Anyone who sells a property and receives the purchase price in interest-free instalments will, in future, usually no longer have to fear tax on “notional interest”. This was decided by the Supreme Court of the Federation for Taxes and Customs on 24 March 2026, marking a departure from decades of previous case law. A highly relevant judgment for practice.
What was the case about?
A married couple sold a developed property to their daughter. Because the daughter was unable to obtain a bank loan and could only pay a limited monthly amount, the parties agreed that the full purchase price would be paid in monthly instalments, without interest.
They also agreed that each instalment would be fully credited against the purchase price. According to the agreement with their daughter, the parents therefore received no interest income.
The tax authorities however, took a different view. It calculated a “hidden” interest component from the monthly instalments and sought to tax this amount, as usual, as “income from capital assets” in the hands of the parents.
In doing so, the tax authorities assumed that anyone who defers payment over a long period is effectively earning something in return. This notional interest gain, it argued, was subject to income tax.
The married couple disagreed with this assessment and brought the matter before the courts.
What did the court decide?
The case ultimately came before the Supreme Court for Taxes and Customs, which delivered a landmark judgment and fundamentally changed its previous case law on this issue.
The Court ruled in favour of the married couple. If the parties expressly agree that no interest is payable and that each instalment is credited 100 per cent against the purchase price, the seller does not receive taxable interest income.
A purely mathematical interest component – for example, one calculated under Section 12(3) of the German Valuation Act – is not sufficient for this purpose.
In doing so, the court expressly abandoned its earlier and considerably stricter case law. Until now, the tax authorities often discounted such instalment payments automatically at 5.5 per cent and taxed the interest component calculated in this way.
Three points are particularly important in this judgment:
- No taxable interest income: Interest-free instalments generally no longer give rise to income from capital assets for the seller.
- No taxable gain from repayments: Because each instalment constitutes pure repayment of the purchase price, it is fully offset against that purchase price. No taxable gain arises.
- No gift tax on the waiver of interest: The waiver of interest does not constitute a taxable gift, because no money from the seller’s assets is made available for use.
There is, however, an important limitation: the judgment applies to property held as private assets and sold for full consideration — in other words, at genuine market value.
These principles do not automatically apply to business assets or to properties that are partly gifted.
What does this mean in practice?
For families in particular, the judgment opens up an attractive and legally secure tax planning option. It is possible to sell a property to children or grandchildren and collect the purchase price over many years in interest-free instalments, without the tax authorities taxing the seller on so-called notional interest.
The court expressly emphasised that such an interest-free deferral is not regarded as tax avoidance. This applies in particular where the arrangement makes the purchase possible in the first place because the buyer cannot obtain a loan.
However, it is not yet known whether the tax authorities will apply the judgment generally. Supreme Court for Taxes and Customs judgments become binding on the tax administration only once they have been published in the Federal Tax Gazette.
Why the wording matters
As welcome as the judgment is, careful contract drafting is crucial if the benefits associated with it are actually to be achieved.
Risks arise where the contract is ambiguous or where the tax authorities suspects a hidden interest arrangement. This may be the case, for example, if a lower purchase price would have applied in the event of immediate payment, or if there are other indications of abusive tax structuring within the meaning of Section 42 of the German Fiscal Code.
Indexation clauses should also be treated with caution in this context. Their tax effect has not yet been conclusively clarified.
Conclusion
Anyone planning to sell a property, for example within the family, using interest-free instalment payments must pay close attention to the details of the contract.
Imprecise drafting can lead to unpleasant surprises in the form of subsequent tax claims. Expert legal advice before signing the contract is therefore strongly recommended.
We would be pleased to assist you with all related tax and legal questions.
Do you have any questions about this topic or require professional legal advice?
If you have any questions or require legal assistance, please do not hesitate to get in touch. I will be happy to assist you.
Yours Leon Feyler
Your ACCONSIS contact
Leon Feyler
Lawyer
Authorised signatory of ACCONSIS
Service phone
+49 89 54 71 43
or via email
l.feyler@acconsis.de
Answers to frequently asked questions:
Does the seller have to pay tax on a form of “notional interest” in the case of interest-free instalments?
No. If no interest has been agreed and each instalment is fully credited against the purchase price, no taxable income from capital assets generally arises. The Supreme Court for Taxes and Customs has now clarified this in its judgment.
Can the tax authorities office nevertheless calculate an interest component?
No. A purely mathematical interest component, for example calculated under Section 12(3) of the German Valuation Act, does not constitute taxable consideration. With this judgment, the court has overturned its previous case law.
Does the judgment also apply to business assets or partial gifts?
No. The judgment concerns sales for full consideration involving private assets. Business assets and partly remunerated transfers are not covered.
What should be considered in the contract when selling a property in interest-free instalments?
The contract must be drafted with particular precision. This applies, for example, to the interest-free nature of the instalment payment arrangement itself, but also to the fact that each instalment is to be credited 100 per cent against the purchase price.
