Paradigm shift for management shareholdings: The BFH creates facts

For a long time, the tax structuring of management shareholdings was like walking a tightrope. The tax authorities regularly attempted to qualify exit profits or high returns as wages (up to 45 % tax) instead of subjecting them to the more favourable regime of flat-rate withholding tax (25 %). The infamous "overall assessment in individual cases" of all circumstances or "overall picture of the circumstances" caused considerable uncertainty and was the focus of numerous tax audits and tax court proceedings.

But that is now a thing of the past. A series of landmark rulings by the Federal Fiscal Court (BFH) at the end of 2023 and most recently on 21 October 2025 (published on 22 January 2026) have fundamentally clarified the legal situation in favour of taxpayers.

1. the end of the overall assessment

The most important liberating blow: The BFH has abandoned the previous practice of a comprehensive overall assessment. If an investment is validly established under civil law, seriously justified and carried out in accordance with the contract, it constitutes an independent special legal relationship in addition to the employment relationship for tax purposes. The resulting income is primarily to be allocated to income from capital assets.

2. amount of return is not an indication of wages (BFH VIII R 13/23)

In a spectacular decision on 21 October 2025 (case no. VIII R 13/23), the BFH clarified that even an "unreasonably high return" does not lead to reclassification as wages. In the judgement case, a manager achieved returns of over 400 % of his capital investment from a typical silent partnership. The BFH strictly rejected an "appropriateness test": the law does not recognise an appropriateness proviso for capital gains. As long as the manager bears an effective risk of loss, it remains taxed as capital income.

3. rehabilitation of leaver clauses and sweet equity

Typical structural features of private equity transactions no longer stand in the way of tax recognition:

• Leaver clauses: According to the BFH, the fact that the participation is linked to the continued existence of the employment relationship (vesting/leaver schemes) does not take away its character as an independent capital investment.
• Sweet Equity: A disproportionate shareholding of the management in the share capital in relation to the investor (sweet equity) is harmless from a tax perspective as long as the acquisition and sale take place at normal market conditions.
• Profit participation rights: The new principles also apply to mandatory profit participation rights (BFH VIII R 14/23). Ongoing interest payments from this are regularly capital income, even if the programme is only open to employees.

4. separation of acquisition and exit

The BFH emphasises the principle of separation: if a manager initially receives shares at a reduced price, only this price advantage is taxable as wages at the time of acquisition. However, this labour law reference does not "infect" the subsequent sale phase. A gain from a subsequent sale at market value is to be treated as capital gains irrespective of the acquisition process.

5. legislator flanked by § 19a EStG

In parallel with the case law, the legislator has increased the attractiveness of employee participation schemes through the Annual Tax Act 2024. Deferred taxation to avoid "dry income" (tax payment without cash flow) was extended to group companies. This means that shareholdings in foreign parent companies can now also fall under the preferential treatment, provided that the thresholds for the entire group are met.

Conclusion for practice

Management participation as a second source of income alongside the employment relationship is more secure than ever before. The hurdles for the tax authorities to reclassify income as wages have risen massively.

Checklist for a legally compliant MEP

1. Seriousness under civil law: Effective contracts, actual payment of capital.
2. Effective risk of loss: The manager must actually be able to lose his capital in the event of failure.
3. Market value principle: Purchases and sales should be underpinned by valuations or recognised formula values (e.g. multiplier method).
4. No arbitrariness: The allocation of profits must not be at the employer's discretion, but must follow clear, predetermined rules. In particular, no excess price that is not customary in the market may be agreed.

The new case law offers enormous opportunities for tax-optimised incentives.