Tax Law Disentanglement in Cross-Border Cases

BFH Judgment of 19.11.2025 – Ref. I R 41/22: “Passive Disentanglement” Also Through DTA Amendment

The Federal Fiscal Court (BFH), in its judgment of November 19, 2025 (Ref. I R 41/22), addressed fundamental questions regarding tax law disentanglement in cross-border scenarios. According to this, disentanglement taxation can not only be triggered by actual occurrences such as the transfer of an asset abroad but also solely by a change in the legal situation – for example, by the entry into force of a new Double Taxation Agreement (DTA). In this context, the term “passive disentanglement” is also used in practice.

For taxpayers and companies, the decision is particularly relevant because tax burdens can arise even when no active restructuring is undertaken, but rather only an international change in the attribution of taxation occurs. From the BFH’s perspective, the critical factor is the objective loss or limitation of Germany’s tax rights on the hidden reserves contained in assets.

What does “disentanglement” mean in tax terms?

Disentanglement refers to the loss or limitation of Germany’s tax rights concerning the hidden reserves of an asset. Hidden reserves are increases in value that have economically already occurred but have not yet been realized for tax purposes (e.g., because the asset remains in business assets).

As long as Germany holds the taxation right, taxation of the hidden reserves can, in principle, occur at a later date, for example, upon sale or withdrawal of the asset. However, if the taxation right transfers to another country, there is a risk from a German perspective that the hidden reserves that arose in Germany can no longer be taxed.

To secure Germany’s tax claim, specifically § 4 para. 1 sentence 3 EStG and corresponding regulations in corporate tax law provide that hidden reserves must be disclosed for tax purposes at the time of disentanglement. Simplified, it is treated as if the asset were sold at fair value (market value approach), which can result in a taxable gain.

Typical Triggers: Relocation – Permanent Establishment – Legal Change

Typical cases of disentanglement include:

• the relocation of a business or individual assets abroad,
• the transfer to a foreign permanent establishment,
• certain cross-border restructurings,
• and – according to the now confirmed understanding – also legal changes, e.g., through a new or amended DTA, when Germany thereby loses or is restricted in its right to tax hidden reserves.

Especially the scenario “legal change without actual change” was contentious in practice, because, factually, nothing needs to change regarding the asset and its assignment within the company.

DTA Amendment as a Trigger: Case with Spain

The procedure was based on a cross-border scenario related to Spain. The starting point was that Germany initially held a taxation right over certain hidden reserves. However, with the entry into force of the new DTA Germany–Spain in 2013, the arrangement of taxation rights under the agreement changed. As a result of the new agreement situation, Germany lost the ability to tax the hidden reserves contained in the assets in the future.

The tax office therefore imposed a disentanglement tax under § 4 para. 1 sentence 3 EStG and recorded a corresponding gain. The plaintiffs argued that there had been no active relocation or transfer; the loss of the taxation right was solely a consequence of the DTA amendment. A “passive” disentanglement was not covered by law.

BFH Decision: Loss of Tax Rights is Sufficient

The Münster Finance Court initially ruled in favor of the lawsuit. However, the BFH overturned this decision and ultimately confirmed that disentanglement can also occur through a change in the legal situation. According to the BFH, it does not matter whether the taxpayer has acted actively. The decisive factor is whether Germany objectively loses or limits its taxation rights – even if this is triggered by a new DTA.

The BFH also clarifies that the legal consequence only arises temporally “in the last legal second” before the cessation of the taxation right becomes effective. This can be significant in practice, especially regarding:

• the question of which fiscal year the profit realization should be recorded,
• the relevant valuation date (fair market value),
• accounting and documentation requirements.

To substantiate this, the BFH refers to the purpose of the de-coupling regulations: They are intended to ensure that latent reserves generated in Germany are not permanently withdrawn from German tax access merely due to a change in the allocation of taxation rights. § 4 para. 1 sentence 3 EStG, according to the BFH, does not contain a restriction that de-coupling can only occur through active action by the taxpayer.

Important classification for practice

The judgment shows: Tax risks can arise even without a transaction if the allocation of taxation rights according to agreements or laws changes. In practice, it is particularly advisable to:

• Monitor changes in DBAs and their transitional regulations,
• Check the allocation of economic assets to domestic or foreign permanent establishments,
• Prepare valuations and documentation for the potential de-coupling date,
• Analyze individual cases, to determine whether there is indeed an exclusion or restriction of the German taxation right (not every DBA adjustment automatically leads to de-coupling).

Additionally, it should be noted that de-coupling, depending on the constellation, can be related to other tax regulatory areas (e.g., profit allocation in permanent establishments, partnerships, transformation tax law, or international tax law). The assessment regularly depends on the specific structure, the type of economic asset, the type of income involved, and the qualification according to agreements.

Conclusion: Early review of cross-border changes

The BFH judgment (I R 41/22) has significant importance for cross-border issues. It confirms that a de-coupling taxation can be triggered even without active involvement solely by a change in the agreement-related situation. Those utilizing international structures or holding assets with foreign reference should promptly examine legal changes—especially in DBAs—to see if this results in the elimination or restriction of German taxation rights on latent reserves.

Note: This article provides general information and does not replace an individual case review.