In a recent decision (judgment of March 3, 2026 – IX R 1/25), the German Federal Fiscal Court (BFH) addressed the highly practical question of whether the capital gain of a shareholder, paid under the condition of his continued employment as a managing director, is subject to taxation as income from employment within the meaning of Section 19 the German Income Tax Act (EStG) at his personal tax rate or as income from business operations under the generally lower tax rates of the partial-income method. The decisive factor is the type of income with which the closer economic causal connection exists. If the additional payment agreed upon in the purchase agreement has no independent economic significance, the amount paid for this constitutes a dependent component of the sale price within the meaning of Section 17(2) EStG. As a rule, the quality and stability of management is a factor influencing the value of the corporation and thus a dependent calculation factor for determining the purchase price for the shares. Components of the purchase price paid for continued employment as a managing director may therefore, under certain conditions, also be subject to the more favorable partial‑income method.
The plaintiff was a shareholder and managing director of a German limited liability company (GmbH) in which he held a 50% stake. Together with his co-shareholder, who was also a managing director, he sold his shares. However, part of the consideration was held back on the condition that the plaintiff would not continue to serve as managing director of the company for a period of five years. This was intended, among other things, to ensure a transfer of know-how. The lower court, the Cologne Fiscal Court (judgment of December 4, 2024 – 12 K 1271/23), held that this portion of the purchase price was granted for the continuation of the managing director’s duties and not for the transfer of the shares, and therefore classified the amount as wage taxable employment income. The plaintiff was thus denied the application of the partial‑income method, which would have been more favorable to him.
The BFH rejected this view in the underlying case. According to established case law of the BFH, benefits constitute wages when they are granted for employment in the public or private sector, i.e., when they are motivated by the employee’s individual employment relationship. To determine the causal link, it is therefore decisive whether a payment is made for the enterprise value inherent in the transferred business share or as a result of the continued work as a managing director. In assessing this question, all material circumstances of the individual case must be taken into consideration. In the opinion of the BFH, in individual cases, the fact that the purchase price exceeds the market value of the shareholding may “exceptionally” indicate the existence of wages.
Income from business operations includes, subject to the further requirements of Section 17(1) sentence 1 EStG, the profit from the sale of shares in a corporation. The capital gain represents the value of the consideration received by the seller for the sale of their shares. In share transfers, claims for other services are part of the sale price even if they are merely an element of the overall pricing and thus a dependent calculation factor. The quality and stability of management are also regularly dependent calculation factors in the context of pricing. This applies particularly when a transfer of know-how is intended to be achieved by the continued employment of the managing director. The agreed repayment obligation in the event of premature termination of the managing director’s activities does not alter this. Rather, such an agreement could be an expression of value preservation when purchasing a stake from a shareholder and managing director.
Contractual arrangements frequently sought in practice, in which part of the compensation depends on the continued employment of the former shareholder, represent a common means of retaining know-how within the company and ensuring the continued success of the business. Not least, due to the decision of the Cologne Fiscal Court as the lower court, there was considerable legal uncertainty as to whether this should be treated as wages subject to income tax or as capital gains subject to the partial-income method. With its decision, the BFH has largely clarified this issue and qualifies a holdback of the share purchase price under the condition of continued employment as wage taxable income in exceptional cases only.
The BFH overruled the lower court’s decision and remanded the case to the Cologne Fiscal Court, as it could not reach a final decision based on the factual findings to date. It remains to be seen how the Cologne Fiscal Court will address the BFH’s reasoning and what the resulting overall assessment will be. It should be noted, however, that with careful contract drafting, classification as salary subject to income tax can be largely ruled out.
Morrison Foerster’s German Tax practice regularly advises major national and international corporations, medium-sized companies, and investment structures; closely monitors current developments; and is available to answer any questions at any time.