German Federal Fiscal Court prevents excessive tax burden on fund losses

Background 

Since January 1, 2018, the reformed German Investment Tax Act has been in force. At the turn of the year 2017/2018, the system was changed to a separate taxation of investment funds and investors. To implement this transition, a deemed disposal of investment fund units as of December 31, 2017 at the redemption price or stock exchange price on the relevant date was assumed. These deemed disposed fund units were then treated as reacquired as of January 1, 2018 at the same value. Any resulting (deemed) capital gain as of December 31, 2017 was not taxed immediately, but only upon actual disposal at a later date (i.e. no “dry income”). 

Since January 1, 2018, a partial exemption of 30 % has also applied to both positive and negative income from equity funds pursuant to Art. 20 (1) InvStG. This is intended, on a standardized basis, to offset prior taxation at the fund level, particularly in respect of dividends. The partial exemption generally also applies to capital gains and losses on disposal. However, the partial exemption does not apply to the deemed capital gain as of December 31, 2017, but only to the gain or loss attributable to value changes from January 1, 2018 until the actual disposal. 

BFH rulings on partial exemption 

In its decisions of November 25, 2025 (VIII R 22/23, VIII R 15/22, VIII R 31/23; largely identical in substance), the BFH has now restricted the application of the partial exemption regime: 

According to the BFH, the partial exemption does not apply to capital losses resulting solely from the recognition of notional higher acquisition costs as of January 1, 2018. 

In the case at hand (VIII R 22/23), fund units acquired after 2008 but before 2018 were sold at a loss in 2018. 
The value development was as follows (rounded figures): 

At the time of the notional sale, a capital gain of EUR 8,000 arises, to which the partial exemption does not apply under the previously applicable rules. Upon the actual sale, a capital loss of EUR 7,500 arises. After applying the 30 % partial exemption (for equity funds), only EUR 5,250 (70 %) is recognized. When combining both sales, this results in a taxable gain of EUR 2,750 (EUR 8,000 minus EUR 5,250), although the actual economic gain amounts to only EUR 500. In the case at hand, this led to an effective tax burden of approximately 160 %. 

The BFH has now ruled that Art. 20 (1) sentence 1 InvStG (partial exemption) is not applicable to the extent that a loss determined under the new law results from the fact that the notional acquisition costs as of January 1, 2018 exceed the historical (actual) acquisition costs. Only any additional “genuine” loss is subject to the partial exemption. 

Please note that the BFH’s decision only addresses equity funds, which were disputed in the cases decided. The application of the partial exemption to mixed funds and real estate funds (Art. 20 (2) and (3) InvStG) has not been clarified. 

Need for action 

The publication of the rulings in early 2026 means that custodian banks were unable to take the rulings into account for the preceding tax assessment periods. In particular, for the 2024 and 2025 tax assessment periods, for which the deadline for filing the tax return has not yet expired, a correction of the tax certificates – if necessary, as part of the tax return – is required. For periods not yet finally assessed, the filing of appeals or correction requests should be considered. Although the relevant rulings have not yet been published in the Federal Tax Gazette II, taxpayers should already be invoking this case law.  

To the extent securities assets are held at foreign financial institutions, the ruling must be taken into account when determining taxable income. Foreign financial institutions often do not fully account for the specific features of German tax law, meaning that an income determination in accordance with German tax principles may need to be performed “manually”. 

Implications of the BFH ruling 

For taxpayers, this is a welcome decision, as capital losses are no longer reduced by the partial exemption in these cases, thereby avoiding excessive taxation resulting from notional disposals. At the same time, the ruling requires taxpayers and their advisors to carefully review the tax treatment of transactions involving investment fund units acquired before 2018. We would be happy to assist you with this review.