Transfer of shares from company to private hands not an acquisition
If shares that were acquired prior to 2009 are transferred from company to private hands and later sold, the profits are not to be treated as taxable income from capital investments according to the Finanzgericht (FG) Münster, the Fiscal Court of Münster.
On January 1, 2009, a flat rate withholding tax (Abgeltungssteuer) was introduced in Germany. A transfer of shares acquired prior to this cutoff date from company to private hands does not amount to an acquisition of shares. That was the verdict of the Finanzgericht Münster in a judgment from March 26, 2020 (Az.: 8 K 1192/18 F). We at the commercial law firm MTR Rechtsanwälte note that this in turn means that any future profits from the sale of such shares will not be treated as income from capital investments.
The plaintiff in the case in question was a GmbH & Co. KG – a type of German limited commercial partnership (KG) consisting of a general partner (GmbH) and a limited partner – that had acquired an equity stake in 2007. In 2011, the company brought an end to its commercial operations, declaring that it would cease trading and restrict its activities to asset management going forward. Ownership of the company’s assets, including the equity stake, was transferred to the shareholders on a pro rata basis. In 2014, the equity stake was sold. The capital gains were subsequently treated by the tax authorities as taxable profits from the investment of capital.
The plaintiff took legal action against this, arguing that because it had acquired the equity stake before the flat rate withholding tax came into force, the capital gains were not subject to taxation as per the statutory transitional arrangements. However, the tax office maintained that the transfer of the shares to private hands amounted to an acquisition.
The Finanzgericht Münster ruled in favor of the plaintiff, reasoning that while it is true that, pursuant to section 20(2) sent. 1 no. 1 of the German Income Tax Act (Einkommensteuergesetz, EStG) as amended on January 1, 2009, profits from the sale of shares are subject to taxation irrespective of the length of the retention period, according to the transitional provision this only applies to shares that were acquired after December 31, 2008. It provides that an acquisition is deemed to have taken place only if it occurs in connection with a change of legal entity. The FG Münster concluded that the cessation of commercial operations had not given rise to a change of legal entity in the instant case. This is not the final word on the matter; an appeal is pending before the Bundesfinanzhof, Germany’s Federal Fiscal Court (Az.: VIII R 12/20).
Lawyers with experience in the field of tax law can provide counsel in the event of tax disputes with the authorities.