Germany: Distinction between capital gains tax and wage tax treatment clarified

Posted on 10th January, 2009

Estimated reading time 2 minutes

Clarity on when employees may escape employment income taxation in respect of gains (and dividends) on shares and other capital held in the employer’s business.

If an employee acquires shares or other capital investment in his employer’s business in connection with his employment then on disposal any gain is taxed as employment income.

However, contrary to attempts by the tax authorities to characterise it as such, according to a decision of the German Federal Finance Court, the profit from the sale of a shares or other capital investment in the business of an employer does not constitute employment income just because of the individual’s status as an employee.

In the relevant case the capital investment had been held by an employee of the business and the investment was offered only to employees of this business.  The true question was whether the acquisition of the asset was in connection with employment.


The decision is of interest because income and capital are taxed differently:

  • income from employment is, in general, fully taxable at marginal income tax rates;
  • income from capital (gains and dividends) was, until 31 December 2008, exempt from tax after a one year holding period.

Following the introduction of the capital gains tax regime (Abgeltungssteuer), on 1 January 2009, a flat rate tax of 25% now applies to capital gains and dividend income.  Although this is less beneficial to tax payers the tax authorities still sought to argue that any employee holding shares or other capital was subject to wage tax and not capital gains tax.

For further information or to discuss the issues raised, please contact Joachim Menz ( on +49 89 24 22 30 0.

This article was produced by, and re-produced with kind permission of, our correspondent firm in Germany, Keller Menz Rechtsanwälte.

Keller Menz


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