Sale of shares in a GmbH while continuing to work as the managing director - How do the profits have to be taxed?
If a shareholder sells their shares in a GmbH [German limited liability company] and keeps working as the managing director, a question that routinely arises is: how should a performance-related purchase price component be classified for tax purposes? The determining criterion will be whether this purchase price component relates to the sale of the shares, or to the continued work as the managing director.
The tax court (Finanzgericht, FG) in Cologne ruled that the performance-related part of the purchase price has to be taxed as income from employment if the payment of it is dependent on the continued work of the managing director (ruling of 4.12.2024, case reference: 12 K 1271/23). This partial amount is not part of the capital gain, but rather remuneration for the continued work. In the underlying case, a shareholder, together with a co-shareholder, had sold his 50% shareholding in the GmbH. The purchase price comprised a fixed amount and a further, conditional partial amount that should only be paid out if both vendors continued in their positions as managing directors for at least five years. A repayment obligation in the case of early termination had been contractually agreed.
The local tax office allocated the conditional partial amount to income from employment (Section 19 of the German Income Tax Act) because, from an economic perspective, this amount should be viewed as consideration for continued work. The Cologne FG confirmed this classification. The condition was clearly tied to the managing directors continuing to work; the payment would thus no longer be consideration for the sale of shares, but rather income from employment.
