Ruling of the German Federal Fiscal Court (BFH) on April 10, 2024 – Case No.: II R 22/21
If a shareholder transfers shares to the company below value, this results in an indirect increase in the value of the remaining shareholders’ shares and is considered a gift under tax law. The German Federal Fiscal Court (BFH) confirmed this in its ruling dated April 10, 2024 (Case No.: II R 22/21). The gratuitous nature of the benefit to the company is not a prerequisite for taxation in this context.
If the value of shares in a corporation increases due to the gratuitous action of a co-shareholder or a third party, this constitutes a gift subject to taxation under Section 7, Paragraph 8, Sentence 1 of the German Inheritance and Gift Tax Act (ErbStG), according to the business law firm MTR Legal Rechtsanwälte, which advises on tax law. Under this provision, gratuitous benefits between corporations are also considered gifts if they are intended to enrich shareholders and provided that the same shareholders do not directly or indirectly hold equal shares in both companies.
Heirs Sell Shares in GmbH
In the case before the BFH, a community of heirs had inherited shares in a GmbH (German limited liability company). The remaining shares were held by a limited partnership (KG). The GmbH purchased the heirs’ shares for a price of €300,000. The purchase price was based on four-year-old company valuations, which estimated the value of the heirs’ shares at €1 million on the valuation date.
The tax office assessed the value of the heirs’ company shares at approximately €1.8 million. Due to the significant difference between the purchase price and the actual value of the shares, the tax office considered this a gift under Section 7, Paragraph 8, Sentence 1 ErbStG, benefitting the remaining shareholders. Accordingly, the tax office imposed a gift tax based on the €1.5 million difference between the purchase price and the actual value of the shares.
Objection to the Gift Tax Assessment
The plaintiff objected to the gift tax assessments, arguing that there was no “benefit” from the donor as defined under Section 7, Paragraph 8, Sentence 1 ErbStG. They claimed that the term only covers actions that increase the company’s assets as the recipient of the benefit. By acquiring its own shares, the GmbH did not increase its corporate assets; it did not acquire an asset it was not already entitled to. Without an increase in the company’s assets, there could be no indirect increase in the value of the shareholders’ shares. Moreover, there was no gift since gratuitous intent, a prerequisite under Section 7, Paragraph 8, Sentence 1 ErbStG, was lacking.
BFH: Gratuitous Intent Not Required
The BFH clarified that the transfer of the heirs’ shares constituted a benefit to the GmbH under Section 7, Paragraph 8, Sentence 1 ErbStG. A benefit under this provision is any act, forbearance, or omission that results in the transfer of assets from the donor. The transfer of the heirs’ shares met this definition, even though the transaction involved the acquisition of its own shares by the company. Gratuitous intent is not a prerequisite in this context. However, tax liability arises only if the donor’s action results in an actual increase in the value of the shareholders’ shares, the Munich judges emphasized.
The enrichment cannot exceed the fair market value of the partly gratuitous benefit. In cases of partly compensated transfer of company shares to the GmbH, the fair market value of the benefit is determined by the difference between the fair market value of the shares and the compensation paid by the GmbH. The BFH also clarified that for such value increases, no “preferential reduction” under Section 13a, Paragraph 1, Sentence 1 and Paragraph 2, Sentence 1 ErbStG can be applied.
The BFH’s decision highlights the importance of considering gift tax consequences when transferring company shares.
MTR Legal Rechtsanwälte advises on gift tax and other tax law matters.
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