- Tax Relief on Real Estate Transfers in the Spin-off from a Sole Proprietorship to a Limited Liability Company
- Presumption of Private Use of Vehicle
- Tax Treatment of Gym Membership Fees under the Income Tax Act
- Business Succession: Does the Gift of Company Shares Constitute Employment Income?
- Tax Relief on Real Estate Transfers in the Spin-off from a Sole Proprietorship to a Limited Liability Company
If a sole proprietorship, including a business property, is spun off into a newly established corporation, this process may qualify for preferential treatment under the group clause of the “Real Estate Transfer Tax Act”, according to the Federal Fiscal Court (BFH). However, the five-year post-transfer holding period must be applied.
Background:
According to the so-called group clause (§ 6a of the Real Estate Transfer Tax Act), certain corporate restructuring measures are exempt from real estate transfer tax if specific pre- and post-holding periods are complied with. Courts repeatedly address the issue of which cases fall under this exemption and when the requirement to observe the time periods can be waived. Here is a court decision in a recent case:
Case Details:
As part of a spin-off to establish a new company, a sole proprietress transferred a domestic property in 2018 to a newly established GmbH (Limited Liability Company), in which she was the sole shareholder. The tax office imposed real estate transfer tax on the GmbH. However, the GmbH invoked the group clause exemption, which the Federal Fiscal Court upheld upon appeal.
Although the transfer of the sole proprietorship along with the property is generally subject to real estate transfer tax—since the GmbH became the owner of the property—this transfer falls within the scope of the group clause and is therefore tax-exempt. Since the GmbH was created as part of the spin-off, the sole proprietress was neither required, nor able to have held at least 95% of the shares for the previous five years. The Federal Fiscal Court considered this non-compliance with the five-year pre-holding period to be harmless.
However, the former sole proprietress, now the sole shareholder of the GmbH, must comply with the five-year post-holding period—meaning she must retain at least 95% ownership in the GmbH during this time. Otherwise, the real estate transfer tax exemption would be retroactively revoked.
Note:
This ruling confirms the Federal Fiscal Court’s previous position: the pre- or post-holding periods do not need to be met when compliance is structurally impossible due to the nature of the transformation — e.g., when a group entity is only created or dissolved through restructuring (such as in a merger). However, not every transformation of a sole proprietorship into a GmbH is exempt from real estate transfer tax — only the spin-off for the purpose of establishing a new entity (§ 123 para. 3 no. 2 of the Transformation Act). The contribution of a sole proprietorship into a GmbH in return for shares (non-cash formation) is still subject to real estate transfer tax.
- Presumption of Private Use of Vehicle
For a vehicle that can also be used privately, it is presumed that it is indeed used for personal reasons other than business purposes. This presumption can only be rebutted with convincing and detailed counterarguments. In a recent ruling, the Federal Fiscal Court (BFH) provided guidance on what constitutes sufficiently persuasive counterarguments.
Background:
The tax office assumes, “based on general life experience,” that a vehicle typically available for private use is actually used privately. However, not every counterargument presented is substantial enough to refute this presumption of private use, as demonstrated by the following case.
Facts of the Case:
An individual entrepreneur owned, in addition to a company car, for which he was taxed for private use under the 1% method, a pickup truck recorded as a business asset, which he claimed was used exclusively for business and for which no logbook was kept. He also had several small cars in private ownership used by his children.
The tax office assessed private use for the pickup truck using the gross list price method. The taxpayer’s objection was unsuccessful, and the tax court also initially ruled in favour of business-only use. However, the tax office appealed the decision, and the Federal Fiscal Court upheld the tax office’s claim. The court ruled that the counterevidence presented by the taxpayer was insufficient to refute the presumption of private use.
Federal Fiscal Court’s Reasoning:
The court deemed the following arguments insufficient:
- The claim that the pickup truck was too large for the family’s private use was rejected because the pickup truck was comparable in size to a minivan, which many families use privately.
- The presumption of private use also applies to station wagons, which can carry both people and goods.
- Advertising decals on the pickup truck did not argue against private use.
- The argument that the entrepreneur did not need a car to get to work or had no time for private use was also dismissed.
- Crucially, the entrepreneur did not have a private vehicle of equivalent utility available.
- Tax Treatment of Gym Membership Fees under the Income Tax Act
Expenses for a gym membership do not arise out of necessity for the taxpayer and are therefore not deductible as extraordinary expenses under Section 33 of the Income Tax Act (EStG). This applies even if participation in a medically prescribed functional training program offered at the gym requires membership in the facility.
Background of the Case:
The taxpayer was prescribed a functional training program in the form of water aerobics by a physician. Such training programs are offered by various providers employing appropriately qualified personnel. The taxpayer chose to participate in a course offered by a rehabilitation association that held the classes at a conveniently located gym.
To take part in the course, the taxpayer was required to pay not only the course fee and join the rehabilitation association, but also to become a member of the gym. This gym membership also entitled the taxpayer to use the swimming pool and sauna, as well as to attend other courses. The health insurance provider reimbursed only the course fees for the functional training.
In processing the income tax return, the tax office recognized only the membership fees for the rehabilitation association as medical expenses — and thus as extraordinary expenses — but did not recognize the gym membership fees. The taxpayer’s appeal and subsequent lawsuit were unsuccessful.
Decision:
The Federal Fiscal Court (BFH) also dismissed the appeal as unfounded. It ruled that gym membership fees do not constitute necessary medical expenses that could be recognized as extraordinary expenses.
This is because the range of services associated with a gym membership is commonly used by healthy individuals to maintain health, enhance physical and mental well-being, or to spend their leisure time in a meaningful way.
The gym membership fees also cannot be considered compulsory merely because the taxpayer had to join the gym in order to participate in the prescribed functional training. According to the BFH, the decision to undergo the training at that particular gym was primarily a matter of voluntary consumer choice, which does not establish the level of compulsion required for tax deduction.
Furthermore, the fact that the gym membership granted access to additional services beyond the medically necessary training also speaks against deductibility — even if the taxpayer did not make use of these extra services.
- Business Succession: Does the Gift of Company Shares Constitute Employment Income?
When a company transfers ownership interests to senior employees free of charge for the purpose of business succession, such transfers do not necessarily constitute employment income. This was confirmed by the German Federal Fiscal Court (BFH) in its decision dated November 20, 2024.
Case Overview:
The plaintiff, Ms. K, had been employed in a senior management position at A-GmbH for many years as of 2014. In 2013, the company’s founding shareholders, Mr. A and Ms. B, transferred 5.08% of the company’s shares each to Ms. K and four other senior employees—25.4% in total—effective January 1, 2014. The remaining 74.6% of shares were transferred to their son, Mr. S.
Prior to the transfer, a shareholders’ meeting confirmed that the transaction was part of a planned business succession. It was agreed that Ms. K and the other senior managers would continue to lead the company after the change in management. Due to Mr. S’s lack of experience, the founders determined that successful business continuity required the continued involvement of experienced executives.
Transfer Independent of Continued Employment:
Key Point: These share transfers were not contingent upon continued employment. The only condition attached was a clawback clause, allowing the transferors to reclaim the shares if tax relief under §§13a, 13b, or 19a of the “German Inheritance and Gift Tax Act” (ErbStG) was not granted or was subsequently revoked to the recipients’ detriment.
Although the tax authority considered the acquisition of shares by the employees to be a taxable benefit derived from their employment (i.e., employment income), the Saxony-Anhalt Fiscal Court (Judgment of April 27, 2022, 3 K 161/21) ruled in favor of the plaintiff.
Reasons for the Decision:
The BFH held that the benefit derived from the gifted GmbH shares did not constitute taxable employment income for Ms. K. Employment income under §19(1) of the Income Tax Act (EStG) requires a monetary benefit to be provided “for” the employment relationship. In this case, the court found that the transfer was not primarily motivated by Ms. K’s employment, but by the company’s succession planning.
Even if the transfer was related to the employment relationship, the decisive motive was the orderly transition of ownership and leadership. This intention was clearly reflected in the shareholder meeting minutes and in the inclusion of the clawback clause tied to inheritance tax provisions.
Furthermore, the transfer was independent of any employment conditions. The value of the shares far exceeded what would typically be considered remuneration, and all managers received identical ownership percentages despite differences in tenure and salary—indicating that the transfers were not compensation for individual performance.
Practical Relevance:
The BFH emphasized that this case significantly differs from its earlier ruling of December 30, 2004 (VI B 67/03), where the transfer of corporate rights was contingent upon the recipient’s future performance as a managing director, and thus was classified as compensation.
In contrast, the present case involved long-serving executives receiving company shares as part of a structured succession plan. Accordingly, the court concluded that the transfers constituted gifts, not employment income. This decision aligns with the broader policy objectives of promoting business succession under the German Inheritance and Gift Tax Act.
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