BFH, March 3, 2026 - IX R 1/25
When corporate transactions are negotiated, the expertise of business owners and managing directors, as well as their relationships with customers, are factors that cannot be overlooked. In transactions involving medium-sized companies, shareholder-managing directors are often retained by the company for a certain period after the sale of their shares through so-called retention payments in order to safeguard these assets.
From an economic perspective, such payments, which are linked to the continuation of management duties, are related both to the actual business operations and, above all, to the sale of the company. The question that arises here is whether, in the case of a GmbH sale, such retention payments should subsequently be classified as commercial capital income (income under Section 17 of the German Income Tax Act (EStG)) or as wages (income under Section 19 EStG).
In its ruling of March 3, 2026 (IX R 1/25), the Federal Fiscal Court (BFH) established the framework for assessing such retention payments and overturned the lower court’s decision. The case has therefore not yet been decided.
1. Facts of the Case
The plaintiff reported the €625,000 as a capital gain under § 17 EStG—income from business operations—using the partial income method. The tax office classified the amount as wages and increased the income under § 19 EStG to €857,586. The Cologne Fiscal Court (Dec. 4, 2024 – 12 K 1271/23, EFG 2025, 567) concurred.
2. Decision of the Federal Fiscal Court
The Federal Fiscal Court (BFH) overturned the Cologne Fiscal Court’s ruling and remanded the case to the judges in Cologne for further proceedings. The ruling emphasizes in particular that the mere link between the payments and the continuation of the management position does not automatically constitute wages. What is far more decisive, it states, is the type of income with which there is a closer economic connection and whether the additional payment has independent economic significance. If this is lacking, the amount constitutes a non-independent portion of the sale price within the meaning of Section 17(2) of the German Income Tax Act (EStG) (in line with the Federal Fiscal Court decision of July 20, 2018 – IX R 31/17, margin note 13).
First, three clarifications regarding the taxpayer: Payments made by the purchaser as a third party may also constitute wages; the third party’s own economic interest does not, in and of itself, preclude this. What is decisive is not what was formally agreed upon, but rather what was economically intended and actually achieved. The “subjective intent” of the parties involved is irrelevant.
Management continuity as a value factor. Merely linking the payment to the continuation of management is not a suitable criterion for classification. The quality and stability of management are, as a rule, a factor in the calculation of the purchase price that influences the value of the corporation and is therefore not independent; they are typically factored into the acquired goodwill.
Market value comparison. The key step in the analysis is comparing the portion of the purchase price attributable to the respective equity interest—in this case, 2.25 million euros—with its market value. If the purchase price exceeds the market value, it may be considered compensation. If the portion is economically absorbed into the market value, § 17 of the German Income Tax Act (EStG) applies. In addition, there are two control questions: Would the acquirer have paid the same amount to an unrelated third-party managing director—and would the seller have received it even without holding a position in the company?
Salary plausibility assessment. If classified as wages, the salary would have amounted to 265,000 euros (140,000 euros plus 1/5 of 625,000 euros)—approximately 50% above the previous salary of 180,000 euros. The Fiscal Court found no compelling reason for this.
Repayment clause. On its own, it does not qualify as wages but may serve to secure the value of the transferred business.
For the second legal proceeding, the Federal Fiscal Court (BFH) clarifies that an expert opinion is not strictly required. As a first step, a comprehensible presentation of the calculation bases of both parties is sufficient.
3. Implications for Practice
- Document the market value: Keep the financial model, purchase price bridge, and board documents on file; if possible, also include the buyer’s valuation assumptions.
- Document the value contribution of management retention (know-how transfer, customer relationships, integration risk) during the valuation process itself, not just during the appeal proceedings.
- Carefully review salary reductions: They may be interpreted as a conversion of compensation and, if so, would constitute earned income within the meaning of § 19 of the German Income Tax Act (EStG).
- The term used in the SPA is not sufficient. A more effective approach is to structure the agreement to safeguard the business value, for example, through a purchase price retention or an escrow arrangement.
- Consider the buyer’s perspective: In the case of third-party wages, the obligation to withhold tax under § 38(1), sentence 3, of the Income Tax Act (EStG) applies to the target company as the employer, while the employee is subject to the reporting obligation under § 38(4), sentence 3, of the Income Tax Act (EStG).
- Earn-outs, retention bonuses, and management equity plans are governed by their own rules. What matters is the economic substance of the payment, not its name.
4. Conclusion
This ruling is of considerable significance for M&A practice because it challenges the blanket assumption that the amount constitutes wages. One difficulty remains: The fair market value of an equity interest is typically determined precisely by including the management commitment. Whether the comparison required by the Federal Fiscal Court (BFH) will be applied with sufficient precision will become clear in the second round of proceedings before the Cologne Fiscal Court. Until then, the documentation of the purchase price calculation will determine the outcome.
