BFH Further Clarifies Its Case Law on Tax Classification of Ongoing Payments from Employee Participation Programs
Legal Insights Germany
March 03, 2026In two recently published rulings, the German Federal Fiscal Court (BFH) has clarified its case law on ongoing payments from employee participation programs, thereby creating further legal certainty with regard to the taxation of employee participation programs in the form of silent partnerships and contractual profit participation rights.
Typical Silent Partnership as an Employee Participation Program (Ruling Dated October 21, 2025, Ref. VIII R 13/23)
Facts of the Case
The plaintiff (employee) entered into a typical silent partnership with the employer company and received ongoing payments from doing so. This participation was only granted to certain employees and ended upon termination of the employment contract. The tax office treated the payments as additional wage payment, whereas the employee considered them to be dividends.
Decision of the German Federal Fiscal Court
The BFH concludes that the payments from the typical silent partnership constitute dividends pursuant to Section 20 (1) No. 4 of the German Income Tax Act (EStG) and must not be reclassified as income from the employment contract.
In accordance with previous BFH case law, the decisive factors are that a special legal relationship has been effectively established, the terms of such special legal relationship have been effectively agreed and implemented, and the special legal relationship has its own economic substance in addition to the employment relationship in terms of its structure.
Furthermore, in the case of ongoing payments from a typical silent partnership, the Federal Fiscal Court explicitly states that no overall assessment should be made as to whether another type of income (income from employment) is predominant. It is therefore irrelevant whether there is a substantial connection with the employment relationship. The only decisive factor is that the silent partnership was effectively established and that the contractual provisions are complied with. An overall assessment that would otherwise have to be made in individual cases, for example with regard to the appropriateness of the income, is not to be made in the case of ongoing payments from a typical silent partnership.
Contractual Profit Participation Right of an Employee (Ruling Dated October 21, 2025, Ref. VIII R 14/23)
Facts of the Case
The plaintiff (employee) participated in a profit participation rights program offered by its employer. To this end, the plaintiff paid a fixed amount as consideration and received in return payments in relation to the company's performance. The profit participation right (PPR) was linked to an existing employment relationship by means of leaver clauses. Subsequently, the tax office treated the payments as wage payment, while the plaintiff considered it to be dividends.
Decision of the German Federal Fiscal Court
The BFH ruled that the payments from the contractual PPR constituted dividends pursuant to Section 20 (1) No. 7 EStG and could not be reclassified as wage payment.
Once again, the decisive factor for the BFH is that a special legal relationship under corporate law was effectively established, which was effectively agreed and implemented and which had its own economic substance in addition to the employment relationship. Accordingly, the BFH further specifies its previous case law: For the allocation of income under tax law, it is irrelevant whether, in individual cases, there is a substantial connection to the employment relationship, in particular due to so-called leaver clauses. The only decisive and sufficient factor for the classification of payments as dividends is the special legal relationship that was effectively agreed and implemented.
Conclusion
The BFH ruling provides additional legal certainty for employee participation programs: ongoing payments from typical silent partnerships and contractual profit participation rights can regularly be treated as dividends as long as a special legal relationship with a certain economic substance is effectively agreed and actually implemented. In any case, an additional overall assessment with regard to a possible substantial connection with the employment relationship is no longer relevant for ongoing payments from such employee participation programs.
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