In a recently published decision (case reference: 1 K 3117/08 F), the Tax Court of Münster ruled on whether a disproportionate distribution of profits should be characterized as a “hidden” purchase price upon the transfer of shares in a limited liability company (GmbH).
The underlying facts of the case are as follows: The plaintiff held a 40 % stake in a GmbH. In 2000, the plaintiff transferred its participation in the GmbH to another GmbH shareholder, who became the sole shareholder. The underlying share purchase agreement did not provide for any consideration for the transfer. At the same time, the shareholders' meeting of the GmbH decided to distribute approximately 40 % of the GmbH´s retained earnings only to the plaintiff (which led to a more favorable income tax result for the plaintiff than a mere sale of the shares under the old imputation tax credit system).
Based on these facts, the tax authorities concluded that the disproportionate profit distribution should be considered hidden consideration for the sale of the shares, rather than an actual profit distribution. The tax office presumed a hidden purchase price, which led to a significant capital gain for the plaintiff.
The tax court of Münster disagreed and ruled in favor of the plaintiff, stating that, from a tax perspective, neither the individual steps nor the transaction as a whole could be characterized as an abuse of law. The court affirmed that, under German corporate law, the right to decide on the distribution and appropriation of profits is the primary and intrinsic right of the shareholders of a GmbH. This right includes, in particular, the right to agree on a distribution of profits that deviates from the proportion that the shareholder’s shareholding bears to the total stated share capital.
According to the court, the plaintiff´s goal to receive 40 % of the GmbH´s retained earnings was achievable by being paid a purchase price or by way of a profit distribution. The court concluded that the method selected should not be viewed as a circumvention of the tax law, but rather as an optimization of the intended economic purpose.
The case has been appealed to the Federal Tax Court (case reference IV: R 28/11).
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