Section 17 or capital income: which rule catches a sale of shares

Six years ago Petra Sommer paid 20,000 € for 2 percent of a GmbH founded by a friend. After two capital increases she stayed out of, she now holds only 0.8 percent. She is selling for 60,000 €, and her bank tells her the gain is ordinary capital income. The tax office will see it differently: what counts is not the holding on the day of sale but the highest holding of the past five years.

Two provisions for the same sale

Anyone who holds shares in a GmbH or stock in an AG as private assets and sells them makes a capital gain for tax purposes. Which provision catches that gain depends neither on the legal form of the company nor on how long the shares were held. It depends solely on how large the seller's stake is or was.

The first option is section 20(2) sentence 1 no. 1 EStG. Under it, income from capital assets includes the gain on selling shares in a corporation. This is the ordinary case of the small investor with stock in a securities account, and for that investor the flat withholding tax applies at its separate rate.

The second option is section 17 EStG. It assigns the gain on selling shares in a corporation to business income, even though the seller runs no business at all. The law thus treats the substantial shareholder as closer to an entrepreneur than to a saver.

Read literally, both provisions fit the same transaction. Section 20(8) EStG resolves the conflict: where income of the kinds listed in section 20 belongs to business income, it is allocated there. As soon as section 17 applies, the capital-income treatment steps aside and the flat withholding tax is out of the picture.

This order of priority is the key to the whole course. Anyone checking how a sale of shares is taxed never starts with section 20 but always with section 17. Only once its conditions are shown to be missing does the gain land among capital income, which the course on capital income covers in detail.

The threshold and the look-back

Under section 17(1) sentence 1 EStG, in the version read on 23 September 2026, the provision applies if the seller held at least 1 percent of the company's capital at any time within the last five years. The threshold is therefore low. Even a modest stake in a family GmbH clears it easily.

Two words carry the rule: within and held. The statute does not ask how large the stake is at the moment of sale. It is enough that the stake reached the threshold at any point during the five years before the disposal, even if only briefly.

This creates an after-effect that surprises many people. Someone who reduces a stake from 3 percent to 0.5 percent remains within section 17 for another five years with the remainder. Only when the last day with a stake of at least 1 percent lies more than five years back can a sale fall under section 20.

Both direct and indirect holdings count. If someone holds part of the shares personally and a further part through their own holding company, both routes are looked at. A person who narrowly misses the threshold directly may reach it through the intermediate company.

The yardstick is the company's capital, which for a GmbH is its registered share capital. What was paid for the shares, or what share of profits the articles allocate, does not matter for the threshold. What matters is the ratio of the seller's own share to the total capital.

In practice this means that anyone planning to sell should rebuild the history of their stake over the last five years without gaps. Purchase agreements, resolutions on capital increases and earlier transfers show on which day the percentage fell below the threshold. Without that date the classification cannot be proven.

The bank or notary handling the sale usually does not know this history. They see only the current position. Checking whether section 17 applies therefore remains the seller's task and a matter for the seller's tax return, not for whoever pays out the purchase price.

Sentence 3 says which shares are meant: stock, GmbH shares, profit-participation certificates and similar holdings, plus expectancies of such holdings, such as subscription rights. Also included are interests in a partnership that has opted into corporate taxation under section 1a of the Corporation Tax Act.

Subsection 7 widens the circle to shares in a cooperative, including the European Cooperative Society. Cooperative shares are therefore subject to the same threshold and the same look-back as GmbH shares, which can matter for larger stakes in housing or purchasing cooperatives.

Gifted, inherited and contributed shares

Sentence 4 prevents the threshold from being dodged by giving shares away. If the seller received the share free of charge in the last five years, it is enough that the predecessor reached the threshold within that period. Where shares passed free of charge several times in a row, any one of the predecessors suffices.

An illustration: a grandfather holds 10 percent of a GmbH and gives each of his twenty grandchildren an equal share. Taken on its own, each grandchild holds only 0.5 percent. If one of them sells within five years of the gift, the grandfather's former stake is enough, and section 17 applies.

The same pattern applies to inherited shares, because an heir also acquires without paying anything. Someone who inherits a small share from their mother, who had held a larger stake, must expect section 17 on a sale within the first five years, even though they themselves own only a fraction.

Subsection 6 closes another gap. Shares that stem from a contribution under the Reorganisation Tax Act at book value or an intermediate value count as section 17 shares even if the threshold was never reached. The condition is that the contributed shares themselves qualified or that a business was contributed.

Anyone who has contributed a sole proprietorship to a GmbH should, when later selling the shares, also bear in mind the lock-up period of the Reorganisation Tax Act. That retroactive taxation is a separate topic explained in the course on converting to a GmbH; here the only question is classification under section 17.

What else counts as a disposal

Under subsection 1 sentence 2, a hidden contribution of the shares to a corporation is treated like a sale. Anyone who transfers GmbH shares without consideration into their own holding company is therefore disposing of them for tax purposes. Under subsection 2 sentence 2 the fair market value of the shares takes the place of the price.

Subsection 4 brings in three further events: the liquidation of the company, a reduction of capital with repayment, and distributions or repayments from the tax contribution account. The disposal price is then the fair market value of what the shareholder receives by allocation or repayment.

This equivalence stops where the payment is capital income anyway. To the extent the receipts fall under section 20(1) no. 1 or 2, for instance as a profit distribution on liquidation, subsection 4 does not apply. How distributions and the contribution account are otherwise treated is shown in the course on profit distributions.

Subsection 5 covers a special case: if the company moves its seat or place of management abroad and Germany thereby loses its right to tax the gain, a sale at fair market value is assumed. This does not apply to a European Company or to moves within the EU.

Why the classification matters so much

If the gain falls under section 20, the separate rate of section 32d(1) EStG applies, deduction of actual costs is replaced by the saver's lump sum, and losses on stock stay in a pot of their own. The details belong to the course on capital income and are not repeated here.

If the gain falls under section 17, everything looks different. It forms part of business income and is taxed at the personal progressive rate. At the same time the partial-income method applies: part of the sale price is tax-free, and in return acquisition and selling costs are only partly deductible.

On top of that comes an allowance that section 17(3) grants for smaller gains and that melts away as the gain grows. And a section 17 loss, unlike a stock loss under section 20, can in principle be set against other income, though only in part and not in every case.

Which variant is more favourable cannot be said in general. With high other income, the progressive rate may exceed the separate rate even though only part of the gain counts. With low income or a loss, section 17 is often the better outcome. The seller cannot choose anyway: the size of the stake decides.

The table sums up the differences. It also shows why the question of the threshold comes at the start of every review: each further row depends on it, and none can sensibly be answered before the history of the stake has been cleared up.

Business assets and a corporation as seller

This course deals with shares held by an individual as private assets. Two neighbouring cases follow other rules. If the shares belong to the business assets of a sole trader or a commercial partnership, the gain is ordinary business profit; section 3 no. 40 letter a EStG provides a partial exemption there as well.

Among business assets, a holding covering the entire nominal capital counts as a separate business unit under section 16(1) sentence 1 no. 1 sentence 2 EStG. Its sale is then a sale of a business, whose further consequences are explained in the course on the income tax rate and extraordinary income.

If instead a corporation, such as a holding GmbH, sells the shares in its subsidiary, the gain is disregarded under section 8b(2) of the Corporation Tax Act, and a flat portion is treated as a non-deductible expense. That exemption is explained in the course on profit distributions, which develops it for dividends.

Shares an employee acquired through a staff scheme likewise fall under section 17 or section 20 on sale, depending on the size of the stake. For the question of which acquisition costs then apply and what was taxed as wages, the course on employee share ownership is the right place.