Germany updates tax rules for business asset transfers

The German Federal Ministry of Finance (BMF) is updating its administrative practices regarding the taxation of partially compensated transfers of business assets. This change follows a Federal Fiscal Court (BFH) ruling that rejected the strict ‘separation theory,’ which previously allowed for taxable profits to be recorded even when the consideration received was lower than the book value of the asset.

Under the new guidance, the ‘modified separation theory’ will be applied to ensure that taxation more accurately reflects actual economic gains. This adjustment aims to prevent scenarios where entrepreneurs are taxed on phantom profits that do not correspond to actual cash inflows.

In a related development regarding business continuity, experts are advising entrepreneurs to finalize succession plans or business sales before December 31, 2026. This recommendation stems from a proposed income tax reform that may eliminate tax exemptions for business sales and liquidations starting in 2027 to offset other government fiscal measures.