Updates
Date:
This article was written by
Certified Tax Advisor, Lawyer, Partner
Certified Tax Advisor, Manager, National Office Tax & Legal
As part of a merger, a limited partner contributed her interest in a German limited partnership (Kommanditgesellschaft; KG) to a German stock corporation (Aktiengesellschaft; AG) at book value, with effect for tax purposes as of December 31, 2007 (Section 20 of the German Reorganisation Tax Act (Umwandlungssteuergesetz; UmwStG)). In exchange, she received shares. Following her death in 2011, a foundation inherited the shares and sold them later that year.
It was undisputed that the sale within the seven-year holding period retroactively triggered contribution gain I for 2007 under Section 22 (1) UmwStG. The only issue in dispute was the person to whom that gain was attributable: the tax office attributed it to the deceased and assessed the foundation in its capacity as universal successor. By contrast, the foundation sought direct attribution of the gain as its own income, so that it would be subject to the foundation’s corporate income tax rather than the deceased’s personal income tax. The Fiscal Court upheld the tax office’s position.
The BFH likewise dismissed the foundation’s appeal on points of law. Contribution gain I is retroactively attributable to the deceased and must be taxed by reference to the deceased’s personal income tax circumstances, with the foundation liable in its capacity as universal successor. It does not constitute the foundation’s own income subject to corporate income tax.
Under Section 22 (6) UmwStG, a successor who acquires the shares without consideration is deemed to be the contributor. The BFH expressly acknowledges that this wording supports the foundation’s position. However, in light of the statutory framework and its purpose, the provision must be interpreted restrictively (teleological reduction): the statutory fiction does not extend to determining the person to whom contribution gain I is attributable. Rather, the successor steps into the contributor’s position only from the time of succession, for example with regard to the annual documentation requirements.
The original contribution and the identity of the contributor at that time remain decisive. Subsequent succession does not retroactively change the person to whom the gain is attributable. Moreover, under the overall statutory framework, succession is not intended to result in a change of tax regime: attributing the gain directly to the foundation would shift hidden reserves originally subject to personal income tax into the corporate income tax regime.
Notice:
Transferring shares subject to a holding period without consideration does not eliminate the risk of retroactive taxation of the original contributor. This applies not only to inheritances but also to gifts. In the case of a gift, the successor who acquires the shares without consideration is required to pay tax only on the capital gain reduced by the hidden reserves already brought into charge through contribution gain I, while the donor bears the tax on the contribution gain without receiving a corresponding share of the sale proceeds. Contractual provisions in the gift agreement can prevent these inequitable consequences for the donor if the successor breaches the holding-period requirements.