The correspondence principle and hidden capital contributions in cross-border cases

Summary

On 19 November 2025, the German Federal Tax Court (the Bundesfinanzhof, or "BFH") handed down its judgment in case I R 40/23. The dispute concerned a sole shareholder who contributed shares in another company from his personal assets into his own GmbH (a German limited liability company) without receiving any consideration in return. In German tax law, this kind of informal transfer—where value moves from a shareholder to the company outside a formal capital increase—is known as a verdeckte Einlage, or "hidden capital contribution."

Under the applicable rules, when shares are contributed in this way, the shareholder is treated as if he had sold them at market value. In principle, any resulting gain should be taxed at the shareholder level under Section 17(1), sentence 2 of the German Income Tax Act (Einkommensteuergesetz, or "EStG"). In this case, however, that deemed disposal gain was never actually taxed.

Seeing that the shareholder had escaped tax on the deemed gain, the German tax office sought to increase the taxable income of the GmbH instead. It relied on what is known as the "correspondence principle" (Korrespondenzprinzip)—a mechanism set out in Section 8(3), sentence 4 of the German Corporation Tax Act (Körperschaftsteuergesetz, or "KStG"). The idea behind this principle is straightforward: where a hidden contribution reduces a shareholder's taxable income, the corresponding benefit at the company level should be added back into the company's taxable income to prevent a double tax advantage.

The BFH rejected the tax office's approach. The court held that the correspondence principle only applies where the shareholder has enjoyed an actual reduction in his or her tax base—for example, through a deductible business expense or an allowable deduction. Simply failing to capture a gain that should have been taxed (a "prevented increase in wealth," as the court put it) does not amount to a reduction in income within the meaning of the statute.

In practical terms, the distinction is between two quite different situations. A genuine income reduction occurs when a shareholder claims a deduction that lowers his or her taxable income. By contrast, in this case the shareholder's taxable income was simply never increased by the deemed gain in the first place. The BFH found that the wording of the statute is clear and does not extend to this second scenario.

Practical Implications

This ruling is particularly relevant for cross-border structures. Hidden capital contributions frequently arise where assets are moved, or financing is granted between entities in different jurisdictions. In such cases, the tax treatment at the shareholder level and at the company level may be governed by different countries' rules, making it even more likely that mismatches of the kind seen in this case will occur.

The decision confirms that Germany's correspondence principle has real limits. Tax authorities cannot use it as a catch-all mechanism to compensate for untaxed gains at the shareholder level. For advisers structuring cross-border transactions, this provides welcome clarity—but it also underscores the importance of carefully analyzing the tax consequences at every level of the structure to avoid unexpected exposures.

Further Reading

Dr Benn Berger examines the judgment and its practical implications for cross-border cases in detail in IWB 2026, 457.