If a limited liability company (GmbH) makes payments to one of its shareholders under an agency agreement, this can prove costly from a tax perspective. In a recent ruling, the Münster Finance Court has decided that such payments are to be treated in full as a hidden distribution of profits (vGA) if the contract does not satisfy the arm’s length principle.
What is this case about?
In December 2014, a GmbH entered into a management services agreement with C GmbH, which held a 50 per cent stake in it. It is worth noting that the same person, the managing director E, acted on both sides of the agreement. C GmbH was to support the management of the GmbH in all areas and, in return, receive a monthly lump sum of 2,500 euros as well as a variable share of 20 per cent of the annual profit under commercial law, before tax and extraordinary depreciation.
Between 2015 and 2018, the annual payments totalled between approximately 331,000 and 514,000 euros. The actual managing directors of the GmbH, Mr D and Mr E, however, did not receive a salary for their management duties.
What did the tax audit take issue with?
During a tax audit, the tax office classified all payments as hidden profit distributions pursuant to section 8(3), second sentence, of the Corporation Tax Act. Several points were cited in support of this:
- The contract had been concluded without the approval of the shareholders’ meeting, as required by the articles of association.
- The nature and scope of the services to be provided were not specified in detail.
- There was no upper limit on the profit-related remuneration, even though significant increases in profits were already anticipated at the time the contract was concluded.
The tax office issued amended assessment notices for corporation tax and trade tax. The GmbH brought legal proceedings after its appeal had been unsuccessful.
What was the tax court’s ruling?
The Münster Fiscal Court dismissed the claim in its entirety and upheld the tax office’s assessment. A prudent and conscientious managing director would not have entered into this contract in this way, and a contracting party from outside the company would not have accepted it. The court specifically criticised three aspects:
- Scope of work: Compared with standard service contracts, the scope of services was too broad and too vague.
- Remuneration structure: The chosen form of remuneration, in particular the absence of a cap on the profit-related component, does not correspond to what independent third parties would agree upon.
- Contract term: A long term without a proper right of termination is not standard practice in the market for external service contracts.
The appeal was dismissed. The judgement is therefore final for the time being (Münster Finance Court, judgement of 20 May 2026, ref. 10 K 1001/23 K,G,F).
What does this mean in practice for shareholders in a GmbH?
The judgement highlights just how carefully contracts between a limited liability company (GmbH) and its shareholders must be drafted. A disguised profit distribution means that the payments do not reduce the GmbH’s taxable income and may be subject to additional tax at the shareholder’s end. In the worst-case scenario, this can prove very costly.
Anyone entering into such contracts should describe the services precisely, set the remuneration in line with market standards, establish a remuneration cap and ensure that all approval requirements under the articles of association are complied with. Particular care is required, especially where the same person acts on both sides of a contract.
Anyone who is unsure whether existing contracts would stand up to an arm’s‑length test should seek tax advice at an early stage to avoid subsequent adjustments by the tax authorities.
Source: Haufe: Tax
This post and the accompanying image were created with the help of AI and have been editorially reviewed.
