Introduction
In the case of valuations for tax purposes, the fair market value of unlisted shares in corporations should generally be determined for their recognition. Insofar as it is not possible to derive the fair market value from sales between unrelated third parties then it has to be determined by taking the corporation’s earning prospects into account. In doing so, not only the simplified income capitalisation method under Sections 199 ff. BewG could be applied, but also other approved, common methods for non-tax purposes (cf. Section 11(2) BewG).
In principle, the taxpayer may choose the valuation method and the decision should be made with reference to the individual circumstances. In this regard, the BFH, in its ruling of 2.12.2022 (case reference: II R 5/19), decided that the fiscal administration may not switch to the simplified income capitalisation method even on the grounds of supposed errors; instead, it has to allow the possibility of corrective actions within the scope of the chosen method.
Against this background, it would be worthwhile to consider both methods and, particularly in this context, the applicable interest rate as well as the income to be valued.
The methodology of the valuation techniques and a sample calculation
According to the Valuation Act (BewG), when the simplified income capitalisation method is applied then the basis for the calculation should be the annual income of the last three preceding financial years. This is multiplied by the standardised capitalisation factor, which is currently 13.75, and the capitalised income value is thus determined. In a fictitious and highly simplified sample calculation, average annual profit in the amount of €2,100k would result in a capitalised income value in the amount of €28,875k (cf. table 1).
The company valuation technique - which likewise may be applied in accordance with the requirements set out by the Institute of Public Auditors in Germany in its standard IDW S 1 - is principally based on discounting the future cash flows to equity capital providers by an adequate rate for the cost of capital (cf. table 2).
The multiplier used in the simplified income capitalisation method - 13.75 - is based on an interest rate of 7.27% (1/13.75 = 7.27%). If this is used in the present sample calculation, by way of simplification, as a constant for the rate for the cost of equity capi-tal, and if the annual profits for the budgeted years correspond exactly to the mean value of the actual annual profits for the preceding years, then both methods would produce identical results.
If however the annual profit and the rate for the cost of equity capital vary then this would result in the following capitalised income values (cf. table 3).
Consequently, in the sample calculation, where the annual profit remains unchanged and equity capital costs >7.27% then the capitalised income value would, potentially, be significantly below the capitalised income value according to the simplified income capitalisation method (please note: while in this report we have forgone a discussion of the particularities of applying the two above-mentioned valuation methods, notably in complex group structures, we would nevertheless like to refer you to the appropriate specialist literature).
Conclusion
Actual values are used as the sole basis for the simplified income capitalisation method, however, company-specific future forecasts are not taken into account. Moreover, a uniform capitalisation factor is applied, while a company-specific (and possibly also a period-specific) rate for the cost of capital is determined for the company valuation technique.
The greater the discrepancy between
1. the actual and the budgeted results and
2. the company-specific cost of capital and the
standardised capitalisation factor, the more the results between the two reviewed methods will basically diverge. For the simplified sample calculation, in the table opposite, we have shown the effects from changes in the annual profits combined with the changes in the interest rate (cf. table 3).
