Articles

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.