In its judgement, the Rhineland-Palatinate Finance Court has strengthened the position of shareholders holding put options in respect of their shares and has ruled on a further case concerning beneficial ownership.
Transfer of beneficial ownership of shares in a company
The transfer of ownership when shares in a company are transferred is a key issue in tax law, as it has a significant impact on when capital gains or losses arise for tax purposes, or from what point in time income from such transactions is to be attributed. When structuring share deals, it is therefore of paramount importance to choose the timing of the transfer of ownership in a way that is as tax-efficient as possible for all parties involved. The decisive factor here is often not the actual transfer of civil-law ownership of the shares as a legal act (e.g. upon entry in the commercial register or register of members), but rather the transfer of beneficial ownership.
These principles are frequently of great relevance in the case of unilateral put or call options relating to shares in a company. In particular, where there are reciprocal put and call options conferring rights on all parties to the contract, the question of the beneficial ownership of the shares in question becomes even more pressing.
Economic ownership vs. civil law ownership
Legal ownership of an asset normally lies with the person to whom it is attributable under civil law. Economic ownership applies in those circumstances under tax law where ‘a person other than the owner exercises actual control over an asset in such a way that they can economically exclude the owner from having any influence over the asset’ (see Section 39(2)(1), first sentence, of the German Fiscal Code (AO)). The regulatory origin of this issue lies in the so-called ‘leasing judgement’ of the Federal Fiscal Court (see BFH, judgement of 10 July 1980 – IV R 144/66), as economic ownership appears to be questionable, particularly in the case of leasing contracts, where the lease terms correspond approximately to the economic useful lives.
The following criteria are particularly decisive in determining whether beneficial ownership exists:
- Actual control: In the case of tangible assets, this refers to possession, i.e. a factual relationship. For intangible assets, however, this criterion is irrelevant.
- Exclusion of the entitled party: The owner under civil law must be excluded from having any influence over the asset, for example if they relinquish their right of possession.
- Control over economic assets: This characteristic is determined by bearing the economic risk, that is, the opportunity to share in the profits, but also the risk of incurring losses.
- Permanence: The exclusion of the beneficial owner must extend throughout the entire useful life of the asset being transferred.
Of course, the circumstances of each individual case are always decisive, so a comprehensive, case-by-case assessment is always required. When acquiring shares in a company, the key factor in determining whether beneficial ownership exists is, in particular, whether all material rights associated with the shareholding (e.g. the right to receive dividends, the right to exercise voting rights – the latter, where applicable, even if only internally) can be exercised.
Transfer of beneficial ownership in the case of put options
A case concerning the transfer of beneficial ownership was recently decided by the Rhineland-Palatinate Finance Court (see Rhineland-Palatinate Finance Court, judgement of 17 December 2024 – 5 K 1293/22). In the case in question, shares in a GbR were contributed to a GmbH in exchange for new shares in the GmbH (i.e. as part of a capital increase). In a further notarial deed drawn up on the same day, an agreement was concluded regarding the right to sell these newly acquired shares (so-called put options). A fixed purchase price was agreed for the newly issued shares. It was also agreed that the put option must be exercised no later than the seller’s 68th birthday, leaving a period of 17 years for this purpose from the date the contract was concluded.
However, during the term of this put option, the seller continued to be entitled to the full right to a share of profits and was able to exercise his voting rights, limited only by the size of his shareholding (24.5 per cent), without restriction. Nevertheless, the tax office regarded the transfer of beneficial ownership of the shares as having taken place in the year in which the GbR shares were contributed or the put option was concluded, and accordingly assessed a capital gain.
The Finance Court, however, did not regard this transaction as constituting a transfer of beneficial ownership in the year the contract was concluded. On the one hand, there had been no transfer whatsoever of the key rights associated with the share (voting rights, etc.). Furthermore, in the view of the Tax Court, the exclusion of the beneficiary had not taken place, as no legally secure position vis-à-vis the transferor had been acquired, for example in the event of inheritance or the insolvency of the company subject to the put obligation. Consequently, in the view of the tax judges at first instance, no capital gain was to be recognised at the time the GbR shares were contributed to the GmbH. However, the tax authorities lodged an appeal against this decision with the Federal Fiscal Court (see BFH Rev. anh., Ref. X R 1/25).
Conclusion
The Finance Court has interpreted the criteria set out in section 39(2)(1), first sentence, of the German Fiscal Code (AO) for determining the existence of beneficial ownership in the transfer of company shares in a very restrictive manner. In principle, this should be regarded (for the time being) as a positive development for contractual and advisory practice.
