I. The Tax Reductions pursuant to § 34 para. 3 EStG

A discussion of the ruling first requires a brief consideration of the standard, which is practically significant but complicated in its details.
The central prerequisite for the tax reduction is the existence of a capital gain (Veräußerungsgewinn) within the meaning of § 34 para. 2 no. 1 EStG. The classic case of application is the sale of a business or partnership interests pursuant to § 16 EStG (also pursuant to § 18 para. 3 EStG in the case of self-employed persons). For capital company shares, a different “tax system” applies, the so-called part-income procedure (Teileinkünfteverfahren).
Up to an amount of EUR 5 million, the tax reduction may be claimed by those who have either reached the age of 55 or are permanently incapacitated for work, § 34 para. 3 sentence 1 EStG. With this requirement, the legislator pursues the purpose of favoring those who permanently terminate their professional activity or have to terminate it due to other factors. The taxpayer is to have the realized profit from the increase in value generated in the course of the entrepreneurial activity available for his/her retirement provision. One practical area of application is, for example, the sale of a medical practice when the owner ceases professional activity. In individual cases, the standard is also significant for restructuring measures.
If the aforementioned conditions are met and a corresponding application has been made, the preferential tax rate is applied to the capital gain in the context of the tax assessment. This is first calculated from the average tax rate of the total taxable income of the year and then multiplied by 56% (§ 34 para. 3 sentence 2 EStG). If a profit in the aforementioned sense exceeds this amount, only a maximum of EUR 5 million is taken into account within the framework of § 34 para. 3 EStG. The exceeding amount is taxed according to conventional regulations (often additionally favored according to the so-called quintuple regulation (Fünftelregelung) under § 34 para. 1 EStG, cf. II.).
The tax reduction is granted only once in a lifetime, § 34 para. 3 sentence 4 EStG. For later cases or also for all other income of the taxpayer in the same assessment period, the general provisions of the EStG apply, in the calculation of which the capital gain is no longer to be taken into account, § 34 para. 3 sentence 3 EStG. This applies even to other capital gains in the same assessment period. The reduced tax rate can only be applied to a capital gain, § 34 para. 3 sentence 5 EStG.

II. Advantages of the reduced tax rate

The described key points can lead to a significantly reduced tax burden in case of a planned application. The taxpayer can determine in which assessment period he/she sells and, if he/she has several such preferential sales, for which capital gain he/she wants to apply for the tax allowance.
In relation to the “quintuple regulation (Fünftelregelung)”, § 34 para. 1 EStG, the reduced tax rate has the advantage that it always leads to a tax concession. The tax rate is 56% of the average tax rate. The “quintuple regulation (Fünftelregelung)”, on the other hand, does not always result into a lower tax burden. Its purpose is to mitigate the progression what is an essential part of the German tax system for one-time, high profits by calculating the tax burden from only one fifth of the profits. This effect is absent if the income is in the range of the top tax rate (Spitzensteuersatz).
The “quintuple regulation (Fünftelregelung)” and the reduced tax rate are in an alternative relationship, so that the taxpayer can decide on the specific legal consequence by filing an application. In principle, an application is always suitable for the highest possible capital gain. If this is at the limit of EUR 5 million, a reduction in the tax burden of approximately EUR 1 million can be achieved. The greatest reduction results if the top tax rate (Spitzensteuersatz) is already applicable with the other income.
The time allocation can be determined to an assessment period by placing the sale either at the end of a calendar year or at the beginning of a new one. There is only a legal second between a transfer on 31 December, 11:59 pm and one on 1 January, 0:01 am.

III. Facts of the BFH’s ruling

This “planning” is affected in one detail by the ruling mentioned at the beginning. In order for the taxpayer to be able to preserve the aforementioned scope for planning for him/herself, he/she must ensure that the tax concession is not granted to him/her unlawfully by the tax authorities.
The ruling was based on a case in which the taxpayer sold his share in a group practice in the year in dispute (2016). He thereby realized a capital gain (Veräußerungsgewinn) pursuant to § 34 para. 2 no. 1 EStG. As part of his income tax return, he applied for the application of the reduced tax rate pursuant to § 34 para. 3 EStG. However, the tax office did not grant this to the claimant. The background to this was that the taxpayer had already been granted the reduced tax rate in 2006. At that time, however, there was neither a sale nor had the claimant filed an application for the granting of the reduced tax rate. However, the quintessence of the case was whether this unlawful granting of the reduced tax rate resulted in a “utilization (Verbrauchen)” of the right in § 34 para. 3 EStG.

IV. Essential considerations of the Senate

The BFH has ruled that the constellation described is also sufficient for “utilizastion (Vebrauchen)” and that a repeated claim is excluded.
The Senate relies on the existing line of case law. A “utilization (Verbrauchen)” according to § 34 para. 3 sentence 4 EStG exists if “the benefit has had an effect on the earlier tax assessment and it can no longer be reversed there” (BFH case of 29 September 2021 – VIII R 2/19, DStR 2022, 38 marginal no. 16). In the case of an unlawful granting without application, the taxpayer is entitled to the legal remedy of an objection. “Utilization (Verbrauchen)” can only not be assumed if the resulting benefit is so small that it was not recognizable for the taxpayer from the issued tax assessment. This is clear from the wording of the standard. It cannot be inferred from the wording “make use of” that an application is necessary. Moreover, this interpretation is consistent with the purpose of the standard. The purpose of the provision is to favor the retirement from professional life for tax purposes. Such a case can only be covered once in a lifetime – irrespective of whether it is a legitimate granting or not.
The BFH leaves open the effect of the absence of a capital gain (Veräußerungsgewinn). In this regard, it only briefly mentions the two existing views in the jurisdictional literature and follows the majority view that the absence of a “capital gain (Veräußerungsgewinn)” can also lead to a utilization of the preferential treatment.

V. The necessary consideration of “utizilation (Verbrauchen)” when dealing with § 34 EStG

First of all, the ruling shows that every “current” tax assessment must be examined to determine whether the tax office has erroneously applied the preferential tax rate (begünstigter Steuersatz) pursuant to § 34 para. 3 EStG, which theoretically may even have occurred before the taxpayer reached the age of 55.
Subsequently, in connection with the tax considerations in the case of potentially favorable disposals, it must be examined in which assessment period the disposal should take place and whether the favorable tax rate pursuant to § 34 para. 3 EStG was once granted in the past (possibly erroneously).