Own shares of the corporation can constitute tax pitfalls

Own shares of the corporation and income tax law

The tax treatment of own shares has always been a "bone of contention" under tax law – in particular, the question how they are to be treated when they are acquired or sold by the corporation has long been controversial. The German legislature has clarified the issue under commercial law with Sect. 272(1a) and (1b) of the German Commercial Code (“Handelsgesetzbuch”). From a tax point of view, the discussion dragged on for a little longer, but was largely concluded by the circular of the Federal Tax Authority of November 27, 2013: The provisions of the German Commercial Code are adopted for income tax law as well, so that the acquisition and sale of own shares constitute neutral transactions for income tax purposes. The Federal Fiscal Court has largely agreed with this view (Judgement of the Federal Tax Court dated December 6, 2017, file number IX R 7/17, Federal Tax Gazette II 2019, p. 213). However, according to the latest case law of the Federal Fiscal Court, this does not entail a departure from the status of the own shares as an asset under tax law (Judgement of the Federal Tax Court dated August 21, 2025, file number IV R 16/22).

This triggers problems in terms of income tax: Where the participation quota of a shareholder in the corporation is decisive, the question regularly arises as to the extent to which own shares are to be included in this consideration. For the purposes of Sect. 17 of the Income Tax Act ("substantial participation in a corporation"), for example, such a problem arises with regard to the "1 percent limit", which is decisive there. In established case law, the Federal Fiscal Court does not consider own shares to be eligible for consideration, so that the threshold tends to be exceeded more quickly (most recently in the judgement of the Federal Fiscal Court of April 5, 2022, file number IX R 19/20). For the purposes of Sect. 17 of the Income Tax Act, this is also treacherous: The participation quota must be monitored over the last five years before the capital gain is realised (Sect. 17(1) sent. 1 of the Income Tax Act).

Likewise, the question has arisen in the case law as to whether the acquisition of own shares by the shareholder above their market value – or sale to the shareholder below the market value – can trigger a hidden distribution of profits (Sect. 20(1) no. 1 sent. 2 of the Income Tax Act). The tax authorities had alleged this in the above-mentioned circular of November 27, 2013. The Federal Fiscal Court has agreed with this view (Judgement of the Federal Tax Court dated May 13, 2025, file number VIII B 33/24).

Relevance of own shares for the real estate transfer tax

But even apart from income taxes, the buyback of own shares can be treacherous. In the case of the real estate transfer tax, the participation quota in a corporation also becomes relevant via Sect. 1 (2b-3a) of the Real Estate Transfer Tax Act. If the corporation holds domestic real estate, the purchase of its own shares entails the risk of a concentration of shares at the level of one shareholder pursuant to Sect. 1(3) of the Real Estate Transfer Tax Act (as already stated by the Federal Fiscal Court in its judgement dated January 20, 2015, file number II R 8/13). The legal threshold for this has since been lowered from 95 percent to 90 percent, so that the problem has tended to become even more substantial over time. What is particularly challenging here is that the actual transaction that leads to the buyback of the company's own shares is not concluded with the person at whose level the shares are concentrated as a result of the buyback (but instead with the departing shareholder; as in the case of the Federal Fiscal Court in its judgement dated January 20, 2015, file number II R 8/13).

The Federal Fiscal Court further expands this line of jurisprudence with its judgement of October 22, 2025 (file number II R 24/22). The problem does not only arise in the case of a corporation, in which one of the two shareholders sells his shares to the company. The case law also applies if several shareholders hold the shares not held by the company itself. 

In the specific case before the court, the repurchase of the shares by the corporation had been carried out from a minority shareholder holding a stake of approx. 0.5 percent – the quota of the majority shareholder, who had previously held just under 95 percent, jumped to slightly above the 95 percent (at the time of the relevant events, under today´s tax law 90 percent) threshold. In addition, the real estate owning corporation held a participation in a real estate owning partnership – here, too, Sect. 1(3) of the Real Estate Transfer Tax Act is applicable insofar as Sect. 1(2a) of the Real Estate Transfer Tax Act does not apply.

Procedural pitfalls regarding the real estate transfer tax

In addition, the Federal Fiscal Court addresses the question of whether real estate transfer tax could still be assessed for the first time in November 2017 due to a buyback of own shares in January 2010. The assessment period of four years began at the end of the year 2010, in which the real estate transfer tax arose (Sect. 38 of the General Tax Act). However, if the transaction is not notified to the tax authorities (Sect. 18-20 of the Real Estate Transfer Tax Act), the assessment period can be "inhibited" by three years pursuant to Sect. 170(2) sent. 1 no. 1 of the General Tax Act. 

In this respect, the Federal Fiscal Court did not consider the notification prepared by the notary of the repurchase of own shares (Sect. 54 of the implementation directive to the Income Tax Act (“Einkommensteuer-Durchführungsverordnung”) to be sufficient for the purposes of Sect. 20 of the Real Estate Transfer Tax Act (on this issue, the Federal Tax Court had already ruled in its judgement dated January 20, 2015, file number II R 8/13). The notification prepared by the notary only contained a request to inform the office of the tax authority in charge of the real estate transfer tax, but did not convey the detailed information required by Sect. 20 of the Real Estate Transfer Tax Act on individual parcels of domestic real estate. Due to the inhibition of the start of the assessment period, the assessment in November 2017 had therefore still been issued within the relevant assessment period.

It is also questionable who owes the real estate transfer tax arising from the concentration of shares at the level of one shareholder (Sect. 43 sent. 1 of the General Tax Act). In this case, Sect. 13 no. 5 of the Real Estate Transfer Tax Act stipulates that the shareholder where the shares are concentrated owes the real estate transfer tax. In any case, the real estate transfer tax owed in this way is not capitalised as incidental acquisition costs of the shares, but is deducted directly (e.g. judgement of the Federal Tax Court dated March 14, 2011, file number I R 40/10, Federal Tax Gazette II 2012, p. 281, margin number 19).