Covert Distribution of Profits

A hidden profit distribution does not reduce the income of a corporation according to § 8 Abs. 3 KStG. The hidden profit distribution is to be added off-balance sheet in the amount of its common value to the income of the corporation – in particular in the case of the GmbH and the entrepreneurial company (limited liability).

1. Hidden profit distribution

A hidden profit distribution is according to § 8 Abs. 3 KStG

a decrease in wealth or a prevented increase in wealth,
which is caused by the corporate relationship,
affects the income of the GmbH and
is not based on a profit distribution resolution that complies with company law.
A hidden profit distribution is primarily defined by special case groups that have repeatedly dealt with the tax courts and the BFH:

  • inappropriately high remuneration of the managing director,
  • interest-free or exceptionally low-interest loan,
  • Excessive interest rate for loans to GmbH,
  • unusual pricing in transactions between GmbH and shareholders,
  • unusual design when renting items,
  • Waiver of the GmbH on rights vis-à-vis shareholders.

Particularly tragic is the hidden profit distribution to a controlling shareholder-managing director or a close relative as a result of a lack of written agreement between shareholder and GmbH.

2. Legal persons and hidden profit distribution

A hidden profit distribution within the meaning of Section 8 (3) KStG can only exist for the following legal entities :

  • Corporations and cooperatives,
  • Mutual insurance associations,
  • Real communities and associations,
  • Businesses of a commercial nature of legal persons under public law.

A hidden profit distribution always presupposes that there is a membership or at least membership-like relationship between the company or corporation and the recipient of the hidden profit distribution, which gives the recipient the necessary influence over the corporation. In the case of a GmbH or an entrepreneurial company (limited liability) , this is the participation of the shareholder who mediates the corresponding rights in the shareholders’ meeting of the GmbH.

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