Taxation of current income from employee share ownership

Income from employment includes all goods that consist of money or monetary value and that accrue to the employee from the employment relationship for the provision of his or her individual labor. However, wages are not subject to tax if a benefit is granted on the basis of other legal relationships or other relationships between the employee and employer that are not based on the employment relationship. The extent to which this distinction is relevant for the taxation of current income from employee share ownership is clarified by the German Federal Fiscal Court (BFH) in its decision of October 21, 2025 (case no. VIII R 13/23).

In the case in question, an employee was employed as a division manager at a limited liability company (GmbH) and earned income from employment from this activity. As a selected, particularly important employee, the GmbH offered him the opportunity to participate in the company as a typical silent partner for the duration of his employment. They therefore concluded a partnership agreement for a typical silent partnership; the division manager made his contribution. He received his share of the profits in the following calendar year. The GmbH treated this as income from capital assets for tax purposes and withheld capital gains tax and solidarity surcharge. The tax office took a different view and assessed income from employment.

The tax court and the BFH shared the GmbH’s view on income from capital assets. This is because the division manager’s share of profits from his typical silent partnership was solely due to the special legal relationship under company law of the typical silent partnership. The prerequisite for this is that this legal relationship has been effectively established, its terms have been seriously agreed upon and implemented, and, in terms of its structure, it represents an independent source of income with its own economic substance alongside the employment relationship. In the present case, the silent partnership led to substantial income for the division manager, which he would have been entitled to even if he had not done any work, e.g., in the event of illness. Furthermore, the contractually stipulated termination of the silent partnership upon termination of the employment relationship did not preclude the required independence of the silent partnership.

The tax office was correct in stating that the division manager had generated income significantly exceeding the nominal amount of his silent partnership due to the positive profit development of the GmbH. However, there is no legal provision to the effect that a high return for the silent partner in comparison to the investment is no longer to be regarded as income from this participation within the scope of capital income and would therefore have to be assigned to other legal relationships. A corresponding appropriateness check of a silent partnership that has been effectively agreed under civil law between third parties and actually implemented in accordance with the contractual provisions is not to be carried out; nor can a comparatively high return be assumed to be motivated by the employment relationship. However, it would be possible to levy income tax on current profit shares, for example, if the employee were to be allocated higher profit shares than those agreed in the contract in a deliberate deviation from the contractual agreements, or if the amount of the profit shares were to be determined at the employer’s discretion.

A so-called monetary benefit can be granted through the purchase of an employee share ownership at a particularly reduced price. Such monetary benefits are always granted on the basis of the individual employment relationship and therefore result in income from employment. However, this does not preclude the assessment of a typical silent partnership in the employer’s company as a special legal relationship under company law and was therefore not relevant in the case in dispute.

Notice:

In its further decision of October 21, 2025 (case no. VIII R 14/23), the BFH took a position on the tax classification of remuneration from a mandatory employee profit-sharing right as capital income and, in this regard, equally rejected income from employment.