Betriebsverpachtung: Leasing Out a Business Instead of Selling It

A Betriebsverpachtung (leasing out a business as a going concern) leaves the business in the owner's ownership while a Pächter (lessee) runs it for their own account. In tax terms this is no side issue: without an express Aufgabeerklärung (declaration that the business has been given up), the business continues to exist for tax purposes and the stille Reserven (hidden reserves, the untaxed gains built up in the assets) remain untaxed — with that declaration they fall due immediately. The decision is taken once and, as a rule, cannot be corrected afterwards.

For owners running an actual process, our approach to selling your company sets out how the mandate works.

What a Betriebsverpachtung is — and how it differs from letting premises

Leasing out is often chosen as the gentle alternative to a sale: the owner hands over responsibility, keeps ownership and draws a running income. What is leased, however, is not a property but a functioning business — premises, fittings, machinery, often stock, customer base and trading name as well. The lessee pays a lease rent and trades for their own account and at their own risk. The lessor remains the owner of the substance.

That construction is exactly what produces the tax peculiarity. Anyone who merely lets premises earns income from letting and leasing. Anyone who leases out an entire business faces the question of whether the business has thereby been given up or is merely dormant.

This article covers both sides: the tax mechanics in Germany and Austria, and the commercial question that regularly gets lost along the way — what is the business still worth once the lease has run its course?

Germany: the lessor election under § 16 Abs. 3b EStG

Where a business is leased out in its entirety, it does not automatically count as having been given up. The lessor holds an election — the Verpächterwahlrecht (lessor's election) under § 16 Abs. 3b EStG (German Income Tax Act) — and it carries far-reaching consequences.

Conditions for the election. All functionally essential business assets must be leased out, for consideration, to a lessee who actually continues the business and does not fundamentally reshape it. There must be no Betriebsaufspaltung (a split of the business into an operating and an asset-holding entity) and no Mitunternehmerschaft (co-entrepreneurship). And the lessor must be able to resume the business once the lease ends — that ability to return is the core of the arrangement.

Without a declaration of cessation. The business remains dormant for tax purposes; what exists is a Betriebsunterbrechung (interruption of the business). The assets stay within the Betriebsvermögen (business assets), and the hidden reserves remain untaxed. The lease income counts as commercial income but is not subject to Gewerbesteuer (German trade tax).

With a declaration of cessation. The Aufgabegewinn (gain on cessation) is determined immediately under § 16 Abs. 3 EStG, and all hidden reserves are realised and taxed. From then on the lessor earns income from letting and leasing. The declaration can be filed with retrospective effect for up to three months — and it is final: a return to continuing the business is ruled out for the duration of the lease.

For owners with old, fully written-down property held in business assets, this is the real fork in the road. That is where the largest hidden reserves sit, and realising them can trigger a tax charge with no payment coming in against it.

Austria: an overall-picture test instead of an election

Austria has no comparable formal election. Whether a lease counts as a cessation of the business is decided by the Gesamtbild der Verhältnisse (the overall picture of the circumstances). The tax authorities assume a cessation where it is highly likely that the lessor will no longer run the business for their own account once the lease ends.

Indicators pointing to a mere interruption: a short-term or terminable lease agreement; the inventory stays with the lessor; the lessor remains involved in an advisory or managerial capacity; the customer relationships stay with the lessor; the lessor keeps rights of control and of modernisation; the agreement permits the fittings to be taken back; and the staff are taken over by the lessee.

Indicators pointing to a cessation: entering retirement; surrender of the Gewerbeberechtigung (Austrian trade licence); deletion from the Firmenbuch (Austrian companies register); advanced age or health reasons; selling rather than leasing the business equipment; and a long-term, non-terminable agreement.

What matters in the authorities' own wording is that no single criterion is decisive on its own — the indicators have to be weighed against one another as a whole. In practice that means the lease agreement co-determines the tax outcome and belongs in front of a tax adviser before signature, not after it.

Where a cessation is assumed, the usual consequences of giving up a business apply, including the realisation of hidden reserves; the underlying logic is set out in tax on a company sale and in tax on business succession.

Trade law and day-to-day operations

The lessee runs the business for their own account and therefore needs the relevant Gewerbeberechtigung in their own name, with the corresponding certificate of competence in the case of regulated trades. In practice this is more often the bottleneck than the tax question: for a skilled-trades, hospitality or healthcare business, only lessees with the matching qualification come into consideration, and that pool is small.

Added to this are the points every lease agreement has to settle: maintenance and replacement investment, the treatment of the inventory, continuation of supplier and customer contracts, use of the name and brand, insurance, termination rights, and the condition in which the business is to be handed back.

The commercial downside: erosion of substance

In tax terms, a lease can be structured cleanly. Commercially it has a weakness that only becomes visible after years: a lessee will as a rule invest only as far as it pays off within their own lease term. Machinery is not replaced, digitalisation does not happen, customer relationships are redirected to the lessee, and qualified staff drift away.

Once the lease expires, the lessor therefore rarely gets back the business they handed over. They get back older substance with a weaker market position — and then face exactly the same succession question as before, only with a lower company value and several years further on. Which factors actually carry value is set out in increasing company value.

There is also the counterparty risk. The lessor continues to bear the owner's risk without holding operational control. If the lessee runs into difficulty, the business comes back in worse condition, often with arrears and unresolved obligations.

When leasing out is nevertheless the right decision

There are constellations in which a lease makes sense. Where a successor from the family is still too young and the business has to be bridged. Where a handover to a known employee is to happen in stages and the lease serves as a preliminary step to a later purchase. Where the business property represents the essential value and the operating business is thin on margin in any case. Or where a sale is ruled out for personal reasons, but standing still would be worse.

In every other case, a sober calculation applies: the lease rent over the term against the purchase price achievable today, discounted — and against the loss of value the lease period causes. That calculation comes out in favour of a sale more often than owners expect. The trade-off between the routes is described in winding up or selling, and the overview of all the variants in succession options.

Leasing as a preliminary step to a sale

One combination works well in practice: a lease with an agreed purchase option. The future buyer first runs the business as lessee, proves their suitability and gets to know the business; the purchase price and the deadline for exercising the option are fixed in the contract.

That takes risk out for both sides. The owner is not handing over to a stranger, and the successor does not have to finance the full purchase price straight away. What matters is that the purchase option is binding and that the price is not left to the later condition of the business, shaped as it will be by the lessee. How value can be established before such an arrangement is set out in what is my company worth.

FAQ

Is a Betriebsverpachtung the same as giving up the business?

Not necessarily. In Germany, leasing out the business in its entirety gives rise to an election under § 16 Abs. 3b EStG: without an express declaration of cessation, the business remains dormant for tax purposes. In Austria, the overall picture of the circumstances decides — the key point is whether the lessor is likely to run the business themselves again once the lease ends.

What happens to the hidden reserves?

Without a declaration of cessation they remain untaxed, because the assets stay within business assets. With the declaration they are fully realised and taxed immediately as part of the gain on cessation under § 16 Abs. 3 EStG — without any purchase price coming in from which the tax could be paid.

Can I withdraw the declaration of cessation later?

No. The declaration can be filed with retrospective effect for up to three months, but it is then final. A return to continuing the business is ruled out for the duration of the lease.

What kind of income do I earn as lessor?

Without a declaration of cessation, commercial income, which is however not subject to Gewerbesteuer. After a declaration of cessation, income from letting and leasing.

Does the lessee need their own Gewerbeberechtigung?

Yes. They run the business for their own account and need the corresponding licence in their own name, with a certificate of competence for regulated trades. That noticeably narrows the pool of possible lessees.

What is the biggest commercial drawback of leasing out?

The erosion of substance. Lessees invest only within the horizon of their own term; machinery, digitalisation and customer relationships all suffer. Once the lease ends, the owner faces the same succession question as before, but with older substance and a lower company value.

Can leasing be combined with a later sale?

Yes, and it is often the most sensible variant: a lease with a binding purchase option. The successor first proves themselves as lessee, and the purchase price and exercise period are set out in the contract. The important part is not to leave the price to the later condition of the business as shaped by the lessee.