Read our insights, reports and more

The European Union Parent-Subsidiary-Directive aims to eliminate economic double taxation within a corporate group in the case of cross-border distributions of profit. To do this it avoids burdens from withholding tax on distributions within the EU, among other things. In its implementation in Germany, in section 43b of the Income Tax Act [Einkommensteuergesetz–EStG], full exemption from withholding taxes is tied to a twelve-month holding period and a minimum shareholding of 10%. Alongside this is an exception under section 43b(1) sentence 4 for investment income as defined by section 20(1) no. 1 received in connection with the liquidation or reorganisation of a subsidiary. The Federal Fiscal Court has now ruled on this particularity (file ref. VIII R 8/24).

The ninth chamber of the Federal Fiscal Court has issued a ruling on the conditions for off-setting losses against other income. In accordance with long-established case law, the pro-visions in section 22 no. 3 sentences 3 and 4 of the Income Tax Act and section 23(3) sen-tences 7 and 8 of the Income Tax Act are constitutional. In typical cases, a waiver on grounds of equity is not an option.

The distinction between the seven types of income under section 2(1) sentence 1 of the Income Tax Act [Einkommensteuergesetz–EStG] is significant in various contexts, such as when determining the tax rate (section 32a vs. section 32d). From the taxpayer’s perspective, however, the tax base differs due to the partial income method when distinguishing between section 17 (income from business operations) and section 19 (income from employment). From the employer’s perspective, the obligation to withhold income tax only applies to income from employment (sections 38 and following). The Federal Fiscal Court [Bundesfinanzhof–BFH] has now again ruled on this distinction (file ref. IX R 1/25).

Trade tax liability under section 2(1) of the Trade Tax Act [Gewerbesteuergesetz–GewStG] is substantively linked to business activity under section 15(2) of the Income Tax Act [Einkommensteuergesetz–EStG]. However, there are differences in the timing between income tax and trade tax. Trade tax liability under section 2(1) of the Trade Tax Act only arises once all the conditions that constitute business activity have been met and the business activity has been started. Income tax, on the other hand, covers all business activities starting from the first preparatory step to open a business. With regard to notional business activities (section 15(3) of the Income Tax Act), which also give rise to a trade tax liability, the Federal Fiscal Court [Bundesfinanzhof–BFH] has again now ruled on this issue (file ref. IV R 5/24).

For many years now, the trade tax burden has been based solely on the assessment basis of “trade income” (section 6 of the Trade Tax Act [Gewerbesteuergesetz–GewStG]). Although this is calculated from the base amount determined under the Income Tax Act and the Corporate Income Tax Act (section 7 sentence 1 of the Trade Tax Act), it is modified by the provisions of section 7 sentence 2 and following of the Trade Tax Act, sections 7a and 7b, and the add-backs and deductions under sections 8 and 9, particularly to implement the nature of the trade tax as a tax on assets. This also includes an add-back for the temporary transfer of rights, on which the fourth chamber of the Federal Fiscal Court [Bundesfinanzhof–BFH] has now ruled (file ref. IV R 26/23).

Exchanging shares under section 21 of the Reorganisation Tax Act [Umwandlungssteuergesetz–UmwStG] allows a group of companies to be rapidly restructured: shares conferring a controlling interest in one corporation are contributed to another corporation in exchange for the issuance of new shares. If an application is made, the exchange can be valued below fair market value, e.g., at the carrying amount. What’s more, under section 8b(2) of the Corporate Income Tax Act [Körperschaftsteuergesetz–KStG] there is no blocked period for groups in which all the entities are corporations.

In the case of partners in a partnership with limited liability, the transparent taxation under section 15(1) sentence 1 no. 2 of the Income Tax Act is restricted in loss situations. The limited partner may offset and deduct his losses directly only to the extent that he also bears them economically (section 15a(1) of the Income Tax Act [Einkommensteuergesetz–EStG]). Otherwise, pursuant to section 15a(2) of the Income Tax Act, the loss is merely assessed as offsettable [verrechenbar]. In that case, it reduces exclusively future profits from the interest in that specific limited partnership. The Federal Fiscal Court [Bundesfinanzhof–BFH] has now issued a detailed opinion on the special features of paragraph 1a of section 15a of the Income Tax Act, in particular regarding its constitutional assessment (file ref. IV R 27/23).

The only silent partnership in commercial law is that under sections 230 and following of the German Commercial Code [Handelsgesetzbuch–HGB]. This is an internal partnership without any assets of its own. Under income tax law, it essentially constitutes a “fully fledged” partnership if the silent partnership has been established in relation to a business operation or if the conditions for the notional business activities under section 15(3) of the Income Tax Act are met (Explanatory Notes to the Income Tax Act [Einkommensteuer-Hinweise–EStH] 15.8(6), “Atypical silent partnership”). Procedural law is also challenging, particularly in cases where the atypical silent partnership has been established in relation to a partnership. The first chamber of the Federal Fiscal Court [Bundesfinanzhof–BFH] has now ruled on this matter (file ref. I R 13/25, previously I R 4/13).

A “withdrawal” (Sect. 4(1) sent. 2 of the Income Tax Act) of business assets generally leads to the realization of hidden reserves. However, this requires the taxpayer to perform an act of withdrawal. Sect. 4(1) sent. 3 and 4 of the Income Tax Act creates a fictitious withdrawal if German taxation rights are excluded or limited. The Federal Tax Court (file numbers I R 41/22, I R 6/23) - in agreement with the tax authorities - considers the elements of the legal rule regarding the loss of the German right to tax to be fulfilled even if this impairment of the right to tax is not triggered by the taxpayer, but by a change in the legal framework (“passive loss of the German right to tax (“Entstrickung”)”).

The sale of a participation in a partnership triggers consequences under trade tax law that “require some getting used to”. If a natural person holding a direct interest sells his participation, no trade tax is due at all, except in the cases specified in Sect. 18(3) of the Reorg Tax Act (“Umwandlungssteuergesetz”). If, on the other hand, a corporation sells its participation, trade tax is due in every case (Sect. 7 sent. 2 no. 2 of the Trade Tax Act), which the partnership whose participation was sold owes itself. The Federal Tax Court had to decide (file number III R 38/22) whether trade tax is due for the selling corporation if the sold partnership is not yet subject to trade tax under Sect. 2 of the Trade Tax Act.

Severance payments are made for the loss of a job. Case law from the Federal Tax Court (“Bundesfinanzhof”) has clarified that such compensation constitutes income from employment within the meaning of Sect. 19 of the German Income Tax Act (e.g. Federal Tax Court, Judgement dated August 1, 2024, file number VI R 52/20, margin no. 31). But how is this addressed in a cross-border context? Do German double tax treaties permit such inclusion if the taxpayer is resident in the other contracting state? The Federal Tax Court has now ruled on this matter again (file number VI R 3/24).

The German trade tax aims to assess the taxable entity – the business operation (“Gewerbebetrieb”) – based on its own earning capacity, without regard to the personal characteristics of the taxpayer or their personal relationship to the taxable entity. In the case of foreign-related aspects of the trade tax, the so-called “territoriality principle” is to be applied. For taxpayers subject to resident income or corporate taxation who operate a business within the meaning of Sect. 2 of the Trade Tax Act, this territoriality must therefore be “established,” inter alia, through the deduction provided for in Sect. 9 no. 3 of the Trade Tax Act. The fourth chamber of the Federal Tax Court has now ruled on the special case of internationally active shipping companies (file number IV R 30/23).

The treatment of wages under German double tax treaties essentially follows the regulations of Art. 15 of the OECD Model Convention 2025. Only the state of residence is entitled to tax such income, “unless the employment is performed in the other contracting state.” The regulations in paragraph 2 of Art. 15 then establish exceptions to the source state’s competing right to tax. In this context, the Federal Tax Court has now once again had to rule on a treaty override (Sect. 50d(9) of the Income Tax Act). In cases of substantive errors, however, it can (unfortunately) also “change course” beforehand.

The Inheritance and Gift Tax Act is currently the subject of controversy due to political debates as well as pending decisions by the Federal Constitutional Court. The decision preannounced on the Federal Constitutional Court’s website in case 1 BvR 804/22 specifically concerns the new inheritance tax law, which had been implemented following the Federal Constitutional Court’s 2014 decision (Federal Constitutional Court, judgment dated Dec. 17, 2014, file number 1 BvL 21/12). The Federal Tax Court has now ruled in favor of the tax authorities in a judgment addressing temporal application issues arising from the transition to the new law (judgment of Nov. 20, 2025, file number II R 7/23).

The Federal Constitutional Court publishes an annual list of “planned decisions for the year 2026.” Among the numerous cases are six decisions related to tax law. Particular focus is placed on the constitutional assessment of Sect. 8c of the Corporate Income Tax Act in the context of the acquisition of more than 50 percent of the shares in a corporation, as well as a landmark decision on the inheritance tax benefits under Sect. 13a and 13b of the Inheritance and Gift Tax Act.

The question of how to determine “profit” is relevant in several areas of income tax law. In ad-dition to the assessment basis “profit” in Sect. 2(2) sent. 1 no. 1 of the Income Tax Act, such questions arise particularly in Sect. 4(4a) of the Income Tax Act, Sect. 34a of the Income Tax Act, but also with regard to the investment deduction (“Investitionsabzugsbetrag”) of Sect. 7g(1–4), 7 of the Income Tax Act. In this regard, the Federal Tax Court has now ruled that off-balance-sheet adjustments must also be taken into account when determining this “profit threshold”.