FG München: Stock splitting does not give rise to capital gains tax

Michael RainerManaging Partner, MTR Rechtsanwälte

Investors who acquire new shares in the course of a corporate spin-off are not required to pay withholding tax on this. That was the verdict of the Finanzgericht (FG) München, the Fiscal Court of Munich (Az.: 8 K 981/17).

Whether shareholders have to pay withholding tax in response to a stock split is a contentious legal issue. In a judgment from December 19, 2019, the Finanzgericht München has now ruled that investors do not need to pay withholding tax if they receive new shares as part of a corporate spin-off. We at the commercial law firm MTR Rechtsanwälte note that the court’s judgment forms part of a wider trend of consumer-friendly rulings.

In the case in question, a married couple received shares in an American company. When the latter changed its name in 2015, it transferred parts of the business to a subsidiary as part of a spin-off. The investors received shares in the renamed company for their old shares as well as an additional share each in the subsidiary. The couple’s shares were registered to their securities account at their bank. The bank categorized the allocation of the shares in the subsidiary as a taxable distribution in-kind and deducted capital gains tax. The tax office did not wish to take into account the capital gains tax deduction for income tax purposes.

The couple, taking the view that the allocation of shares in the subsidiary merely amounted to a tax-neutral repayment of capital, took action against this decision. The claim was successful before the Finanzgericht München.

The court held that the shares in the subsidiary which the plaintiffs had received in the context of the business being restructured did not amount to taxable income from capital. It noted that the prerequisites for a spin-off in terms of section 20(4)(a) sentence 7 of the German Income Tax Act (EInkommensteuergesetz, EStG) had been met. From a tax perspective, the new shares thus took the place of the previous ones. The FG München went on to confirm that the spin-off did not give rise to any taxation at the time the shares were allocated 

The ruling is not yet final. The FG München has granted leave to appeal to the Bundesfinanzhof (BFH), Germany’s Federal Fiscal Court.

A similar judgment was delivered by the Finanzgericht Düsseldorf (Az.: 13 K 2119/17 E). This shows that investors who have wrongly been made to pay capital gains tax might be able to reclaim it, notwithstanding the fact that the BFH is expected to have the final word on the matter.