Business shares, wages and company succession

In the context of business succession, it is common for business owners to transfer company shares to the next generation by way of gifts. It is equally conceivable to gift company shares to employees for strategic reasons. But is such a gift, e.g. of shares in a limited liability company (GmbH), subject to income tax as salary? The Federal Fiscal Court recently addressed this question.

Company succession and donation of shares in a limited liability company (GmbH)

The donation of shares in a limited liability company (GmbH) plays an important role in company succession, especially in connection with anticipated succession, when the shares are donated within the family. In this case, inheritance tax and gift tax issues may come into play.

However, company shares can also be transferred to employees free of charge. Constellations are conceivable in which company owners transfer shares on a larger scale, e.g. to employees, in order to deliberately take them into account for strategic reasons in the context of company succession.

The aim here is to give (deserving) employees influence for the benefit of the company after the transfer of the company via their shareholder status and thus to serve the continued existence of the company.

However, this raises the question: How are such transfers of company shares classified for income tax purposes? Is the value of the shares possibly income tax-liable wages?

Note: If an entrepreneur/company gifts GmbH shares to non-family members, gift tax may be payable by the recipient unless certain special conditions are met. In any case, non-family members do not enjoy any tax allowances.

The Federal Fiscal Court (BFH) has now provided an answer to the question of how a gift of GmbH shares to employees is classified for income tax purposes:

Under certain conditions, such a gift of shares to senior employees does not constitute a monetary benefit for the employees and is therefore not taxable income.

The case:

A company was due to be handed over to the next generation. The owners felt that the son alone would not be able to continue running the business. They therefore decided to transfer shares in the company to managers and long-serving, deserving employees. This was also documented in the minutes of a shareholders’ meeting.

The company founders and owners transferred 5.08% of the company shares to deserving employees. The son of the two owners received 74.61% of the shares.

In particular, it was agreed that

• the transfer of the shares should not be subject to any conditions or restrictions, nor to the continuation of an employment relationship, and
• that the transfer of shares could be reversed if the tax office did not grant tax exemption.

The tax office of one of the plaintiffs assessed the gifted GmbH shares as a monetary benefit and took a monetary benefit into account in the income from non-self-employed activities.

The subsequent appeal was upheld by the tax court. According to the court, the benefit from the transfer of the company shares did not constitute income.

The tax office applied for the judgment of the tax court to be set aside and the appeal to be dismissed. The Federal Fiscal Court had to decide on this.

Why no‘monetary advantage’?

The Federal Fiscal Court came to the conclusion that the transfer of shares did not constitute a monetary advantage or remuneration.

According to this, a monetary advantage requires that it be granted within the scope of employment. However, in this specific case, the decisive motive for the transfer of shares was to implement a company succession arrangement, which was reflected, among other things, in the agreed inheritance tax reversion clause. Furthermore, the aim was to ensure the continued existence of the company by granting experienced employees a blocking minority through the transfer of shares.

Above all, since the transfer of shares was expressly not linked to the employment relationship, the Federal Fiscal Court concluded that the transfer of shares did not constitute remuneration for past or future work.

The Federal Fiscal Court saw further indications against remuneration in the fact that all employees received the same shares, despite very different incomes and lengths of service with the company.

In summary

With this ruling, the Federal Fiscal Court has made a clear decision that the transfer of GmbH shares does not constitute a monetary advantage if the purpose of the transfer is not remuneration but rather the regulation of company succession.

This is a welcome decision that may provide greater legal certainty in the area of company succession (including through employee participation).