Following a decision of the Federal Tax Court (BFH, case reference: II R 28/06) involving the relationship between gift taxes and deemed distributions, the German tax authorities revised the inheritance and gift tax regulations on 20 October 2010. According to the revised regulations, transactions between a corporation, its shareholders and parties related to the shareholders generally can have the result that the corporation is deemed to be making a gift to the relevant person if the agreement does not conform to the arm’s length principle.
No gift tax consequences should arise where contributions or distributions are made to/from 100 % shareholders.
Among others, the following situations may have gift tax consequences:
- Open or deemed contributions with a subsequent disproportionate distribution to the non-contributing shareholder;
- The formation of a new company or a capital increase, where a shareholder makes a contribution without receiving a proportionate share in the company;
- A waiver of a receivable against a related party; and
- Deemed distributions to a related party that is not a shareholder in the company.
Particularly in the case of a deemed distribution to a related party who is not a shareholder in the company, the German tax authorities previously took the position that the shareholder rather than the corporation made the gift, which resulted in more favorable gift tax treatment (i.e. lower rates and increased threshold amounts for relatives). The new position of the German tax authorities in the regulations is based on the BFH decision, in which the court rejected the idea that the gift was made by the shareholder to the related person, but indicated that the gift may have been made by the corporation to the related party. Thus, German gift tax would apply on the excess remuneration at the most disadvantageous gift tax rate (50 %, a 30 % tax rate applies if total gifts granted within a 10-year monitoring period do not exceed EUR 6 million).
The BFH decision also revived discussions as to whether such transactions could have gift tax consequences if all parties to the transaction were part of the same corporate group. In the professional literature, representatives of the tax authorities appear to take the view that there may be a gift tax liability, with the result that gift tax consequences of deemed distributions may have to be taken into account even in purely corporate situations, but discussions on this issue appear to be ongoing.
Taxpayers should monitor any developments and discuss with their advisors whether a notification of the tax authorities for gift tax purposes would be required.
If you have any questions, please contact the authors of the article at gtln@deloitte.de or your regular Deloitte contact.
