BFH enables tax-optimized management participation

Family successions are on the decline in Germany. Therefore, one possible option in the context of succession is to give the management a partial or free stake in the company. In our analysis of the ruling, we show how the BFH ruling of 20 November 2024 (VI R 21/22) now contributes to the tax-optimized use of management participations in succession.In the context of corporate succession, the shareholders of a GmbH decided to transfer their shares to their son and several managers, including the plaintiff, free of charge.

The aim was to ensure the long-term continuation of the company, as the son was unable to take over the management of the company alone due to other professional commitments. The transfer was made without consideration and was not part of the managers' employment contracts, but the tax office deemed the transfer to be taxable wages in accordance with Section 19 (1) sentence 1 no. 1 EStG (dry income).

The plaintiff filed a lawsuit and argued that the transfer was solely for the purpose of securing the company and not as remuneration for her work.

Differentiation between wages and other benefits

The BFH clarified that benefits only count as wages if they are granted in return “for” the manager's work. In this case, however, there was no connection between the transfer of shares and the work performed.

Focus on succession planning

The transfer was exclusively intended to secure the company's succession. The involvement of the managers as shareholders was intended to promote the stability of the company and was not part of the remuneration.

Case-by-case assessment decisive

The BFH emphasized that the tax classification of benefits always requires an overall assessment. Motives such as business necessities and the objective of the transfer are decisive.

No automatic classification as wages

Not every benefit from an employer or its shareholder to a manager is taxable wages. If there is no connection with the work performance, there is no remuneration.

Value of company succession

The long-term continuation of the company was the focus of the decision. The transfer was a strategic step to ensure the stability and sustainable management of the company.Company succession often presents entrepreneurs with tax challenges.

With this ruling by the BFH, at least one building block has been created to reduce tax obstacles in the succession process.

Not every preferential transfer of company shares to managers therefore qualifies as wages. The main succession plan and the reasons for selecting the managers should be set out in detail and comprehensibly in the transfer documentation.

A close relationship of trust, loyalty to the company, in-depth knowledge of the company and its processes, a shared understanding of values, etc. can be reasons for selecting the managers as successors.

In addition, a coherent succession plan should be developed with suitably qualified advisors. This ruling opens up the possibility of avoiding classification as wages in the event of disputes with the tax office about the actual company value, even in the case of transfers to managers that are generally fully remunerated, if the focus on the succession of the company was properly documented in advance. In our view, the ruling could also be transferable to other variants of partial or gratuitous management participation:

- Sale to investor with discounted participation of managers

- Staggered or one-off (partial) transfer to managers

- Management participation via special vehicle (e.g. MEP GmbH & Co. KG)

Together with the gift tax exemptions under Sections 13a and 13b ErbStG, this ruling offers interesting structuring options for a tax-optimized management participation as part of a succession solution.