I. General information

Pursuant to § 7 para. 8 sentence 1 ErbStG, an increase in the value of shares in a corporation also qualifies as a gift. This requires that the increase in value of a person holding shares in the corporation must benefit from the performance rendered by another person to the corporation.
While only actual (civil law) transfers of assets are generally subject to gift tax, the special feature of § 7 para. 8 ErbStG is that it covers the economic increase in assets in the form of an (indirect) increase in the value of shares, without there being a civil law transfer of assets between the donor and the donee. This is because, under civil law, the performance of the donor is attributed to the corporation, but not to the donee, who experiences the increase in the value of his shares. In order to recognize indirect donations via an increase in the value of the shares, § 7 para. 8 ErbStG simulates a donation by the donor to the favored shareholder.

II. Requirements of § 7 para. 8 ErbStG

The gift tax facts according to § 7 para. 8 sentence 1 ErbStG require the following:

• contribution to a corporation
• The benefit is provided by someone other than the person who benefits from the increase in the value of the shares
• The recipient must have a direct or indirect interest in the corporation to which the benefit is provided
• The recipient must be a natural person or a foundation
• The benefit must result in an increase in the value of the shares in the corporation

In principle, a benefit subject to gift tax can thus be assumed if someone makes a contribution to a corporation without receiving compensation of equivalent value in return. According to the tax authorities, a “benefit” can be both an asset and a use or service. This defines the concept of a benefit differently from the concept of a contribution under income tax law; the latter does not cover contributions in kind.

III. Ruling of the Fiscal Court of Münster dated 23 May 2024

The problem with the above definition of the gift tax event pursuant to § 7 para. 8 ErbStG, however, is its scope. This is because any transaction that is favorable for the corporation could be deemed to be a gift from the provider to the shareholders (directly or indirectly) participating in the corporation.
The Münster Fiscal Court has recently addressed this very issue. The judgment was based on the fact that two brothers held shares in a limited liability company. One of the two brothers sold his shares to the limited liability company at a price that the tax office considered to be below market value. As a result of this favorable transaction, the value of the shares in the limited liability company increased in favor of the other brother. The tax authorities classified this as a gift in accordance with § 7 para. 8 ErbStG.
The increase in the value of a GmbH shareholder’s business interest due to a transfer of assets from a third party to the GmbH, without a corresponding consideration, does not lead to any direct transfer of assets to the enriched shareholder due to the legal independence of the GmbH’s corporate assets and thus, in principle, does not lead to any taxable benefit. As explained, § 7 para. 8 sentence 1 ErbStG breaks with these principles by stating that the donation to the shareholder or shareholders (direct or indirect) is a “benefit” to the assets of the corporation, which then indirectly represents a donation to the shareholder or shareholders when the value of the shares increases. The benefit to the corporation is the object of the gift, whereas the taxable increase in assets and thus the object of taxation is the causally related increase in the value of the shares. § 7 para. 8 sentence 1 ErbStG only simulates the direct benefit to the beneficiary by also treating the indirect benefit as a direct benefit. However, in the opinion of the Münster Fiscal Court, this does not result in the complete fiction of all the elements of § 7 para. 1 no. 1 ErbStG, so that the “benefit” on the part of the benefactor must nevertheless be provided in the knowledge that this will increase the value of the business share of the indirect beneficiary, without receiving equivalent compensation from the latter.
In the opinion of the Münster Fiscal Court, no gift could therefore be assumed in the given circumstances, because in addition to the above-mentioned requirements of § 7 para. 8 ErbStG, a subjective characteristic is a requirement for the facts of the case, namely the awareness regarding the gratuitousness of the performance. The donor must be aware of the (partial) gratuitousness of his gift to such an extent that he provides the gift without any obligation and without any legal connection to an equivalent, causal consideration.
The tax authorities argued, in accordance with the guidelines (R E 7.5 para. 10-14 ErbStR (law on inheritance tax) 2019), that it did not depend on the donor’s intention to donate, but rather that it was sufficient that the purchase price remained below the value of the share determined according to the simplified earnings method (§ 199 et seq. German Valuation Act (BewG)). Even if the subjective element were important, in the case of a striking imbalance between the market value of the share (determined by tax valuation methods) and the consideration actually provided, it would be reasonable to assume that the provider recognized this imbalance and was therefore aware that the consideration was (partly) gratuitous.
However, the Münster Fiscal Court did not consider this as sufficient. The value according to the simplified capitalized earnings method is only one of several aspects for establishing the subjective element. This is due in particular to the fact that the simplified capitalized earnings method does not lead to accurate results in many cases, which is intrinsic to a standardized method. Thus, the occurrence of further circumstances is generally required. However, this was not the case in the judgment, as the parties involved had arrived at a sales value in a comprehensible manner that both parties considered to be in line with the market. The family ties between the parties did not have to be taken into account in this case (as an exception), since the family relationship had broken down and, based on the circumstances, it could be assumed that there was a conflict of interests when determining the value.

IV. Digression: Disproportionate contribution and capital reserve

A disproportionate contribution regularly meets the criteria of § 7 para. 8 sentence 1 ErbStG. According to the Federal Fiscal Court (ruling dated 19 June 2024), gift tax risks can, however, generally be avoided if the disproportionate contribution is allocated to the capital reserve and this is allocated on a shareholder-related basis. This is the case if the repayment of the capital reserve is made to those shareholders who have also made the contribution, regardless of the ownership structure. For tax recognition, it is necessary that such a deviating allocation of the capital reserve is possible under the company’s articles of association and that the shareholders effectively adopt a corresponding resolution.
However, a gift may arise if the shareholder making the disproportionate contribution waives (full) compensation for the amount he has contributed to the capital reserve. This may be the case, for example, if a different allocation of the capital reserve is agreed in the course of a capital increase. In doing so, the shareholder making the disproportionate contribution waives a (future) claim, as a result of which the other shareholders are enriched and a gratuitous transfer in accordance with § 7 para. 1 no. 1 ErbStG is deemed to have occurred.
When agreeing on a shareholder-related capital reserve, particular attention should be paid to subsequent changes in allocation (e.g. by amending the articles of association), as these may constitute a gift tax event if a value-equivalent compensation is not provided.

V. Conclusion

It cannot be assumed that every transaction that is beneficial for the corporation constitutes a gift under § 7 para. 8 ErbStG. Rather, the subjective element – the awareness of the gratuitousness – must also be examined in principle. However, each individual case must be considered. § 7 para. 8 ErbStG does not automatically imply a gift between third parties, but only in circumstances where the provider is aware that the service is provided free of charge. In order to determine whether this is the case, all relevant circumstances must be taken into account; a mere consideration of the relationship between the purchase price and the simplified capitalized earnings value is not sufficient.
Ultimately, the Münster Fiscal Court also indirectly ruled that the tax authorities cannot use their own valuation method because, as is well known, in many cases this leads to values that are above the market value. Also, if other plausible valuations are used by the parties, this may mean that the subjective gratuitousness is not given.
It should be noted that a supreme court ruling on this matter is still pending. However, the judgment of the Münster Fiscal Court provides an initial basis for argumentation vis-à-vis the tax authorities.