Tax recognition of incongruent profit distributions - New Federal Ministry of Finance circular
In 2022, the Federal Fiscal Court (Bundesfinanzhof, BFH) delivered a decision on incongruent profit distributions that drew considerable attention and differed from the opinion to-date of the fiscal administration; it was therefore not published in the Federal Tax Gazette (Bundessteuerblatt). However, after almost two years, the Federal Ministry of Finance (Bundesministerium der Finanzen, BMF) has now recognised this decision.
Background - Changes compared with the previous BMF circular
A profit distribution would generally be deemed to be incongruent if the profits have not been allocated in accordance with the equity interests of the shareholders but, in deviation from this, on the basis of other criteria. The BFH had decided, on 28.9.2022 (case reference: VIII R 20/20), that a shareholders' resolution on an incongruent advance distribution that is adopted unanimously at a GmbH [a German private limited company], is not contested and is effective under civil law can, therefore, form the basis for taxation. The BFH thus challenged the view hitherto taken by the BMF in its circular of 17.12.2013. This specified that an incongruent profit distribution would only be recognised for tax purposes if in the company agreement, in accordance with Section 29(3) sentence 2 of the Limited Liability Companies Act (Gesetz betreffend die Gesellschaften mit beschränkter Haftung, GmbHG), a different allocation formula is specified or if there is a statutory clause that permits unanimously agreed deviations.
In the wake of this ruling, the BMF has now revised its circular on the tax recognition of incongruent profit distributions and it published an updated version in its circular of 4.9.2024. The BMF now accepts the opinion of the BFH that incongruent profit distributions that have been adopted effectively under civil law have to be recognised under tax law.
Preconditions for tax recognition
For tax recognition there are various structuring options under civil law that are also specific to the legal forms.
Private limited company (GmbH)
A deviating allocation formula in the company agreement - According to Section 29(3) sentence 2 GmbHG, it is possible to specify a different way to allocate profits other than in proportion to the size of the shareholding. In this case the distribution would be effective under civil law and have to be recognised for tax purposes.
Escape clause in the company agreement - The company agreement contains a clause under which it would be possible to determine a different way to allocate profits. This would require the approval of the shareholders who would be allocated less profit than would correspond to their quota.
Selective resolution that deviates from the statutes - The BFH also recognises resolutions that have been passed unanimously by the shareholders’ meeting and have not been contested. This would make it possible for a one-off allocation of profits that deviates from the statutes without having to amend the statutes themselves. In such a case there would be an incongruent distribution that would have to be taken into account for tax purposes and would become effective under civil law. However, a resolution that deviates from the statutes would be deemed to be null and void if, in the process, not all the formal and substantive requirements for an amendment to the statutes had been satisfied, even if the resolution had been passed unanimously.
Split appropriation of profits, temporally incongruent profit distribution - The BMF likewise recognises a so-called split appropriation of profits as well as a temporally incongruent profit distribution. In this regard, the BFH decided on 28.9.2021 already (case reference: VIII R 25/19) that a shareholders’ resolution that provides for the share of the profits of a majority shareholder to be transferred to a shareholder-related surplus profit reserve also has to be recognised for tax purposes. The BMF further clarified that the principles of this ruling do not contravene the provisions in Guideline 20.2 of the German Income Tax Guidelines 2023 (H 20.2 EStH 2023) on “The accrual date for profit distributions - Controlling shareholders/sole shareholders” [Zuflusszeitpunkt bei Gewinnausschüttungen – Beherrschender Gesellschafter/Alleingesellschafter].
Stock corporation (AG)
In contrast to GmbHs, for stock corporations (Aktiengesellschaft, AG) incongruent profit distributions have to be recognised less frequently. The stricter rules are due to the fact that, in principle, profits have to be allocated on the basis of the ratio of shares to the share capital. In order to protect the interests of the shareholders, in the case of AGs, incongruent profit distributions will only be recognised for tax purposes if a deviating allocation formula, in accordance with Section 60(3) of the German Stock Corporation Act, has been specified in the statutes. A deviating distribution based on a resolution that deviates from the statutes or an escape clause is not permissible in the case of AGs.
