No wages in the case of gifts transfer of shares to secure company succession

In accordance to Section 19 (1) of the German Income Tax Act, income from employment includes wages and salaries as well as other remuneration and benefits in cash or cash equivalents that are granted ‘for’ employment in the public or private sector. This applies regardless of whether there is a legal entitlement to them or whether they are regular or one-off payments. In its ruling of November 20, 2024 (case no. VI R 21/22), the German Federal Fiscal Court (BFH) had to clarify the legal question of whether the gift transfer of Limited Liability Company (GmbH) shares to senior executives to secure company succession leads to taxable wages in the case of income from employment.

In the case in dispute, the founding shareholders of the GmbH each transferred 5.08 % of the GmbH shares to five senior executives, i.e. a total of 25.4 %, in order to regulate the company succession. This regulatory purpose was set out in the minutes of the shareholders' meeting; in addition, the share transfer and assignment agreement provided for a reversion clause, according to which the share transfer could be cancelled if the competent tax office did not grant the inheritance tax exemption regulations or changed them to the detriment of the acquirers. The remaining 74.6 % of the GmbH shares were transferred to the joint son of the founding partners, who, however, was ruled out as the (sole) company successor due to his other professional activity and lack of entrepreneurial experience. The tax office regarded the free acquisition of shares by the senior executives as a non-cash benefit, increased the income of the senior executives from employment accordingly in the case in dispute and subjected it to taxation. Both, the tax court of first instance and the BFH, disagreed with this.

In the view of the BFH, the requirements for income from employment were not fully met. It is true that the required non-cash benefit was present in the case in dispute due to the acquisition of shares at a discount compared to the market price, i.e. as a gift. In addition, however, the non-cash benefit must be granted for employment, i.e. be caused by the individual employment relationship, without the need for consideration for specific (individual) services provided by the employee. Whether the non-cash benefit is granted to the employee by the employer itself or by a third party, such as the founding shareholders of the GmbH in the case in question, is irrelevant.

The BFH considered the transfer of shares as a gift to be related to the employment relationship of the senior executives, but not as having been significantly induced by it. The decisive motive for the share transfer was recognisably the regulation of the company succession for all parties involved. This could be deduced from the inheritance tax reversion clause in the contract and the minutes of the shareholders' meeting. On the one hand, the founding shareholders gave their son 74.6 % of the GmbH shares as the main shareholder, and on the other hand, by transferring a total of 25.4 % of the GmbH shares, they gave the senior executives a blocking minority and thus significant influence on the company management. 

The BFH also confirmed the view of the court of first instance that the benefit in the gift transfer for reasons of company law does not (also) constitute remuneration of the senior executives for services rendered in the past or to be rendered in the future. This is because the transfer of shares in the case of dispute was not linked to the continuation of the employment relationships and the benefit assumed by the tax office was clearly out of line compared to the gross wages of the senior executives.