The partial income procedure can generate tax advantages in the case of a profit distribution from a GmbH. After all, in the partial income procedure, 40% of the profit distributed remains tax-free. However, the personal income tax rate is applied to the taxable part. Therefore, it is necessary to estimate exactly whether the part income procedure makes sense in a certain situation. Anyone who wants to pay out a lot of profit at once should better resort to other tax arrangements.

1. Profit distribution from GmbH by partial income procedure – Introduction

A GmbH has the great advantage for many entrepreneurs that they can tax the profits there with a relatively low tax rate of about 30%. Then you can save the remaining profit in the GmbH. Unlike individual companies and partnerships, there is no obligation to allocate the entire profit directly to the shareholders or entrepreneurs. So as long as you save the profit in the GmbH, there is no obligation to further taxation on a private level.

Nevertheless, it will sooner or later be the case that the shareholders of a corporation, including the GmbH, decide to pay out profits from the GmbH. In that case, taxation is normally carried out on a flat-rate basis using the capital gains tax at a rate of 25 %. At first glance, you might think that a tax rate of 25% seems moderate, but you often forget that the GmbH has already paid about 30% in corporate tax, so that you pay practically 25% tax on 70% of the original profit. Overall, the net amount is in the order of 52%. So we are often asked if there is no better alternative. And we can answer: Yes, fortunately!

2. Partial income procedure for profit distribution from GmbH

In fact, the legislator has realized that a GmbH that only makes relatively small profit distributions would tax its shareholders if they had to apply the capital gains tax. Even if the dividend were less than the basic allowance and the shareholder had no further taxable income (and the progression reservation had no effect on it), the capital gains tax would have to be applied from the first cent. In order to compensate for this injustice, the legislature has created the legal prerequisites for the so-called partial income procedure for a profit distribution from a GmbH or another corporation.

3. Parts income procedure: Profit distribution from GmbH tax

The legislature has therefore sought a way to return the distribution of profits to the progressive tax regime of income tax law instead of the flat-rate tax rate of capital gains tax. He has created the solution for this with the so-called partial income procedure in § 32d paragraph 2 number 3 EStG. The procedure is that only 60% of the profit distributed is taxable. So you can basically pay out 40% tax-free from the GmbH. The taxable 60 % will then be taxed at the tax rate normally established. So on the one hand, it depends crucially on the amount distributed, but on the other hand also on whether other income is taxed, for example from rental and lease or from self-employment, which is particularly relevant for managing director compensation.

In addition to this formula for calculating income tax according to the partial income procedure, there are also some requirements that must be met in order to be able to apply this alternative. The first is also the easiest to fulfill. Thus, the partial income procedure for taxation of a profit distribution from a GmbH can only be initiated at the request of the taxable person. You are still considered eligible if you hold at least 25% of the share capital company. Since many GmbH shareholders are 100% involved in their GmbH, this condition is usually easy to meet. Even if four shareholders divide the participation in equal parts, each of them can submit the application for the application of the partial income procedure. However, if the shareholding is lower but still exceeds 1%, then the part income procedure is applicable even if you have a leading role in the company. So here one thought in particular of managing directors and similarly important functions.

4. Calculating Example of Part Income Method

But does the part income process really offer advantages? Let's make an example of arithmetic by itself:

Ms. Frohlock is proud of the TraumKI GmbH she founded and 100% owned. And for good reason, because their company has collected a profit carry forward of EUR 2.000.000 in the last five years. Now she wants to distribute this profit to her private level and use the parts income process. This means that EUR 800,000 is tax-free and she has to tax the rest of EUR 1,200,000 with her personal tax rate. Since this is accompanied by a marginal tax rate of 45%, which would affect a large part of the taxable income, it is easy to calculate that this method is not very attractive.

On our advice, Ms. Frohlock nevertheless applies the Parts Income Procedure to the profit distribution of her GmbH. However, it limits the profit distribution to only EUR 150,000, so that only EUR 90,000 are taxable. Since Mrs Frohlock is married and neither she nor her spouse has any other income, she can count on an average tax rate of just under 20% when she is assessed together with him. The income tax on a profit distribution of EUR 150,000 can then be calculated with only EUR 17.922. Thus, her income tax is 5% less than the capital gains tax otherwise incurred, for which she would have paid even EUR 37,500, because the advantage of the co-investment is omitted and the basic allowances of the spouses would have no effect.

In this way, Ms. Frohlock can distribute the total amount of EUR 2.000.000 from her GmbH over a period of about 14 years. In the end, it pays only about EUR 240,000 instead of EUR 500,000 (plus solidarity surcharge), which would have been incurred if it had distributed the entire EUR 2.000.000 at once. Patience pays off in this case.

5. Parts income procedure for profit distribution from GmbH – Conclusion

The Parts Income Procedure is certainly an interesting method to design taxes. However, it is not a panacea with which one can proceed without hesitation. First of all, we must pay attention to the various preconditions associated with the application of this method of taxation. It is accommodating if these usually appear easy to fulfill. What is trickier, on the other hand, is determining the ideal amount of profit distribution, because these depend on some personal factors. For example, if you are unmarried or live in a partnership with a person who also has a considerable income, you can only benefit from a tax advantage through the partial income procedure if you pay out a relatively small profit from your own GmbH. In any case, the advantage of the parts income method is particularly worthwhile if it can be used repeatedly in the long term. It is suitable, for example, to use profits for investments in private retirement provision. The partial income procedure can also be worthwhile for the long-term construction and provision of equity for the acquisition of real estate.