Hidden profit distribution requires the intention to make a contribution
Hidden profit distribution requires the intention to make a contribution
A transfer of assets from a corporation to a shareholder (hidden profit distribution, "vGA-Verdeckte Gewinnausschüttung") caused by the corporate relationship requires the intention to make a contribution. In its ruling dated 22.11.2023 (case reference I R 9/20), the BFH decided that this may not be the case due to an error on the part of the shareholder-managing director.
The share capital of a GmbH 1 was to be provided by its sole shareholder-managing director by, among other things, contributing a 100% shareholding in another GmbH 2. A capital increase was carried out at the GmbH 2 to be contributed, which ultimately was beneficial to the shareholder-managing director. The contribution to the shareholder-managing director was made in error due to an oversight when the capital increase was notarized. A memo from a meeting with her tax advisor revealed that GmbH 1 should have taken over the new share. In addition, GmbH 1 reported the share in its annual financial statements and was designated as the sole shareholder in the shareholder resolutions of GmbH 2. In order to ultimately create the corporate structure that was already to be formed by the capital increase resolution, GmbH 1 and the shareholder-managing director concluded a share transfer agreement.
Pursuant to § 8 para. 3 sentence 2 of the German Corporation Tax Act (KStG), hidden profit distributions (vGA) are reductions in the assets ("prevented increases in assets") caused by the corporate relationship. A corporate causation is to be assumed if the corporation grants its shareholder or a related party a pecuniary advantage that it would not have granted to a non-shareholder if it had acted with the diligence of a dutiful and conscientious manager.
However, as confirmed by the German Federal Fiscal Court, in order to assume a transfer of assets from a corporation to a shareholder or a related party due to the corporate relationship, there must be an intention to make a contribution. This may not be the case due to an error on the part of the shareholder-managing director. The decisive factor here is whether the specific shareholder managing director was subject to a corresponding error; not, however, whether a managing director acting properly and conscientiously would also have made the error. Subjective reasons for excusing an error can eliminate the specific cause in the company relationship so that the necessary business connection is ensured. The BFH emphasizes that this is an exceptional case in which conflicting presumptions of an arm's length comparison could be rebutted by concrete proof of causation.
Note:
It appears certain that the ruling will not be able to retroactively eliminate every "vGA". The facts of the case in the ruling had special circumstances that justified such an exception. In addition, the BFH has left open which requirements are to be placed on the credibility of the statements and the credibility of the shareholder. The decisive factor for the assessment of an error is the time of the conclusion of the contract. However, in addition to the accounting treatment, subsequent shareholder resolutions that serve to achieve what was originally planned can also be included.