Read our insights, reports and more

Private assets for tax purposes are "only" subject to taxation under the provisions of Sect. 17, 20(2) and 23 of the German Income Tax Act. However, in the case of Sect. 23 of the Income Tax Act, the income tax relevance is limited in terms of time and substance. While the time dimension covers a maximum of 10 years, "other assets" than real estate are also covered in terms of substance. However, "items of daily use" are excluded. The Federal Fiscal has now had to clarify the scope of this provision once again.

In its Circular of 19 December 2025, the German Ministry of Finance updated its Circular of 12 December 2023 (BStBl. I 2023, p. 2179) on the tax treatment of employment income under double taxation agreements (DTAs). Note: The paragraph numbers below refer to this Circular.

The partially remunerated transfer of individual assets has recently caused a stir, particularly in the area of privately held tax assets. This is where the "strict separation theory" applies, according to which, for the purpose of determining the profit from a private sale (e.g., Sect. 23 of the Income Tax Act), a division into a fully remunerated and a fully non-remunerated part is made according to the ratio of the consideration to the market value of the transferred asset (Judgment of the Federal Tax Court dated March 11, 2025, file number IX R 17/24). In the area of taxable business assets, there is still uncertainty regarding this issue, which the fourth chamber of the Federal Tax Court has now decided in favor of the "modified separation theory."

Prohibitions and restrictions on deductions for business expenses can be found in numerous provisions in German tax law. In particular, Sect. 4 et seqq. of the German Income Tax Act contain comprehensive prohibitions on deductions, although Sect. 4g of the Income Tax Act also includes "unsystematic" provisions to mitigate immediate taxation. However, the vast majority of provisions restrict the deduction of business expenses. Sect. 4k of the Income Tax Act, for example, contains a very comprehensive prohibition on deductions, induced by EU law, for expenses that are related in the broadest sense to "tax incongruities" between countries. The "license barrier" of Sect. 4j of the Income Tax Act, on the other hand, has been abolished with effect from the 2025 assessment period (Sect. 52(8c) sent. 3 of the Income Tax Act). For other provisions – such as Sect. 4i of the Income Tax Act covering special operating expenses in a cross-border context – repeal is only being discussed at this stage. The Federal Fiscal Court has now ruled again on the first applicability of Sect. 4f of the Income Tax Act ("assumption of obligations").

Sect. 233a(1) sent. 1 of the General Fiscal Code (“Abgabenordnung”) specifies a canon of taxes on which reimbursement interest is payable – these taxes include the German trade tax. If a business receives such reimbursement interest, the question arises whether it must in turn pay tax on it as business income. Income taxes are then deducted from the 1.8 per-cent “credit interest” (Sect. 238(1a) General Fiscal Code), resulting in an “imbalance”: Debit interest under Sect. 233a General Fiscal Code is not deductible from income taxes as an ancillary tax payment (“steuerliche Nebenleistung”; Sect. 3(4) no. 4 General Fiscal Code; Sect. 4(5b) Income Tax Act), but credit interest is fully taxable. The German Federal Fiscal Court has now confirmed this treatment for the trade tax (file number IV R 16/23).

On 5 January 2026 the 147 countries and jurisdictions included in the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS Inclusive Framework) agreed on the main elements of a package for the Side-by-Side System in OECD global minimum taxation.

The repurchase of own shares in a corporation is a well-known means of providing shareholders with cash while not triggering a distribution. However, the fact that it can be a tax pitfall must be taken into account in spite of all the enthusiasm. The negative effects do not only extend to income taxes, where the shareholder's participation quota in a corporation is measured without taking into account the company's own shares. Problems can also arise with real estate transfer tax, where exceeding participation thresholds can also be harmful.

The income taxation of German partnerships has a special feature in the form of "special business assets" (“Sonderbetriebsvermögen”). The consequences of an allocation of assets to the special business assets are far-reaching. These assets do constitute business assets (“Betriebsvermögen”), and unlike private assets for tax purposes, a non-taxable sale is no longer conceivable. In addition, in the case of commercial partnerships, special business assets are also included in the trade tax assessment basis. The German Federal Fiscal Court has described the "subtleties" of a contribution to and withdrawal from the special business assets in detail in a new ruling (file number IV R 20/23).

Alterations to a “tax regime” are notoriously difficult. Whether it is the transition from the tax-ation of capital income (Sect. 20 of the German Income Tax Act) to the flat-rate withholding tax regime (Sect. 32d of the German Income Tax Act) or the fundamental switch from the credit method to the half/partial income method for the taxation of corporations and their shareholders, frictions always arise at the intersection of the regimes. Which problems arose during the transition from the previous system of semi-transparent taxation of public investment funds to an opaque system on December 31, 2017?

The liability to trade tax (under Sect. 2 of the Trade Tax Act) is a prerequisite for any trade tax being charged in the first place. In many cases, this prerequisite is fulfilled without any problems – for example, in the case of an original commercial (“trading”) activity pursuant to Sect. 15(2) of the Income Tax Act (picked up by Sect. 2(1) sent. 2 of the Trade Tax Act). The situation is even more straightforward for corporations due to an assumption of a trad-ing activity by law (Sect. 2(2) sent. 1 of the Trade Tax Act). However, in which manner are foundations (“Stiftungen”) to be taxed under the Trade Tax Act?

From 1 January 2026 the reduced rate of 7 percent applies again to food, while beverages continue to be taxed at 19 percent. This change not only affects restaurants, but also canteens, food-trucks and event catering. For businesses this means that prices, cash register systems and processes have to be updated on time. The risks of errors and liability are particularly high at the turn of the year and in handling vouchers.

The European Court of Justice (ECJ) has clarified that tooling supplies, as they are known, are to be considered distinctly for VAT treatment and are not automatically an ancillary supply to the supply of parts, especially if the goods are not supplied in the same way. The judgement therefore has a crucial effect on the automotive and supplier industry and a direct impact on contract drafting, invoicing and input tax deduction.

Since 1 January 2026 an important change came into force for all employers: the old paper-based procedure for reporting contributions to private health and private care insurance was replaced by a completely electronic data exchange procedure. The aim of this transition is to simplify the processes involved with payroll deduction, reduce sources of error and make the tax treatment of premiums for privately insured employees more efficient and legally certain.

Active pensions, electronic allowances, income thresholds, electric cars – as 2026 begins, employers are again facing numerous challenges in payroll and social security. These have come about from recent court decisions, the authorities changing their interpretations and new legal regulations.

German tax authorities appear to be re-evaluating the availability of withholding tax relief on dividend distributions to US-owned German entities treated as disregarded for US tax purposes. While no formal denial has yet occurred, recent information requests indicate a potential shift in administrative practice with significant implications for US investors.

Electromobility continues to gain importance—and there are also significant new developments in tax law: Starting January 1, 2026, the electricity price allowance will come into effect. Its purpose is to enable both employers and employees to settle electricity costs much more easily when the charging of a company car is initially paid privately, for example via a home charging station. The basis for this is the average annual electricity price for private households published by the Federal Statistical Office. In the future, employers can choose between providing proof of actual costs and using the new electricity price allowance. This not only reduces administrative effort but also allows for optimal tax treatment when reimbursing electricity costs.