Transfer of company shares as a gift in the context of business succession planning
For many small and medium-sized enterprises (SMEs) making arrangements for business succession planning is already imminent in the short term; from medium and long-term perspectives, companies should however also make a start in this respect. This is because in order to make use of internal company know-how and to achieve a long-term solution it is necessary to take the tax law-related challenges into account. Moreover, against this background, attention should be paid to a recent landmark ruling by the Federal Fiscal Court (Bundesfinanzhof, BFH) in which it decided in favour of transfers of shares in the sense of keeping the business going.
The case in question: the transfer of shares to a senior executive with a view to succession planning
In their ruling of 20.11.2024, the Munich-based BFH judges took the view that income from a gratuitous transfer of shares must not be automatically deemed as being income subject to payroll tax (case reference: VI R 21/22). This decision is important in that it can considerably reduce the tax burden in the event of succession planning.
In the specific case, a lawsuit was brought by a senior executive to whom company shares had been gratuitously transferred. The overall aim underlying this had been to settle the business succession in a way such that the senior executives should receive company shares free of charge. The local tax office considered the transaction to be a benefit in kind that was liable to payroll tax because the shareholding was related to the position of the claimant as a senior executive.
The BFH took a different view and denied the existence of a benefit in kind that was relevant for payroll tax purposes. From the BFH’s perspective, the crucial factor was that the transfer was primarily meant to settle the business succession and, thus, could not be regarded as remuneration for work that had already been performed.
Admittedly, a ‘discounted purchase’ or a sale at ‘prices not in line with the market’ would generally have to be considered a benefit subject to payroll tax if this benefit is a result of the employment relationship. However, the crucial factor in the case in question was that the transfer agreement contained a reversionary clause as protection in order to make it explicit that the transfer of the shares was primarily for the purpose of business succession planning.
General relevance for SMEs
For SMEs, whose transition to the next generation will, at best, be trouble-free and settled early on, this decision constitutes a ground-breaking precedent. The possibility of transferring company shares gratuitously without a payroll tax disadvantage ensuing from this makes it easier for owners to retain qualified senior executives in the company. This can help to ensure the continued existence of the business and to structure the process of transition in a tax-optimised way.
For family-run companies, in particular, - where the owners frequently also manage the business operations -, the transfer of shares plays a key role. Here, a tax expense that is too high can quickly become an obstacle for plans to settle the succession.
Transparent contractual arrangements and their documentation
Companies considering settling their business succession in such a way should ensure that the aim of this type of transaction should - already in advance - be clearly documented. Transparent contractual arrangements that emphasise the primary aim - to ensure the succession planning - are vital. Furthermore, it is recommended to consult tax advisers and lawyers early on in order to avoid potential tax pitfalls.
