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German Tax Updates in May 2026

1. Tax-Exempt Benefits That Can Help Attract and Retain Talent
2. Deductibility of Entertainment Expenses and E-Invoicing Compliance
3. Tax Incentives for EV Company Cars and Business Electric Vehicles
   
   
   

1.Tax-Exempt Benefits That Can Help Attract and Retain Talent

In Germany, from the perspective of attracting and retaining employees, it is becoming increasingly important not only to review salary levels but also to make use of fringe benefits that receive preferential tax treatment. In particular, amid continuing inflation and rising personnel costs, a simple salary increase can easily lead to higher social security contributions and overall personnel costs for the company, while the increase in the employees’ net take-home pay may be limited.

In this respect, by making use of benefits in kind and allowances that meet certain requirements, it is possible to increase employees’ effective disposable income while keeping company costs under control. For Japanese companies with German subsidiaries as well, these systems are worth considering when recruiting and retaining local talent, designing compensation packages for expatriates and local management, and reviewing employee benefit programs.

Benefits in Kind of up to EUR 50 per Month

Employers may provide employees with benefits in kind of up to EUR 50 per month, generally free from wage tax and social security contributions. On an annual basis, this amounts to a benefit of EUR 600, which can effectively increase the employees’ net income.

However, it is important to note that this system is treated not as a tax-free allowance but as an exemption threshold. In other words, if the monthly amount exceeds EUR 50 even by one cent, not only the excess amount but the entire benefit in kind may become subject to tax and social security contributions.

Cash payments are also not permitted. The benefit must be provided as a genuine benefit in kind. Examples may include gift vouchers, prepaid cards, or employee benefit platforms that meet certain requirements. Systems that are equivalent to cash or can be freely converted into cash may fall outside the scope of the preferential tax treatment.

For Japanese companies with German subsidiaries, it is important not to simply apply the employee benefit system of the Japanese parent company to the German subsidiary, but to confirm whether the arrangement qualifies as a “benefit in kind” under German tax law or not.

Meal Allowances, Company Canteens, and Meal Vouchers

Meal allowances are also a useful tool for improving employee satisfaction. Employers can provide meal subsidies up to a certain amount per working day. As of 2026, a meal subsidy of up to EUR 7.67 per working day is possible, of which the benefit-in-kind value is EUR 4.57, and the tax-free employer subsidy portion is EUR 3.10.

The benefit-in-kind value can either be taxed by the employer at a flat rate of 25% or treated as an employee contribution. In practice, this system is often used in combination with company canteens, meal vouchers, or digital meal subsidy solutions.

For Japanese companies with German subsidiaries, different arrangements may be considered depending on the type of workplace, such as company canteens for factories and logistics sites, and meal vouchers or digital meal subsidies for office employees. For companies where hybrid work has become common, it is also important to clearly define the treatment of office workdays and work-from-home days.

Mobility Subsidies Such as the Deutschlandticket

Subsidies for commuting costs and the use of public transportation are also easy-to-understand benefits for employees. From 2026 onwards, the monthly price of the Deutschlandticket is EUR 63, and if the employer bears this full amount, it represents a commuting-related benefit worth EUR 756 per year.

Subsidies for public transportation can reduce employees’ commuting costs while limiting tax and social security burdens. They can also be effective as a way of demonstrating the company’s environmentally conscious approach.

For Japanese companies with German subsidiaries in particular, mobility subsidies can be a highly practical benefit for office employees in urban areas, local employees commuting by public transportation, and employees who travel frequently for business. On the other hand, where such subsidies are used together with company car schemes or employer-provided parking, the wage tax treatment should be reviewed and clarified.

Recreational Allowance

A recreational allowance may also be considered as a way to support employees’ vacation and recovery. If the employer applies flat-rate taxation at 25%, the recreational allowance is treated as tax-free for the employee.

The annual maximum amounts are EUR 156 for the employee, EUR 104 for a spouse or life partner, and EUR 52 for each child. Depending on the employee’s family situation, this can be used as a family-oriented employee benefit, not just a benefit for the employee alone.

However, the recreational allowance must be used for recreation and recovery purposes, and the purpose of use should be documented and retained. If it is paid simply as additional remuneration, the preferential tax treatment may be denied.

Internet Allowance

As remote work and hybrid work have become established, the internet allowance is one of the more practical systems to use. Employers can subsidize employees’ internet costs up to EUR 50 per month, or EUR 600 per year.

In this case, if the employer bears flat-rate taxation at 25%, the amount is tax-free for the employee and no social security contributions arise. Another reason why this system is flexible and easy to use is that it can apply regardless of whether the internet is used for business or private purposes, and regardless of whether the employee works at the office or from home.

However, the subsidy amount must not exceed the internet costs actually borne by the employee. Therefore, when introducing the system, it is advisable to obtain declarations or evidence of costs from employees and retain them at the company.

For Japanese companies with German subsidiaries, it is important to clearly position this allowance in salary regulations or remote work policies so that it does not overlap with work-from-home allowances, communication cost subsidies, or the provision of IT equipment.

Health Promotion Measures

Health promotion measures are also tax-advantaged as a way to improve employee health management and well-being. Certified workplace health promotion measures can be provided up to EUR 600 per year without wage tax or social security contributions.

To qualify, the measures must be certified in accordance with the prevention guidelines under Sections 20 and 20b of Book V of the German Social Code. Examples may include certain health programs and certified courses relating to exercise, prevention, or stress management.

A point to note is that ordinary gym membership fees or discretionary fitness expenses are not always tax-exempt. If a company introduces such a system, it should confirm in advance whether the relevant program satisfies the tax requirements.

Important Prerequisite: Benefits Must Be Provided in Addition to Regular Salary

When making use of these tax-exempt benefits, it is especially important that they generally must be provided “in addition to the salary already owed.”

Arrangements that reduce part of an existing salary and replace it with tax-exempt benefits may not be accepted for tax purposes. If such treatment is adopted, the tax exemption or preferential treatment may be denied, creating a risk of additional wage tax and social security contributions.

Therefore, when introducing a new employee benefit system, it is necessary to carefully design the arrangement, including employment contracts, salary regulations, benefit policies, and how the benefits are shown on payslips.

How Japanese Companies Can Use These Benefits in Germany

At Japanese companies with subsidiaries in Germany, compensation systems are often designed under the leadership of the Japanese parent company. However, the German treatment of payroll taxation, social security, and employee benefits differs significantly from Japan, making it important to design benefits in line with local German tax rules.

In particular, there may be room to use tax-exempt benefits in the following situations:

• When revising salaries for local employees 
• When designing offer packages for new hires 
• When reviewing compensation for expatriates and local management 
• When establishing remote work or hybrid work systems 
• When expanding employee benefits to improve retention 
• When introducing HR measures with ESG or employee health management in mind 
  
  

In some cases, these systems can be used in parallel. If properly structured, they can effectively increase employees’ net take-home pay, while helping the company improve its competitiveness in recruitment and employee satisfaction.

At the same time, each system has detailed rules, including monetary limits, documentation requirements, method of provision, the requirement that the benefit be additional to salary, and requirements for eligible services. To avoid denial of the treatment in a future tax audit, it is essential to confirm the requirements before implementation and document the operating rules.

Practical Action Points

When Japanese companies review employee benefit programs for their subsidiaries in Germany, it is effective to consider not only simple salary increases, but also a compensation design that combines benefits in kind, meal allowances, transportation subsidies, internet allowances, and health promotion measures. By observing the limits and formal requirements of each system and reflecting them in salary regulations, employment contracts, and expense reimbursement rules, companies can build attractive compensation packages for employees while reducing tax risks.

2.Deductibility of Entertainment Expenses and E-Invoicing Compliance

In Germany, in order for business entertainment expenses to be deductible as business expenses for tax purposes, companies must maintain appropriate documentation showing the business purpose of the entertainment, the appropriateness of the amount, participants, purpose of the entertainment, date, location, and the form of invoice or receipt.

The Federal Ministry of Finance circular dated November 9, 2025 again set out detailed rules regarding documentation requirements where persons are entertained for business reasons in a restaurant or similar establishment. In particular, in connection with the e-invoicing system introduced from January 1, 2025, documentation management for entertainment expenses has become more important than before.

For Japanese companies as well, business meals with customers and business partners often take place with visitors from the Japanese parent company, sales representatives of the German subsidiary, or local management. Going forward, it will be necessary not only to retain restaurant receipts, but also to check consistency with e-invoices, cash register systems, TSE information, tip records, and internal expense reimbursement systems.

Entertainment Expenses Exceeding EUR 250 and E-Invoices

In Germany, the e-invoicing system has generally been introduced for domestic B2B transactions. For entertainment expenses as well, where the restaurant transaction exceeds the VAT small-value invoice threshold of EUR 250, the relationship with the e-invoicing system must be reviewed.

An e-invoice does not mean a simple PDF or image file, but an invoice that includes a structured electronic data component. Common examples include ZUGFeRD and XRechnung formats. By contrast, PDFs, image data, and paper receipts are generally treated as “other invoices,” even if they are sent electronically.

That said, at the time the entertainment takes place at a restaurant, it is also expected in practice that a conventional paper entertainment receipt or an electronic “other invoice” may first be issued, and then corrected or supplemented later by an e-invoice where necessary. In practice, it is important to establish a process that links and stores the paper receipt received immediately after the entertainment with the structured e-invoice data received later.

Small-Value Invoices, Standard Invoices, and Self-Prepared Entertainment Records

There are several types of documentation for entertainment expenses, depending on the amount and method of issuance. For small-value invoices of EUR 250 or less, simplified invoice requirements are accepted compared with standard invoices, whereas stricter invoice requirements apply for amounts exceeding EUR 250.

In addition, because Germany currently does not impose a mandatory cash register obligation on all businesses, some restaurants may not issue machine-generated entertainment receipts or e-invoices. Furthermore, where entertainment takes place outside Germany, it may not be possible to obtain receipts that satisfy German domestic formal requirements in the same way.

In such cases, in addition to the invoice from the restaurant, a self-prepared entertainment record created by the company becomes important. This should include the participants, purpose of the entertainment, business relationship, and payment details. However, a so-called “beer coaster” or simple memo alone is not sufficient documentation for tax purposes. In particular, if input VAT is to be deducted, the invoice requirements under VAT law must be satisfied.

Checking Cash Register Systems, TSE Information, and QR Codes

Where a restaurant uses an electronic cash register system to issue an entertainment receipt, the cash register data must be protected by a certified technical security device, known as zTSE or TSE.

In order to secure the tax deductibility of entertainment expenses supported by a machine-generated receipt, it is important to check whether the receipt contains certain information. Examples include the serial number of the electronic cash register system, the serial number of the TSE, transaction number, start and end time of the transaction, signature counter, and verification value.

Since 2024, receipts subject to the issuance obligation must show both the serial number of the electronic cash register system and the serial number of the TSE. This information may be printed in readable form on the receipt, or it may be embedded in a QR code.

Therefore, employees submitting expense claims and accounting staff should establish a process to confirm that the QR code on a receipt is not merely an advertising link or coupon, but contains TSE-related information. In practice, it may also be possible to use verification apps to check the content of QR codes.

Treatment Where the TSE Fails

Even if the required TSE information is not shown on an entertainment receipt, the deduction of the entertainment expense is not necessarily always denied immediately. For example, where there was a temporary failure of the restaurant’s TSE, it is important that this fact is clearly indicated on the receipt.

Specifically, if the receipt includes a note such as “TSE failed,” the deductibility of the entertainment expense may be accepted under certain conditions. However, rather than relying on such exceptional treatment, companies should make it a rule to obtain receipts that satisfy the formal requirements wherever possible.

In addition, where an invoice is issued several days after the entertainment, is not generated using an electronic cash register system, and is paid by a non-cash method such as bank transfer or credit card after receipt of the invoice, TSE information may not be required in some cases. In such cases, it is important that the payment method can be verified from the invoice, or that separate payment evidence is retained.

Treatment of Tips

In Germany, it is common to pay tips when entertaining guests. Tips can also be treated for tax purposes in the same way as entertainment expenses, provided they are properly evidenced.

Possible methods of documenting tips include recording the tip amount on the invoice and having it confirmed by the restaurant, or showing the tip amount on the machine-generated entertainment receipt. In particular, where tips are paid together with the invoice amount by credit card or cashless payment, care should be taken to ensure that the tip breakdown does not become unclear later during expense reimbursement.

In practice, recording the tip through the cash register system and having it reflected on the receipt provides stronger evidentiary value than handwritten additions. In recent years, self-order terminals and web ordering systems increasingly allow guests to enter a tip at the time of ordering or payment. In such cases, the tip is also recorded in the cash register system, making it easier to link with accounting records.

Where tips accrue to the restaurant operator itself, the VAT treatment and applicable VAT rate in relation to the main service may also become relevant. If a reduced VAT rate applies to restaurant meals, the VAT treatment of taxable tips paid to the operator must also be correctly reflected. The electronic cash register system must be programmed accordingly so that the correct VAT is shown on the invoice.

Retaining E-Invoices as Entertainment Documentation

Invoices for entertainment expenses may be issued and transmitted not only on paper, but also electronically. In such cases, the retention requirements differ depending on the format, such as e-invoices, PDFs, image files, or digital receipts.

Where an invoice is issued as an e-invoice, the structured electronic data component must be retained without modification. Information that the company must add, such as the purpose of the entertainment and the participants, may be added to a visualized invoice screen or PDF, but the original structured data itself must be retained unchanged.

In practice, it is necessary to establish a process that links the paper entertainment receipt, self-prepared entertainment record, and e-invoice data received later. Where an expense reimbursement system or document management system is used, these documents should be stored so that they can be reviewed together as one set of supporting documentation.

Points Reviewed During Tax Audits

The tax authorities do not view entertainment receipts merely as supporting documents for expenses. For entertainment expenses, they first check whether there is a business connection. For example, if a meal is held close to a family member’s birthday or a private event, or if children’s meals are included, additional explanations may be requested regarding the business purpose.

In addition, it is not sufficient simply to apply the mechanical treatment of deducting 70% of entertainment expenses and treating 30% as non-deductible. The purpose of the entertainment, participants, appropriateness of the amount, invoice requirements, possibility of input VAT deduction, payment method, and tip records must be reviewed comprehensively.

Furthermore, entertainment receipts may also be used to check consistency with other tax-related records. For example, if a business meal is recorded in City A on the same day that a vehicle logbook shows an appointment in City B more than 300 kilometres away, the entertainment receipt may become evidence of inconsistency with other records.

Practical Response for Japanese Companies

For Japanese companies with a subsidiary in Germany, entertainment expenses may be advanced not only to employees of the German entity, but also to visitors or expatriates from the Japanese parent company. In such cases, even if the documentation is sufficient under the Japanese expense reimbursement rules, it may not satisfy German tax requirements.

Therefore, German entities are advised to take measures such as the following:

• Include fields in the entertainment expense reimbursement form for participants, company names, purpose of entertainment, business relationship, payment method, and tip amount 
• For entertainment expenses exceeding EUR 250, check whether an e-invoice is required 
• Link and retain paper receipts and e-invoices received later 
• Establish rules for accounting staff to check TSE information, QR codes, and cash register system information 
• Standardize the method for recording tips 
• Inform business travellers and sales employees how to obtain entertainment documentation required in Germany 
• Check whether the expense reimbursement system supports German e-invoicing and documentation retention requirements 
  
  

In particular, companies using a global expense reimbursement system of the Japanese parent company need to confirm whether Germany-specific documentation requirements are reflected in the system. Simply attaching an image file may be insufficient as retention of structured e-invoice data or TSE-related information.

Practical Action Points

For entertainment expenses, the traditional approach of receiving a paper receipt and simply treating 70% as deductible and 30% as non-deductible is no longer sufficient. It is important to manage e-invoices, TSE information, QR codes, tips, self-prepared entertainment records, and payment evidence as an integrated set, and to establish a framework that allows the company to explain both the business purpose and the formal requirements in the event of a tax audit.

3.Tax Incentives for EV Company Cars and Business Electric Vehicles

Germany provides tax incentives for company cars and business vehicles to promote the spread of electric vehicles. Compared with conventional internal combustion engine vehicles, significant tax benefits may arise in connection with payroll taxation where employees or directors also use company cars privately, and with depreciation where companies or sole proprietors acquire electric vehicles for business use.

For Japanese companies as well, it is important to review these tax treatments when considering company car schemes for expatriates or local management, renewal of sales vehicles, and the transition to environmentally friendly mobility.

The 0.25% Rule for Electric Company Cars

In Germany, where employees or directors are allowed to use a company car privately, the private-use portion is treated as a benefit in kind and is subject to income tax. For ordinary internal combustion engine vehicles, the taxable amount is generally calculated at 1% per month of the vehicle’s gross list price.

By contrast, for certain fully electric vehicles, a preferential rule applies under which only 0.25% per month is treated as taxable. This applies to fully electric vehicles acquired between July 1, 2025 and December 31, 2030 with a gross list price of no more than EUR 100,000. As the eligible price threshold has been increased, relatively high-priced EVs may also be able to benefit from the preferential treatment.

For example, for a vehicle with a gross list price of EUR 50,000, the monthly taxable amount for private use differs as follows:

• Internal combustion engine vehicle: EUR 50,000 × 1% = EUR 500 per month 
• Fully electric vehicle: EUR 50,000 × 0.25% = EUR 125 per month 
  
  

In this way, even for vehicles in the same price range, choosing an EV can significantly reduce the employee’s taxable income. For the company, this also makes it easier to design a more attractive company car scheme.

Treatment of EVs Exceeding EUR 100,000 and Plug-in Hybrid Vehicles

For fully electric vehicles with a gross list price exceeding EUR 100,000, the 0.25% rule does not apply; instead, the 0.5% rule applies. Plug-in hybrid vehicles may also be eligible for the 0.5% rule if they satisfy certain requirements.

Specifically, a plug-in hybrid vehicle must have a minimum electric range of 80 kilometres and CO₂ emissions of no more than 50 grams per kilometre. If these requirements are not met, the ordinary 1% rule may apply.

When selecting vehicles, companies should compare not only purchase prices and lease payments, but also the gross list price, classification as EV or hybrid, electric range, CO₂ emissions, and impact on the employee’s payroll taxation.

Additional Taxation for Commuting Use Is Also Reduced for EVs

Where a company car may also be used for commuting between the employee’s home and workplace, an additional taxable amount arises in addition to the private-use portion. For ordinary internal combustion engine vehicles, the additional monthly taxable amount is calculated by multiplying 0.03% of the gross list price by the one-way commuting distance.

By contrast, for fully electric vehicles eligible for the 0.25% rule, 0.0075% per month applies to commuting use.

For example, where the gross list price is EUR 50,000 and the one-way commuting distance is 20 kilometres, the additional monthly taxable amount is as follows:

• Internal combustion engine vehicle: EUR 50,000 × 20 km × 0.03% = EUR 300 per month 
• Fully electric vehicle: EUR 50,000 × 20 km × 0.0075% = EUR 75 per month 
  

Because the taxable amount is reduced for both private use and commuting use, the benefit of using an EV company car becomes significant for employees.

The Calculation Basis Is the Gross List Price, Not the Actual Purchase Price

A point to note in company car taxation is that the calculation is based not on the actual purchase price or lease payments, but on the gross list price at the time of first registration. Manufacturer options and factory-installed special equipment are also included.

Therefore, even if a substantial discount is granted by the dealer or a lease contract is used, the tax calculation is based on the gross list price, not the actual amount paid after discounts.

Used electric vehicles may also be eligible for preferential treatment if certain conditions are met. In such cases as well, the basis is not the resale price, but the original gross list price at the time of first registration.

Declining-Balance Depreciation for Business Electric Vehicles

For electric vehicles, attention should be paid not only to company car taxation but also to preferential depreciation rules when a vehicle is acquired as a business asset. Under new investment incentive measures, declining-balance depreciation of up to 75% in the first year has been introduced for certain business electric vehicles.

To use this system, the vehicle must be acquired with the intention of serving the business on a long-term basis and must be classified as a fixed asset. As for the timing of acquisition, the vehicle must be acquired after June 30, 2025 and before January 1, 2028. It is also a prerequisite that the vehicle qualifies as an electric vehicle under the German Motor Vehicle Tax Act.

This declining-balance depreciation may be worth considering particularly for vehicles with a clear business use, such as sales vehicles, service vehicles, or executive vehicles. Because a large depreciation expense can be recorded in the year of acquisition, it may have the effect of reducing taxable income in the investment year.

Points to Note Where a Business Closure or Vehicle Sale Is Planned

For sole proprietors and owner-managers, acquiring an electric vehicle at a time when a business closure is planned may allow tax planning using declining-balance depreciation. For example, a taxpayer may acquire an EV for actual business use, record it as a fixed asset, and recognize a large depreciation expense in the first year.

However, for this to be accepted for tax purposes, it must be possible to demonstrate that the vehicle is actually used for business activities, that the acquisition is economically reasonable, and that it is not purely tax-driven. In the example discussed, it is an important prerequisite that the vehicle is used for business activities until the business closure and has the character of a fixed asset.

At the time of business closure, if the vehicle is transferred to private assets, hidden reserves and VAT treatment may become issues. Therefore, it is important to run simulations in advance, not only at the time of acquisition but also taking into account future sale, private use, business closure, and transfer into private assets.

Practical Response for Japanese Companies with German Subsidiaries

At Japanese companies with a subsidiary in Germany, company car schemes are sometimes designed based on the policy of the Japanese parent company or a global policy. However, in Germany, payroll taxation for private use of vehicles is clearly regulated, and the tax burden on employees can vary significantly depending on the type of vehicle selected.

Accordingly, when operating a company car scheme at a German entity, it is advisable to check the following points:

• Clearly specify the treatment of EVs and plug-in hybrid vehicles in the company car policy 
• Confirm the gross list price, CO₂ emissions, and electric range of each vehicle 
• Clearly define the existence or non-existence of private use and commuting use in the employment contract or company car policy 
• Estimate the tax impact for expatriates, local directors, and sales employees 
• Compare the tax costs of leased vehicles and purchased vehicles 
• Clarify the treatment of charging costs, charging facilities, and company-borne costs 
• Where vehicles are acquired for business use, confirm in advance the treatment of depreciation, private use, VAT, and sale 
  
  

In particular, where a company car is provided to an expatriate, it may be treated in Japan as part of the benefit package, but in Germany it may be subject to payroll taxation. It is important to confirm whether this is properly reflected in German payroll calculations and whether there is consistency with payslips and year-end wage tax certificates.

Practical Action Points

EV company cars are an effective tool for reducing employees’ payroll taxation while also contributing to corporate environmental initiatives and recruitment competitiveness. In addition, for business electric vehicles, declining-balance depreciation of up to 75% in the first year may be available, potentially having a significant impact on investment planning and vehicle renewal plans. When introducing vehicles, companies should conduct a comprehensive review from the perspectives of tax, payroll, and accounting, including the gross list price, acquisition timing, actual use, commuting use, charging costs, depreciation, and treatment at the time of future sale or business closure.

Disclaimer: All views expressed in this article are solely for informational purposes and should not be construed as legal advice. This information is for reference only and is bound to change in case of any amendments or changes to applicable laws. We do not assume any responsibility or liability for any errors or omissions in the content of this article, and do not make any warranties about the completeness, reliability and accuracy of the information expressed in this article.

German Tax Updates in March 2026

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1. Retention Periods of Commercial and Accounting Documents

At the turn of the year, the question often arises as to which documents and data can be disposed of or deleted. There are several aspects to consider here.

Background

Both commercial and tax law stipulate that business people must retain business and accounting documents — whether in paper form or as electronic data — for a certain period of time (Section 257 of the German Commercial Code, Section 147 of the German Fiscal Code (AO), Principles for the proper management and storage of books, records, and documents in electronic form and for data access (GoBD)). The length of the retention period depends on the type of documents or data:

Different Periods for Different Types of Data

The longest retention period of ten years applies, in particular, to trading books, inventories, opening balance sheets, and annual financial statements, as well as the work instructions and other organizational documents required for their understanding.

The shortest period of six years applies, among other things, to incoming and outgoing commercial or business letters.

Please Note: 

The Fourth Bureaucracy Relief Act reduced the retention period for accounting documents from ten to eight years. The relief generally applies if the previous 10-year period had not yet expired on the date the law came into force (January 1, 2025).

It All Depends on the Start Date

The expiry of the retention period after six, eight, or ten years is clearly defined. However, it is important to clarify when the period begins. According to Section 147 (4) of the German Fiscal Code (AO), the following applies: “The retention period begins at the end of the calendar year in which the last entry was made in the book, the inventory, the opening balance sheet, the annual financial statements or the management report were prepared, the commercial or business letter was received or sent, or the accounting document was created, and furthermore, the record was made or the other documents were created.”

Please Note: 

It is not the year or the end of the year for which, for example, annual financial statements are prepared that is decisive, but the year in which the annual financial statements are prepared, or the last entry is made. For example, the retention period for annual financial statements for 2014 that were prepared in 2015 ends on December 31, 2025.

The period may be extended if and as long as the documents are still relevant for tax assessments that are not time-barred. This may apply, in particular, in the case of (announced) tax audits or if legal proceedings are pending.

For electronic files, the retention obligation means that the data must be available in its original format at any time within the relevant time limits. It is not sufficient to simply store them in paper form.

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2. GmbH Financing: Should Shareholder Loans Bear Interest or Not?

Smaller GmbHs often receive loans from their shareholders. In practice, this raises the question of whether it is better to grant the loan with interest or without interest. Learn about both tax consequences in a specific practical case and find out whether interest is worthwhile.

The Initial Situation

Let us assume that “A” is the sole shareholder and managing director of a GmbH. The GmbH generates an annual profit of €100,000 and is in a municipality with a trade tax rate of 440 percent. “A”, himself, is single and non-denominational. His income is subject to a linear tax rate of 42 percent plus 5.5 percent solidarity surcharge.

Because this GmbH needs money for a business investment, “A” would like to grant it a loan of €100,000. He asks himself the following question: Should he grant the loan without interest and later distribute the interest saved to himself, or would agreeing on an arm’s length interest rate of three percent per annum lead to a better result for him? “A” has already used up the saver’s allowance for other investment income.

Scenario 1: The Loan is Interest-Free

In the “loan is interest-free” scenario, the tax consequences are as follows:

1. Tax Burden at the Level of the GmbH

Without interest on the loan, the GmbH’s profit amounts to €100,000. It should be noted that, despite the lack of interest, the loan is not to be discounted at 5.5 percent per annum in the GmbH’s tax balance sheet. The mandatory discounting of non-interest-bearing liabilities was abolished in 2023.

The €100,000 profit is subject to corporate income tax of 15 percent (Section 23 (1) KStG) plus 5.5 percent solidarity surcharge (Section 4 SolzG), resulting in a tax burden of 15.825 percent (€15,825). In addition, the profit is also subject to trade tax. With a trade tax rate of 440 percent, this amounts to 15.40 percent (3.5 x 440/100) and thus €15,400. After deduction of those taxes, €68,775 remains at the level of the GmbH.

2. Tax Burden at Shareholder Level

“A” cannot directly access the GmbH’s net profit of €68,775. This is because the profit must first be distributed to him. If the GmbH distributes the €68,775, this generates income from capital assets for “A” (Section 20 (1) No. 1 EStG). The flat-rate withholding tax rate of 25 percent (Section 43 (1) No. 1 and Section 43a (1) No. 1 EStG) is decisive for taxation. The solidarity surcharge of 5.5 percent is added to this 25 percent, so that the effective tax burden is 26.375 percent.

However, “A” does not have to pay this tax directly. This is because the GmbH is already obliged under Section 44 (1) EStG to withhold the tax from the distribution and pay it to the tax office. If the GmbH distributes the net profit of €68,775 to A, €50,635.60 will be credited to his account after the tax deduction (€68,775 ./. 26.375 percent).

Important: 

The tax deduction of €18,139.40 settles the tax office’s tax claim (Section 43 (5) EStG). “A”, therefore does not have to declare the income in his personal income tax return.

Due to his shareholding of at least 25 percent in the GmbH, “A” has the option of applying for exemption from the flat-rate 25 percent withholding tax plus solidarity surcharge pursuant to Section 32d (2) No. 3 EStG. The advantage: 40 percent of the profit distribution (€27,510) would then be tax-free (Section 3 No. 40 letter d in conjunction with Section 2 EStG). However, the remaining 60 percent (€41,265) would then be subject to the regular income tax rate of 42 percent plus 5.5 percent solidarity surcharge. Because the resulting tax burden including the solidarity surcharge amounts to €18,284.52, which is more than the flat-rate tax burden of €18,139.40, the application is disadvantageous.

3. The Result of Waiving Interest on the Loan

Without agreeing on loan interest, the total tax burden amounts to €49,364.40. “A” has €50,635.60 available after taxes.

Scenario 2: The Loan Bears Interest at 3% Per Annum

In this scenario, the tax consequences outlined as below shall apply:

1. Tax Burden at the Level of the Limited Liability Company

If interest is agreed upon for the loan, the interest represents a business expense at the level of the limited liability company to the extent that the interest rate is customary for third parties. Higher interest rates, on the other hand, are to be regarded as hidden profit distributions and would not reduce the income of the limited liability company (Section 8 (3) sentence 2 KStG). Because the interest rate of 3% is reasonable in the example and the loan amounts to €100,000, the annual interest is €3,000.

This reduces the GmbH’s profit to €97,000; the corporation tax (15 percent) plus solidarity surcharge (5.5 percent of corporation tax) amounts to €15,350.25. In addition, trade tax of 15.40 percent (€14,938) is payable, leaving the GmbH with €66,711.75 after deduction of all taxes.

2. Tax Burden at Shareholder Level

If the €66,711.75 is distributed to “A”, the GmbH must withhold 25 percent withholding tax (€16,677.93) plus 5.5 percent solidarity surcharge (€917.28). “A” therefore receives €49,116.54 in his account. Compared to the initial example without interest, this represents a disadvantage of €1,519.06.

Added to this is the interest paid by the company. This constitutes income from capital assets for him (Section 20 (1) No. 7 EStG). Because the GmbH is not obliged to deduct tax (it is not a bank or similar), “A” must declare the interest in his personal income tax return (Section 32d (3) EStG). As part of the tax assessment, taxation is then generally carried out at the flat-rate withholding tax of 25 percent plus solidarity surcharge (Section 32d (1) EStG). However, because “A” holds at least a ten percent stake in the GmbH, the special provision of Section 32d (2) No. 1 (b) EStG applies. Consequence: The interest is not subject to the lucrative withholding tax, but to the standard income tax at the marginal tax rate. For “A”, this amounts to 42 percent plus 5.5 percent solidarity surcharge, resulting in a tax burden of €1,329.30. After deduction of taxes, A is left with €1,670.70 of the interest.

3. The Result with a 3% Loan Interest Rate

If an interest rate of 3 percent is agreed, “A” receives a total of €50,787.24 net (€49,116.54 + €1,670.70). This represents an advantage of €151.64 compared to the lack of interest.

.

3. Wage Tax Withholding: New Regulations for the Allowance for Social Security Contributions Since January 1, 2026

Since January 1, 2026, the tax rules governing the allowance for social security contributions (Vorsorgepauschale), which must be considered when calculating monthly wage tax withholding, have fundamentally changed. Below is an overview of the key new aspects and how the allowance will be calculated in 2026.

Basic Principles of the Vorsorgepauschale

When determining the monthly tax withheld from wages, an allowance for social security contributions is taken into account. The purpose is to ensure that contributions to health insurance, long-term care insurance, and pension insurance (and from 2026, potentially partial contributions to unemployment insurance) affect taxation not only later through special expense deductions in the annual income tax return, but already during the year through wage tax withholding (§ 39 para. 2 sentence 5 no. 3 EStG).

New Regulation Since January 1, 2026: Key Changes

In a letter dated August 14, 2025 (IV C 5 – S 2367/00012/004/033), the German Federal Ministry of Finance (BMF) published new rules for determining the Vorsorgepauschale. The following now applies for wage tax purposes:

• Since January 1, 2026, there is no longer a minimum Vorsorgepauschale (until the end of 2025: 12% of wages, maximum €1,900 or €3,000).
• From 2026 onward, only statutory contributions calculated based on the monthly salary are included in the Vorsorgepauschale.
• A new feature is that a partial amount for unemployment insurance is also included (see details below).
• For private health and long-term care insurance, only contributions electronically reported by the insurance company to the Federal Central Tax Office (BZSt) and retrieved via ELStAM will be included in the allowance.

Please Note: 

The new regulation pursues several objectives. On one hand, the allowance is intended to become more precise and therefore fairer. On the other hand, mandatory electronic transmission of contribution payments reflects the ongoing digitalization of tax administration.

Inclusion of a Partial Amount for Unemployment Insurance

As mentioned above, since January 1, 2026, partial contributions to unemployment insurance are included in the Vorsorgepauschale if an employee has actually paid such contributions.

However, for tax classes I to V, these contributions are considered only if health and long-term care insurance contributions are below €1,900 per year. Up to this amount, unemployment insurance contributions are included in the allowance.

Conclusion:

Recalculating the Vorsorgepauschale based on actual contributions may have different effects on taxpayers from January 1, 2026:

• Low-income earners who previously benefited from the (for them excessive) minimum allowance may receive lower net pay starting in 2026.
• High-income earners with higher contribution levels may benefit from higher net salaries in 2026 if the previous minimum allowance was too low compared to their actual contributions.

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4. Flat-Rate Wage Taxation for Company Events: Everything New from 2026?

The German Federal Fiscal Court (BFH) granted it — and the legislator has taken it away again. In 2024, the BFH ruled that flat-rate taxation could also be applied to company events organized exclusively for executives. However, this favorable ruling has been overturned by a legislative amendment effective from 2026.

Participation in Company Events Constitutes Employment Income

Events organized at company level with a social character (e.g., company outings, anniversary celebrations, summer parties, or Christmas parties) qualify as company events (“Betriebsveranstaltungen”).

If you participate in such an event, the resulting benefit is generally considered taxable employment income subject to tax and social security contributions (§ 19 para. 1 no. 1a EStG).

An exception applies if participation serves professional duties, for example, if you attend in your role as HR manager or works council member across multiple departments.

Safety Net: €110 Allowance Per Employee

However, the benefit from participating in a company event is not automatically taxable. According to § 19 para. 1 no. 1a sentence 3 EStG, the benefit is not treated as income to the extent that it does not exceed €110 per company event.

The €110 is a tax allowance (Freibetrag) per employee, not a tax exemption threshold (Freigrenze). Two conditions must be met:

• Participation must be open to all employees. The employer must invite all employees to qualify for the allowance. If only some are invited, the allowance is generally not granted.
• Exceptionally, the allowance may apply to restricted participant groups if the limitation does not constitute preferential treatment of certain employees. For example: events for a specific department (e.g., sales staff), all pensioners, or employees celebrating certain service anniversaries.
• The allowance applies to a maximum of two company events per year. If you attend more than two events, you may choose which two should benefit from the allowance.

Flat-Rate Taxation Prevents Employee Tax Burden

If the benefit from a company event exceeds the €110 allowance, or if you attend more than two events in a year, the excess amount or additional events become taxable. Normally, taxation is based on your individual tax characteristics, meaning both taxes and social security contributions apply.

Employers can avoid this burden for employees by applying flat-rate taxation of 25% under § 40 para. 2 sentence 1 no. 2 EStG at the employer’s expense. This:

• simplifies wage tax collection, and
• eliminates both employer and employee social security contributions (§ 1 para. 1 no. 3 SvEV).

Flat-Rate Taxation Also for Exclusive Events?

Previously, tax authorities interpreted company events as those open to all employees or a defined business unit. Events with individually selected participants were therefore not considered company events, meaning:

• the €110 allowance was not granted, and
• flat-rate taxation was not granted.

In 2024, the BFH overturned this view regarding flat-rate taxation (judgment of March 27, 2024, case VI R 5/22), retroactively applicable since 2015. Because the legal definition of a company event in § 19 para. 1 no. 1a sentence 1 EStG no longer depends on the participant group:

• The participant group matters only for the €110 allowance.
• For flat-rate taxation, it is sufficient that the event qualifies as a company event; the participant group is irrelevant.

Practical Tip:
Since 2015, flat-rate taxation could therefore be applied even to exclusive events such as Christmas parties attended only by board members or executives — although the €110 allowance would not apply.

Legislator Removes Privilege for Exclusive Events

The legislator viewed the tax advantages for exclusive events following the BFH ruling critically, particularly due to potential conflicts with the constitutional principle of equality (Article 3(1) Basic Law).

Therefore, the Tax Amendment Act 2025 abolished this privilege effective from 2026. The revised wording of § 40 para. 2 sentence 1 no. 2 EStG states:

“Notwithstanding § 40 para. 1 EStG, the employer may levy wage tax at a flat rate of 25 percent on employment income paid in connection with company events, provided participation is open to all employees of the company or a business unit.”

Conclusion and Practical Recommendation

The legislative change strengthens equal treatment among employees, as flat-rate taxation for company events is again limited — as before 2015 — to events open to all employees.

However, it is important to note:

• The favorable BFH ruling has not been completely invalidated.
• The new rule applies only from January 1, 2026.
• Therefore, for assessment periods from 2015 to 2025, flat-rate taxation may still be applied to exclusive events.

This remains particularly relevant for tax audits covering past years or, for example, exclusive Christmas parties held in December 2025 for selected employees such as executives.

Disclaimer: All views expressed in this article are solely for informational purposes and should not be construed as legal advice. This information is for reference only and is bound to change in case of any amendments or changes to applicable laws. We do not assume any responsibility or liability for any errors or omissions in the content of this article, and do not make any warranties about the completeness, reliability and accuracy of the information expressed in this article.

German Tax Updates in December 2025

1. Tax Return: 2026 Is Just Around the Corner – File Your Voluntary 2021 Tax Return Now and Benefit
2. Draft of the New BMF Circular on the Introduction of Electronic Invoicing (E-Invoicing)
3. Special Depreciation for SMEs
4. Minimum Taxation for Corporate Income Tax and Trade Tax Confirmed as Constitutional
5. Tax Treatment When a GmbH Interest Is Sold and the Seller Continues as Managing Director

1. Tax Return: 2026 Is Just Around the Corner – File Your Voluntary 2021 Tax Return Now and Benefit

It feels like 2025 has only just begun, yet the end of the year is already fast approaching.
Anyone who was not required to file a tax return for 2021 and has also not submitted a voluntary return should act quickly. The reason is simple: any tax refund for 2021 will be forfeited if the return has not been submitted to the tax office by 31 December, 2025.

Applying for a favourable tax assessment under Section 32d (6) of the German Income Tax Act (EStG) after that date will not help. A taxpayer recently learned this the hard way before the German Federal Fiscal Court (BFH).

The Assessment Period for Voluntary Tax Returns

The tax office may only issue a tax assessment if the relevant assessment period (Festsetzungsfrist) has not yet expired. Once this period ends, the tax claim itself lapses (§ 47 German Fiscal Code – AO).

As a result, any tax assessments issued after the expiration of the assessment period are unlawful (though not void) and may be challenged by filing a timely objection.

Under § 169(2) no. 2 AO, the assessment period is four years. Pursuant to § 170(1) AO, it generally begins at the end of the year in which the tax arose. Consequently, income tax for the year 2021 becomes time-barred at the end of 31 December, 2025.

It is important to note that the deadline is met as long as the tax assessment—or, in cases covered by § 122a AO, the electronic notification—leaves the tax authority before the deadline expires (§ 169(1) no. 1 AO).

Important: If 31 December falls on a Saturday or Sunday, the deadline automatically shifts to the next working day (§ 108(3) AO). This will be 2 January of the following year, as 1 January is always a public holiday.

Example 1

The limitation period expires at the end of 31 December. The tax office sends the assessment notice by mail on 30 December, and the taxpayer, Marie, receives it only in the following year.

Solution:
In Marie’s case, the tax assessment is valid. The fact that the notice was actually received after 31 December is irrelevant.

If the notice had not been received at all, no valid administrative act would exist. In that scenario, the tax office could not simply issue a new assessment in the following year, as the claim would already be time-barred.

For this reason, tax offices often send administrative acts shortly before the expiration of the assessment period by registered mail with proof of delivery (PZU), enabling them to prove proper notification.

Filing a Tax Return Shortly Before the Deadline

If you expect a tax refund from filing a voluntary tax return, it is essential to keep the assessment period in mind. If you have not yet filed a return for 2021, the refund claim becomes time-barred at the end of 31 December, 2025.

This raises an important question: what happens if you submit your 2021 tax return on the very last day, 31 December, 2025? Would the assessment period still expire because the tax office cannot possibly issue the assessment on the same day?

Fortunately, this is not the case.

Several provisions suspend the expiration of the assessment period, including § 171(3) AO. 

This provision states:

“If, before the expiration of the assessment period, an application for tax assessment is submitted, the assessment period shall not expire with respect to that application until a final and non-appealable decision has been issued.”

Thus, if you voluntarily submit your 2021 tax return to the competent tax office within the assessment period, this constitutes an application for tax assessment. In that case, the limitation period does not expire until the tax assessment has been issued and has become final—typically after the objection period has expired, provided no objection has been filed.

Example 2

On 20 December, 2025, Marie voluntarily submits her 2021 income tax return to the tax office. The expected refund amounts to EUR 500.

Solution:
Because the return was filed in due time, the suspension of the limitation period under § 171(3) AO applies. No limitation period has yet occurred.

As a result, the tax office must issue the tax assessment even in 2026 or later and cannot rely on the statute of limitations.

If Marie had submitted the return only on or after 1 January, 2026, the 2021 tax year would already have been time-barred.

A Lifeline: Mandatory Filing Obligations

The assessment period is calculated very differently if you are required to file an income tax return rather than filing voluntarily. Such an obligation exists, for example:

• if you have business income or other income exceeding EUR 410 that was not subject to withholding tax (e.g., rental income),
• if spouses have tax class combinations III/V or V/III,
• if you receive progression income exceeding EUR 410
  (§ 149(1) sentence 1 AO; §§ 25(3) and (4), 48 EStG).

Important:
If you are required to file a tax return, § 170(2) no. 1 AO provides that the four-year assessment period does not begin at the end of the assessment year, but rather at the end of the year in which the mandatory tax return is submitted.

Consequently, if the return is not submitted at all, the assessment period would not begin, meaning that no limitation would occur and the tax office could issue an initial assessment even many years later.

For this reason, § 170(2) no. 1 AO also stipulates that the assessment period begins no later than the end of the third year following the year in which the tax arose.

Example 3

Due to business income of EUR 25,000, Marie was required to file an income tax return for 2021. She submitted the return in 2023.

Solution:
Although the income tax for 2021 arose at the end of 31 December, 2021, the obligation to file means that the assessment period did not begin until the end of the year in which the return was filed—namely, 31 December, 2023.

Accordingly, the limitation period expires at the end of 31 December, 2027.

Variation

Marie has still not submitted the mandatory income tax return for 2021.

Solution:
The assessment period begins no later than the end of the third year following the year in which the tax arose. Since the tax arose at the end of 31 December, 2021, the assessment period begins at the end of 31 December, 2024.

Accordingly, the limitation period expires only at the end of 31 December, 2028.

Voluntary Filing – Is a § 32d Application a Lifeline?

Employees without significant additional income are generally not required to file an income tax return. For them, the tax year 2021 becomes time-barred at the end of 31 December, 2025.

However, many employees receive investment income, such as interest or dividends. This income is subject to a flat withholding tax of 25% (§ 43a (1) EStG), and this withholding generally settles the tax liability (§ 43(5) EStG).

In many cases, however, filing an application for a favourable tax assessment under § 32d(6) EStG can reduce the actual tax burden—namely, when taxation under the progressive income tax scale (§ 32a(1) EStG) results in a lower tax burden than 25%.

Important:
It may also be advisable to apply for a review of the tax withheld under § 32d (4) EStG, particularly if the saver’s allowance has not been fully taken into account or if foreign taxes are creditable.

If you submit an application for a favourable assessment under § 32d(6) EStG without being otherwise required to file a return, the key question is whether this application alone creates a filing obligation, thereby shifting the start of the assessment period from § 170(1) AO to § 170(2) no. 1 AO.

The consequences would be substantial: the assessment period for 2021 would then expire not at the end of 31 December, 2025, but only at the end of 31 December 2028. In other words, at the end of 2025, it would not be 2021 that becomes time-barred, but 2018.

The BFH recently addressed this issue and ruled in favour of the tax authorities. The court held that an application for a favourable assessment under § 32d(6) EStG does not suspend the start of the limitation period under § 170(2) no. 1 AO if it is submitted together with a tax return after the expiration of the assessment period under § 169(2) AO
(BFH judgment of 14 May, 2025, case no. VI R 17/23).

However, the ruling also contains a positive aspect. The BFH clarified that § 170(2) no. 1 AO does apply if the positive sum of taxable income not subject to withholding tax exceeds EUR 410. This includes investment income that has not been subject to withholding tax, such as interest from private loans (mandatory assessment under § 32d (3) EStG).

Example 4

For the year 2021, the limitation period normally expires at the end of 31 December, 2025.
Marie submits her 2021 income tax return only in 2026. In addition to her employment income, she declares interest income of EUR 500 from a private loan.

Solution:
Because the interest income exceeds EUR 410, Marie is required to file a tax return.
As a result, the assessment period does not expire at the end of 2025 but only at the end of 31 December, 2028.

Accordingly, the return submitted in 2026 can still be taken into account, and a tax assessment (including a refund) can be issued.

Conclusion

If you were not required to file a tax return for 2021 and have not yet submitted a voluntary return, you should urgently check whether a refund is possible. This is often the case, in particular, if:

• deductible expenses exceed EUR 1,230,
• a tax credit for craftsmen’s services or household-related services can be claimed (§ 35a EStG),
• you changed employers during 2021 or took up employment for the first time, or
• banks withheld tax on investment income that can be taxed more favourably under § 32d (6) EStG.

If you expect a refund, submit your 2021 tax return without delay. Otherwise, the refund claim will be lost due to the statute of limitations at the turn of the year.

2. Draft of the New BMF Circular on the Introduction of Electronic Invoicing (E-Invoicing)

As of 1 January, 2025, and subject to transitional rules, the use of electronic invoices (e-invoices) has become mandatory for domestic B2B transactions in Germany. An initial BMF circular on this topic was published on 15 October, 2024. The second circular, announced at that time, was released as a draft on 25 June, 2025.

Key Points of the Draft Circular

The main purpose of the draft is to align the German VAT Application Decree (UStAE) with the explanations provided in the BMF circular of October 2024. In addition, it clarifies several practical issues and provides guidance for implementation.

However, the draft itself is difficult to read in isolation, as it mainly lists amendments compared to the previous circular and the existing UStAE. A proper understanding therefore requires a comparative review of both BMF circulars and the UStAE.

Scope of Application and Main Exceptions

The obligation to issue e-invoices applies not only to standard invoices but also to:

• self-billing invoices (credit notes),
• reverse-charge transactions,
• transactions subject to flat-rate taxation in agriculture and forestry,
• travel services, and
• margin scheme transactions.

The obligation also applies even if the invoice recipient is a small business, a farmer, or carries out only VAT-exempt supplies.

Exceptions apply to small-amount invoices (up to EUR 250), invoices issued by small businesses, and passenger transport tickets, which may still be issued in non-e-invoice formats.

Key Practical Considerations

• Description of supplies
  The structured data of an e-invoice must allow a clear and verifiable identification of the supplied goods or services. Additional details may be included as attachments (e.g. PDF files), but references via links alone are not sufficient.

• Invoice corrections
  If an invoice is required to be issued as an e-invoice, any correction must generally also be made in e-invoice format.

• Archiving requirements
  E-invoices must be retained for eight years. In particular, the structured data element must be preserved in its original, unaltered form. Storage outside a GoBD-compliant system does not automatically constitute a violation.

• Validation requirements
  All mandatory VAT invoice data must be included in the structured part of the e-invoice. Content errors identified during validation may result in an e-invoice that is formally invalid for VAT purposes, even though it technically qualifies as an e-invoice.

Outlook and Assessment

The draft circular was circulated to industry associations for comments in summer 2025. Final publication is expected in Q4 2025. In addition, the GoBD were amended in July 2025 to include specific rules on e-invoicing and archiving.

While the EU originally envisaged a later implementation of comprehensive VAT digitalisation, Germany has moved ahead with an early introduction. As a result, key interpretative issues remain unresolved even after the start of the regime, leading to practical uncertainty for businesses.

3. Special Depreciation for SMEs

Using Tax Planning Opportunities Effectively

The special depreciation regime under Section 7g (5) of the German Income Tax Act (EStG) is designed to support small and medium-sized enterprises (SMEs) by facilitating investments. In addition to regular depreciation, special depreciation reduces taxable profit and therefore creates a tax deferral effect. The key requirements and planning opportunities are summarized below.

Eligible Assets and Requirements

Normally, movable depreciable fixed assets are depreciated over their useful life using either the straight-line or declining-balance method. Independently of this, additional special depreciation may be claimed if the requirements of Section 7g (5) EStG are met.

The main conditions are:

• The business must have generated a profit of no more than EUR 200,000 in the year preceding the acquisition or production of the asset.
• The asset must be used exclusively or almost exclusively for business purposes (or leased) in the year of acquisition or production and in the following financial year,
  and must be used in a domestic permanent establishment.

Amount and Flexible Allocation

Special depreciation may amount to up to 40% of the acquisition or production costs.

A key feature of this regime is its flexibility: the depreciation can be allocated freely over the year of acquisition/production and the following four years (i.e. a total of five years).

• Depreciation does not have to be claimed every year.
• The maximum amount of 40% does not have to be fully utilized.

Practical Planning Tip

Special depreciation is particularly attractive in years with high profits, as it allows businesses to maximize the tax deferral effect by shifting taxable income to later years.

Important Notes

Each asset can, of course, be depreciated only once in total. Consequently, special depreciation reduces the amount available for future regular depreciation.

• Declining-balance depreciation:
  The reduced book value affects depreciation immediately in the following year.
• Straight-line depreciation:
  From the sixth year onward, after the preferential period under Section 7g (5) EStG has expired, depreciation must be recalculated by spreading the remaining book value over the remaining useful life
  (Section 7a (9) EStG).

4. Minimum Taxation for Corporate Income Tax and Trade Tax Confirmed as Constitutional

— Even Where Loss Carryforwards Expire Due to Insolvency —

The German Federal Constitutional Court (Bundesverfassungsgericht) has ruled that the minimum taxation regime applicable to corporate income tax and trade tax is constitutional, even in cases where loss carryforwards can no longer be utilized due to insolvency proceedings and the subsequent liquidation of a company.

Background of the Minimum Taxation Regime

Under German corporate income tax law, loss carryforwards are unlimited in time but restricted in amount:

• Losses may be offset in full against taxable income of up to EUR 1 million per tax year.
• Any income exceeding this threshold may only be offset by 60% of the excess amount (temporarily increased to 70% for tax years 2024–2027).

These rules are set out in Section 8(1) of the Corporate Income Tax Act (KStG) in conjunction with Section 10d (2) of the Income Tax Act (EStG).

A comparable limitation applies to trade tax loss carry forwards, although without the temporary increase to 70%.

As a result, a minimum level of taxable income remains, even if substantial loss carryforwards exist.

Legal Issue and Referral to the Constitutional Court

The Federal Fiscal Court (Bundesfinanzhof) questioned whether this minimum taxation system is permissible where losses become definitively unusable, for example when a company enters insolvency and is liquidated.

The case concerned a GmbH whose loss carryforwards expired unused due to insolvency proceedings and subsequent dissolution, resulting in what is known as a definitive loss effect.

Decision of the Federal Constitutional Court

The Court acknowledged that income taxes should, in principle, be based on a taxpayer’s ability to pay. It also recognized that the definitive loss of loss carryforwards may lead to taxation that effectively reaches beyond economic capacity.

Nevertheless, the Court held that the minimum taxation rules are not unconstitutional. The resulting burden is justified by legitimate fiscal interests of the state and falls within the legislator’s permissible discretion to standardize and simplify tax rules.

Conclusion

The decision confirms that minimum taxation remains valid even in insolvency and liquidation scenarios, despite the permanent loss of loss carryforwards. Consequently, taxpayers cannot successfully challenge minimum taxation on constitutional grounds solely because losses can no longer be utilized.

5. Tax Treatment When a GmbH Interest Is Sold and the Seller Continues as Managing Director

— Capital gain or employment income? The BFH’s decision is awaited —

In Germany, it is common for a (co-)owner of a GmbH to remain with the company as a managing director (Geschäftsführer) for a certain period after selling his or her ownership interest, based on contractual arrangements. In such transactions, part of the purchase price is often made conditional upon the continued performance of managing director duties. This raises an important tax question: how should such payments be classified for tax purposes?

Specifically, the issue is whether the amount in question should be taxed as:

• a capital gain from the disposal of shares pursuant to Section 17 of the Income Tax Act (EStG), or
• employment income under Section 19 EStG, as remuneration for services rendered as a managing director.

The distinction is significant, as capital gains may be taxed more favourably, whereas employment income is subject to the individual’s progressive marginal tax rate, which is often considerably higher.

This issue is currently pending before the German Federal Fiscal Court (Bundesfinanzhof, BFH), and its decision is expected to have substantial practical relevance. In the lower court proceedings, however, the Cologne Fiscal Court (Finanzgericht Köln) held that the payment constituted employment income.

Facts of the case

In the case at hand, the shareholder, together with a co-investor, sold a 50% interest in a GmbH to a third party. The purchase price consisted of two components:

• a fixed amount, payable unconditionally upon the transfer of the shares, and
• an additional conditional amount, payable only if both sellers continued to serve as managing directors for a minimum period of five years.

If either seller terminated his managing director position before the end of this period, the agreement required the amount already received to be repaid.

Positions of the tax authorities and the taxpayer

The tax authorities took the view that the conditional payment did not constitute consideration for the transfer of the shares, but rather remuneration for the continued provision of services as managing director. Accordingly, the amount was classified as employment income and taxed at the applicable marginal tax rate.

The former shareholder, by contrast, argued that the payment formed an integral part of the consideration for the sale of the GmbH interest and should therefore be treated as a capital gain pursuant to Section 17 EStG.

Decision of the Cologne Fiscal Court

The Cologne Fiscal Court sided with the tax authorities. In its judgment of 4 December, 2024 (case no. 12 K 1271/23), the court emphasized that the payment was both legally and economically linked to the continued performance of managing director duties. Particular weight was given to the fact that the payment was subject to a repayment obligation in the event of early termination.

Against this background, the court concluded that the consideration was not paid for the transfer of the GmbH interest itself, but rather for the seller’s continued service as managing director. Consequently, the amount had to be classified as employment income for tax purposes.

Proceedings before the BFH and practical implications

The seller has appealed the judgment to the Federal Fiscal Court. The case is currently pending under file number IX R 1/25. The BFH is expected to clarify the criteria for distinguishing between consideration for the sale of a shareholding and remuneration for personal services.

In cases with a similar structure, taxpayers may wish to consider filing an objection against the relevant tax assessment and requesting a suspension of proceedings pursuant to Section 363(2), sentence 2 of the German Fiscal Code (AO), referring to the pending BFH proceedings. Until a final decision is rendered, a cautious and well-considered approach is advisable.

Disclaimer: All views expressed in this article are solely for informational purposes and should not be construed as legal advice. This information is for reference only and is bound to change in case of any amendments or changes to applicable laws. We do not assume any responsibility or liability for any errors or omissions in the content of this article, and do not make any warranties about the completeness, reliability and accuracy of the information expressed in this article.

HLS Global Expands to Singapore 

October 1, 2025

HLS Global Expands to Singapore 

Tokyo, Japan / Singapore – HLS Global Co., Ltd. (“HLS Global”), a leading international accounting, taxation and business advisory firm, today announced the expansion of its global presence to Singapore by establishing its new subsidiary, HLS GLOBAL SEA PTE. LTD. (“HLS SG”), in Singapore.

This expansion underscores HLS Global’s commitment to serving multinational companies across Southeast Asia. HLS SG will focus on providing a comprehensive range of services, including accounting, audit, tax, due diligence, post-merger support, ESG advisory, CFO services, and financial digital transformation.

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German Tax Updates in April 2025

1. Capital Expenditures that Constitute Acquisition Costs: Example of a Condominium
2. Maintenance Payments: Cash Payments No Longer Accepted by the Tax Authorities
3. Employees’ Business Travel: Advance Lease Payments Allocated Over the Lease Term
4. Attention Parents: Childcare Costs will be More Tax-Deductible Starting in 2025

1. Capital Expenditures that Constitute Acquisition Costs: Example of a Condominium

According to Section 6 (1) No. 1a of the Income Tax Act (EStG), expenses are reclassified as production costs if, within three years of the acquisition of the building, repair and modernization measures are carried out whose net expenses exceed 15% of the acquisition costs of the building. The expenses are then not deductible immediately, but only through the depreciation of the building. In the case of a condominium, two special features must be taken into account, as pointed out by the Hessian Fiscal Court.

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HLS Global Expands to the UAE with the Launch of its Subsidiary in Dubai

Tokyo, Japan / Dubai, UAE – HLS Global Co., Ltd. (“HLS Global”), a leading international accounting, taxation and business advisory firm, is pleased to announce the expansion of its global presence to the United Arab Emirates (UAE) by incorporating its subsidiary company, HLSGL Management Consultancies LLC, in Dubai (hereinafter referred as “HLS-Global UAE”). The establishment of HLS-Global UAE marks a significant milestone in the firm’s commitment to serving Japanese and multinational companies in the region with excellence.

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German Tax Updates in January 2025

1. Partial Income Method Can Enable Deduction of Income-Related Expenses for Capital Income
2. Surprise Visit from the Tax Office: What to Bear in Mind During a Cash Register Inspection
3. E-Mobility: New Tax Benefits to Make Company Provided Electric Vehicles More Attractive

1. Partial Income Method Can Enable Deduction of Income-Related Expenses for Capital Income

Capital gains are generally subject to a flat-rate withholding tax without deduction of income-related expenses. Shareholders with a material interest can opt for the partial income method for their dividends, in which case costs are deductible. According to the Federal Fiscal Court, an initially admissible application does not lose its five-year effect if the requirements are no longer met later.

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German Tax Updates in November 2024

1. Tax Reform Act Will Increase Net Income From 2025
2. Celebrating in the Company: Which Tax Rules Apply to Company Events
3. Allocation of the Business Identification Number to Self-Employed Will Start Shortly

1. Tax Reform Act Will Increase Net Income From 2025

In Japan, there is currently a heated debate over the so-called JPY1.03 million barrier, and an increase in the basic deduction amount is being considered. However, in Germany, an increase in the basic deduction amount from 2025 has already been agreed upon by the government.

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ASTHOM Partners Holds the 2nd General Meeting

ASTHOM Partners Collaborates to Strengthen Support for Japanese Companies Globally

法人名 ASTHOM PARTNERS 株式会社 

本社所在地 100-0004 東京都千代田区大手町 1-9-5 大手町フィナンシャルシティノースタワー24 階 代表者 虷澤篤志、齋藤俊輔 

設立 2022 年 12 月 

株式会社 AGS コンサルティングと Hotta Liesenberg Saito LLP の共同出資により設立。 

資本金 1,000 万円 

事業内容 企業の商標権、著作権、特許権等の知的財産権の取得、管理およびコンサルティング業務等 Web サイト https://asthom.co.jp/