BMF expands the municipal tax cross-subsidization regime: new opportunities for municipalities

With its letter dated October 10, 2025 (IV C 2 – S 2706/00061/003/134), the BMF has significantly expanded its previous principles on the combination of commercial activities of public-law entities (Betriebe gewerblicher Art – BgA) pursuant to Art. 4 (6) sentence 1 no. 2 KStG (German Corporate Income Tax Act). In addition to combined heat and power plants (CHP plants), heat pumps, hybrid PV systems, and district heating networks can now also establish a technical and economic interconnection. 

Focus on sustainable energy supply: BMF clarifies tax cross-subsidization regime

Thus, the BMF acknowledges the growing importance of sustainable energy concepts within municipal structures and sends a further signal regarding the tax treatment of modern energy and utility solutions within municipal multi-utility structures. Moreover, the letter can be seen as a first indirect step toward the adjustment of the tax framework for municipal tax cross-subsidization regimes, as announced in the current coalition agreement, with the aim of ensuring the long-term provision of essential municipal services. A draft version of the letter had already been published last year. The final version largely adopts the contents of the draft, differing only in a few minor aspects.

Expanded technical possibilities

Until now, for the purposes of a tax cross-subsidization pursuant to Art. 4 (6) sentence 1 no. 2 KStG, only the use of a combined heat and power plant (CHP plant) was recognized. Going forward, heat pumps, hybrid photovoltaic (PV) systems and district heating networks may also establish the required technically and economically significant interconnection between a municipal swimming pool activity (Bad-BgA) and a municipal utility activity (Versorgungs-BgA).

The assessment remains case-specific, but the BMF sets out minimum criteria for assuming such an interconnection. The economic viability of these technologies is generally presumed, as they are more sustainable and cost-efficient in the long term than conventional heat supply systems (in particular CHP plants). Therefore, unlike in the case of CHP plants, the BMF no longer requires proof of economic viability through an expert report.

Overview of technical variants

Heat pump

A consolidation is only possible with an electricity grid operation (Stromnetzbetrieb-BgA), which must be operated by the taxpayer itself. A prerequisite is that the grid operation is granted control rights over the heat pump (i.e., the ability to switch it on and off).

If the grid operation is already combined with other activities for tax purposes, an interconnection is still possible, provided the grid operation is not of subordinate importance within the combined activity. As a rule of thumb, a revenue share of at least 10% of the grid operation within the combined activity indicates that it is not of subordinate importance.

A heat pump may meet the requirement of “sufficient significance” if it supplies all heat generated to the municipal swimming pool, covers at least one-third of the swimming pool’s total heat demand, and has an electrical capacity of at least 50 kW.

Compared to the draft version, the rules have been amended such that only the heat demand of the swimming pool itself is relevant, while ancillary areas (e.g., sauna or kiosk) may be disregarded.

Hybrid photovoltaic systems

Hybrid PV systems combine electricity and heat generation within a single system. In addition to solar cells that generate electrical energy from sunlight, they are equipped with an integrated heat exchanger that uses unused solar radiation to heat liquids. As a result, the system simultaneously produces electricity for the energy supply operation and heat for the connected municipal swimming pool. In terms of functionality, these systems are largely comparable to combined heat and power plants (CHP plants). Accordingly, the tax authorities apply almost identical requirements to these systems as to CHP plants (cf. BMF letter dated May 11, 2016).

For tax consolidation, an energy supply BgA (either electricity retail supply or electricity grid operation) is required. As with heat pumps, if the energy supply activity has already been combined with other activities, it must not be of subordinate importance, which is generally assumed if it accounts for at least 10 % of total revenue. The system must be allocated to the business assets of the energy supply BgA. A system is considered to have sufficient significance if it covers at least 10 % of the heat demand of the specific connected swimming pool (additional 10 % threshold) and has an electrical capacity of at least 50 kW.

District heating networks

The integration of a municipal swimming pool into a district heating network may also justify a tax consolidation in the future. This requires contractual or organizational arrangements granting the district heating BgA the necessary control rights within the scope of its heat load management (e.g., the ability to switch on and off at a district heating transfer station).

The requirement of sufficient significance is met if:

• at least 80% of the swimming pool’s heat demand is covered by district heating, and
• the swimming pool has a water volume of at least 750 m³ (previously 1,000 m³).

The tax authorities assume that the municipal swimming pool must have a certain minimum size in order to be used at all for heat supply and grid stability purposes. Contrary to the original size of 1,000 m³, the tax authorities have reduced the volume, which generally covers a standard municipal swimming pool with a sports pool.

Conclusion and outlook

The current BMF letter represents a necessary step if the tax cross-subsidization between municipal swimming pools and utility operations is to remain viable in the future. Given the strained financial situation of many municipalities, there is a concern that, without the tax advantages of the tax-cross subsidization regime, operating many municipal swimming pools will become even more difficult for financial reasons. However, it remains to be seen whether the requirements set by the tax authorities for the necessary interconnection can be met in practice. In particular, the 10 % revenue threshold in cases where the multi-utility structure involves additional utility activities may not easily be exceeded by many municipal utilities. In practice, discussions with the tax authorities will show whether revenue alone is decisive, or whether other indicators may also demonstrate that an activity is not of subordinate importance. The BMF letter remains unclear in this respect, as it uses the term “generally” without providing further examples, despite requests from municipal associations.

Further interpretative issues are also likely to arise during initial discussions. In connection with earlier guidance on interconnection involving CHP plants, the tax authorities already issued extensive supplementary explanatory guidance in addition to the original BMF letter. It would be desirable for similar clarifications to be issued for the current letter.

As a result, in many cases it will remain necessary to obtain a binding ruling in order to ensure that the use of new technologies complies with the tax authorities’ expectations.

Ultimately, the BMF letter responds to technological developments in municipal energy supply and acknowledges the growing importance of sustainable energy concepts by explicitly including heat pumps, hybrid photovoltaic systems, and district heating networks in the “catalogue” of eligible technologies for establishing a tax cross-subsidization structure. Despite this expansion, the tax framework remains complex, characterized by a high degree of regulation, extensive documentation requirements, and rigid percentage thresholds. Whether the new possibilities for interconnection will actually strengthen the tax-cross subsidization regime in practice remains to be seen. Municipal companies should therefore review the new opportunities at an early stage, adapt existing structures where necessary, and closely monitor further developments.

It also remains to be seen whether the legislator will address other outstanding issues relating to the tax-cross subsidization regime. In addition to the ongoing and increasing risk of invalidity due to potential violations of state aid law, it is still unclear how the Federal Fiscal Court (BFH) will respond to the non-application decree concerning chain consolidations. These issues can ultimately only be resolved through legislative amendments, as already envisaged in the coalition agreement calling for a direct adjustment of the legal framework.