In its letter dated 4 September 2024, the Federal Ministry of Finance (BMF) responded to the case law of the Federal Fiscal Court (BFH) and published the BFH rulings dated 28 September 2022 and 28 September 2021 applied beyond the individual case. The BMF is thus correcting its previous opinion from the Letter dated 17 December 2013. This amendment is welcome as it creates legal certainty for companies and shareholders. What does this mean in concrete terms for the tax treatment of incongruent profit distributions? We shed light on the background and the effects of this development.
Background: BFH judgements and the previous administrative opinion
Previously, the BMF took the view that profit distributions must generally comply with the distribution rules set out in the articles of association in order to be recognised for tax purposes. Deviations, so-called incongruent profit distributions, often led to uncertainties with regard to taxation. However, in its rulings of 28 September 2021 and 28 September 2022, the BFH clarified that shareholder resolutions that are effective under civil law must also be taken into account for tax purposes, even if they deviate from the articles of association.
In its judgement of 28 September 2022, the BFH ruled that a unanimous shareholder resolution on an incongruent advance distribution is to be recognised for tax purposes if it is in breach of the articles of association and cannot be contested by any shareholder. Such a resolution means that a shareholder to whom no profit is distributed does not have to pay tax on a taxable notional inflow. This clarifies that the actual distribution of the profit and not the statutory participation is decisive for taxation.
The ruling of 28 September 2021 deals with a different constellation. Here, the Federal Fiscal Court ruled that a resolution effective under civil law, according to which the profit share of a majority shareholder is not distributed, but instead allocated to a shareholder-related profit reserve, is also to be recognised for tax purposes. This also applies if the profit shares of minority shareholders are distributed at the same time. The allocation to a revenue reserve does not lead to a direct notional inflow of investment income, even in the case of a controlling shareholder. This decision strengthens the flexibility of companies in the appropriation of profits.
Adjustment due to the BMF letter dated 4 September 2024
With the BMF letter dated 4 September 2024, the tax authorities have now expressly adopted this case law and applied it beyond the specific GmbH circumstances of the BFH rulings. According to the new administrative opinion, a resolution on an incongruent profit distribution that breaches the articles of association is relevant for tax purposes if it is effective under civil law. The prerequisite is that the shareholders' meeting adopts the resolution unanimously and that it cannot be contested. This means that, in future, taxation will be based on the actual distribution of profits and not on the statutory participation.
For stock corporations (AG), however, the BMF letter provides for a restriction. Here, an incongruent profit distribution is only recognised for tax purposes if a different profit distribution key is specified in the articles of association. A mere opening clause in the articles of association or a resolution that breaks through the articles of association is not sufficient. In such cases, the incongruent distribution leads to a taxable inflow according to the BMF (margin no. 8 of the letter). This different treatment of GmbHs and AGs could trigger discussions in practice.
Practical effects and significance
The amendment by the BMF circular creates clarity and increases planning security for companies. In the case of GmbHs in particular, shareholders can now decide more flexibly on the distribution or retention of profits without having to fear tax disadvantages. An example: A GmbH with three shareholders unanimously decides that only two shareholders will receive a distribution, while the third transfers his share to a reserve. According to the BFH judgements and the new BMF circular, the third shareholder is not charged with a notional inflow.
However, the situation remains more restrictive for stock corporations. If a public limited company decides on an incongruent profit distribution without a corresponding basis in the articles of association, this will not be recognised for tax purposes. This could prompt majority shareholders to amend the articles of association at an early stage in order to achieve similar flexibility as with limited liability companies.
Conclusion and recommendation for action
The BFH rulings of 28 September 2021 and 28 September 2022 and the BMF circular of 4 September 2024 mark an important step towards a more practical tax treatment of mismatched profit distributions. While GmbHs benefit from the new flexibility, AGs remain bound by stricter requirements. Companies should review their articles of association and decision-making practices in order to avoid tax risks and make the most of the new opportunities. As of 5 September 2024, the BMF circular provides a solid basis for tax planning, even if the different treatment of GmbHs and AGs still requires attention.
Yours TAXGATE team supports medium-sized companies with complex tax issues and the fulfilment of their compliance obligations. Do you have questions about the tax recognition of incongruent profit distributions or do you need support in implementing the new requirements? Please feel free to contact us!
Status: September 2024 - Subject to change during the legislative process.
