Countries conclude double taxation agreements (DTAs) to prevent or mitigate multiple taxation in cross-border situations. DTAs do not create new taxing rights; rather, they limit the domestic taxing rights of the contracting states. When a DTA enters into force—or an existing DTA is amended—previously unrestricted taxing rights may become constrained.
Under German tax law, where German taxing rights over hidden reserves are excluded or restricted, the event is treated as a withdrawal for non-business purposes, triggering taxation of a deemed withdrawal gain. In a decision dated 19 November 2025, the Federal Fiscal Court (BFH) held that such a passive divestment can arise not only from a taxpayer’s active conduct, but also from legal changes, such as the entry into force of a new or amended DTA. The BFH also clarified the timing of the deemed withdrawal transaction in passive divestment scenarios. In another decision issued on the same day, the BFH ruled there was no passive divestment.
In the first, case, the limited partners of a German GmbH & Co. KG (a kind of a partnership with a limited liability company as a partner and individuals as limited partners) held shares in a Spanish S.L., whose assets consisted predominantly (i.e., over 50%) of immovable property. Under the Germany-Spain DTA, as amended with effect from 1 January 2013, Spain—unlike under the prior agreement—was granted taxing rights over gains from the disposal of shares by German-resident shareholders in such a real estate-rich entity. To avoid double taxation, the amended treaty applies the credit method, thereby limiting Germany’s taxing rights.
The German tax authorities treated the entry into force of the amended DTA as a divestment under Section 4(1) sentence 3 of the Income Tax Act (EStG) as of 1 January 2013. According to this provision, the exclusion or restriction of German taxing rights in respect of gains from the disposal of an asset is to be treated as a withdrawal for non-business purposes. The tax authorities therefore assessed a deemed withdrawal gain equal to each partner’s share of the Spanish company’s net asset value, reduced by the book value of the shares.
Passive divestment is possible
The BFH held that a divestment under Section 4(1) sentence 3 EStG does not require deliberate taxpayer action. It may arise through external legal developments, such as the entry into force of a new or amended DTA without any conduct by the taxpayer. The BFH emphasised:
Although the BFH accepted the possibility of passive divestment, it ultimately ruled in favour of the taxpayer on timing grounds. The court held that the divestment gain must be recognised not on 1 January 2013 (when the restriction took effect), but rather in the preceding assessment period on 31 December 2012, and thus one legal second before the restriction on German taxing rights took effect.
Because Section 4 (1) sentence 3 EStG functions as a final taxing mechanism, hidden reserves must be taxed immediately before Germany’s taxing rights lapse. Thus, the relevant gain is recognised at the last moment in which Germany still held full taxing authority.
In a separate decision issued on the same day, the BFH again ruled for the taxpayer—this time on substantive grounds relating to the Germany-Australia DTA.
In this case, a German KG had acquired and leased commercial property in Australia since 2009, giving rise to limited Australian tax liability. A new DTA entered into force in 2017, which included a revised capital gains article that was comparable to article 13 of the OECD model treaty. The tax authorities took the position that Germany previously held taxing rights over gains from the sale of the property and that the new DTA eliminated those rights, triggering a passive divestment.
The BFH disagreed. It held that Germany had no taxing right over such gains at the time of acquisition in 2009, even under the previous DTA. Because no German taxing right existed, the 2017 DTA could not have restricted the right. Consequently, no divestment gain arose.
Negotiations for new or amended DTAs often span several years. Where changes are foreseeable, taxpayers should assess whether a passive divestment may arise and what tax burden would result.
Importantly, exit taxation does not always produce a less favourable tax outcome. If a new DTA shifts taxing rights to a jurisdiction with higher tax rate, it may be advantageous for hidden reserves to be taxed in Germany before the treaty change rather than abroad at a later disposal.
Roland Speidel
BDO in Germany
Under German tax law, where German taxing rights over hidden reserves are excluded or restricted, the event is treated as a withdrawal for non-business purposes, triggering taxation of a deemed withdrawal gain. In a decision dated 19 November 2025, the Federal Fiscal Court (BFH) held that such a passive divestment can arise not only from a taxpayer’s active conduct, but also from legal changes, such as the entry into force of a new or amended DTA. The BFH also clarified the timing of the deemed withdrawal transaction in passive divestment scenarios. In another decision issued on the same day, the BFH ruled there was no passive divestment.
Facts of the Case
In the first, case, the limited partners of a German GmbH & Co. KG (a kind of a partnership with a limited liability company as a partner and individuals as limited partners) held shares in a Spanish S.L., whose assets consisted predominantly (i.e., over 50%) of immovable property. Under the Germany-Spain DTA, as amended with effect from 1 January 2013, Spain—unlike under the prior agreement—was granted taxing rights over gains from the disposal of shares by German-resident shareholders in such a real estate-rich entity. To avoid double taxation, the amended treaty applies the credit method, thereby limiting Germany’s taxing rights.The German tax authorities treated the entry into force of the amended DTA as a divestment under Section 4(1) sentence 3 of the Income Tax Act (EStG) as of 1 January 2013. According to this provision, the exclusion or restriction of German taxing rights in respect of gains from the disposal of an asset is to be treated as a withdrawal for non-business purposes. The tax authorities therefore assessed a deemed withdrawal gain equal to each partner’s share of the Spanish company’s net asset value, reduced by the book value of the shares.
BFH Decision
Passive divestment is possibleThe BFH held that a divestment under Section 4(1) sentence 3 EStG does not require deliberate taxpayer action. It may arise through external legal developments, such as the entry into force of a new or amended DTA without any conduct by the taxpayer. The BFH emphasised:
- Section 4(1) sentence 3 EStG adopts only the legal consequences of a withdrawal, not its factual prerequisites.
- German profit determination is based on causation, not on the principle that only controllable actions may trigger taxation.
- General provisions of the EStG and the Fiscal Code contain no requirement that a taxable event must result from an active act.
- Even in passive cases, the taxpayer’s underlying conduct (e.g., holding shares) remains the economic basis for the taxation of hidden reserves.
Although the BFH accepted the possibility of passive divestment, it ultimately ruled in favour of the taxpayer on timing grounds. The court held that the divestment gain must be recognised not on 1 January 2013 (when the restriction took effect), but rather in the preceding assessment period on 31 December 2012, and thus one legal second before the restriction on German taxing rights took effect.
Because Section 4 (1) sentence 3 EStG functions as a final taxing mechanism, hidden reserves must be taxed immediately before Germany’s taxing rights lapse. Thus, the relevant gain is recognised at the last moment in which Germany still held full taxing authority.
Another Relevant BFH Decision
In a separate decision issued on the same day, the BFH again ruled for the taxpayer—this time on substantive grounds relating to the Germany-Australia DTA.In this case, a German KG had acquired and leased commercial property in Australia since 2009, giving rise to limited Australian tax liability. A new DTA entered into force in 2017, which included a revised capital gains article that was comparable to article 13 of the OECD model treaty. The tax authorities took the position that Germany previously held taxing rights over gains from the sale of the property and that the new DTA eliminated those rights, triggering a passive divestment.
The BFH disagreed. It held that Germany had no taxing right over such gains at the time of acquisition in 2009, even under the previous DTA. Because no German taxing right existed, the 2017 DTA could not have restricted the right. Consequently, no divestment gain arose.
BDO Perspective
Negotiations for new or amended DTAs often span several years. Where changes are foreseeable, taxpayers should assess whether a passive divestment may arise and what tax burden would result.Importantly, exit taxation does not always produce a less favourable tax outcome. If a new DTA shifts taxing rights to a jurisdiction with higher tax rate, it may be advantageous for hidden reserves to be taxed in Germany before the treaty change rather than abroad at a later disposal.
Roland Speidel
BDO in Germany