Tax & Legal

A shareholder with a 50.1% stake in a limited liability company (GmbH) who reduces his debt by assigning a non-valuable position designated as a right of first refusal in connection with a property belonging to him to another group company which he indirectly controls might face the consequences of a hidden profit distribution. In a recent judgment the Supreme Tax Court held that this is the case if the GmbH “pays” for this by “taking over” the negative clearing account with the other group company.

The Supreme Tax Court once again decided on pension promises to a managing director who is also the majority shareholder of the employer company and specified in more detail the rules for distinguishing allowable business expenses from disallowable “hidden distributions”. In the case at hand the plaintiff received compensation for early termination of pension claims as a result of significant financial difficulties of the company.

The Supreme Tax Court decided that so-called parallel imports of (original) pharmaceuticals may constitute a hidden profit distribution on the part of the group's (domestic) sales company and in favor of the (foreign) parent company.

The Supreme Tax Court decided that remuneration agreements (for profit related bonuses and sales bonuses) between a stock corporation (AG) and a member of the management board who is also a minority shareholder are generally to be recognized for tax purposes. Only in exceptional cases are they treated as a hidden profit distribution, specifically if there are clear indications in individual cases that the supervisory board of the AG has unilaterally focused on the interests of the management board member in the remuneration agreement.

The Supreme Tax Court decided that a hidden profit distribution may be assumed if the shareholder saves own expenses. Such cost savings can also be the result of a waiver of an agreement for reimbursement or compensation claims. The tax court of first instance must now determine whether the economic embargo in the customer's home country and the ensuing compensation payments had legal consequences for the GmbH or whether the breach of contract was solely made at the instruction of the parent company.

The Federal Ministry of Finance has published a circular with comments on the consequences of a Supreme Tax Court decision from 2023 on hidden distributions and has in one part adjusted its earlier circular from 2017 regarding the tax accounting of pension commitments.

A civil law resolution for a selective incongruent advance distribution to only one of two shareholders contravening the articles of association but passed unanimously by the shareholders' meeting is also tax effective. Thus, the “left-out” shareholder does not realize taxable income by way of a hidden distribution.

The Supreme Tax Court has held the cost of bonus dividend points of members of a co-operative bank to be a hidden distribution when the programme is open to members only and the maximum bonus is capped.

The Supreme Tax Court has handed down four judgments on pension promises to managing directors who are also majority shareholders specifying rules for distinguishing allowable business expenses from disallowable “hidden distributions”.

The Supreme Tax Court has held that a benefit from a foreign company to a German shareholder is a hidden distribution taxable in Germany as investment income.

The Supreme Tax Court has held that the thin capital rules in force up to 2007 are in breach of the non-discrimination clause in the Swiss double tax treaty.

The finance ministry has issued a decree on a number of technical points in connection with the obligation of banks to withhold tax from the investment income of private individuals.