Payments for the redemption of a conditional usufruct of company shares are not taxable

In the most recent case law, the Cologne Fiscal Court issued an exciting ruling on redemption payments for usufructuary rights.

1. Background to the ruling

At the heart of this case was the question of whether payments made in connection with the redemption of a reserved usufruct of shares in a corporation are subject to income tax.

2. The central decision

The Cologne Fiscal Court ruled that such payments are not taxable.

The main arguments for this were:No compensation for lost income:

The waiver of a reserved usufruct in an equity investment does not constitute compensation within the meaning of the Income Tax Act, as the dividend income in this case is attributed to the shareholder and not to the usufructuary if the latter does not have the power of disposition.

No sale:

The transfer of shares subject to a reservation of usufruct is a gratuitous transfer of assets and not a sale. The same applies to the subsequent redemption if the usufructuary receives a compensation payment for his waiver.

Waiver of right of use not taxable:

A waiver of a right of use in the private sphere is not subject to income tax.

3. Relevance for practice

This decision underlines the enormous importance of usufructuary rights in business succession and wealth planning. Usufructuary rights not only offer tax advantages, but also a certain degree of security for the older generation, who transfer assets but at the same time wish to continue to benefit from the income. However, if the usufructuary later waives his or her right in return for payment, the question of the taxability of this payment arises. In the absence of taxability, a paid redemption of the usufruct may offer new structuring options.

4. Outlook

As an appeal has been lodged against this decision, it remains to be seen how the Federal Fiscal Court (BFH) will ultimately rule. However, it is advisable to refer to this ruling in the event of conflicts with the tax authorities and to keep the cases open, but the issue will also occupy the BFH very extensively due to the ruling of the Münster tax court of 12.12.2023 (6 K 2489/22 E).

This is because the question of whether a waiver of a usufruct right for consideration triggers a taxable sale in accordance with Section 23 EStG was answered in the negative. Here, too, the appeal is pending at the BFH.

We will continue to monitor the issue and will provide information as soon as new developments are foreseeable.

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