Partial-income method (Teileinkünfteverfahren)

How does the partial-income method work?

Of the income from the shareholding – dividends or capital gain – 40 % is exempted (§ 3 no. 40 EStG). The remaining 60 % enters the normal income tax assessment and is taxed at the personal, progressive rate. Mirroring this, § 3c (2) EStG provides that expenses connected with this income (financing interest, advisory fees, disposal costs) are likewise only 60 % deductible. Since 2009, the method has replaced the former half-income method (50/50).

When does the partial-income method apply?

• Mandatory: shares held as business assets – for instance when a sole proprietorship or a GmbH & Co. KG holds GmbH shares.
• Mandatory: disposal of significant shareholdings under § 17 EStG – i.e. at least 1 % ownership at any point in the past five years, even for privately held shares.
• On application (§ 32d (2) no. 3 EStG) instead of the flat tax for distributions: with at least a 25 % stake – or at least 1 % plus professional activity for the company with significant entrepreneurial influence.
• Not applicable: small portfolio dividends in private assets below these thresholds – there, the flat withholding tax remains.

Partial-income method vs. flat withholding tax

In terms of pure tax burden, the two methods are close: the flat tax costs 26.375 % (incl. surcharge), the partial-income method 60 % of the personal rate – 25.2 % at a 42 % rate, around 27 % at 45 %, correspondingly less at lower rates. Three differences are decisive: first, expense deduction – only the partial-income method allows it (at 60 %), which tips the scales for debt-financed stakes or high advisory costs. Second, loss offsetting: losses under § 17 EStG are 60 % offsettable against other income. Third, progression: those with a low overall tax rate – for instance in retirement or a loss year – fare better under the partial-income method.

Practical example: a debt-financed share purchase

An entrepreneur buys 30 % of a GmbH for €600,000, financed at €25,000 interest per year, and receives an €80,000 distribution. Under the flat tax she pays 26.375 % on the full €80,000 – around €21,100, and the interest evaporates for tax purposes. With the partial-income application, €48,000 is taxable (60 %), less €15,000 of deductible interest (60 % of €25,000) – leaving €33,000 taxable, around €13,900 at a 42 % rate. Saving: over €7,000 per year, purely from ticking the right box in the tax return.