Hidden Profit Distribution in Tax Law and Corporate Law

The hidden profit distribution (HPD) is a term used in both tax law and commercial and corporate law. Tax courts use this term to appropriately tax asset transfers between a corporation and its shareholders. In tax law, HPD refers to asset reductions or prevented asset increases at the corporate level, which are caused by the corporate relationship and affect the difference amount in terms of the Income Tax Act. In commercial and corporate law, however, an HPD occurs when benefits from corporate assets are granted to shareholders without adequate compensation.

Requirements

2.1 Asset Reduction or Prevented Asset Increase

Asset reduction occurs when the corporation incurs expenses without adequate compensation. Prevented asset increase occurs when the company waives adequate remuneration for services rendered. An HPD can also be caused by purely factual actions, not just by legal actions of corporate bodies. The determination of asset reduction or prevented asset increase is based on a hypothetical tax balance sheet and the difference amount.

2.2 Caused by the Corporate Relationship

The reduction or prevention of assets must be caused by the corporate relationship. The arm's length comparison is crucial to determine whether the action would have been granted to a non-shareholder. Risk transactions carried out in the interest of a shareholder can also be considered as HPD.

2.3 Impact on Income Level

The benefit must affect the tax balance sheet profit to be considered as HPD. The aim is to correct possible shifts of the tax substrate between the company and the shareholder.

Legal Consequences

3.1 At the Corporate Level

In the case of an HPD, the fair market value is used as a benchmark. The HPD is added to the reported profit off-balance sheet and is subject to corporate tax and trade tax. An HPD can increase the corporate tax burden and entail the solidarity surcharge. VAT or non-deductible input tax are not additionally added.

3.2 At the Shareholder Level

If an HPD exists, it is also considered in the shareholder's assessment. The income tax is adjusted accordingly, depending on whether the participation is held in private or business assets. The HPD can lead to a requalification into capital income if a controlling shareholder receives inappropriate remuneration.

3.3 Example of Tax Burden in an HPD

An example illustrates the tax implications of an HPD on a GmbH and its shareholder-managing director. Inappropriate remuneration leads to additional tax payments at both the corporate and shareholder levels.

Overall, it becomes evident that the HPD is a complex issue that has tax implications at both the corporate and shareholder levels. The precise examination and legal classification of hidden profit distributions are of great importance for companies and their shareholders.