Intention to Make a Profit (Gewinnerzielungsabsicht) under German Tax Law

According to established case law of the Bundesfinanzhof (BFH), a taxpayer must pursue their activity with the objective of generating a positive total profit (Totalgewinn) over the entire duration of the activity. This applies in particular to:

• Commercial enterprises (Gewerbebetrieb)

• Freelance professions (Freiberufler)

• Agriculture and forestry (Land- und Forstwirtschaft)

• Rental income (Vermietung und Verpachtung

If this profit intention cannot be established, the tax authorities may classify the activity as so-called “Liebhaberei” (hobby activity).

When Do the Tax Authorities Doubt Profit Intention?

It is common for new businesses to incur losses in the start-up phase. Initial losses alone do not endanger tax recognition. However, problems arise when:

• Losses continue over many consecutive years,

• No sustainable business concept exists,

• There is no realistic prospect of achieving profitability,

• The taxpayer does not take measures to improve the financial situation.

In such cases, the tax office will examine whether a positive total profit forecast (Totalgewinnprognose) exists. This forecast assesses whether, over the expected lifetime of the activity, total revenues will exceed total expenses.

If no positive prognosis can be demonstrated, the activity may be treated as Liebhaberei.

Legal Consequences of Liebhaberei

If an activity is classified as Liebhaberei:

• Losses may no longer be offset against other income.

• Previous tax assessments may be amended.

• The activity is treated as part of private life for income tax purposes.

This can result in significant tax disadvantages.

Long-Term Losses Do Not Automatically Mean Liebhaberei

Longer periods of losses do not automatically lead to a reclassification. The decisive factor is whether the activity is objectively capable of generating profits and whether the taxpayer seriously intends to achieve them.

Temporary circumstances such as:

• High start-up investments,

• Market fluctuations,

• Economic crises,

do not automatically eliminate profit intention if there is still a realistic long-term prospect of profitability.

How to Demonstrate Profit Intention

To avoid classification as Liebhaberei, you should:

• Prepare a documented business plan

• Create a profitability forecast (Ertrags- und Totalgewinnprognose)

• Keep proper accounting records

• Regularly review and adjust pricing and cost structures

• Document measures taken to improve profitability

• Seek advice from a qualified tax advisor (Steuerberater)

Active entrepreneurial behavior and documented efforts to improve earnings are key indicators of profit intention.

Conclusion

Under German tax law, profit intention is an essential prerequisite for recognizing self-employed activities for tax purposes. The decisive question is whether the activity is aimed at generating a long-term total profit and whether this intention can be objectively substantiated.

If losses persist without a realistic prospect of improvement, the tax authorities may classify the activity as Liebhaberei. Therefore, maintaining clear documentation and a credible profit forecast is crucial to protect your tax position.