Tax & Legal

The Hesse Tax Court has decided that the immediate taxation of a contribution gain pursuant to Section 22 (2) of the Reorganization Tax Act in conjunction with Section 17 of the German Income Tax Act violates the EU Merger Directive if it is applied on a general basis to cross-border contributions within a seven-year period. According to the court, this current provision wrongfully presumes an abusive sale of shares and leads to an impermissible retroactive taxation of hidden reserves.

The profit from the sale of a share in the upper-tier partnership as prescribed in Section 7 sentence 2 no. 2 Trade Tax Act is not to be allocated to the hidden reserves of the upper-tier partnership and the hidden reserves of the lower-tier partnership. It is rather a single and uniform sales transaction at the level of the upper-tier partnership, the Supreme Tax Court said in a most recently published decision.

The application pursuant to Section 21 (2) Sentence 3 of the Reorganization Tax Act to use the book value (acquisition cost) or an intermediate value as the sale price of the shares in the case of an exchange of shares does not require any specific formal requirement. It can also be made expressly or implied.

The failure to tax the deemed capital gain under Section 17 (1) Sentence 2 Income Tax Act at the level of the shareholder in the case of a hidden contribution of shares in a corporation is not a reduction in income as provided in Section 8 (3) Sentence 4 Corporation Tax Act which would otherwise result in an increase in taxable income. This was decided by the Supreme Tax Court in a recently published judgment.

In a recently published interim decision, the Supreme Tax Court expressed considerable doubts as to the legitimacy of the German Energy Crisis Contribution Act which was in force for years 2022 and 2023.

In a recently published judgment, the Supreme Tax Court decided that contributions made by parents to a support association for their children’s private school may, under certain circumstances, be treated as deductible school tuition for income tax purposes. However, expenses for lodging, care, and meals are not eligible.

Donations to a foundation with legal capacity established by a federal state are not exempt from gift tax if, according to the purposes specified in the statutes of the foundation, the donations do not exclusively serve the purposes of the federal state and are not exclusively used for tax-privileged purposes. This is the conclusion reached by the Supreme Tax Court in a recently published decision.

The change in the shareholder structure of a limited property-owning partnership due to a contribution of the limited partners' shares in the partnership to a shelf-company may be exempt from real estate transfer tax pursuant to Section 6a sentence 1 RETT Act provided that the transferor, i. a., held at least 95% of the shares directly or indirectly or partly directly for an uninterrupted period of five years before the legal transaction took place. This was decided by the Supreme Tax Court in a most recent judgment.

Since the wording of Section 27 (7) of the German Corporation Tax Act does not cover estates, private foundations under civil law with legal capacity are not eligible for the specific determination of the special tax contributions account which is necessary to establish the amounts of tax neutral repayments of capital contributions. This was decided by the Supreme Tax Court in two similar cases. Contrary to the view held by other local tax courts the Supreme Tax Court gives precedence to the strict wording of the law.

In a recent judgement, the Federal Social Court confirmed the German Pension Insurance of Oldenburg-Bremen’s opinion and thus overturned the decisions of the lower courts. At the heart of the case was the question of whether expenses for an office anniversary celebration, which amounted to more than EUR 110 per employee and was only subjected to flat-rate taxation on a date well after the pay slip was issued, were subject to social security contributions.

In a recent ruling, the (lower) Tax Court of Hamburg decided that the disproportionate contribution to the free capital reserve of a partnership limited by shares is not a transaction that is subject to gift tax.

According to a decision of the Supreme Tax Court, the mere fact that a foundation returns the amount it previously received from the donor to the latter within a short period of time as an interest-bearing loan and uses the interest income earned to promote its tax-privileged statutory purposes is not in itself a reason to deny the tax-deductibility of the contribution as donation.

With regard to the refund of withholding tax on profit distributions made by a domestic subsidiary to its EU parent company, the Supreme Tax Court decided that these distributions are not excluded from the tax relief under the EU Parent-Subsidiary Directive if they relate to profits that, although distributed after the commencement of the subsidiary’s liquidation, were generated prior to the opening of the liquidation proceedings.

In a most recent decision, the Supreme Tax Court held that profits from special compensation for the general partner of a limited partnership pursuant to Section 5a (4a) sentence 3 Income Tax Act attributable to the period following the cessation of the commercial and promotional activity of a partnership are not part of the trading profit subject to trade tax.

The Supreme Tax Court decided that a hidden profit distribution may be assumed if the shareholder saves own expenses. Such cost savings can also be the result of a waiver of an agreement for reimbursement or compensation claims. The tax court of first instance must now determine whether the economic embargo in the customer's home country and the ensuing compensation payments had legal consequences for the GmbH or whether the breach of contract was solely made at the instruction of the parent company.

A provision for contingent liabilities (for payments in arrears) must be recorded in the tax accounts for the employer's obligation to grant paid time off (two days per year of service) which is available to employees who are at least 60 years old and have been with the company for at least ten years. With its decision the Supreme Tax Court contradicts the previous view of the tax administration.

The Federal Ministry of Finance (MoF) has provided the Finance Committee of the Bundestag several formulation aids for its ongoing consultations on the Finance Bill 2022.

The Supreme Tax Court once again decided on pension promises to a managing director who is also the majority shareholder of the employer company and specified in more detail the rules for distinguishing allowable business expenses from disallowable “hidden distributions”. In the case at hand the plaintiff received compensation for early termination of pension claims as a result of significant financial difficulties of the company.

The Federal Ministry of Finance (MoF) has sent the draft of a revised version of the attribution taxation for foreign family foundations pursuant to Section 15 of the Foreign Tax Act to certain associations. They as well as interested professionals are given the opportunity to comment until 15 January 2026.

In a most recent judgment, the Supreme Tax Court decided that the restriction for exemption from taxation of the retained income of foreign foundations with their management or registered office in a member state of the European Union or a contracting state of the EEA to be in conflict with the EU free movement of capital.