Articles

German Tax Updates in March 2026

.

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.

.

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.

.

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.

Publication of Revised Accounting Guidelines for SMEs

The Committee for the Preparation and Review of Accounting Guidelines for Small and Medium-sized Enterprises (hereinafter referred to as the “Committee”), which was established primarily by the Japanese Institute of Certified Public Accountants (JICPA), the Japan Federation of Certified Public Tax Accountants’ Associations, the Japan Chamber of Commerce and Industry, and the Accounting Standards Board of Japan, reviewed the Accounting Guidelines for Small and Medium-sized Enterprises (hereinafter referred to as the “SME Accounting Guidelines”) and, at its meeting on September 19, 2025 and approved the publication of the revised Accounting Guidelines for Small and Medium-sized Enterprises (hereinafter referred to as the “Revised SME Accounting Guidelines”).

(more…)

UAE Economic Substance: The Key to Controlled Foreign Corporation (CFC) Compliances in Japan 

Existing or Proposed subsidiaries of Japanese Companies need to meet “Economic Substance Requirements” so that the Japanese Parent Company can demonstrate that it qualifies for an exemption from Japan’s Tax-Haven Rules.

Why it Matters

To avoid having any income earned via the UAE subsidiary included in its Japanese parent company, and taxed under Japan’s tax rate, the UAE entity must demonstrate real economic presence in the UAE — by merely stating that it is not a shell company or that it does not generate a passive income is not sufficient. Having real economic presence in the UAE strengthens your exemption position under Japan’s Tax Haven Rules – Controlled Foreign Corporation (CFC) Rules.

(more…)

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.

(more…)

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.

(more…)

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.

(more…)

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.

(more…)

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/