The distribution of profits from a GmbH is usually taxed at the shareholders by the capital gains tax. Alternatively, however, there is also the so-called part income method, which can be used instead under certain conditions. The part income method offers the advantage that advertising costs can also be applied here. In addition, if the personal tax rate is less than 42 %, the effective tax rate in the partial income procedure may be lower than in the capital gains tax. In short, the Parts Income Procedure has the potential to optimize the profit distribution from a GmbH for tax purposes.

In the video we explain the advantages & disadvantages of the capital gains tax and the partial income procedure for the distribution of profits of a GmbH.

1. Taxation in the distribution of profits from a GmbH

When taxing the distribution of profits from a GmbH, the Income Tax Act usually provides for the methodical approach of capital gains tax. With this withholding tax, the Treasury collects 25% of the profits paid out. Although a tax exemption of EUR 801,00 per person is also provided, it also covers any actual advertising costs.

In addition, however, the legislature has established an alternative procedure for the taxation of such income, which is known among experts as the part income procedure. Since this applies as an alternative to capital gains tax within the framework of income tax, the statutory provisions for this are also defined in the Income Tax Act (§ 32d para 2 no. 3 EStG).

Of course, the taxation procedures under consideration here also apply to participation in all other forms of limited liability companies. However, the GmbH is by far the most widespread form of company among corporations. So in our article they are representative of all other corporations in the center of our discussions.

2. Taxation of a GmbH shareholder

2.1. Capital gains tax

In the case of capital gains tax, the profit distribution from a GmbH is first to be reduced by a so-called savings lump sum of EUR 801,00 per person. In the case of married persons, this savings lump sum doubles to EUR 1,602.00. Although this allowance can be shared arbitrarily between the two partners, it also covers the actual advertising costs associated with all capital gains, regardless of their amount. So if you have more than one income from capital income, you can still only use this one saver lump sum to take into account your advertising costs. Let me be clear: the capital gains tax does not take into account actual advertising costs.

2.2. Parts income procedure

Since the partial income procedure can only be regarded as an alternative to the standard capital gains tax, it is hardly surprising that its application in taxation is subject to certain conditions. In principle, there are four conditions. While two of these are formal requirements, two more are available as alternative variants.

2.2.1. The Four Requirements for the Parts Income Procedure

2.2.1.1 Restriction to investment income from corporations

The first condition concerns the limitation of the partial income procedure to such investment income which is in connection with the distribution of profits from a GmbH or another limited company. On the other hand, other capital gains, such as normal bank interest or profits from the sale of shares, are excluded from this procedure.

2.2.1.2. Use of the partial income procedure only on request

The second point to be mentioned is that the partial income procedure is only applied if this is requested in the context of the income tax return at the tax office. Otherwise, the tax office will refrain from regular taxation under the capital gains tax. Once submitted, the request shall remain valid until revocation. However, if the application is revoked once, no further application is possible for the taxation of profit distributions from this GmbH. Thus, an application for the use of the partial income procedure can only be made once in a lifetime for each participation. Therefore, you should always think very carefully whether you actually want to revoke a request once submitted. Therefore, in this regard, it is highly advisable to consider the expertise of a particularly experienced tax consultant.

2.2.1.3. Option 1: Participation of the GmbH shareholder of at least 25%

Now we come to the two alternative requirements, of which at least one must be fulfilled in order to be able to apply the part income method.

The first variant is given if the GmbH shareholder holds at least 25% of the shares in the GmbH. It is irrelevant whether he also works directly for the company or whether he is only a shareholder.

2.2.1.4. Option 2: Participation of at least 1% of a GmbH shareholder in a senior position

If, however, the participation of the GmbH shareholder is less than 25%, the partial income procedure can still be applied. However, this requires a participation of at least 1% and the active, direct participation of the company. In other words, the law requires in this case a management position of the shareholder in the company. And this is usually held by the managing director of the GmbH.

2.2.2. The taxation procedure

First of all, 40% of the income from the distribution of profits from a GmbH is tax-free. So only 60% of income is taxed. But even these incomes are subject to a further reduction under favorable circumstances.

Unlike in the case of capital gains tax, in the partial income procedure the recognition of actually incurred advertising costs associated with the participation in the GmbH is applicable. However, here too, only a proportionate approach of 60% is permitted.

This amount reduced by the proportionate advertising costs is then subject to the regular income tax. Depending on the amount of the personal tax rate of the GmbH shareholder, the amount of the tax can also vary significantly.

Now let’s get to the promised arithmetic example. In this example, we assume that the profit distribution from a GmbH is made to a sole shareholder. For this we take a round sum of EUR 100,000, which the GmbH pays out as profit after taxes. It does not matter whether this profit comes from one marketing year or has been accumulated over several years.

3.1. Capital gains tax

Although the taxation of capital income, such as the distribution of profits from a GmbH, is part of the income tax, these capital incomes are taxed separately. In our example, we first deduct from the EUR 100,000.00 the lump sum of 801.00 for the GmbH shareholder, assuming that he is unmarried. So he still has exactly EUR 99.199.00, which he has to tax. With a flat-rate tax rate of 25 %, exactly EUR 24.799.75 flows to the Treasury. The flat-rate tax rate of 25%, which we apply to this, is thus independent of the personal tax rate of the GmbH shareholder, regardless of whether this is above or below 25%.

However, the capital gains tax also forms the basis for the solidarity surcharge, which is also relevant. This means that 5.5% of the tax is to be paid as a further levy. With a tax of EUR 24,799.75, the surcharge is therefore a further EUR 1,363.99.

In addition, if necessary, there is another tax, which is levied lump sum on the capital income, namely the church tax. However, in order to keep the example as clear as possible, we waive their calculation by simplifying the assumption of a taxpayer without a denomination.

All in all, after deduction of EUR 26,964.74, we pay taxes on an amount of EUR 73,035.26 actually paid by the GmbH to its shareholder. We now want to compare this result with what we can achieve with the partial income procedure for this taxpayer.

3.2. Parts income procedure

Since our GmbH shareholder holds a 100% stake in his company, he definitely meets the necessary conditions to opt for the parts income procedure. So he does.

As already mentioned, 40% of the EUR 100,000.00 is tax-free. Thus, the taxpayer only taxes EUR 60,000.00. Since we have already chosen a simplistic approach in connection with church tax, we also stick to the line and assume here also a non-denominational taxpayer. Moreover, we continue to assume that he has not incurred any advertising costs in connection with the GmbH and that he is subject to a personal tax rate of 42%. This is therefore also the regular top tax rate in Germany. So let’s see how much of his profit distribution is left after deducting all taxes and duties.

First, the actual tax burden is 42% to EUR 60,000.00 and thus EUR 25.200.00. This represents a further 5.5% for the solidarity surcharge, which amounts to an additional EUR 1,386.00. The total tax burden is EUR 26.586.00. Thus, when taxed with the partial income procedure, the taxpayer is left with an actual profit of EUR 73,414.00.

4. The advantages of the parts income process

Who now compares the two results more closely, inevitably finds that there are no significant differences. In fact, this is hardly surprising, because the legislator has given his own thoughts on the balance between the two procedures when determining the tax-free share in the partial income procedure. In particular, it wanted to prevent taxpayers who choose the part-income method from being subject to a greater tax burden than those who, at less personal business risk, have to tax their capital gains with the capital gains tax.

However, we emphasize at this point that we deliberately ignored all possible tax advantages in the simplifications of the parts income procedure. In particular, this applies to the lack of advertising costs and the application of the top tax rate.

Advantage 1: 40% of income is tax-free

Strictly speaking, the tax exemption of 40% of the profit distribution from a GmbH is not a tax advantage in itself. However, this is the calculated calculation basis with which the legislature ensures that the taxpayer who chooses the partial income procedure does not suffer any disadvantage compared to taxation by capital gains tax. This is also important in view of the unique possibility of applying. And thus, at least indirectly, an advantage.

Advantage 2: 60% of advertising costs are eligible

Although the consideration of advertising costs is also provided in principle for the taxation of the profit distribution from a GmbH by capital gains tax, but only on a flat-rate basis. Therefore, if the advertising costs are significantly higher than the savings lump sum, then the possibility of at least 60% as a reduction of the capital income seems quite relevant. In particular, if the GmbH was acquired, for example, through a third-party purchase, the interest due on the loan may well significantly exceed the flat-rate amount of EUR 801,00 or even 1,602.00. Anyone who can set these financing costs in parts should therefore be happy.

Advantage 3: Tax advantage if the personal tax rate is below 42%

Of course, the advantage of a tax rate below 42% is also important. However, this also applies to a taxpayer who has to tax other income in addition to the capital gains tax. After all, in connection with the partial income procedure, additional potential for savings in income tax is to be expected, sometimes even considerable. However, this is all the more so because it reduces the tax rate on capital gains below the 25 % value and is therefore lower than the capital gains tax. Because of this, a large tax advantage can be generated with a relatively low profit distribution, so that under certain circumstances even no income tax is due. This aspect may be of particular interest to those who are planning to set up a GmbH, but do not yet have a clear idea of how high their profit may be, especially in the initial phase of the company.

5th Conclusion

The part income procedure may be bound by certain conditions, but these are given in many cases. If this is actually the case, then this option should be considered when distributing profits from a GmbH. Especially in situations where considerable advertising costs are to be expected, it is worthwhile to apply for the parts income procedure. But even if it is foreseeable that the personal tax rate is below 42%, this option for taxation should be used. The lower the personal tax rate, the greater the tax advantage compared to the capital gains tax. However, it should always be borne in mind that the request for use of the partial income procedure can only be made once. Anyone who revokes the once approved application loses this privilege in the long run.