After the IAB: How the ongoing returns and the sale of a direct investment are taxed

The investment deduction and the special depreciation under §7g EStG are the loud half of the tax story: they noticeably reduce your tax burden already in the year of investment. How strongly, is shown by the worked example in IAB under §7g EStG: example calculation for battery storage. The quiet half comes afterwards and is rarely explained: how are the ongoing returns taxed over the years, and what happens on the tax side when the investment is sold at the end of the term? Because a direct investment is an entrepreneurial, commercial holding, both follow a different logic than the 25% flat withholding tax on interest or fund distributions. This article sets out the tax picture after the IAB.

How are the ongoing returns of a direct investment taxed?

The ongoing returns of a direct investment are commercial income and are taxed at your personal income tax rate, not with the 25% flat withholding tax that applies to interest or dividends. This is the flip side of the very principle that makes the §7g leverage possible in the first place: you are entrepreneurially invested in the asset, typically as a limited partner (Kommanditist) of a project-holding GmbH & Co. KG or as a sole proprietor. The profit share attributable to you is assessed uniformly and separately at the level of the partnership and flows into your income tax return via Anlage G. In practice this means: in the early years, depreciation usually exceeds the operating profit by a wide margin, your profit share is then low or negative, and little to no tax falls on the investment. How this share enters the tax return is described in The IAB in your German tax return: where and how to actually claim it. VAT on the electricity revenue runs in a system of its own alongside this and does not reduce the return; how it is settled, and why the input VAT deduction on the purchase price depends on it, is shown in VAT on PV and storage direct investments: why 19% is charged here, and how it flows back.

Does trade tax apply to the investment?

In principle, yes: the partnership earns commercial income and is subject to trade tax. For you as a private individual, however, the actual burden usually stays low. First, an annual allowance of €24,500 applies (§11 GewStG), which is available to partnerships. Second, and more decisively, the trade tax is largely offset again through §35 EStG: four times the pro-rata trade tax base amount is credited against your income tax. Up to a municipal multiplier (Hebesatz) of around 400%, this credit neutralises the trade tax for the partner almost entirely; only above that does a small residual remain. As a result, for most investors in a direct investment, trade tax is not a separate, additional block of tax but effectively runs into the income tax calculation. The full calculation, from the allowance via the apportionment in favour of the host municipality to the credit, is shown in Trade tax on PV and storage direct investments: how much of it actually sticks.

Why the ongoing tax rises over the years

The IAB is a deferral of tax, not a gift. In the first years, the investment deduction, special depreciation and declining-balance depreciation push the taxable profit down, often below zero. But these write-offs run out: the special depreciation over the five-year relief window, the declining-balance depreciation falls year by year, and the hardware is fully written down for tax purposes after roughly its ten-year useful life. From then on there is barely any depreciation left to offset the operating cash flow, the taxable profit share rises, and in the later years you pay tax on what you saved at the start. Anyone wanting to understand the interplay of the depreciation types and their timing will find it in Sonder-AfA §7g (5) vs. declining-balance AfA §7 (2): which combination, when?. The point matters for honest expectations: the tax advantage shifts the burden into the future, it does not dissolve it.

What happens on the tax side at the end of the term?

At the end there is, as a rule, a sale, either of the asset itself or of your partnership interest. And this is exactly where the early saving catches up with you a second time. Because the IAB, special depreciation and declining-balance depreciation have driven the tax book value far below the real value, a taxable gain arises on the sale: the difference between the sale price and the low residual book value is what is known as hidden reserves, which are disclosed and taxed on disposal. To illustrate: if the storage system has long been written down to zero for tax purposes but still has a salvage or residual value, then practically the entire sale proceeds are a taxable gain. This is not a disadvantage of the structure but the logical reverse side of the high initial depreciation, and it belongs in the overall assessment from the start. What recovery value an asset can realistically still have at the end of the term is put into context in A solar park after 20 years: continued operation, repowering or decommissioning?. A sale is not the only ending, though: if the business passes to the next generation by inheritance or gift, no hidden reserves are realised, and the business-asset exemption applies for inheritance tax; this is explained in Passing on a direct investment: how German inheritance tax favours business assets.

Is the disposal gain taxed at a reduced rate?

Under certain conditions, yes. If you sell or wind up your entire business or your complete partnership interest in one go, the gain is a disposal gain under §16 EStG and can benefit from the reduced taxation under §34 EStG via the one-fifth rule (Fünftelregelung), which smooths the progression over five years for calculation purposes. This relief still exists, but is now granted only in the assessment (the automatic application in the payroll tax deduction was removed from 2025; for disposal gains it was always a matter of the tax return anyway). From the age of 55, or in the event of permanent occupational disability, two further benefits are added once in a lifetime: an allowance of up to €45,000 under §16 (4) EStG (which tapers off above a disposal gain of €136,000) and, optionally, the reduced tax rate under §34 (3) EStG. The distinction matters: only the sale or wind-up of the entire business or interest in one transaction is relieved. The ongoing sale of individual assets during the term is normal current profit, without the one-fifth rule. Incidentally, the same §34 mechanism also governs the taxation of a severance payment; see Investing a severance payment tax-efficiently: the fifth rule, the IAB and the energy investment. And they are exactly the reliefs that apply when a practice, firm or business is sold; how they interact with a reinvestment there is shown in Selling a practice or business: optimising the tax and reinvesting the proceeds sensibly.

What about the IAB if I sell earlier?

An early exit has a tax consequence of its own. If the asset is removed from the business or sold before the retention and use periods expire, the IAB and special depreciation can be reversed retroactively: the tax saving of the early years is unwound, and interest under §233a AO is added to the back payment. When exactly this looms and which deadlines count is set out in Reversing the IAB: what happens if you don't invest, deadlines, interest, ways out; that article also notes the outlook on a possibly rising interest on back payments. For planning, this means: the timing of a sale is never purely a return question, but always a tax question too. How an early exit works in practice, who the buyers are and what the bank has to say about it is described in Selling a direct investment early: how liquid an energy direct investment really is.

The three tax phases at a glance

What does this mean for your decision?

The tax advantage of a direct investment is a life cycle, not a one-off gift: relieving early on, rising over the years, and a taxable gain at the end that can be taxed at a reduced rate with clean structuring. This timing structure is precisely the difference from the flat-tax world of shares and funds, where 25% applies both on an ongoing basis and on sale; how the direct investment differs structurally is set out in Direct investment or closed-end fund? The structural comparison. What counts for the return after tax is therefore not the effect of a single year, but the view across the entire term, cleanly calculated, including ongoing taxation and exit; how a robust return analysis is built is shown in Battery storage returns: where the revenue comes from, and what is realistic. That is exactly what we work through on your figures in a non-binding first call, with the assumptions disclosed.