Federal Fiscal Court ruling: Contribution gain on inheritance

Contribution gain and gratuitous succession under section 22(6) of the Reorganisation Tax Act

Where an individual, upon application, contributes an interest in a partnership [Mitunternehmeranteil] to a corporation at a value below fair market value [gemeiner Wert] (section 20(2) sentence 2 of the Reorganisation Tax Act), the shares received are subject to a seven-year lock-up period. If these shares are sold within that period, the gain from the contribution is to be taxed retroactively in the financial year of the contribution as a gain of the contributing party within the meaning of section 16 of the Income Tax Act [Einkommensteuergesetz–EStG] (section 22(1) sentence 1 of the Reorganisation Tax Act). The sale is deemed to be a retroactive event (section 22(1) sentence 2 of the Reorganisation Tax Act, section 175(1) sentence 1 no. 2 of the Fiscal Code [Abgabenordnung–AO]). The contribution gain is reduced by one seventh for each full year elapsed (section 22(1) sentence 3 of the Reorganisation Tax Act) and is deemed to constitute subsequent acquisition costs of the shares received (section 22(1) sentence 4 of the Reorganisation Tax Act). In cases of succession without remuneration, the successor of the contributing party is deemed to be the contributing party within the meaning of section 22(1) to (5) of the Reorganisation Tax Act (section 22(6) first half-sentence of the Reorganisation Tax Act).

It was disputed whether this fiction extends only to the triggering event or also to the attribution of the gain. The tax authorities look to the successor solely for the breach of the lock-up period and draw the legal consequences in the hands of the original contributing party (Reorganisation Tax Decree [Umwandlungssteuererlass–UmwStE], Federal Ministry of Finance [Bundesministerium der Finanzen–BMF] Circular of 2 Jan 2025, Federal Tax Gazette [Bundessteuerblatt–BStBl.] I 2025, p. 92, para. 22.41; previously Federal Ministry of Finance Circular of 11 Nov 2011, Federal Tax Gazette I 2011, p. 1314, para. 22.41). The Düsseldorf Fiscal Court [Finanzgericht–FG], by contrast, gave precedence to the wording – in relation to section 24(5) in conjunction with section 22(2) of the Reorganisation Tax Act: the fiction, it held, differentiates neither in temporal nor in substantive terms (Düsseldorf Fiscal Court judgement of 7 Mar 2024, file ref. 8 K 2849/17 E). The fourth chamber of the Federal Fiscal Court most recently left the question open (Federal Fiscal Court judgement of 8 May 2025, file ref. IV R 40/22, Federal Tax Gazette II 2025, p. 603, para. 25), but for trade tax purposes (section 7 sentence 2 of the Trade Tax Act [Gewerbesteuergesetz–GewStG]) looked to the circumstances of the foundation that had originally made the contribution (Federal Fiscal Court judgement of 8 May 2025, file ref. IV R 40/22, Federal Tax Gazette II 2025, p. 603, para. 24).

In the case at issue, the deceased, E, was a limited partner of a limited partnership [Kommanditgesellschaft–KG]. In 2008, the limited partnership and its general partner GmbH were merged into a stock corporation [Aktiengesellschaft–AG] with a tax transfer date of 31 December 2007. For tax purposes, this constituted a contribution of all interests in the partnership at book value under section 20 of the Reorganisation Tax Act. In return, E received new shares. After her death in 2011, the claimant, a foundation and sole heir, sold the shares in the same year. It was undisputed that this retroactively gave rise to a contribution gain of EUR 2,155,359 for 2007. In the 2007 notice of determination of profits, the tax office attributed the gain to the claimant in its capacity as E’s universal successor. The claimant sought direct attribution as its own gain – with the consequence that the corporation tax rate rather than E’s income tax rate would have applied. The Munich Fiscal Court dismissed the action (Munich Fiscal Court judgement of 9 Feb 2024, file ref. 8 K 602/23).

Teleological reduction: contribution gain remains with the contributing party

The tenth chamber dismissed the appeal as unfounded (section 126(2) of the Code of Procedure for Fiscal Courts [Finanzgerichtsordnung–FGO]). Its reasoning rests on four key findings:

• Wording favours the claimant: Unlike the Fiscal Court, the chamber considers the wording of section 22(6) first half-sentence of the Reorganisation Tax Act to be unambiguous. It also covers the legal consequences of section 22(1) sentence 1 of the Reorganisation Tax Act (para. 19). The legislative materials are inconclusive, because the government draft still provided for taxation at the time of sale. Retroactivity was only added by the Finance Committee (Bundestag Printed Paper [Bundestags-Drucksache–BT-Drucks.] 16/3369, p. 12; paras. 20 and following).
• Statutory scheme: The fiction is limited to section 22(1) to (5) of the Reorganisation Tax Act and does not extend to the contribution provision of section 20 of the Reorganisation Tax Act. Since the change of system brought about by the Act on Tax Measures Accompanying the Introduction of the European Company and Amending Further Tax Provisions [Gesetz über steuerliche Begleitmaßnahmen zur Einführung der Europäischen Gesellschaft und zur Änderung weiterer steuerrechtlicher Vorschriften–SEStEG], the identity of the contributing party at the time of contribution has been central. A later succession cannot retroactively replace the taxable person (paras. 25 and following). Attribution to assessment periods before the birth or formation of the successor, the chamber held, is not comparable with the eight-month retroactive effect under section 2(1) of the Reorganisation Tax Act (paras. 29 and 30). The law frequently allows the fulfilment of the statutory elements and the attribution of the gain to diverge (for example section 6(5) sentence 4 of the Income Tax Act, section 16(3) sentence 3 of the Income Tax Act, section 22(2) of the Reorganisation Tax Act; paras. 33 and 34). As an exception, section 6(3) of the Income Tax Act cannot be generalised (para. 38).
• Purpose of the provision: Section 22 of the Reorganisation Tax Act is intended to prevent a change of tax status. Hidden reserves generated by the deceased and subject to income tax must not migrate into the corporation tax regime by way of succession (paras. 41 and following). The fact that the transfer without remuneration to a foundation does not already trigger a deemed realisation [Ersatzrealisation] under section 22(1) sentence 6 no. 1 of the Reorganisation Tax Act is, according to the chamber, due to an oversight on the part of the legislature (paras. 44 and following). This interpretation, it held, operates neutrally, i.e. also in the case of a switch from the corporation tax regime to the income tax regime (para. 49).
• Fiction only ex nunc: The successor is deemed to be the contributing party only from the time of succession. The obligation to provide evidence under section 22(3) of the Reorganisation Tax Act likewise passes only from that point (paras. 39, 48). The foundation is therefore taxed on the gain as E’s universal successor.

The Federal Fiscal Court reduces the wording that it itself describes as unambiguous (paras. 50 and 51). The temporal dimension is likely to be the decisive argument: a fiction that arises only upon succession cannot reach back years to the time of contribution. The argument based on the oversight in section 22(1) sentence 6 no. 1 of the Reorganisation Tax Act appears less persuasive. The Federal Fiscal Court does not close this gap but instead corrects section 22(6) of the Reorganisation Tax Act. A lifetime transfer to a foundation thus continues not to trigger a deemed realisation.

For trade tax purposes, the claimant’s legal position might well have turned into a Pyrrhic victory. If the gain is attributed to E as a directly participating individual who contributed her entire interest in a partnership, the contribution gain is unlikely to form part of income for trade tax purposes [Gewerbeertrag] under section 7 sentence 2 of the Trade Tax Act (Federal Fiscal Court judgement of 11 Jul 2019, file ref. I R 26/18, Federal Tax Gazette II 2022, p. 93; file ref. IV R 40/22, para. 24). Were the foundation deemed to be the contributing party, the gain would not be attributable to an individual (section 7 sentence 2 no. 2 of the Trade Tax Act) and would thus be subject to trade tax. It is doubtful, however, whether the objective trade tax liability could be deemed to arise for the successor at all by way of the retroactive event (cf. Federal Fiscal Court judgement of 18 Nov 2020, file ref. I R 25/18, Federal Tax Gazette II 2021, p. 732, paras. 12 and following).

Contribution gain on gifts and inheritance: practical implications

Following the judgement, the lock-up period risk under section 22 of the Reorganisation Tax Act remains with the contributing party. This has the following consequences:

• Inheritance: The heir owes the tax as universal successor (section 45 of the Fiscal Code), but according to the deceased’s taxation characteristics. According to the Federal Fiscal Court, this also applies where the shares are due to a legatee and the legatee breaches the lock-up period (para. 37). Testamentary dispositions should specify who bears the costs.
• Gifts: In the case of a lifetime transfer, the donor owes the tax even though the donee sells the shares and receives the proceeds. The Federal Fiscal Court refers to precautions under civil law (para. 36). Gift agreements and foundation deeds should include prohibitions on sale, information obligations and tax indemnities.
• Evidence: From the time of succession, the successor must provide the annual evidence under section 22(3) of the Reorganisation Tax Act. Otherwise, the shares are deemed to have been sold (section 22(3) sentence 2 of the Reorganisation Tax Act) – with tax consequences for the predecessor.
• Trade tax: Attribution to the original contributing party also determines the application of section 7 sentence 2 of the Trade Tax Act. Where a corporation made the contribution, the contribution gain remains subject to trade tax even if the shares subsequently pass to an individual (file ref. IV R 40/22, para. 24).

It remains open whether these principles can be applied to section 22(2) and section 24(5) of the Reorganisation Tax Act. The parallel structure of the retroactive effect is an argument in favour of this. For inheritance tax purposes, the further question arises as to whether income tax arising retroactively only as a result of the heir’s sale is deductible as a debt of the deceased [Erblasserschuld] (section 10(5) no. 1 of the Inheritance and Gift Tax Act [Erbschaftsteuer- und Schenkungsteuergesetz–ErbStG]). In any event, the increase in acquisition costs under section 22(1) sentence 4 of the Reorganisation Tax Act reduces the successor’s own capital gain. For succession planning involving foundations, the desired change of tax status within the lock-up period is therefore not achievable.