A hidden distribution of profits – often abbreviated to vGA – is from a tax point of view an indirect payment of dividends from a corporation to a shareholder. This reduces the profit taxable by the company by corporation tax and business tax, so that this requires a correction of the profit according to the Corporate Tax Act. However, if this does not happen and only becomes known subsequently in an audit, then this profit share must be taxed subsequently at company level. At the same time, however, there is also a correction of the income tax of the shareholder who received the hidden profit distribution.
In the video we explain to you what tax consequences the hidden profit distribution has and why a vGA is not as dramatic as many assume.
1. What is a hidden profit distribution?
1.1.Legal framework for hidden profit distribution
The hidden distribution of profits is a term related to corporate tax. The corporation tax, on the other hand, is a tax which, instead of being levied on natural persons, must be levied on legal persons. Accordingly, it must be regarded as equivalent to the income tax of natural persons. First and foremost, therefore, it is of great importance for corporations. Indirectly, however, it also influences the dividend of the shareholders involved in it.
1.2. General Disclosure of Profits
Back to the hidden profit distribution. The easiest way to explain it is when you put her twin against her: the open profit distribution. The open profit distribution is the regular payment of the already taxed profit of a corporation to its shareholders. And the hidden profit distribution is thus its opposite. Thus, in addition to the open distribution of profits, all benefits, of whatever kind, which a shareholder receives from the relationship with a limited company in which he participates, are considered to be a hidden distribution of profits if they are to be regarded as inappropriate in terms of amount. Such alternative remuneration or benefits which a shareholder receives from his company are therefore also possible in addition to the open distribution of profits, provided that they are within an appropriate range.
The adequacy of such ancillary services is monitored by the financial administration. However, if a shareholder disagrees, then the tax courts assess whether there is a hidden profit distribution.
1.3. Examples of a hidden profit distribution
Perhaps the easiest way is if we give you some examples of hidden profit distribution:
This article does not replace tax or legal advice in an individual case. Facts, current law, jurisdiction, documentation and implementation remain decisive.