German Court Rules on Share Valuation for Unlisted Companies

The German Federal Fiscal Court (Bundesfinanzhof) has issued two significant rulings in September 2024 concerning the valuation of shares in unlisted corporations when they are transferred. The decisions (case references II R 15/21 and II R 49/22) address the conditions under which the fair market value of such shares must be recognized, and when this value can be determined to be below the company's net asset value.

In the first case (II R 15/21), the court dealt with the redemption of shares in an unlisted family holding company. Tax authorities and lower courts had valued the shares based on the higher net asset value. However, the Federal Fiscal Court determined that if the fair market value can be reliably derived from transactions between unrelated third parties, conducted less than a year prior, the net asset value cannot be used as a lower limit. Merely using historical redemption prices was not sufficient if they did not reflect market economy principles like supply and demand.

In the second case (II R 49/22), involving the transfer of shares as a gift to children, the court did not accept a valuation based on over 60 transactions if these were not conducted in the ordinary course of business. Specifically, agreements between shareholders and a predetermined order for sales prevented the formation of a freely negotiated market price. Furthermore, a flat-rate holding discount, unchanged over years, was not considered justifiable, suggesting that case-specific discounts should be applied.

The rulings emphasize that reliable valuation must be based on actual market conditions, not assumptions or internal practices. While a company's net asset value forms a basis, it can be undercut if a market-driven valuation can be demonstrated. Particularly in family-owned holding companies, the valuation of shares can be influenced by the limited circle of shareholders.