Increase in value of shares in a corporation as a gift

The mere increase in value of shares in a corporation, which 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 (Section 7 (8) sentence 1 of the German Inheritance Tax Act (Erbschaft- und Schenkungsteuergesetz; ErbStG)). This provision is extremely relevant in practice, as shown by the decision of the German Federal Fiscal Court (Bundesfinanzhof; BFH) of September 23, 2025, case no. II R 19/24.

A father held a 40 % stake in a limited liability company (GmbH), while his two sons each held a 30 % stake. In a contract dated January 15, 2013, one of the sons sold his GmbH shares with a nominal value of EUR 30,000 to the GmbH or a third party to be named by the GmbH, effective November 1, 2017. A purchase price of EUR 2.1 million was agreed, taking into account any profit distributions made after the date of notarization. The father died in 2013. In a notarized agreement dated January 31, 2018, the other son, as the remaining GmbH shareholder and representative of his brother without power of attorney, declared the transfer of the GmbH shares sold with effect from November 1, 2017, to the latter, which he also accepted in his capacity as managing director with sole power of representation. The brother approved the declaration of assignment before a notary on May 29, 2018. Due to the increase in value of the shares, the tax office assumed that this was a mixed gift between the brothers and assessed gift tax against the remaining GmbH shareholder. The latter objected that he had been estranged from his brother and that there was no intention of gifting or enrichment between estranged brothers. The Fiscal Court of Münster agreed with this argument. However, the BFH took a different view, overturned the first-instance ruling, and referred the case back to the Fiscal Court of Münster for further hearing and decision.

The transfer of GmbH shares by notarized contract fulfills the definition of performance within the meaning of Section 7 (8) sentence 1 ErbStG. This also applies if the GmbH acquires the shares itself (acquisition of own shares), because from the transferor’s perspective, they are transferring a marketable asset that retains its value. An awareness of gratuitousness or an intention to enrich oneself (= so-called subjective element) are irrelevant for the application of Section 7 (8) sentence 1 ErbStG. This is because the provision is not linked to the concept of generosity.

The prerequisite for an increase in value pursuant to Section 7 (8) sentence 1 ErbStG is that the fair market value of the beneficiary’s shares after the donor’s contribution to the company exceeds the fair market value of the shares before the contribution. If the payment consists of the transfer of GmbH shares to the GmbH, an increase in the value of the shares of the remaining shareholders may result from the fact that the membership rights of the GmbH consist of its own shares; since own shares confer fewer rights, there is a shift in value to the detriment of the GmbH's own shares and in favor of the other company rights. Whether the transfer to the company has actually led to an increase in the value of the other shares in it must be determined on a case-by-case basis. The date on which the tax arises is decisive for the valuation; in the case of gifts between living persons, the date of execution is decisive. If the payment within the meaning of Section 7 (8) sentence 1 ErbStG consists of the transfer of a GmbH share, the date of execution generally corresponds to the date on which the transfer becomes effective under civil law.

If the assignment agreement is provisionally invalid, for example due to the actions of a representative without power of attorney (Section 177 (1) of the German Civil Code (Bürgerliches Gesetzbuch; BGB)), gift tax only arises when the necessary declaration of approval is submitted by the represented party (Section 184 (1) BGB). The civil law retroactive effect of the approval is irrelevant for gift tax purposes, as it does not change the relevant actual course of events. In the case in dispute, the valuation date was the day on which the brother had notarized his approval of the transfer of his shares in the GmbH, i.e., May 29, 2018. Since the tax office had not demonstrated an increase in the value of the GmbH shares within the meaning of Section 7 (8) sentence 1 ErbStG on this relevant date, the gift tax assessment issued is unlawful. In the second instance, the tax court must now make up for the previously missing findings on the existence of an increase in value within the meaning of Section 7 (8) sentence 1 ErbStG on May 29, 2018.

Notice:

With its current decision, the BFH remains consistent with its decision of April 10, 2024, case no. II R 22/21. It clarifies that the functional circumstances of Section 7 (8) sentence 1 ErbStG must be viewed independently of the basic circumstances of Section 7 (1) no. 1 ErbStG and that its constituent elements must be interpreted independently.

In the present case, the special feature was that the purchase of the GmbH shares was to take effect only several years later. At that time, the shares were worth significantly more than the purchase price originally agreed and paid. The fact that the purchase price had been determined at the time through intensive negotiations between the quarreling brothers and that, accordingly, any intention to make a gift and/or enrichment could be virtually ruled out is irrelevant for the subsequent tax treatment. The only decisive factor for taxability under Section 7 (8) sentence 1 ErbStG is the objective increase in value of the shares.

This results in a very broad scope of application for the provision, which corresponds to its unrestrictive wording “payment by a donor to the company” and meets the legislator’s intention to close a loophole in the law on non-proportional contributions as comprehensively as possible.