earn-out payments in the context of corporate transactions are a frequently chosen arrangement to facilitate the conclusion of contracts between buyer and seller. Through earn-out clauses agreed in the purchase contract, the purchase price is divided into a fixed and a variable part. Deviating from the base purchase price payable on the sales date, the variable shares are payable only upon the agreed condition. The performance obligation can be linked to a financial variable such as the profit achieved or to real variables such as the development of a new market or the reaching of a certain number of customers. In its judgment of 9 November 2023 IV R 9/21, BFH dealt with the taxation of the variable purchase price components of an earn-out. In the following we give you an overview of the BFH’s reasons for decision.

1st BFH judgment on the earn-out – Introduction

The tax treatment of variable purchase price components in connection with the sale of a co-entrepreneur share was at issue. The shareholders of the plaintiff, a GmbH & Co. KG, were M-GmbH, which was not involved in terms of assets, and the 100 %-participating limited partner. The limited partner was also the sole shareholder of Komplementär-GmbH. With a notarial contract from 2010, it sold not only its share in the limited partnership but also all its shares in M GmbH to R GmbH. In addition to a fixed base purchase price, an additional purchase price in the form of a variable fee had been agreed. The obligation to pay was linked to the company’s gross margin achieved in the financial years 2011 to 2013, so that the limited partner received corresponding payments in subsequent investment periods.

The tax office considered the earn-out payments as a retroactive event pursuant to § 175 (1) no. 2 AO in the assessment period of the sale. The Finanzgericht Rheinland-Pfalz, on the other hand, granted the claim of the limited partner by judgment of 30 March 2021 (5 K 2442/17). It considered that the payment was taxable as an ex-post operating income only at the time of the inflow. Against the subsequent taxation was the revision of the tax office.

2nd BFH judgment applies inflow principle to earn-out

The BFH joined the opinion of the Finance Court. It considered that the ex-post purchase price payments did not increase the profit on the sale during the assessment period of the sale, but had to be recognised only with their inflow. In its reasons for the judgment, BFH referred in particular to the previous case law that the profit- or turnover-related purchase price claims are suspensively conditional purchase price claims for which it is neither certain whether the claim arises nor how high it will be at the time of the sale. In this respect, the Senate follows the justifications of the BFH judgment of 19 December 2018 (I R 71/16) concerning the sale of shares in corporations against profit- or sales-related purchase price claims.

3rd BFH judgment underlines previous case law on earn-out

In the BFH judgment of 9 November 2023, the case-law confirms the previous handling of the taxation of the payment of a variable purchase price component (earn-out). It thus also confirms and the opinion of the previous case-law. Thus, remuneration dependent on profits or turnover, which has not yet been determined in terms of reason and amount at the time of sale, will continue to be taken into account as ex-post operating income within the meaning of § 15 (1) in conjunction with § 24 (2) EStG.

This is mainly due to the considerable difficulties in estimating the object value of subsequent payments. For this purpose, one cannot calculate an exact value. As a consequence, there may also be subsequent gains or losses on the sale price in the event of a subsequent deviation in the amount of profit- or revenue-related payments from the sale price fixed at the time of sale. In addition, a re-relation of the earn-out should not apply already because in the BFH judgment (IV R 67/98) of 19 August 1999, by comparison, an earlier death of the pensioner in the event of a sale against an annuity does not lead to retroactive effect either.

4th BFH judgment on the earn-out – Conclusion

If an earn-out occurs in the course of a company sale, as a result of which the seller receives subsequent variable purchase price payments in addition to a fixed basic purchase price, the BFH judgment of 09.11.2023 (IV R 9/21) reinforces the previous tax treatment of such earn-out payments. This gives us final legal certainty.