New circular letter provides legal certainty regarding the taxation of treasury shares acquisitions
In its circular letter dated 27 November 2013, the Federal Ministry of Finance comments on the tax consequences of the buy-back of shares by a company (file no. IV C 2 – S 2742/07/10009). The circular letter answers a number of questions that arose in 2009 due to the German Accounting Law Modernization Act (so-called BilMoG), which amended the balance sheet regulations on the accounting of treasury shares for commercial law purposes (Sec. 272 para. 1a, 1b German Commercial Code). According to these provisions, the acquisition of treasury shares is treated as a reduction of the share capital for purposes of commercial accounting. Since the Federal Ministry of Finance revoked its former circular letter from 1998, its position on the tax treatment of the acquisition of treasury shares was eagerly awaited, in particular with regard to the variety of reasons that may cause companies to acquire their own shares (e.g., the intended subsequent reduction of the share capital or the improvement of the capital structure).
According to the new circular letter, the following applies:
- At the level of the company, the tax treatment follows the concept of the commercial law provisions: The acquisition of treasury shares is deemed a capital measure also for tax purposes.
- However, at the level of the shareholder, the acquisition of treasury shares is treated as a disposal of shares and leads to a taxation of capital gains. As far as both tax conceptions do not fully harmonize, the tax treatment as capital gains prevails. In general, no German withholding tax will be levied on the purchase price of the shares. Only in specific cases the company has to deduct withholding tax on the capital gain from the sale transaction, e.g. in case of domestic bank or credit institution safekeeping shares in a custody account. The tax treatment at the level of the shareholder follows the general rules. In particular, the 95 percent exemption for capital gains stemming from a sale of shares by companies applies (Sec. 8 para. 2 German Corporate Income Tax Act); no withholding tax will, in general, be deducted in cross-border cases.
- According to the Federal Ministry of Finance, a purchase price which is not at arms’ length, but benefits the shareholder, may lead to a hidden profit distribution (verdeckte Gewinnausschüttung). It should be noted though that the transaction is deemed to be at arms’ length, provided the shares are acquired on the stock exchange or by way of a public offering addressed to all shareholders (so-called tender procedure).
- The new circular letter applies to all cases which are subject to the accounting regulations of the BilMoG (this means, in principle, all fiscal years beginning after 31 December 2009). For prior cases, the circular letter from 1998 is reinstated.
The circular letter is to be welcomed. The eagerly awaited statements by the Federal Ministry of Finance provide legal certainty for the planning of the share buy-back by a company. It is clarified that a sale of shares leads to taxable capital gains at the level of the selling shareholders. It does, in general, not trigger withholding taxes. Equally welcome is the fact that the Federal Ministry of Finance reaffirmed that transactions on the stock exchange and on tender proceedings do not lead to hidden profit distributions. This provides legal certainty for large stock corporations which plan a comprehensive share buyback program on the stock market or by way of a public offering.