Increase in value of shares in a corporation

According to Section 7 (8) sentence 1 of the German Inheritance Tax Act (ErbStG), an increase in the value of shares in a corporation, which, for example, a natural person (beneficiary) with a direct or indirect interest in the corporation acquires through the contribution of another person (donor) to the corporation, is also considered a gift.

The main application of this provision is seen in the so-called disproportionate contribution of a shareholder to a corporation. In this case, the contributing shareholder contributes assets to the company without the other shareholders participating with their own contributions in proportion to their shareholdings and without the contributor being granted special rights under company law. This increases the value of the shares of the other shareholders, which, according to Section 7 (8) sentence 1 ErbStG, is considered a gift from the contributing shareholder to the co-shareholders. The provision is intended to close a tax loophole by treating contributions made by the donor to the assets of a corporation as equivalent to a direct gift to the (co-)shareholder for gift tax purposes.

The German Federal Fiscal Court decision of August 27, 2025 (case no. II R 1/23) shows that other cases may also be affected by the provision in Section 7 (8) sentence 1 ErbStG. In the underlying case, a sole shareholder of a limited liability company (GmbH) received a gift of EUR 4 million from his mother on the condition that he contribute this amount to the GmbH as equity capital so that it could purchase a piece of real estate. The BFH considered the payment of the sum of money from mother to son, who forwarded it to the GmbH, to be a payment by the mother to the GmbH within the meaning of Section 7 (8) sentence 1 ErbStG.

On the one hand, the fact that the money was initially paid into the account of the son as the sole shareholder of the limited liability company did not preclude a payment to the limited liability company. This was because this payment had been made from the outset with the specific purpose of contributing the amount received to the limited liability company as equity capital so that the latter could acquire the property. The son therefore merely had to pass this amount on to the GmbH as an intermediary or conduit, without any of this payment remaining in his assets.

Furthermore, the fact that the mother herself did not hold a stake in the limited liability company did not preclude the acceptance of a benefit. According to the wording of Section 7 (8) sentence 1 ErbStG, the person making the gift is not limited to a person who holds a direct or indirect stake in the corporation receiving the benefit. Persons who do not hold a stake in the corporation are also covered. The donor within the meaning of section 7 (8) sentence 1 ErbStG can therefore also be a third party who is not a member of the corporation.

Notice:

In addition, with this ruling the BFH confirmed its case law on the procedural interaction between the obligation to report gifts and the submission of a gift tax return: the suspension of the limitation period for assessment only ends at the end of the calendar year in which the tax return is submitted, and not when the gift is reported.