The Stuttgart procedure in german practice

Company valuation from another era

The Stuttgart method was once the standard for business valuations for inheritance and gift tax purposes in Germany. Today, it can occasionally still be found in old articles of association. What else you need to know about the Stuttgart procedure, read here.

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Calculating the value of a company in Germany using the Stuttgart method

As a mixed method, the Stuttgart method takes into account both the business assets (net asset value) and the earnings (capitalized earnings value). The Stuttgart method is one of the so-called excess profit methods. Here, an excess profit limited to 5 years is added to the net asset value, whereby the interest rate for the excess profit interest is 9 percent.

In addition to this basic principle, the Stuttgart procedure has numerous special regulations as well as surcharges and deductions for certain circumstances or forms of business in german practice.

German inheritance and gift tax law before 2009

Until the end of 2008, the Stuttgart method was found in the applicable german inheritance and gift tax law. According to Section 12 (2) of the German Inheritance Tax Act (ErbStG) in conjunction with Section 11 (2) of the German Valuation Act (BewG), it applied to companies that have neither a value determined on the stock exchange nor a value resulting from the sale of shares within one year. The Stuttgart procedure was described in detail in the German Inheritance Tax Guidelines (ErbStR 2003) (R96 et seq.).

In the run-up to the 2009 inheritance tax reform, the German Federal Constitutional Court overturned the preferential treatment and valuation rules for business assets in force at the time. One reason for this was that the Stuttgart method was regularly not suitable for determining the true value of a business.

IDW S1, DFC method and simplified capitalized earnings method in german practice

Today, the income capitalization approach according to IDW S1 and the discounted cash flow method are the most widely recognized methods of business valuation in Germany. These can determine realistic market values for limited liability companies as well as partnerships or sole proprietorships.

And there is also a successor to the Stuttgart method in german inheritance and gift tax law. According to § 199 BewG, the value of a german company or a share in a company can be determined using the simplified capitalized earnings value method. This capitalizes the average past annual income with a standardized capitalization factor.

The Stuttgart method in german partnership agreements

The Stuttgart method also appeared outside of german tax law. It can still be found in many older partnership agreements. It is of particular practical relevance when it comes to the compensation of departing shareholders. If the articles of association of a GmbH or the partnership agreement of a partnership provide for a calculation of the severance payment according to the Stuttgart method for this case, this method is in principle still applicable. The unconstitutionality in tax law therefore does not affect company law in german practice.

The settlement values determined on the basis of the Stuttgart method are therefore initially binding for the shareholders, although as a rule they do not express the actual company value. A correction can only be considered if the deviation from the market value is "significant". It is obvious that this question can quickly spark off a serious shareholder dispute. Shareholders with the Stuttgart method in their articles of association should therefore at least consider whether a new contractual provision is required.