{"id":6880,"date":"2022-04-04T11:20:00","date_gmt":"2022-04-04T09:20:00","guid":{"rendered":"https:\/\/honert.de\/?p=6880"},"modified":"2022-04-04T12:35:33","modified_gmt":"2022-04-04T10:35:33","slug":"incongruent-profit-distributions","status":"publish","type":"post","link":"https:\/\/honert.de\/en\/incongruent-profit-distributions\/","title":{"rendered":"INCONGRUENT PROFIT DISTRIBUTIONS"},"content":{"rendered":"\n<style type=\"text\/css\" data-created_by=\"avia_inline_auto\" id=\"style-css-av-gshc2x-20496ad143ac54b19f9a6f6acc920cbe\">\n.avia-section.av-gshc2x-20496ad143ac54b19f9a6f6acc920cbe{\nbackground-repeat:no-repeat;\nbackground-image:url(https:\/\/honert.de\/wp-content\/uploads\/3629.jpg);\nbackground-position:0% 0%;\nbackground-attachment:scroll;\n}\n<\/style>\n<div id='av_section_1'  class='avia-section av-gshc2x-20496ad143ac54b19f9a6f6acc920cbe main_color avia-section-default avia-no-shadow  avia-builder-el-0  el_before_av_section  avia-builder-el-first  hide_on_print avia-full-stretch avia-bg-style-scroll av-minimum-height av-minimum-height-40 av-height-40  container_wrap sidebar_right'  data-section-bg-repeat='stretch' data-av_minimum_height_pc='40' data-av_min_height_opt='40'><div class='container av-section-cont-open' ><main  role=\"main\" itemprop=\"mainContentOfPage\"  class='template-page content  av-content-small alpha units'><div class='post-entry post-entry-type-page post-entry-6880'><div class='entry-content-wrapper clearfix'>\n<\/div><\/div><\/main><!-- close content main element --><\/div><\/div><div id='av_section_2'  class='avia-section av-1jvgpl-c48f26ef95da345430dd593b2674ebaa main_color avia-section-default avia-no-shadow  avia-builder-el-1  el_after_av_section  avia-builder-el-last  avia-bg-style-scroll container_wrap sidebar_right'  ><div class='container av-section-cont-open' ><div class='template-page content  av-content-small alpha units'><div class='post-entry post-entry-type-page post-entry-6880'><div class='entry-content-wrapper clearfix'>\n\n<style type=\"text\/css\" data-created_by=\"avia_inline_auto\" id=\"style-css-av-dyj2g9-16689a5995c07d1d44afc61b9787cb7f\">\n.flex_column.av-dyj2g9-16689a5995c07d1d44afc61b9787cb7f{\nborder-radius:0px 0px 0px 0px;\npadding:0px 0px 0px 0px;\n}\n<\/style>\n<div  class='flex_column av-dyj2g9-16689a5995c07d1d44afc61b9787cb7f av_two_third  avia-builder-el-2  el_before_av_two_third  avia-builder-el-first  first flex_column_div av-zero-column-padding  '     ><style type=\"text\/css\" data-created_by=\"avia_inline_auto\" id=\"style-css-av-l1kkh6pk-869035fc05c0669bb1b5bde6878717a8\">\n#top .av-special-heading.av-l1kkh6pk-869035fc05c0669bb1b5bde6878717a8{\npadding-bottom:10px;\n}\nbody .av-special-heading.av-l1kkh6pk-869035fc05c0669bb1b5bde6878717a8 .av-special-heading-tag .heading-char{\nfont-size:25px;\n}\n.av-special-heading.av-l1kkh6pk-869035fc05c0669bb1b5bde6878717a8 .av-subheading{\nfont-size:15px;\n}\n<\/style>\n<div  class='av-special-heading av-l1kkh6pk-869035fc05c0669bb1b5bde6878717a8 av-special-heading-h1 blockquote modern-quote  avia-builder-el-3  avia-builder-el-no-sibling '><div class='av-subheading av-subheading_above'>4. April 2022\n<\/div><h1 class='av-special-heading-tag '  itemprop=\"headline\"  >INCONGRUENT PROFIT DISTRIBUTIONS<\/h1><div class=\"special-heading-border\"><div class=\"special-heading-inner-border\"><\/div><\/div><\/div><\/div>\n<style type=\"text\/css\" data-created_by=\"avia_inline_auto\" id=\"style-css-av-d50ea1-9e58517e6b264823a14402a0fcddceca\">\n.flex_column.av-d50ea1-9e58517e6b264823a14402a0fcddceca{\nborder-radius:0px 0px 0px 0px;\npadding:0px 0px 0px 0px;\n}\n<\/style>\n<div  class='flex_column av-d50ea1-9e58517e6b264823a14402a0fcddceca av_two_third  avia-builder-el-4  el_after_av_two_third  el_before_av_two_third  first flex_column_div av-zero-column-padding  column-top-margin'     ><section  class='av_textblock_section av-l1kkhkec-246b2444f2037a6b0ea3ace033643c88 '   itemscope=\"itemscope\" itemtype=\"https:\/\/schema.org\/BlogPosting\" itemprop=\"blogPost\" ><div class='avia_textblock'  itemprop=\"text\" ><p><strong>Incongruent profit distributions and their tax recognition are a perennial topic in case law and consulting practice. While the tax authorities tend to classify deviating resolutions on the distribution of profits as an abuse of the tax system (\u00a7 42 German Fiscal Code (Abgabenordnung &#8211; AO)), acceptance is much greater in the case law of the tax courts. This has now been confirmed once again by the M\u00fcnster Fiscal Court in a recent ruling.<\/strong><!--more--><\/p>\n<\/div><\/section><\/div>\n<style type=\"text\/css\" data-created_by=\"avia_inline_auto\" id=\"style-css-av-a670mx-6f81c97571ada6efc61aa16a0e712830\">\n.flex_column.av-a670mx-6f81c97571ada6efc61aa16a0e712830{\nborder-radius:0px 0px 0px 0px;\npadding:0px 0px 0px 0px;\n}\n<\/style>\n<div  class='flex_column av-a670mx-6f81c97571ada6efc61aa16a0e712830 av_two_third  avia-builder-el-6  el_after_av_two_third  el_before_av_one_third  first flex_column_div av-zero-column-padding  column-top-margin'     ><section  class='av_textblock_section av-l1kkj7g5-68536d44086b2d7dbfd8f42968383d81 '   itemscope=\"itemscope\" itemtype=\"https:\/\/schema.org\/BlogPosting\" itemprop=\"blogPost\" ><div class='avia_textblock'  itemprop=\"text\" ><h2>I. Introduction<\/h2>\n<p>In principle, (open) profit distributions are made according to the capital shareholding quota. This means that dividends are allocated to the shareholders in proportion to their respective share in the share capital. This results, for example, for limited liability companies from \u00a7 29 para. 3 sentence 1 Limited Liability Companies Act (<em>Gesetz betreffend die Gesellschaften mit beschr\u00e4nkter Haftung<\/em> &#8211; GmbHG). However, incongruent (disproportionate) distributions may also be made in deviation from this. It is still hotly disputed whether these can be recognized for tax purposes. The case law has affirmed such recognition in almost all cases decided to date. Nevertheless, the tax authorities very often refuse to recognize disproportionate profit distributions with reference to \u00a7 42 AO as an abuse of the tax system. This is also shown by the case below, which the M\u00fcnster Fiscal Court had to decide last year (M\u00fcnster Fiscal Court, ruling of 30 June 2021, ref. no. 13 K 272\/19 G, F, final and binding).<\/p>\n<h2>II. Facts of the case<\/h2>\n<p>The claimant in the main proceedings was a limited partnership which held 91% of the shares in N-GmbH in the year in dispute 2013. The remaining shares were held by the claimant&#8217;s partners. These included, in particular, G-GmbH, which acted as the claimant&#8217;s general partner, which held a 25% share in the claimant&#8217;s assets and to which 2.33% of the shares in N-GmbH were directly attributable. In addition, G-GmbH was the controlling company of its own group of companies, which was not included in the claimant&#8217;s consolidated financial statements.<br \/>\nG-GmbH generated a loss in the amount of millions in the year in dispute. In order to avoid insolvency of the company and to improve the creditworthiness of G-GmbH, the shareholders&#8217; meeting of N-GmbH therefore decided in the same year on a disproportionate distribution in favor of G-GmbH to compensate for the loss of G-GmbH.<br \/>\nThe corresponding resolution on the appropriation of profits was adopted subject to the condition precedent of an effective amendment to the Articles of Association of N-GmbH, by which a so-called opening clause with regard to the distribution of profits was to be included in the Articles of Association. Furthermore, it was intended to implement a liquidation preference to the effect that the remaining shareholders would be compensated in advance to offset the incongruent distribution made in favor of G-GmbH upon dissolution of the company.<br \/>\nBy shareholders&#8217; resolution dated 17 March 2014, N-GmbH amended its Articles of Association in the aforementioned sense. In particular, the possibility of concluding a deviating profit distribution agreement permissible under company law pursuant to \u00a7 29 para. 3 sentence 2 GmbHG was anchored in the Articles of Association. The amendment to the Articles of Association was entered in the commercial register in April 2014. G-GmbH then recognized the distribution as a receivable in its 2013 financial statements and applied the tax exemption of \u00a7 8b German Corporate Income Tax Act (<em>K\u00f6rperschaftsteuergesetz <\/em>&#8211; KStG) to the income. This resulted in an exemption of the disproportionate distribution in the amount of 95%.<br \/>\nIn the course of the external tax audit, the deviating profit distribution was classified as an abuse of structure. The auditor argued that the improvement of the creditworthiness or the avoidance of an imminent insolvency of G-GmbH could also have been achieved by the normal case of a proportional profit distribution with subsequent contribution of the amounts by the shareholders of the claimant who held shares in G-GmbH. The chosen arrangement therefore served the sole purpose of obtaining a tax advantage not provided for by law. For this reason, it was not to be recognized pursuant to \u00a7 42 AO.<br \/>\nThe tax assessment office concurred with this assessment and determined the claimant&#8217;s income as it would have been in the event of a congruent distribution. This subsequently led to a partial elimination of the tax exemption under \u00a7 8b KStG and to the application of the partial income procedure for the other shareholders of the KG. At the same time, it was assumed that the amounts were contributed to G-GmbH. After the appeal proceedings remained unsuccessful, legal action was filed.<\/p>\n<h2>III. Decision<\/h2>\n<p>The M\u00fcnster Fiscal Court ruled in favor of the claimant. It ruled that the distribution resolved in the year in dispute was attributable solely to G-GmbH for tax purposes. The condition precedent agreed in the resolution came into effect when the amendment to the Articles of Association was entered in the commercial register in 2014, which led to the effectiveness of the resolution. The mere fact that a distribution was made which deviated from the shareholding ratios does not justify an abuse of the tax system. In this respect, the court refers to the previous case law of the Federal Fiscal Court, according to which the effect of \u00a7 42 AO is overstretched if the amounts in question are deemed to have fictitiously accrued to another shareholder.<br \/>\nIn addition, in the case in dispute, a fictitious pro rata distribution would lead to overcompensation of the remaining shareholders. This is because they would have agreed with G-GmbH to compensate for the current disproportionate distribution in the future by being compensated via a proceeds waterfall (<em>Erl\u00f6swasserfall<\/em>) in the liquidation.<br \/>\nFurthermore, there is no general legal principle according to which incongruent profit distributions are abusive. On the contrary, corporate law explicitly recognizes such distributions as permissible under \u00a7 29 para. 3 GmbHG. Therefore, there are no basic objections to following this principle from a tax point of view. It must also be taken into account that almost every hidden profit distribution also represents a disproportionate distribution. For tax purposes, however, these are indisputably attributed to only one and not all shareholders in accordance with the quota. In this respect, there are no reasons to treat open and hidden profit distributions differently.<br \/>\nFinally, and without it being important, the court comments on the non-tax reasons put forward by the claimant for the chosen structure. It grants the taxpayer freedom of decision in the choice of the implementation of capital measures. Thus, the shareholder is not forced to make such additions in a certain way, i.e. by means of a pro rata distribution and subsequent contribution, if this is associated with a higher tax burden.<br \/>\nThe court did not allow an appeal to the Federal Finance Court (<em>Bundesfinanzhof<\/em>), as it considered the legal situation in this respect to be clarified.<\/p>\n<h2>IV. Consequences for the practice<\/h2>\n<p>The ruling of the M\u00fcnster Fiscal Court once again makes it clear that, at least in case law, deviating profit distribution agreements are not classified as tax abuse per se.<br \/>\nUnfortunately, the tax authorities continue to be very restrictive. It requires that a profit distribution agreement deviating from the share in the capital stock or share capital must be sufficiently defined (letter of the Federal Ministry of Finance dated 17 December 2013, Federal Tax Gazette I 2014, 63). In the case of GmbHs (limited liability companies), this is the case if a different standard is stipulated in the Articles of Association pursuant to \u00a7 29 para. 3 sentence 2 GmbHG or if the Articles of Association contain an opening clause and the corresponding resolution on the appropriation of profits was adopted with the majority stipulated in the agreement. Furthermore, in the opinion of the tax authorities, the principles of abuse of legal structuring possibilities (\u00a7 42 AO) must be examined in all cases of disproportionate distribution. Thus, an abuse shall (only) not exist if considerable economically reasonable non-tax reasons are proven for the distribution deviating from the statutory profit distribution key.<br \/>\nFor consulting practice, this means the following:<br \/>\nFirst of all, it must be ensured that the deviating profit distribution is regulated either explicitly or by means of an opening clause in the Articles of Association. In our opinion, the literature correctly points out that resolutions that break through the Articles of Association are also possible and permissible under civil law, which speaks in favor of consideration for tax purposes. However, according to their own statement, the tax authorities do not recognize this. We can therefore look forward to pending proceedings at the Federal Fiscal Court (case no. VIII R 20\/20), in which the court will take a position on this. The lower court, also the M\u00fcnster Fiscal Court, had in any case affirmed recognition.<br \/>\nIn addition, non-tax reasons, if any, which should be the rule for a deviation from the statutory distribution, should be clearly documented in order to be prepared in the event of a tax audit. If there are no non-tax reasons for an incongruent distribution, or if these can at least no longer be clearly understood, it is nevertheless worth taking legal action against the corresponding notices. This is because, as already explained, the Federal Fiscal Court considers the effect of \u00a7 42 AO to be overstretched if amounts are fictitiously attributed to another shareholder.<br \/>\nThis applies all the more, and this is also made very clear by the ruling of the M\u00fcnster Fiscal Court discussed above, if the shareholder benefiting from the distribution has to compensate the co-shareholders in some form in the future. Liquidation preferences are therefore a secure means of avoiding, on the one hand, the favoring of a shareholder (which may be subject to gift tax) and, on the other hand, an unintended attribution of the income to the co-partners.<\/p>\n<\/div><\/section><\/div>\n<style type=\"text\/css\" data-created_by=\"avia_inline_auto\" id=\"style-css-av-9f65hl-97852d04b2ceb32669373ad1ab24029a\">\n.flex_column.av-9f65hl-97852d04b2ceb32669373ad1ab24029a{\nborder-radius:0px 0px 0px 0px;\npadding:7px 0px 0px 0px;\n}\n<\/style>\n<div  class='flex_column av-9f65hl-97852d04b2ceb32669373ad1ab24029a av_one_third  avia-builder-el-8  el_after_av_two_third  avia-builder-el-last  sy-only-desktop hide_on_print flex_column_div  column-top-margin'     ><p><div  class='avia-builder-widget-area clearfix  avia-builder-el-9  el_before_av_textblock  avia-builder-el-first '><section id=\"categories-3\" class=\"widget clearfix widget_categories\"><h3 class=\"widgettitle\">Newsletter 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onclick=\"window.print();return false\">Print<\/a><br \/>\n\n\n\n\t<div class=\"dkpdf-button-container\" style=\" text-align:left \">\n\n\t\t<a class=\"dkpdf-button\" href=\"\/en\/wp-json\/wp\/v2\/posts\/6880?pdf=6880\" target=\"_blank\"><span class=\"dkpdf-button-icon\"><i class=\"fa fa-file-pdf-o\"><\/i><\/span> Download (PDF)<\/a>\n\n\t<\/div>\n\n\n\n\n\n<\/p>\n<\/div><\/section><\/p><\/div><\/div><\/div><\/div><!-- close content main div --><\/div><\/div><div id='after_section_2'  class='main_color av_default_container_wrap container_wrap sidebar_right'  ><div class='container av-section-cont-open' ><div class='template-page content  av-content-small alpha units'><div class='post-entry post-entry-type-page post-entry-6880'><div class='entry-content-wrapper clearfix'>\n","protected":false},"excerpt":{"rendered":"<p>Incongruent profit distributions and their tax recognition are a perennial topic in case law and consulting practice. While the tax authorities tend to classify deviating resolutions on the distribution of profits as an abuse of the tax system (\u00a7 42 German Fiscal Code (Abgabenordnung &#8211; AO)), acceptance is much greater in the case law of the tax courts. This has now been confirmed once again by the M\u00fcnster Fiscal Court in a recent ruling.<\/p>\n","protected":false},"author":26,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"mc4wp_mailchimp_campaign":[],"footnotes":""},"categories":[177],"tags":[],"class_list":["post-6880","post","type-post","status-publish","format-standard","hentry","category-2022-q1-en"],"acf":[],"_links":{"self":[{"href":"https:\/\/honert.de\/en\/wp-json\/wp\/v2\/posts\/6880","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/honert.de\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/honert.de\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/honert.de\/en\/wp-json\/wp\/v2\/users\/26"}],"replies":[{"embeddable":true,"href":"https:\/\/honert.de\/en\/wp-json\/wp\/v2\/comments?post=6880"}],"version-history":[{"count":12,"href":"https:\/\/honert.de\/en\/wp-json\/wp\/v2\/posts\/6880\/revisions"}],"predecessor-version":[{"id":6898,"href":"https:\/\/honert.de\/en\/wp-json\/wp\/v2\/posts\/6880\/revisions\/6898"}],"wp:attachment":[{"href":"https:\/\/honert.de\/en\/wp-json\/wp\/v2\/media?parent=6880"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/honert.de\/en\/wp-json\/wp\/v2\/categories?post=6880"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/honert.de\/en\/wp-json\/wp\/v2\/tags?post=6880"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}