date | theme

December 6, 2019 | Profit distribution from a GmbH: The advantages of the parts income process

17. January 2020 | GmbH shareholders: Managing Director salary or profit distribution?

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

8 October 2020 | Taxation of the profit of a GmbH: pay 25% instead of 50% tax!

20. January 2022 | Tax optimizations at GmbH: Incongruent profit distributions are not misuse of design (this contribution)

Incongruous distributions of profit are distributions of profit not measured by the ratio of the shares traded by the shareholders. Within the framework of a GmbH, certain tax advantages can be achieved. We explain the admissibility of incongruent profit distributions and what design possibilities there are.

Only recently, the Federal Finance Court (BFH) had to deal with an incongruent profit distribution again due to a revision of the tax office. However, the revision of the tax office was rejected. In this regard, reference was made to previous decisions, in which the BFH has already fundamentally decided that incongruent profit distributions do not give rise to misuse of design and that the case was no different in the context of the legal dispute.

Thus, the first question arises as to what an incongruent profit distribution is at all. In principle, pursuant to § 29 (3) sentence 1 GmbHG, the distribution of the profit earned in the GmbH to the shareholders takes place in accordance with the ratio of the shares held by the shareholders. By way of derogation, according to § 29 (3) sentence 2 GmbHG, a so-called incongruent distribution of profits is permitted under company law if this is expressly stipulated in the articles of association. For example, the ratio of the deposits actually paid can be taken into account. In addition, it is also possible to set a preferred dividend for certain shareholders. Subsequently, deposits are regularly made into the company by the beneficiary of the incongruent distribution of profits. For this reason, this process is regularly also called the bulk-from-return process.

In order for an incongruent profit distribution to be effective under civil law, the requirements of § 29 (3) sentence 2 GmbH must be met at a GmbH. Therefore, the articles of association must set a different criterion for the distribution of profits than the ratio of the shares. For a subsequent statutory amendment to regulate an unequal distribution of profits acc. § 53 paragraph 3 GmbHG requires the consent of all participating partners. Alternatively, instead of a specific distribution measure, the articles of association may contain a clause according to which a different distribution of profits can be decided each year with the approval of the affected shareholders or unanimously. Tax law interesting is the incongruent profit distribution for the GmbH. This requires a clause according to which the distribution of profits can be changed at any time and an associated shareholder resolution.

In order to cover the different interests of the individual shareholders of a corporation, the incongruent distribution of profits is a very useful way of tax optimization.

Incongruent profit distributions allow an otherwise unused loss carry forward of individual shareholders to be exploited. The following example is given:

D and M each hold a 50% stake in DM-GmbH, whose annual net profit of EUR 1,000,000 is to be distributed to the shareholders.

D has a tax loss carry forward of 1,000,000 euros. Whereas M has a taxable income of 400 000 euros before capital income.

The taxable income of the D after a congruent profit distribution amounts to -500,000 euros. Consequently, the D remains an unused loss carry-forward of EUR -500,000. The M, on the other hand, has a taxable income of 900 000 euros.

Now the shareholders can agree to incongruently transfer the distribution 100% to D. That is why the D receives the EUR 1 000 000. After the distribution, D should then deposit the amount incongruently into the GmbH again. Thus, the D is enabled to deduct the loss and he can exploit the complete loss potential. Due to the incongruent deposit, the money is returned to the GmbH. In the case of the M, on the other hand, a taxable income of 400 000 euros remains. This is subject to either the partial income procedure or the withholding tax. The distribution can of course be waited until the shareholder also makes losses. Certain progression effects can thus be exploited in particular in the context of the part income method. In fact, the capital to be distributed can be stored as a kind of “credit” at the corporation and called up if necessary.

Due to incongruent profit distributions, the profits of subsidiaries of a Holding GmbH can be attributed to a shareholder. In this way, it is possible to determine exactly which shareholder should be entitled to which profits from which subsidiary. Tax savings can in particular arise if a shareholder contributes a tax ownership interest in the company assets of a GmbH and then receives the profit distributions from the free floating share in the context of an incongruent profit distribution of the GmbH.

A rather economic and corporate law purpose of the incongruent profit distributions takes effect when a new shareholder joins. If only the old shareholders are to participate in retained earnings before the new shareholder joins, the incongruent profit distributions may benefit. This makes sense in particular if the full distribution of the retained earnings could not be decided before the new shareholder joined.

The BFH has confirmed that incongruent profit distributions do not cause misuse of design. BFH assumes abuse of design at best if a legal arrangement is chosen which is inappropriate for achieving the desired economic objective, is intended to reduce tax and cannot be justified by economic or other considerable extra-tax reasons. Furthermore, an arrangement is said to be inappropriate if they would not choose wise parties in view of the economic facts because it is inappropriate. Nevertheless, this definition remains vague. The central point, however, is that the design is solely aimed at saving taxes and no other considerations play a role, it is economically rather pointless.

Although the incongruent distribution of profits for the comprehensive exploitation of the loss potential is just clearly used to fully exploit the loss amount. Nevertheless, the comprehensive absorption of losses corresponds precisely to the principle of taxation according to economic performance. Therefore, the use of the losses is constitutionally necessary. Only the legal limits, in particular § 10d EStG, restrict the loss compensation. There are no other restrictions. In addition, hidden profit distributions in particular are often incongruently attributed. Therefore, as far as the design is in accordance with the legal objectives, no further extra-tax motives are necessary.

It is questionable whether the subsequent incongruent contribution does not constitute a contribution to the other shareholders. The capital injection also increases the value of the shareholdings held by the co-shareholders. However, the incongruent reinsurance of previously incongruently distributed profits is usually in self-interest. Therefore, it can certainly not constitute a donation. The BFH has also confirmed this.

At present, proceedings are still pending before the BFH. In this case, the incongruent distribution of profits had no basis for authorisation in a shareholder resolution. It therefore remains to be seen whether BFH makes the civil validity of an incongruent distribution of profits as a condition of admissibility.

The BMF responded to the decision of the BFH with a so-called non-use decree. This is a BMF letter showing that a BFH decision is not applied. Rather, it should apply only in the decided individual case.

Incongruent distributions of profits should therefore only be recognised for tax purposes if special contributions by the shareholder justify the distribution of profits deviating from the legal distribution key. These benefits must be in the relationship between the distributing limited liability company and the beneficiary member. This is the case, for example, if a shareholder of the limited company transfers valuable land free of charge for use or if he takes over the management of the limited company free of charge. Thus, incorrect distribution of profits was not recognized in principle.

But the BMF could not uphold this principle. In particular, the BFH has reaffirmed its legal view in proceedings after the non-application decree. This is why there is a new BMF letter. As a result, the incongruent distribution of profits must first be effective under civil law. As explained above, however, BFH will decide in the future whether the incongruous distribution of profits actually requires civil law effectiveness. In addition, there is no misuse of design if considerable economically reasonable extra-tax reasons are proven for the deviating distribution of profit. Thus, the BMF no longer maintains the existence of economically significant shareholder services. Indication of abuse is frequent change of profit distribution key. This reverses the previous rule/exception ratio. Therefore, incorrect distributions of profits are recognised in principle.

The renewed rejection of the BMF’s legal conception by the BFH in the context of the rejection of the revision last year shows that the limits of the new BMF letter are still too narrow. In particular, it remains to be seen how he decides BFH the still pending revision. In cases of doubt, however, it is possible to obtain the opinion of the financial office about your specific individual case by way of binding information.

Finally, we summarize again what there is to consider incongruent profit distributions. In the case of a GmbH, an incongruent distribution of profits requires an incongruent distribution of profits, according to which the distribution of profits can be changed at any time and an associated shareholder resolution. The use of a loss deduction does not fall within the scope of design abuse. However, caution is advised when changing the profit distribution key frequently.