Concealed profit distribution – gift taxable – donation – corporation

Allowances inter vivos

may be subject to gift tax if they are “freely given”, i.e. in particular free of charge (cf. §7 par.1 Inheritance Tax Act). Up to now, the question of whether a free gift can also exist if a corporation (GmbH) makes excessive payments to its shareholder (e.g. in connection with salaries or rent payments) has been disputed.

The Federal Fiscal Court

had already ruled in this regard that such hidden profit distributions for income tax purposes do not constitute gifts subject to gift tax. This is justified by the fact that the distributions of a corporation are not made freely, but rather are based on the corporate relationship, regardless of whether the distributions are made openly or concealed. However, the tax authorities have so far rejected a general application of this case law.

In several recent decisions

the German Federal Fiscal Court has now confirmed the view that hidden profit distributions are generally not subject to gift tax as free gifts from the company. This also applies if, for example, the GmbH does not pay the excessive remuneration to the shareholder himself, but to a person close to him (e.g. spouse). The prerequisite here is that the shareholder (managing director) participates in the contract between the company and the related party, as in this case the payment is also made with regard to the shareholder’s rights under the company agreement.

The court

However, it also expressly points out that (gratuitous) benefits to a related person can, however, be assessed as gifts from the shareholder himself to the related person that are subject to gift tax. Since the shareholder waives future distributions or makes a corresponding withdrawal as a result of the (hidden) profit distribution, he suffers a reduction in assets which, in turn, leads to an increase in assets for the related party; this can trigger gift tax.

(Further comments & information on this can be found in our information letter 05/2018 under the item 3.)