Non-cash benefits, wages and income tax
In addition to salaries and wages, non-cash benefits may also be subject to income tax if and to the extent that they are granted “for employment in the public or private sector”, namely for work performed. This may also be the case with “discounted employee shares”, for example.
Also see our article on the Federal Fiscal Court’s ruling from December 2023 “Management shareholdings: taxable wages?”.
Consequently, “gifted company shares” would have to be classified at their full value as a taxable non-cash benefit if they are transferred as consideration “for work performed”.
But when is this the case and when is it not?
Senior manager receives company shares
This question was posed to a woman who was employed in the management of a medium-sized company (GmbH). She and other members of the management were each gifted 5.08% of the company shares. This gave the company’s management a total of 25.38% of the shares, creating a blocking minority …
The minutes of the corresponding shareholders’ meeting expressly stated that the recipients should continue to assume responsibility for the company after the change in management because the owners’ son would not (be able to) handle this role alone.
There were no conditions attached to the gift. In particular, the gift was not connected to the existence of the employment relationship. The gift was only subject to one reversion clause related to inheritance tax law.
Assessment by the tax office
When assessing the gift under income tax law, the tax office came to the conclusion that the value of the donated company shares was subject to income tax as a non-cash benefit for the recipient.
After an unsuccessful appeal against the tax assessment, one of the recipients then filed a lawsuit. The line of argument stated that the gift served to regulate the company succession and not as remuneration for her work. Therefore, the value of the gift was not subject to income tax.
The motive is decisive
She won the case. The Finance Court concluded that the benefit to the recipient from the transfer of the company shares did not represent income from employment. The motive for the transfer was clearly to ensure the continuation of the company.
The Federal Fiscal Court (decision dated November 20, 2024, Ref.: VI R 21/22) came to the following conclusion: The gift was not part of the woman’s wages, neither for past nor for future work. The minutes of the relevant shareholders’ meeting clearly show that all parties involved were aware that this transfer process was intended to secure the company’s succession.
The company owners aimed to provide the son, as the main shareholder, with an experienced management team, which jointly received a blocking minority under company law to further the interests of the company.
What other arguments did the Federal Fiscal Court see?
The shares were transferred independently of the existence of the employment relationship, which speaks for independence from the work performance. Furthermore, the value of the transferred shares would be disproportionately high in relation to the actual income of the recipients and was identical for all members of the management despite their very different lengths of service.
The company succession was the deciding factor
In this case, the motive behind the transfer of the company shares was clearly recognizable and documented. This will have been a decisive factor in this ruling. Therefore, companies are advised to document the motives for transfers, by means of minutes of a shareholders’ meeting, for example, to provide reliable proof for the courts.
What can we do for you?
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Summary of the key facts:
- The free/discounted transfer of company shares may be subject to income tax for employees as a non-cash benefit.
- This only applies if the shares are transferred as remuneration for work.
- If the transfer is clearly made for other reasons, the value of the shares/benefit is not subject to income tax.
