When selling a company, the purchase price often depends partly on certain conditions. If the seller is also employee of the target company, the question always arises whether from a tax point of view parts of the purchase price are reclassified as salarys. Now the Germany Federal Fiscal Court (BFH) has developed in its judgment of 3rd March 2026 criteria for the destincition between salary income and purchase price.
The taxpayer held a 50% stake in a target company (GmbH). At the same time, he was also managing director of the GmbH. The purchase price consisted of a fixed price and variable remuneration, which was linked to the continuation of the managing director's activities for at least five years. As part of the sale, the fixed remuneration for the managing director was reduced. The tax office qualified the share of the purchase price, which was linked to the continuation of the managing director's activity, as employment income. Thus, this income would not be subject tot he preferential regime for capital gains, but would have been subject to wage tax.
The Federal Fiscal Court developed criteria for the distinction of employment income and capital gains for such cases.
In order to qualify as employment income, the income has to be a consideration for the management activity. This is always the case if the payment is made "with regard to the employment relationship" and qualifies as consideration for the work performed. In contrast, the payment does not qualify as salary if the it is granted on the basis of other (legal) relationships. In continuation of previous case law, the Federal Fiscal Court also states that a wage payment can also be made by third parties, in this case the buyer of the shareholding. However, a prerequisite would be that the payment can be regarded as consideration for the work performed. For this purpose, an evaluative considering the legal and economic relationship between the third party and the employee must be made on a case-by-case basis.
Since there was a connection to both types of income in the present case, it was necessary to determine the closer economic link. By doing so, an objective perspective must be used. The subjective intention of the parties, on the other hand, is irrelevant. It must be taken into account that the management of the company can certainly be a value-creating factor in determining a purchase price. This is especially the case if the management has special know-how that is essential for the buyer. In this respect, the fact that the variable component is linked to the activity as managing director does not speak against the classification as a purchase price. The decisive factor is whether the payment is paid as remuneration for a company value (which may be increased by the staffing of the management) or for the activity as managing director.
As a result, the variable purchase price can only be regarded as remuneration if the market value of the sold participation is below the total purchase price. If, on the other hand, a purchase price (including variable portion) is paid that corresponds to the market value, there is no wage. In the specific case, the fact that – despite a reduction in the remuneration of the managing director – this would have led to a disproportionately high salary increase also spoke against classification as a salary payment.
The Federal Fiscal Court was unable to decide the case at hand due to a lack of sufficient clarification of the facts, but referred it back to the Finance Court.
It is common practice to link parts of the share purchase price to certain conditions. Often, a condition is the continued activity as a managing director. In these cases, there has always been a risk that part of the sale price would be reclassified as wages and thus subject to higher wage tax. Now the Federal Fiscal Court has established criteria that can be used as a basis for contractual arrangements in practice to ensure that taxation is carried out as capital gains.
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