This article explains the taxation of profit distributions (dividends) at the shareholder. There are clear differences between shareholders in the legal form of corporations (GmbH), partnerships (GmbH & Co. KG), individual companies and private individuals.

This article deals with the taxation of profit distributions in the Income Tax Act, Corporate Tax Act and Business Tax Act. The housework should give the reader in particular an overview of how supposedly equal income is taxed differently (highly) depending on the recipient.

At the outset, the taxation of profit distributions based on the different recipients is therefore explained and presented.

Finally, possibilities for reducing the tax burden are presented and an outlook on future developments regarding the taxation of capital income is given.

This article deals with the taxation of profit distributions from a predominantly technical point of view. Less attention is paid to the background and problems of the corresponding standards in the Income Tax Act, Corporate Tax Act and Business Tax Act than to the actual implementation of taxation techniques. Furthermore, it deliberately dispenses with international issues and interconnections of interests and both at the level of the distributing company as well as on the part of the recipient or shareholder. The seller assumes a purely national approach.

2. taxation of profit distributions

In the following, profit distributions refer to the shares attributable to the balance sheet profit of a corporation[1]. The distribution of profit distributions is a way of using profit after tax. The amount of the dividend to be distributed per share is determined by decision of the competent bodies of the corporations[2]. Profit distributions are attributable under income tax law to income from capital assets (§ 2 Abs.). 1 S.1 No. 5 in conjunction with § 20 Abs. 1 No. 1 EStG. In principle, the dividend is taxable at the time of inflow (§ 11 para 1 EStG). Deviating from this, the inflow is already given if the income is credited to the shareholder account[3].

In the case of controlling shareholders, the inflow of income already takes place at the time of the resolution at the shareholders' meeting, since at that time the economic property is transferred to the shareholder according to § 39 AO. Furthermore, the shareholder must always tax the dividend income to which the shares are attributable at the time of the shareholder resolution (§ 20 para 2a EStG).

2.1. Natural persons

Natural persons in the legal sense are all persons who are not legal persons[5]. A natural person usually acquires his legal capacity[6] with the completion of the birth (§ 1 BGB). In the case of natural persons, a distinction must be made as to whether the shares held in corporations are imputable to private or business assets[7]. This section will deal with the taxation of profit distributions in private assets.

As mentioned above, profit distributions are part of the income from capital assets and are subject to a separate tax rate of 25% of the gross dividend (§ 32d (1) S. 1 EStG). The distributing company has to withhold and pay the tax at source in the form of the capital gains tax (§ 43 para 5 p. 1 EStG). In this case, it develops a compensation effect. However, if the taxpayer opts in the context of his personal income tax return for the assessment of the income from capital assets, a taxation different from the withholding tax is possible on request.

according to § 32d para. 4 EStG makes it possible to make use of the hitherto unused or not fully used savings lump sum of EUR 801,00 (§ 20 para 9 EStG) and to recover capital gains tax already paid. Furthermore, it is in accordance with § 32d Abs. 6 EStG is possible to refrain from taxation under the separate tax tariff (§ 32d para 1 EStG) and to subject the capital gains to the personal tax tariff (§ 32a para 1 EStG). This makes sense in particular if the marginal tax burden on the entire income of an investment period is less than 25% and thus would be more favorable than the capital gains tax in general. The option to tax income from capital assets according to the personal tariff income tax rate can only be set uniformly in the corresponding tax period[8].

The taxation techniques described above are applicable to all distributions of profits held in private assets. A deduction of actual advertising costs is excluded in principle (§ 20 para 9 p. 1 Hs. 2 EStG).

However, if the taxpayer holds shares in corporations at least 25%, or he holds shares at least 1% and at the same time works for this company, it is possible to opt for the application of the separate tax rate for income from capital assets to the application of the partial income procedure (§ 32d para 2 no. 3 i.V.m. § 3 no. 40, § 3c para 2 EStG). With optimization, the application of the lump sum does not apply and the deduction of actually incurred advertising costs is possible within the framework of the partial income procedure (§ 32d para 2 no. 3 p. 2 EStG). In the further course of this work, this type of control design is taken up again in more detail.

With regard to this article, this section is intended to explain the taxation of distributions of profits held by natural persons in business assets. Operating assets are the necessary and arbitrary operating assets of a sole proprietor and shares in the total assets of a co-entrepreneurship. The income from profit distributions generated from these assets is not income from capital assets, but according to § 20 para. 8 in conjunction with § 15 Abs. 1 no. 1 EStG as income from business operations (subsidiarity principle).

As a result, the separate tax rate for income from capital assets acc. § 32d para 1 EStG does not apply. Instead, they are now as income from business operations the personal tax tariff acc. § 32a para 1 EStG. In the context of the partial income procedure, the income is taxable to 60% (§ 3 no. 40 EStG) and accordingly off-balance sheet in the personal income tax return of the taxpayer.

The savings lump sum is therefore no longer to be granted. On the contrary, operating expenses related to profit distributions (e.g. financing costs for acquiring the shareholding) are deductible to 60% (§ 3c (2) EStG).

Capital gains tax already retained by the distributing company can be counted in full as an advance payment on income tax[9]. The income is taxable at the level of the shareholder. At the level of the company, only a separate profit determination takes place, which ensures the assignment to the individual shareholders.

If the business activity of the taxable person or the co-entrepreneurship in a partnership the constituent features of § 2 Abs. 1 GewStG, the income in addition to the income tax is also subject to trade tax.

Decisive for the basis of assessment of business tax is the profit from business operations determined according to the provisions of the Income Tax Act (§ 7 GewStG). The structure of the Trade Tax Act also provides for additional charges and reductions in business income according to § 7 GewStG. With regard to profit distributions resulting from participations attributable to the operating assets described above, the ratio with which the operation participates in the distributing corporation plays a decisive role. According to § 8 No. 5 GewStG, the tax-free dividends according to § 3 No. 40 EStG are to be added to the business income in full. If the participation rate at the beginning of the survey period (usually the calendar year) is at least 15%, the tax-free dividends according to § 3 no. 40 EStG are to be reduced again from business income (§ 9 no. 2a GewStG). Thus, the amount of the participation ratio is decisive whether the dividend income is subject to trade tax at 0 or 100%. In addition, it should be mentioned that expenses directly related to the dividend income the reduction amount acc. § 9 No. 2a GewStG (§ 9 No. 2a S. 3 GewStG)[10].

2.3. Corporations

Corporations are legal entities and independently hold rights and obligations. A special feature is the liability of the shareholders, which is normally limited to their contribution. The companies referred to below as corporations are to be, in particular, the company with limited liability (short: GmbH) and the stock company (short: AG). The taxable income of corporations is determined in accordance with the provisions of the Income and Corporate Tax Act (§ 8 para 1 p. 1 KStG).

according to § 8 para. 1 KStG i.V.m. § 20 Abs. 1 No. 1 EStG represent profit distributions taxable income of the corporation. In principle, such income is not recognised in the determination of the taxable income of the corporation in order to avoid a double tax burden at company level (§ 8b (1) KStG). Irrespective of this, the distributing company has to pay capital gains tax, which on the part of the receiving company in the context of the assessment is to be counted as advance payment on the corporation tax (§ 43 para 1 p. 3 EStG, § 31 para 1 p. 1 KStG i.V.m. § 36 para 2 no. 2 p. 1 EStG).

Since the introduction of the “new” § 8b para. 4 KStG as of 01.03.2013, however, this dividend privilege only applies to limited companies taxable in Germany[11]. According to this, profit distributions are taken into account which result from a participation of less than 10% in the distributing company (so-called free float dividends). The participation is to be assessed at the beginning of the calendar year and relates in principle to the share capital or share capital (§ 8b (4) S. 1 KStG). However, if the corporation acquires a participation of at least 10% in the distributing company during the current calendar year, this participation shall be deemed to have taken place at the beginning of the calendar year for the purposes of this standard (§ 8b (4) S. 6 KStG). By way of derogation from paragraphs 1 to 6 of § 8b KStG, no tax exemption applies to participations in credit institutions pursuant to § 1a Kreditwesengesetz.

If the requirements of § 8b para. 1 KStG are given and the corresponding dividend income is received tax-free, 5% of the emoluments of the tax-free profit distribution are considered non-deductible operating expense and are added to the taxable income of the corporation (§ 8b para 5 KStG). It is irrelevant here whether no or lower expenses related to the tax-free income actually arose. The provisions of § 8b (5) KStG also affect business tax (§ 7 1 GewStG)[12].

As already in the subsection Sole entrepreneur / partnership, the profit from commercial operations forms the starting point for the determination of the commercial income (§ 7 S. 1 GewStG). Tax-free income of the corporation i.S.d. § 8b para. 1 KStG shall be disregarded.

pursuant to § 8 No. 5 GewStG are tax-free profit distributions in accordance with § 8b para. 1 KStG to be added to the business income. If the participation in the distributing company is at least 15% at the beginning of the survey period, the business income is again to be reduced by the dividend (§ 9 No. 2a). It should be noted here that the participation limit for distinguishing free float and box dividends in the Trade Tax Act, unlike the Corporate Tax Act, is not 10%, but 15%. As a result, shareholdings may be exempt from corporate tax, but sometimes not exempt from trade tax. Since the lump-sum, non-deductible operating expense i.H.v. 5% of the gross dividend (§ 8b para.) 5 KStG), the dividend income is always subject to trade tax at least 5% of the gross dividend (§ 9 No. 2a S. 4 GewStG).

3. design and planning measures to reduce the tax burden

In the following section, basic features of tax consulting and design options are to be shown in order to reduce an existing tax burden or to avoid potential additional tax burden.

3.1. Group structures

This section deals with the trade tax treatment of profit distributions on an organization. As mentioned at the outset, profit distributions from participations of at least 10% (for business tax purposes 15%) are effectively exempted from 95% corporate tax (§ 8b para 1 in conjunction with § 8b para 5 KStG). These regulations also apply to the tissue tax (§ 7 S. 4 GewStG).

In the case of the income tax organization, the so-called gross method of § 15 KStG is to be applied, i.e. that § 8b para. 1-6 KStG are not applicable. This should enable a uniform profit determination at the level of the organ company. The profit of the organ company thus continues to include profit distributions from shareholdings.

For the determination of the business income of the organ companies, however, these incomes are to be reduced completely (§ 9 no. 7 p. 1 GewStG). Since § 8b Abs. 1 to 6 is not applicable due to the gross method, the reduction amount according to § 9 No. 7 S. 3 in accordance with § 9 No. 2a S. 4 GewStG is not to be reduced by fictitious operating expenses i.H.v. 5% of the gross dividend. This means that the profit distributions are not part of the corporate income of the organ company. For the purposes of trade tax, the net business income of the organ company is now added to the organ carrier. However, since the dividend income is no longer included in this business income, it can no longer be included in the determination of the business income of the organ carrier acc. § 8 Abs. 1 KStG remain out of approach. Accordingly, there is also no addition of flat-rate non-deductible operating expenses of 5% of the gross dividend (§ 8b para 5 KStG).

The consequence of the above-described arrangement, in which an organ carrier receives profit distributions via an intermediary organ company, is the complete, trade tax-free receipt of box dividends.

The design procedure described above is based on the BFH judgment of 17.12.2014 – I R 39/14 (BB 2015, p. 871). Although in the present judgment profit distributions were received from a foreign limited liability company, it should also apply to profit distributions of domestic limited liability companies (§ 9 No. 2a GewStG).

Depending on the lifting rate of the municipality entitled to collect taxes, the tax savings vary. Based on an average trade tax burden, so that KSt and GewSt each amount to approximately 15% of the taxable income, the design leads to a saving of approximately 50% compared to the receipt of the profit distribution by a non-organically affiliated company.

In view of the current legal situation, it is important to look at the level of participation in the respective corporation. Even for natural persons, the level of participation plays an important role. For example, in the case of divestments of holdings in corporations, it decides whether the income is to be attributed to those from capital assets or those from business operations (§ 17 (1) EStG, § 20 (2) S. 1 (1) EStG). Accordingly, the applicable tax rate (§ 32a para 1, § 32d para 1 EStG) and the associated tax burden will change. It therefore makes sense to be informed in advance about the tax consequences of a planned share acquisition.

For corporations in particular, the taxation of profit distributions in accordance with the version of § 8b para. 4 EStG the participation rate of considerable importance. Such are so-called "g". Free float dividends[13] fully subject to corporate tax and business tax. The participation rate at the beginning of the calendar year is decisive (§ 8b para 4 p. 1 KStG). § 8b Abs. 6 KStG states, however, that the acquisition of a shareholding of at least 10% takes place during the calendar year for purposes of this paragraph as at the beginning of the calendar year. However, according to the Financial Administration, the acquisition of a shareholding of at least 10% during the current year does not affect the previously held free float holdings in the same corporation[14].

4th Conclusion

The taxation of profit distributions varies depending on the recipient. However, the aim of the legislature is that income is not double taxed, which is why the Corporate Income Tax Act provides for certain tax exemptions for income from (stakeholder) shares. This is to avoid that profit distributions are taxed multiple times in full. Particularly when selecting the tax rate, natural persons who meet certain participation rates have options available.

In the case of corporations, the sometimes open structure of § 8b KStG (especially with regard to various participation rates) leaves room for tax structuring by means of certain corporate connections. participation rates.

Precisely because the capital market is not limited to national borders and, above all, cannot be restricted, ways will still be found in which it leads to a lower tax burden at the level of corporations through consistent and tax-optimizing planning. However, the natural person as the last link (without a dominant influence on the participating corporation) in the cycle of capital gains will still be able to fall back on a limited scope to optimize tax consequences.