01. Aug 22

Gifting company shares to employees in the context of company succession

Company succession is on the agenda of many businesses, with one option being to transfer shares in the company to employees. However, one needs to be mindful of the tax implications.

Many owner-run companies are facing a generational shift and the retirement of their owner. With the search for a suitable successor often proving to be a challenge, one approach is to look for one or more successors among the ranks of the company’s longest-serving and most reliable employees. When transferring company shares to employees, we at the commercial law firm MTR Rechtsanwälte stress the need for prudence in order to avoid the transfer being assessed as wages that are subject to income tax.

The question of whether a gift of GmbH shares to employees amounts to wages that are subject to income tax has been answered in the negative by the Finanzgericht (FG) Sachsen-Anhalt – the Fiscal Court of Saxony-Anhalt – in a ruling from June 14, 2021 (case ref.: 3 V 276/21).

The case in question concerned a married couple that were shareholders of a GmbH, a type of limited liability company in Germany. Looking ahead to their upcoming retirement with a view to keeping the company within the family, but with their son working in a completely different industry and lacking any entrepreneurial experience, the couple decided to transfer the shares in the company not only to their son but also a 5.08% stake to each of five executive employees at the GmbH as a way of ensuring a successful handover.

While the relevant tax office viewed the transfer of the shares not as a gift but as wages that were subject to income tax, the Fiscal Court of Saxony-Anhalt took a different view, noting that the share transfer agreement made no mention of any reason for the transfer. Moreover, no consideration was expected from the employees. The Court also noted that the transfer was not for services rendered by the employees in the past or to be rendered in the future, that no holding period had been agreed for the shares, and that the transfer of the shares had been made without reservation and with no strings attached. The FG Sachsen-Anhalt went on to state that the motive behind the transfer was clearly to make arrangements for the handover of the company to ensure that it remained in business. The Court concluded that it had found no wages on which income tax was due, but that the transfer may be relevant for gift tax purposes.

Our team of expert lawyers can advise on issues relating to company succession and assist in optimizing the transition, including from a tax perspective.

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