date | theme

08 July 2021 | Repayment of hidden profit distribution – tax treatment (this contribution)

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

9 June 2020 | Hidden distribution of profits – Requirements Legal consequences and disadvantages

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

As a shareholder, you are obliged to repay an increase in assets or a reduction in assets that is caused by the company relationship, has an impact on income and is unrelated to an open distribution, i.e. a hidden distribution of profits. In this case, of course, you should also consider the company law background and the tax consequences. We present these in the following. Due to the often existing obligation to repay the hidden profit distribution, it could be assumed that the repayment of the hidden profit distribution would also have to neutralize the negative consequences of a hidden profit distribution.

Legally defined, the hidden profit distribution is not. Rather, the BFH has developed a corresponding definition over a longer period of time. Therefore, a hidden distribution of profits is any impairment or impeded increase in assets caused by the company relationship, affects the level of income of the corporation and is unrelated to an open distribution of profits. The initiation of a capital reduction by the company relationship shall be presumed if the limited liability company grants its shareholder a capital advantage which it would not have granted to a non-shareholder by applying the diligence of an ordinary and conscientious director. Consequently, an example of a hidden distribution of profits is inappropriate remuneration of the limited liability company to the shareholder on the basis of exchange contracts.

1.2 Legal consequences of a hidden distribution of profits

According to § 8 II S. 3 KStG, a hidden distribution of profits may not reduce the income of the corporation. Therefore, as far as a hidden distribution of profits has been declared by the company as operating expenses, there is a subsequent taxation at company level. Furthermore, the burden of trade tax is incurred at company level. In addition, the hidden distribution of profits is also subject to business tax at the level of the shareholder if the shareholder holds the investment in the company assets. Thus, it can be said that in the case of a hidden distribution of profits, the taxpayer is presented as if the corresponding amount had been distributed openly.

The granting of an advantage increases the shareholder’s income from the participation of the corporation. If the shareholder holds the participation in private assets, the income is to be classified as such from capital assets according to § 20 I No. 1 EStG.

2nd company law obligation to repay hidden profit distribution

2.1. Public limited companies Obligation to repay hidden profit distribution

Under company law, shareholders are generally only obliged under §§ 62 I S. 1, 57 I AktG to return the benefit turned by the corporation to it. It follows from this that in the law on shares only the properly established balance sheet profit may be paid to the shareholder. As a result, there is a regular obligation to repay the hidden distribution of profits only for public limited companies where hidden distributions of profits are prohibited.

2.2. GmbH Repayment of hidden profit distribution conceivable

§ 31 I GmbHG states that payments made contrary to the provisions of § 3o must be repaid. Consequently, only those payments which are contrary to the principle of the preservation of capital are to be reimbursed. Thus, only the share capital of a GmbH is protected. In addition, there are overarching mechanisms at the GmbH with which a duty to repay hidden profit distributions would also be conceivable. In particular, other shareholders who have not received the hidden distribution of profits may invoke the principle of equal treatment. Therefore, this principle can also be used to justify recovery claims for infringements. Furthermore, hidden profit distributions can violate the internal social jurisdiction order and thus be reclaimed. In addition, fiduciary duties can also be violated.

2.3. Further provisions on the repayment of hidden distributions of profits

Another way to establish the obligation to repay hidden distributions of profits is to contractually agree that transactions by which the shareholder receives a hidden advantage from the company are inadmissible and the company can therefore claim the advantage back. Therefore, a reclaim is often based in the articles of association in so-called statutory clauses.

3. problems with the repayment of hidden profit distribution

The central question is whether the activation of the recovery claim can reverse or avoid the distribution burden of the hidden profit distribution. However, the problem with this is that it is not usually a question of accounting for the benefit at the end of the marketing year. As a rule, the repayment of hidden profit distributions is only considered when the tax office has revealed the hidden profit distribution. However, this discovery usually takes place only after the year of granting the advantage. Therefore, an ex-post retroactive accounting of the rebate right by way of the balance sheet adjustment is necessary. This requires, however, that the balance sheet was originally wrong. Consequently, the condition for retroactively undoing the negative consequences of the hidden distribution of profits is that the condition for the balance sheet adjustment is present and the refund does not constitute a deposit.

If the shares are held in private assets, the inflow principle according to § 11 I 1 EStG applies. An income thereafter generally increases a taxpayer’s income at the time it accrues to him. The inflow is equated to the attainment of economic power of disposal. An obligation (if applicable) to repay hidden distributions of profits does not preclude obtaining power of disposal. Consequently, the taxable person must pay tax on the income received irrespective of the duty of restitution. According to § 3 No. 40 EStG, the partial income procedure applies to these revenues, as a result of which the shareholder has to pay only 60 % tax.

In the year of outflow, repaid revenue should be considered as negative revenue. These can then be deducted from the tax again in the outflow year. According to § 3c II EStG, only 60 % of the negative income can be deducted. This would in principle neutralize the negative consequences of the hidden profit distribution.

Profit distribution from a GmbH: Capital gains tax vs. Partial income method

4.2. Shares in operating assets

The shareholder who holds his interest in the operating assets can prevent the taxation of the hidden distribution of profits by in-phase accounting for the obligation to repay the hidden distribution of profits. If, however, this passivation is not undertaken, the disclosure of the hidden distribution of profits depends on the existence of the requirements of the balance sheet adjustment. Therefore, the shareholder’s balance sheet should have been incorrect in the year of the hidden distribution of profits as a result of the exclusion of the repayment obligation. When accounting for a liability, the so-called precautionary principle applies. Therefore, for a liability to be accounted for, the incurrence of the liability must be sufficient. In addition, according to § 3c II EStG, only 60 % of the liability may be deducted. Nevertheless, the repayment obligation cannot be passivated if the existence of a hidden distribution of profits and thus the repayment obligation for the shareholder could not be recognized even if the due diligence was exercised.

If the requirements of the balance sheet adjustment are not met, the taxation of the hidden profit distribution at shareholder level according to the partial income procedure remains.