Recurring remuneration from a typical silent partnership between the employee and the employer company is taxable as capital investment income within the meaning of Section 20 (1) No.4 Income Tax Act and not separately as commercial income or income from employment.
According to the ruling of the Supreme Tax Court published on 28 August 2025, taxation under the Investment Tax Act 2004 represents the final tax burden and for private investors it takes precedence over taxation under the general provisions. This also hinders a fund's capital investments being allocate to the shareholder under Section 39 (2) No. 1 of the Tax Code.
Certain type of capital investment income may be taxed under the partial income method (so called half-income method) upon application of the taxpayer and is valid for another 4 years following the year in which the application was made. According to the Supreme Tax Court, the specific preconditions laid down in Section 32d (2) Income Tax Act, e.g. for minimum ownership, only have to be met in the first year of application; a failure to meet the requirements in the following four assessment periods is not harmful.
In a recent ruling, the Supreme Tax Court held that the deemed settlement of final withholding tax under Section 43 (5) Sentence 1, Half-Sentence 1 Income Tax Act (ITA) also applies if the tax has been withheld by the debtor (payer) of the investment income, but not declared and paid over to the tax office. As a result, investment income from a fraudulent pyramid scheme is in principle no longer to be included in the income tax base.
The finance ministry has reissued its slightly modified regulations to be followed by those responsible for deducting tax on investment income at source.
The Supreme Tax Court has held that lapsed options based on market rate movements rather than on a conscious decision by the taxpayer are not deductible from investment income.
The Supreme Tax Court has held that a benefit from a foreign company to a German shareholder is a hidden distribution taxable in Germany as investment income.
The Supreme Tax Court has rejected an assessment to gift tax on a supposed hidden distribution to a shareholder on the grounds that a shareholder’s receipt of a hidden benefit is his investment income.
The Supreme Tax Court has filed a preliminary question with the ECJ on the calculation of the German income tax attributable to foreign source income as the maximum amount of the foreign tax credit.
The finance ministry has issued a decree on a number of technical points in connection with the obligation of banks to withhold tax from the investment income of private individuals.
