Capital increase with premium: Gift tax pitfalls and solutions for start-ups

As an experienced lawyer for IT law, corporate law and media law, I have been observing an interesting development in the area of start-up financing for some time now. The question of whether and when a capital increase with a premium could lead to a gift tax problem is becoming increasingly relevant. Although this issue is as old as gift tax itself, it has recently gained increased attention due to social changes and some attempts to circumvent it. It can therefore be assumed that this topic could come up more frequently in the event of queries or tax audits. The complexity of this issue, particularly in the context of Section 7 (8) ErbStG, makes careful legal consideration essential. As your contact for legal challenges in the start-up sector, I would like to give you an overview of the most important aspects and show you how I can support you in structuring your financing rounds. It is important to understand that the tax law assessment of capital increases with a premium is not only of great importance for established companies, but also for young, fast-growing start-ups in particular. The dynamic nature of startup valuations and the often complex investment structures require particularly careful planning and implementation of financing rounds. In addition, the correct structuring of a capital increase with a premium can not only minimize tax risks, but also increase the attractiveness of the company for potential investors. It is therefore advisable to obtain legal expertise at an early stage in order to thoroughly think through all aspects of the capital increase and avoid potential pitfalls.

Premium for capital increases

In the case of capital increases, it is customary for subscribers to pay a premium for the acquisition of the new shares. This premium is an issue fee that exceeds the nominal amount of the new shares. The resolution on the increase must specify this premium, which does not necessarily have to be a fixed amount, but must at least be determinable. In my consulting practice, I pay particular attention to ensuring that these provisions are formulated clearly and with legal certainty in order to avoid subsequent disputes. A distinction is made between a corporate premium, which is an integral part of the capital increase resolution under company law, and a hidden premium under the law of obligations between the shareholders. If the premium is included both in the capital increase resolution amending the articles of association and in the takeover declaration, the BGH considers this to be a statutory or corporate premium. The amount of the premium should be calculated carefully, as it not only has tax implications, but also economic ones. A premium that is too low can lead to a dilution of the existing shareholders’ shares, while a premium that is too high could deter potential investors. When determining the premium, standard market valuation methods and the specific situation of the company must also be taken into account. In addition, the use of the premium, for example for investments or to strengthen equity, can have an influence on the tax assessment. It is therefore important to plan and document the use of the premium in advance in order to create a solid basis for possible subsequent audits.

Appropriateness of the premium

The prohibition of a sub-par issue means that the issue amount may not be less than the nominal amount of the new share. The question of whether a premium must also be set at an amount that corresponds to the intrinsic value of the new shares is controversial. As your advisor, I can support you in determining an appropriate premium and help you prepare the necessary documentation to justify the chosen valuation to the tax authorities. When determining an appropriate premium, various factors must be taken into account, such as the current company value, future earnings expectations, industry standards and the specific situation of the startup. It is important to choose a comprehensible and consistent valuation method that can also be used in subsequent financing rounds. Various valuation approaches such as the discounted cash flow method, multiplier methods or, in the case of very young start-ups, valuations based on comparable transactions can be used. The chosen method should be well documented and justified in order to be able to argue in the event of a tax audit. It is also advisable to regularly review the appropriateness of the premium, especially if the business situation or market conditions change significantly. Careful documentation of the valuation bases and methods can be of crucial importance in the event of a subsequent audit by the tax authorities.

§ 7 para. 8 ErbStG: Gift tax pitfalls

§ 7 para. Section 8 sentence 1 of the German Inheritance Tax Act (ErbStG) presumes a gift if the value of the shares of another person involved is increased by a payment made by one person to a corporation. This provision can become relevant in the case of capital increases with a premium, particularly if not all shareholders participate in the capital increase in proportion to their previous shareholding or if the premium is disproportionately high. My task as your lawyer is to recognize these constellations at an early stage and to develop strategies to avoid unintended tax consequences. The application of Section 7 (8) ErbStG requires a careful analysis of the shareholder structure before and after the capital increase. Not only the direct shareholding, but also possible indirect shareholdings must be taken into account. It is important to note that in the past the tax authorities have sometimes taken a very broad interpretation of this provision. However, there are tendencies in case law to restrict the application of Section 7 (8) ErbStG, particularly if there is no intention to make a gift. In order to minimize the risk of a gift tax burden, various structuring options can be considered, such as the agreement of a disproportionate distribution of profits or the creation of different share classes. It is also important to document the economic reasons for the chosen structure of the capital increase in detail in order to be able to refute a possible gift intention. Careful planning and documentation can help to significantly reduce the risk of a gift tax burden.

Relevance for startups and investors

This topic is particularly important for start-ups and their investors, as capital increases with a premium are frequent financing instruments and the valuation of start-ups is often complex and volatile. In my advice, I place great emphasis on understanding the specific challenges of your startup and developing customized solutions that take into account both your commercial objectives and tax requirements. The dynamic nature of the startup environment often requires quick decisions in financing rounds, which can make careful planning of tax aspects difficult. Nevertheless, it is crucial not to neglect these, as subsequent corrections can often be difficult and costly. Another important aspect is communicating with potential investors about the tax implications of the capital increase. Transparency in this area can strengthen investor confidence and avoid potential conflicts. In the case of international investors, possible cross-border tax implications must also be taken into account. It is also advisable to examine the impact of the capital increase on existing employee participation programs or planned exit scenarios. Forward-looking planning can avoid complications later on and increase the startup’s attractiveness for future financing rounds or a possible sale. Startups and investors should also consider the possibility of obtaining binding information from the tax authorities in order to obtain legal certainty in complex cases.

Avoidance strategies

In order to minimize the risk of a gift tax burden, I recommend various strategies. These include the proportional participation of all shareholders in the capital increase, the careful determination of an appropriate share premium and detailed documentation of the economic reasons for the chosen structure. As your legal advisor, I can assist you in implementing these strategies and ensure that all legal and tax aspects are taken into account. Another option is to implement a disproportionate profit distribution clause in the articles of association, which allows the economic consequences of the capital increase to be offset. However, care must be taken to ensure that this clause cannot itself be interpreted as a concealed gift. In some cases, the issue of different share classes with different rights can also be a sensible option in order to take into account the interests of all parties involved. Another strategy can be the use of convertible loans or convertible notes that are only converted into equity at a later date. This can help to avoid the valuation problem at an early stage. It is also advisable to carry out regular company valuations in order to have a solid basis for determining the premium. In more complex cases, obtaining binding information from the tax office can also be considered in order to obtain legal certainty. It is also important to carefully plan the entire transaction structure and examine possible alternatives in order to find the optimal tax solution.

Disproportionate profit distribution as a solution?

One way to mitigate the problems of Section 7 (8) ErbStG is to agree a disproportionate (incongruent) distribution of profits in the articles of association of the GmbH. However, this solution requires careful planning and implementation. The prerequisites for an effective disproportionate distribution of profits include an explicit provision in the articles of association, the consent of all shareholders and objectively justified reasons for the deviation. A typical formulation in the articles of association could read: “The shareholders may decide each year, with the consent of all shareholders, to distribute profits differently from the shareholding ratios, including disproportionately.” However, the implementation of such a clause should be carefully considered, as it can have far-reaching effects on the shareholder structure and the rights of the individual shareholders. It must also be ensured that the disproportionate distribution of profits cannot itself be interpreted as a concealed gift. Another approach that I often recommend in my consulting practice is the realistic valuation of contributions in kind or of the startup itself. With appropriate evidence and sound planning, it can be shown, for example, that the premium will be used for the growth of the startup. This strategy can help to minimize tax risks while supporting the company’s commercial objectives. It is also important to note that the disproportionate distribution of profits should be reviewed regularly and adjusted if necessary to ensure that it continues to reflect economic realities. In some cases, it may make sense to limit the disproportionate profit distribution in time or to link it to certain milestones in order to maintain flexibility for future developments. In addition, the agreement of a dispr

Conclusion

As your lawyer for startup law, I understand the complexity and risks associated with capital increases and premium payments. My many years of experience in advising start-ups and investors enable me to develop tailor-made solutions that are both legally compliant and economically viable. If you are faced with the challenge of carrying out a capital increase with a premium or if you have questions about the tax implications of your financing structure, I will be happy to assist you. Together we can develop strategies that protect your company from unexpected tax burdens and at the same time support your growth objectives.

Contact me for comprehensive advice tailored to your specific situation. Let’s work together to find the optimal solution for your startup and put your future on a solid legal footing.

Author: Marian Härtel

Marian Härtel ist Rechtsanwalt und Fachanwalt für IT-Recht mit einer über 25-jährigen Erfahrung als Unternehmer und Berater in den Bereichen Games, E-Sport, Blockchain, SaaS und Künstliche Intelligenz. Seine Beratungsschwerpunkte umfassen neben dem IT-Recht insbesondere das Urheberrecht, Medienrecht sowie Wettbewerbsrecht. Er betreut schwerpunktmäßig Start-ups, Agenturen und Influencer, die er in strategischen Fragen, komplexen Vertragsangelegenheiten sowie bei Investitionsprojekten begleitet. Dabei zeichnet sich seine Beratung durch einen interdisziplinären Ansatz aus, der juristische Expertise und langjährige unternehmerische Erfahrung miteinander verbindet. Ziel seiner Tätigkeit ist stets, Mandanten praxisorientierte Lösungen anzubieten und rechtlich fundierte Unterstützung bei der Umsetzung innovativer Geschäftsmodelle zu gewährleisten.