How do I apply for the capital gains tax allowance (section 16 (4) EStG)?
If you are aged 55 or over or are permanently incapacitated, you can apply for a capital gains allowance. This is provided it is the first time since 1996 (§ 16 para. 4 EStG).
It may be the case that a portion of the capital gain is subject to tax at only 60% under the partial income procedure. This applies if the business assets sold included shares in corporations. This portion cannot additionally benefit from the capital gains allowance. Therefore, the portion subject to 60% tax must be deducted from the capital gain and entered in line 16.
(2022): How do I apply for the capital gains tax allowance (section 16 (4) EStG)?
How often can the capital gains allowance under Section 16 (4) EStG be claimed?
The tax allowance under § 16 (4) EStG is granted to each person once in a lifetime for a capital gain.
In addition to the allowance, you can also apply for the tax reduction under § 34 (3) EStG. The capital gain is then taxed at a reduced rate, which is 56% of the average tax rate (but at least 14%). The tax reduction under § 34 (3) EStG is also granted to each person once in a lifetime for a capital gain.
(2022): How often can the capital gains allowance under Section 16 (4) EStG be claimed?
How do I apply for the reduced tax rate (section 34 (3) EStG)?
If you are over the age of 55 or permanently incapacitated, you can benefit from a further tax reduction:
The capital gain can, upon request, be taxed at a reduced rate on the amount exceeding the tax allowance for capital gains. This applies provided it is the first time since 2001. The reduced rate is 56% of the average tax rate, but at least the basic tax rate of 14% (§ 34 para. 3 EStG).
(2022): How do I apply for the reduced tax rate (section 34 (3) EStG)?
What is included in capital gains?
Income from business operations also includes the profit from the sale of an entire business, a part of a business (branch, subsidiary), or a share in a partnership. A sale also includes the closure of a business. Shares in a company acquired through contributions are also covered; these arise when a business owner contributes their business, part of a business, or partnership share to a company as a capital contribution and receives shares in the company at below market value (§ 21 UmwStG).
Anyone who sells or closes their business or partnership share can take advantage of two important tax benefits:
- Tax allowance for sale: The profit from the sale is tax-free up to 45.000 Euro. However, this amount is reduced if the profit from the sale exceeds 136.000 Euro, by the amount exceeding this limit. Therefore, the tax allowance is no longer available from a profit of 181.000 Euro (§ 16 Abs. 4 EStG).
- Reduced tax rate: The remaining profit after deduction of the allowance is eligible for the one-fifth rule. Upon request, it can also be taxed at a reduced rate, namely 56% of the average tax rate and at least 14% (§ 34 Abs. 3 EStG).
The tax allowance for sale and the reduced tax rate are only granted under certain conditions:
- You must be at least 55 years old or permanently incapacitated for work in the sense of social security law.
- You can only claim the benefits once in your lifetime: the tax allowance for sale from 1996, the reduced tax rate from 2001.
- You must apply for the benefits.
If the business is sold before the age of 55, without being permanently incapacitated, only the one-fifth rule applies. However, this rule does not result in any tax savings if current income is already taxed at the top rate.
When selling a partnership share, you are also entitled to the full tax allowance for sale, not just a proportionate amount. However, if you sell only part of your partnership share, the profit from the sale is considered current income, and neither the tax allowance for sale nor the reduced tax rate or the one-fifth rule apply (§ 18 Abs. 3 i.V.m. § 16 Abs. 1 Satz 2 EStG).
(2022): What is included in capital gains?
