Preferential tax treatment of retained profits under § 34a EStG
Profits of sole proprietors and co-entrepreneurs are generally subject to income tax at the progressive rate. This also applies if the profits are retained in the business and are not withdrawn for private purposes. To provide relief for retained profits, § 34a EStG (German Income Tax Act) provides for preferential taxation upon application.
Under the currently applicable version of the law, the reduced tax rate under § 34a para. 1 EStG is 28.25 percent up to and including 2027. Thereafter, it will decrease in stages to 27 percent for 2028 and 2029, 26 percent for 2030 and 2031, and 25 percent from 2032 onwards.
Subsequent taxation in the event of later withdrawals
If profits taxed at a preferential rate are withdrawn at a later date, subsequent taxation may be triggered. Under § 34a para. 3 EStG, this occurs in particular if the withdrawals exceed the current profit and the capital contributions.
To assess the economic significance of such transactions, the following must be taken into account: excess withdrawals are deemed to be withdrawals from profits previously taxed at a preferential rate and are subject to subsequent taxation at 25 percent. A special exception is contained in § 34a para. 4 sentence 3 EStG. Under this provision, withdrawals for the payment of inheritance tax or gift tax on the acquisition of a business or co-entrepreneurial interest reduce the amount subject to subsequent taxation.
The amount of such preferential withdrawals is determined separately, § 34a para. 10 EStG.
Decision of the FG Münster on withdrawals for inheritance and gift tax
The 13th Senate of the Finanzgericht Münster (FG Münster, Münster Fiscal Court) had to decide on the scope of this preferential treatment. The judgment of 14 July 2026, Az. 13 K 3816/19 F (case no. 13 K 3816/19 F), had already been released for publication on 1 October 2026 according to the court’s publication details; the court’s notice is dated 15 October 2026.
The subject of the proceedings was § 34a EStG 2009 and thus the former legal position. The decision concerns in particular the question of whether withdrawals for the payment of inheritance and gift tax may also qualify for preferential treatment if only part of a co-entrepreneurial interest was transferred.
Claimant received shareholdings in companies by legacy and gift
The claimant was a limited partner of X KG. In 2015, he received a limited partnership interest in X KG by way of legacy. In addition, further interests were transferred to him by gift.
According to the published information, this concerned in particular:
- further interests in X KG,
- a share in X Verwaltungs GmbH as special business assets of X KG,
- interests in X Herstellungs GmbH & Co. KG,
- shares in X Herstellungs GmbH.
Inheritance and gift tax of approximately EUR 9.4 million arose in respect of these acquisitions. To settle these tax liabilities, the claimant withdrew funds from a private account at X KG in 2017.
Later, the exemption rule under § 13a ErbStG (German Inheritance Tax and Gift Tax Act) was taken into account upon application. The tax was reduced to approximately EUR 1.6 million in 2021.
Dispute with the tax office over the scope of the preferential treatment
In the assessment notice for 2017, the tax office ultimately recognised only withdrawals of approximately EUR 0.45 million as preferential. Among other things, it took the view that the later reduction of the inheritance and gift tax had retroactive effect on the tax treatment of the withdrawals.
The tax office also took the position that § 34a para. 4 sentence 3 EStG did not apply where only parts of a co-entrepreneurial interest had been transferred. By contrast, the claimant sought a determination of preferential withdrawals amounting to approximately EUR 9.4 million.
Claim largely successful
The action was largely successful. The Finanzgericht Münster determined preferential withdrawals of approximately EUR 9.08 million. The claimant was unsuccessful only with regard to a smaller amount of approximately EUR 280,000.
In the court’s view, the decisive factor for the tax treatment was the time of the actual withdrawal in 2017. The later reduction of the tax in 2021 did not change this.
The actual withdrawal in the respective assessment period is decisive
The FG Münster focused on the fact that the withdrawal had actually been made. What was decisive, by reference to the assessment period, was the actual removal of assets from the business sphere for non-business purposes.
The purpose of the withdrawal existing at the time of payment could also no longer be changed subsequently. A later tax refund therefore did not have retroactive effect on the withdrawal transaction. A withdrawal once made is not reversed by subsequent events.
According to the decision, the economic connection between the withdrawal and the payment of inheritance or gift tax was sufficient for the preferential treatment.
Preferential treatment also where part of a co-entrepreneurial interest is transferred
The court also recognised the preferential treatment in a case where not a complete co-entrepreneurial interest, but only part of such an interest, was transferred. The transferred part was to be regarded as an independent co-entrepreneurial interest at the time of transfer.
Accordingly, the partial transfer also fell within the purpose of the provision. § 34a para. 4 sentence 3 EStG is intended to provide tax support for business succession. According to the case law of the 13th Senate, the transfer of part of a co-entrepreneurial interest under the former legal position of § 34a EStG 2009 also results in a partial transfer of profits subject to subsequent taxation.
The decision therefore also covers constellations in which company interests are transferred as part of succession planning not uniformly to one person, but only in part.
Limits of preferential treatment where there is no connection with the withdrawing business
At the same time, the FG Münster made clear that the preferential treatment is not unlimited. Only the tax attributable to the transfer of the business or co-entrepreneurial interest from whose business assets the funds were withdrawn is preferential.
Withdrawals for taxes on interests in another business are therefore not preferential. Against this background, the court did not recognise an amount of approximately EUR 280,000 as preferential. This amount related to shares that had no direct connection with the business from which the funds had been withdrawn.
Special business assets as a preferential connection
The court assessed differently the tax attributable to shares in special business assets that were transferred at the same time. According to the published information, these included shares in an administrative GmbH.
In this respect, the Finanzgericht found a sufficient business connection. The shares were essential for the business and were transferred in connection with the participation. The tax payments attributable to them could therefore be taken into account when determining the preferential withdrawals.
Appeal on points of law pending before the Bundesfinanzhof
An appeal on points of law against the judgment of the FG Münster is pending before the Bundesfinanzhof (BFH, Federal Fiscal Court). The proceedings are being conducted there under case no. IV R 11/26.
The decision has therefore not yet been finally clarified by the highest court. Nevertheless, the proceedings are significant for tax practice because they concern the separate determination of bases of taxation for the purposes of § 34a EStG 2009 in the case of withdrawals for the payment of inheritance and gift tax. The topic is already being addressed in continuing professional tax training.
Significance for business succession and taxation of retained profits
The decision of the FG Münster illustrates that, in the case of withdrawals for the payment of inheritance and gift tax, the specific connection with the transferred business or co-entrepreneurial interest is decisive. At the same time, in the court’s view, the actual circumstances at the time of the withdrawal are relevant.
For entrepreneurs, shareholders and high-net-worth individuals, significant tax demarcation issues may arise in connection with business succession, co-entrepreneurial interests and profits subject to subsequent taxation. MTR Legal Rechtsanwälte advises on tax law in relation to such matters, taking into account the respective corporate and tax law structures. Further information can be found at Legal advice in tax law.
