15), even if there is no procedural link between income tax and trade tax (e.g., Federal Fiscal Court judgement of 28 May 2020, file ref. IV R 17/17, Federal Tax Gazette II 2023, p. 607, para. 21).

Distinguishing between the different types of income

Distinguishing between types of income is consequently a bone of contention. In some cases, the law itself prevents such disputes by mandating a “lateral commercial tainting” [gewerbliche Abfärbung], in the case of partnerships, for example (section 15(3) no. 1 first sentence first alternative of the Income Tax Act). Above (very low, see Explanatory Notes to the Income Tax Act 15.8(5)) de minimis thresholds, other income is simply added to income from business operations, so that only a single type of income is recognised. 

For sole proprietors [Einzelunternehmer], however, there is no such “commercial tainting” (e.g., Federal Fiscal Court judgement of 6 Jun 2019, file ref. IV R 30/16, Federal Tax Gazette II 2020, p. 649, para. 22). The distinction must therefore be made based on the defining characteristics of the individual types of income. The consequences of trade tax law (section 2(1) second sentence of the Trade Tax Act [Gewerbesteuergesetz]) mean that the question frequently arises whether section 15 or section 18 of the Income Tax Act should apply: “If a taxpayer engages in both freelance and trading activity, the activities must be separated to the extent that this is possible according to common understanding. This also applies if there are factual and economic links between the various activities. However, if, in the case of a single activity, both types of activity are so intertwined that they are inextricably interdependent, this creates a single activity (mixed activity which cannot be separated), which must be classified for tax purposes based on whether the freelance or the trading element predominates” (Federal Fiscal Court judgement of 22 Jan 2009, file ref. VIII B 153/07, under 2.a.). 

In other respects as well, the law partially prescribes the “hierarchy” of income types: section 20(8) sentence 1 of the Income Tax Ac establishes a comprehensive subsidiarity of income from capital assets, which is replicated, among other things, in the context of the question of the binding nature of the withholding tax deduction (section 43(5) sentence 2). The wording of section 22 no. 3 sentence 1 makes it clear that subsidiarity applies not only in relation to the other six types of income but even within the “other income” category of section 22.