In its judgment of 2 April 2025 (case no. 9 K 147/22), the Niedersächsisches Finanzgericht (Lower Saxony Fiscal Court) ruled on the application of § 22(1), sentence 1 UmwStG (German Reorganisation Tax Act) in the event of a breach of the lock-up period within the first year. The central issue was whether contribution gain I must be taxed in full in such a case without the relief available under § 16(4) EStG (German Income Tax Act) and § 34 EStG, or whether § 22(1), sentence 1, second half-sentence UmwStG must be reduced by purposive interpretation in this respect.
The court affirmed a purposive reduction where an event triggering a breach of the lock-up period occurs during the first year. At the same time, it clarified that the seven-year period under § 22(1), sentence 1 UmwStG must be calculated to the exact day in accordance with § 187(1) and § 188(2) BGB (German Civil Code). The decision is not final; an appeal on points of law is pending before the Bundesfinanzhof (BFH, Federal Fiscal Court) under case no. X R 14/25.
Background to the Proceedings Before the Niedersächsisches Finanzgericht
Change of Legal Form From a Professional Partnership to a GmbH
The claimants were physicians from various specialties who converted their joint professional partnership into a GmbH on 28 August 2019 by way of a change of legal form. For tax purposes, the conversion was given retroactive effect as of 1 January 2019.
On the same day as the conversion resolution, the sale of all shares in the GmbH to an unrelated third party was agreed. The sale was to take effect on 1 January 2020. Completion of the share purchase agreement was subject to the condition precedent that the competent admissions committee issue a final determination confirming the continuation by the GmbH of all existing accredited physician positions and employment authorisations.
Dispute Over the Determination of the Tax Bases for 2019
The subject matter of the fiscal court proceedings was a notice concerning the separate and uniform determination of tax bases for 2019. The claimants had initially filed an objection against this notice.
The Finanzamt (tax office) had determined a contribution gain I but reduced it by one seventh. At the same time, it denied the application of the relief available under § 16(4) EStG and § 34 EStG. In doing so, the tax authorities followed their established position that this relief does not apply to breaches of the lock-up period under § 22(1), sentence 1 UmwStG.
Core Legal Issue: Lock-Up Period Under § 22(1), Sentence 1 UmwStG
Contribution Gain I Upon Disposal of Shares Subject to a Lock-Up Period
§ 22(1), sentence 1 UmwStG applies, among other things, to cases in which shares resulting from a contribution are disposed of within a seven-year lock-up period. In such circumstances, a contribution gain I may arise and must be recognised retrospectively.
The Niedersächsisches Finanzgericht had to assess the consequences where the event triggering a breach of the lock-up period occurs during the first year. This concerned not only the calculation of the lock-up period but also whether the tax relief under § 16(4) EStG and § 34 EStG applies despite the wording of § 22(1), sentence 1, second half-sentence UmwStG.
Exact-Day Calculation of the Seven-Year Period
The court ruled that the seven-year period under § 22(1), sentence 1 UmwStG must be calculated to the exact day. The general rules governing the calculation of time limits under § 187(1) BGB and § 188(2) BGB were decisive.
Accordingly, the calculation is not based on a general year-by-year approach. Rather, the specific period between the contribution and the subsequent event is decisive for determining the lock-up period.
In the case at issue, this calculation produced the following result: The tax transfer date, and thus the date of contribution, was 1 January 2019, meaning that the lock-up period did not begin until 2 January 2019 and the first year ended at the close of 1 January 2020. By contrast, title to the shares in the GmbH had already transferred at midnight on 1 January 2020. The disposal therefore still fell within the first year, and the court based the further legal consequences on this finding.
Purposive Reduction for a Breach During the First Year
Tax Relief Despite Breach of the Lock-Up Period
According to the Niedersächsisches Finanzgericht, § 22(1), sentence 1, second half-sentence UmwStG must be reduced by purposive interpretation where the lock-up period is breached during the first year. The court therefore concluded that the relief under § 16(4) EStG and § 34 EStG may apply to this category of cases.
In support of its decision, the court reasoned that the sale for consideration of the shares subject to the lock-up period during the first year resulted in the full taxation of hidden reserves under the income tax regime. The court did not consider the arrangement in the case before it to constitute abusive tax structuring.
No Avoidance of Taxation of Hidden Reserves and No Change of Tax Status
The Niedersächsisches Finanzgericht further stated that a breach during the first year results neither in the avoidance of taxation of hidden reserves nor in a change of tax status. In this situation, the tax effect is equivalent to a contribution at fair market value under § 20(4) UmwStG.
The court also took into account that, unlike a contribution in the narrower sense, a change of legal form does not involve a change of legal entity or a change in the composition of the shareholders. Even taking into account the legislature’s power to establish generalised rules, the court found no objective grounds for taxation entirely without relief. It additionally based its assessment on the principle of equal treatment.
No One-Seventh Reduction of Contribution Gain I
Decision Rejecting the Original Calculation in This Respect
The Finanzamt had reduced contribution gain I by one seventh. The Niedersächsisches Finanzgericht did not accept this calculation.
According to the decision, contribution gain I was specifically not to be reduced by one seventh. The court reasoned that no full year had elapsed between the date of contribution and the disposal. On this point, the decision therefore rejected the calculation providing for a one-seventh reduction.
Difference Between Reduction and Preferential Tax Treatment
The decision distinguishes between two issues that must not be equated:
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whether contribution gain I must be reduced proportionately because a year has elapsed,
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whether the relief under § 16(4) EStG and § 34 EStG applies despite a breach of the lock-up period during the first year,
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whether § 22(1), sentence 1, second half-sentence UmwStG must be reduced by purposive interpretation for this particular category of cases.
The Niedersächsisches Finanzgericht rejected the one-seventh reduction but affirmed the application of the relief under § 16(4) EStG and § 34 EStG on the basis of a purposive reduction.
Departure From the Tax Authorities’ Established Position
Tax Authorities Have So Far Rejected the Relief
The decision expressly departs from the tax authorities’ established position. They consider the relief under § 16(4) EStG and § 34 EStG inapplicable to breaches of lock-up periods.
According to the tax authorities, § 16(4) EStG and § 34 EStG should not apply to contribution gain I under any circumstances, expressly including cases in which the triggering event occurs during the first year. In its decision, the Niedersächsisches Finanzgericht expressly distanced itself from this position and did not endorse it for breaches occurring during the first year.
By contrast, the Niedersächsisches Finanzgericht adopted a different legal assessment for breaches of the lock-up period during the first year. The scope of this decision must be confined to the circumstances considered by the court and cannot automatically be extended to all breaches of lock-up periods.
No Final Clarification by the Bundesfinanzhof
The highest court has not yet ruled on whether § 22(1), sentence 1, second half-sentence UmwStG must be reduced by purposive interpretation in the event of breaches during the first year. The Niedersächsisches Finanzgericht granted leave to appeal on points of law due to the fundamental importance of the matter.
The appeal on points of law is pending before the Bundesfinanzhof under case no. X R 14/25. The judgment of the Niedersächsisches Finanzgericht is therefore not final. The legal position on this issue will remain unresolved until the Bundesfinanzhof delivers its decision.
Assessment of the Decision
Dispute in the Legal Literature
The Niedersächsisches Finanzgericht notes that whether § 22(1), sentence 1 UmwStG should be reduced by purposive interpretation where the lock-up period is breached during the first year is highly disputed in the legal literature. This divergence of opinion was one reason for granting leave to appeal on points of law.
At the same time, the court relied on Bundesfinanzhof case law concerning purposive reductions in the event of breaches of the lock-up period under § 6(5), sentence 6 EStG, including the BFH judgment of 15 July 2021 (IV R 36/18). The decision therefore concerns a distinct issue of reorganisation tax law.
Frequently Asked Questions
What Did the Niedersächsisches Finanzgericht Decide Regarding § 22(1), Sentence 1 UmwStG During the First Year?
The Niedersächsisches Finanzgericht ruled that § 22(1), sentence 1, second half-sentence UmwStG must be reduced by purposive interpretation where the lock-up period is breached during the first year. Accordingly, the relief under § 16(4) EStG and § 34 EStG may apply in these circumstances.
Is Contribution Gain I Reduced by One Seventh if the Lock-Up Period Is Breached During the First Year?
According to the decision of the Niedersächsisches Finanzgericht, contribution gain I is not to be reduced by one seventh if no full year has elapsed between the contribution and the disposal. The exact-day calculation of the time limit is governed by § 187(1) and § 188(2) BGB.
What Practical Consequences Does the BFH Proceeding X R 14/25 Concerning § 22 UmwStG Have for Companies?
The pending proceeding X R 14/25 may be significant for companies and shareholders where comparable conversions and disposals occur during the first year. As the judgment is not final, the ultimate legal assessment will depend on the decision of the Bundesfinanzhof.
Tax Treatment of Conversions and Lock-Up Periods
The decision of the Niedersächsisches Finanzgericht concerns a narrowly defined issue of reorganisation tax law that is nevertheless significant for conversion transactions. It demonstrates that the application of § 22 UmwStG in conjunction with § 16(4) EStG and § 34 EStG depends on the specific timing and structure of the individual circumstances. MTR Legal Rechtsanwälte assists companies, investors and high-net-worth individuals with tax law matters relating to restructurings, share disposals and ongoing fiscal court proceedings; further information is available under Tax Law Advice.
