The income from § 17 EStG concerns those arising from the sale of privately owned shares in corporations. The Bundesfinanzhof (BFH) had to decide whether the targeted bringing about a loss on sale by a premium payment eliminates the profit intention or constitutes misuse of design. Both would result in losses not being taken into account. Below we explain the decision.

Is the profit intention missing in case of targeted losses?

1.1.Intent to make profit on income from § 17 EStG

In the determination of income, according to general principles, only those positive or negative incomes that were generated with the intention of generating income are to be recognised. If there is no intention to generate income, there is no taxable income. No income tax is therefore payable on these incomes.

Under the conditions of § 17 (1) sentence 1 EStG, the income from commercial operations also includes the profit from the sale of shares in corporations held in private assets. For this purpose, the vendor must have had a direct or indirect share in the company’s capital of at least 1 % within the last five years, so-called relevant shareholding. In addition, the taxpayer must acquire and hold the shares in the company with the intention of making a profit. The latter concerns profit-making intentions.

1.2 Existence of misuse of design (§ 42 AO)

In order to be able to assess whether the occurrence of losses represents design abuse, it is first to understand what design abuse actually is.

According to § 42 (1) sentence 1 AO, the tax law cannot be circumvented by the abuse of design possibilities. If the facts of the scheme are fulfilled in an individual tax law which serves to prevent tax avoidance, the legal consequences are determined in accordance with that provision (§ 42 (1) sentence 2 AO). Otherwise, according to § 42 (1) sentence 3 AO, the tax liability arises in the event of abuse within the meaning of § 42 (2) AO as it arises in the case of a legal arrangement appropriate to economic transactions. According to § 42 (2) sentence 1 AO, an abuse exists if an inappropriate legal arrangement is chosen which leads to a tax advantage not provided for by law for the taxpayer or a third party compared to an appropriate arrangement. However, this does not apply if the taxable person proves extra-tax reasons for the chosen arrangement that

according to the overall picture of the circumstances are considerable (§ 42 paragraph 2 sentence 2 AO).

1.3. Losses on income from § 17 EStG

In connection with income from § 17 EStG, a taxpayer is in principle

free, whether, when and to whom he sells his shares. This also applies in principle if the

Divestment leads to a loss. The fact is that taking into account a loss on capital is in line with the principle of taxation on capacity. That does not mean that it is abusive from the outset.

Deviating may apply if a loss arises only if the parties involved

reconcile incorrect purchase prices which blatantly miss the value ratios of the share of the company intended for sale. Then is the loss

not by an impairment inherent in the shares of a corporation, but by

a sale of shares far below value.

2nd item: Intent to make profit in case of targeted losses

Based on these standards, the BFH had to decide the following case. It also dealt with the consideration of losses in the case of income from disposals under § 17 EStG.

The plaintiff had founded the A-GmbH as the sole shareholder. Their business object is aimed at the acquisition and management of real estate. Their share capital initially amounted to EUR 25,000. It was divided into 25,000 shares in nominal value of EUR 1 each. In mid-December 2015, the shareholders’ meeting adopted a capital increase of EUR 1,000. For this purpose, it created a further share in the nominal amount of EUR 1,000. The plaintiff also took over this share of the business. As a result, it paid a surcharge of EUR 500,000 into the free capital reserve of the GmbH in addition to the nominal amount. On 28.12.2025, the plaintiff sold 300 shares in nominal value of EUR 1 each and the new share at the purchase price of EUR 26.300 to a third party, which henceforth held a 5 % share in the capital of the GmbH.

In the income tax return, the plaintiff declared a loss of EUR 475,000 to be taken into account in accordance with § 17 EStG from the sale of the GmbH shares. The defendant tax office did not follow this calculation. Rather, the tax office separated according to the individual shares sold. The tax office did not recognise the loss resulting from the sale of the newly created share. In view of the high acquisition costs of EUR 501,000, the plaintiff had a lack of profit intention. From the sale of the other 300 shares, the tax office determined a profit of EUR 5.770 (EUR 6.070 proportional sale price – EUR 300 acquisition costs) to be taxed pursuant to § 17 EStG. The established income tax was EUR 0. A tax burden of EUR 0 sounds good at first. However, the taxpayer wanted her incurred loss also to be taken into account.

3rd legal assessment

3.1. Recognition of the intent to win by the tax court

The plaintiff wanted to achieve this by appeal and subsequently by action. In this regard, it claimed that the profitability assessment should not be based on individual shares. Rather, their entire participation in the GmbH was decisive. The tax court upheld the lawsuit and acknowledged the loss.

3.2. BFH recognises profit intention

3.2.1. Rejection of the appeal

The tax office appealed against this decision of the tax court. It insisted that no loss of sale should be taken into account for the applicant. The BFH rejected the revision as unfounded. The sale of the shares in the GmbH leads to income from business operations according to § 17 (1) sentence 1 EStG. The resulting loss amounted to EUR 475,000 and is to be set at EUR 285,000 in accordance with the Parts Income Procedure. There would be no misuse of design.

3.2.2. Basically: Self-employment of the shares

The individual shares in the GmbH are civilly independent. However, this self-employment is only reflected in the tax assessment to the extent that the sale of an individual share of the business and not only the sale of the total shareholding is taxable under the conditions of § 17 (1) sentence 1 EStG. Furthermore, when determining the capital gain pursuant to § 17 (2) sentence 1 EStG, the acquisition costs for the respective share must be determined in isolation if they are different for the individual shares. In addition, the prohibition of loss allowance laid down in § 17(2), sixth sentence, of the EStG is also proportionate.

3.2.3. No transfer of independent consideration to profit intention

However, this independent consideration of the shares is not extended to the profit intention. The wording of § 17 EStG gives no indication of this. On the other hand, tax systematic considerations dictate that profit-making intentions should be measured in relation to the taxable person’s total shareholding. This is due, first of all, to the fact that, if the relevant threshold of § 17 (1) sentence 1 EstG is reached, the participation in the corporation as a whole and not only the individual share of the business is tax-related. In addition, when assessing whether there is a profit intention, the total profit as a result of the tax-related activity is relevant. Profits or losses on individual sales of shares therefore have no meaning in themselves as to whether the taxpayer has acquired and held the entire shareholding in the limited company with the intention of making a total profit from it.

In any case, the income from § 17 EStG must not only take into account the increases in the value of the participation. Includes current income on distributions attributable to income on capital assets. The amount of the capital gain and the distribution behaviour of the limited liability company are in a correlation. Thesaurated profits regularly increase the capital gain and distributions reduce it.

The opinion of the tax office leads to differences in the assessment of the surplus intention in the income from capital assets according to § 20 EStG. It recognises that the intention to generate surpluses must not be determined uniformly for the entire type of income, but for each individual investment. However, investment is to be understood as the totality of the taxpayer’s shares in the respective company.

Furthermore, the provision of § 17 paragraph 2a sentence 5 EStG, which was inserted on 12.12.2019, would not have been necessary if the tax recognition of a specifically induced loss from the sale of a share of the business, which is burdened with high acquisition costs due to contributions into the company's capital, already fails due to the lack of profit intention.

3.2.4. No misuse of design

In addition, the payment of a surcharge for the acquisition of the newly created share of the business does not involve any misuse of design.

In view of the economic purpose pursued thereby to provide financing to the GmbH, the acquisition of the share of the business under surcharge is not unreasonable. Given the applicant’s position as sole shareholder, the way in which it provides capital to the company is irrelevant.

On the basis of a share-based assessment of the divestment events, the plaintiff suffered a real loss in relation to the divested share. In the year under discussion, it has reduced its performance. A sale price of EUR 20,230, corresponding to the market value of the share, amounted to EUR 501,000.

On the one hand, it is the disposition of the taxpayer to arrange sales transactions in such a way that he is tax-favorable. This implies the freedom to inject capital into the company in a tax-advantageous manner. Therefore, the plaintiff was neither obliged to provide the GmbH with a higher share capital in advance nor to make a co-payment into the capital reserve pursuant to § 272(2) no. 4 HGB, which would have been distributed over all the shares.

On the other hand, the taxpayer can decide for himself which share of his shareholding he sells. This applies regardless of whether the sale is made to a third party or to a close relative.

In addition, a – self-purposefully created – loss is offset by the divestment of excess-cost interests by subsequent gains from the divestment of low-cost interests. The capital reserve created by the surcharge increases the market value of all shares, just like an asset acquired by the company. There is therefore no misuse of design.

4. calculation of the amount of the total loss

4.1. Sale price – acquisition costs

The acquisition costs of the plaintiff for the sold shares are to be deducted from the sale price achieved (EUR 26.300) in accordance with the profit determination formula of § 17 (2) sentence 1 EStG. If the acquisition costs and any disposal costs incurred exceed the disposal price, a loss has been incurred.

4.2. Determination of the cost is based on share

If the taxable person has acquired shares in a corporation at different times and at different acquisition costs, aggregation of the individual shares and formation of an average acquisition price is not permitted. This would be contrary to the principle of civil autonomy and distinctness of shares. Therefore, the profit or loss on the sale of the shares in the corporation must be determined on a pro rata basis, both in terms of the sale price and the acquisition cost.

4.3. Surcharge is not a hidden deposit

The surcharge which an acquirer of new shares has to pay to the limited liability company in excess of the nominal amount of the contribution on the basis of a given contribution agreement also constitutes consideration for the acquisition of the shareholding. Because of the civil-law autonomy of each share, the surcharge is attributable only to the share as an acquisition cost for which it had to be paid. This applies even if the sum of the nominal amount of the new share and the surcharge exceeds the market value of the new share. BFH has clarified that the part exceeding the market value is not a hidden contribution by the shareholder, which would have to be taken into account as an ex post cost for all the shares. It lacks the necessary unpaidness.

In any case during the year in dispute, the premium paid by the plaintiff for the acquisition of the share was therefore not to be distributed among all the shares held by her. § 17 paragraph 2a sentence 5 EStG orders this legal consequence, but it applies for the first time for divestments after 31.07.2019.

4.4. No statutory prohibitions on loss consideration

Legal prohibitions on loss consideration do not exist. Section 17(2), sixth sentence (b), first sentence of the EStG provides that a loss on sale shall not be taken into account insofar as it relates to shares which have been acquired in return for payment and which have not been part of a taxable person’s participation within the meaning of the first sentence of Section 17(1) of the EStG within the last five years. However, this does not apply to shares acquired within the last five years which were acquired after the establishment of a relevant investment. The plaintiff acquired the share of the business sold at a loss at a time when it was already relevant within the meaning of § 17 (1) sentence 1 EStG. Thus, the prohibition of loss consideration does not apply.

5th Conclusion: Assessment of the profit intention

The necessary profit intent is not missing, because capital losses are generated in order to achieve tax advantages. The profit intention does not relate to the totality of the sold shares. Rather, the totality of the shares held in the respective corporation is decisive.