German Federal Fiscal Court Rules on ‘Passive Disjunction from German Taxation’ („passive Entstrickung“) in case of Changes to DTA
Legal Insights Germany
May 12, 2026In two similar cases involving a partnership (I R 41/22) and a corporation (I R 6/23), the German Federal Fiscal Court (BFH) decided whether the mere amendment or conclusion of a new Double Tax Agreement (DTA) can lead to an exit tax due to a taxable disjunction even without active action on the part of the taxpayer.
The BFH concluded that an exclusion or restriction of the right to tax under § 4(1), sentence 3 of the German Income Tax Act (EStG) or § 12(1), sentence 1 of the German Corporate Income Tax Act (KStG) does not require any action on the part of the taxpayer, but can also be triggered solely by a change in the legal situation—for example, due to the entry into force of a new or amended DTA (so-called passive disjunction from German taxation). Neither the wording nor the structure and history of the law allowed for another conclusion. This result does also not violate constitutional or EU law.
This conclusion that also the mere changes of DTA may lead to an exit taxation without requiring any action of the taxpayer is essentially in line with the view of the German tax authorities (see BMF Circular of Oct. 26, 2018, BStBl I 2018, p. 1104, para. 1). In terms of timing, the BFH holds that relevant exit taxation should not be triggered upon the new or amended DTA becoming applicable (as per the BMF Circular cited above), but rather one legal second prior to that point in time. This may be particularly relevant if, for example, the DTA is to take effect at the beginning of a new calendar year.
In our view, it can be expected that the tax authorities will concur with the BFH’s view regarding the timing of profit realization; official statements on this matter remain to be seen.
Research assistant Bartosz Paniak contributed to this article.
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