I. General information

Disproportional (alternatively: incongruent) profit distributions occur when a corporation distributes profits to the shareholders in a way that deviates from the participation ratios. If, for example, two shareholders each hold a 50 % stake in a corporation and one of the shareholders receives less or more than 50 % in a profit distribution, this constitutes a disproportionate profit distribution. The instrument of disproportionate profit distribution is regularly used to reward individual shareholders who make a greater contribution to the corporation (special commitment in favor of the company).
Disproportionate profit distribution is generally permissible under corporate law without any restrictions. However, its tax recognition is subject to certain conditions. In addition, gift tax aspects must be kept in mind.

II. Requirements for recognition for income tax purposes

According to the BMF (letter dated 4 September 2024), incongruent profit distributions are generally to be recognized if they have been effectively agreed under civil law. This is particularly the case in the structures listed below. A distinction must be made between the legal form of a limited liability company (GmbH) and a stock corporation (AG).

1. Limited liability company (GmbH)

a) Regulation in the Articles of Association
If there is a provision in the Articles of Association according to which an incongruent profit distribution is possible, this must also be recognized under tax law. However, this presupposes that the distribution also corresponds to the distribution key specified in the Articles of Association, which deviates from the shareholding ratio.
A subsequent amendment to the Articles of Association to include such a clause is also possible, but requires the consent of the shareholders affected by this.
As an alternative to a clause that already stipulates a specific disproportionality of the distributions, an opening clause in the Articles of Association is also possible. This opening clause must provide for an incongruent profit distribution to be ordered by shareholder resolution. If, as a result, the shareholder resolution is passed with the necessary majority and the consent of the impaired shareholders as stipulated in the opening clause, the incongruent profit distribution must also be taken into account for income tax purposes.
b) Selective resolution breaching the Articles of Association
In the opinion of the BFH, an incongruent profit distribution is permissible for tax purposes in cases of so-called resolutions that breach the Articles of Association at certain points. The previous administrative opinion was opposed to this. However, this was adapted to the BFH case law in the above-mentioned updated BMF letter. As a result, the incongruent distribution of profits on the basis of a resolution that selectively breaches the articles of association is now also recognized by the tax authorities.
A resolution that selectively breaches the Articles of Association is deemed to exist if its effect is limited to the individual measure, i.e. the Articles of Association are breached, but not amended with effect for the future. If the resolution that breaches the Articles of Association is passed unanimously and cannot be contested, it is also decisive for taxation purposes. This does not apply if the resolution has a permanent effect (irrespective of the period of its duration) and in this respect no longer only has a “selective” effect.
c) Split profit allocation
A resolution according to which the profit attributable to the majority shareholder is allocated to a shareholder-related revenue reserve, while the profit share attributable to the other shareholders is distributed, is also to be recognized for tax purposes. A mismatch can therefore also arise if not all of the profit is distributed, but only part of it. A (fictitious) inflow of investment income to the majority shareholder is not to be assumed in this case.

2. Stock corporation (AG)

Incongruent profit distributions are only recognized to a very limited extent for tax purposes in the case of the AG. Disproportionality can only be used as a basis for taxation if a specific distribution formula that deviates from the shareholding ratio has been defined in the articles of association and the profit distribution corresponds to this distribution formula. The other options permitted for a GmbH, such as the opening clause or the resolution to breach the Articles of Association in certain cases, remain irrelevant for tax purposes.

III. Gift tax aspects

Incongruent profit distribution can also have gift tax consequences. For example, family businesses may have a clause in the Articles of Association relating to incongruent profit distributions, according to which the children holding a stake in the corporation receive a disproportionately high share of the profits. This would be recognized for income tax purposes under the aforementioned conditions. If the share of profit, which is too high in relation to the shareholding, is not made in order to compensate for certain services provided by the children in connection with the company, a gift must be assumed. If the incongruent profit distribution is therefore not performance-related, this constitutes a gift taxable event. In this case, the donors are the shareholders to whom the profit distribution agreement deviating from the shareholding relationship applies.
In the case of disproportionate profit distributions, the gift tax consequences must therefore always be taken into account. In order to avoid a transaction subject to gift tax, the higher profit share in relation to the participation quota should therefore be offset by a corresponding commitment or “more” performance by the beneficiary shareholder.

IV. Conclusion

Disproportionate profit distributions are recognized for tax purposes under certain conditions. There are various structuring options here, particularly in the case of the GmbH, whereas the structuring of the AG is only possible to a very limited extent.
In addition to the income tax consequences, the gift tax risks must also be taken into account. This is because incongruent profit distributions that are not performance-related regularly result in a gift tax liability. In order to avoid this, the amount of the mismatch and the corresponding benefit should be precisely coordinated.