Capital loss from an investment in the event of a so-called bad leaver clause

The Hamburg Fiscal Court (3 K 30/16) ruled on the tax consideration of a loss from the sale of a significant shareholding as part of a management participation programme ("MPP") made a decision. According to this ruling, the sale of a significant shareholding in a holding company for a symbolic purchase price of €1 is a sale for consideration in accordance with Section 17 EStG. The contracting parties had stipulated in the participation agreement that the participation is worthless in the case of a so-called bad leaver if, due to the lack of capitalised earnings value, a certain specified annual EBITDA of at least 50 % is not achieved.

This decision, which has since become final, was based on the following Facts of the case on the basis of:

The plaintiff had been a member of the management board of an A-AG since 2005. This was taken over by a financial investor in 2008. From 1 September 2008, the plaintiff was appointed as a member of the Management Board for a further five years. Via an asset-managed GbR, the plaintiff indirectly participated in a holding company, which in turn held the shares in A-AG, as part of an MPP via an asset-managing KG.

In this context, the plaintiff held an indirect stake of at least 1 % in a downstream holding company between August 2008 and December 2010. He did not receive any income from capital assets from this during the years 2008 to 2010.

Based on the participation agreement, the asset-managing GbR was obliged to transfer its share in the asset-managing KG to other participants if certain conditions were met, depending on the development of the group and the occurrence of "good leaver" or "bad leaver" events at the plaintiff. A so-called bad leaver event included, among other things, the ordinary termination of the employment relationship by the member of the Executive Board. The purchase price for the shareholding to be transferred back was regulated in a comprehensive clause of the participation agreement.

As the business performance of A-AG in 2009 was significantly worse than expected, the plaintiff/Management Board member terminated his employment relationship with A-AG in 2010 for good cause, whereupon the asset-managing GbR founded by him (and his wife) transferred its share in the asset-managing KG to another limited partner for a purchase price of € 1.