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Sale of partnership interests – Earn-out payments only have to be taxed when they are received

When stakes in a partnership are sold, besides a fixed purchase price, the contracting parties sometimes also agree variable purchase price components that are based on the company’s (subsequent) profits or revenues. According to a more recent ruling by the Federal Fiscal Court (Bundesfinanzhof, BFH), these so-called earn-out payments only have to be taxed at the time when they are actually received by the vendor. Therefore, they may not be included – also not retroactively – in the gain on the date of the sale (no retroactive effect).

According to a BFH ruling of 9.11.2023 (case reference: IV R 9/21), claims for payment of the purchase price that are profit-related and sales-related may only be reported when the vendor realises them on the date they are received. They constitute purchase price claims subject to a condition precedent where, initially, it is not yet clear whether or not the claims will arise and in what amount. In the view of the court, these uncertainties justify excluding these types of payments from the calculation of capital gains as at the closing date.

Outcome: Earn-out payments have to be taxed as subsequent operating income at the time when payments are received. As in the case in question, this might even be several years after the sale of the stake. 

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