Portrait: LM AT

Wages or capi­tal income? Taxa­tion of the dispo­sal of manage­ment inte­rests
Thomas Jäger
Photo: Thomas Jäger, mana­ging part­ner, graduate in busi­ness admi­nis­tra­tion (FH) and tax consul­tant at LM Audit & Tax
Manage­ment share­hol­dings, mostly in compa­nies of a corpo­rate group, are a common instru­ment for incen­ti­vi­zing mana­gers. Manage­ment stakes in port­fo­lio compa­nies are also common in the envi­ron­ment of private equity funds.
Text: Thomas Jäger

The ques­tion of taxa­tion as wages (fully taxa­ble under progres­sion) or capi­tal income subject to final with­hol­ding tax leads to conflic­ting views between taxpay­ers and the tax autho­ri­ties. — The BFH confirms posi­tive case law from 2016.

In a first rele­vant ruling from 2016 (IX R 43/15), the Fede­ral Fiscal Court (Bundes­fi­nanz­hof, BFH) denied the quali­fi­ca­tion of a manager’s share­hol­ding in his employer as remu­ne­ra­tion for work. At that time, the manage­ment parti­ci­pa­tion was quali­fied as a special legal rela­ti­onship inde­pen­dent of the employee acti­vity of the mana­ger. — This trend in case law, which is plea­sing for the appli­ca­tion in prac­tice, has been confirmed by the BFH in 2 further current rulings from Decem­ber 2020, both published on 27.05.2021.

From prac­tice: In the ruling VIII R 40/18, shares in an affi­lia­ted company within the group were offe­red to a selec­ted group of employees (“mana­gers”) for purchase at USD 0.0625 per share, in this case a total of USD 10. The sales proceeds per share achie­ved a good 3 years later amoun­ted to around USD 1,750 per share.

A shareholding is an independent means of earning

As a result, the BFH ruled that the parti­ci­pa­tion is an inde­pen­dent source of income, inde­pen­dent of the employ­ment rela­ti­onship, if:

  • the employ­ment contract does not provide for an entit­le­ment to the acqui­si­tion of the share­hol­ding and a pro rata share of the proceeds from the sale as conside­ra­tion for the non-employed acti­vity, and
  • the invest­ment is acqui­red and sold at the market price (and not at a discount), and
  • the employee bears the full risk of loss, and
  • no special circum­s­tances arising from the employ­ment rela­ti­onship are iden­ti­fia­ble that influence the salea­bi­lity and perfor­mance of the investment.

The mere fact that the share­hol­ding is held by an employee of the group of compa­nies and was also only offe­red for purchase to a selec­ted group of employees and, moreo­ver, accor­ding to the argu­men­ta­tion of the tax office, the employee did not bear a signi­fi­cant risk of loss, while at the same time being able to achieve an extra­or­di­na­rily high return, did not result in the quali­fi­ca­tion of the proceeds from the sale as income from employment.

From prac­tice: In the ruling VIII R 21/17, a self-employed manage­ment consul­tant indi­rectly held an inte­rest in a holding company via a GbR. The tax office quali­fied the later signi­fi­cant proceeds from the sale of the invest­ment as remu­ne­ra­tion for the plaintiff’s consul­ting services. The action and appeal filed against this at the BFH were successful. 

Here, too, the BFH has ruled that an equity invest­ment only counts as busi­ness assets in excep­tio­nal cases and confirmed that, accor­ding to the BFH’s estab­lished case law, finan­cial tran­sac­tions by members of the libe­ral profes­si­ons are gene­rally priva­tely indu­ced and lead to income from capi­tal assets if the equity invest­ment has its own econo­mic weight compared to the libe­ral profes­sio­nal acti­vity, e.g. if the taxpayer’s primary concern is the capi­tal invest­ment and other aspects, such as winning orders, are rele­ga­ted to the back­ground as merely a desi­ra­ble side effect. 

In addi­tion, it was also decisive in this ruling case that the invest­ment was acqui­red and sold at the market price and that the share­hol­der bears the full risk of loss from the invest­ment. The increased chance of profit asso­cia­ted with the possi­bi­lity of parti­ci­pa­tion did not play a role in this respect, since such a chance is inher­ent in every capi­tal parti­ci­pa­tion accor­ding to the BFH. As a result, there were no indi­ca­ti­ons that the plain­tiff had achie­ved an increased return that was not in line with the market and that could be quali­fied as an addi­tio­nal bonus payment for his consul­ting activities.

Note from the practice

Both rulings from 2020 clearly show that, also in view of the amount of the proceeds from the sale that is often at issue in rela­tion to the acqui­si­tion costs that tend to be clas­si­fied as low (ex post), the dispute with the tax office in compa­ra­ble circum­s­tances is often preordained.

It is also signi­fi­cant in this context that in the case of the ruling VIII R 40/18 crimi­nal tax inves­ti­ga­ti­ons had alre­ady been opened against seve­ral employees of the company due to the tax treat­ment of the proceeds from the sale of shares.

In the case of the ruling VIII R 21/17, the audi­tors came to the conclu­sion in the course of a tax inves­ti­ga­tion audit that the payments made due to the sale of shares were to be regarded as remu­ne­ra­tion for the plaintiff’s consul­ting activities.

In this context, it is all the more grati­fy­ing that the BFH has now deve­lo­ped clear guide­lines for the treat­ment of sales proceeds from manage­ment share­hol­dings as capi­tal income and the demar­ca­tion from treat­ment as wages and sala­ries. These should provide taxpay­ers with a good argu­men­ta­tion aid in compa­ra­ble cases.

From our point of view, it is important to disc­lose the facts in a trans­pa­rent manner, e.g. in the income tax return of the mana­gers invol­ved, in order to elimi­nate the accu­sa­tion of “conce­al­ment” later on.

The ques­tion of the valua­tion of the share­hol­dings in the case of purchase and sale remains open, on which the BFH did not have to comment in the cases dealt with. Thus, special atten­tion will have to be paid to the ques­tion of share valua­tion at the rele­vant tax-rele­vant times.


Judgment of Octo­ber 04, 2016, IX R 43/15
Judgment of Decem­ber 01, 2020, VIII R 21/17
Judgment of 01 Decem­ber 2020, VIII R 40/18

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