Federal Fiscal Court Confirms Previous Case Law on the Taxation of Management Participations

Legal Insights Germany

March 14, 2024

In its rulings dated December 14, 2023 (VI R 1/21 and VI R 2/21 NV), the Federal Fiscal Court (BFH) confirmed its previous case law on the taxation of management participations and further specified the criteria for distinguishing between capital income and wage income.


In the two almost identical cases, the respective plaintiff participated in a management participation program (MPP).

The investment in the MPP was made through the acquisition of a limited partnership interest in an asset-managing limited partnership (Manager KG), which in turn held an indirect interest in the plaintiff's employer company (A GmbH) via an investment in a Luxembourg corporation (Lux Sarl). The sale of the MPP participation occurred by way of repurchase of the shares held by Manager KG in Lux Sarl as consideration for the transfer of shares in an intermediate holding company, which had been placed on the stock exchange in the meantime.

The tax office assumed that the shares in Manager KG respectively Lux Sarl had been acquired under the respective fair market value and therefore a non-cash benefit was to be assumed in this respect. As a result, the profit made from the repurchase in return for the transfer of shares was to be treated as taxable wage income.

The tax court followed the plaintiff's opinion. The BFH rejected the tax office's appeal as unfounded in both cases.


The BFH first sets out the standards for the qualification of income as wage income and comes to the conclusion that the assumption of wage income is to be ruled out in the present case. The participation in Manager KG was duly agreed and carried out and was therefore to be recognized as a separate legal relationship and an independent source of income.

The BFH further states that the contractually agreed leaver provisions also do not justify the assumption of wage income: Even though the leaver provisions establish a link between the limited partnership interest and the employment relationship, this does not jeopardize the pursued purpose of binding the employees to the company and enabling them to participate in the further development of the company.

Finally, the acquisition of the limited partnership interest under the respective fair market value could only lead to the assumption of a benefit subject to wage tax with regard to the acquisition under fair market value itself, but not with regard to a subsequent gain on disposal. Any non-cash benefit granted during the acquisition process is to be treated for tax purposes and completed at the time of the acquisition. According to the correct opinion of the BFH, a subsequent sale is to be assessed separately; in particular, any benefit subject to wage tax that may exist in the context of the acquisition does not have an effect on the tax treatment of a subsequent sale.


The decisions of the BFH are to be welcomed, as they clarify for the practice that the acquisition of management participations under the respective fair market value in itself does not lead to the assumption of a wage taxable benefit upon subsequent disposal. The clarification that the incorporation of so-called leaver provisions in the MPP documentation does not preclude the classification of the limited partnership interest as an independent legal relationship existing alongside the employment relationship is also welcome due to the indispensability of such leaver provisions in practice. 


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