According to a ruling of Hamburg’s fiscal court – the FG Hamburg – from July 11, 2023, it is possible to transfer assets tax-free thanks to a loophole with respect to gift tax (case ref.: 3 K 188/21).
The judgment has caused quite a stir, as it suggests that it is possible to avoid paying gift tax by contributing to the capital reserves of a type of commercial partnership limited by shares known in Germany as a Kommanditgesellschaft auf Aktien (KGaA). However, it is worth mentioning that the ruling is not yet final, notes commercial law firm MTR Legal Rechtsanwälte. An appeal is currently pending before the country’s highest tax court, the Bundesfinanzhof (case ref.: II R 23/23).
The case at hand concerns the joint KGaA of a son and his father. The company’s capital stock was covered in full by the father acting as the sole limited partner. The son, in turn, made an asset contribution towards the KGaA as the personally liable partner. In accordance with the articles of association, the partners’ participating interests in the profits and reserves of the KGaA were reflected in the proportional relationship between their capital accounts as regards the capital stock, with this reflecting a 90-to-10 ratio in favor of the son.
After the KGaA was registered, the father made a contribution of several million euros to the company’s unrestricted capital reserves, which, as per the articles of association, was not included in the capital accounts.
This was viewed as a transaction subject to gift tax by the relevant tax office, which issued a corresponding tax assessment notice. The move was successfully challenged by the son. The FG Hamburg did not consider the conditions for levying gift tax to have been met.
While it is true that the German Inheritance and Gift Tax Act (ErbStG) treats an appreciation in the value of shares in a corporation as a gift inter vivos where this is achieved for the benefit of someone with a stake in the company through a contribution made by another person towards said company, the court ruled that these conditions had not been met here. Despite the father’s disproportionate contribution leading to an increase in the value of the son’s investment, the son did not have a stake in the capital stock of the corporation. Accordingly, his involvement did not amount to a share in the corporation. The FG Hamburg went on to clarify that German tax law makes a distinction between a personally liable partner’s stake in a KGaA and the share in a corporation, and that it is the legislature – and not the tax authorities – who are responsible for closing this loophole.
MTR Legal’s team of tax experts can provide counsel in the event of disputes with the tax authorities.
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