I. Introduction

Pursuant to section 13b para. 1 no. 3 sentence 1 German Inheritance and Gift Law [Erbschaftsteuer- und Schenkungsteuergesetz – ErbStG] shares in a corporation whose registered office or management is located in Germany or an EU/EEA member State are assets which may be granted tax concession if the testator or the donor held more that 25 % of the nominal capital of a company at the time, when the tax liability arose. Pursuant to section 13b para. 1 no. 3 sentence 2 ErbStG the question of whether the testator or the donor meets the minimum shareholding amount, is to be determined by the amount of shares directly attributable to the testator or the donor and the shares of other shareholders if the testator or the donor and the other shareholders are collectively among each other obliged to uniformly dispose of the shares or to transfer them to other shareholders who are subject to the same obligation and to uniformly exercise their voting rights towards uncommitted shareholders.
A corresponding provision is contained in section 13b para. 4 no. 2 ErbStG concerning shares in corporations which are to be allocated to the business assets of a unit eligible for preferential treatment under section 13b para. 1 ErbStG. Thus, these are part of administrative assets if the direct participation in the nominal capital of the company makes up 25 % or less. Pursuant to section 13b para. 4 no. 2 sentence 2 ErbStG the question of whether this threshold is undercut, is to be determined by the amount of shares directly attributable to the business and the shares of other shareholders if the business and the other shareholders are collectively among each other obliged to uniformly dispose of the shares or to transfer them to other shareholders who are subject to the same obligation and to uniformly exercise their voting rights towards uncommitted shareholders.
With regard to a tax concession, both provisions are therefore based on a shareholding rate of more than 25 % which was classified by the legislator as an indication for that the shareholder is involved in the company as an entrepreneur and not only as an investor (see Bundestag document BTDrucks 16/7918, 35). In addition, a multi-stage auditing procedure is required for both provisions with regard to the minimum shareholding amount. First, the shares held directly by the testator or donor or in the company must be determined. If these amount to 25 % or less, it must then be examined whether the shares of other shareholders are to be added on the basis of a so-called pool agreement and whether the required shareholding quota is thereby achieved.
For the tax concession of shares of other shareholders it is required that the shareholders are obliged among each other to only uniformly dispose of the shares or to transfer the shares to a shareholder subject to the obligation (limitation of disposal). Furthermore, it is also necessary that the shareholders have undertaken to uniformly exercise their voting rights (pooling of votes).
The BFH has recently ruled on the prerequisites necessary for such pool agreements to be recognised for tax purposes.

II. BFH judgment of 20 February 2019 (file no. II R 25/16)

The claimant was the sole heir of his father who deceased in July 2009. A sole proprietorship of the father containing a company share of 12 % of the nominal capital of a limited liability company [Gesellschaft mit beschränkter Haftung – GmbH] was part of the inheritance. The claimant and a limited partnership [Kommanditgesellschaft – KG] were further shareholders of the GmbH, holding 74 % and 14 %, respectively. The claimant held in turn 100 % of the shares in the KG.
According to the articles of association of the GmbH, the transfer of shares to a third party was subject to the consent of all shareholders and was only admissible to shareholders, spouses as well as descendants of a shareholder and their spouses, however, a transfer of shares to spouses and descendants required the approval of the company. Furthermore, the company’s articles of association regulated that each shareholder was granted one vote for every DM 1,000 of the shares, whereby the testator was personally entitled to ten times more voting rights.
The value of the GmbH share amounted to more than 91 % of the value of the father’s sole proprietorship. As regards the question whether the shareholding in the GmbH was to be classified as an administrative asset of the sole proprietorship, the competent tax authority took only the direct shareholding of the testator of 12 % as a basis. It did not regard the provisions of the GmbH’s articles of association regarding the transfer of shares and voting rights as a permissible pool agreement within the meaning of the administrative asset test. As a consequence, an inheritance tax concession for the acquired sole proprietorship was rejected because the administrative asset ratio of 50 % applicable in 2009 was exceeded. With his appeal, the claimant objected to this.
In its decision, the BFH first clarified that the limitation on disposal required for the tax concession can yield from the contractual clauses of the notarized articles of association of the company or from a separate agreement. A limitation of disposal is given if the shares can only be transferred to a limited circle of persons, e.g. spouses or descendants of the shareholders, or if such a transfer requires the consent of the majority of those shareholders bound by the obligation.
The Court then commented on pooling of the votes as required for the tax concession to be applicable. Such pooling requires an agreement under the law of obligations between the shareholders bound by such obligation which grants the individual shareholder a legally enforceable claim against the other shareholders bound by such obligation to make only uniform use of the voting right. In the opinion of the BFH, however, purely factual obligations, e.g. due to a majority in the shareholders’ meeting, a moral obligation or many years of actual handling are not sufficient.
Furthermore, the court makes it clear that a pooling of votes is also required if all shareholders have committed themselves with regard to the disposal of the shares. The wording of the provisions on tax concessions in the ErbStG alone could cast doubt on this because it merely requires the uniform exercise of voting rights against non-bound shareholders.
It is further stated that the pooling of votes may be established by agreement in the articles of association or a separate agreement between the shareholders bound by the pooling obligation and must generally apply to all future votes in order to be recognised for tax purposes. Contrary to the opinion of the tax authorities, there is no need for a certain form, so that a pooling of votes can be concluded in writing or orally by means of a separate agreement. However, the Court points out that an oral agreement on the uniform exercise of voting rights must be proven by the person relying on it. If such proof cannot be provided, this is to the detriment of the taxable person.
The BFH assessed the provision in the articles of association concerning the transfer of shares in the GmbH as a limitation on disposal to be recognised. However, it refused to consider the testator’s voting rights agreed in the articles of association as an agreement for the pooling of votes. In its reasoning, the court states that although the testator was always able to enforce his right to several votes in the shareholders’ meeting on his own, the other bound shareholders were not implicitly obliged to exercise their voting rights uniformly due to the regulation. The proceedings were referred back to the tax court for other negotiations and decisions, as the tax court had not yet determined whether the bound shareholders had verbally agreed on a pooling of votes in the event of a dispute.

III. Consequences for consulting practice

The judgment primarily illustrates how pooling agreements between shareholders of a corporation can be used for tax optimization within the framework of succession planning. It also provides information on the (formal) requirements to be met by a GmbH with regard to such agreements. In this context, it is certainly a positive development that the BFH also expressly recognizes oral agreements for the pooling of votes, because no specific form is prescribed by law for these. In practice, however, it is not only advisable as a precautionary measure of evidence against the tax office to agree in writing on both the limitation on disposal and the pooling of votes. Whether such agreements are included in the articles of association or by separate agreement between the shareholders is left to the parties involved and generally depends on whether the pool is to cover all or only some of the shareholders.
However, if it is considered by shareholders to enter into a pool agreement in order to optimize the inheritance or gift tax burden, or if a pooling of votes is required for other reasons, e.g. negotiations on the sale of a company or the incorporation of a new shareholder, one aspect must be taken into account: In the event that the company carries forward tax losses or interest, it is possible that these could be lost as a result of a pooling of votes. The reason for this is the application of section 8c para. 1 sentence 1 German Corporation Tax Act [Körperschaftsteuergesetz – KStG], which classifies share transfers to corporations of more than 50 % within five years and comparable circumstances as harmful acquisitions. In the current letter of application to this provision, tax authorities explicitly state voting right agreements, pooled voting rights and waivers of voting rights as facts comparable to a transfer of shares. It must therefore always be examined in each individual case whether and, if so, which risks are associated with agreements on the uniform exercise of voting rights.