The ministry of finance recently published a circular letter which outlines accounting treatment for tax purposes following a share buyback. This is a very helpful guide for intercompany transactions as well as exit situations. Basically, the German tax authorities now follow the accounting principles as provided for in the German commercial code. In addition to these accounting principles certain tax specific issues apply:
- Where a company a purchases its own shares for more than their nominal value, payment is to be regarded as a capital repayment up to the total nominal value amount and then as a dividend thereafter. If distributable reserves are insufficient, the excess is a repayment of capital reserve.
- If the shares are purchased for less than their nominal amount, the difference is to be set off against the share capital from the capitalization of revenue reserves. Remaining amounts are to be taken from the capital reserve.
- For the seller’s, the sale of the shares in the company to the company should be regarded as a sale of an asset and therefore subject to capital gains taxation. Consequently no withholding tax on a constructive dividend from the sale of those shares applies.
- If the company sells its own shares then this does not create a tax relevant gain or loss. The nominal value of this sale reduces the deduction from the issued share capital. An excess receipt should be taken from the capital reserves and a deficit is to be deducted from a positive balance on that account. Any remaining deficit is a balancing item representing capitalization of reserves.