date | theme

25. November 2018 | Taxation of profit distributions from GmbH

9 March 2019 | Hidden distribution of profits at GmbH / Corporations

24. June 2020 | Hidden distribution of profits: advantage or disadvantage?

8. July 2021 | Repayment of hidden profit distribution – tax treatment

08. June 2022 | Donations to affiliated foundations as hidden profit distributions of a GmbH: criteria & legal consequences (this contribution)

If a GmbH donates assets to a foundation, the question arises whether the donation can be deducted for tax purposes. It should be noted that donations to affiliated foundations can represent hidden profit distributions to the shareholders. Therefore, it is crucial when hidden profit distributions can even exist and what legal consequences are to be linked to them. These questions are clarified below.

For example, if a corporation donates assets to a foundation, the question arises whether the donation can be deducted for tax purposes and, if so, how. In principle, donations are deductible according to § 9 (1) no. 2 KStG to non-profit organizations reducing income tax.

The provisions of § 9 (1) no. 2 KStG apply only subject to § 8 (3) KStG. Consequently, donations can also constitute a hidden distribution of profits by the company to its shareholders. Accordingly, it is problematic if society and foundation are connected. As a result, donations to affiliated foundations can be a hidden profit distribution.

Hidden distribution of profits is generally considered for services to the shareholders themselves. But also benefits to persons who are close to the shareholder can be hidden profit distributions. Therefore, donations represent a hidden distribution of profits to the shareholders of the oriented company if there is a special relationship between the company and the foundation. In addition, the grant must be particularly prompted by this proximity relationship. The criterion for this is that the company would not have granted the donation to a non-partner using the diligence of an ordinary and conscientious director. In summary, the prerequisites are the proximity, the foreign unusualness and the advantage of the shareholder.

This clarifies under which criteria donations to affiliated foundations can constitute a hidden profit distribution. The relationship between the foundation and society is decisive. It covers any relationship between a shareholder and a third party which allows it to conclude that it has influenced the granting of benefits by the limited liability company. The relationship can therefore be of a family law, company law, debt law or actual nature. Nevertheless, such a close relationship cannot yet be assumed if the shareholders identify solely with the objectives of the beneficiary.

2.2.2. Unusual nature of the grant

However, it is not enough that the shareholder of the company is a member of the foundation and therefore has an influence on the decision-making process. In addition to this close relationship, it must be noted that the donation would not have been granted to a non-related person when considering a regular and conscientious director. Therefore, the donation must not be foreign customary. The decisive factor is, among other things, the amount of the grant or its frequency.

2.2.3. Advantage of the shareholder

In addition, the contribution from the shareholder must lead to another reference within the meaning of § 20 (1) no. 1 sentence 2 EStG. This means that the shareholder must benefit from the donation. It is sufficient for a person close to the shareholder to benefit from the relocation. Therefore, the foundation must gain an advantage. As a rule, this already lies in the fact that the donation enables it to pursue its statutory purpose. However, it is also possible that another related person receives an advantage through donations to affiliated foundations. A charitable motivation of the donation, on the other hand, does not yet speak against a hidden profit distribution and therefore does not oppose the advantage of the shareholder.

A concealed distribution of profits therefore exists if, on the one hand, the shareholders of the approaching company have founded the foundation as the sole founder and determine as directors over the assets independent in the foundation. On the other hand, the amount of the donation is particularly high, while other charitable institutions are only made donations in lower amounts. It can be considered an advantage for the shareholders, for example, if the foundation receives the support desired by the shareholders.

But if there is a hidden profit distribution, it is of course important to know what legal consequences this has for the society and the foundation at all. The classification of a donation as a hidden distribution of profits means that the donation must not reduce the profit of the company. At company level, the hidden distribution of profits is therefore treated as use of profit and the profit is taxed accordingly. The hidden distribution of profits leads to income of the shareholders according to § 20 (1) no. 1 sentence 2 EStG. Accordingly, they are subject to either capital gains tax or the partial income procedure. Consequently, the shareholders are tax liable.

On the other hand, there are no tax consequences on the part of the charitable institution as a donation recipient. There, the donations as free grants are tax-free income regardless of whether they are tax deductible at the donor company.

Even if corporations are sent to charitable foundations, there is a risk of a hidden profit distribution. This applies in particular if the founder or close relatives of the founder are at the same time shareholders of the corporation and the foundation and the company are thereby linked in terms of personnel. Border cases can be clarified by a binding information at the tax office. We are happy to provide you with comprehensive advice on hidden profit distributions and clarify how you can benefit from them.