The valuation of hidden profit distributions

para. | paragraph

AO | Tax Code

BewG | Valuation Act

BFH | Bundesfinanzhof

BilMoG | Accounting Law Modernization Act

for example | for example

or | or

i.e. | that is

EStG | Income Tax Act

FA | Tax Office

FG | Finance Court

gem. | according to

if applicable | if applicable

grds. | in principle

GrEStG | Property Transfer Tax Act

i. S. d. | in the sense of

i.V.m. | in conjunction with

KapGes | corporation

KStG | Corporate Tax Act

KStR | Corporate Tax Guidelines

No | Number

S. | sentence

so-called

UStG | VAT Act

vGA | hidden profit distribution

Altmeppen, Holger | NZG issue 25/2021

Bergmann, Alfred

Götte, Wulf

Götz, Jürgen

Hennrichs, Joachim

Leunering, Dieter

Merkt, Hanno

Mülbert, Peter

Schaub, Bernhard

Von Schenk, Kersten

Westermann, Harm Peter

Ziemons, Hildegard

Brandis, Peter Heuermann, Bernd | Blümich, EStG, KStG, GewStG

As of May 2021

Breithaupt, Joachim Ottersbach, Jörg H. | Compendium Corporate Law 1. Condition 2010

Briese, André | Hidden distribution of profits with ABC Basics

from 23.04.2021

Drinhausen, Florian Eckstein, Hans-Martin | Beck's Handbook of AG 3. Coverage

Gehrmann, Reinhald | Hidden distribution of profits as of July 2021

Gosch, Dietmar | Corporate Tax Act Comment 4. Conditions for 2020

Grashof, Dietrich Mach, Holger | Basic features of tax law, Until 13. Under conditions

the title Current tax law as of 15.03.2021

Heidinger, Andreas Leible, Stefan Schmidt, Jessica | Commentary on the law concerning companies

with limited liability 3rd edition 2021

King Ulrich | Tax Code §§1 to 368 Comment 4. Coverage

2021

Lahme, Stefan | Beck's tax and accounting law lexicon, Edition 55

2021, as of 01.01.2021

Oppenländer, Frank Trölitzsch, Thomas | Practical manual of the GmbH management 3rd edition

2020

Pelka, Jürgen Petersen, Karl | Beck’s tax advisor manual 2021/22 18. Coverage

Prinz, Ulrich Winkeljohann, Norbert | Beck's Handbook of GmbH 6. Condition 2021

Rössler, Rudolf Troll, Max | Rössler/Troll Evaluation Act Commentary

31.01.2021

Vögele, Alexander | Transfer prices Business administration and tax law

5th edition 2020

Weber-Grellet, Heinrich | Schmidt, Income Tax Act 40. Condition 2021

The valuation of hidden profit distributions depends on several factors. So you can carry out the valuation of hidden profit distributions according to the reason, the amount or with the common value. It can affect the GmbH in the areas of corporate tax, sales tax or real estate acquisition tax. On the other hand, the impact that an assessment of hidden distributions has on the taxation of shareholders depends on whether they are natural or legal persons.

1st introduction

In the course of their business activities, corporations pursue the economic objective, achieved profits to their entrepreneurs or companies. shareholders. Often this happens via open profit distributions. The distribution may the profit of the corporation according to § 8 Abs. 3 KStG shall not be reduced. Attempts are made to avoid taxation of the surpluses to be distributed and to carry out operational asset changes in order to claim them as expenses for the company. This minimizes the annual tax surplus and leads to a lower tax burden at the company level.

In these special cases, one speaks of a hidden profit distribution, which is partially only revealed when the annual accounts are audited by external third parties or auditors. By valuing a transaction into a hidden distribution of profits, the state tries to prevent the tax loss and merely reclassify it for tax purposes.

In this housework, the definition and origin of the hidden profit distributions are first presented.

Subsequently, the valuation of the hidden profit distribution is treated with its various methods and the associated tax consequences.

At the end, a conclusion is drawn and the significance of the hidden profit distribution is explained.

2. definition and origin of the hidden profit distribution

2.1. Definition

In tax law, the term “distribution” generally refers to any kind of distribution of assets of a corporation to its shareholders. [1] Entities are associations, cooperatives and legal entities. [2] Withholding the company regulations, the distribution can be "open" and must be taxed accordingly. [3] The reason for the regulation of the vGA is that the more operating expenses of a corporation are declared and are taken into account for tax purposes in a way that reduces profits, the less corporate tax and solidarity surcharge the German state collects and has to pay the company. [4] The term vGA is not specified by law. [5] Despite this, this is for example in § 8 para. 3 p. 2 KStG explicitly addressed, but not explained. Also in company law one finds the so-called indeterminate legal concept. [] 6]

In a judgment [7], the BFH closed this legal loophole and defines the vGA in settled case law as follows: 3 S. 2 KStG is a reduction in assets or a prevented increase in assets, which is caused by the company relationship, affects the amount of income and is unrelated to an open distribution. This definition is also followed by KStR R 8.5 and also mentions the four criteria as the basis for the existence of a vGA.

2.2 Creation of the hidden distribution of profits

2.2.1. Characteristic of the offence – reduction of assets or prevented increase of assets

An asset reduction occurs when KapGes. makes an effort which is not adequately compensated. Accordingly, a prevented increase in assets is the “counterpart” to the reduction in assets, i.e. the KapGes. waives an adequate remuneration for a service provided by it. [9]

In summary, a vGA exists if it has led to a reduction or prevention of an otherwise possible profit or a higher loss. [10]

2.2.2. Characteristic – Causation by the social relationship

This criterion explicitly distinguishes between a controlling and a non-controlling partner. A decisive feature of the vGA is the basis of the arm's length comparison. In this case, the social initiation of the non-controlling partner is compared with another ordinary and conscientious business manager under otherwise identical circumstances, whether he would also have received the initiation,[11] this can be denied, therefore if a vGA exists. Furthermore, the arm's length comparison is to be divided into the formal and the material arm's length comparison. Formally, it must first be examined whether the agreement is based on seriousness and a contractual performance relationship. [12] In material terms, it is examined whether the hypothetical criterion is based on an ordinary manager and compared with concrete circumstances of a comparable individual case. [] 13]

If there is a controlling shareholder, i.e. he is more than 50% in KapGes. In addition to the arm's length comparison, it is checked whether there is a prior clear and unambiguous agreement in the form prescribed by civil law. In principle, contracts between the shareholder and the corporation are capable of interpretation, but this should be agreed in writing in such a way that an external third party can unequivocally recognize that the performance of the company is based on a paid agreement. [14] Thus, if no agreement has been reached, a controlling shareholder first has a vGA. The influence of a controlling partner of a corporation is far greater than that of a non-controlling partner. [16] If a service is provided by a limited liability company to a third party who is close to the shareholder, it is a so-called indirect vGA, and any relationship between the shareholder and a third party that shows that he thereby obtains a benefit is sufficient to justify the closeness. [17]

2.2.3. Characteristic – Impact on income

The previously defined loss of assets affects the amount of income, therefore the difference according to § 4 para. 1 p. 1 EStG i.V.m. § 8 para. 1 KStG. This indirectly makes it clear that § 8 Abs. 2 KStG is a correction rule for the determination of the tax profit, which can only take place if a tax reduction has previously occurred. [] 18)

2.2.4. Criterion – in no way related to an open distribution

The vGA is distinguished from the open distribution by this factual characteristic. [19] An open distribution exists if there is a corporate profit allocation decision. [] 20]

3. valuation methods and tax valuation of the vGA

The most common examples of the occurrence of a vGA in the current marketing year between KapGes. and shareholders are the lack of adequacy of managerial remuneration, interest-free or low interest on the loan to the shareholder and exceptionally high-interest loans from the shareholder to the company, hobby, unreasonably low tenancy and transfer of use, but also high royalties to shareholders. [] 21]

If the vGA is not properly declared to the FA, this omission does not directly lead to an offence of tax evasion acc. § 370 Abs. 1 AO or tax reduction, but must be corrected and taken into account in the tax calculation.22 If a vGA is now available in the tax sense, it must be evaluated correctly and the KapGes. may be added to increase the profit. Furthermore, the discovery of the vGA also leads to a tax impact at the level of the shareholder.

3.1. Assessment methods of the vGA

In order to determine the amount of the VGA at company level, the arm's length comparison explained at the outset is used. Therefore, the difference between the agreed remuneration and the remuneration which is to be regarded as appropriate in the light of the arrangement carried out is taken into account. [23] The decisive factor here is not the resulting advantage obtained by the shareholder through the vGA, but only the view of KapGes., according to which the valuation is also based. [24] It should also be noted that the scope and thus the amount depends significantly on whether it is a vGA in terms of reason or amount. [] 25]

3.1.1. vGA by reason (“total vGA”)

In the case of a hidden distribution of profits, the respective loss of assets or the avoided increase in assets for the benefit of the shareholder must be categorized in full as “total vGA”. At the same time, the total vGA also forms the first stage of the assessment of the vGA after it has been discovered. [26] In the first examination stage, the legality, i.e. the social cause, is finally determined by the tax court. It should be noted that a discretion of appraisal is not due to the courts, unlike in the following second stage of examination.[27] In the case of a controlling partner, the examination level is not given. In this case, the legal transaction is not to be recognised for tax purposes as a whole. [] 28]

3.1.2. vGA according to height ("partial vGA")

The counterpart of the total vGA is the partial vGA, in which the debt-related initiation of the grant is recognised for tax purposes, but the amount of the grant was considered inappropriate. The vGA refers only to the proportionate extent of the inadequacy.[29] If a vGA is now available in height, you are in the second test stage, in which the FA according to FIG. § 162 Abs. 1 AO has to be estimated. [30]

Aim of this estimate according to §162 AO is the closest to reality, this means that the estimate results must be overall conclusive, economically possible and reasonable. [31] FA and FG may use the generally accessible estimation aids, for example statistical surveys. [32] If the competent authority has chosen the examination method, there is no reason for the second stage examination. In individual cases, the BFH may disagree and apply both methods over and above the rating. Despite the serious differences, the determination method and the estimation method are largely the same.

3.1.3. Rating vGA with common value

The two valuation methods mentioned above correspond largely, but not without restriction, with the common value of § 9 para. 2 BewG, with the two reservations made usually in the assessment of the vGA at the level of KapGes. is applied.

The mean value is grds. for all tax purposes, the general valuation standard if no other valuation standards are prescribed in the BewG itself or in other tax laws. [33] However, a formula does not contain the definition of the term in § 9 BewG. Paragraph 2 only mentions aspects according to which the common value can be determined with retention of the special features.[34] Deviating from § 9 para. 3 BewG are explicitly to take into account the unusual and personal relationships when evaluating the vGA, if these would have arisen between a regular and conscientious managing director and a non-partner. [] 35

3.2. tax assessment at company level

3.2.1. Corporate income

§ 8 KStG regulates the determination of the income of a corporation. § 8 KStG does not define the concept of income at all, but contains an income qualification and a general reference to the EStG. Due to the interaction of § 8 KStG with the income tax regulations, the decisive principle of the trade balance for the tax balance also applies according to the BilMoG.[37]

The vGA has an impact on the income of KapGes. if the vGA determines the difference amount on which the income is based i. S. d § 4 para. S. 1 EStG has reduced.[38] Thus, in the tax balance sheet, the actual profit must be compared with a “fictitious” profit of a tax balance sheet and increased off-balance-sheet by the deviation based on a vGA. [39] In this case, the common value explained above is used. Trade-balance-sheet profit increases due to the existence of a vGA must be corrected in the commercial profit determination. [40]

3.2.2. Sales tax

The valuation with the common value must be excluded when considering the vGA from a sales tax perspective. Because the vGA in the form of free deliveries or other services of the corporation to its shareholders has VAT effects acc. § 3 para 1b in V. m. § 10 para. 4 and 5 UStG.[41] According to § 8 para. 3 S. 2 KStG, the triggered sales tax constitutes a part of the income tax-related VGA and is therefore not additionally added under § 10 No. 2 KStG. [42] The actual VAT is calculated by applying the vGA to the usual sales price without VAT share plus the actual VAT. [43] The minimum tax base according to § 10 Abs. 5 UStG applies to its shareholders in the event of a reduced performance of the company. [44]

3.2.3. Property transfer tax

If there is a free transfer of land acc. § 8 Abs. 2 No. 1 GrEStG or for a sub-price sale of a property according to § 9 Abs. 1 No. 1 GrEStG between KapGes. and shareholders, a vGA is present and at the same time real estate acquisition tax is triggered. [] 45

3.3. tax assessment at shareholder level

3.3.1. Partner is a natural person

In the case of a corporation, in accordance with the principle of separation, the taxable income is payable to the organ owner or shareholder and to the organ company or shareholder. Cape Ges. To be determined separately.[46] When determining the income of the natural person, one must generally differentiate between two situations.

If a stock is in the tax deposit account acc. § 27 KStG, it must be checked whether the vGA leads to a use of the deposit account in the event of outflow and thus a guarantee of deposits is available.[47] It is questionable whether the guarantee still applies if the vGA is now only revealed in an audit of the company and there is not enough distributable profit. [48] As a result, the vGA is not tax-free as a deposit refund, but taxable as a distribution to the shareholder. [] 49]

If the vGA is taxable as a distribution, a distinction must be made between shares in private assets and shares in business assets. If the shareholder holds the shares in private assets, the vGA is with the gross amount in the amount of the actual inflow as income from capital assets acc. § 20 EStG and the withholding tax acc. § 32d EStG or the partial income procedure on request according to § 32d para 2 no. 3 EStG.[50] If the vGA can be assigned as revenue to another type of income, a reallocation must be carried out which leads to the application of the partial income procedure (subsidiarity principle). This is the case if the shareholder holds his shares in the business assets, this results in the requalification of the income from capital assets to income from business operations acc. § 15 EStG. Once the hidden profit distribution has been realized, it can no longer be reversed in order to avoid a higher tax burden. The BFH and the financial administration deny this with the so-called deposit theory. [] 51]

3.3.2. Partner is a corporation

If the partner benefiting from the vGA is a corporation, § 8b (1) and (3) applies. 5 KStG, so that the vGA is valued as an open distribution. [52] The hidden distribution of profits remains in accordance with § 8b KStG when determining the income of the corporation grds received. Out of Approach.[53] The tax exemption of the distribution requires that at the beginning of the calendar year a minimum participation ratio of 10 % in the distributing corporation is fulfilled. [54] Only 5 % of the distribution remains in accordance with § 8 b para. 5 KStG and must be added to the income as non-deductible operating expenses. If the minimum participation rate is not met, it is the so-called “participation rate”. Free float distribution and distribution is fully subject to corporate tax and solidarity surcharge, but operating expenses are then fully deductible. [] 55

4th Conclusion

The hidden distribution of profits, as explained in the housework, consists of four factual characteristics, on the basis of which one recognizes the existence of a hidden distribution of profits.

When it comes to valuation, these valuation methods often lead to difficulties, because the comparison with similar companies often leads to a difficult implementation in practice, since the shareholders cannot or almost cannot arrange the examination in their own hands, due to the lack of information.

Furthermore, in the course of the company’s financial year, there are often situations in which a hidden profit distribution accidentally arises, which is initially not noticeable. Nevertheless, it must be noted that the tax consequences usually do not lead to serious effects. Especially at the shareholder level, the requalification of managing directors’ salaries into hidden profit distributions even regularly leads to a tax advantage. If the personal tax rate is above 25%, it benefits from taking into account the withholding tax, which is constant at 25%. [] 56

At the level of the company, the addition leads to an increase in the income of the company and thus to an increase in the income tax and corporation tax as well as solidarity surcharge and sometimes also to a correction of other types of tax. [] 57]

Due to the new developments in tax law with regard to the law for the modernization of the Corporate Tax Act, in which an option model for partnerships for the fictitious tax treatment as a corporation was created, there will be more often hidden profit distributions in the future. [] 58]