Profit participation rights are a form of property rights based on the law of obligations that enable investors to participate in the profit and/or liquidation proceeds of a company. In return, the holder of profit participation rights provides the issuer with capital for operational use, and this is recorded in a corresponding contract.
Good to know: Profit participation rights compared to other financing instruments
Profit participation rights do not grant any membership rights such as voting rights and are similar in some ways to profit-participating loans or silent partnerships. However, the distinction can be complex, as it is not always clear in individual cases.
The special feature of profit participation rights: Recognition of equity in the commercial balance sheet
Under certain conditions, profit participation rights can be recognized as equity in the commercial balance sheet. This agreement is often used in crisis situations by converting existing loans into profit participation capital(debt mezzanine swap).
Commercial law assessment according to IDW guidelines
The IDW stipulates that profit participation capital can be recognized as equity under certain conditions. These include the subordination of the repayment claim, the performance-related nature of the remuneration, participation in losses and a long-term capital transfer of at least 5 years.
Tax assessment of profit participation rights
For tax purposes, profit participation rights are considered debt capital in the tax balance sheet due to their debt capital character. However, conversion into taxable equity can be advantageous in certain cases, particularly in restructuring situations.
BMF letter dated 11.04.2023: Clarity on tax issues
A recently published BMF circular confirms the tax principles for profit participation rights. It confirms that recognition as equity under commercial law does not automatically lead to treatment as equity for tax purposes.
The tax authorities make exceptions, especially if there is no repayment obligation. When granting profit participation capital in a crisis, debt capital is generally assumed unless the repayment obligation has not been seriously agreed.
Risks and exceptions in tax valuation
The tax treatment of profit participation rights depends on various factors, including the economic burden. However, derecognition of the profit participation capital liability from the tax balance sheet is an absolute exception and requires special circumstances.
Conclusion: profit participation rights as a versatile financing instrument
Profit participation rights offer companies and investors a flexible financing option. However, the treatment under commercial and tax law requires close examination in order to achieve the best results. In certain situations, profit participation rights can make a contribution to the restructuring of companies if they are structured carefully.
