Profit distributions in a legal entity

Profit distributions in a stock corporation (AG) or a limited liability company (GmbH) can have different tax consequences. It is important to differentiate between hidden and open profit distributions.

Profit Distributions

When open profit distributions are made, this leads to no tax consequences at the level of corporate income taxes. Since they do not have profit-reducing effects, no correction needs to be made.

However, both hidden and open profit distributions trigger withholding tax consequences.

In the case of a hidden profit distribution, the profit and loss account is charged contrary to commercial law. This means that the distributions must be attributed to the taxable profit due to the principle of materiality. Legally, such a consequence is provided for in Art. 58 I b of the Federal Law on Direct Federal Taxation (DBG).

Examples of Profit Distributions

Typical examples of hidden distributions include the payment of excessive salaries to shareholders. The payment of excessive, i.e., not market-conforming interest on loans from shareholders also falls under this category. Similarly, if the legal entity grants a loan to a shareholder and charges too little interest. Another example is the sale of assets to shareholders at prices that are not market-compliant.