Valuation of shares in unlisted corporations due to transfer

If shares in an unlisted corporation are transferred, they must be recognised at the fair market value determined on the valuation date (Sections 11 (2), 9 (2) German Valuation Act). In its rulings of September 25, 2024 (case reference II R 15/21 and II R 49/22), the German Federal Fiscal Court had to clarify the legal issues under which conditions the fair market value of such shares must be recognised at least at the net asset value (Section 11 (2) Sentence 3 German Valuation Act) and whether the fair market value of such shares may be reduced by a flat-rate discount if the corporation is a holding company.

In one case (case reference II R 15/21), shares in an unlisted family holding corporation were redeemed and their value was derived from the same share price ratio of other recent redemptions of the same company. The tax office and tax court, on the other hand, determined the share value on the basis of the (higher) net asset value of the corporation. The German Federal Fiscal Court disagreed with this to the extent that the net asset value as a lower limit is not applicable to a value derived in accordance with Section 11 (2) German Valuation Act from sales less than one year ago between unrelated third parties. This is because it is possible to derive the fair market value from recent sales between third parties and thus to value the individual assets with an approximation of the fair market value, this does not have to be replaced by a higher net asset value. However, the German Federal Fiscal Court did not consider the collection rate, which had remained the same over the years, to be a fair market value derived from recent sales between third parties. After all, this price was not determined on a case-by-case basis in accordance with market economy principles of supply and demand, taking into account the actual asset and earnings prospects of the corporations and their associated companies.

In the other case (case reference II R 49/22), shares of a shareholder were transferred to his children as a gift and their value was determined on the basis of over 60 other sales of shares between predominantly distantly related parties in the last year before the gift. These purchase prices were based on the so-called net asset value of the company as determined by the tax department of the corporation, which was reduced by a flat-rate holding discount of 20 %. The tax office determined the value of the shares given away in accordance with the net asset value method as a fundamentally correct net asset value that could not be undercut, but did not allow the holding discount. In contrast, the tax court derived the value of the shares from the recognised sales of shares less the holding discount. The German Federal Fiscal Court disagreed with this. Firstly, the previous sales of shares could not be used to determine the value of the donated shares, as these had not been realised in the ordinary course of business. Instead, individual shareholders had to agree to the respective sale of shares and the shares intended for sale had to be offered for sale to certain persons in a predetermined order. This meant that a freely negotiated price based on supply and demand could not be formed. Likewise, the flat-rate holding discount, which remained the same over the years, was not to be granted. This is because it is a purely empirically determined pricing factor that has nothing to do with the nature of the shares themselves, as evidenced in particular by its constant amount over time. In addition, the restrictions on the disposal of the company shares agreed in the articles of association fall under personal circumstances, which are not to be taken into account when determining the value in accordance with Section 9 (2) Sentence 3, (3) German Valuation Act. Instead of a constant flat-rate holding discount, a case-by-case discount could be applied.