Gift tax law: The Federal Fiscal Court continues to leave numerous practically relevant questions unanswered. The case is based on an inheritance dispute.
Frankfurt. With Section 7, Paragraph 8 of the Inheritance Tax Act, the legislator has created a provision aimed at taxing the perceived loophole of increased value of shares in corporations resulting from contributions to their assets. The situation in which a shareholder contributes assets to a corporation without receiving adequate or no consideration – a so-called disproportionate contribution – is particularly controversial.
The legal text is deliberately formulated broadly. Accordingly, any increase in the value of shares in a corporation that a directly or indirectly involved natural person or foundation (the recipient) experiences through a transfer from another person (the donor) is also considered a gift. ” The text is not limited to specific cases of abuse, but rather targets any type of contribution to a corporation as a potentially taxable gift to the other shareholders, ” explains lawyer István Cocron.
There has always been intense debate about whether the law requires a subjective element, namely the awareness of an unbalanced power relationship. In business dealings between unrelated parties, the natural conflict of interest ensures that the parties involved generally do not give each other any special treatment. The Münster Tax Court has previously recognized a subjective element in cases of disproportionate capital contributions to corporations.
Inheritance tax: Significance of the increase in value of shares
However, in two recent rulings, the Federal Fiscal Court (BFH) clarified that the law does not require a gratuitous transfer of assets as a prerequisite. The underlying case involved an inheritance dispute in which several co-heirs acquired shares in a limited liability company (GmbH), in which some already held indirect stakes. The purchase price for the GmbH’s acquisition of its own shares was €300,000, although an appraisal four years earlier had estimated the value at approximately €1 million.
For this reason, the tax authorities considered the shareholders who held shares prior to the inheritance to have been enriched and levied gift tax proportionally on the difference between the purchase price and the currently determined fair market value. The Federal Fiscal Court (BFH) ruled, with regard to the taxable enrichment under the Inheritance Tax Act, that only the increase in the value of the shares is relevant. This increase must be determined according to valuation standards.
The Federal Fiscal Court (BFH) further emphasized that even in the case of an increase in value, a tax exemption is excluded, since the subject of the gift relates to the increase in value itself and not to the shares in the company. ” In this context, the fair market value of the benefited shareholder’s share before the gift is made must be compared with the fair market value after the gift, ” explained attorney Cocron.
