Starting in 2022 the German option model provides an alternative to the profit retention discount for commercial partnerships. What are the pros and cons of both models?
The regulation on the profit retention discount can be applied since 2008. The new option model is available since January 1, 2022. The Wachstumschancesgesetz from March 27th, 2024 has changes regulations on the profit retention discount. For example payed taxes are no longer considered as distributed earnings. The German Ferderal Ministry of Finance has published additional regulations on March 12, 2025 for the application of the new rules.
To finally reach tax neutrality for the conversion to the option model it has to be kept for at least 7 years. Regarding the profit retention discounts you can choose for each and every year and also separately for every shareholder whether you would like to apply it or not and if so, what amount you choose.
Often the tax burden in case of using the profit retention discount will be lower than when applying the option model, even if you consider a certain amount of profit distribution.
If you already have used the profit retention discount and you’re thinking of changing to the option model, please consider that you have to tax the already received discount in that case at once.
Before deciding on one of the options please perform a thorough analysis of the respective consequences. If you apply the profit retention discount for the first time you should consider what to do with former reserve funds to avoid having them trapped. Regarding the option model tax loss carry forwards can be lost and it can trigger an exit tax.
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