date | theme

17. August 2019 | Video: 5 tax advantages of the GmbH optimal use: 30% tax dividend sale real estate salary

17. January 2020 | GmbH shareholders: Managing Director salary or profit distribution?

20. January 2020 | Video: How high the Managing Director salary must be at the GmbH

09. July 2021 | Key figures of the industry on managing director salary

06. August 2021 | Appropriate GmbH Managing Director Salary – these four criteria make the difference (this contribution)

If you as a GmbH shareholder are also managing director, then you can use the managing director salary to save taxes. Because the higher the managing director's salary, the lower the tax. However, it is also true that one remains within the usual, because the tax office otherwise considers excessive salary as a hidden profit distribution and taxed accordingly. Therefore, you should consider four criteria that ensure that an appropriate executive salary is available. For example, an appropriate general manager salary must withstand an arm's length comparison. This applies both in comparison to managing directors in other companies and in their own. Furthermore, the fixed content must be at least 75% of the total references and only 25% royalties. Third, it must be ensured that the GmbH receives a sufficiently high return on equity. Even a legal person can have no interest in its managing director accruing the entire profit as managing director salary. And fourth, retroactive increases in managing director salary are also considered hidden profit distributions.

GmbH shareholders who manage their own company have the opportunity to influence taxation via their managing director salary. In fact, it succeeds at two different levels. On the one hand, the managing director’s salary represents operating expenses, which are usually deductible and thus reduce the taxable profit of the GmbH. Thus, lower corporate and business taxes are incurred if the managing director salary is higher. On the other hand, under certain circumstances, the taxation of the director’s salary at the level of the shareholder may be more favourable than if the same amount were received as a dividend.

Of course, the financial administration would consider it an abuse of design if a GmbH shareholder-managing director wanted to claim the entire company profit as a managing director salary. On the other hand, in such a case, of course, the freedom to determine a managing director salary according to your own ideas applies. So where should you draw the line up to which you can agree with the tax office on an appropriate managing director salary?

Appropriate Managing Director Salary: Legal Basis

In the dispute with the tax office on the question of whether an adequate managing director salary is available, one has to rely on various legal bases. Very important here is what the legal requirements for hidden profit distributions execute. Because everything that goes beyond an appropriate Managing Director salary is automatically qualified as a hidden profit distribution.

Although § 8 (3) sentence 2 KStG explicitly refers to the term technicus hidden distribution of profits (vGA for short), there, as elsewhere in tax laws, one searches in vain for an exact definition of the term. Instead, one has to work out a definition following the case law. This is generally stated that a hidden distribution of profits represents a reduction in assets or a prevented increase in assets and thus has an influence on the level of income of the company. It is based on the company relationship with the managing director, without being based on an ordinary shareholder resolution. This also applies to persons close to the managing director.

What plays less of a role in this generally accepted definition is when exactly a reduction in assets caused by the company relationship occurs within the framework of a managing director's salary. For this purpose, managing directors as well as the financial administration are guided by the usual standards in business. But ultimately, in disputed cases, the decision as to whether an appropriate managing director salary is available is left to the tax courts or, in the last resort, to the Federal Finance Court.

In order to set the framework for determining what constitutes an appropriate general manager salary, we list four criteria, the conditions of which should be considered in order to avoid a hidden profit distribution.

3.1. Appropriate Managing Director Salary Criterion 1: External Comparison

The first item on our agenda is often the most important one, because it concerns the level of the executive salary. Whether an appropriate managing director salary is now available depends largely on what other managing directors in a comparable position and situation earn. On the one hand, this can be determined by certain industry indicators, which are also recognized by the financial administration. This allows you to draw the comparison to managing directors’ salaries in other companies. However, in addition to the external arm comparison, an internal arm comparison may also be necessary. If at least one other managing director is working in the same company, then his managing director salary is also relevant in this consideration.

Another point that should be considered from the point of view of an arm's length comparison is the level of remuneration of a managing director in relation to the company's total profit. Because if a managing director receives 50 % of the profit as a managing director's salary, then one can doubt that this is an adequate managing director's salary. Because one may well ask which company would pay half of its profit as a managing director salary if the managing director were not a shareholder.

3.2 Adequate Managing Director Salary Criterion 2: Quota of royalties

The second point focuses on the character of remuneration to a managing director. Because an appropriate executive salary must meet a certain quota. A distinction is made between whether the company pays the remuneration as a regular managing director’s salary to the shareholder-managing director or whether this takes the form of royalties. Because here it is important that the royalties have only a complementary character. For example, at least 75% of the total remuneration should be available as a firmly agreed management salary. However, if the royalties amount to more than 25 % of the total remuneration, it can be assumed that there is no adequate managerial salary. In such a case, the excess share simply constitutes a hidden distribution of profits, which is therefore subject to capital gains tax.

3.3 Appropriate Managing Director Salary Criterion 3: Return on equity

Our third criterion concerns the company’s equity return. Because you have to pay attention to this as a GmbH shareholder Managing Director if you want to be sure that you receive an appropriate Managing Director salary. In most cases, an equity return of 10 % or more is considered appropriate. If one assumes that the foundation of a GmbH often takes place with a share capital equal to the legally required minimum share capital, then this means that at least EUR 2,500 of the profit must remain in the GmbH.

3.4 Appropriate Managing Director Salary Criterion 4: Avoid Subsequent Remuneration

The last point, which characterizes an appropriate general manager salary, is less about the amount of the remuneration and more about the time of the agreement on this. Because only if the remuneration takes place according to already made agreements, their adequacy is guaranteed. However, in the course of the financial year, managing directors often find that they actually earned a higher managing director salary due to unexpected business success. If you then subsequently agree to an increase in the managing director’s salary, then this retroactive part of the compensation is to be regarded as a hidden profit distribution – with the corresponding corporate and tax consequences.