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Reciprocal sales – Rotating holdings at below their value will not be recognised for tax purposes

Tax saving potential cannot be generated by rotating the holdings of two shareholders in a GmbH [German private limited company] among each other if the purchase prices fall significantly short of realistic value ratios.

The facts of the case that formed the basis of the correspondingly formulated decision by the Federal Fiscal Court (Bundesfinanzhof, BFH) of 20.9.2022 (case reference: IX R 18/21) were that two shareholders who each held a 50% interest in a GmbH both sold their holdings to each other by way of a rotation of their holdings at a purchase price of €12,500. The previously recognised acquisition costs for the GmbH holdings had been €500,000 so that, for tax purposes, the rotation had resulted in a ‘loss’ of €487,500 prior to applying the partial income rule. The fair market value of the GmbH when calculated on the basis of the simplified income capitalisation method was approx. €1.5m. The local tax office, the tax court in Saxony and then also the BFH considered these transactions to be abusive structuring within the meaning of Section 42 of the Fiscal Code (Abgabenordnung, AO). 

Background: If a ‘loss’ arises within the meaning of Section 17 of the German Income Tax Act in the course of a rotation of holdings because of a purchase price that reflects the true value of the holdings in the GmbH that have been sold then this loss should also be taken into account for tax purposes. In principle, rotating holdings does not constitute abusive structuring within the meaning of Section 42 AO since the shareholders are free to choose if, when and to whom they sell their holdings. This will admittedly apply even if the sale results in a loss, however, not if the price falls significantly short of realistic value ratios.

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