The local tax court of Berlin-Brandenburg recently took the view that the transfer of treasury stock to the shareholders at a value below the fair market value constitutes a deemed dividend. Although the decision appears reasonable (no arm’s length remuneration), the underlying facts make the decision remarkable. The treasury stock was transferred to the shareholders based on their pro rata ownership in the company. Accordingly, the proportion in which the shareholders benefitted in the company’s profits, as well as the proportion in the company’s voting rights, remained unaffected. Consequently, none of the shareholders effectively profited from the share transfer. Nevertheless, the lower tax court determined that the shareholders obtained a benefit (required for the assumption of a deemed dividend according to German case law), particularly because they no longer faced the risk of the own shares being transferred to a third party, thereby diluting their share in the company.
The court rejected the shareholders’ argument that they alternatively could have let the company redeem the treasury stock and that they could have increased the share capital in the value of the remuneration granted in exchange. Although this alternative would have been comparable from an economic perspective and would have been tax neutral, the court ruled that only the effectively realized facts can be decided on.
As a result of this decision, shareholders intending to reduce the amount of treasury stock should let the company redeem the shares (instead of purchasing them below fair market value or distributing as a dividend in kind). In cases in which shareholders will be granted treasury stock of a company (not necessarily in the same proportion that they already own the outstanding shares), the shareholders will have to pay the fair market value. Otherwise, a deemed distribution will be presumed.
