Gift to Employees – Ruling of the Federal Fiscal Court on Tax Implications – Ref.: VI R 21/22
If a company gifts business shares to employees in order to secure business succession, this does not automatically lead to taxable employment income for the employees receiving the gift. This was decided by the Federal Fiscal Court (BFH) in its ruling of November 20, 2024 (Ref.: VI R 21/22).
The question of business succession is a pressing issue for many companies in Germany. If no suitable successor can be found within the family, the continuation of the company by long-serving employees can be a viable option. When gifting company shares to employees, tax-related aspects must be taken into account. In addition to gift tax, the key issue is whether the gift results in taxable employment income for the employees, explains the law firm MTR Legal Rechtsanwälte, which advises, among other things, in the field of tax law.
Gift to Secure Business Succession
With its ruling, the BFH made it clear that gifting company shares for the purpose of ensuring business succession does not automatically result in taxable employment income. If the gift is made for corporate reasons—for example, to secure succession—there is no connection to the employee’s work performance. Therefore, the gift is not to be classified as employment income.
In the underlying case, a family business was seeking a successor. As their son was not available for the role, the founding shareholders decided to transfer management to long-serving employees, including the plaintiff. Each of the five employees received 5.08 percent of the company shares as a gift.
Tax Office Classifies Monetary Benefit as Employment Income
The responsible tax office considered the monetary benefit from the gift as employment income and taxed it accordingly. The plaintiff opposed this and was successful before the Saxony-Anhalt Tax Court. The court ruled that the gifted transfer of shares could not be considered compensation for the plaintiff’s work. The motive for the gift was succession planning. Therefore, the gift did not constitute taxable employment income.
BFH Dismisses Appeal
The Federal Fiscal Court dismissed the tax office’s appeal against the ruling. It confirmed the decision of the tax court that the gifted transfer of shares did not constitute taxable employment income.
According to the BFH, taxable income from employment includes not only wages and salaries but also other benefits that constitute a monetary advantage. This applies regardless of whether there is a legal entitlement to these benefits and whether they are recurring or one-off. However, employment income also requires that the monetary benefit be granted for employment—that is, arise from the employment relationship. A specific service from the employee is not required, the BFH further explained.
Business Succession as the Key Motive for the Gift
However, no employment income is present if the benefit is granted not because of the employment relationship but for other reasons. Only if an employee receives shares at a reduced rate as compensation for their work does it result in income from employment. That was not the case here, the BFH emphasized.
In its reasoning, the BFH further stated that although the gifted transfer of shares is related to the employment relationship, it is not primarily caused by it. Business succession was clearly the decisive motive for the gift. This was indirectly reflected in the inheritance tax clawback clause included in the contract and was clearly expressed in the minutes of the shareholders’ meeting.
Gift Not Considered Compensation for Work
Although the company founders made their son the main shareholder with 74.61 percent of the shares, they also ensured that experienced employees were part of the management, holding 25.39 percent of the shares. This gives them a blocking minority, allowing significant influence on the company’s decisions. By involving experienced employees, the continued existence and further development of the company were to be secured through succession, according to the BFH. Professional expertise in management is an essential criterion for succession. Therefore, the gifted transfer for corporate reasons is not to be seen as compensation for past or future work, the BFH emphasized.
MTR Legal Rechtsanwälte advises on tax-related questions concerning business succession and other areas of tax law.
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