Who is a "unrelated third party" - and does a sale beat the net asset value (Substanzwert) or not?

In its judgement of November 2, 2022 (Case No.: 4 K 1832/20 F, Revision pending at the BFH (Federal Fiscal Court) under Case No.: II R 49/22), the Düsseldorf Finance Court (FG) commented in terms of valuation law on

1. the group of persons of "unrelated third parties" ("fremde Dritte") within the meaning of Sec. 11 (2) Sentence 2 of the German Valuation Law (Bewertungsgesetz - BewG) (hereinafter under 1.)
2. the ordinary course of business (gewöhnlicher Geschäftsverkehr) within the meaning of Sec. 11 (2) sentence 2 BewG (2.),
3. the so-called "holding discount" (3.) and
4. the falling below the net asset value within the meaning of Sec. 11 (2) Sentence 3 BewG (4.)

In summary, the Finance Court comes to the following theses:

1. "Sales among unrelated third parties"

"Sales among unrelated third parties" within the meaning of § 11 (2) sentence 2 BewG also exist in the case of sales among related persons who are not relatives within the meaning of § 15 (1) of the German Tax Code (Abgabenordnung - AO). Here, the FG negatively distinguished the term "unrelated third parties" from the term (close) relatives within the meaning of Sec. 15 (1) AO.

A person who is a relative cannot be a stranger and a person who is a stranger cannot be a relative. Sales between persons whose relationship exceeds the third degree ("further than cousins") can be used as a measure of value when deriving the fair market value of shares in corporations. This was disputed, since the legislator probably only intended an arm's length relationship, but the wording of the law would certainly permit a different view.

2. The ordinary course of business

The ordinary course of business is not already excluded by the fact that the articles of association provides for restrictions on disposal. Rather, the scope of the restriction, i.e. the group of persons still available, is decisive. "Closed" restraints on disposal are harmful, whereas open ones are not. An opening clause should therefore be considered here for advisory practice.

Moreover, the values determined and made available here internally could be accepted or rejected without coercion and voluntarily. This would correspond to the value formation/determination of each contractual partner without coercion and not out of necessity, but voluntarily in the protection of its own interests, i.e. in the ordinary course of business.

For the consulting practice it is to be paid attention to the fact that valuations and purchase prices are not given bindingly in advance, but function only as suggestion/orientation. Here, too, the following applies: "closed" valuations are harmful, whereas "open" valuations are not.
Sales at a purchase price that does not approximately reflect the value of the shares remain problematic.

3. Shares in holding companies

Shares in holding companies are valued on the market at less than the sum of the values of the investments held by them. When valuing shares in holding companies, a market value discount (also known as a holding discount) must be applied.

The amount is determined on the basis of previous sales of the company or, for example, a comparison with sales of comparable companies. The valuation of holding companies remains an exciting issue. This applies more to group holding companies; shares in a personal investment holding company (e.g. of a venture capitalist), on the other hand, are rarely sold.

4. No net asset value as minimum value

If the fair market value of shares in corporations is derived from sales between unrelated third parties pursuant to Sec. 11 (2) Sentence 2 BewG, then the net asset value (Sec. 11 (2) Sentence 3 BewG) cannot be used as the minimum value. This results from the "irrefutable" presumption of the legislator that recent sales in the past correctly reflect the applicable market value on the valuation date.

Therefore, there is no need for recourse to the net asset value as a minimum value. This is an opportunity and a risk at the same time. The FG is thus in line with the BMF (cf. BMF v. 16.11.2021, BStBl. I 2021, 2308, marginal no. 19). The Münster Finance Court (judgement dated April 15, 2021, Case No.: 3 K 3724/19 F) had taken a different view. In this respect, too, revision proceeding is pending before the BFH (Case No.: II R 15/21). The second senate will therefore certainly be happy to comment on this issue.

5. The BFH and the revision proceedings

In the Revision proceedings described above, the Second Senate of the BFH now has the opportunity to make the legal situation regarding the valuation of shares in corporations within the meaning of Sec. 11 BewG more tangible and legally secure for consulting practice.