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Tax
10. Feb 2026
RA/StB Frank Moormann

Transferring business assets under the reservation of usufruct - Part 1: Sole proprietorships

If, in the context of business succession planning, business assets are transferred to the next generation, then this frequently happens under the reservation of usufruct. The aim is to secure the transferor's old-age provision and, concurrently, to make optimum use of the gift tax advantages. However, the most recent ruling by the Federal Fiscal Court (Bundesfinanzhof, BFH) has presented new challenges for consultants and taxpayers. In this report, we examine the criteria for tax-neutral book value continuation when (individual) trading or business enterprises are transferred. In the next edition of our magazine, a report will then follow with a description of the framework conditions for the transfer of partnership interests.

Transfer of a sole proprietorship for no consideration

In accordance with the previous legal position, if a trading or business enterprise was transferred by way of a gift under the reservation of usufruct, and if the usufructuary continued to pursue their commercial activity, then under Section 6(3) of the German Income Tax Act, this was nevertheless deemed to be a business transfer for no consideration. Consequently, the book values of the transferred assets had to be maintained and there was no taxable realisation of hidden reserves. Although, in 2017, the BFH had already denied a tax-privileged business transfer in the case of a leased commercial enterprise.

Scope of the restrictive ruling expanded to include active businesses

In its ruling of 29.1.2025 (case reference: X R 35/19), the BFH has now expressly extended its restrictive ruling to also apply to active businesses. For business transfers it is necessary for transferors to cease their commercial activities. Therefore, in the future, hidden reserves will generally be realised if the donor/ usufructuary continues to pursue their commercial or leasing activities. For tax purposes, the business will then remain with the donor. The transferred assets will be withdrawn and will become the private assets of the beneficiary.

The income tax consequences for the donor could be considerable, especially as there would be no corresponding inflow of liquidity for the donor from the transfer. As the business would continue to be operated, it would not be possible to make use of the tax concessions available in the case of a cessation of business, even if the other requirements for this have been met (reaching the age of 55 years or permanent occupational incapacity).

Caution

Tax disadvantages could likewise arise for the beneficiary because, in the absence of a transfer of the business, it would not be possible to claim an exemption under the gift tax rules. In this respect, the income tax ruling would also apply to gift tax.

Tax concessions upon termination of the usufruct

If the usufruct ceases to exist at a later date (through a waiver or the death of the usufructuary), then the tax-privileged business transfer to the beneficiary would happen at this point in time if the beneficiary were to continue to pursue the donors activities. The assets that were already previously gifted and were held as private assets would then be contributed once again to business assets at their allocable value (market value).

Important transitional arrangements

The fiscal administration responded to the ruling in the circular from the Federal Ministry of Finance of 28.10.2025 and issued the following application rules for the transfer of active businesses.

  • The new opinion will be mandatory for all transfers after 17.4.2025 (publication date of the BFH ruling).
  • In the case of transfers prior to 17.4.2025, where the tax assessment is not yet final and absolute, upon a request jointly submitted by both parties concerned, the book values may be maintained for reasons of protecting legitimate expectations.

Please note

Agricultural and forestry enterprises are expressly not affected by the new ruling. The fiscal administration also clarified this in the relevant Letter of Application. In this respect, these will still be tax-privileged business transfers, even if the donor/usufructuary continues to play an active role or acts as a lessor.