Remuneration for continuing in the role of managing director following the sale of shares – sale price or salary?

In practice, when shares in owner-managed limited liability companies (GmbHs) are sold, payments are often agreed for the selling shareholder to continue in their role as managing director. This can make good business sense, as it allows the company to continue to draw on the selling shareholder’s expertise and business relationships and ensures the smooth continuation of the company’s operational activities.

Until now, the highest court had not ruled whether, for tax purposes, these cash payments constitute part of the sale price under Section 17 of the Income Tax Act (EStG) – and are therefore income from business operations – or whether they constitute wages under Section 19 of the Income Tax Act (EStG) – and are therefore income from employment. In its recent judgement of 3 March 2026 (IX R 1/25), the Federal Fiscal Court (BFH) has now established important criteria for distinguishing between the sale price and wages.

Facts of the case

The proceedings centred on the sale by the claimant of shares in a limited liability company (GmbH). The claimant held a 50% stake in the GmbH and was also appointed as its managing director. In the year in question, both the claimant and his co-shareholder sold their shares in the GmbH. As part of the sale transaction, the claimant was granted a sum to continue managing the company for a period of at least five years following the sale of the shares. This payment was subject to a condition of pro rata reimbursement in the event of premature termination of his role as managing director. To secure this claim for reimbursement, the claimant was in turn required to provide a bank guarantee. 

In his income tax return for the year in question, the claimant included the amount received for continuing his role as managing director as part of the sale price under Section 17 of the Income Tax Act (EStG), applying the partial income method. He deducted the total guarantee commissions incurred for the guarantee as disposal costs, thereby reducing his taxable profit. The tax office, however, classified the amount received for continuing his duties as managing director as income from employment under Section 19 of the German Income Tax Act (EStG). The tax office permitted the deduction of the guarantee commissions as income-related expenses only to the extent of the payments actually made in the year in question. The Cologne Finance Court dismissed the action brought against this decision.

Decision

The Federal Fiscal Court (BFH) upheld the plaintiff’s appeal, set aside the decision of the lower court and referred the case back to the Tax Court for further hearing and decision.

The classification as income from business operations pursuant to Section 17 of the German Income Tax Act (EStG) or as income from employment pursuant to Section 19 EStG is determined by the type of income with which there is the closer economic connection.

According to the BFH, the decisive factor here is whether the service agreed in the purchase contract – in the form of the continuation of the managing director’s duties – has independent economic significance. If this is not the case, the amount paid for this constitutes a dependent part of the sale price, which is to be classified under Section 17 of the Income Tax Act (EStG). The decisive factor for the assessment is not what is formally stated, but what is economically intended and actually achieved, which must be ascertained on the basis of the objective circumstances.

In this context, the quality and stability of the management generally constitute a factor influencing the value of the company and thus a dependent factor in the calculation of the purchase price for the shareholding.

The Federal Fiscal Court (BFH) criticised the Finance Court’s judgement in particular for having regarded the significance of a corporation’s management as a factor influencing value as irrelevant. Furthermore, for the purchase price to be classified as wages in exceptional circumstances, the Finance Court would have had to establish that the purchase price as a whole exceeded the value of the company. This was not the case. Another factor arguing against classification as salary and in favour of classification as part of the purchase price was that, otherwise, if the amount had been allocated on a pro rata basis, the managing director’s salary would have increased by 50 per cent without any conclusive reason for this being apparent. Furthermore, there were no findings as to whether the amount would also have been paid to a managing director who was not a shareholder.

Furthermore, the Federal Fiscal Court (BFH) clarifies that the agreed repayment obligation in the event of the plaintiff’s premature termination of his role as managing director does not, in itself, justify classification as salary, as such an obligation may also be agreed as a contractual safeguard for the value of the company, meaning that the repayment obligation is in the nature of compensation for damages.

For the same reasons, the classification of the guarantee commission, amounting to the payments made in the year in question, as income-related expenses under Section 19 of the Income Tax Act (EStG) was also incorrect.

Practical note

This judgement provides several important practical implications:

The Federal Fiscal Court’s (BFH) judgement is an important contribution to assessing whether payments for the continuation of management activities qualify for tax purposes as part of the sale price or as wages. Only if classified as part of the sale price is the route to the partial income procedure open.

The BFH generally regards the quality and stability of management as a dependent valuation factor that is covered by the purchase price. Only in exceptional cases may payments made for this purpose be classified as wages. Even repayment obligations in the event of the premature termination of the managing director’s role do not necessarily have to be classified as wages, as they may be characterised as compensation for damages.

In conclusion, it should be noted that a precise and carefully drafted provision in the purchase agreement, which reflects the economic intent, is of particular importance in order to achieve the desired tax outcome.