Some tax situations feel like a system error: the tax authority demands tax on income that never arrived in your account. No payment received, no revenue, no cash inflow — and yet a real tax liability. In the English-speaking world this is called phantom income or dry income. German tax law has no unified term for it, but the phenomenon is very real.
For founders in early stages, it is particularly dangerous — liquidity is already tight, and an unexpected tax bill can be existentially threatening. The three traps below don't arise from bad intent. They arise from unfamiliarity with German tax rules, time pressure, and the understandable assumption that something "internal" can't have tax consequences. Under German law, that assumption is wrong.
Trap 1: The unnoticed Betriebsaufspaltung
A Betriebsaufspaltung arises when a shareholder lets the GmbH use an essential business asset and both sides are under common control. The consequence: private assets become business assets. When the arrangement ends, hidden reserves are treated as realised — tax without any cash inflow.
What is a Betriebsaufspaltung?
The Betriebsaufspaltung — loosely translated as a "deemed business split" — is not a statutory provision. It is a construct developed through German case law. Its original purpose was to prevent business owners from avoiding trade tax by holding valuable assets privately and leasing them to their GmbH. Under this doctrine, the private holding entity is treated as a commercial business for tax purposes, even though it would otherwise be classified as private asset management.
A Betriebsaufspaltung arises when two conditions are met simultaneously:
Personal interconnection: The same person controls both the holding entity (the private lessor) and the operating entity — i.e. the GmbH to which the asset is being provided.
Material interconnection: The holding entity provides the operating entity with an essential business asset. In the classic case, this is real estate. In a startup context, it can also be intellectual property, a licence, or simply the office space from which the company operates.
The startup case: the founder's own property as a tax trap
A founder owns a commercial property — an office or business premises they have held for some time. When founding the GmbH, they let the company use this property as its business address and working space, either for rent or sometimes for free. This looks like a pragmatic arrangement. Under German tax law, it will almost always constitute a Betriebsaufspaltung: the founder is a shareholder of the GmbH (personal interconnection) and is providing an essential business asset in the form of the property (material interconnection).
At the moment the Betriebsaufspaltung comes into existence, the founder's GmbH shares are deemed to have been contributed to a notional business asset — at their value at that point in time. For a freshly incorporated GmbH, that value is close to zero.
The worst case: financing round meets Betriebsaufspaltung
The company grows. A financing round follows. The company is valued at €20 million on paper. The founder's 50% stake is now worth €10 million. The GmbH moves into larger rented premises — the arrangement with the founder's property ends. At exactly that moment, the Betriebsaufspaltung also ends: the essential business asset is no longer being provided.
The consequence: the GmbH shares are deemed to have been withdrawn from the notional business asset at their current market value of €10 million. The taxable gain is the difference: €10,000,000 withdrawal value minus €12,500 original contribution value — nearly €10 million of taxable income. Taxed as ordinary trade income, not under the more favourable partial income method.
The founder has not seen a single euro of this. The shares still exist, no cash has moved. But the tax liability is real — and can destroy the entire venture before any actual exit has occurred.
What helps
The most important measure is prevention: any provision of premises, IP, or other essential business assets between the founder as an individual and the GmbH must be reviewed for tax implications before it happens — not afterwards.
If a Betriebsaufspaltung already exists, that is not necessarily a problem — but it must be actively managed. It must not end unintentionally. A founder who knows they have a Betriebsaufspaltung can plan around it. A founder who doesn't know is walking into the trap.
Trap 2: The silent GbR before incorporation
When several founders work on a product together before incorporating, a GbR regularly comes into existence — even without a contract. The value created up to that point sits in that GbR. Transferring it into the new GmbH without a tax-neutral contribution can create a taxable event before the first euro of revenue.
What happens in the pre-incorporation phase?
Founding teams rarely start with a notary appointment. The reality is usually this: people meet, develop an idea together, write code, file patent applications, have early customer conversations — and at some point, when the concept is solid, they incorporate a GmbH. This pre-incorporation phase can last weeks. In medtech and deep-tech, it often lasts years.
During this entire period, a German civil law partnership — a GbR (Gesellschaft bürgerlichen Rechts) — typically already exists under German law. Not because anyone planned it, but because German law recognises a GbR as soon as two or more people jointly pursue a commercial purpose. No partnership agreement is required.
The problem: value created in the GbR, GmbH incorporated alongside it
When real value is created during this phase — a registered patent, a working prototype, early customer contracts, a user base — those are assets of the GbR. They legally belong to the partners personally.
Then the GmbH is incorporated. The team continues as before — the GmbH takes over the operations, the patents are "brought along", the customer contracts now run under the GmbH. What often doesn't happen: a properly documented, tax-compliant transfer of those assets from the GbR to the GmbH.
From the tax authority's perspective, this is a disposal event. The GbR — and therefore the founders personally — has transferred assets to the GmbH. If hidden reserves exist at the time of transfer — meaning the transferred value exceeds the tax book value — those reserves must be disclosed and taxed.
The worst case: financing round as proof of value
The founding team has spent two years in the GbR phase doing research, filing patents, and building a prototype. The GmbH is incorporated. Three months later, a seed round closes at a €5 million valuation. The tax authority argues: that value was not created in three months — it already existed in the GbR. The hidden reserve belongs to the GbR, must be disclosed there, and the founders owe personal income tax on it.
Not a single euro has changed hands. The GmbH shares exist, but the founders have no liquidity. The tax liability, however, is real — and can be existentially threatening before the startup has even properly launched.
What helps
Don't ignore the pre-incorporation phase from a tax perspective. Founders working together on a shared concept should clarify early on whether and when a GbR comes into existence — and what value is being built during that period. Patent filings, customer contracts, IP development: all of these are potential hidden reserves.
When the GmbH is incorporated, any transfer of assets from the GbR must be clearly documented and structured correctly under tax law. There are ways to achieve this in a tax-neutral or tax-efficient manner — but those paths must be taken before the transfer, not afterwards. The earlier a tax advisor is involved, the more options are available.
Trap 3: Shareholder loans without documentation
A shareholder loan without a written agreement, interest rate or repayment schedule does not withstand an arm's-length comparison. The tax office can impute interest or treat the payment as a hidden capital contribution. Either way, a tax liability arises on money that never changed hands.
What happens
The founder injects money into the GmbH — and does it correctly: written loan agreement, market-rate interest, clear term. Everything properly documented. And yet a tax trap arises — not because of missing documentation, but because of a deemed receipt rule that most founders are unaware of.
The deemed receipt rule for controlling shareholders
German tax law normally follows the cash basis principle: income is taxable when actually received. For a controlling shareholder — a majority shareholder who could determine the timing of any payment themselves — this rule does not apply without restriction.
Germany's Federal Fiscal Court (BFH) has confirmed: interest on a shareholder loan is deemed to have been received by a controlling shareholder at the point of maturity — regardless of whether the money was actually paid out. The reasoning: a majority shareholder could have demanded payment of the interest at any time. The fact that they chose not to is irrelevant for tax purposes.
The GmbH records the interest as an expense in its accounts. The founder sees nothing in their bank account. Yet they must declare this interest in their personal income tax return in the year of maturity and pay tax on it — at their personal income tax rate, not at the flat 25% withholding tax rate. Founders holding more than 10% in the GmbH they are lending to are excluded from the flat withholding tax rate. At a top marginal rate of 45%, this is a substantial difference.
Room for planning — new BFH ruling, September 2025
The BFH provided important clarification in September 2025: the deemed receipt rule only applies once the interest claim is actually due. If the maturity date is pushed back by mutual agreement before it falls due — a so-called prolongation — no taxable receipt arises. A founder who agrees with the GmbH in writing to defer the maturity date before it arrives can therefore manage the timing of the tax event. This requires that the deferral agreement is reached before maturity and is properly documented.
Additional risks: what can go wrong even with a clean agreement
If the agreed interest rate exceeds the market rate, the tax authority classifies the excess as a deemed profit distribution (verdeckte Gewinnausschüttung). The GmbH cannot deduct it as a business expense, and the founder faces dividend taxation on the excess rather than the planned interest treatment.
A loan with no written agreement risks being reclassified as a deemed equity contribution if there was no apparent intention to repay from the outset. If the money later flows back as a "loan repayment", the tax authority may treat it as a return of equity contribution — and therefore as a taxable dividend. The founder gets their own money back and still owes tax on it.
What helps
A written loan agreement with a market-rate interest rate is the foundation. To document the market rate, founders should obtain and retain evidence of comparable lending rates at the time the agreement is signed — for example, current bank lending conditions for loans of similar size and duration. The market rate always depends on the security provided: an unsecured shareholder loan to an early-stage startup will be priced differently from a secured bank loan, and the agreed rate must reflect that difference to withstand scrutiny.
Controlling shareholders who allow interest to accrue should keep track of maturity dates and discuss early with their tax advisor whether a prolongation before maturity is appropriate — and ensure any such deferral is documented in writing before the due date arrives.
Older articles on shareholder loans frequently reference a discounting obligation under §6(1) No. 3 of the German Income Tax Act (EStG): non-interest-bearing loans had to be discounted in the tax balance sheet at 5.5%, generating notional taxable income at GmbH level. Germany's Fourth COVID Tax Relief Act (2022) abolished this discounting obligation for liabilities with effect from the 2023 financial year onwards. This specific phantom income effect at GmbH level is therefore no longer current. The deemed receipt rule for controlling shareholders at the personal level is unaffected by this change.
What all three traps have in common
In all three cases the tax liability arises not from a decision but from the absence of one. Providing an asset, working together beforehand and injecting capital happen anyway — they only become a tax problem when they remain undocumented.
None of them arise from bad intent. They arise from unfamiliarity with German tax rules, time pressure, and the assumption that something "internal" can't carry tax consequences. Under German law, there is no such thing as an internal sphere that tax cannot reach.
What makes all three traps avoidable: documentation before the transaction, not after. And tax advice at the moment when money, assets, or rights flow between a shareholder and the company — in either direction, and regardless of whether any cash actually moves.
This guide simplifies complex tax matters and may contain errors. It does not constitute individual tax or legal advice and should not be used as the sole basis for any decision. For binding guidance, please consult a qualified tax advisor or lawyer of your choice.
This guide provides general, non-binding initial information and does not constitute tax or legal advice. The presentation is deliberately simplified and does not cover every individual case. Individual review is required before any specific decision. Details in the full disclaimer.