Significant Participation – Legal Concept and Significance
The term ‘significant participation’ is a central concept in German law, particularly in tax law, company law, and supervisory law. It denotes a level of shareholding in a company that exceeds certain legal thresholds and thereby triggers specific legal consequences. The exact definition and legal consequences of significant participation vary depending on the area of law and statutory regulation. The following article provides a comprehensive overview of the definition, areas of application, distinctions, and implications of significant participation.
Definition and General Meaning of Significant Participation
In legal terms, significant participation refers to holding a substantial interest in a corporation or partnership. The statutory threshold at which a participation is deemed significant depends on the respective law and regulatory area. Significant participations mark the point at which shareholders or equity holders go beyond the status of mere investors and acquire special rights or obligations, particularly participation, information, or blocking minority rights.
Thresholds and Legal Foundations
- The threshold for significant participation is often set at 1%, 10%, 25%, or 50% of the company’s shares or voting rights, depending on the regulatory context.
- The structure may relate to capital interests, voting rights, or other economic factors of influence.
Significant Participation in Tax Law
The term significant participation is particularly used in German income tax law. The central rule is § 17 Income Tax Act (EStG). According to this, the gain from the sale of shares in corporations is subject to income tax if, within the previous five years, the seller held at least 1% of the company’s capital.
Income Tax and Capital Gains (§ 17 EStG)
- The relevant criterion is holding at least 1% of the company’s registered capital.
- Indirect and multi-tiered participations are also included, for example through the interposition of additional companies.
- The five-year period ‘at any time during the last five years’ refers to the period prior to the disposal of the shares.
- In addition to purchase and sale, gratuitous transfers are also (partially) covered.
Determining the Level of Participation
- Both legal and economic participation are decisive.
- Trust participations or intermediate holding structures are also taken into account.
- Multiple participations in the same company are usually aggregated.
Tax Implications
- Capital gains are generally subject to income tax, regardless of the holding period, if the participation threshold has been exceeded.
- For tax calculation purposes, advertising expenses, acquisition costs, or losses may be taken into account accordingly.
Significant Participation in Company Law
The term significant participation is also used in company law, particularly to determine participation rights, voting rights, and notification requirements.
Rights and Duties of Major Shareholders
- Upon exceeding certain thresholds, shareholders acquire extended rights to information, to make motions, and to veto.
- Blocking minorities grant minority shareholders special influence; for example, with a participation of 25% + 1 vote, fundamental decisions of a company can be blocked.
Disclosure and Notification Obligations
- The Securities Trading Act (WpHG) requires shareholders to notify the company and the Federal Financial Supervisory Authority (BaFin) upon reaching certain participation levels (usually 3%, 5%, 10%, 25%, 50%, 75% of voting rights).
- The aim is transparency in shareholdings and disclosure for capital market participants.
Significant Participation in Supervisory Law (Banks, Insurers)
In banking supervision and insurance supervision law, the term significant participation is applied to determine when special approval and notification obligations apply to acquisitions of interests in credit institutions or insurance undertakings.
Statutory Provisions
- The main statutes are the Banking Act (KWG), Insurance Supervision Act (VAG), and Payment Services Supervision Act (ZAG).
- In these regulations, significant participation is usually defined as holding at least 10% of the capital or voting shares.
Notification and Approval Requirements
- The direct or indirect acquisition of a significant participation in a supervised entity must be notified in advance to the competent supervisory authority (BaFin or ECB) (§ 2c KWG, § 16 VAG).
- The authority may prohibit the acquisition of the participation if it would jeopardize the proper management of the company.
Other Areas of Application for Significant Participation
Accounting and Group Law
- In the context of consolidated accounting under the Commercial Code (HGB), significant participation can result in an obligation to consolidate a company in the group accounts (so-called controlling or participation relationships).
International Tax Law
- In international tax law, the threshold for significant participation plays a role in controlled foreign company taxation and the reporting requirements for business dealings with foreign companies.
Distinction from Other Types of Participation
There is a distinction between ‘significant participation’ and other forms such as ‘qualified participation,’ ‘controlling participation,’ or ‘substantial participation.’ Significant participation generally denotes the lowest threshold with extended legal consequences, while other terms have more specific effects on participation or control rights.
Summary
Significant participation is a cross-disciplinary legal term whose meaning and threshold are defined by the respective statute. It serves to distinguish ordinary shareholding from positions with increased influence and specific legal consequences, particularly in the areas of tax, company law, banking and insurance supervision, and accounting. Careful analysis of the relevant legal framework is essential to determine the duties, rights, and possible risks when the thresholds are exceeded.
References and Further Resources
- Income Tax Act (EStG)
- Commercial Code (HGB)
- Securities Trading Act (WpHG)
- Banking Act (KWG)
- Insurance Supervision Act (VAG)
- Federal Ministry of Finance (BMF) – Letters and Explanations on Participation in Tax Law
- Federal Financial Supervisory Authority (BaFin) – Guidelines and Forms on Owner Control Procedure
Note: The term significant participation must always be considered in the context of the respective legal provisions. Its specific application and the resulting rights and obligations should be examined in accordance with the relevant legal framework.
Frequently Asked Questions
What rights and obligations are associated with significant participation?
Significant participation entails numerous rights and obligations, arising especially from company law, tax law, and capital market regulations. Rights generally include voting rights at shareholder meetings, information and inspection rights, and the entitlement to dividends. Depending on the amount of the shareholding, special minority rights may also exist, such as the right to convene general or shareholders’ meetings, rights of challenge with respect to resolutions, or the right to request special audits. Obligations include, among others, the disclosure of the participation to the company and/or the commercial register and, in certain cases, notification to financial supervisory authorities. There may also be duties of loyalty towards the company, such as refraining from actions that could harm the business. From a tax perspective, there are special filing obligations and, for example, in the context of exit taxation or hidden profit distributions, tax consequences. In the context of capital market law, reporting obligations under the WpHG must be observed when certain thresholds are exceeded.
What notification and publication requirements exist for significant participations?
The notification and publication requirements depend primarily on the type and size of the company as well as the level of participation. For listed companies in Germany, the Securities Trading Act (WpHG) is particularly relevant, which stipulates notification to the company and the Federal Financial Supervisory Authority (BaFin) when certain participation thresholds (3%, 5%, 10%, 15%, 20%, 25%, 30%, 50%, and 75%) are reached, exceeded, or fallen below. The company itself is obliged to make these notifications publicly known. Comparable reporting requirements also exist under the Capital Investment Code (KAGB) and the Foreign Trade and Payments Act (AWG) in cases of cross-border acquisitions. In GmbH law, registration requirements in the commercial register are also relevant; changes in shareholders and levels of participation must be disclosed there.
What are the tax consequences of significant participation?
In tax law, participations are deemed significant if, as defined under the Income Tax Act (§ 17 EStG), they equal or exceed directly or indirectly 1% of the share or nominal capital. As a result, capital gains from such participations are not considered purely private disposals but as business income, which results in special filing obligations and a different tax treatment. Special valuation and tax provisions also apply to gifts or inheritances of significant participations. Exit taxation under § 6 AStG may become relevant if the shareholder with at least a 1% participation moves abroad. For corporations, the so-called participation exemption (§ 8b KStG) is significant, under which dividends from significant participations are largely tax-exempt, but only under certain conditions.
How is the term significant participation defined in company law?
There is no uniform definition of significant participation in company law; it depends on various legal provisions. For example, under § 17 AktG, participations of 25% or more are considered significant, as they may confer blocking minority rights. In GmbH law, special rights may be granted already at participations of 10% or more, such as the right to convene a shareholders’ meeting. Certain takeover threshold rights exist for participations of 30% or more, which entail further legal consequences. In tax law (see above), a stake of only 1% is often sufficient.
What are the implications of significant participation for codetermination and control in a company?
Anyone holding a significant participation can exert substantial influence over management and the strategic direction of the company. Certain levels of participation are associated with rights of involvement and control, such as the right to appoint supervisory board members, initiate special audits, or block significant corporate decisions (blocking minority). In German codetermination law, large participations do not automatically affect the composition of the supervisory board, but do so by voting rights at the general meeting. Furthermore, major shareholders have a heightened interest in the company’s policies and can significantly influence corporate direction through their voting behavior.
What restrictions or approval requirements exist when acquiring a significant participation?
The acquisition of a significant participation may be subject to various restrictions or statutory approval requirements, depending on the sector, the acquirer’s nationality, and the level of participation. For example, under the Foreign Trade and Payments Act (AWG), sensitive sectors—such as security-relevant companies—require prior approval by the Federal Ministry for Economic Affairs and Climate Action (BMWK) for foreign investors acquiring a 10% or greater stake. In the banking and insurance sector, §§ 2c KWG and § 104 VAG prescribe notification and reliability checks for ‘qualified participations’ (typically from 10%). Antitrust reviews by the Federal Cartel Office may also be necessary above certain turnover and participation thresholds.
What are the sanctions for breaches of participation obligations?
Violations of statutory notification and publication obligations upon reaching a significant participation can be subject to severe penalties. These range from fines under the WpHG, coercive fines for violations of the GmbH or Stock Corporation Act, to the invalidity of voting rights for non-reported participations (§ 44 WpHG). In tax law, retroactive taxation, interest, and even criminal sanctions for tax evasion may result. Acquisitions requiring approval that are carried out without proper clearance can lead to the prohibition of acquisition or exercise of shareholder rights, or even reversal of the transaction. The stock exchange watchdog and BaFin can also impose further regulatory measures.
