Business Assets

What are business assets?

Business assets (German: Betriebsvermögen) refers in tax law to the assets (Wirtschaftsgüter) that are attributable to a business, including debts incurred for business reasons. Asset (Wirtschaftsgut) is the tax term for individually valuable items of property such as machinery, vehicles, land or intellectual property rights. The term has two meanings. First, it describes the allocation of individual assets to the business rather than to the entrepreneur's private sphere. Second, it means the net assets of the business, that is, assets less debts; in the tax balance sheet, this corresponds to equity. The comparison of these net assets on two reporting dates (comparison of business assets, Betriebsvermögensvergleich) gives the taxable profit (Section 4(1) of the German Income Tax Act (Einkommensteuergesetz, EStG)). Withdrawals and contributions, that is, transfers between the business and the private sphere, are stripped out in the process.

Formula: Profit = business assets at the end of the financial year minus business assets at the end of the previous year + withdrawals minus contributions

The distinction is of practical importance above all for sole proprietors, partnerships and their partners. A self-employed architect, for example, holds the car in which she mainly drives to building sites as business assets; the flat she lives in remains private assets. The allocation determines whether depreciation and costs reduce profit and whether increases in value become taxable on sale or withdrawal. For gifts and inheritances, it decides on the reliefs of inheritance and gift tax. Commercial law speaks instead of assets (Vermögensgegenstände) that appear on the balance sheet on the assets side (Aktiva).

Necessary and elective business assets

Three groups are distinguished by the extent of business use; the percentage limits of the Income Tax Guidelines (Einkommensteuer-Richtlinien) apply to movable assets:

• Necessary business assets: assets that are used exclusively or to more than 50% for the business itself. They belong to the business without any choice.
• Elective business assets: assets that are objectively suited and recognisably intended to promote the business, for movable assets with a business use of at least 10% up to 50%. The allocation is an election that must be documented promptly and clearly, generally by inclusion in the bookkeeping.
• Necessary private assets: assets with a business use of less than 10% or with no business connection.

Land is considered separately: each part of a building used differently is a separate asset, and the part used by the business itself belongs to the necessary business assets. Parts of minor importance need not be treated as business assets. Under the rule recast at the end of 2025, these are parts that are at most 30 square metres in size or EUR 40,000 in value (Section 8 of the Income Tax Implementation Ordinance (Einkommensteuer-Durchführungsverordnung, EStDV)). The associated expenses are then not deductible for financial years beginning after 31 December 2025. Debts follow the purpose for which the funds were used; a loan for a business investment is a business debt even if it is secured with private assets.

Business assets of a GmbH and a partnership

For a corporation, the question of delimitation does not arise: a GmbH (German limited liability company) has no private sphere; all its assets are business assets. If shareholders use company assets privately without paying a consideration at arm's length, there is regularly a hidden profit distribution (Section 8(3) sentence 2 of the German Corporate Income Tax Act (Körperschaftsteuergesetz, KStG)). This means an advantage outside the regular distribution of profit, which may not reduce the company's profit. The shares in the GmbH, by contrast, usually belong to the shareholder's private assets. Their sale is taxed under Section 17 EStG in the case of a holding of 1% or more under the partial-income method, under which 60% of the gain is taxable.

For partnerships, business assets comprise, in addition to the partnership assets, the special business assets (Sonderbetriebsvermögen) of the partners. These include assets that belong to a partner and directly serve the partnership, such as land let to the limited partnership (KG) or intellectual property rights made available, as well as assets that serve the participation. Under civil law they remain the partner's property; for tax purposes they are part of the business.

Withdrawal, contribution and hidden reserves

Hidden reserves are the difference between book value and actual value. They arise through depreciation that exceeds the loss in value and through increases in value, for example with land. As long as the asset remains in the business assets, they are irrelevant for tax purposes. They are disclosed and taxed on sale, on discontinuation of the business and on a withdrawal, that is, the transfer to private assets. It is valued at the going-concern value (Teilwert, Section 6(1) no. 4 EStG), in simplified terms the value that an acquirer of the whole business would attribute to the individual asset. Contributions from private assets are conversely valued in principle at the going-concern value.

Section 16 EStG applies to the sale or discontinuation of an entire business or of an interest in a commercial partnership (co-entrepreneur interest, Mitunternehmeranteil). Under personal conditions, an allowance and a reduced tax rate may come into consideration. Certain transfers permit the continuation of book values, such as the transfer of a business free of charge as part of business succession (Section 6(3) EStG).

Business split and company sale

A business split exists when an asset-holding company makes an essential operating asset, typically land, available to an operating company that it controls. The asset-holding company is often the shareholder personally, who lets the land to their GmbH. The prerequisites are material interdependence (the asset made available is essential for the business) and personal interdependence (the same person controls both sides). The letting then becomes a trade or business for tax purposes; the land and the shares in the operating GmbH are business assets of the asset-holding company.

If the interdependence ends, for example because the shares in the operating GmbH are sold, the asset-holding company is generally regarded as discontinued. The hidden reserves in the land are then taxed, although no purchase price flows for the land. Whether a business split exists and how it can be safeguarded before a sale, for example through a commercially structured partnership, must be clarified for tax purposes before the sale process begins.

The choice of transaction form also depends on business assets. In an asset deal, the purchase of the individual assets, their hidden reserves are disclosed at the seller. The buyer can depreciate the purchase price, to the extent it relates to depreciable assets and goodwill, over the useful life. If a GmbH sells its business, it taxes the gain in full, and a second layer of tax arises when it distributes to the shareholders. In a share deal, by contrast, the shares change hands, and the book values in the company remain unchanged. Only the gain from the sale of shares is taxed, for a selling corporation 95% tax-exempt (Section 8b KStG).

In due diligence, buyers check whether all essential operating assets belong to the company to be sold, such as intellectual property rights, software, domains or land. They also clarify whether private expenses run through the company and which assets are dispensable for the business.

Worked example: business assets in a business split and a sale

A founder holds 100% of the shares in an operating GmbH and lets it an operating site that she owns personally; a business split exists. A buyer acquires all the shares for EUR 6,000,000, the land stays with the founder and continues to be let to the GmbH.

• Because of the business split, the shares belong to the business assets of the asset-holding company, their book value is EUR 50,000; disposal gain 6,000,000 minus 50,000 = EUR 5,950,000
• Taxable part under the partial-income method: 5,950,000 × 60% = EUR 3,570,000
• With the sale, personal interdependence ends, and the asset-holding company is regarded as discontinued. The land is stated at its fair market value (gemeiner Wert) of EUR 1,300,000; the book value is EUR 400,000.
• Discontinuation gain from the land: 1,300,000 minus 400,000 = EUR 900,000, taxable in full
• Taxable amounts in total: 3,570,000 + 900,000 = EUR 4,470,000
• Inflow from the transaction: EUR 6,000,000 from the sale of the shares, no payment received for the land

The tax on the EUR 900,000 must be paid from the proceeds of the shares or from other assets. Without a business split, the land would remain private assets. The sale of the shares would be taxed in the same way, the increase in value of the land only on a sale within ten years of acquisition (Section 23 EStG). Whether tax-rate reductions apply and which structure avoids the disclosure depends on the individual case.

Distinctions: business assets, private assets and non-operating assets

• Private assets: assets without a sufficient business connection. Changes in value are taxable only in cases provided for by law, for example with shares in corporations or with land within the ten-year period for private disposal transactions (Section 23 EStG).
• Operating assets required for the business (betriebsnotwendiges Vermögen): a term of business valuation. Assets that are dispensable for the business are valued separately, usually at their disposal value, even if they are business assets for tax purposes.
• Non-operating assets (Verwaltungsvermögen): the part of the business assets that is in principle not relieved for inheritance and gift tax, such as land let to third parties, securities and financial assets above certain limits.

Common mistakes

• Essential operating assets outside the company. If intellectual property rights, software or land lie with the shareholder, transfer and tax consequences must be clarified before a sale.
• Unrecognised business split. If the interdependence goes unnoticed, the disclosure of hidden reserves often becomes apparent only in the sale, when there is no time left for structuring.
• Special business assets forgotten in succession. If a partnership interest is transferred without the associated special business assets, a withdrawal and the loss of reliefs are threatened.
• Elective business assets without a view to the exit. What has once been allocated can return to private assets only through a taxable withdrawal.

Frequently asked questions

Does a company car belong to business assets?

A car that is used more than 50% for business does, as necessary business assets. Private use is then taxed as a withdrawal on a flat-rate basis under the one-percent rule or on the basis of a driver's log. For business use between 10% and 50%, there is an allocation election. A car of the GmbH is always business assets of the company; private use by the managing director is employment income for that person.

Does a GmbH have private assets?

No. All assets of a GmbH are business assets. If shareholders receive private advantages without adequate consideration, there is generally a hidden profit distribution.

What happens when business assets are transferred to private assets?

There is a withdrawal, which is valued at the going-concern value. The difference from the book value must be taxed as profit, although no money flows.

How are business assets relieved for inheritance tax?

Through the business relief (Verschonungsabschlag): qualifying business assets remain partly or entirely tax-free when inherited or given (Sections 13a and 13b of the German Inheritance and Gift Tax Act (Erbschaftsteuer- und Schenkungsteuergesetz, ErbStG)). For this, the acquirer must continue the business for several years and, above a certain number of employees, maintain the payroll total. Shares in a corporation are likewise relieved for a direct holding of more than 25%, including in private assets (Section 13b(1) no. 3 ErbStG).

Non-operating assets are in principle not relieved, and young non-operating assets that have belonged to the business for less than two years in no case. The acquirer's personal allowances apply irrespective of this.

The Roemer Capital view

Before a succession or a sale, we clarify early whether all assets that carry the business also belong to the company that is to be sold. If land, intellectual property rights or software lie with the shareholders, we pass the question of a business split and special business assets to the tax adviser. We plan any necessary restructuring so that it is complete before buyers are approached; the sale process itself typically takes 6 to 12 months.

On the basis of the tax adviser's information, we calculate what amount arrives after tax. This net view often helps decide which transaction form is economically preferable.