Tax relief for start-up founders: Home offices are more often classified as private assets

End 2025, the legislature has defused one of the tax pitfalls for start-ups, the self-employed and shareholder-managing directors of limited liability companies (GmbHs). The revised Section 8 of the Income Tax Implementation Ordinance (EStDV) clarifies that a room located in one’s own home and used for business purposes – such as a study or a small storeroom – will no longer automatically be classified as business assets for tax purposes. The condition is that the room must either be no larger than 30 square metres or its value must not exceed 40,000 Euro.

What appears to be a technical detail has considerable practical significance. Until now, it was precisely the home office that could turn out to be the most costly office-related decision. If such a room was let to one’s own limited liability company (GmbH), there was a real risk of an unintended division of the business, with far-reaching tax consequences. In such cases, both the GmbH shares and the part of the property used for business purposes were no longer regarded as private assets, but as business assets. Particularly risky were cases where the limited liability company had no other business premises and the home office effectively served as the centre of business management. 

This tax entanglement often went unnoticed until the use ceased, for example due to the limited liability company moving premises or the termination of the tenancy agreement. If the factual connection ceases to exist, the part of the building and the GmbH shares are treated for tax purposes as if they had been withdrawn from the business assets. The result is taxation of hidden reserves, even though no cash is received.

The problem here is that the value of the withdrawal is not based on the historical acquisition or contribution costs, but on the current market value. For GmbH shares, this may be determined, for example, using the simplified income-based valuation method set out in the Valuation Act, whereby the average taxable profit over the last three years is multiplied by a statutory factor, currently set at 13.75. If, for example, a GmbH generates a taxable profit of 100,000 euros each year for three years, this results in a calculated value of 1.375 million euros. If the company was founded with a share capital of 25,000 and no further contributions have been made, the mere termination of the lease agreement – and thus the division of operations – could result in a taxable profit of 1.35 million euros (1.375 million euros minus 25,000 euros) – in addition to the taxation of the hidden reserves in the building portion. 

Although Section 8 of the Income Tax Implementation Regulation (EStDV) had previously contained an exemption, it remained largely ineffective. On the one hand, the space made available was permitted to account for no more than one-fifth of the property’s value, which regularly required a costly valuation. Secondly, the absolute value limit stood at just 20,500 Euro – a threshold that, given rising property prices, was quickly exceeded even for small rooms.

This is precisely where the new regulations come into play. The previous relative value limit has been replaced by a clear area limit of 30 square metres, whilst the value limit has been raised to 40,000 Euro. Furthermore, it is now sufficient to comply with just one of the two limits. For the self-employed, start-up entrepreneurs and shareholders in limited liability companies (GmbHs), this provides greater clarity as to when a part of a building forming part of their private assets is to be classified as business assets for tax purposes.