Reversal of a share transfer due to cessation of the basis of the transaction
In its decision of May 9, 2025 (case no. IX R 4/23), the Federal Fiscal Court confirmed that the transfer of GmbH shares as part of a marital equalization of gains between spouses generally constitutes a taxable sale transaction under Section 17 of the German Income Tax Act (EStG). However, it was clarified that any resulting capital gain may be retroactively eliminated if the transfer is reversed due to an error regarding the tax consequences and this error formed the basis of the contract.
In a dispute, spouses who were assessed jointly agreed to separate property, deviating from the statutory matrimonial property regime of community of accrued gains. This resulted in a claim for equalization of accrued gains on the part of the wife, which the husband fulfilled as agreed by transferring shares in a limited liability company. Based on tax advice, both assumed that no income tax would be payable on this. When it became clear that this was incorrect and the tax office assessed a substantial amount of income tax, the spouses amended the notarized agreement, reversed the transfer of shares, and agreed on a cash payment for the equalization of accrued gains, which was deferred with interest until the husband's death.
The tax court recognized the retroactive amendment to the marriage contract. The capital gain was deemed to have been eliminated with retroactive tax effect. The Federal Fiscal Court confirmed the opinion of the lower court. It recognized a retroactive cessation of the basis of the transaction for tax purposes. In this regard, it emphasized that the circumstances that formed the basis of the agreement are neither apparent from the wording of the agreement nor must they be disclosed to the tax authorities at the time the agreement was concluded.
However, the BFH expressly points out that the termination of a contract due to the cessation of the basis of the transaction pursuant to Section 313 (3) of the German Civil Code (BGB) is a legal option that is limited from the outset to special exceptional cases and must appear to be unavoidable in order to avoid unacceptable consequences that are fundamentally incompatible with law and justice. Therefore, strict application is required. A taxpayer who invokes the discontinuation of the basis of the transaction must demonstrate and prove that, before or at the time of concluding the disrupted legal transaction, a circumstance was discussed whose occurrence was so evident in the joint opinion of the contracting parties that the execution of the legal transaction “stands or falls” with it.
