Germany Scraps €20,000 Cap on Loss Offsetting for Capital Gains

The rules around tax-loss compensation for German investors are being redrawn. A key restriction that has shaped investment strategy for years is disappearing entirely.

When the Annual Tax Act 2024 was published in the Federal Law Gazette on December 5, 2024, it quietly dismantled a limitation that had been in place since the 2009 tax reform. Previously, losses stemming from futures transactions and the irrecoverability of capital claims could only offset gains up to €20,000 per year — a threshold that applied to losses incurred after December 31, 2020. That ceiling is now gone, with no upper limit replacing it.

The flat-rate saver allowance remains central

Despite the loosening of loss-offsetting rules, the Sparer-Pauschbetrag — Germany's flat-rate saver allowance — continues to anchor the taxation system for investment income. Single filers can earn up to €1,000 tax-free, while married couples filing jointly receive a €2,000 exemption. The law explicitly prohibits deducting actual income-related expenses (Werbungskosten) against this income.

Unused portions of the allowance can be transferred to a spouse under specific conditions. The Federal Constitutional Court affirmed back in 2009 that this framework applies exclusively to income from capital assets — not to other payment streams like annuities.

When does income count as received?

Timing is everything in this system. Tax liability hinges on when funds become economically available to the taxpayer, not merely when they fall due. For controlling shareholders, this can happen as early as the credit appearing in a clearing account — or at the moment a profit appropriation resolution is passed.

Distributions arising from the liquidation of a corporation fall under Section 20 (1) No. 2 of the Income Tax Act (EStG). The notable exception is the repayment of nominal capital. Converted revenue reserves are treated differently: they are taxed specifically to prevent accumulated profits from being paid out without any tax consequence.

Executive compensation under scrutiny

Tax auditors are paying close attention to how companies compensate their managing directors. The total package — base salary, profit-sharing bonuses, and benefits in kind — must withstand a comparison with what unrelated third parties would receive in similar arrangements. If it doesn't, the tax authorities may reclassify the excess as a hidden profit distribution (verdeckte Gewinnausschüttung).

The Federal Fiscal Court has established clear benchmarks for what qualifies as acceptable:

• Bonuses may not exceed 25 percent of total compensation
• The aggregate bonus pool is capped at 50 percent of annual profit
• Overtime and holiday premiums paid to shareholder-managing directors are typically treated as hidden profit distributions

Bond-stripping rules tightened since 2017

A separate set of provisions has been active since the start of 2017 targeting bond-stripping strategies. Detaching a coupon from the principal of a bond is now treated as a disposal for tax purposes. The measure closes a loophole where investors could manufacture artificial losses to dodge the 25 percent withholding tax rate.

For losses on capital assets, a binding effect links the loss-determination notice with the income tax assessment. Legal experts advise that any objections to the tax basis must be raised in the appeal against the income tax assessment itself — waiting until later stages of the process is not an option.

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