Liebhaberei and profit intention: when the tax office cancels the tax lever

The investment deduction, the special depreciation and the declining-balance depreciation all hang on one condition that most accounts leave unspoken: there has to be a business run with the intention of making a profit. That is not a formality; it is the test on which tax-saving constructions fail. The German Federal Ministry of Finance puts it plainly in its application decree of 17 July 2023: claiming an investment deduction under §7g EStG requires „a business activity with profit intention and therefore with a forecast total profit“ (BMF of 17.07.2023, BStBl I 2023, 1494, marginal no. 19). Where that intention is missing, German tax law speaks of Liebhaberei, and the whole lever disappears, retroactively and with interest.

What does profit intention mean, and when does the tax office speak of Liebhaberei?

Profit intention is the striving to increase business assets and to achieve a total profit over the entire period between the founding and the ending of the business. That is how the Grand Senate of the Federal Fiscal Court framed it in 1984 (decision of 25.06.1984, GrS 4/82, BStBl II 1984, 751), and the court still quotes the definition verbatim, most recently in its judgment of 21.05.2025, III R 45/22. Where that striving is absent, the activity falls under no type of income at all and is disregarded for income-tax purposes; this is Liebhaberei. The legislator wrote two clarifications into §15(2) EStG that matter for tax-driven motives: a reduction of income taxes caused by the activity is expressly not a profit (sentence 2); and it is enough for the profit intention to be merely a secondary purpose (sentence 3).

Together these produce the rule an energy investment has to meet. That the tax saving is one motive does no harm. That it is the only viable outcome does a great deal of harm. Profit intention is an internal fact that can only be established from external circumstances, and under settled case law the burden of proof lies with the taxpayer claiming the loss, not with the tax office. Anyone pulling the §7g lever must therefore be able to evidence the economics of their project. The further requirements of §7g are covered in Investitionsabzugsbetrag: all §7g EStG requirements, and who can use it.

Over what period is the total profit calculated, and does the sale proceed count?

As a rule the whole duration of the activity is decisive, and there are no fixed time limits; the court expressly stresses that this always has to be assessed case by case (III R 45/22, marginal no. 26). The 30-year mark familiar from real estate applies to income from letting and leasing, not to trade businesses. For a solar park or a large-scale storage unit the natural frame of reference is therefore the planned operating life of the project including its realisation at the end, not a rigid window.

The total profit is made up of the running profits and losses plus the gain on disposal or cessation expected when the business ends. The hidden reserves held in the business assets are included as well; where no sale is foreseeable, a notional cessation gain under §16(3) EStG is estimated. For energy investments this is the practically decisive point: a project deep in the red in its early years because of depreciation can still be clearly positive over the total period, because the disposal of the asset releases the hidden reserves again.

Two recent decisions have sharpened this calculation in investors' favour. In its judgment of 21.05.2025 (III R 45/22) the court held that a future cessation or disposal gain counts in the forecast even where the hidden reserves were not already captured in a business plan available at the start; purely speculative hidden reserves, however, stay out. And for photovoltaics the court clarified in its order of 17.05.2024 (X B 119/23) that a residual value to be recognised in principle need not actually exist in a particular amount, but conversely that later changes in the law cannot rescue a forecast after the event: what matters are the circumstances foreseeable at the time of the investment decision.

Do the investment deduction and the special depreciation ruin the forecast?

Not for the Liebhaberei test. What governs the total profit is the taxable profit, and the investment deduction and special depreciation merely shift it: they reduce the book value and therefore raise the disposal or cessation gain by the same amount, and that gain belongs in the forecast under the case law quoted above. Over the total period the two cancel out. This follows from the structure of the forecast calculation; there is no judgment that states this sentence as such, which is why it appears here as an assessment and not as a quotation. What the individual depreciation routes actually deliver is calculated in IAB under §7g EStG: example calculation for battery storage.

For the second test, the loss-offsetting brake of §15b EStG discussed below, the opposite applies. There the court expressly held in its judgment of 02.10.2025 (IV R 13/23) that exercising tax options in order to generate losses can be an indication that a concept is geared towards negative income. The same §7g lever is thus harmless in one test and an aggravating indication in the other. This dual nature is why the two questions belong apart.

How long may a new business make losses before the tax office intervenes?

Losses alone do not establish Liebhaberei, and in the opening phase they are all but priced in. The court works from a business-specific start-up period which as a rule runs to five years (judgment of 23.05.2007, X R 33/04); as long as it has not ended, tax recognition can be refused only in exceptional cases, even where the activity produced nothing but losses from the outset. The most important of those exceptions: where the decision to set up the business rests essentially on personal interests and inclinations, start-up losses are recognised only if a coherent business plan existed at the start.

For energy assets that is a comparatively comfortable position. The court distinguishes between activities that typically serve to satisfy personal inclinations, the so-called hobby sphere, and all others; for the latter, a finding of Liebhaberei requires „additional indications that the losses are being accepted for personal reasons or inclinations“ (III R 45/22, marginal no. 28). A large-scale battery at the grid connection point is plainly not a hobby. That is not an all-clear, though, because the same decision names the counterpart: over a longer loss period, the mere failure to identify the causes of the losses and to counter them with suitable measures speaks against profit intention in itself. Anyone who simply lets losses run for years supplies the argument themselves.

What happens in practice if the tax office finds Liebhaberei?

Then there is no business for tax purposes, and without a business there is no §7g. The investment deduction and the special depreciation do not fall away going forward; they fall away from the outset. The assessments for the years concerned are amended and the tax saving is reclaimed. That an assessment has long since become final regularly does not help: §7g(3) sentence 3 and (4) sentence 3 EStG expressly order the amendment even for final assessments and extend the assessment period at the same time.

Interest is added on top. Back payments carry interest under §233a AO at 0.15% for each full month, that is 1.8% per year (§238(1a) AO); the interest period starts 15 months after the end of the year in which the tax arose. On a €300,000 participation at a 44.3 % marginal rate, the investment deduction alone accounts for roughly €66,500 of tax relief that would have to flow back with interest. How the reversal works in detail and what it costs in euros is worked through in Reversing the IAB: what happens if you don't invest, deadlines, interest, ways out, which deals with the other trigger, the investment that never happens.

Why does my tax assessment say „provisional“, and how long does that last?

Because the tax office is keeping the question open. Under §165(1) AO a tax may be assessed provisionally where it is uncertain whether the conditions for it to arise have been met, and that power is regularly used for newly founded businesses with start-up losses. What the explanation in the assessment then looks like can be taken from a real case the court decided in 2025: the assessment was provisional as regards the income from the trade business „because the profit intention cannot currently be conclusively examined“ (III R 45/22, marginal no. 9).

In practice this means an assessment in hand is not yet a confirmation. The uncertainty ends only once the auxiliary facts relevant to the assessment are established and the tax office has positive knowledge of them (BFH of 21.08.2013, X R 20/10); mere restructuring within the business does not end it, and §165 AO knows no upper time limit. The real examination therefore typically arrives years later with the tax audit, and at that point the provisional note is the amending provision; how such an audit runs and which documents it calls for is described in Tax audits and the investment deduction amount: what the tax office actually checks. Which is exactly why the documentation of the economics belongs in the year of the decision, not in the year of the audit.

Is my participation a tax-deferral model under §15b EStG?

This is the second test, and it is independent of the first. §15b EStG blocks losses from a tax-deferral model from being offset against other income; they are preserved but may only be set against later profits from the same source of income. A tax-deferral model exists where a model-like arrangement is intended to produce tax advantages in the form of negative income, that is, where a pre-fabricated concept offers the investor the opportunity to offset losses in the opening phase against other income. The provision only bites once the forecast losses of the opening phase exceed 10% of the capital deployed (§15b(3) EStG); with a §7g-driven investment that threshold is regularly crossed, so everything turns on the pre-fabricated-concept criterion.

What that means was specified by the court in its judgment of 02.10.2025 (IV R 13/23), concerning a wind-power limited partnership: the concept must originate from a person other than the taxpayer and must have been fixed, in terms of both business purpose and construction, before the actual investment decision; characteristic of it is „the passivity of the investor in developing the business idea and the contractual arrangements“. Conversely, where the investor specifies the arrangement themselves and shapes the concept „not merely insignificantly“, it is no longer a pre-fabricated concept. Two further points matter in practice: the question is answered separately for each investor, not uniformly for all; and §15b does not require the investment to be commercially pointless (BFH of 21.11.2024, IV R 6/22, BStBl II 2025, 283). A good project offers no protection here.

For direct participations this is good news with a condition attached. Anyone who examines a project individually, helps shape the structure and negotiates the contracts is a long way from the picture of the passive subscriber that §15b addresses; anyone who signs a finished package unseen is considerably closer to it. Where the structural differences between a direct participation and a prospectus-based fund product lie is set out in Direct investment or closed-end fund? The structural comparison. And because the loss ratio of the opening phase decides the 10% threshold, a close look at the cost side of an offer pays off, as described in Transparent costs: which fees a direct investment involves, and which ones are hidden.

How does the tax office recognise a real business?

The court names three axes of examination: the nature of the business, the way it is run, and its earnings prospects (III R 45/22, marginal no. 26). Translated into the practice of an energy direct investment, that means:

• A robust economic forecast, prepared before the investment decision and using the assumptions on yields, prices and degradation that were foreseeable at the time.
• A commercially plausible residual value or realisation scenario at the end of the term, not merely the residual book value.
• Operating, lease, maintenance and marketing contracts on arm's-length terms.
• A financing structure that the total profit can carry. Careful with participations: interest at partner level counts as special business expenses and can tip a forecast that is intact at partnership level.
• No private use; §7g additionally requires almost exclusively business use of at least 90%.
• Shaping the structure yourself rather than subscribing to a finished concept, which is at the same time the best argument against §15b.
• Documented action when losses accumulate: identify causes, renegotiate, restructure.

It is striking how closely this list overlaps with the features of a simply well-examined project. That is precisely the point: tax recognition is not a separate topic alongside due diligence, it is a by-product of it. Which questions to put to any provider and which warning signs to watch for are collected in How to tell a trustworthy provider of energy direct investments; how ongoing taxation and a later sale work is shown in After the IAB: How the ongoing returns and the sale of a direct investment are taxed.

Whether a specific project carries the forecast is decided by its numbers, not by its tax brochure. That is exactly where we start in a no-obligation first conversation: economics without the tax effect, the structure of the participation and the project risk, in coordination with your tax advisor. We do not give return promises.