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Dicta in a decision rendered by the Federal Tax Court dated 25 October 1995 (BStBl II 1996, 160) suggested that constructive contributions to corporations by their shareholders might in some circumstances constitute taxable gifts under the German estate and gift tax law. The case involved a GmbH owned by a two persons, father and son. The father had loaned the GmbH substantial sums. Pursuant to shareholder resolution, the father agreed to waive rights to repayment of or interest on the loans for a period of 10 years. The tax authorities treated the waived interest as a taxable gift to the son in proportion to his ownership interest in the GmbH (here 75 %). Under German law, the donee is primarily liable for gift tax. The Federal Tax Court upheld a lower court decision in favour of the son, the grounds of which were in essence that the waiver was an act which benefited the GmbH, not the son. The Court did not deny an indirect benefit to the son by virtue of the improved financial position of the GmbH, of which the son was part owner. Nevertheless, the separate legal identity of the GmbH was to be respected.

Since this decision there has been speculation that the waiver may have been a taxable gift to the GmbH, since it, after all, was the person benefited. The fact that a GmbH (or AG) is a legal and not a natural person is not incompatible with its being the recipient of taxable gifts. It happens relatively frequently that shareholders in German corporations make contributions to their corporations other than in connection with formal increases in capital. The apprehension arose that, in each instance, a tedious and perhaps inconclusive investigation would be necessary to determine whether donative intent existed within the meaning of the gift tax law or whether the constructive contribution was motivated by the shareholder relationship.

The issue is one posed essentially for corporations owned by natural persons, as donative intent is not likely to exist when a corporate parent makes a contribution to its subsidiary.

In addition, a directive issued by the Munich Regional Tax Office (30 July 1996) on this matter has recently become public ( Die Wirtschaftspruefung 1997, 78). The directive provides that at least constructive contributions by a sole shareholder to a corporation will not be treated as taxable gifts on the theory that such gifts increase the value of the sole shareholder's interest in the corporation by the same amount which they deplete his other wealth and hence constitute a mere reorganisation of property.

The Munich Regional Tax Office has jurisdiction only within Bavaria. There are unconfirmed reports that the other German states may soon officially adopt the same position, however.

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