BFH Insights

The legislature has prescribed correspondence principles for both hidden profit distributions and hidden contributions. Taxation at the company level thus has an impact on tax exemptions for shareholders (in the case of hidden profit distributions, Sect. 8b(1) sent. 2 ff. of the Corporate Income Tax Act). Conversely, the treatment at the shareholder level has an impact on the company's income (in the case of hidden contributions, Sect. 8(3) sent. 4 ff. of the Corporate Income Tax Act). The Federal Fiscal Court has now published a surprising ruling.

Reorganizations under the German Reorg Tax Act (“Umwandlungssteuergesetz”) are often favored for income tax purposes via the opportunity to apply book values upon request. However, a reorg also entails other legal consequences. In particular, the "retroactive effect" provisions of the Reorg Tax Act implement a different allocation of income in the retroactive period (“Rückwirkungszeitraum”, Sect. 2, 20(5, 6) Reorg Tax Act). In addition, provisions such as Sect. 4(2) of the Reorg Tax Act prescribe a special legal succession. The extent of this legal succession is controversial, particularly in the case of share for share exchanges (Sect. 21 of the Reorg Tax Act).

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.

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).

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?