Saving tax as a lawyer or law-firm partner: the §7g lever alongside the firm

Any lawyer who is a partner in a Sozietät or a partnership company knows the mechanism: the assessed profit share is taxed personally and in full in the year it arises, regardless of how much is actually drawn, and every additional euro is taxed at up to 47.5 %. Yet the strongest tax instrument for investments, the investment deduction (Investitionsabzugsbetrag, IAB) under §7g EStG, regularly fails in a well-running firm because of a single number: the profit cap of €200,000. The way out lies not in the firm but next to it: in a separate investment business with a profit cap of its own. How that works, where the trap for partnerships sits and what the numbers say, in order.

Why do lawyers and law-firm partners pay so much tax?

Because law-firm profits are fully subject to income-tax progression as income from self-employed work (§18(1) no. 1 EStG): from around €68,000 of taxable income the top rate of 42 % applies, from around €278,000 the surcharge rate of 45 %, each plus the solidarity surcharge; at the top, around 47.5 %. That holds for the sole practitioner as much as for the partner: in a Sozietät or partnership company the profit is assessed at the level of the firm and attributed directly to the partners; what is taxed is the full share in the year it arises, not the drawings. Unlike a GmbH there is no retention, unlike capital income there is no flat-tax cap. Specialisation lifts the surplus further, and partners of business-law firms regularly sit above the 45 % threshold.

The classic levers are quickly exhausted. Contributions to the lawyers' professional pension scheme (Versorgungswerk) are deductible as basic provision only up to the cap of €30,826 (2026; €61,652 for joint assessment), and mandatory contributions plus voluntary top-ups usually use most of that at a healthy profit share. Investments in the firm (IT, legal tech, premises) make business sense but are limited as a pure tax instrument: they cost real money for assets the firm actually has to need, and as a partner you carry them only pro rata anyway. Where the remaining legal levers for high earners rank by effect is set out in Legally reducing your tax: the most effective strategies. That leaves the lever with the largest single effect: §7g EStG.

Can I use the investment deduction although our firm makes more than €200,000 profit?

Yes, because the €200,000 profit cap of §7g EStG applies per business, and an energy direct investment is a separate, newly founded commercial business with a cap of its own. The firm itself indeed cannot form an investment deduction in good years: if its profit in the year of formation exceeds €200,000, the IAB is ruled out there. But the business acquiring the energy asset is a different one: your own energy direct investment, which acquires a battery storage system or a photovoltaic plant. This business starts without legacy profits, its profit cap is reliably met, and the IAB, special depreciation and declining-balance depreciation work through loss offsetting against your personal top tax rate. All requirements are covered in Investitionsabzugsbetrag: all §7g EStG requirements, and who can use it; the full mechanics with numbers are shown in IAB under §7g EStG: example calculation for battery storage.

Does the profit cap apply to the firm or to me personally?

For the firm it applies at the level of the partnership: in a Sozietät or partnership company, what counts is the profit of the entire firm, not your personal share. A firm with four partners and €800,000 of total profit is above the cap even if each individual share stays below it. For the §7g lever, however, that is irrelevant, because the lever is not pulled inside the firm at all: for the cap of your own investment business, only that business's profit in the year of formation counts, and it starts at zero. Neither the firm's profit nor your assessed share is counted there, and vice versa.

What is the commercial infection rule, and why does it concern partnerships?

The infection rule (Abfärbung) of §15(3) no. 1 EStG says: if a freelance partnership, such as a Sozietät organised as a GbR or a partnership company, also carries on a commercial activity or receives commercial income from participations, all of the partnership's income is deemed commercial. The freelance firm becomes a commercial business for tax purposes, with all the follow-on questions. For the partnership's own commercial activity, the Federal Fiscal Court has drawn a de-minimis line (3 % of net revenue, at most €24,500 per year; BFH, judgments of 27 August 2014, among them VIII R 6/12). For commercial participation income, however, this de-minimis line does not apply: even a small direct investment held by the Sozietät itself infects all income for income-tax purposes (BFH, judgment of 6 June 2019, IV R 30/16); under the same decision the requalified firm is spared trade tax, but the income-tax requalification and its consequences remain.

Nor does the legal form protect against it: the PartG mbB only limits liability for professional errors, for tax purposes it remains a partnership like any other, and the infection rule applies there just the same. The only protection is holding the investment personally.

Sole practitioners are not affected: the infection rule applies only to partnerships. If you run your firm alone, you simply have two separate businesses side by side, the freelance firm and the commercial investment business; the firm remains freelance in every respect. The investment business itself is commercial, but remains largely neutral in the overall burden thanks to the trade-tax allowance of €24,500 for sole proprietorships and partnerships and the crediting of trade tax against income tax (§35 EStG). And your partners do not have to be involved for tax purposes: the investment is your personal decision outside the partnership's assets; whether your partnership agreement provides notification or consent duties for activities alongside the firm is for you to check.

Does the investment turn into a second job alongside the client work?

No. A direct investment is set up as a passive capital and tax structure: professional asset management takes over the technical and commercial operation of the plant, from direct marketing of the electricity through maintenance and insurance to the annual reporting for your tax return. Your own time is concentrated in the decision phase: project selection, financing, subscription. How that path runs from the first conversation to closing is shown in From first enquiry to closing: how a direct investment works step by step; what happens after closing over 20 to 30 years of operation, and what the reporting looks like, is described in What happens after closing: reporting, asset management and why a partner is not a broker.

The paperwork also stays manageable: the profit determination and tax reporting of the direct investment are prepared professionally, and your personal tax return takes over the assessed figures. Where the IAB and depreciation are actually entered is shown in The IAB in your German tax return: where and how to actually claim it. There is no conflict with professional law: holding a direct investment outside the firm is different from carrying on a commercial activity inside the firm; that is what the separation described in the previous section is for.

What does it deliver in concrete tax terms? The worked example

Starting point: a law-firm partner with taxable income of €200,000 at the top tax rate (44.3 % including solidarity surcharge, without church tax). He invests €300,000 in an energy direct investment acquiring a grid-scale battery storage system; the IAB is formed in the year before acquisition, special and declining-balance depreciation apply in the acquisition year:

A good 40 % of the investment volume flows back as tax relief in the first year in this constellation; the individual positions and the pitfalls behind them are broken down in IAB under §7g EStG: example calculation for battery storage. Since energy projects are typically financed 60 to 75 % through the asset itself, the actual equity deployed is far below the nominal amount; how tax refund and project financing net out to the effective input is shown in How much equity is actually required?. Whether special and declining-balance depreciation are taken in full in year one or stretched is a question of individual tax planning; the trade-off is covered in Sonder-AfA §7g (5) vs. declining-balance AfA §7 (2): which combination, when?. All variants presuppose a business the tax office recognises; what that depends on is shown in Liebhaberei and profit intention: when the tax office cancels the tax lever.

What applies to employed lawyers, in-house counsel and the law-firm GmbH?

Employed lawyers, including salary partners, can use the §7g lever too, just not through their salary: as for all employees, access runs through a direct investment of their own, which as a business of its own creates business income; the IAB and depreciation work through loss offsetting against total income. The routes are described in Investitionsabzugsbetrag: all §7g EStG requirements, and who can use it. The same holds for in-house counsel (Syndikusrechtsanwälte): they are employees of their company (§46 BRAO), their income is salary, and §7g access only arises through the separate investment business alongside. If, on the other hand, you have organised your work through a law-firm GmbH or another professional-practice company in corporate form, you face a different threshold question: there an IAB works at the level of the company against roughly 30 % corporate and trade tax instead of up to 47.5 % personal marginal rate, and the profit cap applies to the company itself. Whether to invest privately or through the company is compared in Invest through your GmbH or privately? The honest tax comparison. For physicians and dentists, Saving tax as a physician or dentist: the §7g lever alongside the practice shows the same mechanics using the medical practice as the example; Saving tax as a business owner or managing director: the §7g lever alongside your company carries them over to business owners and managing directors.

How does this fit with the pension scheme and the eventual firm exit?

The three building blocks occupy different levels and do not compete. The professional pension scheme is basic provision: plannable, but capped as a tax instrument by the special-expenses maximum, which a healthy profit share usually exhausts already. The §7g lever works beyond that, in annually adjustable doses: the IAB can be formed anew every year, so a one-off tax effect can grow into a diversified energy portfolio over several years; the strategy is described in Using the investment deduction every year: building a portfolio over multiple years. And at the end of professional life there is one more special case with particularly large leverage: in the year the firm is sold or a partner exits against a settlement, the capital gain, the reduced tax rate and the IAB meet; how that combination computes is shown in Selling a practice or business: optimising the tax and reinvesting the proceeds sensibly.

Whether the structure fits your situation depends on the form of your firm, income and liquidity, and on a project that stands on its own even without the tax effect. That is exactly what we examine in a no-obligation first conversation: tax effect, effective equity input and project risk, discussed against your numbers and in coordination with your tax advisor. We do not give return promises.