The determination of the purchase price, the modalities of its calculation, due date and payment is the commercial core of a company purchase agreement. In addition to a fixed purchase price, the parties often agree on a performance-related purchase price. The condition typically becomes effective one to three years after the transaction is completed. In most cases, the condition is linked to the achievement of certain financial indicators, such as turnover, EBITDA or profit.
In these cases, the question arises for the seller as to when the variable profit is realised and in which period it is taxable. When selling shares in partnerships (such as a GmbH & Co. KG) or in an asset deal, the seller may have an interest in reduced taxation in accordance with Sections 16 and 34(3) of the Income Tax Act (EStG).
However, this requires that the income was generated in one assessment period (‘accumulation’). This is the case for profits determined on a specific date. If, on the other hand, the variable purchase price is dependent on the occurrence of subsequent conditions, the profit cannot yet be determined on the specific date. Aggregation only occurs if the earn-out payment qualifies as a retroactive event within the meaning of section 175(1) sentence 1 no. 2 of the German Fiscal Code (AO).
In cases where the purchase price is not determined or determinable on the realisation date, case law denies the qualification of the subsequent occurrence of the condition as a retroactive event (BFH, judgement of 9 November 2023 – IV R 9/21). The tax authorities have adopted and expanded these principles (FM Schleswig-Holstein VI 3012-S 2242-131 of 20 August 2024). As a result, the seller cannot claim reduced taxation in these cases when agreeing on a performance-related earn-out.
The structuring practice attempts to avoid these legal consequences. This is to be achieved, for example, by means of a purchase price subject to a condition subsequent (‘negative earn-out’) or by agreeing a guarantee promise regarding the achievement of the desired financial indicators.
Although the structuring options outlined above have not been ruled on or explicitly considered by the tax authorities, the success of such an agreement is questionable. If the performance-related purchase price component must be agreed for commercial reasons, it could offer an opportunity to claim reduced taxation. However, it does not provide a legally secure position.
Conclusion
The seller of a co-entrepreneur share or a business should consider the tax implications of agreeing on a performance-related earn-out when negotiating the purchase price, the terms of its calculation, due date and payment.
Summary of the key facts
- Earn-outs based on profit or turnover are not subject to reduced taxation: Variable purchase price components in company sales are not covered by Sections 16 and 34 of the Income Tax Act (EStG), but are taxed as regular income in accordance with Section 24 No. 2 EStG.
- The reason for this is the delayed inflow: Since earn-out payments are only made when conditions are met – typically one to three years after the sale – there is no tax-privileged accumulation of income.
- Early consideration in negotiations is necessary: Structuring approaches such as negative earn-outs or guarantees are legally uncertain; sellers should factor the tax burden into their purchase price negotiations.
