Germany: BFH Case Law - Current Knowledge on Sec. 7 para. 8 sent. 1 ErbStG and Disproportionate Contributions

When Do Contributions by a Shareholder to a GmbH Result in a Taxable Gift to Co-Shareholders?

The provision of Sec. 7 para. 8 sent. 1 of the Inheritance and Gift Tax Act (Erbschaftsteuer- und Schenkungsteuergesetz, "ErbStG"), introduced in 2011, deems a person making a contribution to a capital company to have made a gift to directly or indirectly participating shareholders to the extent that their share increases in value as a result of the contribution. This particularly affects so-called disproportionate contributions.

The interpretation of the provision has been disputed from the outset and has been the subject of several German Federal Fiscal Court (Bundesfinanzhof, "BFH") decisions in recent years that are of considerable significance for advisory practice. These are briefly presented below.

1. BFH, Rulings of 10 April 2024 (II R 22/21, substantively identical ruling II R 23/21): No gratuitous intention required

In the case in dispute, co-heirs had sold a limited liability company (Gesellschaft mit beschränkter Haftung, "GmbH") shareholding valued at EUR 1,819,176 to the GmbH itself for only EUR 300,000. The purchase price was based on a company valuation as at 31 December 2009, although the transfer did not take place until 10 October 2013. The gratuitous nature of the transaction was questionable, as the parties assumed an arm's length purchase price.

The BFH held that Sec. 7 para. 8 sent. 1 ErbStG deems a gift to have been made. Unlike under the basic provision of Sec. 7 para. 1 ErbStG, the gratuitous nature of the payment to the company is not a prerequisite for taxability.

The sole decisive factor is the increase in value of shareholdings in the company. Such increase in value must be obtained by a directly or indirectly participating shareholder through the contributor's payment to the company.

The provision therefore also covers hidden contributions. These are treated as taxable transactions for income tax purposes pursuant to Sec. 17 para. 1 sent. 2 of the German Income Tax Act (Einkommensteuergesetz, "EStG").

2. BFH, Decision of 6 June 2025 (II B 43/24, suspension of enforcement): Doubtful whether shareholder-specific allocation requires provision in articles of association

In suspension proceedings, the BFH expressed serious doubts as to whether disproportionate contributions by a shareholder to the capital reserve of a GmbH had resulted in an increase in value of the co-shareholders' shares subject to gift tax. Although the shareholders had agreed that the payments should be allocated to the respective contributing shareholder, there was no provision in the articles of association, which is why the tax office did not recognise the allocation and assumed a taxable gift pursuant to Sec. 7 para. 8 sent. 1 ErbStG. However, upon summary examination, the BFH doubted whether a provision in the articles of association is really required for this.

The fact that the BFH had to rule on this matter is particularly noteworthy. Administrative instructions had previously suggested that contractual agreements are sufficient. According to R E 7.5 para. 11 sents. 13 et seq. of the Inheritance Tax Guidelines (Erbschaftsteuer-Richtlinien, "ErbStR"), payments by individual shareholders do not lead to a taxable increase in value insofar as "supplementary agreements" exist between the shareholders or with the corporation. These must ensure that the payment does not lead to a permanent transfer of assets in favour of the co-shareholders. The same applies insofar as the payment is recorded as a capital reserve "contractually" bound in favour of the contributing shareholder.

3. BFH, Ruling of 19 June 2024 (II R 41/21): Dissolution of a shareholder-specific allocation

In the case in dispute, the shareholders of a GmbH (father and two sons) had initially validly resolved that in the case of disproportionate contributions to the capital reserve, "each shareholder remains the legal owner and proprietor of his share of the capital reserves". In the following years, the father paid a total of EUR 4.95 million into the capital reserve, which according to this resolution belonged solely to him.

Later, only the two sons carried out a capital increase, whereby the father's participation decreased from 33.33% to only 1.62%. The parties agreed on a value equalisation for the father. However, when calculating this equalisation, they allocated the capital reserve - contrary to the original resolution - to all three shareholders at one third each. Had they correctly allocated the capital reserve to the father alone, his loss in value would have been significantly higher and the equalisation payment by the sons to the father would have had to be correspondingly higher.

The BFH ruled that this deviation from the originally validly agreed shareholder-specific allocation resulted in a gratuitous gift pursuant to Sec. 7 para. 1 no. 1 ErbStGin favour of the sons. For a gift not to have occurred, the father would have had to have the decrease in value arising from the capital increase fully compensated and should not have accepted that the capital reserve was allocated to all shareholders - contrary to the valid allocation - when calculating the equalisation payment.

4. BFH, Ruling of 23 September 2025 (II R 19/24): No subjective element required for Sec. 7 para. 8 sent. 1 ErbStG

In its most recent ruling, the BFH clarifies that Sec. 7 para. 8 sent. 1 ErbStG does not contain a subjective element. Neither awareness of the gratuitous nature of the transfer nor an intention to enrich is required.

In the case of transfer of a GmbH shareholding, the time of execution generally coincides with the time at which the transfer becomes effective under civil law. With reference to this point in time, it must be examined whether and to what extent the payment has led to an increase in the value of the shareholders' shareholdings.

5. Pending proceedings

In two pending proceedings, the BFH (II R 23/23 and II R 32/24) will have to decide whether a disproportionate contribution to the uncommitted capital reserve of a partnership limited by shares (Kommanditgesellschaft auf Aktien, "KGaA") constitutes a gift to the personally liable partner. In addition, it will have to clarify whether the participation of a personally liable partner in a KGaA can be regarded as a "shareholding in a corporation" within the meaning of Sec. 7 para. 8 ErbStG.

6. Practical guidance

The following important recommendations for action arise in practice:

• In the case of disproportionate contributions to the capital reserve of a GmbH, clear agreements should be made that ensure that the contribution remains allocated to the contributing shareholder. This can be achieved through additional agreements, provisions in the articles of association on deviating asset distribution upon liquidation or by recording it as a shareholder-specific capital reserve. Anyone wishing to be on the safe side should include a corresponding provision in the articles of association.

• Contracts regarding contributions to capital companies can provide for reclaim rights in the event that the contribution subsequently proves to be subject to gift tax pursuant to Sec. 7 para. 8 sent. 1 ErbStG. In the event of reversal, the gift tax may lapse pursuant to Sec. 29 para. 1 no. 1 ErbStG.

• In borderline cases, it is advisable to submit a precautionary gift notification (or "non-gift" notification).

• In the case of contributions in kind (e.g. shares), their valuation should be comprehensively documented in order to avoid the appearance of a disproportionate contribution

The above information is for informational purposes only and does not constitute legal or tax advice.