Real estate transfers within a family – for example, as part of a succession planning arrangement – are often structured as installment payments of the purchase price. In many cases, the parties intentionally agree that these installments will be interest-free to make the acquisition more financially manageable for the buyer. Until now, the tax treatment of these arrangements has generally been “corrected” by the German tax authorities. Both the tax authorities and the courts had assumed that the installment payments included a taxable interest component, even if the parties had expressly agreed that no interest would be charged.
In two recent decisions issued on March 24, 2026, however, the German Federal Fiscal Court (BFH) fundamentally challenged this long-standing approach and reversed its previous case law. The implications are significant and represent a welcome development for taxpayers.
The previous approach: imputed interest under the German Valuation Act
Until now, the German tax authorities, relying on earlier BFH case law, followed a standardized approach:
Installment payments were treated as consisting of both a principal repayment component and an interest component from an economic perspective. This treatment was generally based on Section 12(3) of the German Valuation Act (BewG), which provides for a present value calculation using a statutory interest rate of 5.5%. The calculated interest component was treated as taxable investment income under Section 20(1) No. 7 of the German Income Tax Act (EStG) for the seller. This approach applied even where the parties had expressly agreed that the purchase price would be paid without interest.
An alternative view held that an interest-free deferral of the purchase price constituted a gift equal to the financial benefit of the interest savings over the deferral period, resulting in a gift subject to gift tax in favor of the recipients.
No investment income from an interest-free purchase price deferral
In its decisions BFH VIII R 30/24 and BFH VIII R 1/23, the German Federal Fiscal Court has now made a clear departure from its previous case law.
1. The parties’ civil law agreement is decisive
The BFH makes it clear that what matters is the agreement the parties actually entered into – not what may be inferred from the transaction based on economic considerations. If the parties agree that the purchase price will be paid in installments and that each installment constitutes solely a repayment of principal, with no interest component, there is generally no transfer of capital for consideration.
2. An interest-free deferral does not give rise to taxable investment income
According to the BFH, an interest-free deferral of the purchase price does involve the transfer of capital, but it is made without consideration. As a result, it does not give rise to taxable investment income. Even a calculated or merely hypothetical interest component is irrelevant for tax purposes. This also applies to any interest amount determined under Section 12(3) BewG, which does not constitute taxable consideration for the transfer of capital.
3. No more allocation of installment payments between principal and interest
As a consequence, each installment must be treated entirely as a repayment of the purchase price. The installment payments must no longer be allocated between principal and interest.
This applies both to Section 20(1) No. 7 EStG (current investment income) and to Section 20(2) EStG (capital gains arising from the disposal or repayment of financial assets).
4. Section 12(3) BewG is not a basis for creating tax liability
The BFH further clarified that Section 12(3) BewG cannot create a tax liability where no interest has been agreed. In practical terms, this marks the end of the long-standing practice of the German tax authorities of using valuation rules to impute taxable investment income where no contractual interest exists.
5. No gift of the interest benefit resulting from a mere deferral
Although the BFH acknowledged that the sellers intended to make a gratuitous transfer of the interest benefit to the buyer, it nevertheless concluded that no gift tax was due. The court reasoned that there had been no transfer of assets from the sellers to the buyer. Rather than making an interest-free sum of money available from their own assets, the sellers had merely agreed to defer payment of the purchase price.
According to the BFH, this is also what distinguishes such an arrangement from a below-market interest loan, in which the buyer would be granted the benefit of using borrowed funds at favorable terms (see also our article “Intra-Family Loans: Low Interest Rates Can Trigger German Gift Tax”).
Contract terms are key
At the same time, the BFH emphasized that the parties’ agreement must be recognized for tax purposes and must not constitute an abusive tax arrangement within the meaning of Section 42 of the German Fiscal Code (AO). The specific terms of the agreement therefore remain decisive. For example, a lower purchase price offered for immediate payment could indicate that the installment arrangement contains a hidden interest component.
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No such indications existed in the cases before the court. The parties had structured the transaction to make the purchase of the real property financially feasible, not to obtain a tax advantage.
Significant new planning opportunities
The decisions open up important new planning opportunities, particularly for intra-family transactions. Sellers can now provide financial support to buyers without generating taxable investment income or triggering gift tax on the value of the interest savings.
Contract drafting becomes even more important
To benefit from this approach, the purchase agreement should clearly state that no interest is payable and that all installment payments constitute repayments of principal. It is particularly important to avoid inconsistent provisions, such as hidden interest components or arrangements that could be characterized as a loan rather than a mere deferral of the purchase price.
With its decisions of March 24, 2026, the BFH has delivered a genuine game changer:
- No more imputed interest on interest-free installment payments
- The parties’ civil law agreement takes precedence
- Section 12(3) BewG no longer serves as a basis for imputing taxable investment income in private transactions
- No gift tax arises from an interest-free deferral of a purchase price claim
In practice, these decisions provide significantly greater legal certainty while also placing greater importance on careful contract drafting.
WINHELLER advises on all aspects of succession planning
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