Pension payments to a shareholder with a controlling stake who also draws a managing director”s salary do not necessarily constitute hidden profit distributions according to the Finanzgericht (FG) Münster, the Fiscal Court of Münster.

If a shareholder draws an appropriate salary and additionally receives other forms of remuneration, this normally constitutes hidden profit distributions. We at the commercial law firm MTR Rechtsanwälte note that this has implications, inter alia, for the calculation of corporation tax.

Having said that, not every additional income stream gives rise to the assumption of a hidden profit distribution, as a ruling by the FG Münster from July 25, 2019 demonstrates (Az.: 10 K 1583/19 K). According to the ruling, pension payments to a shareholder with a controlling stake who also serves as managing director and draws a salary for this do not necessarily amount to hidden profit distributions.

In the instant case, the sole shareholder of the plaintiff GmbH was also its managing director until 2010. Following his removal for reasons relating to age, he received monthly pension payments from the company. In 2011, the sole shareholder was once again appointed to the position of managing director and received monthly payments for this, though these amounted to less than ten percent of the remuneration he previously received as managing director. Moreover, he continued to receive the pension payments.

The competent tax office deemed the pension payments to be hidden profit distributions and amended the relevant corporation tax notice accordingly. The GmbH brought an action against this, claiming that the sole shareholder had been reinstated as managing director for operational reasons due to the threat of order losses under his successor.

The claim was successful before the FG Münster. The concurrent payment of a managing director”s salary together with pension payments did not, in this case, constitute hidden profit distributions. The Court noted that the reinstatement of the shareholder as managing director was not originally intended and only took place in the interests of the GmbH to prevent order losses. It went on to state that the newly agreed managing director salary was not a full salary; it was only intended as a recognition of his position. The combined total of the salary and the pension payments amounted to a mere 26 percent of the previous remuneration. The FG Münster held that the pension payments were not to be viewed as an undue contribution instigated by the company and that they passed the arm”s length test. Even unrelated third parties would have approved an appointment at a low salary plus pension payments according to the Court, which granted leave to appeal to the Bundesfinanzhof, Germany”s Federal Fiscal Court.

Lawyers with experience in the field of tax law can offer advice.