The Tax Court of Cologne has ordered a minority shareholder to pay income and sales tax (case no. 13 K 3023/13). The shareholder was making a business out of systematically raising legal challenges and then being persuaded to withdraw his claims in return for a lavish settlement. The man cashed up to five-figure sums through his attorneys in return for dropping his objection to necessary capital increases, for example.
As his holdings were in each case small (between € 10 – 500), the tax court assumed that the aim of the challenges was not the assertion of a claim for compensation. What the man in fact wanted was just one thing: to capitalize as a shareholder from his power to adopt an obstructionist position. The Tax Court of Cologne interpreted this as a long-term activity. This serves to underline the system that lies behind it. After all, the accused shareholder had been acting in exactly this manner for years, not only in his own name but also in that of a limited liability company set up by him. This made it obvious that he was acting with every intention of repeating his actions in the long term. For this reason, the payments were deemed “other income” and subject to income and sales tax. The verdict is not yet final.
Practical recommendations
The judgment asks serious questions of the business model of professional plaintiffs. The assumption behind this model is that the lawyers of professional plaintiffs share with the latter the attorney’s fees received from the other party on the basis of a court settlement. And yet, if the professional plaintiffs are obliged to pay tax on the share of the proceeds paid out to them, the balance between opportunity and risk will shift to their detriment. This will probably bring about a further decline in the number of bogus legal challenges now that some measures enacted by the legislature have already made an effective contribution in curbing them.
As his holdings were in each case small (between € 10 – 500), the tax court assumed that the aim of the challenges was not the assertion of a claim for compensation. What the man in fact wanted was just one thing: to capitalize as a shareholder from his power to adopt an obstructionist position. The Tax Court of Cologne interpreted this as a long-term activity. This serves to underline the system that lies behind it. After all, the accused shareholder had been acting in exactly this manner for years, not only in his own name but also in that of a limited liability company set up by him. This made it obvious that he was acting with every intention of repeating his actions in the long term. For this reason, the payments were deemed “other income” and subject to income and sales tax. The verdict is not yet final.
Practical recommendations
The judgment asks serious questions of the business model of professional plaintiffs. The assumption behind this model is that the lawyers of professional plaintiffs share with the latter the attorney’s fees received from the other party on the basis of a court settlement. And yet, if the professional plaintiffs are obliged to pay tax on the share of the proceeds paid out to them, the balance between opportunity and risk will shift to their detriment. This will probably bring about a further decline in the number of bogus legal challenges now that some measures enacted by the legislature have already made an effective contribution in curbing them.
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