11.09.2024Ministry of Finance publishes updated decree related to incongruent dividend distributions
The updated decree incorporates recent taxpayer favorable jurisprudence from the federal tax court
In a decree published on 4 September 2024, the German Ministry of Finance (MOF) updated its 17 December 2013 decree regarding the recognition of disproportionate (i.e., “incongruent”) dividend distributions for tax purposes. The updated decree incorporates taxpayer friendly decisions of the federal tax court from 2021 and 2022 (see GTLN dated 02/09/22), which were issued against the view of the tax authorities.
The revised guidance includes the position of the tax authorities related to different cases of disproportionate dividend distributions made by limited liability companies (GmbHs) and stock corporations (AGs).
For AGs, the tax authorities confirm their unchanged view that disproportionate dividend distributions can be recognized for tax purposes, but only if a profit allocation that deviates from the shareholding percentage is explicitly provided in the articles of the company. A disproportionate profit distribution that is based on a general escape clause in the articles or a shareholder resolution will not be recognized by the tax authorities in the case of AGs.
For GmbHs, the updated decree distinguishes between four different scenarios:
- Based on the unchanged view of the tax authorities, a disproportionate dividend distribution generally should be recognized for tax purposes if there is a corresponding provision in the articles of a GmbH (scenario 1) or if the articles include an escape clause that allows for a disproportionate dividend distribution (scenario 2).
- In response to a 2022 decision of the federal tax court, the updated decree now also recognizes a disproportionate dividend distribution for tax purposes where a selective shareholder resolution is resolved in a shareholder’s meeting with the approving votes of all shareholders even if in violation of the articles of the company (scenario 3). The updated decree defines a selective shareholder resolution that violates the articles as a resolution that has a one-time effect and does not have a general statute-changing effect for the future. Only where the shareholder resolution overrides a company statute with permanent effect (even if for a limited period of time) and the conditions for a change of the statute are not met, the disproportionate dividend distribution is not recognized for tax purposes.
- The tax authorities in scenario 4 incorporate a 2021 decision of the federal tax court that confirmed the validity of a distribution for tax purposes in case of a “split dividend distribution” (or “temporary disproportionate distribution”). The tax authorities state that a shareholder resolution that is legally effective should generally be recognized for tax purposes if it allocates the majority shareholder’s profit share in a shareholder-related profit reserve at the level of the company, even though the profit allocated to the minority shareholders is distributed at the same time. In addition, the tax authorities explain that, based on their view, this does not contradict previous guidance that was provided unrelated to the recognition of disproportionate dividend distributions.
The updated guidance will be applied by the tax authorities in all open cases.
The revised guidance is a welcome development and provides certainty to taxpayers when doing disproportionate dividend distributions. The tax authorities confirm the view of the federal tax court that, generally, as long as the disproportionate dividend distribution is legally valid it should also be recognized for tax purposes. The updated decree does not include any guidance related to disproportionate dividend distributions in carried interest structures. It would certainly be welcome by taxpayers if the tax authorities would apply the principles as described in their updated decree in these situations as well.
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