Ina Ree­se Tax & Legal Prac­ti­ce – Flens­burg | Harrislee

Agency agreement between a limited liability company (GmbH) and a shareholder as a hidden distribution of profits

Pay­ments made by a GmbH to its share­hol­der may be regard­ed as a hid­den dis­tri­bu­ti­on of pro­fits. The Müns­ter Finan­ce Court high­lights whe­re con­tracts fall short. 
Agency agreement between a limited liability company (GmbH) and a shareholder as a hidden distribution of profits

Agency agreement between a limited liability company (GmbH) and a shareholder as a hidden distribution of profits

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.

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