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:
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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