Any business owner or limited liability company (GmbH) holding securities as part of its business assets faces an important question at the end of the year: what are the tax implications if share prices have fallen? The answer is less clear-cut than many might assume. Whilst commercial law mandates a write-down in certain cases, tax law grants an option. And this option is not always to one’s advantage.
Fair value rather than market price: the tax valuation basis
Under income tax law, business assets are valued at their so-called ‘partial value’. Put simply, this is the value that a hypothetical purchaser of the entire business would assign to the individual asset. In the case of listed securities, the partial value generally corresponds to the market price on the balance sheet date.
However, the key point is this: a tax write-down to the lower residual value is only possible if the impairment is expected to be permanent. If there is no permanent impairment, a write-down to the residual value is in fact prohibited.
The 5 per cent threshold as a guide
The Federal Fiscal Court has developed a rule of thumb for listed securities: if the market price on the balance sheet date is more than five per cent below the acquisition cost, this generally indicates a permanent impairment. However, this threshold is not a rigid rule, but a strong indicator. In individual cases, other circumstances may alter the picture.
There are also specific considerations regarding fixed-rate bonds. If the issuer is expected to repay the nominal amount in full at maturity, a temporary fall in the price due to a rise in market interest rates does not, in principle, constitute a permanent impairment. In such cases, a write-down is more likely to be considered if the debtor’s creditworthiness has deteriorated.
The specific risk associated with companies limited by shares
There is an important special case for limited liability companies (GmbHs) and other corporations. Whilst they may, in principle, write down the value of shares in the event of permanent impairment, under Section 8b of the Corporation Tax Act, such a write-down generally has no tax effect for corporations. The hoped-for tax relief therefore does not materialise at all.
This becomes particularly problematic if prices rise again later on. This is because, under both commercial and tax law, there is then an obligation to write up the asset to the level of the original acquisition cost. In practice, this is referred to as the ‘write-up trap’: the earlier depreciation yielded no tax benefit, but the subsequent write-up may give rise to taxable income.
A practical calculation example
A limited liability company (GmbH) purchases shares for 100,000 euros. On the balance sheet date, the share price stands at 90,000 euros. Under commercial law, it must be assessed whether the impairment is permanent; if so, there is an obligation to write down the value. For tax purposes, a partial write-down would be possible, but would have no tax effect due to Section 8b of the Corporation Tax Act (KStG). If the share price subsequently recovers to €100,000, a write-back must be recognised, which may have tax consequences. In this case, it would have been wiser not to exercise the option.
What does this mean for businesses?
The crucial question is not merely whether a tax write-down is permissible, but whether it is also appropriate in the specific circumstances of each individual case. Particularly in the case of shareholdings and shares forming part of the business assets of limited companies, the decision should be weighed up carefully, taking future financial years into account. Anyone who writes off an asset today that yields no tax benefit risks facing an unexpected tax liability tomorrow. Seeking advice from a tax adviser at an early stage helps to avoid such pitfalls.
Source: Haufe: Tax
This article was created with the help of AI and has been editorially reviewed.
