Gift tax: Care required with respect to capital increases

Care is required when carrying out capital increases at a German limited liability company (GmbH), with which new shareholders participate in the limited liability company. Attention increasing has to be give here to gift tax aspects. If the value of a new shareholder’s share received in the course of a capital increases exceeds the contribution to be made, a gift from the existing shareholders to the new shareholder which is subject to gift tax can exist. This was held by the German Federal Fiscal Court (Bundesfinanzhof – BFH) in its judgement handed down on 27 August 2014, which has just been published (II R 43/12).  
The special feature of the capital increase in question was that both the existing shareholders and the new shareholders were foreign corporations. The German Federal Fiscal Court therefore first of all clarified that charitable gifts can also exist between corporations. The gift can also only come into consideration between the existing shareholders (= corporation) and the new shareholders (= corporation). A gift to the owners of the new shareholder (= corporation) initially assumed by the tax office was expressly rejected by the German Federal Fiscal Court.

The enrichment which is amongst other things necessary to trigger a gift tax liability can, however, in the opinion of the German Federal Fiscal Court be rebutted by a comparison the fair value of the shares of the existing shareholders before and after the capital increase. An enrichment and therefore a gift to the new shareholders therefore does not exist unless the fair value of the shareholding after the capital increase and the payment of the contribution by the new shareholders is lower than the fair value of the shares of the existing shareholders which these would have had at the time of the capital increase if the capital increase had not taken place.

Whether the existence of a taxable gift in the context of a capital increase could have been prevented by the existence of a possible constructive dividend of an existing shareholder (= corporation) to its shareholders, was left unanswered by the German Federal Fiscal Court in its statement of the facts of the case. It hinted, however, that there was no legal basis to take foreign income tax law into consideration in German gift tax law.

The judgement, however, also has the positive message that inheritance tax relief for company assets can also be applied to such gifts in the context of a capital increase (e.g. the 85% or 100% tax exemption). In this context, the contribution constitutes a deductible acquisition expense, which can, however, only be taken into consideration to the extent that the gift of the share is liable for tax after the tax relief has been taken into account.