date | theme

October 9, 2020 | Sell company without taxes? Three options that bring you closer to your goal

23. April 2021 | Buy company shares – write off purchase price in supplementary balance sheet

18. June 2021 | Business Divestment: Share-Deal not taxable – also consider adverse legal consequences!

19. November 2021 | Shares in an insolvent GmbH: Recovery of the purchase price possible?

19. August 2022 | Divestiture of shares: the sale of shares in partnerships and corporations is taxed (this contribution)

In the case of the sale of shares, a distinction must be made between shares in partnerships and shares in corporations. If the latter is present, the disposals must be further distinguished according to whether the shares are held in business assets or in private assets and their amount. We explain how the sale of shares is subject to taxation and show what differences can arise.

First sale of shares: distinction between the types of companies

For the sale of shares, a fundamental distinction must be made according to whether the participation came from the private assets, the operating assets of a sole proprietorship or a partnership or the operating assets of a corporation. Depending on this, the legal consequences of tax law are completely different. In this respect, the rules of § 20 (2) EStG, § 16 EStG and § 17 EStG are decisive.

2nd sale of shares in corporations

2.1 Participation over 1 % in private assets

2.1.1. Sale of shares: Requirements of § 17 EStG

§ 17 EStG, like § 22 no. 2 EStG, § 23 EStG, covers income from the sale of private share assets. The standard covers gains and losses on the sale of shares in a limited liability company, i.e. shares, shares in GmbH, profit participation certificates or similar participations and entitlements, as well as shares of a cooperative society including the European Cooperative Society. This is to ensure the taxation of hidden reserves of the shares.

The sale of shares is subject to the provisions of § 17 EStG if the seller has directly or indirectly held 1 % of the company’s capital within the last five years. It is sufficient if he was briefly substantially involved within the five years.

The income is by virtue of special regulation according to § 2 (1) sentence 1 number 2 EStG such from business operations. Accordingly, the determination of the gain or loss on sale refers to the time at which the gain or loss was generated. Therefore, the inflow does not matter. Consequently, it is irrelevant when the purchase price is paid or whether it is deferred.

2.1.2 Legal consequences in the sale of shares according to § 17 EStG

If the facts of § 17 EStG exist, § 17(3) EStG makes the proceeds of the sale partly tax-free. Accordingly, capital gains up to 9,060 euros are tax-free. However, this allowance applies only to the extent that 100 % of the shares are sold. Otherwise it will be reduced proportionately. In addition, the allowance is reduced by the value by which the capital gain exceeds the relevant part of EUR 36,100.

The capital gain is determined in accordance with § 17 paragraph 2 EStG by the difference between the capital gain and the acquisition costs as well as the capital gain. If the vendor has acquired the shares free of charge, his cost shall be deemed to be that of his legal predecessor.

The income from disposal and are subject to the partial income procedure pursuant to § 3 no. 40 letter d EStG. Therefore, 40 % of income is exempted. Therefore, according to § 3c paragraph 2 EStG, the operating expenses of the vendor are only 60% deductible. The other 60 % taxable is subject to the vendor’s tariff income tax rate. The reduced tax rate of § 34 EStG no longer applies.

Losses on sale are also to be taken into account under the restrictive conditions of § 17 (2) sentence 6 EStG. Therefore, a loss on the sale of the seller can only be offset if the shares were acquired in return for payment and the shareholding was always above the 1 % threshold over the last five years.

2.2. Divestment of shares if participation less than 1 % in private assets

2.3 Participation in operating assets

If the participation belongs to the operating assets of the shareholder, it is also not covered by § 17 EStG. Profits from the sale of shares held in the company’s assets are already subject to the general rules on profit determination of § 4 EStG and § 5 EStG. In the area of income from profits, the profit concept of § 4 (1) sentence 1 EStG therefore ensures the complete recording of all income from sales. Thus, the profits or losses on the sale would also be taxable without the provision of § 16 EStG.

The importance of the provision therefore consists in partially exempting the profit from the settlement of hidden reserves at the end of an entrepreneurial commitment in accordance with § 16 (4) EStG and then only burdening it with a reduced tax rate in accordance with § 34 EStG. In addition, the full loss allowance may be possible, whereas the private significant participation is subject to the restrictions of § 17 (2) sentence 6. The purpose is therefore to avoid excessive tax progression, which can be triggered by the discovery of hidden reserves, sometimes arising in the long term. On the other hand, smaller capital gains should be spared.

3rd sale of shares in the partnership

The profits from the sale of an interest in a partnership are also part of the income from business operations according to § 16 (1) sentence 1 number 2 EStG. Therefore, the legal consequences apply, as they also apply to investments in operating assets in corporations. Consequently, the sale of the entire share of the co-entrepreneur also benefits from the tariff concession provided for in Section 34(1), (2)(1) of the EStG and the exemption provision provided for in Section 16(4) of the EStG.

The concept of co-entrepreneur’s share within the meaning of § 16 (1) no. 2 EStG includes not only the co-entrepreneur’s share of the company’s assets, but also the special business assets. The prerequisite is therefore that essential operating bases included in the special business assets of the vendor are also transferred. This is based on the purpose of § 16 EStG to favour only the discovery of concentrated hidden reserves. Therefore, § 16 (1) second sentence of the EStG excludes advantage for profits from the sale of partial shares in a co-entrepreneurship. These are instead the current profit.

Conclusion on the sale of shares